FEATURE ARTICLE, MAY 2006

STAKING OUT YOUR CLAIM
If a company is dragging its feet on your insurance claim, here are the steps to take to get your money.
Tina Hsu

During the recovery period for past hurricane seasons, filing an insurance claim was business as usual. Your risk management department swung into action: an adjuster was brought in to assess the damage, and the accountants figured out how much to claim against the insurance policies. The claim was written up, submitted and paid.

Last year, however, Hurricane Katrina and other major storms wreaked record dollar amounts of damage across the Southeast. Once again, your risk management department assessed the damage, put together a claim and submitted it to your insurers, only to receive no response. Clearly, the “business as usual” response did not work this time. To resolve the stalemate, your company will need to take a different approach, but what are the best steps to take?

While many insurers are undoubtedly inundated with post-Katrina claims implicating important legal issues, it doesn’t take a catastrophic event to cause insurance companies to dig in their heels. And it does not take a high dollar amount to stall a claim. Coverage cases from hurricanes and events long past still clog the court system. But there are things you can do to avoid having a claim (and subsequent property rehabilitation) drag on without resolution.

Keep Tabs

If your claim has gone unacknowledged, a polite written reminder is a good way to start. Particularly in the wake of a major disaster, claim paperwork can get lost in the shuffle. Even if the inattention is less than innocent, a letter can (1) escalate your claim, and (2) document your efforts to move your claim along. In addition, your letter may initiate a dialogue with your insurer that may help smooth negotiations down the road. Be sure to document your communications, including written confirmation of phone conversations. This record can provide crucial exhibits in any future litigation with your insurer if the situation deteriorates.

Reaching out to your insurer by phone or letter may also give you insight into where your claim is in the adjustment process, and what your insurer is focusing on. This may provide you with an opportunity to strengthen your claim with newly-available information or clarifications if it appears your adjuster has questions. It may be easier to deal with any problems at this stage than to wait until a formal denial has been issued.

Knowing what your state requires of insurance companies can help you draft letters that will get a response regarding your claim. Some states require insurers to process claims within certain timeframes. In Louisiana, for example, La. R.S. 22:658 states that insurers “shall initiate loss adjustment of a property damage claim within 30 days of notification of loss by the claimant.”  Other provisions of this statute set deadlines for making written settlement offers and for making payments. If your risk management team is not already aware of such statutes, a lawyer can help advise you on what your state requires.

Dealing with Denials

A notice of denial from your insurer is not necessarily the end of the story. In most cases, a denial of your claim can be treated as an invitation to further negotiation. Review your insurer’s stated basis for denying the claim, and investigate ways of addressing the asserted deficiencies with additional facts and explanations. If they have not been engaged already, accountants and lawyers can help you understand the issues in dispute, and work to put together the strongest response. Lawyers, in particular, can help identify deficiencies in the insurer’s case for denial and develop ways to reconcile the differences to provide you with maximum coverage.

For instance — and particularly in the case of a large disaster — insurers may not have or deploy the necessary resources to fully investigate losses. Adjusters might be in short supply or be poorly trained. If you believe that your denial was based on inadequate investigation, you or your lawyer should prepare a letter that details how that investigation fell short and provides factual support and documentation, if possible, of those aspects of your claim that were missed.

Any factual errors by the insurer should be catalogued and substantiated in the same way. The insurer may seek further investigation to follow up on your letter. This is your opportunity to fill in any gaps in your original claim and to buttress any weaknesses. Make sure you have all the necessary documentation and that all supporting materials are logically organized by coverage category. This process may lead to a settlement offer, which, depending on your internal assessment of the value of the loss, could lead to resolution of your claim, or to further negotiations.

Once on notice of the existence of information that might support your claim for coverage, your insurer is obligated to follow up with a good faith investigation of that information before it can deny your claim. If, however, after providing notice of these insufficiencies to the insurer, and complying with any further requests for information, the insurer maintains its denial of your claim, you may have a basis for bringing a lawsuit for bad faith denial of your claim. After all, under a standard all-risk policy, your claim is covered until proven otherwise — not the other way around.

Handling the Worst-Case Scenario

You may also need to resort to litigation if your dispute over the claim is a legal one — for example, if you have a dispute about the meaning of policy terms or the effect of certain provisions. Especially if your dispute with your insurer revolves around a hot-button issue, such as whether the flood exclusion applies to the damage caused by Katrina, you could find your insurer extremely reluctant to negotiate. In these situations, it is critical to get your legal department involved, or engage outside counsel. Legal counsel can help you stay on top of legal developments and address the substance and handling of your claims accordingly.

As a case in point, the damage caused by Hurricane Katrina may obligate insurance companies to cover $35 to $60 billion in insured damages. In the face of such enormous potential liability, it is not surprising to find insurance companies fighting tooth and nail over even small coverage claims. The viability of both large and small claims may turn on important legal questions. One example is the issue raised in the lawsuit filed by the Mississippi Attorney General, which seeks to force insurance companies to cover damage caused by storm surge by invalidating certain clauses as against public policy in Mississippi. In April, a federal judge in Mississippi ruled that the flood exclusion language contained in Allstate’s homeowner policies is “valid and enforceable” — a decision that insurers hope to apply to other cases dealing with flood exclusions

Another example with more limited, but still important effects, is the recent ruling by the Supreme Court of Virginia, which held that US Airways’ receipt of aid proceeds in the aftermath of September 11 disqualified it from recovering business interruption coverage for the same losses. It is possible that insurers will rely on this ruling to limit or bar the recovery of business interruption losses by the many companies that received governmental aid in the wake of Hurricane Katrina. Whether the ruling could affect your company will depend, among other factors, on your specific policy provisions, and the terms of the aid your company received. Because the outcome of any litigation on this issue could have far-reaching effects on companies seeking to rebuild after Katrina, if your company has significant business interruption claims, you should consult with a lawyer to see if those proceeds may be affected.

Cases like these address issues that can impact not only your coverage, but the coverage of thousands, or even millions, of similarly-situated policyholders. This possibility exposes insurance companies to significant potential liability, leading your insurer to view your claim — to the extent it implicates a hot-button legal issue — as a “bet-your-company” dispute. In this situation, your insurers may be referring all communications to their lawyers, and even routine communications will be guarded and unproductive. If this is the case, unless you are willing to agree to a substantial compromise of the value of your claim, you may need to accept that litigation will be the only way to achieve resolution.

Avoiding Conflict

Although it may not be possible to avoid coverage litigation when your claim relies on new or controversial legal arguments, there are definitely steps you can take to break deadlocks or otherwise smooth the way to a mutually agreeable resolution. Aggressively initiating and keeping open lines of communication are key to identifying and resolving differences, and carefully documenting those communications will help you deal with more contentious disputes down the road. These are basic tactics that you can employ on your own, or using in-house staff — even if, in the end, it takes a lawyer’s involvement (and the implicit threat of litigation) to get through impasses.

Tina Hsu is Of Counsel with Washington, D.C.-based Gilbert Heintz & Randolph LLP.

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.