When an insured party suffers a loss, the first question will invariably be “do any of the insurance policies I own cover this type of loss?”
Insurance policies are contracts between the insured and the insuring company. Like all contracts, the actual policy wording matters. The law is clear that contracts must be interpreted based on the actual wording of the contract. Generally speaking, if the wording of the contract can logically be interpreted to support insurance coverage for the claim, then a court of law will support that the carrier must pay out on the claim.
When a claim occurs and is submitted to the insurance carrier’s claims department, the first thing that will happen is that the insurance carrier will start an investigation to determine whether or not the policy wording supports the insured’s request to pay out on the claim. When a claim occurs, the insurance carrier is going to look at all the relevant factors that led up to the claim as well as how the situation was handled by the insured – keep in mind that no two claims occurrences are ever exactly the same. All insurance policies have very specific wording regarding what is covered as well as wording describing what is excluded; unfortunately the interpretation of this wording is not always as straightforward as it may seem, because words often have multiple meanings and therefore insurance policy wording may be open to multiple interpretations. This often leads to an insurance company claiming that the intent of the policy wording is one thing while the insured claims that the intent of the policy wording is another.
When a insured party suffers a loss and the insurer denies coverage, the insured’s first reaction may be “let’s sue the insurance carrier.” However, an insured party needs to be careful here because litigation puts the outcome of the dispute in the hands of a third party, and removes the decision-making process from the two parties that know the issues better than strangers (jury) or a judge. More often than not, a better way for an insured to handle a claims dispute is to negotiate, mediate, arbitrate, and then only as a last resort to litigate.
When an insured party first receives a denial of coverage from the carrier, they should check the policy wording as the process for disputes is normally specified in the policy. Second, they should reach out to the agent or broker to get their point of view and to advocate with the carrier on their behalf. The insured should begin the negotiation process as early as possible by reaching out to the carrier to explain why the claim should be covered. Keep the merits of the claim simple, discuss other lines of coverage with the carrier, be willing to compromise, and speak to the long-term relationship with the carrier. Above all, remain polite and non-confrontational; remember these are people you are dealing with and being nice can go a long way.
Mediation is an option that should be considered before going down the path of litigation. Mediation tends to have a high success rate because it limits the dispute issues and allows a neutral third party to provide insight into the disagreements.
With arbitration, the stakes get higher but is still usually a more favorable alternative to litigation as it is often less costly than court and has the advantage of a compressed timetable for the completion of discovery. The downside of arbitration is that the decision of the arbitrator(s) is normally binding with almost no right of appeal.
Keep in mind that most insurance companies do not like to get into lawsuits with their policy holders as the process can become expensive. This is why more than 95% of litigation matters settle before going to trial.
When a claim occurs and the carrier denies coverage, the insured should think, negotiate, mediate, arbitrate, and then only as a last resort litigate.