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Leave Yourself Room to Negotiate a Future Insurance Claim

DON’T FIND YOURSELF WITH YOUR HANDS TIED BEHIND YOUR BACK

It’s up to the policy language.  Here’s how:

There’s a world of difference between an insurer able to take action “solely at their option” vs having to negotiate a claim in good faith.  Insurance policy language arranged up front is the key to making this happen.

These are three examples in commercial property/casualty insurance where seemingly small distinctions become hugely important later at claim time:

  1. A representation vs a warranty
  2. Absolute vs non-absolute answers on the application
  3. Permission to settle

Representation vs Warranty

Always be on the lookout for the words “warranty” or “warranted” in your insurance policy.  A warranty given by the insured is interpreted so strictly that a violation of it can strip you of coverage even if the breach is not material to the claim.

For example, you might represent that your construction project will be fenced and lighted.  If you fail to do so, and then your project is subject to hurricane damage, obviously unrelated to the fencing or lighting, you should be fine, at least on that specific claim.  But on the other hand, if the policy had contained a warranty with respect to these two conditions, your claim could well be in jeopardy, notwithstanding the fact that the claim was not related to the breach in any way.

Lloyd’s of London and other UK insurers are overly fond of using warranties in their policies, so be on the lookout with those insurers, especially.  Warranties are used by US insurers as well, but sparingly.  Try to avoid warranties totally.

Absolute Answers on an Application

Insurance applications can be mine-fields.  We never want to lie on an application.  But sometimes the questions are worded so ambiguously, that you might not know exactly how to answer it and might opt for the less conservative answer.  This happens with questions to which the only possible choices are “yes” or “no.” 

In a recent cyber insurance case the following question came back to bite the insured in a big way:

Question: “Do you replace factory
default settings to ensure information security systems are securely
configured?”
Answer: “Yes.”

Questions like this can never be answer with an absolute yes.  Would you then be making a promise you cannot keep? If the one time you have a loss you had not taken the action promised, you would likely be accused of a misrepresentation, putting coverage in harm’s way.

One type of answer we might recommend in the above example would be:

–do not check either yes or no;  write in:

 “It is our procedure to do so whenever possible.”

Saying yes leaves no room for error.  Saying no is riskless, but inaccurately implies a lack of care.  The written answer is the right middle ground providing the room to maneuver. Our position in the claim setting would be:

“-- we do have the procedure and
here’s a copy, but we failed to execute this one time!”

Permission to Settle

You may be sued by some party claiming your company injured them.  You have liability insurance for these cases.  Sometimes the claims are not legitimate (at least in your opinion), but the insurer wants to settle them anyway.  Settlement might be financially prudent for the insurer, but not the right thing to do based on the merits.  If there is an unwarranted settlement, it affects your claim record and your reputation, and might generate more copycat claims, so therefore you want to have some say in the matter.  Let’s see how to get some room to maneuver in these cases:

General Liability: the policy gives the insurer strong grounds:

 “We may , at our discretion, …settle any claim…”.  

That seems pretty clear, giving us little room.  The GL is a tough one, but we have argued in important cases that the policy also gives this to the insured:

  “We [the insurer]will have the …duty to defend the insured…”.  

Don’t these two clauses contradict each other?  I don’t know that this has been debated in any court, but the argument gives us some room to maneuver.

Directors & Officers (D&O) Liability and Professional Liability:  In these lines of insurance, reputation is more important and the policies give the insured more freedom to influence the settlement.  Be aware of these options in your policy purchase.

Here is one of the best consent clauses:

“The Insurer may, with the
written consent of the insureds, settle any claim for a monetary amount
 that the insurer deems reasonable”

This one clearly requires the insured’s consent, or the insurer simply cannot settle and must defend.

In many large cases the insured is in control of the defense with the insurer paying the bill.  The policy would say:

“The insureds will not enter into
any settlement agreement without the insurer’s prior written consent.”  

There is one key clause to be added, and that is: 

“The insurer’s consent will not
be unreasonably withheld.”  

That last language is the key to the room to maneuver we are looking for, and it is available.

With the right competition-generated leverage, these terms can be negotiated at the time of policy purchase. At that time underwriter concern can be managed.  But, after a loss – all bets are off – insurer attitude adjustment takes place.  You can be sure any clause in the insurer’s favor is likely to be construed to the letter in the claim settlement process.

Be street-smart: know what’s in your policy and be pro-active.  A one-way contract negotiation is never going to end well! See a general discussion of policy language negotiation: improve coverage

Frank Licata
[email protected];   617.718.5901

Jun 13, 2019

Licata Risk Licata Risk & Insurance Advisors, Inc.
137 South Street, Second Floor
Boston, MA 02111-2848
617-451-2140     [email protected]
LicataRisk Advisors is an independent risk management and insurance consulting firm. We are not brokers and we do not sell insurance. We are not connected to any insurance company or product in any way and do not receive commissions. This is an important difference as you will have an expert on your side who is only committed to you.