This article originally appeared on Bill Wilson’s awesome Insurance Commentary. Republished here with his permission. This is an excerpt from his new book When Words Collide: Resolving Insurance Coverage and Claims Disputes, published by Insurance Nerds and now available for pre-order.
Last week, I blogged about “Claim Declination and Reservation of Rights Letters” and led off with this comment:
The first rule in the claim resolution process is to never accept an oral declination of coverage. In one claim, a written denial was sent in the form of a letter that stated “You have no coverage for this loss.” That is no more acceptable than an oral declination. All claim declinations should meet at least three criteria:
1. Be in writing;
2. Cite the specific policy language (and only that language) that is applicable to the present denial; and
3. Explain why and how that policy language works to exclude coverage.
Also governing how claims should be denied are various state Unfair Claims Settlement Practices laws. The National Association of Insurance Commissioners (NAIC) model act defines over a dozen acts that constitute an unfair claims practice, including [emphasis added]:
- Knowingly misrepresenting to claimants and insureds relevant facts or policy provisions relating to coverages at issue;
- Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear;
- Compelling insureds or beneficiaries to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them;
- Refusing to pay claims without conducting a reasonable investigation;
- Attempting to settle or settling claims for less than the amount a reasonable person would believe the insured or beneficiary was entitled by reference to written or printed material accompanying or made a part of an application;
- Failing in the case of claims denials or offers of compromise settlement to promptly provide a reasonable and accurate explanation of the basis for such actions;
Many states have adopted this model act, some with modification. Some states have even more stringent and/or specific provisions for what constitutes unfair claims settlement practices, methods of competition, or deceptive acts. For example, Florida includes [emphasis added]:
Failing to promptly provide a reasonable explanation in writing to the insured of the basis in the insurance policy, in relation to the facts or applicable law, for denial of a claim or for the offer of a compromise settlement;
California Code of Regulations, Title 10, Chapter 5, Subchapter 7.5 says [emphasis added]:
Fair Claims Settlement Practices Regulations
Where an insurer denies or rejects a first party claim, in whole or in part, it shall do so in writing and shall provide to the claimant a statement listing all bases for such rejection or denial and the factual and legal bases for each reason given such rejection or denial which is then within the insurer’s knowledge. Where an insurer’s denial of a first party claim, in whole or in part, is based on a specific statute, applicable law or policy provision, condition or exclusion, the written denial shall include reference thereto and provide an explanation of the application of the statute, applicable law or provision, condition or exclusion to the claim. Every insurer that denies or rejects a third party claim, in whole or in part, or disputes liability or damages shall do so in writing.
The NAIC model law has a similar provision but appears to lack the important requirement that there be an explanation of how the cited policy terms apply to eliminate coverage. And, again, many states have statutory requirements for policy language or claims settlement practices. For example, according to attorney Dan Kohane, New York statute 3420(d)(2) requires written disclaimers (not reservation of rights) in cases involving bodily injury and wrongful death. Failure to incorporate mandated language in insurance contracts or follow statutorily-mandated procedures can adversely impact a claim denial.
Never accept an oral claim denial and insist that written claim denials comply with applicable state laws. To paraphrase, proper and enforceable claim denial and reservation of rights letters are not only a good idea, they’re the law.