The insurance claims area of insurance law is also widely known as insurance defense since these cases almost invariably test whether denials of claims are proper. When an insured is sued by another party for a covered injury (as in the case of a car accident), the insurance company is often contractually obligated to provide the insured with legal representation. Attorneys that work to defend the insureds usually specialize in tort and personal injury law. Insurance defense attorneys’ jobs are to assess each case and determine whether to settle quickly or try to win a not liable verdict on the merits. This module will look at the rights and duties of the parties as well as the claims process.
To receive the proceeds under an insurance policy, an insured must first file a claim. The manner in which a claim is made is governed by the provisions of the policy and compliance with these provisions is a condition to the insurer’s duties to perform its obligations and to pay proceeds.
Notice of Loss
Insurance policies generally require that the insured provide a notice of loss to the insurer immediately after a loss. This allows the insurer’s attorneys to investigate and gather factual information before the information disappears or becomes unavailable.[1] Another reason for the notice of loss provision is to protect against additional future losses. For example, prompt notice may allow for quick repairs to property to protect against greater future losses. Many policies require that the notice of loss be in writing. However, if an insurer receives oral notice and fails to inform the insured that written notice is required, the insurer will be estopped from asserting noncompliance with the provision. Moreover, if the insurer receives notice of loss from other sources, depending upon the quality of the information received, the insurer may also be precluded from denying coverage based on estoppel.[2]
Regarding timing of notice, courts have consistently employed the reasonable time test. When damage occurs for which the insured might be liable, the test is what a reasonable insured would do in the same set of circumstances. Whereas most polices use language requiring the insured to give notice “immediately,” or “as soon as possible,” the courts have interpreted this language as requiring notice in a reasonable time in light of all the circumstances. Varying time periods between the loss and notice have been applied in various cases.
Let’s look at two examples in which the circumstances, rather than the time elapsed, proved the critical factors. In Lord v. State Farm Mutual Automobile Insurance Co.[3] the insured had just been admitted to law school and was moving apartments. He had parked his car on the street near the apartment he was leaving. He was carrying a stack of books, and while reaching into his pocket to retrieve his keys, he was attacked by an assailant and stabbed, causing him to be hospitalized for nine days and to incur over four thousand dollars in medical expenses. The insured was not aware that his auto insurance policy might cover his medical expenses, so he did not give notice to his insurance company. After recovering and consulting a lawyer, he provided notice, 173 days after the incident occurred. The insured argued that he was unskilled in insurance matters and did not expect to be covered for this incident under his auto policy and therefore his late notice should be excused. The court, however, ruled that he was not prevented by his injury from making a timely claim. Rather, he was simply ignorant of his policy provisions. The Court also observed that, had the insurer been given reasonable notice, it would have been better able to investigate the matter. The lack of timely notice without sufficient justification constituted a breach of notice conditions, allowing coverage to be denied.
In Weaver Brothers, Inc. v. Chappel,[4] the insured and two family members were killed in 1974 when their van was hit head-on by a Weaver Brothers tractor-trailer. In 1975, the family members’ estates filed a wrongful death lawsuit, which it won in 1979. In 1980, Weaver Brothers filed a claim for contribution against the insured’s estate and notified the insured’s insurer of the claim. This notice was over six years after the accident occurred. The Supreme Court of Alaska ruled that despite the long delay, the insurer would not be excused unless it could demonstrate that it was prejudiced by the delay. It cited a strong public interest in protecting accident victims in not allowing the insurer to deny coverage merely because of the delay. In some cases, an insured’s lack of notice may be excused. For instance, notice may be excused when the insured is an additional unnamed party unaware of an insurance policy or when the insured has reason to be unaware that the event could be covered under the policy or where the insured, as a result of sickness or disability, was not capable of giving notice.[5] Under the modern view, most courts apply the notice-prejudice rule, which states that late notice does not discharge coverage unless the insurer is prejudiced by the late notice. Given that it is difficult to prove prejudice, under this rule, coverage would rarely be denied due to late notice.[6]
In Morales v. National Grange Mutual Insurance Co.,[7] a New Jersey court determined prejudice by looking at: (1) whether substantial rights pertaining to a defense against the claim had been irretrievably lost by the delay, and (2) whether the possibility or likelihood of the insurer’s successful defense of the claim had been diminished by the delay. Morales held that prejudice must be material and not just an inconvenience.
