What are some typical appellate rulings on coverage issues? Differing opinions on whether something is an excluded pollutant such as fumes from a concrete sealant, perchlorate groundwater contamination, and carbon monoxide poisoning. Decisions go both ways. In one Florida property claim, leakage of fluids from a bloated corpse was found not to be an “explosion.” Why litigate the obvious?

Construction defect claims create many appellate cases. The complex wording on products and completed operations coverages and exclusions have courts ruling differently depending on the state involved. “Additional insured” endorsements are constantly changing, which leads to disputes. “Intentional acts” exclusions are common issues. There may be a “genuine dispute” over coverage or a “reasonable expectation of coverage.”

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Confusing court decisions make it extremely difficult for adjusters to ever be certain what their policy contract means unless they research it carefully and consider every possible interpretation. This is where that fatal disease, “assumption,” becomes contagious. Adjusters cannot “assume” that coverage applies or does not apply. Every case is different and the decisions in each case must also be different.

Avoiding the “sleeper”

Some claims begin with a lawsuit where the insured may not have been aware of the loss, but the adjuster is aware of an attorney's involvement in a claim and may be awaiting “the package;” the stack of bills and documents that constitute the claim.

When they arrive they may be 10 times what the adjuster has reserved on the file. Such cases are called “sleepers.” They explode with a bang that may be a high demand either verbally, in a letter or in a lawsuit for far more than the insured's limits of liability. It may be too late to send an excess letter, but one will be sent anyway. The insured will call the insurer and demand settlement within the policy limits and then hire a lawyer, preparing for a bad faith lawsuit.

In commercial liability policies, many forms may contain “aggregate limits.” Other claims may erode those limits to far less than is necessary to settle pending claims. There may be “additional insureds” who must also be defended or contractual agreements such as indemnity or hold harmless agreements to consider. Adjusters must sort out all the coverage issues first. To simply pick up the phone and call the plaintiff's attorney offering what is left of the policy limits in exchange for a release of the insured but not protecting others such as additional insureds, is bad faith in action.

When insureds are sued without prior notice, if a coverage issue exists, the insurer should issue a reservation of rights letter. See if an extension of the time to answer the lawsuit can be arranged. If that is not possible, defense counsel should file an answer but hold discovery while investigation and coverage issues are resolved. That may require a declaratory relief action if coverage is not clear. This involves a conflict of interests where the insured will obtain an attorney to fight the insurer over coverage.

Litigation is complex; liability insurers have a greater duty to defend than to settle. Hopefully this series has been helpful in exploring these complex issues.

[Related: Understanding litigation and court decisions - Part 1]