Understanding Coverage from Dawn's Early Light

December 2005

A couple of months ago, Jack Gibson, in his opening dialog in IRMI Update 122, questioned the increasing lack of both understanding and cooperation within the insurance industry, between the underwriting side and claims. This isn’t something new; it has been somewhat of a problem for years. Yet, it seems to have become more prevalent during the past decade or so.

by Peter M. Polstein

There is no question, that the claims side of the industry has flexed its muscles on far more occasions than in the past. It begs the question of whether the insurance industry has taken a position that, despite policy language, tested or otherwise, loss adjustment may be a major factor in the ability of the industry to manage their loss ratios. One might even suggest that with the overall market conditions, where market share has been prevalent, and in many cases physical underwriting less than profitable, loss adjustment becomes a critical control factor.

Time and time again, I have seen occasions where there has been an either partial or total breakdown in the understanding of the terms and conditions of policies. Over the years, I have taken the position of "Don’t tell me what was intended; what does the policy say?" You can mitigate some, if not all, of this potential problem by any number of negotiating methods prior to binding.

Just consider the continued battle over the World Trade Center placement, where a number of positions have been taken by the insured, underwriter, loss adjusters, and the courts. Wouldn’t it make sense, when negotiating coverage, especially on larger accounts, to do so in the presence of both the underwriter and claims personnel? This is especially true if the coverage is being negotiated using a manuscript form. You might as well understand from "dawn's early light" what the policy not only intended, but in actuality, what is physically covered. Now, there is no question that there will be occasions when a court will adjudicate cover. The world does change, but in broad terms, that’s usually a case where there is liability, as opposed to first-party loss.

Two years ago, I wrote an article where I suggested that creating so called "towers of coverage" created an insurance environment which left a great deal less confusion on the part of all parties to the contract. This necessitates using a primary policy form, with language, broad or otherwise, where all participants agree on underwriting and claims, not only on the intent, but the meaning of the cover.

Any layers above the primary would, out of necessity, "follow form" in their entirety, thereby providing what should be a singular solid block of coverage. It also eliminates the use of multiple pages of language, as each ascending layer simply "follows form" subject to the negotiated rating per layer. Had the placement on the World Trade Center been in this fashion, there would have been little, if any, discussion of what was or was not covered, or how many occurrences. From a liability standpoint, I have argued ad nauseam that layers of so-called umbrella coverage, where most, if not all, participants have their own language, is tantamount to a loaded gun under the right claims circumstances.

There will be those who argue that the market no longer has the capacity to entertain this exercise. Don’t believe it. Good business is, in and of itself, a motivating factor. And the broker/agent who fully understands the insured’s potential for risk and the appetite to assume risk, and can present this in a forthright manner, with equitable terms and conditions, will be heard.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author’s employer or IRMI. This article does not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.