Documents Prepared with a Claim
Proof of Loss
Policies generally require the insured to complete a sworn statement as to the amount of loss, called a “proof of loss.” The document requires the insured to specify
(1) the time and cause of the loss;
(2) the interest of the insured and other parties in the property;
(3) other insurances that may apply to the loss;
(4) changes in title or occupancy during the term of the policy (in the case of real estate);
(5) specifications of damage to buildings and repair estimates;
(6) an inventory of damaged personal property; and
(7) receipts for additional expenses.[8]
Completion of the proof of loss form is generally a condition precedent to coverage. Courts have held that “substantial” compliance is what is required to discharge the insured’s responsibility to complete and send a proof of loss.[9]
Appraisals
Where there is disagreement regarding the value of the loss, appraisers may be hired by each party. If necessary, a third “neutral” appraiser may be hired to settle a disagreement between the appraisers of the respective parties. Some policies, though, provide that the issue of property value be submitted directly to arbitration.[10]
Time Limitations for Filing Suit Against the Insurer
While insureds may sue the insurers for failing to process claims, there are time limitations for these lawsuits that may be imposed by the policies themselves or by state statutes of limitation. Contractual limitations set forth in the policy are generally more important because these limitations are usually shorter than state statutes of limitation. Still, contractual time limitations will not be enforced by courts if they are unreasonably short. Courts have held that a limitations period of one year is reasonable as a contractual limitation. The contractual limitations period is a condition subsequent to the insurer’s duties, as the insured failing to sue within the time specified may discharge the insurer’s contractual duties.[11]
One of the difficulties in applying this limitation is when the loss occurs slowly over time, as in the case of a progressive injury. Some courts have found that this time does not start until “appreciable damage occurs,” or when the insured should have been aware that the notification duty would be triggered. Other courts have ruled that the time period in which the insured is required to sue does not begin until the insurer denies the claim, as, until that time, the insured should be free to follow the policy-mandated procedures to seek resolution.
No-Action Clauses and Direct-Action Statutes
Many policies include no-action clauses that prevent the naming of the insurer as a defendant in a lawsuit against the insured. The primary purpose behind no-action clauses is to prevent prejudice by a jury against an insured that may occur if the jury is aware that there is an insurance policy (since the jury might be more likely to rule against the insured if it figured that the insured isn’t sustaining the loss in any case). In fact, many courts have refused to allow direct actions against insurers even without no-action clauses in the policies.[12]
There are, however, situations in which direct actions are allowed against an insured, including:
– -Once the third party has obtained a judgment against the insured, an action can be brought against the insurer to collect the judgment;
– -Where an auto insurance policy covers uninsured motorists driving the car insured by the policy (such as where the car was lent to a friend and the friend got into an accident), courts will not require the victim to sue the uninsured motorist before suing the insured;
– -When the insurer mishandles the defense of the insured, it may be estopped from asserting the no-action clause to avoid being named as a defendant.[13]
Some states and US territories, including Wisconsin, Louisiana, Rhode Island, Puerto Rico and Guam have circumvented no-action causes by enacting statutes called direct action statutes, which make the insurer directly liable to the injured third-party and permit liability to be established in a single action against the insured and insurer jointly, or even in an action against the insurer alone. Some other states, such as Georgia, apply this rule only in car accident cases.[14]
The Insured’s Duty to Cooperate
Although the insurance company will ultimately be liable for injuries covered under its policies, the insured has a duty to cooperate in defending against lawsuits. The insured’s duty can be expressed under the terms of the insurance contract or implied. It requires the insured to actively cooperate in furnishing information for investigations or supplying information to assist attorneys in preparing court documents on behalf of the insurance company’s defense. It also encompasses such tasks as attending depositions and court appearances, when necessary.[15]
