Last week a friend who works for one of the largest U.S. insurance brokers called to ask me a question about an additional insured issue. After I answered her question, I referred her to a page in our Contractual Risk Transfer reference manual where she could read up on the issue. To my astonishment, she said she did not subscribe to the manual. I was surprised by her answer because I know that her firm has a companywide license to the publication and anyone with her company can access it over the Internet. She just didn't know they had the subscription.

Is it possible that you have access to the IRMI library and not know about it? Since the majority of the 100 largest agents and brokers (as ranked by Business Insurance magazine), including 9 of the top 10, have companywide access licenses to our publications through SilverPlume or IRMI Online, you probably have access if you work for one of them. Similarly, if you work for one of the largest four commercial lines insurers, you probably have access (three of the four have companywide licenses), and many smaller insurers are companywide subscribers.

It would be a shame to have access to this powerful tool and not take advantage of the competitive edge that it gives you. Ask your manager, IT director, or office manager if your company subscribes, and check out the depth and breadth of the IRMI library—you'll be amazed. I promise that it will cure many of your headaches and make you a more efficient and effective insurance professional. If you can't find someone who can tell you whether your firm subscribes, we can help. Just send us the name of your firm and we'll check for you and help you find out whom to contact to get your password. You can contact us here.

Thank you very much for subscribing to IRMI Update. We are truly honored by your decision to be a part of the IRMI subscriber family.

All the best,

Jack

Jack P. Gibson, CPCU, CRIS, ARM
President
IRMI

Risk Tip

Class Codes Can Adversely Affect Experience Modification—Many businesses, especially contractors, are subject to serious negative consequences if their experience modification exceeds 1.00. These include more than additional underwriting scrutiny. Bid requirements now often contain experience modification limits. A poor mod begins to impact revenue in addition to insurance expense.

Do you realize that by manipulating class codes at policy inception in an attempt to get the most payroll into the lowest rated classes may drive the experience modifier up over time? The mod is produced as a function of actual losses as compared to expected losses. Some insureds inadvertently lower expected losses unrealistically by allocating payroll to less risky classifications. This increases the possibility that actual losses will exceed the expected for the classification which will lead to a higher modifier in the future. Utilizing the most appropriate classification for the risk will avoid both this problem and the possibility of an unexpected additional premium at audit to correct an inappropriate classification.

Attempting to gain the lowest up front premium should be done through a proper risk review with your agent and underwriter, not through artificially moving payroll.

By: Kevin Hill, VP Agency Operations
Conor Patrick Insurance Services
Carmel, IN

Suggest a Risk Tip. Send us a practical tip (less than 300 words) for identifying and managing risks, buying insurance, managing claims, or filling gaps in insurance coverages. Submit your tips. We'll acknowledge your contribution as we did for Kevin.

New Expert Commentary

There are now 720 risk management and insurance articles on IRMI.com. Below you'll find summaries of some recent additions with links to the articles.

Faulty Work Not an "Occurrence"—In his October Case of the Month column, Kevin Merriman reviews a South Carolina case ruling that the liability for faulty work should fall on the one performing that work.
Higher Policy Limits for Specific Projects—David Collings explains that architects and engineers do not need to avoid projects that require higher insurance limits. Other options are available, such as adjusting professional liability limits.
Achieving Security in the Global Supply Chain—Daniel Wagner examines the need to keep the world's cargo secure but cautions that the costs associated with it will have to be borne jointly by governments and business.
Auto versus Mobile Equipment in the 2004 CGL—An Update—Insurance professionals must make determinations whether "mobile equipment" is subject to motor vehicle registration and financial responsibility laws or compulsory insurance laws. Craig Stanovich provides advice.
Manganism?—Jeff Slivka explains why it would be prudent for organizations to add the Manganese exposure to their overall environmental risk profile to methodically analyze the risk and manage it.
Controls Design for Efficient Compliance with Sarbanes-Oxley's Section 404—Well-designed internal controls can lighten the regulatory burden, reduce errors and fraud, and still leave people feeling like people. Matthew Leitch explains how.

Your View—Underwriting versus Claims

In IRMI Update 122, Jack Gibson asked readers whether they thought there was a disconnect between underwriting and claims within most insurance companies and if this leads to problems, such as instances where adjusters interpret the policies to not cover circumstances that the underwriter intended to cover. We received many responses, many of which are reproduced below.

