Current trends in claims management reflecting poorly on industry: strategic denials

In our most recent article, we advise that the insurance market is in a state of hardening. In our article of current market conditions (located here), we observe a trend of ‘wrongful’ insurer coverage denials are emerging.

Assessment of claims is becoming more onerous, rigorous, complicated and costly. Claim examiners appear to be engaging external experts more frequently. Conceptually that may be the insurer’s management directing its claims department to reduce “leakage”. Pressure is put on the claim examiner to reduce claims expenses. Consequences of the strategy however are increased claim costs, delayed claim responses and growing frustration of brokers/policyholders.

In turn experts are required to be more cost effective. New more competitively priced experts are sought and engaged. Some have little regard for fundamentals, maxims and etiquette of insurance contracting. Some see the benefit to their own top-line of taking coverage positions – they do not consider the insurer’s or the industry’s reputation.

In recent times we have experienced, and other scenarios are well documented, that insurers and their experts:
  1. refuse to meet with the policyholder (its own client) to clarify facts which it had mistaken in its coverage position (this being pre-litigation)

  2. denied cover for over 12 months based on the application of an exclusion. Its own Senior Counsel’s opinion determined that exclusion did not apply. On the rendering of that opinion the insurer determined cover was not available for a different reason (not previously stated). We anticipate on its Lawyer’s and Counsel the insurer expended close to $65,000. The claim was $20,000.

  3. do not provide critical documents in their possession to prove notice was given to a policyholder about its disclosure obligations

  4. require that the policyholder prove an exclusion does not apply

  5. deny cover where there is clear and obvious ambiguity in a policy wording

  6. advise cover would be extended and later withdraw indemnity even though no differing facts and circumstances emerged since advancing cover

  7. seeking to amend pleadings and put on new evidence (significantly changing their pleaded case) 6 weeks prior to hearing

  8. allege “material non-disclosure” where either such matters were incapable of being disclosed, or, were in the public domain, or, were not material to the risk being underwritten, or, where a reasonable person in the circumstances of the insured could never have anticipated disclosure of those matters

And so, the “strategic denial of indemnity” appears to have emerged. The policyholder must deal with its loss (wherein it must incur significant uninsured loss/damage, costs and expenses manage its reputation, deploy its resources, manage its clients and other stakeholders who may be involved in the loss) and go to war with its insurer.  In many of the above matters (which range in quantum between $35,000 and $11m) the policyholder does not have the financial resources, capacity or it is not financially viable, to proceed

Initially, the policyholder faces a loss which ought to be indemnified under its policy. The claim examiner will seek significant information from the insured (much of that having very little relevance or utility to determine coverage), instructs experts to advise on facts giving rise to the claim and engages counsel to ‘reserve insurers’ rights. Back and forth with the insurer can take months.

Practically, policyholders have limited avenues to obtain a quick resolution of the claim. Insurers’ internal dispute resolution processes simply prolongs the insurer’s decision. The Australian Financial Complaints Authority (AFCA) has limited appetite and capacity for complaints referred to it (most recently a $45,000 claim notified in August 2019 is still on foot).

Then there are the Court’s. Justice Allsopp’s Federal Court Insurance List for Short Matters is helpful for policy interpretation, however where facts are in dispute, the matter may need to revert back to the District or Supreme Court.

Where litigation is on foot with an insurer it has far more resources (financially and otherwise) than a policyholder. Insurers and their experts know this: remember, the genesis of the dispute is an insured seeking indemnity for a loss which they foreshadowed (and it was critical to the very existence of their business) would be covered.

The insurer’s experts will run numerous interlocutory applications and very much frustrate the smooth running of proceedings. By way of example recent matters where policyholders seeking indemnity of between $1.2m and $5m as against their insurer (no other parties involved) legal cost, expenses, expert fees and Counsel disbursements will be between $275,000 and $325,000. It will also take at least 18 months to get a Court date.

The insurance broker must face the consumer of insurance. These trends are alarming. In a hardening market there is no place for claims not being met, particularly when premiums are so high. We do not suggest all claims are paid, but insurers must ensure that claims positions are thorough.

For insurers and claims adjusters:

  1. paying claims is the shop window of the industry

  2. strong claims paying philosophy will yield greater and more “preferred” business

  3. do not under resource claims departments

  4. ensure that timeframes are met and where possible exceeded

  5. err on the side of the insured in the event of ambiguity and be PRACTICAL

  6. be objective and not cynical

  7. be patient with the insured/its broker, empathise with the policyholder’s predicament

  8. claims do not have to be adversarial, work through claims issues, pick up the phone to the broker, meet with the insured, articulate the coverage position clearly

  9. ‘utmost good faith’ is not a phrase used only when a broker/policyholder ‘has nothing else’ to say. It is fundamental to insurance contracting and claims payment.

  10. The trend of “underwriting” and “claims” teams not working through claims together (because of “commercial conflicts”) is alarming. Many insurance contracts are formed on intention, and many coverage positions are being taken absent adequate consultation between underwriting and claims.

  11. empower your internal claim examiners to make decisions

  12. selecting your panel should not be based on cost cutting but the experience and expertise of the Firm and those it is putting forward to represent your business and its strategic objectives

For policyholders
  1. there are many insurers and their panel experts who deliver excellence in insurance claims

  2. many “strategic denials” are taken by insurers alleging non-disclosure. Please refer to our non-disclosure article here to understand this very important obligation.

  3. there are many things that need to be done for a claim to be met under a policy. It is often a difficult time. Your broker is there to assist prepare claim submissions to your insurers, you should work with your broker closely throughout this process. If you are not getting assistance from your broker, you ought to engage new representation.