The average American spends thousands of dollars
per year of insurance. Homeowners, automobile, medical, life,
business, disability, umbrella and other coverages. Because
most of us never suffer the large losses that everyone worries
about, people have very little experience in dealing with
insurance companies on large claims. Those that do are often
in for a bit of a shock. Delay, the use of complex policy
language to deny claims, and substantial underestimating of
losses by carriers are common. Many people don't realize that
insurance companies, like banks, earn their profits from investments,
stocks, bonds, venture capital and real estate. The profitability
of a company depends on how much money they have available
to invest. If a company owes X million to all claimants at
a given point in time, it can save 8% or more of that per
year in investment profits by merely engaging in delay. It
can save another 30 to 40% by engaging in lowballing. Another
20 to 30% can be saved by wrongful claim denials on confusing
policy language.
Whether an uninsured will recover for a legitimate
claim at all, and if so, the amount he or she will be paid,
depend largely on the policyholder's own knowledge of his
or her rights and responsibilities. Policyholders are often
at the mercy of their insurance company. The company wrote
the policy, the company interprets the policy, the company
evaluates the claim and the company holds the money.
So the policyholder is really at a substantial
disadvantage to the insurer. However, there are ways to begin
to level the proverbial playing field. To do so, you must
familiarize yourself with important principles of insurance
law which judges and legislators have fashioned over the years
for your protection.
1. An insurance company must act in utmost
good faith in the interpretation of their policies, and
in the investigation and payment of claims.
It is unlawful for an insurer to engage in
unreasonable delay; to put their financial interests ahead
of the financial interests of the policyholder; or to lowball
(underpay) claims. They cannot use deception or trickery
in sales or claims handling. They cannot compel an insured
to hire an attorney in order to be paid what they are owed.
They must be fair to their policyholders. The violation
of any of these standards is a violation of the duty of
good faith which the law imposes on insurance companies.
It exposes the carrier to potentially significant damages.
2. If an insurance company unreasonably
denies a claim or breaches its duty of "Good Faith
and Fair Dealing," and you must sure them in order
to recover your policy benefits, the insurance company must
pay for your legal costs and attorney's fees.
If the attorney's fees and other damages were
not available, the policyholder could not be made whole
and the insurer would be able to under-settle claims merely
by arguing that they are offering more to settle that than
what the uninsured would net on the actual value of the
claims, after payment of their legal fees. If an insurer
makes this argument to you in an effort to underpay, thank
them in advance for offering to pay your costs and attorney's
fees. That is exactly what they doing by engaging in such
conduct.
3. If an insurance agent misrepresents the
coverage being provided at the time the agent sells you
your policy, the insurance company will have to honor the
coverage representations made by their agent.
Insurance agents are really nice. Otherwise,
they wouldn't be able to sell you any policies. The same
is true for claims adjusters. Otherwise, they wouldn't be
able to settle any claims. It is important to distinguish
these nice individuals from the company itself. The purpose
of an insurance company is not to be nice, but to make money
for its stockholders. If it makes more money than expected,
the stock goes up. If it makes less money than expected,
the stock goes down. When the stock goes up, executives
are given bonuses. When the stock goes down, they are given
headaches. The name of the game in the home office begins
with the word "profits." Don't ever forget this.
When the home office trains agents or claims adjusters they
don't tell them to be sinister. There are no conventions
at which agents are taught to misrepresent coverage and
adjusters are taught low-balling techniques. What does happen,
however, is that agents are told very little about the policies
they are selling. They may know something about what is
covered, but they know very little about what is not.
If you were to spend the rest of your life
talking to insurance agents about policies they are selling,
you would probably not find a single agent who would be
able to simply pull out a policy and explain it. The truth
is that agents don't understand policies. They just sell
them. Most agents won't even show you a copy of the policy
they are urging you to buy. If you ever see a policy at
all, it will probably be sent to you in the mail directly
by the insurance company days, or weeks, after you have
purchased the insurance. So at the time of sale, you don't
know what you are buying other than what the company or
agent promotional or sales pitch conveys to you.
