1The carrier mismanaged defense costs. An insured can claim that the carrier “fell asleep at the wheel” in managing legal fees which, in turn reduced the money
available for paying claims.
2The carrier’s unwarranted decision to defend an additional insured (AI) accelerated epletion of the named insured’s coverage.
Named insureds may balk at the insurer accepting coverage for
additional insureds, even if the facts and policy language support
that decision. (I’ve also had files where the named insured — for
customer/business relation reasons — lobbied the carrier to accept AI status despite the policy and the facts not supporting it.)
Often in litigation, named insureds and additional insureds
have clashing interests. Recognizing this danger and as a precaution, adjusters may hire separate counsel for the additional
insured. Additional insureds may demand separate counsel to
avoid conflicts of interest. Failure to split the file via separate
counsel can expose the insurer to bad faith claims from additional insureds.
For adjusters, this is yet another no-win situation. Denying
coverage to an additional insured or denying the AI separate
counsel could, in either case, trigger bad faith claims. Granting
coverage to an AI or providing it with separate counsel can invite
bad faith claims from named insureds.
3The insurer failed to adequately communicate with the policyholder about the policy’s burn rate from
accumulating legal expense.
Occasionally, defense expenses can rapidly erode policy limits.
Or fees may be modest but defense counsel has an eye-popping
litigation budget which will exhaust the insurance. If the carrier
fails to regularly communicate the burn rate to the insured, the
latter may claim he was kept in the dark and had he known of
the case’s policy erosion, he would have sought an earlier claim
4The carrier failed to seek or pursue settlement opportunities before xhausting the policy limit.
This is a variation on “the insurer failed to settle when it could
have and should have.” Policyholders can allege that the carrier,
knowing that defense costs depleted the limits, should have explored early settlement before substantial depletion of the policy
limits, when more indemnity dollars were available. Delay in
pursuing settlement led to a situation where by the time the carrier sought settlement, the amount left on the policy was insufficient to address the claim and forced the insureds to dip into
their own funds.
Turning from dangers to remedies, here are five practical tips
for avoiding these claims. Identifying the pitfalls virtually suggests the preventative step in each case:
1Remind the insured what kind of coverage was purchased. Provide a friendly refresher to the insureds that they bought
eroding limits. The initial claim acknowledgment letter is a good
time for this. Some policyholders may have forgotten this aspect
of their coverage, rosily presuming that claims will never happen.
2Carefully weigh additional insured claims. Are they genuinely entitled to additional insured status? Decide based upon the merits of the AI’s arguments, not on
based on whether or not accepting the additional insured will further deplete policy limits. Also, alert the named insured that other
entities are seeking AI status, the viability of those claims, and the
ramifications of AI coverage on depleting the insurance limits.
3Proactively manage legal fees. Sound litigation management disciplines apply even more here. Negotiate competitive hourly rates. Review bills.
Audit invoices. Question staffing or charges that seem excessive.
Require periodic budgets from counsel. Exercise due diligence in
cost management. Let the policyholder know you’re minding the
store and watching the meter.
4Communicate with insureds about accumulating payments and limits erosion. DWL policies may heighten the need to send excess
ad damnum letters [which explain the amount that can be recovered under a default judgment] to policyholders and convey
the latter’s right to engage separate counsel. Err on the side of
over-communicating. Build a record to let them know how much
the carrier has spent and how much is left. Loss runs can serve
this purpose, but better still are periodic letters or emails to the
policyholder. Share copies of counsel’s litigation budgets. Build
a paper trail to show that the policyholder has been informed of
accumulating expenses and policy limit erosion.
5Seek and seize early settlement opportunities. Evaluate claims early with regard to liability and damages in litigated cases. Seek early defense counsel assessments
of the odds of prevailing and of the claim’s compromise settlement value. An old adjusting maxim is, “Claims — unlike fine
wine — do not improve with age.” Typically, the longer a claim
goes on, the more expensive it is.
The take-away: seek early windows of opportunity for settlement before there is a risk of policy depletion due to defense
costs. Sound advice, not only in “eroding policies,” but when
dealing with defense-outside-of-limits policies.
No magic bullets will insulate adjusters from bad faith claims
arising from eroding policies. Self-eroding policies do not erode
the adjuster’s good faith duties. If anything, they call for additional care in navigating potential traps and pitfalls. Use these
practice tips, though, to minimize the risk of extracontractual
liability claims arising from these coverages.
Kevin Quinley CPCU, AIC is the principal of Quinley Risk Associates LLC. For more information visit www.kevinquinley.com, follow him on
Twitter @ClaimsCoach or reach him at email@example.com.