The flaw in using flawed opinions to deny claims

Chris Amrhein
Policy Issues
Agent and Broker Magazine
March 31, 2006

Welcome to March, which is National Ethics Month, as sponsored by the CPCU Society and other fine insurance organizations. A while back,  an alert reader sent me an intriguing e-mail message regarding an ethics issue, and this is just the occasion to discuss it. At the core of his conundrum is his observation that some insurance companies deny claims based on legal precedents in which courts have obviously misinterpreted policy language, especially in cases involving the CGL policy. The reader noted that it was not merely his opinion that the verdicts in question were flawed—industry experts had published articles about them in various journals, discussing what went wrong, and courts in other states later rejected the rulings. Still, he said, insurers use such obviously erroneous judgments to justify denying their insureds’ claims.

“Claims adjusters have told me that, regardless of what I think or how other states’ courts have dealt with such matters, once a court rules on the meaning of a policy’s language, that’s the final word,” the reader reported. “Such reasoning, in my view, is nonsense. While statutory law may vary by state, the insurance contracts used in most states are identical or nearly so. And while statutory law may trump policy language, case law certainly does not. When a court fouls up a ruling, the insurers in that state should not rely upon the ruling to deny future claims.”

The reader said he suspects that, in many cases, insurers who argue against paying a claim based on policy-language rulings in one particular state also argue the opposite in other states when subrogating against other insurers. He added that a carrier’s assertion that a contract’s wording means two completely different things in two different states is “the height of hypocrisy and a violation of ethical standards.” Unfortunately, based upon the e-mails I receive and the tales I hear in class, the reader is not alone in either his observation of claims-handling duplicity or his distaste for such carrier practices.

As I have discussed previously in this column, if there is one thing all insureds expect from their coverage, it is a predictable outcome when they file a claim. No one likes to have a claim denied, but when it happens, most insureds act like adults and face the disappointment appropriately—as long as they perceive that the results are consistent and fairly applied. When that’s not the case, things can quickly turn ugly. Misery loves company, and if insureds even suspect that their claims are handled differently from those of other folks, they’re bound to cry “foul” and likely to follow up with a lawsuit.

Before leaping straight into the ethical implications suggested by our reader, let’s first review his assertions about court cases. How, exactly, do courts’ decisions factor into claims settlement?

Disclaimer: I am not an attorney. Having said that, I have a few general observations based on my own experience and research into claim-settlement matters. First, courts may, indeed, have legal authority over coverage decisions in a given state, but only if their decisions are rendered at the appellate level or higher. Local courts often are the first port of call for claims disputes, but the decisions may be, well, specific to their locale. For instance:

“The court finds the insurance carrier to be the lowest form of carpetbagger scum, and therefore orders it to pay this poor, suffering individual the full amount of his claim.”

“Wow! Thanks, Uncle Billy!”

“No problem, Beau. And tell your Mom I’m looking forward to her buttermilk pie come dinnertime Sunday.”

If the parties involved in a claim dispute decide not to appeal the local court’s decision, the case is closed. But a dispute that makes its way to an appellate court, or a higher one, assumes greater importance. A decision rendered at that level, often referred to as a “legal precedent,” has the same effect as law on subsequent similar cases until the decision is overturned on appeal or the legislature changes the law upon which the decision rested. One caveat: Since legal precedent arises from a specific court’s decision, the “legal precedent” only carries the force of law within the jurisdiction of that court. For example, a decision rendered by the U.S. 5th Circuit Court of Appeals carries the weight of law only within the geographical boundaries of the 5th Circuit. When processing claims in any other circuit, carriers may legally ignore that particular court’s decision. Similarly, a ruling handed down by a state Supreme Court is legally binding only within that state. Other states’ high courts can, and do, render different verdicts when reviewing claims scenarios that are virtually identical—a fact often overlooked when certain court decisions are publicized in the mainstream media or in insurance magazines, creating the very confusion our reader described regarding the way carriers invoke court decisions when processing claims.

Now, back to the key question: Is the carrier conduct described above unethical?


While others may disagree, I believe that if we are to agree on whether an  action will be deemed “ethical,” we need something that goes beyond individual values and morals; we need a “code of ethics.” An effective code is not a mere statement of values and morals but a guide for action. It is the ruler against which your actions shall be measured, the plumb line against which your foundation will be judged. Once you’ve chosen your code, post it prominently to tell the world—and to remind yourself—that you have committed to abide by it. Without predictability, consistency and the ability to measure actions against promises, there are no ethics, and thus no basis for integrity or trust.

A carrier may argue that it must produce the best possible results for itself and its stockholders by exploiting whatever legal loopholes or precedents are available. Many attorneys consider it not only ethical but also their duty to advocate for their clients, using all the tools at their disposal, so long as they abide by the law. Anyone who watches “Perry Mason” or “Law & Order” has seen even the “good guys” at times bend the rules to attain the “right” result. Often I have heard legislators and lawyers say, unapologetically and with no apparent irony, “If you are in the right, argue principles; if you are in the wrong, argue the law.”

Our reader’s e-mail asserts that some carriers go far beyond merely invoking previous rulings within a given jurisdiction—they “cherry-pick” the decisions likely to produce the desired results, regardless of whether those decisions truly apply to the claims at hand or were later overturned by a higher court. And no doubt carriers have taken opposing positions in arguing the same types of cases, depending upon what is likely to yield the most favorable outcome.

Such “playing the legal game” has a huge negative impact on the perceived integrity, or lack thereof, of the claims process and the way insureds believe they are treated. Every day agents and carriers make promises to insureds: “You’re in good hands.” “We are your Trusted Advisor.” “We serve you first.” “We sell peace of mind.” “We’ll be there when you need us the most.” In reality, insureds buy not a product but a promise, and to meet the criteria for ethical behavior, a carrier’s actions must be predictable, consistent and measurable against its prior promises. In effect, a carrier creates its own code of ethics, which says: “Trust us—we keep our promises.”

If you read many of the claims articles that have appeared in this and other publications, many claims-related court cases, and the ongoing coverage of the rebuilding of hurricane-devastated areas along the Gulf Coast, you will find that much of the disappointment with, and anger toward, our industry does not arise from courtroom conflict or legal twists and turns. Rather, it results from insureds’ belief that insurers fail to keep their promises, and their sadness and disillusionment following the apparent breach of trust.

So to my alert reader, I say two things. First, if claims adjusters and carriers pursue illegal practices, they should be legally taken to the woodshed. Second, if a carrier argues that its seemingly sleazy practices are perfectly legal, someone should whack it and its claims personnel upside the head with a two-by-four into which has been carved that carrier’s promise to treat insureds fairly when handling their claims.

Legalists often advise us to follow the law, and “let the chips fall where they may.” Too bad their “chips” derive from cows. This month, let’s commit to taking the high ground. Ethics can raise us from the pasture of broken promises to the mountaintop of trust. Onward and upward!

Chris Amrhein is an insurance educator and speaker with more than 30 years in the industry. He is also chief fun officer of www.insuranceisfun. com. Readers may contact Chris at

Copyright © 2006 Pfingsten Publishing, LLC

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