4. If the amount of your insurance coverage
is not sufficient to cover your actual loss because the
insurance agent recommended that you insure for less than
the amount you actually needed, the insurance company may
be responsible for paying your entire loss, not just the
amount of the policy benefits.
For example, when an individual purchases business
property or homeowner's insurance, they will often ask the
agent what the policy limits should be before the particular
property in question. Sometimes, the agent, in attempting
to give you the lowest premium bid possible (in order to
beat out the competition), will underinsure the property,
(e.g. insuring a property for $600,000 that would cost $800,000
to replace) thus lowering the premium quoted. Perhaps the
agent rationalizes that the policy contains a "replacement
guarantee" anyway. The problem is that replacement
coverage is useless unless you actually rebuild the property
with "like, kind and quality: of what was destroyed.
In the event of catastrophic loss, many policyholders decide
to take their insurance payment and buy elsewhere, rather
than actually rebuilding. In that case the underinsured
policyholder loses a bundle. Moreover, personal property
and business property are usually insured under these policies
as a percentage of the face value of the policy, not a percentage
of the replacement value of the property. Therefore an underinsured
policyholder is uninsured for both the building coverage
and the personal or business proper coverage.
This is another good reason to take notes when
you buy your policy in the first place, and to keep these
notes in your insurance file. If the limit which your purchased
were recommended by the insurance agent and they are insufficient,
you are entitled to be paid for all losses on the basis
of what your limits should have been.
5. Any ambiguity in your policy must be
interpreted in your favor and against the insurance company.
Take a look at this paragraph from a State
Farm homeowners' policy:
"We do not insure under any coverage for
loss consisting of one or more of the items below:
a. conduct, act, failure to act, or decision
of any person, group, organization or governmental body
whether intentional, wrongful, negligent or without fault;
b. defect, weakness, inadequacy, failure unsoundness
in:
(1) planning, zoning, development surveying,
siting;
(2) design, specifications, workmanship,
construction, grading, compassion;
(3) materials used in construction or repair;
or
(4) maintenance; of any property (including
land, structures, or improvements of any kind) whether
on or off the residence premises."
Every insurance company has a Mad Hatter Department.
This Department is in fierce competition with its counterparts
at other insurance companies to see who can write the most
incomprehensible and loophole-filled gobbledygook in the
industry. I'm convinced that insurance companies have secret
awards dinners at which bonuses are given to those who have
written the most obtuse, self-canceling phrases of the year.
The reason policies are so incomprehensible
is not because insurance companies cannot find people who
can write in plain English. It is because the companies
know that the less clear the policy is, the less clear their
obligation to pay will be. So they write policies that they
have to obtain "coverage opinions" on from law
firms to whom they pay hefty fees to explain what they have
written. Believe it or not, even these lawyers are often
wrong.
You can turn this confusion from a disadvantage
to you and into an advantage by simply showing that an applicable
provision is ambiguous. If it is, coverage must be provided,
and the claim must be paid.
6. The insurance company, not the policyholder,
has the obligation of providing the applicability of a "limitation"
or "exclusion" in the policy.
Insurance policies typically contain a very
brief "insuring clause" describing what's covered.
Dozens of paragraphs and thousands of words are then spent
listing exclusions, exceptions and limitations.
When a large claim occurs, insurance companies
want to be able to write a letter to their policyholder
denying coverage by quoting from one or more of the "exclusions."
The bottom line will be that they sure would like to pay
your claim, but golly darn, they just can't.
Many insureds will either accept what they
are being told or will seek advice from someone in the insurance
industry or from a lawyer who doesn't specialize in this
field. As a result, many legitimate claims go either unpaid
or severely underpaid.
