Using Legal Cases to Understand How Insurance Works
Insurance company and broker advertising tells one story; to find out how it really is, look at the lawsuits.
We’ll look at three cases, with three different messages.
- What’s in your policy? Don’t assume anything.
- Never take no for an answer.
- When a claim happens, sit up and pay attention.
You Must Know What is in Your Policy
What does the policy language say? Sometimes core coverages are excluded. Don’t assume anything.
The Case: Dos Santos v. Utica First Insurance Co. et al., case number 3:22-cv-00649, U.S. District Court for the District of Connecticut.
In this case, the broker and insurer sold to a general contractor (GC) a general liability policy which excluded the main exposure inherent to construction activity.
An independent contractor suffered severe injuries on the construction site from a forklift accident, and then sued the general contractor. The GC is often alleged to be responsible for failing to maintain a safe workplace, and this is a known exposure which needs to be insured. Independent contractors and employees of subcontractors may collect workers compensation provided by their own employers, but they will still look to the GC for additional remedy via a lawsuit. This is a general contractor’s biggest exposure.
Remarkably, the general liability policy sold to the GC had this major gap. The policy excluded “bodily injury to: … contractors, subcontractors or independent contractors…or any …subcontractors’ or independent contractors’ employees.”
Policies are generally interpreted per their “plain meaning.” In this case, the exclusion wasn’t vague or hard to understand. It was buried deep into the contract, though.
This case is not by any means the only one we have run across where the core exposure is not covered by the policy. Sometimes the lack of coverage is so blatant, the coverage is called “illusory,” meaning it exists in name only.
Lesson: know what is in your policy. How to find out
Don’t Take No for an Answer in Claims
When you have an insurance claim and the insurer denies the claim, don’t simply shake your head and walk away. The insurer will stake their position, but they might be wrong. Know the specific reason for the denial, and make sure you understand it and agree with it!
The Case: Norwegian Hull Club et al. v. North Star Fishing Co. LLC et al., case number 5-21-cv-00181, U.S. District Court for the Northern District of Florida.
In this one, a large (261 ft) fishing boat was under construction in Panama City, Florida when it was destroyed by a hurricane.
The amount of “hull” insurance was $77 million, which the insurer paid, but it actually cost the owner more than that to rebuild because construction costs had increased.
The dispute is over a blank space in a policy endorsement relating to an “escalation clause.” This endorsement indicated that if costs did increase prior to the loss, the policy would reimburse the insured for the extra cost depending on the % increase indicated in the schedule. Unfortunately, the schedule was blank.
You might guess what the insurer’s position was! The insurer argued that since the schedule was blank, the escalation clause was not operable. The insured, on the other hand, argued that the endorsement should not have been on the policy if it was not to be effective.
A U.S. district court ruled the clause was effective and applied the industry norm of 25%. With interest added, this resulted in an additional $19m payment to the insured. Ambiguity of policy language usually does favor the position of the insured as a rule of interpretation. In some cases, disputes like this can be settled without litigation. But the insured should be willing to litigate when on solid ground.
(Even better than dispute-settling is clarity of coverage in the first place. See rule #1 above!) See how to know and improve coverage.
When a Claim Happens, Sit Up and Pay Attention
The so-smart people at Harvard really screwed up in this case.
Be careful to report claims in the right way and on time!
The Case: Fellows of Harvard College v. Zurich American Ins Co., case # 22-1938, U.S. Court of Appeals for the First Circuit.
A suit was filed against Harvard alleging discrimination in admissions by an organization called Students for Fair Admissions.
There were two professional liability policies in play that would cover the claim:
- A primary $25 million layer by insurer AIG
- an excess layer of $15 million by Zurich Ins Co
Harvard reported the claim to AIG right away but did not report to Zurich at that time.
The first layer of $25 million was exhausted by legal expenses, and then Harvard would have to go to Zurich to pick up after that first $25m layer.
All liability policies have conditions re prompt reporting (such as the need to report “as soon as practicable”), but “claims made” policies such as the ones in question for Harvard actually have specific day or date requirements. In the case of the Zurich policy, the claim had to be reported during the policy period or within 90 days of expiration. Harvard reported to Zurich about 4 months after that deadline.
Harvard tried various arguments to get coverage in spite of that violation of policy terms, but the court was not sympathetic. The judge quoted Massachusetts law as follows:
“A policy of insurance when provisions are plainly and definitely expressed in appropriate language must be enforced in accordance with its terms.”
In a separate case, a different insured, Demoulas Supermarkets, Inc. made a different mistake which is costing them. It involved fiduciary liability coverage, which covered Demoulas for claims by 401k plan beneficiaries over management of the plan.
There was a $15 million policy with insurer Chubb. Demoulas had reported the claim and had had many discussions with Chubb, but then at the end Demoulas agreed to a settlement with the claimants without the approval of Chubb. This was a serious error as Chubb does not agree with the settlement amount ($17m) and is only offering $7.8m of its $15m policy limit. So now Demoulas is in a second set of litigation, this time against its own insurer!
Claims of all types have to be handled correctly in several ways. Sit up and pay attention at claim time!
(c ) Licata Risk & Insurance Advisors, Inc. 2022
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Jun 05, 2023