We unfortunately have a perfect example. Our client has locations in known windstorm areas. His appetite for loss is small and therefore he requested that we buy down the 2% wind deductible on the property policy to $25,000. We arranged coverage through a well-known wholesale broker in a well-rated company (at the time anyway).

They issued the buy down policy and indicated a $25,000 deductible on the declarations page. They also attached ISO forms for building contents and business interruption.

The property policy had a 2% wind deductible on building, contents, and business interruption which are blanketed under one occurrence limit. There is no waiting period on the BI. The ISO form slapped on by the buy down carrier contains a 72-hour BI waiting period. Our checker should have picked this up, but he was guided by the declarations page and didn't read the boilerplate form attached.

Of course, there was a loss from one of the hurricanes of 2004 and at this point the claim department took over. They read the form and now applied a 72-hour waiting period and then a $25,000 deductible on the business interruption. This will cost the insured about $160,000 and will probably result in legal action against us, the wholesaler (who agrees with us that the coverage is correct and the interpretation is wrong), and probably the carrier.

The carrier was recently downgraded since they wrote a great deal of this type of coverage and obviously the "deny everything you can" theory is at work. Clearly, our intent was to cover excess of the 2% with no waiting period. The underwriters had a copy of the property policy that they were buying down.

No amount of argument will budge their claim people to change their position. There would be no point in buying down a deductible under a policy without a 72-hour waiting period and then include the waiting period on the buy down policy.

Brokers beware, read every line, even of the boilerplate.

—Charles J. Weisblum, Chairman,
MLW Services, Inc., New York, NY

The case scenario you present between what a claims department does and what an underwriter underwrites when a loss occurs is interesting. However, in my broad claims experience working in different lines of business (workers compensation, general liability, products liability, construction defects, etc.), I have never worked for an insurance company where their claims department was trying to "weasel" out of paying a legitimate claim. Have there been differences of valuation? Absolutely. We have always tried to work out those differences with the insured or self-insured (if an excess policy is involved). If those differences were not resolved voluntarily, then the claims department would propose to trigger the mediation clause of the policy, if the policy had such a provision.

If the dispute was one of coverage and the insured or broker was alleging that the underwriter indicated that the submitted loss was going to be covered under the policy, the claims department that I have been involved with would seek a response from the underwriter for the intent when the risk was underwritten. If the underwriter verifies in writing that the policy in question was supposed to cover such a loss, the claims department would honor the claim. If the underwriter denies that they ever made a claim that a particular type of loss would be covered, and there is no correspondence in the underwriting file suggesting that it was ever discussed, the submitted claim would be denied. If the insured or broker request for an ex gratia payment, then the request would be brought to the attention of management in the claims division for a decision. The underwriting division would also participate in the decision-making, and perhaps even the executive division if the amount sought is high enough.

In short, in most of my experience in the insurance industry, claims and underwriting have worked together well to resolve issues involving interpretation of a policy, intent of what was to be covered, along with other critical coverage questions. Have there been problems in communications? Yes. However, a good claims professional who is managing a loss will have the perseverance and tenacity to get a response from the underwriting department, if one is required, and resolve the claim as quickly as possible. To most good claims professionals, this is part of providing not just a claims service, but extraordinary claims service.

—David Rivera, Claims Consultant,
David & Associates, New York, NY

I agree strongly with your comments regarding the importance of claim and underwriting functions working closely together in the insurance business. Years ago, while working for a former employer, we had a large hull loss on a fishing vessel, which in my opinion, as the underwriter, should be paid. The company's claim people wanted to deny the claim, found a surveyor and a lawyer that readily agreed, and began the lengthy and expensive litigation process.

My opinion as the underwriter was ignored, and I was even told not to interfere in the claim process. If I had been called to testify in the case, should I be required to give the company position on payment of the claim if I did not agree with it professionally?

The case was heard in Admiralty, and the company was forced to pay the claim. We lost a good assured client, and we lost the trust of a valuable broker. All of it could have been avoided if the claim adjuster had consulted with the underwriter before rushing to avoid payment of a claim.

—James Jenkins, Hull & Marine Liability Director,
Fireman's Fund Insurance Company, San Francisco, CA

I have recently discovered an unintended consequence of the disconnect between underwriting and claims. Two underwriters for different national carriers refused to discuss coverages with me, on the advice of their legal department. Instead they e-mailed me the forms, and said they were not able to discuss them, only present them for my review. I understand the final decision on the form lies with me and my client, but not being able to discuss the client's unique need for the coverage puts me at a disadvantage in my opinion. I would certainly expect no help at claim time from either of these two underwriters.

