One risk management challenge is that a claim policy may differ by type of claim or line of coverage. As for gray area claims, a company may be philosophical in tolerating payments and settlements. Companies may not resist settling fleet auto or general/premises liability claims. On disputed workers' compensation accidents, though, employers may contest such claims due to adverse morale repercussions. Should the risk manager have a policy singular or a policy plural? A pluralistic approach may make sense, tailoring the approach to the line of coverage or financial exposure.

By contrast, a corporate claim policy may be different in other situations. Because of sensitivity about stock price, market reputation or precedent, a company may be hawkish on directors and officers' (D&O) and product liability losses. For various reasons, a company may dismiss any talk of “nuisance value” settlements for cases like these.

We must be careful in speaking of claim policies representing an extreme of “no pay” on one side and “settle everything” at the other. These are opposite ends of a continuum. Companies can formulate flexible claim policies. For example, a company may say that, for a certain product or products, it will disdain settlement and defend through to trial.

Product liability illustrates this point. Some manufacturers are single-product companies. Settling a claim might make sense in an isolated incident, but be disastrous in a broader business context. A diversified company may have one product that is a genuine cash cow. Settling such a claim might be tantamount to admitting a defect or inviting other claims. Due to the importance of a product to a company's brand and profit, a claim policy may be pro-defense in one area but philosophical and settlement-oriented elsewhere.

In other types of litigation, such as intellectual property or commercial disputes, companies might embrace a claim policy that differs from its view of, say, handling workers compensation losses or fleet auto accidents. There may be no one single claim policy within an organization but rather different policies that recognize varying defense and resolution approaches, depending on the broader business picture and corporate philosophy.

Dynamic Documents

A corporate claim policy should not be static or one-dimensional. The risk manager may need multiple policies, depending on the sensitivity of the claim, its importance to the business, its plans, and its financial performance.

Furthermore, claim policies may evolve. A firm that absorbs a large jury award on a winnable case may rethink its “defend to the death” policy. Companies similar to Costco, which occasionally face bogus slip-and-fall claims, may forgo quick settlements in lieu of aggressive defense approaches.

Claim policy also impacts vendor selection. This includes insurers, defense attorneys, and third-party claim administrators. The risk manager must clearly communicate the claim policy and corresponding philosophy to outside constituencies. This forges goal-congruence between outside vendors and a client's aims. It is pointless to craft a fine policy only to have it observed in the breach by service providers pursuing different paths.

Communicating and enforcing a claim settlement policy may be straightforward with TPAs and outside legal counsel. The job is tougher, though, when getting insurer buy-in.

Harmonizing with Insurers

There is a pro-settlement tendency among insurers. Settlements reduce legal defense costs. However, any given settlement may conflict with a pro-defense claim policy. Insurers often select legal counsel from approved panels. These can include firms chosen largely on the basis of having low hourly rates. Selection criteria may, however, conflict with a claim policy calling for the best legal talent available, talent that charges an hourly rate twice that of insurance panel firms.

Insurance policies typically give insurers the right to defend or settle any claim. Insurers want to call the shots on settlement versus trial, favoring the former over the latter. Trying cases is expensive, often far exceeding what it might take to settle a case. Juries are unpredictable. The risk of a large jury award gives insurers pause, despite the urgings of some insureds to “go long” and defend. If a jury award exceeds the insurance limit, then new perils confront an insurer, including the danger of extra-contractual liability and/or a suit from its own policyholder for not resolving the case. For myriad reasons, insurers are risk-averse.

Executing a finely honed claim policy is easier when a company self-insures. Although, if a company buys insurance — as most do — this time investment can become futile in the face of standard insurance contract wording.

Thus, risk managers should not draft a corporate claim policy in a void. A pro-defense and anti-settlement policy implies either self-insurance, a healthy dose of retention, or deft negotiating with insurers about contract wording. Self-insureds can pursue whatever claim policy they want. A firm retaining risk can pursue its preferred claim policy, as long as the loss falls within its self-insured retention.

The company that insures its exposures must bend to the insurer's claim philosophy, convincing the insurer to tweak its claim policy or negotiate a claim-handling protocol. The time to do this is when the risk manager has the largest degree of negotiating leverage: during the purchasing phase, especially in a “soft” insurance market. Once coverage is placed, it may be too late to modify the insurer's inertia and risk-averse instincts.

Desire for claim control may also shape decisions about which exposures should be retained and which should be insured. It is easier to enforce a claim policy when one retains the risk. It is “my money, my decision.” The more one transfers risk to an insurer, the less influence one has over claim policy, because insurance contracts typically confer the right to defend or settle to the insurer, not the insured.

Crafting a corporate claim policy is a useful discipline, but only to the extent that action follows. Wordsmithing is pointless if the risk manager fails to periodically reassess the wisdom of the corporate claim policy and its alignment with business goals. Execution must follow wording to build a rudder that sets a strong course for the company in navigating the rocks and shoals of a perilous tort system.