Improper Claim Denials

I initiated this column in 2019 with a 12-month series of articles summarizing the key points in my book “When Words Collide: Resolving Insurance Coverage and Claims Disputes.” In my June 2019 column, I wrote about what claim declinations should and shouldn’t do.

For example, all claim denials should be in writing, cite the specific policy language (and only that language) that is applicable to the claim, and explain why and how that policy language works to exclude coverage. Virtually all state Unfair Claims Practices laws support these premises.

In addition, all claim denials should NOT generalize or paraphrase policy language, reference policy language excerpts that misrepresent the intent of coverage and cite policy language as a basis for the denial that has no real relevance to the claim. These criteria are supported in most states, again, by Unfair Claims Practices laws or case law, often based on an interpretation of such laws.

Recently, someone came across my June 2019 column and asked for examples of these doctrines. Given that this is the fifth year of my column, in this issue, I’ll provide five examples of claim denials or coverage opinions that I believe were improper.

Paraphrasing

An insured had a bank-wired transfer intercepted and the funds were stolen. The claim was denied under a cyber crime policy on the basis that the fraud itself must physically take place from within the insured’s or the bank’s premises. The denial paraphrased policy language to support this as follows: “… related to the use of a computer inside the insured’s premises or the premises of the bank.” However, what the policy language actually said was: “… related to the use of any computer to fraudulently cause a transfer of that property from inside your premises or from a banking institution or similar safe depository, to a person (other than a ‘messenger’) outside those premises or to a place outside those premises.”

The language in the denial, even though shown in the written declination in quotation marks, was paraphrased incorrectly from what the policy language actually said and covered.

Selective Form Language Citation

This was a coverage inquiry and not a claim but illustrates why it is critical to read the policy and provisions therein completely and not selectively.

A condo owner rented the clubhouse for his child’s birthday party and the property management company required evidence of at least $300,000 of liability insurance. The underwriter said his condo policy did not cover this exposure because of an exclusion for liability “Arising out of a premises: (2) Rented to an ‘insured’.”

What the underwriter failed to read or cite in the policy was an exception further down that page such that the exclusion applied only to liability “Arising out of a premises: (2) Rented to an ‘insured’ … that is not an ‘insured location.'” The definition of “insured location” included “Any part of a premises occasionally rented to an ‘insured’ for other than ‘business’ use,” which was exactly what the insured was doing.

Citing Policy Language Inapplicable To a Claim

A homeowner returned from work to discover that the first floor of her home had flooded due to a burst water pipe in the kitchen that had gushed all day. The denial letter cited over a dozen exclusions ranging from wear and tear to pollution to “birds, vermin, rodents, or insects.” The denial consisted largely of entire pages of exclusions that had absolutely nothing to do with the loss.

In addition, the adjuster failed to mention a policy provision at the end of the exclusions that said, “If any of these cause water damage not otherwise excluded, from a plumbing, heating, air conditioning or automatic fire protective sprinkler system or household appliance, we cover loss caused by the water … .”

Failing to Explain Why Exclusions Apply

A crane operator overloaded a crane during a test, causing it to collapse, resulting in property damage. The denial cited, word for word, the ISO CGL policy’s Coverage A Insuring Agreement (including every definition referenced in the Insurance Agreement), Exclusions j.(1)-(6), k., l., m., n., and t., none of which applied to the claim. The denial offered no explanation as to why any of these exclusions applied to the claim.

Sometimes an adjuster will cite one or more exclusions that he or she believes applies to a loss and, also, one or more other exclusions that, after investigation, might apply.

In a Reservation of Rights letter, that is entirely acceptable. However, it is not acceptable to simply cite almost every exclusion in the policy as if the validity of the denial is based on the extent of the verbiage cited in the declination letter or the weight of the paper it’s written on. It also is not acceptable to cite an exclusion or, worse, a litany of exclusions without explaining why and how such policy provisions apply to exclude the loss.

In Harleysville Group Insurance v. Heritage Communities, 803 S.E.2d 288 (S.C. 2017), the South Carolina Supreme Court opined, “[I]t is axiomatic that an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage … generic denials of coverage coupled with furnishing the insured with a copy of all or most of the policy provisions (through a cut-and-paste method) is not sufficient.”

Improperly Denying an Uncovered Loss

A dentist’s office computer system was hit by ransomware that encrypted all of his customer files. Similar to the homeowner water damage claim, the adjuster’s voluminous denial letter cited most of the exclusions in the dentist’s business income and accounts receivable policies, none of which applied to the claim.

What was not cited and was relevant to the loss was the insuring agreement in each policy form that required “direct physical loss.” Based on case law in that jurisdiction, the insured’s loss was not a direct, physical loss. So, the claim wasn’t covered, but not for the reasons cited by the adjuster.

In denying a claim, it is critical that legal and ethical practices be employed whether the denial is proper or not. That is likely required by statutory, regulatory, or case law but, given that this month (March) is Ethics Awareness Month for the insurance industry, it’s also always the right thing to do.