Our friend and fellow Long Islander Marc Lanzkowsky, Founder and Principal of Lanzko Consulting, Inc., recently launched the blog Claims Spot, which discusses and comments on direct, excess and reinsurance-related claims issues. Marc has done a great job with Claims Spot and, not surprisingly, his blog is drawing some heavy traffic.
A controversial issue that Marc has been covering is whether or not insurance companies should have in place written claims guidelines and procedures. One school of thought is fearful of their use (or abuse) by insureds in coverage actions. For example, a company employee might mistakenly not follow written guidelines and procedures in the course of handling a claim, and a dispute might arise as a result. The insured will legitimately be able to argue that the company’s handling of the claim did not comply with its own guidelines and procedures, and that, accordingly, the company mishandled the claim. Proponents of this view will say that having claims guidelines and procedures is fine as long as they are merely aspirational and not in writing.
Others advocate the “damned if you do, damned if you don’t” view. If a large, professional insurer has no written guidelines and procedures, then the insured’s refrain in a coverage or bad faith action will be that the company is grossly negligent because it lacks the internal or external controls necessary to regulate a very significant portion of its business operations. But if the company has written claims guidelines and procedures, then surely they will come back to haunt it in the event of litigation.
Others, including Marc, believe the benefits associated with well-drafted and carefully considered claims guidelines and procedures outweigh the costs associated with formulating and implementing them, and, more importantly, whatever costs might be incurred by the insured’s potential use or abuse of the procedures in the event of a dispute. Drawing on his experience as a lawyer and a claims executive for two major insurance companies, Marc offers assistance to companies that are interested in implementing written claims guidelines and procedures or improving existing ones.
Marc recently brought the discussion up to the reinsurance level in his post, “Absence of Procedures to Notify Reinsurance is a Basis for Bad Faith.” He was kind enough to mention what inspired his thoughtful post — an interesting discussion he and I had about the subject not long ago over a delicious sushi and bento box lunch at Misaki — Manhasset, New York’s best (and only) Japanese restaurant.
As Marc points out there has been law in the Second Circuit for some time stating that a ceding company’s failure to have in place procedures for notifying reinsurers of claims can constitute bad faith, which may relieve a reinsurer of liability for a late-noticed claim without any showing of prejudice. That is a pretty good argument for having in place written, ceded-claims handling procedures designed to ensure timely notice to reinsurers.
In the reinsurance-late-notice context the cost-benefit analysis is probably less challenging than it might be in the direct-insurance-bad-faith context. If the ceding company does not have in place written guidelines and procedures, and cannot establish by credible and consistent testimony the existence of unwritten guidelines and procedures, then, at least in a case pending in court (as opposed to arbitration), the reinsurer may get a “pass” on a claim based on late notice without any showing of prejudice. (Prejudice has been defined as “tangible economic injury.”)
On the other hand, if the ceding company has written procedures in place, but they are not followed in a given case, then that, in conjunction with other evidence, may establish that notice was late. But the reinsurer still has to show prejudice to be relieved of liability.
So in our hypothetical, counsel for the reinsurer may be able to make some hay at a deposition concerning the cedent’s failure to follow its own guidelines and procedures. But points scored at depositions can be (and in this case are) ephemeral: without evidence of prejudice, failure to comply with the guidelines is, for all practical purposes, irrelevant.
In this day and age of internal controls and corporate responsibility, it seems to us that appropriate written claims guidelines and procedures can benefit insurers, cedents and reinsurers, provided they are carefully drafted, implemented and managed. We offer the following, very general and non-exclusive list of things companies might consider:
1. If written claims procedures are to be adopted and implemented they should be carefully prepared by claims experts and reviewed by experienced counsel. Poorly drafted and ill-conceived written claims procedures are probably worse than none at all.
2. Careful thought should be given to privilege issues associated with in-house or outside attorney review of draft guidelines and the involvement of counsel in other aspects of the drafting and implementation process. The process should be carefully managed and attention should be paid to the company’s document retention policies as respects the maintenance or destruction of drafts. Remember, in a future litigation or arbitration the insured’s attorneys will likely request prior drafts and depositions of all involved in the preparation and implementation process. While the insured may or may not be successful in obtaining all the discovery it seeks, it will likely get at least some of it.
3. Written claims procedures should be drafted to confer upon claims personnel an appropriate degree of discretion where such discretion is appropriate. Locking adjusters into particular claims positions without regard to the facts, circumstances and practical realities can cause a myriad of problems.
4. To the extent claims procedures provide a certain period of time within which a particular action must be taken, and to the extent that the period is not an inflexible one provided by law or contract, flexibility should be built in to account for minor delays caused by special circumstances or the press of business.
5. If written claims guidelines and procedures are to be adopted, the company should ensure claims personnel take them very seriously and do their best to abide by them at all times.
6. Written claims procedures should be subject to periodic review by in-house counsel and the claims department to ensure that they comply with current legislation and recent case law developments.
7. Outside counsel handling coverage or other, claims-related matters for the company should keep the company’s general counsel apprised of any problems that might be caused or exacerbated by written guidelines and procedures.