Pursuing Smaller Coverage Claims

By Harckham, Finley | Risk Management, April 1995 | Go to article overview

Pursuing Smaller Coverage Claims


Harckham, Finley, Risk Management


Disputing claims in court may pay off in a big way, with less litigation and higher recovery amounts.

Media reports about the daunting expense of high stakes, take-noprisoners environmental and asbestos insurance coverage lawsuits have left some risk managers with the impression that once coverage has been denied, there is no point in pursuing their claims in court unless millions of dollars are at stake. That is, of course, what many insurers would like their policyholders to believe. However, nothing could be further from the truth. A policyholder's recovery on relatively small claims in the range of $500,000 to $5 million can far exceed the percentage of recovery on larger claims. And those results can be achieved in a much shorter period of time and with far less litigation.

Success in these smaller cases is possible for the same reason that bigger actions can be so expensive -- the damage or injury at issue for environmental, asbestos and other toxic tort claims often spans multiple coverage periods and therefore triggers several insurance policies sold by a number of different companies. In a big dollar "megacase," the insurers will pool their resources and fight a war of attrition against their policyholder. Their goal is to achieve an inexpensive settlement by making the litigation extremely expensive for the policyholder. However, in a case involving fewer coverage dollars, many insurers will quickly settle a good faith claim, rather than incur litigation costs that may exceed their exposure.

LOOK BEFORE LEAPING

The most important phase of any insurance coverage action, large or small, is the initial evaluation of the coverage claims. This requires basic information about the lawsuits and other actions in which the policyholder is exposed to liability, and a review of all liability insurance policies dating back to the year in which the first supposedly harmful activity began. For example, for an environmental coverage action, the review should begin with the first year of polluting activity at any of the environmental sites, even if the policyholder was not involved in that activity. Older insurance policies often prove to be very valuable in environmental coverage actions, and insurance archaeologists may be able to locate copies of policies that have been lost over time.

The insurance policy review will create a picture of the policyholder's coverage at relevant times, but may not, in itself, provide an answer to whether a coverage action is warranted. The coverage analysis is often complicated by the question of which state's law will be applied in an insurance coverage action, because the meaning given to relevant standard form general liability insurance policy provisions differs from state to state.

For example, some state courts have interpreted the standard form pollution endorsement introduced in 1970 as a mere clarification of the scope of "occurrence" based coverage, while other courts interrupt it as excluding coverage for pollution claims that do not result from a quick and unintended discharge of contaminants. Thus, whether the pollution endorsement bars coverage for a particular claim will depend upon which state's law is applied in the case as well as the facts relating to that contamination problem. Even if a restrictive interpretation is given to the pollution endorsement, ample coverage may exist. This is true particularly under policies that typically were sold before June 1970, which do not contain that provision.

Unless the location of the injuries or damage and the policyholder's headquarters at the time the insurance policies were issued are all in the state in which the suit is filed, there will be no certainty as to which state's law will be applied. That uncertainty is best dealt with by determining which states' laws a court might reasonably apply, and determining whether the suit is worth pursuing under any of those laws.

NAMING DEFENDANTS

If a corporation decides to bring a coverage lawsuit, the next important issue to address is which insurers to name as defendants. …

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