—Clyde Marshall, Agent,
The Mahoney Group, Phoenix, AZ

As a career-long underwriter, I agree the underwriter should have a voice in the claims process. I have worked in both situations where we did, and those where we did not. The insurers that encouraged and even sought underwriter participation had a better reputation for fairly settling claims, thus making it easier to negotiate policy terms, knowing the underwriter's intent would be sought before denying a loss where coverage may be questionable. Thank you for recognizing the important part the underwriter plays in the process.

—Donald Noah, Business Development Manager,
Wilshire Insurance Company, Lancaster, CA

Your description of a "disconnect" between underwriting and claims in your Oct. 12 newsletter will undoubtedly open a Pandora's box of responses! I don't think underwriting involvement in claims adjustment is a good idea. Claims personnel are the true interpreters of insurance policies and forms in the real world, while underwriters are the deal doers—that's the way it is, and the two functions compliment each other well, just like sales and marketing on the brokerage side. Acting as foils for one another is part of the job description—though it seems claims never comes out looking quite as good as underwriting! The only time underwriting should be involved is when the question of true intent comes up in a larger claim, as illustrated by the World Trade Center one-versus-two occurrence debate a couple years ago. Perhaps a better idea would be to have claims personnel involved in the underwriting function!

—Robert Meder, Director of Marketing,
Hagedorn & Company, New York

Your reference to the organization of small Lloyd's syndicates is, I believe, revealing and right on the mark. Most organizational problems trickle down from the top. Underwriters are responsible, as you state, for risk selection and pricing; but in many insurance and reinsurance companies, they are the sole marketing arm. Claims handling is regarded as a staff (support) function. It's not. Claims handing is a line function. Claims people deliver the product.

Those latter-day Lloyd's syndicates understood the overall objective. It isn't sales; it isn't risk selection; it isn't pricing; it isn't adequate reserving; and it isn't even competent claims payments. The objective is an underwriting profit, which is to say all the forgoing, plus some. To the degree that everyone is responsible to shareholders or policyholders for putting their assets at risk and producing competitive returns on equity, everyone is an underwriter. Those companies, whose organizational models reflect this vision, involve a range of disciplines in initial underwriting decisions. They produce more dynamic and rewarding work environments, high quality products, better customer relations, and consistently superior results.

—Lawrence Nolen, Senior Consultant,
Insurance Resolutions, Inc., Boston, MA

As a claims professional for 18 years, I have seen companies who have tried to address this issue, as well as companies who have ignored the issue. I do listen to the opinion of the agents and the underwriters, however, the final decisions to deny or to honor claims is my responsibility.

Your question is phrased to indicate that all claims people do is deny claims. Please note that we pay claims as well. Further, claims are both first and third party, therefore your question needs to address the entire situation not just a narrow view of the issue.

It is naive to assume that the claim process would work better if underwriters' opinions were relied on in the claims decisions. The statement that claims people look for reasons to deny claims is insulting. I have been doing this for a very long time and I usually look for reasons, usually over the objects of underwriters and agents, to pay a claim. My decision is tied to liability, regardless if it is first- or third-party coverage.

In my experience, the conflict usually arises as a result of the potential financial incentives that underwriters and agents have in the outcome of a claim. The reason that the compensation for claims professionals is not tied production numbers is so our decisions are unbiased. I take my Fair Claim obligations very seriously! Are underwriters going to respond to the insurance commissioner if questions are being ask about the decisions that were made on a claim? Please also consider, that if, on a regular basis, underwriters consulted claims staff prior to writing an account or risk, would we have fewer claims?

Each discipline has its strengths and its weaknesses, and each has it obligations. I agree that there should be a dialogue, from BOTH sides, before and after claims arise. However due the potential financial rewards to be gained by underwriters, either through current or future business, there is an unavoidable bias in the position of underwriter regarding claims decisions.

This is a clear conflict of interest: customers know it, claims professionals know it, insurance commissioners know it, and the judicial system is also very aware of it. The separation of the underwriting and claims disciplines is not only inherent to the industry, but is a necessary element of fair claims practices.

—Gary Mitchell, Claims Consultant,
Forcon, Avon, CT

When I was a young adjuster, last century, underwriters and claims people spoke all the time. Now, the twain shall never meet.

