The claims process can be far from straightforward, especially for third-party liability, so it pays for the insurer and insured to know where they stand
The claims process should be simple enough: on the one side are you and your insurer, on the other whoever is making a claim against you. This principle is, after all, why a business takes out insurance – you want someone to swing into action and represent your interests when the worst happens.
Unfortunately, there are occasions, in professional liability and certain other forms of third party liability insurance cover, when three is most definitely a crowd and a conflict of interest develops – often to the complete surprise of the insured, who is left trying to fight their own corner.
Insurers don’t like finding themselves in a position where they feel boxed in with a firm they are not used to
Miles Banks, chief claims officer, Willis Group
The issue arises because of the way in which insurance cover operates. “When there is a third-party claim against an insured, the insurer may have the right to appoint their own choice of lawyer to act on behalf of the insured in defending the claim as well as the insurer,” says K&L Gates litigation and dispute resolution and insurance coverage practice groups partner Sarah Turpin. This may not be a problem but, in some instances, conflicts of interest may arise between the insured and the insurer.
“It could be in relation to the scope of the insurance cover, if the insurer has reserved the right to rely on coverage defences and later decides that the claim – or some element of it – is not actually covered by the policy,” says Turpin.
There could also be a conflict between the insured and insurer over how to defend the third-party claim. “If there is disagreement over the timing or terms of a proposed settlement,” says Turpin, “the insurer and insured may have fundamentally different interests. The insurer, as the party paying the defence costs, is likely to be focused on the commercial implications of continuing to defend the claim. The insured may be concerned about reputation and prefer to fight on and defend their reputation. They may also be concerned about potential disciplinary or regulatory issues, which may not be of immediate concern to insurers.”
All of which can come as quite a shock. “Insureds aren’t always alert to these potential issues and may simply assume that the insurer, and the lawyers they appoint, will always have their best interests at heart,” says Turpin.
Where a conflict of interest does arise, the insurer is often better prepared to resolve differences than the insured. Some policies include what’s known as a QC clause. “If the parties cannot agree, the conflict is referred to a QC, who will normally act as an arbitrator. Their decision over whether the claim should be settled will be binding on both parties,” says Turpin.
“However, in practice, the insurer will often exert considerable pressure on the insured to agree the settlement terms, with the result that QC clauses are not always relied upon.”
The best solution is for an insured to be adequately prepared before taking out the policy – for example, by reserving the right to appoint your own choice of law firm or choosing from a list of approved panel firms agreed by both parties.
“From a client’s perspective, if there is an agreed panel of solicitors and the insured is happy that they are not too insurer-friendly, that is a step in the right direction,” says Willis Group chief claims officer Miles Banks. “It is worth negotiating similar agreements with panels of loss adjusters and forensic experts.”
This can be a far from straightforward process. “It can be challenging securing agreement on the make-up of a legal panel,” says Banks. “Insurers don’t like finding themselves in a position where they feel boxed in with a firm they are not used to.”
From the insured’s perspective, it’s important to recognise that the insurer’s panel law firms may not always have the insured’s best interests at heart, despite having a duty to act in the best interests of both insurer and insured. “There are definitely firms of lawyers in the UK and the US that specialise in being insurer-focused and it is insurers that provide the majority of their instructions,” says Banks.
The key is to do all you can to avoid surprises and take a proactive approach to your policy cover and get the best cover available. “I would absolutely recommend using a broker,” says Banks. “Very often, a broker will have a far broader relationship and experience of working with insurers than the insured can ever have. Plus, without a broker, you are limiting the amount of leverage you have to ensure difficult claims are resolved.”
According to Banks, your strategy should adapt to reflect the type of claim you are facing. “For a third-party claim from an injured worker, for example, or damage to someone else’s property – perhaps there’s been a fire that has damaged a third-party’s property – or even a straightforward liability claim, there is no single solution for these different claims. It’s important to work with your broker to find the right approach.”
It’s also important to take a rounded view of the cover. “Don’t just focus on the policy limits,” says Turpin. “If you want to minimise the opportunities for insurers to deny or limit the cover available, it is worth negotiating the policy wording and to do so when you are buying the policy. It’s far harder to negotiate when the policy is in place, particularly if you are facing a significant claim.
“There are, of course, some things that insurers won’t budge on,” she continues, “but equally there will be others that are open to discussion. Certainly, if you are paying significant premiums, you should be in a good position to negotiate.” And always remember: the devil is in the detail.
Read the small print
To minimise the scope for insurers to deny policy cover, it’s essential to know exactly what the requirements of your policy are, particularly when it comes to claims notification.
“They can be very stringent,” says K&L Gates partner Sarah Turpin. “There can be a time limit on notifying third-party claims to insurers. This can mean notifying the insurer within a specified time period, or as soon as possible, or even immediately after you become aware of a third-party claim.”
If you delay, the insurer may decline your cover on the grounds of late notification. If you have a broker, use them: “Work with your broker at every stage of the claims process. Keep them informed,” says Willis Group chief claims officer Miles Banks. “They can help manage expectations and work to secure the best result.”