The Perils of Self-Management of Claims

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The  6/4/09 Knowledge Knugget is below.   A related posting on LinkedIn has generated a lot of commentary, as has another posting from a colleague questioning insureds’ propensity to report late.  I have not yet begun to delve in to the possible Agents’ E&O exposures of an agent knowing his insured is doing this and not bringing these problems to their attention.

I was recently reviewing an EPL account where there were four claims but none reported to the carrier.  Upon discussion with the agent, I discovered that the insured turned claims and allegations over to their own attorney, who resolved matters.  None of these incidents were turned in to the carrier, on the assumption that if something spun out of control that would be the time to get the carrier involved.

I asked the agent if the current policy had a provision for the insured to manage its own claims within the retention, and he responded that it did not.

What is this insured doing to itself?

Clearly, there are three issues:

1.  Inaccurate claims reporting and possible voiding of future coverage.  If loss runs are pulled, they show a clean slate.  There isn’t one.  Luckily for all underwriters involved, this insured discloses its claims, but if it were not so forthcoming, it could easily mislead underwriters, and loss runs would support the deception.  The only time the omission would come to light is if investigation of a later claim turned up evidence of the prior ones.  There is a clear loss and frequency pattern, of which knowledge the underwriters would be deprived.  If this lack of reporting were to come to surface later, a policy could be rescinded for material misrepresentation.

As far as the insured is concerned, it’s no harm, no foul because the claims have been resolved within the deductible.  Don’t get me started. Again, in my specific case,the insured did disclose the claims via narrative, but I quail to think how many insureds don’t, when they assume that a claim settled within the deductible is no one’s concern but their own.

2.  Risking declination of a claim when submitted.  More importantly, the insured is taking its life into its hands if any given claim cannot be favorably resolved within the deductible. When the claim blows up, there is a late report situation (may be critical, depending on policy reporting provisions), and if the carrier’s position and ability to defend the insured have been prejudiced, such prejudice may give the carrier a reason to decline coverage.

3.  Paying a deductible twice.  Monies paid to its own attorney without consent of the carrier may not serve to meet the deductible in the first place.  Many policies have a provision that indicates they will not consider covered any expenditures that take place without the carrier’s consent.  Clearly, paying ones own counsel to manage a claim that is not submitted to the carrier would constitute an expenditure taking place without the carrier’s consent.

Why take these chances?  Isn’t it better to arrange with the carrier ahead of time if one wishes to manage ones own claims within a retention?  Many carriers are agreeable to this arrangement, and if a current carrier is not — find another one!  Or get the desired counsel agreed by the carrier, and run the claims through the system so that expenditures within the deductible count against it, and the insured does not have to pay it twice (once to its own attorney, then again to reimburse the carrier for the next round of legal services).

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