Demystifying Insurance Coverage Disputes: Insights from Experienced Legal Counsel

Coverage disputes are a persistent concern for all types of insurers. Denials frequently lead to disputes; and, even when denials are clearly justified under the relevant policy language, insurers must often be prepared to defend their decisions in the face of allegations of bad faith and other improper insurance practices.

Given that some disputes will simply be unavoidable, it is imperative that insurers have a clear understanding of potential claims and defenses as well as potential means of resolution. With that said, insurers should take a proactive approach to preventing insurance coverage disputes as well—as these efforts can result in significant cost savings over the long term.

Common Issues in Insurance Coverage Disputes

We’ll begin by taking a look at some of the most common issues we see in insurance coverage disputes involving claim denials. Some examples of issues that frequently lead to disputes include:

Interpretation of Policy Language

Conflicting interpretations of policy language are a frequent source of insurance coverage disputes. In some cases, the policy language may be ambiguous or conflicting; in others, it may not be clear how policy language applies to a particular set of circumstances. In others still, claimants may argue for an interpretation that is unjustified.

Questions Regarding Policy Applicability

Questions regarding policy applicability are a frequent source of insurance coverage disputes as well. This includes questions related to the timing of claims (i.e., whether a claim is covered under a “claims-made” or “occurrence” policy), non-payment of premiums, lapses in coverage, and other similar types of issues.

Questions Regarding Policy Exclusions

Policy exclusions also lead to coverage disputes in many cases. Oftentimes, claimants will be unaware that a specific type of claim is excluded, or they will disagree that the circumstances surrounding their claim trigger an exclusion’s applicability. In both types of scenarios, clearly demonstrating the applicability of an exclusion (if possible) can help facilitate an efficient resolution.

Issues Related to the Claim Itself

Disputes can also arise out of issues with claims themselves. While insurers may be fully justified in denying otherwise valid claims that contain inaccurate or incomplete information, this point is often lost on insureds and third-party claimants. With that said, insurers must be careful to ensure that issues with claims truly justify a delay or denial, and are not immaterial or de minimis in nature.

Allegations of Insurance Bad Faith

How insurers choose to handle these issues (among others) can often lead to allegations of insurance bad faith. Not only do state laws across the country prohibit bad-faith insurance practices; but, in many cases, they entitle claimants to additional compensation as well. As a result, allegations of insurance bad faith have become extremely common, and insurers must be prepared to defend against these allegations in a wide range of circumstances.

Dealing with Allegations of Insurance Bad Faith

Dealing with allegations of insurance bad faith presents unique challenges. To overcome these allegations, thorough documentation is key. If an insurer can demonstrate a reasonable justification for a coverage decision—even if the decision ultimately proved to be wrong—this will be enough to favorably resolve an insurance bad faith claim in most cases. Likewise, if an insurer can demonstrate that a claimant has failed to submit timely responses, has submitted false or misleading information, or is otherwise responsible for a delay or denial, this can prove to be a highly effective defense strategy in many cases as well.

Means of Resolving Insurance Coverage Disputes

When coverage disputes arise, insurers have a variety of options for pursuing a favorable resolution. Broadly speaking, this is true regardless of the specific issue (or issues) involved. The options that are generally available in this scenario include:

• Coverage Opinions – A coverage opinion is a written assessment of the validity of a claim and any potential issues from the insurer’s legal counsel. Obtaining a coverage opinion can be a highly effective means of resolving (or avoiding) a coverage dispute in many cases.
• Declaratory Judgment Actions – A declaratory judgment action seeks a judicial determination of a claim’s validity before the claim leads to a lawsuit from the claimant. Declaratory judgment actions can be highly effective means for efficiently resolving coverage disputes as well.
• Negotiations – When an insurance coverage dispute involves one or more legitimate issues, negotiating a resolution that avoids the need for alternative dispute resolution (ADR) or litigation may be the best approach.
• Mediation or Arbitration – Mediation and arbitration can both be effective ADR tools for resolving insurance coverage disputes. Mediation is most effective when both parties are prepared to settle, while arbitration serves as a streamlined alternative to litigation.
• Coverage Dispute Litigation – In some cases, litigation will be the only option. If a claimant is intent on disputing the insurer’s coverage determination or accusing the insurer of engaging in bad-faith practices, then litigating the dispute in state or federal court may be necessary.

Means of Preventing Insurance Coverage Disputes

Of course, the most cost-effective approach is to avoid contentious insurance coverage disputes whenever possible. This does not mean that insurers should err on the side of providing coverage, but rather that they should take an informed (and well-documented) approach to making coverage determinations. Some key strategies for making sound coverage determinations include:

• Maintaining full documentation of the claim and all communications with the claimant.
• Promptly conducting an unbiased and good-faith investigation of the claim.
• Thoroughly documenting all findings from the investigation, including findings that are favorable to both the insurer and the claimant.
• Interpreting and applying the relevant policy language in good faith, and proactively addressing any concerns regarding ambiguous or conflicting contract terms.
• Obtaining a coverage opinion from the insurer’s legal counsel when necessary.

Contact the Insurance Defense Lawyers at Rendigs

At Rendigs, we have well over 75 years of experience advising and advocating for clients in the insurance industry. If you have questions about how to favorably resolve a coverage dispute (or reducing your volume of coverage disputes going forward), we encourage you to contact us for more information. To speak with an attorney in our Insurance Coverage & Bad Faith practice group, please call 513-381-9200 or inquire online today.