Don’t Lose the Claim Game

Good risk management is more than picking policies and paying premiums. It’s also about collecting on your legitimate claims — something that you can’t take for granted. Business owners are often caught off guard when, instead of simply dropping a check in the mail, an insurer stalls, makes a lowball offer, or threatens to deny payment altogether. They shouldn’t be surprised. Insurance companies habitually “push back,” fully aware that policyholders under financial duress will often settle for much less than their due.

They claim to have valid reasons to delay payments — required due diligence, missing paperwork, or an honest difference of opinion about the value of property. But that’s small comfort to a burned-out retailer struggling to reopen before the holidays or a small manufacturer that that can’t fill a big order. As a business owner, you can minimize those kinds of problems by understanding how the system works and how to look out for your own interests. Here are some guidelines:

Know Your Coverage

The best time to think about insurance claims is before you need to file one. The more you understand your obligations and those of your insurers, the better you’ll be able to avoid mistakes that could lead to denials, and the more effectively you’ll be able to respond in the event that the company fails to live up to its obligations.

Collect and catalog copies of all your company’s expired and current policies, including those of businesses you may have acquired or merged with. If a warehouse goes up in smoke or you’re hit with a product liability lawsuit, you’ll want to be able to get your hands on them fast, since you, not the insurance company, will need to initiate a claim. You will want to know what your policies cover and don’t cover, and have a clear understanding of your responsibilities and those of the insurers.

Old policies, especially for liability, can be as valuable as new ones. Current claims for damages can be based on “triggering events” — toxic spills, design errors, and the like — that occurred decades ago. The  policy in effect at that time as well as other liability policies you may have owned in the interim could be liable for defense costs and damage awards. If you have acquired another company, you may even be covered by that company’s policies. Such older policies may have fewer exclusions than those written today. The catch:  To take advantage of this coverage, you need to have copies of those old policies, or offer other secondary proof that you purchased them.

Your lawyer and insurance broker also may be able to point out protections that you didn’t know you had. For example, some business owners assume that lawsuits by present and former employees are uninsured, though such claims may be covered by workers’ compensation and employers’ liability policies. You may also be listed by suppliers’ or customers’ policies as an “additional insured.”

If a particular policy cannot be found, don’t despair: Secondary sources often provide positive proof that a missing policy was purchased.  A search for these sources may even lead you to the lost policy itself.  When searching for secondary evidence, examine these sources:

  • Internal accounting records and outside accountants’ files for evidence of premium payments
  • Legal records and lawyers files, paying special attention to claims files;
  • Known insurance policies for references to other policies 
  • Insurance policies of other parties also facing potential liability in the same matter
  • Records of affiliated or predecessor companies
  • Workers’ compensation records to determine if an insurance company defended the workers’ compensation claim, since workers’ compensation and liability insurance are often purchased from the same insurance company
  • Records of companies that would have required submission of a certificate of insurance from your company before engaging in business with it — for instance, construction company records or state and federal government records

Give Timely Notice

Alert your insurer promptly after learning of a loss or liability claim. Insurance companies regularly deny claims on the assertion that the policyholder failed to furnish “timely notice.”

A surprising number of companies wander into this trap. Some get so caught up in defending underlying claims or dealing with losses that they just never get around to telling their insurers. Others want to avoid premium increases. Many don’t realize that they must report not only claims, but any events likely to result in a claim -- a tough judgment call for someone untrained in the finer points of insurance law.

Here’s how it can happen. You own a SoHo hot spot that boasts the best raw oyster bar in town.  One day your friend and patron, an up-and-coming comedian, tells you that the oysters are truly “to die for — and I almost died last night after eating a plateful; I was violently ill for 24 hours.” A real knee-slapper, until you receive a letter from the comedian’s lawyer two months later informing you that the restaurant is being sued for damages. Your lawyer assures you that the claim can be settled for not much more than $10,000, so you don’t bother mentioning it to your insurer. Three months later you get a letter from a second patron claiming to have gotten food poisoning the same evening.  Another four months down the road, a third letter arrives from yet another alleged victim.  At this point, you decide that it’s time to contact the insurance company, but it’s too late: Coverage is denied.

Can they get away with this? Maybe. In most states, the insurance company would need to demonstrate “prejudice” — i.e., that untimely notice has significantly interfered with its rights to investigate and prepare a defense on its policyholder’s behalf. In New York, there is no such requirement.  If notice is late according to the terms stated in the policy, it’s late, no matter how good your excuse or how unlikely it is that the insurance company was “prejudiced” by your delay.  That’s why your first reflex upon learning of any potential loss or liability must be to notify your insurance company immediately. Why risk losing your coverage? 

Don’t Take No For an Answer

Insurance companies routinely deny claims, even if they ultimately have no basis for doing so. But you don’t have to accept that decision. Insist that the company spell out its reasons. Compare the provisions of the policy to the insurance company’s interpretation.  Under New York law, any ambiguity in the policy is construed strictly against the insurance company. 

Your first hint of trouble may be something known as a “reservation of rights” letter — a long, tersely worded statement setting forth numerous boilerplate reasons explaining why insurance coverage may be denied. Cooperate with any reasonable requests for information as long as you don’t relay privileged information such as conversations and correspondence with your lawyer. If the insurance company wants to see a large set of documents, you might invite a representative to review them in your office. Complain to the office of the state insurance commissioner if it appears that the insurance company is stalling or not acting in good faith.

In running a successful business, protecting your assets from a financial disaster can often prove to be as crucial as generating revenue or operating efficiently.  Effective protection requires not only buying the right insurance, but aggressively pursuing claims when a loss does occur. Prudent policyholders are also prepared to wrangle with their insurance companies in order to secure full and complete coverage.  Policyholder persistence is crucial in maximizing insurance benefits under almost all policies.