I am often asked, “What measures can an insured take to make sure their insurance claims will be covered or paid?” Whether a claim is made under a business policy or a policy covering personal assets such as a homeowners, renters, or automobile policy.
By and large, there are three common mistakes people or companies (as insureds) make that jeopardize coverage under their insurance policies:
- Failing to give the insurance company timely notice of the claim
- Failing to cooperate with the insurance company in the defense or handling of the claim
- Selection of defense counsel and failing to insist on independent defense counsel when you are being defended by the insurer under a reservation of rights
The first mistake is failing to give the insurance company timely notice of the claim. Many times insureds forego immediately notifying their insurance carrier about a claim for various reasons – most often because they believe the claim is an amount less than the deductible and don’t want to notify the insurer for fear that their premium will be increased or worse yet, their policy will not be renewed.
Whatever the reason, not providing timely notice of a claim under an occurrence-based policy could result in your claim being denied based on provisions in the policy that require any notice of a claim be provided “promptly” or “as soon as reasonably possible.”
Even beyond that, Wisconsin has enacted laws that any notice given more than one year after a loss is presumed to have harmed the insurer. This means that if you pursue your insurer for coverage, the insurer doesn’t need to prove it was prejudiced by the late notice. The court will assume it was harmed and the burden becomes yours to convince a court otherwise. No insured wants to find him or herself in that position. So, regardless of any concern you have, notify your insurance carrier of a claim as soon as you become aware of it.
The second mistake that insureds make is failing to cooperate with the insurance company in the defense or handling of the claim. Many people think that once you give notice of a claim to the insurer, your obligations are done. But that is not the case. Insurance policies also contain what is called an “assistance and cooperation” provision, in which an insured has agreed to work with and assist in any defense the insurance company has assumed on their behalf. The most common examples of “assistance and cooperation” are those more tangible in nature like showing up to testify at trial, testifying truthfully, providing relevant documents or information, and allowing your deposition to be taken.
But cooperation requires more than that. It also precludes an insured from taking certain actions that could affect the outcome of the claim or other rights under the insurance policy.
Many insureds get coverage denied for all or part of a claim, because they enter into an agreement with the plaintiff or other party without first getting consent of the insurer. This can result in settling your claim, or cutting off the insurer’s recovery rights against another party who may have caused or contributed to the claim.
It could also take the form of admitting liability for an accident or loss, or making some other acknowledgment that makes it difficult and more costly, for the insurance company to properly defend you. These sorts of actions include:
- Allowing a default judgment be entered against you
- Colluding with an adverse party to affect an outcome at trial
- Assigning your policy recovery rights to a third party who is not a named insured under the policy
Whatever form, the lesson to be learned is to never take any action with respect to a claim or lawsuit without involving your insurer — even if you believe the action taken is the right or easy thing to do. Doing so can give the insurer a basis for denying coverage under the insurance policy and may leave you ultimately responsible for the legal fees and costs to defend yourself in a lawsuit.
The third mistake insureds often make has to do with the selection of defense counsel and failing to insist on independent defense counsel when you are being defended by the insurer under a reservation of rights.
Indemnity policies allow insureds to hire their own defense counsel and seek reimbursement of certain defense and indemnity costs after the claim or lawsuit is concluded. However, most policies are liability policies, which provides the insurer with the right and duty to defend the insured, including the selecting and hiring of defense counsel and control of the defense. In the normal course, insurers select “panel counsel” from a list of firms that insurance companies frequently hire to defend their insureds.
Some insureds fail to realize the dynamic shifts when an insurer assumes the defense under a reservation of rights. This means the insurer is defending, but alerting you to coverage issues that could ultimately result in the claim not being covered under the policy.
Not all coverage issues are of equal severity, but those that create a conflict in legal positions between the insurer and insured may entitle the insured to assume control of the defense including the selection of its own “independent” counsel — a defense still paid for by the insurer. The “classic example” of a viable conflict is one where the lawsuit brought against an insured alleges both negligent and intentional conduct – the insurance company would benefit from a finding of intentional conduct because it negates coverage, while the insured wants either a defense verdict in its favor, or at least a finding of negligence in order for there to be coverage under the policy.
It is crucial that insureds act immediately in order to determine if such a conflict exists and, if so, to pursue any consequential rights of selection of counsel and control of the defense.
All of the issues I mentioned can be prevented or minimized by acting early and making sure you involve the insurance company from the very beginning.