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Holes In The Parachute

Common Insurance Company Affirmative Defenses

Volume 1, No. 2, First Quarter 1995

By Robert N. Hughes, CPCU, ARM

A couple of years ago, upon instructions from my spouse, I set my cruise control on 55 mph and, while listening to Garrison Keillor tell a hilarious story, left it on 55 mph while passing through a 35-mph zone. The resulting speeding ticket caused me to seek out the Comedy Driving School, where I took a defensive driving course in order to void the ticket. It was a hilarious and relatively painless way to learn about defensive driving and I actually enjoyed it (save for losing a Saturday). In short, I learned that defensive driving is about trying not to do stupid things yourself while, at the same time, expecting everyone else to do stupid things and planning how to avoid the consequences of their stupidity.

I talked to you in the last issue about your insurance "parachute" and whether or not you could count on it when you needed it. You may recall I said the first step was to buy insurance from companies which have a reputation for paying their claims and which would most likely be financially able to do so. I want, in this issue, to begin to tell you about some of the excuses (holes in the parachute, if you will) insurance company attorneys are offering for their clients’ denial of coverage to their policyholders and how you might avoid being the subject of such excuses if you are unfortunate enough to have a large liability claim. In other words, I’m going to teach you the principles of "defensive driving" as they apply to your insurance program.

These "excuses" I just mentioned are what is known in legal jargon as "affirmative defenses." At last count, more than 60 were being used with a high degree of regularity. Most policyholders are unaware of these defenses unless they have had the misfortune of being sued by or having to sue their insurance companies. I want, therefore, to talk to you about a few of them over the next several issues. Some will amuse you. Many will horrify you. Most, if not all, will likely anger you. Hopefully, however, with prior knowledge and a little planning, you can avoid much of the aggravation of having these defenses used by your insurance companies as an excuse of not paying a claim.

Just as in defensive driving, some of what I will tell you will involve your own behavior modification. Other advice will deal with actions you might expect from some insurance companies and the "defensive driving" techniques you should use to eliminate or minimize the "damage" they might cause. By the way, the defenses will appear in random order as they come to me, so don’t ascribe any significance to the order in which they appear.

Most liability policies require you to give the company notice "as soon as practicable." What you are supposed to notify them about varies. Primary CGL policy language usually requires you to give notice of an "occurrence" (which is defined in the policy). Excess or umbrella policies usually require you to give notice when it "appears likely" that a claim will become sufficiently large to reach that particular layer of coverage. Many policies require you to give "immediate" notice of any claim or suit.

The law in some states provides that insurance companies cannot deny coverage on the basis of "late notice" unless their interests have actually been prejudiced by the "lateness" of the notice. It is my opinion that this has always been an essential element of the bargain struck between policyholders and their insurance companies. Unfortunately, these affirmative defenses are put forward, not by underwriters, but by attorneys who, for the most part, have little experience in the buying, selling or application of insurance.

"Well," you may say, "I don’t think someone who sits around forever before notifying his or her insurance carrier should be able to get coverage." Perhaps not, but think about this. The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) was passed in 1980, making thousands of companies and individuals retroactively liable for acts and conditions which had not theretofore been illegal. Some insurance companies have now denied liability for claims arising out of "Superfund" sites on the basis that they should have been notified of the "condition" contemporaneously, decades ago. Now I ask you, how are you going to notify your insurance company of an "occurrence" when you don’t know it has happened and even if you did, you were not legally liable for the consequences? Here’s another thought … what if you notify your agent of what you believe is an "occurrence" and he or she tells you it isn’t covered? Then, sometime later you find out it is covered and you notify your insurance company, which does absolutely nothing. Or what if you notify your agent/broker, who fails to notify the insurance company? Should the insurance company be able to say after you sue, "We don’t owe because notice was too late."?

So here are your "defensive driving" hints regarding notice. First, read your policy and make sure you understand the notice requirement. If you are not sure, discuss it with your agent/broker and get a written response. Second, if by any stretch of your imagination you think there might have been an occurrence, give notice and make sure that notice is forwarded to your insurance company. Don’t try to make coverage decisions on your own. Finally, amend all your current policies, all your future policies, and as many of your past policies as you can, to state that denial of a claim on the basis of late notice shall not be effective unless the insurance company can show that its interests were prejudiced by such late notice. Finally, get all your liability carriers to agree, in writing, that any notice to your agent/broker is notice to the company.

Many insurance companies are now taking the position that if you can’t produce your policy they have no way to tell what your coverage really was, so you have no coverage. (Do I hear the hiss of steam emerging from your ears?) This is particularly true of excess carriers whose policies "reference" the underlying coverage. Can you imagine that an excess carrier whose policy purports to follow "all the terms and conditions of the underlying policy" doesn’t have a copy of that policy in its file? Oh, by the way, you might also be surprised to learn that very few agents or brokers actually keep complete copies of your policies in their files. They keep what are called "dailies," which are usually no more than the declarations page plus some endorsements. The companies have refused in most litigation to recognize agents’ or brokers’ "dailies" as evidence of coverage.

This has become such a problem in environmental cases that a whole new profession has emerged. It is called "insurance archaeology," and its practitioners are specialists in looking for lost policies. Amazingly enough, in some cases, the last place they hope to find them is in the hands of the insurance companies themselves.

So, given this very frustrating fact, here are your "defensive driving" hints regarding the "lost policy" defense. First, don’t ever throw away a liability policy. (I’ll talk more expansively about insurance document retention in a future article, but right now I’m sticking to liability policies.) Keep them forever in a very secure, fireproof place. (And for all you smart-alecs who know the difference, yes, you need to keep your claims made policies as well.) Second, if you do not now have such a retention policy, begin immediately to reconstruct your coverage for as many past years as you possibly can. Pretend you are looking for an amount of cash equal to the policy limits because, if the future were known, you might actually be doing just that. Finally, make sure you have copies of all underlying policies to which your excess policies may follow form. You also need to make sure that your excess policies are clear and unambiguous as to which policy terms they will follow. Don’t accept "to be advised" or lists of numerous underlying policies. Insist that a single policy be referenced by company name, date and number.

Well, here I am out of space and I have only talked about two of dozens of affirmative defenses being offered by insurance companies in coverage litigation. I suppose that means we’ll just have to keep publishing. Just remember, in the meantime, to know the terms and conditions of your policies and try to behave in accordance with them. At the same time, be prepared to deal with some very unexpected tactics from your insurance companies when you have the "big one." See you again soon.