It also includes the duty not to take any action that would adversely affect the insurer’s handling of the lawsuit. If terms are not expressly stated in the policy, the implied duty of good faith and fair dealing requires that neither party to the contract do anything that might cause the parties to fail to carry out their duties. Other examples of duties under liability policies require the insured to send copies of the complaint to the insurer, inform the insurer of the circumstances surrounding the accident, and identify for the insured any victims or witnesses.[16] The insured’s duty to cooperate is a constructive condition to the insurer’s duty to pay, so failure to cooperate can negate the insurer’s responsibility to defend the lawsuit or pay proceeds. Still, the failure to cooperate must be material and the insurer cannot demand performance that would be outside the scope of its defense. Most courts also require that the insurer show that it is prejudiced by the insured’s failure to cooperate before releasing the insurer from its duty to defend.[17]
In Home Indemnity Co. v. Reed Equipment Co.,[18] the insured company’s president did not advise the insurer for eleven months after an accident of the existence of a defective wheel that allegedly came off the insured’s vehicle, causing an accident. While preparing a defense, the insurer thus assumed an incorrect cause of the accident. This court nevertheless found that concealing the defective wheel was not shown to have caused prejudice to the insurer. The decision was a pro-victim decision, allowing the victim to recover for its injuries from the insurer. In general, the public interest in ensuring that victims are compensated for their injuries has been found to outweigh the failure to cooperate in many cases, especially when the insured is unable to pay the damages from his own pocket.
The Insurer’s Duty to Defend
The duty to defend the insured includes hiring competent counsel and paying reasonable defense costs. Under some policies, the insurer must defend the insured even against groundless claims. This is why liability insurance is sometimes referred to as litigation insurance. Still, for the duty to defend to apply, the insured must establish that the complaint’s allegations involve issues that are within the bounds of the insurance policy’s coverage. The “eight corners rule” dictates that if the “four corners” of the complaint measured against the “four corners” of the policy show that the allegations of the complaint are potentially within the policy’s coverage, the insurer is required to defend the insured.[19]
The application of the eight corners rule is not without problems. A civil complaint may not trigger the insurance policy because civil complaints are only required to give “notice” to the defendant of the cause of action. These allegations may omit material facts even though they’re sufficient for notice pleading. Therefore, some courts have adopted the potentiality rule, allowing the allegations of the complaint to be the starting point, but allowing additional facts outside of the complaint to be reviewed when determining whether the insurer has a duty to defend. Other courts have developed an extrinsic evidence rule, allowing for the duty to defend to be determined from the universe of information gained not just from the plaintiff’s complaint but from all relevant circumstances.[20] Ambiguous circumstances are often resolved in the insured’s favor. Moreover, if multiple actions are brought in a single lawsuit, some where there is a duty to defend and some where there is not, the duty to defend does apply to the lawsuit.
Reservation of Rights
An insurer may agree to defend the insured while preserving its right to deny coverage by issuing a reservation of rights, which gives notice that the insurer is reserving its right to deny coverage notwithstanding its initial determination to defend the insured. As with most other actions discussed in this module, this must be done in a timely manner, generally before assuming control of the defense.[21]
In our last two modules, we will survey rules relevant to specific types of insurance, including automobile, real property, life, disability, liability and title insurance.
[1] Corey Harris, “Notice of Loss: Who May Submit It?” Property Insurance Coverage Law, (Jan. 2, 2010), https://www.propertyinsurancecoveragelaw.com/2010/01/articles/insurance/notice-of-loss-who-may-submit-it/.
[2] Robert H. Jerry II, Douglas R. Richmond, Understanding Insurance Law, (Carolina Academic Press 2018).