What you should know is that the insurance
company, not you, has the burden of proving that an exclusion
or limitation in the policy is (1) clear, (2) conspicuous
and (3) applicable. The shifting of this "burden"
concerning exclusions - to the insurers - is contrary to
the usual rule of the law that the party making the claim
is the one who hears this burden. Because most policyholders
are unaware of this rule, insurance companies often avoid
paying legitimate claims based on exclusions that, if challenged,
the exclusions, to the company.
7. In cases involving your insurance company's
duty to defend, its duty to defend is broader than its duty
to indemnify.
The liability portion of every business, homeowner,
auto or similar insurance policy is the portion of the policy
that protects you from lawsuits by others. It requires the
insurance company to pay your legal defense costs and fees
if you are sued. Sometimes an insurance company will say
that it doesn't have to defend you because you have been
sued for something that is not specifically covered in the
policy. It must also defend you in any situation which potentially
seeks covered damages. For example, if a complain filed
against you does not see damages within the scope of your
overage but is capable of being amended or modified to include
such damages, your insurer must defend. Furthermore, if
the insurance company learns of facts from any source which
would trigger coverage (not just the complaint itself),
it must also defend you. In addition, it must defend where
the policyholder has a reasonable expectation that it will
do so.
If there are multiple causes of action in the
complaint against you, let's say that you were sued in a
complaint alleging both negligence, breach of contract and
intentional misconduct, then if the insurance company must
defend any of those causes of action, it must defend all
of them.
If an insurance company that has a duty to
defend in a particular case refuses to do so, then it may
well be responsible for all resulting damages, including
payment of the amount of any judgment entered against you,
or of any settlement (including collusive or fraudulent.)
8. An insurance company that tries to rescind
(eliminate) your policy coverage once you have made a claim,
on the grounds that you made a misrepresentation on your
insurance application, may be violating the law.
This point can be complicated. Just remember
that some policy application questions are very, very broad.
For example, on a health care policy application, you may
be asked to "list all of the physicians you have seen
during the past five years." Or, "have you ever
been treated for diabetes, cancer, heart disease, head injury
or pain."
Note that such a question is tricky. If an
agent asks this question verbally, most people will think
in terms of important medical visits or serious conditions.
They will not think of every doctor they have seen during
the past five ears and may not focus on treatment for tension
headaches, which technically fall within the latter question
as "head injury or pain." After fifteen or twenty
questions all containing numerous sub-parts people tend
to glaze over somewhat. So when the agent slides an application
across the table one assumes that the answers the agent
has written down are accurate. They sign under a declaration
citing penalty of perjury. I have seen many insurance companies
later try to escape paying a large claim by accusing a policyholder
of trying to defraud them by obtaining insurance under false
pretenses. They point out solemnly that doing so is illegal.
Some people become so frightened that they give up their
claim. If you are innocent of any wrongdoing, don't give
in to such tactics.
There are three important principles to remember
on this subject: (1) Read all policy applications yourself
and read them skeptically; (2) Don't fall for a bluff when
an insurance company tries to rescind. If you have been
honest, stand up for yourself and fight it. You will probably
win and will wind up proving that the insurance company
was engaging in bad faith as well by trying to take away
your coverage after the claim occurred; and (3) There are
"incontestability periods" in most policies and
under the law. That means that beyond a particular date
(e.g. two years), the company can no longer rescind the
policy for an alleged misstatement on the application. When
they try to rescind, don't rollover, examine the situation
carefully.
9. Punitive damages are awardable against
insurance companies of engaging in oppressive, fraudulent
or malicious conduct. Use this fact in negotiations where
applicable.
Insurance companies love to tell anyone who
will listen that punitive damages are a terrible and unwarranted
things, a concept cooked up by lawyer parasites to get rich
off innocent, misunderstood insurance companies. Don't buy
it. Punitive damages are the only thing that prevents insurance
companies from engaging in even more outrageous bad faith
conduct than they already do. If a given insurance company
has, let's say $100 million, in valid claims that have been
made, it knows that its investment profits on this money
alone will likely exceed $15 million per year. It also knows
that if it merely delays, long enough, many insureds (particularly
if they are ill or have lost substantial assets or property)
will substantially under-settle their claims. If they have
died during the delay, the company may never have to pay.
