The “London” Approach to Handling Claims
The “London” Approach to Handling Claims01.01.2017
I just spent a week in London having meetings with underwriters and brokers. A common theme that ran through our discussions was the “London” approach to handling claims. Simply, I was reminded repeatedly that it is the obligation of the claim professional to pay claims once coverage is confirmed, and the value of the claim is documented and agreed upon. This is not to say that domestic (US) insurers do not handle claims in the same fashion. This is also not to say that London insurers to do not deny claims that either fall outside the scope of coverage or otherwise within an exclusionary clause.
However, as a former practicing insurance coverage attorney, I have seen too many occasions where insurance companies and their counsel use vague or ambiguous policy language to craft an argument to avoid coverage obligations. I have seen such an approach succeed time and time again even though such ambiguity in an insurance policy is supposed to be interpreted against the drafter of the policy, the insurer. The purpose of this discussion is not an indictment against the insurers and attorneys but, rather, is to point out to the professionals purchasing an E&O policy to be mindful of an insurer’s approach to claims is as important as premium cost in the decision-making process since the ultimate cost to your business could be dramatic in the event of a coverage declination.
An example of such a situation came to my attention while in London with a November 2016 Federal Court decision. In that case, the U.S. District Court for the Northern District of California ruled in favor of an insurer that it had no duty to defend or indemnify an insured education technology company with respect to a False Claims Act lawsuit. In that action, the education technology company was alleged to have an improper employee incentive program for student recruitment in violation of the 1965 Higher Education Act.
The company had sought a defense and reimbursement for the settlement under its Directors & Officers policy, and the insurer denied coverage on the basis that the lawsuit arose out of “professional services” (an exclusion under the policy). In response, it was argued that that the employee compensation system was unrelated to professional services as an education company. The Court nonetheless agreed with the insurance company on the basis that the “casual link between the precluded activity (incentive compensation) and the actions underlying the lawsuit (educational services)”.
What I found most noteworthy is that the D&O policy did not define “professional services”. Thus, in order to succeed, which it did, the insurer relied upon the professional services of its insured as a basis for non-coverage, a term it did not even define!
It is within this context that a lesson is to be learned for professionals when purchasing an E&O (or in this case D&O) policy – pricing including premiums and the overall cost of annual insurance when taking into consideration deductibles and limits of liability are obviously important. However, the reputation of an insurer at the time the insurance is needed, a claim or lawsuit, should not be overlooked.
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