[3] Lord v. State Farm Mutual Automobile InsuranceCo., 295 S.E.2d 796, 799-800 (Va.1982).
[4] Weaver Brothers, Inc. V. Chappel, 684 P.2d 123, 125 (Alaska 1984).
[5] Robert H. Jerry II, Douglas R. Richmond, Understanding Insurance Law, (Carolina Academic Press 2018).
[6] Robert H. Jerry II, Douglas R. Richmond, Understanding Insurance Law, (Carolina Academic Press 2018); Jonathan Bukowski, “The Importance of Promptly Providing Notice of Loss,” Property Insurance Coverage Law, (Feb. 10, 2018),https://www.propertyinsurancecoveragelaw.com/2018/02/articles/insurance/the-importance-of-promptly-providing-notice-of-loss/.
[7] Morales v. National Grange Mutual Insurance Co., 423 A.2d 325, 329-30 (N.J. Super. 1980).
[8] Your Duties After a Loss, UPC Insurance, https://www.upcinsurance.com/claims/duties-after-loss/ (last visited Nov. 9, 2018).
[9] Robert H. Jerry II, Douglas R. Richmond, Understanding Insurance Law, (Carolina Academic Press 2018); “The Obligation to Comply with Proof of Loss Policy Conditions,” Property Insurance Coverage Law, (Jan. 15, 2017), https://www.propertyinsurancecoveragelaw.com/2017/01/articles/insurance/the-obligation-to-comply-with-proof-of-loss-policy-conditions/.
[10] John F. Dobbyn, Insurance Law in a Nut Shell 280 (Thomson West, 1981).
[11] Robert H. Jerry II, Douglas R. Richmond, Understanding Insurance Law, (Carolina Academic Press 2018); “When an Insurance Company Breaches its Contract: A Brief Summary of the General Law in the United States,” Alexander Law Group, https://www.alexanderlaw.com/library-fraud-4 (last visited Nov. 9, 2018).
[12] John F. Dobbyn, Insurance Law in a Nut Shell 283 (Thomson West, 1981).
[13] Robert H. Jerry II, Douglas R. Richmond, Understanding Insurance Law, (Carolina Academic Press 2018).
[14] Mark Mese, “Direct-Action Statutes,” Kean Miller, https://www.keanmiller.com/files/direct_action_statutes.pdf (last visited Nov. 9, 2018).
[15] R. Brent Cooper, “Duty to Cooperate,” IRMI (Aug. 2010), https://www.irmi.com/articles/expert-commentary/duty-to-cooperate.
[16] Robert H. Jerry II, Douglas R. Richmond, Understanding Insurance Law 521 (Carolina Academic Press 2018).
[17] Id at 686.
[18] Home Indem. Co. v. Reed Equipment Co., 381 So. 2d 45, 49 (Ala. 1980).
[19] Robert H. Jerry II, Douglas R. Richmond, Understanding Insurance Law, (Carolina Academic Press 2018); Eliot M. Harris, “The Duty to Defend: What Insurers, Insureds and Their Counsel Need to Know When Faced With a Liability Coverage Dispute – ABA YLD 101 Practice Series,” American Bar Association, (May 3, 2011), https://www.americanbar.org/groups/young_lawyers/publications/the_101_201_practice_series/duty/.
[20] Robert H. Jerry II, Douglas R. Richmond, Understanding Insurance Law 700 (Carolina Academic Press 2018); Eliot M. Harris, “The Duty to Defend: What Insurers, Insureds and Their Counsel Need to Know When Faced With a Liability Coverage Dispute – ABA YLD 101 Practice Series,” American Bar Association, (May 3, 2011), https://www.americanbar.org/groups/young_lawyers/publications/the_101_201_practice_series/duty/.
[21] Id at 706; Reservation of Rights, IRMI, https://www.irmi.com/term/insurance-definitions/reservation-of-rights (last visited Nov. 9, 2018).