Claims files end up in litigation for a variety of reasons. Unless the reason for the litigation was intentional on the part of the insurance company or self-funding entity, the litigation may indicate unsatisfactory service by the claims department or an individual adjuster. Litigation is an extra expense on top of the value of the claim, unless the basis for the dispute was legitimate and unavoidable.

Why do claims files end up in litigation? There are a number of reasons why an insurer may elect to litigate a claim. The first is that there is a coverage dispute and the insured does not agree with the insurance company that the coverage does not apply to the claim. In such cases, the insurer may file a lawsuit with the court requesting declaratory relief, even if the insurer is actually defending the claim under a reservation of rights (ROR). The court will then review the claim and the coverage and look for the “eight-point match,” under which the “four corners of the policy” must match the “four corners of the claim or lawsuit.” If they do not match, then coverage does not apply—or at least it does not apply in totality. The parties must then agree as to what is covered and what is not covered as well as who will pay for non-covered parts of the claim. In a good claims investigation and negotiation, however, those factors should have been determined and agreed upon without the court's help. When the auditor is reviewing a claim in litigation for declaratory relief, he or she should look for evidence that the adjuster sat down and reviewed the policy with the insured, seeking advance agreement that the coverage did not apply or applied to only part of the claim. If that is missing, then the file was not well adjusted. It requires a very good and experienced adjuster to be able to do this correctly and to document any “non-waiver” agreements reached with the insured in a formalized and official way. 

Source of Coverage Disputes
Coverage issues can arise from many causes involving almost any aspect of the policy. The claim may involve a question of whether the parties against whom the claim is being made are insured under the terms of the policy or by virtue of some contract. The dispute may involve a condition, such as late notice or, in a “claims made” policy, determination of when the insured first knew about the claim and whether it was made within the time prescribed by the policy. The claim may not fit—or may not totally fit—the insuring agreements. Many lawsuits against insureds are filed for financial damages. Financial damages are neither bodily injury nor property damage, except to the extent of special damages or loss of use of physical property. Perhaps the most common source of a coverage issue is an exclusion. If a loss is clearly excluded, then there is no coverage.