Since the claims department and the underwriting department are separate, they never speak, and usually the claims people have no idea what the underwriting people thought. That is because claims people are not trained to properly read insurance policies and told that they should—to determine intent—interview the underwriter to obtain the underwriter's intent as he or she determines the insured's intent.

It is the cost-cutting of insurers to reduce or eliminate claims training that has caused the problem. It's time insurers spend more time and money training their people.

—Barry Zalma, Lawyer,
Barry Zalma, Inc., Culver City, CA

When a coverage is manuscripted and deviates from uniform printing and standard wording, there is certainly a need for claims to connect with underwriting to be sure the coverage intent is understood. However, that constitutes a very small percentage of claim situations. The majority of claims involve standard forms, most of which are products of ISO. A line underwriter hopefully has a sufficient grasp of the coverage he is handling, but would we really want him in the claim process?

The current situation you describe wherein claims and legal people make the decisions is the proper course to follow. It is their responsibility to stay abreast of the latest interpretation of coverage forms and the decisions made in connection with those forms. Claims adjusters are tested, certified, and licensed to do the job in accordance with accepted fair practice standards and, depending on the advice and decisions of mature claims adjusters, assures the even treatment of policyholders.

—Joseph Carroll, Independent Insurance Consultant, Syracuse, NY

Dear Jack, it seems as though you may have fallen into the same old concepts that have plagued underwriting companies since time began. "It is always the claims department's fault!" After serving this industry for over 40 years, I did learn a thing or two. One problem, admitted to by company insiders including former insurer board members, was that the underwriting department never talked to the claims department and vise versa. Whenever a company showed good profits, the praise went to the great underwriting, but if profits were down, it was the claims departments fault. Nothing was ever admitted about the fact that lower profits resulted from the underwriters accepting poorer risks.

There is rarely any confusion over coverage by a competent adjuster or coverage counsel. I have challenged many in my day and have successfully convinced underwriting clients' in-house counsel to accept coverage when they had denied it which, in that regard, proves your point.

I found coverage issues arose mostly from overzealous or uninformed, shall we say, brokers who are motivated by economics, both in self-commission and their employers' goals, or lack the knowledge of the risk to the extent of not being able to foresee the exposures clearly. They submit applications to the companies' underwriters who then issue the policy as they see fits the application as closely as they can. An underwriting company can cover anything they desire to accept and often do on complex risks by manuscripting the policy or attaching amendments and endorsements that will alter the policy to meet the risk. The claims department has a clear definition to work with in most cases.

I have worked with many insurers, foreign and domestic, personal lines, and specialized in commercial property and casualty, aviation and maritime, and with extreme exception, I have never found the insurer's claims department attempting to decline coverages without clearly defined cause. Cases that have been challenged in court have proven to me over the years of passing generations that the disputes arise not out of lack of good faith application of coverages by the insurer but by the ability of a verbally eloquent lawyer convincing a jury or the court that the underwriters didn't mean what they said in the policy. His poor client found the policy ambiguous, perhaps his broker didn't explain it to him clearly, but whatever the reason, he deserves coverage. Our courts in the political correctness era have rewritten policies from the bench and removed any defense from the underwriters who sold a policy based on good faith but was not intended to cover all sins. Only God can do that.

Most cases I have seen involving coverage disputes have been bred in the original transaction between the insured and the broker. When I handled E&O claims, I could find the broker failed to get proper documentation signed by the insured so there could be no dispute as to what the insured agreed to. Or the broker application to underwriters was in error or changed from what the original application signed by the insured stated. I have found forged applications by brokers and manuscripts that did possess contradictory clauses so the only resolution was complex at best. I have found insured's who deliberately falsified their applications. No policy would have been issued had the truth been known, which also falls to the broker's negligence.

Your comments are well put and certainly have merit, but it is a much deeper problem than most realize and as bad a rap as insurance companies get, I would put my 40+ years on the line in saying they deserve far more credit than they get. At least the men and women in the trenches who do a great job each day, and most of the adjusters, are dedicated people. There will always be bad ones, but the same is true of those serving as risk managers, brokers, lawyers, and politicians.

I practiced what I taught many adjusters over the years, that every claim has a value. If it is important enough for the person to file, it is important enough to give it your best effort. That value may be $0.00 or it may be $1 million, but when we get to the bottom line, everyone may not be happy about it, but they will understand the reason why. In 40 years, I had only two cases go through a jury trial and won both. Managed numerous litigations, mitigated many, and settled them with lawyers. Coverage issues were at the root of many, but they were resolved with lengthy disputes because reasonable people dealt with reasonable people.