In addition, the company knows that if it wrongfully
denies the claims, many policyholders will not be willing
or able to fight them. Last, even as to those who do fight,
insurers know that most people will not be willing or able
to fight them. Last, even as to those who do fight, insurers
know that most people will probably wind up with a lawyer
who knows little about insurance law or who doesn't have
the financial capacity to fight a multi-billion dollar industry
with an infinite supply of lawyers. Therefore, instead of
just paying out the money to policyholders to whom it is
owed, an aggressive insurance company can keep much of the
money owed, and can earn even more back on investments made
during the delay period. So that little, or none of the
actual money owed is ever paid.
The insurers also know how difficult it is
to recover punitive damages in courts these days. Punitive
damages are disfavored by judges and juries alike. If you
are going to recover punitive damages against an insurance
company, you had better have some very persuasive evidence
or the judge will not even permit the issue to go to the
jury in the first place. If punitive damages do go to the
jury and the case is not extremely strong, the jury will
toss you out the door. In addition, if punitive damages
are awarded, the judge can reduce them. Finally, the insurance
company can appeal the verdict.
So the insurance company has quite a bit going
for it in avoiding ever having got pay a substantial punitive
damages award. The rarity of punitive damages awards that
actually stick, makes it very important that such an award
be appropriate in light of the conduct and wealth of the
particular insurance company. For years, insurers have been
trying to get state legislatures or Congress to cap punitive
damages at say, $300,000 or $400,000. That sounds like alot
of money until you look at the figures. If you must deter
someone with a bank balance of $500 million from making
money illegally, it would certainly not be too much to award
one to ten percent - to make it less profitable to engage
in the legal practice. Naturally, an insurance company is
not going to be deterred by smaller amounts. But if you
take the same percentage, 4%, or 5% and apply it to an insurance
company with a net surplus (beyond reserves and expenses)
of $800 million, then punitive award comes to $40 million.
There are very few $40 million or more punitive damage awards
upheld against insurance companies. But a $300,000 or $400,000
cap would be laughable to a multi-million dollar insurance
giant. They would continue with business as usual, because
the illegal profits earned would be far greater than the
potential damages threatened.
In any event, the prospect of punitive damages
can give you as the Insurance consumer, important leverage
to encourage an insurance company to treat you fairly in
the first place. That is really what punitive damages are
for, to make an insurance company think twice before ignoring
the law. The companies realize that even those who know
the least about insurance law may happen to wind up in the
hands of a lawyer who, after subpoenaing the claims file,
and fighting through fifty or so depositions, obtains the
evidence necessary to ask a jury to set an example. This
fact can be helpful for you to know when trying to negotiate
a fair claim settlement on your own behalf.
10. You can usually get free legal advice
from an insurance law expert so that you know your rights
before you talk to your company, rather than after it is
too late.
Lawyers who take on these insurance bad faith
cases have to evaluate them carefully beforehand. These
cases are usually taken on a percentage or contingency fee
with the lawyer advancing all the costs. The cases had better
be good ones or the lawyer will soon be out of business.
Therefore, a great deal of time is spent giving
free legal analysis to insureds, whether a case is ever
filed or not. Use this to your advantage to get free advice
regarding your claim. Make certain that the lawyer you are
getting the advice from is truly an expert in this field.
Seek a referral to a specialist from a lawyer friend, and
question the attorney thoroughly before relying on his or
her options. Obviously you should make sure that the expert
insurance lawyer does not specialize in representing insurance
companies.
As mentioned earlier you are spending a great
deal of money every year on insurance. Be aware that to
get what you're paying for, against this industry, you have
to know something about your rights. Store this article
with your insurance papers. If the insurance underwriters
were right in their projections, you will never need to
review it because like most people you will never have a
large claim.
Remember that protecting yourself and your
family starts but does not end with this information. When
it comes to insurance, Caveat Emptor is always the rule!