From Tom Scherff of the Capital Insurance Group of Reno, Nevada and Montery, California:

“First a point of correction. You decline coverage and deny liability.”

(Authors note: I knew that. Just testing you. Thanks.)

“Now in response to the question, there is also an additional advantage to the insured. If a copy of the declination letter is sent to the plaintiff, it allows him to better understand the reasons for the declination and hence amend the complaint to bring it into terms of the insurance contract.”

“I see nothing that would harm the insured and agree with you that there is nothing in the policy to resolve the issue. Interesting question and article.”

(Authors note: You know, that is true. But I wonder if it is the insurers task to help the plaintiff bring an insured lawsuit?)

T. P. Morrison, Project Director for Pilot Catastrophe Services also sees no ethical issue in the insurers action:

“I do not agree with the agents position about the notice of denial to the claimants attorney. Since the insurer knew the claimant was represented (how else would they know about the attorney), [the insurer] had an obligation to let the claimant know [it was] denying coverage. Otherwise the claimant would be left out in the cold about the status of the claim.”

“Since a claim was reported, once a decision is made the insurer had an obligation to let all parties know the outcome of the coverage investigation.”

“To do anything else would be unethical on the part of the insurer.”

From a lawyers perspective, Martin Quinn, an Austin, Texas, attorney with Jordan, Quinn & Carmona, P.C., weighed in with the following comments:

“The answer, like many other answers to ethical questions, is it depends. If the disclosure would harm the insured, then the carrier should not do it.”

Mr. Quinn went on to give an example of when the disclosure might harm an insured.

“The plaintiff would press the insured hard because he might think that the insured-defendant is short of defense dollars and so might settle for a quick sum. A plaintiff might wish to do this in order to finance the litigation against other parties.”

“Without disclosure, the defendant-insured might be able to lie behind the log for a while and get rid of the case.”

Mr. Quinn continued: “Here is another problem. In mass tort litigation, defendants are sued in a number of different jurisdictions and plaintiffs lawyers share information such as coverage denials. Facilitating such sharing might not be in an insureds interest.

“On the other hand, if disclosure might help the insured, then I cannot see the direct and immediate harm in it. An insured might actually want the information to get around.”

“But consequences are difficult to predict, as well as trace. If I were counsel for the insured, I would be skeptical of this move, at least early in the game. I would be especially skeptical of it when an insurer denying coverage was doing it.

“Insurers and insureds need to be able to trust each other as much as circumstances permit. Thus, I would ask whether this unilateral move by the liability insurer would enhance or diminish trust. If the latter, [then] probably the insurer should not do it absent clear-to-compelling countervailing considerations. Of course, this point is both an ethical one and a prudential one from the point of view of the insurer.

“Finally, if the plaintiffs lawyer has the denial letter, [he or she] will get to work on finding ways to circumvent it, e.g., by repleading, by supplying the defendant with a rebuttal letter, by supplying the insured consultants, and possibly, by engineering some of settlement-with-assignment so that the plaintiff can proceed against the insurer as insureds assignee.”

Doug Hamm, of K&K Insurance, isnt fond of the practice, but has a practical approach:

“Personally I think this an injustice to the insured. However, examine New York Insurance Code 3420(d), which states that an insurer not only must give timely notice of a disclaimer to the insured, but also to the injured party or claimant. Ethical or not, if an insurer is going to stay within the parameters of the insurance code they must follow this practice.”

Marty Lesbon, a New York insurance consultant, also frowns at the release of this information. He writes: “I am not an attorney. I am a veteran New York area broker and agent. I've been in the business for over 40 years. For the past 10 years or so, I have served as an expert witness in a variety of insurance lawsuits.

“I believe the carrier should not send the letter of denial to the plaintiff's attorney because it prevents the insured and his attorney from deciding if they want this information revealed.

“Mr. Brownlee thinks the carrier is doing the insured a favor. If the decision is made to share the information, the same result will occur, but at the discretion of the insured. I believe that sending the letter to the plaintiff's attorney removes the insured's opportunity to deal with the denial in the manner in which he chooses, and therefore should not be done.”

Bruce Hillman, JD, is Editorial Director of Risk and Insurance Markets for the Professional Publishing Group of The National Underwriter Company, in Erlanger, Ky. Questions and comment are invited at [email protected].

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 25, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.