There is no question the industry needs improvements, education being the greatest of these. Not in just technical knowledge but in acquiring understanding about the responsibilities of coexistence between the insurers and their insureds.

The insurance industry cannot exist without their insureds, and the country can not exist without the protection of the insurers, in what ever limitations we can agree upon.

—R.W. Bob Love, Independent Adjuster

I agree with Jack's statement in the latest IRMI Update editorial. Underwriters should be more involved in denying or accepting claims from their customers. On the other hand, they should also include claims handlers in the negotiations with customers when designing an insurance policy. I believe this would help in avoiding lengthy and difficult discussions whenever a claim occurs.

—Sven Ibens, UPS Europe

This was a very thought-provoking commentary—thank you for helping clear the cobwebs. First of all, I would like to say that if anyone responds "No" to your question, they would be lying. The problem is this was the case in 1984 when I started in the insurance business, and it still remains today. I have to agree with you that the underwriter should have an active role in these decisions when they arise. I also think that good notes regarding the reasons for the initial decision to accept the risk are vital to the overall final coverage decision.

Too often, the reasons that a company accepts a particular risk are not taken into consideration. However, the premium always is. More importance should be placed on the overall risk versus premium argument. Having been on the coverage language side of things for way too many years, I would also like to add that the intent of the language should always be clear and concise with as much elimination of grey as possible, and both underwriting and claims should be involved at the development stage. This rule would lessen these types of situations in the future.

—Renee Chatt, Director of Pricing & Product Management,
Auto Club South Insurance Company, Tampa, FL

This is one of the reasons we like dealing with markets like Scor, which doesn't even have a claims department for energy claims. The underwriter deals with them.

—Steve Kimball, Administrator Risk Management,
Saudi Aramco, Dhahran, Saudi Arabia

This is really a bag of worms. Many would argue that underwriters would act more liberally in order to protect the client and claims may get paid that shouldn't. Therefore, the claims staff should remain autonomous. Others are aware that in many companies, claims staff feels far superior to the underwriters due to their "real world" knowledge of how coverages, intended or not, have been litigated and determined to be different by state, or court jurisdiction. In other cases, company culture goes the other way, and claims staff interprets policy language the way underwriting says they meant it, even if the policy or endorsement language really doesn't support that interpretation.

Insurance companies and their policy languages along with claims interpretations often vary all over the ballpark. That would seem both good and bad. Good because the variety enhances competition. Bad because agents must get under the language differences and explain how coverage changes when a client changes insurance carriers ... challenges build character?

—Don Hannon, Director of Underwriting,
Marvin Johnson & Associates, Inc., Columbus, IN

I wholeheartedly agree that the "intent of the underwriter" should be included in the decision-making process when an insurance company is looking to accept or deny coverage. Conversely, perhaps we as risk managers should have the underwriter discuss the issue with the claims department to get the claims department's "take" on coverage.

—Becky Walker, CPCU, ARM, Risk Manager,
D.E. Harvey Builders, Houston, TX

While it's been many years since I worked in the Commercial Claim Department, I and my colleagues often did confer with underwriting when there was a complicated coverage situation to be decided. Our initial evaluation of coverage would come from our own analysis of policy language and how it had been interpreted in the venue where the lawsuit, if any, was likely to take place. If that left the door open to additional interpretation, we'd often bounced the situation off the underwriter. Having said that, however, my recollection is that the underwriter either hadn't anticipated this particular "wrinkle" and/or was reluctant to make a grant of coverage in light of an actual claim. My own experience was that these quests for underwriting positions were not particularly fruitful.

—Donna Eriksen, Senior Broker,
Hilb, Rogal & Hobbs, Hartford, CT

The sad reality is that many underwriters are not well versed in policy coverage details. They may know what a policy covers in general but fall short when it comes to policy conditions and exclusions that may result in a claim being denied. There are many reasons for this, one being that policy forms change all the time and it is often up to the underwriter to stay current, i.e., the companies are not very good when it comes to continuing education.

It would be a nightmare to allow underwriters to decide what claims are covered. The policy is a legal contract, and the contract language must be followed. That is the adjuster's responsibility. To have the underwriter override the adjuster routinely would be chaotic.

The solution is for insurers to "certify" their underwriters in various coverages and require that they have continuing education to maintain the certification. Unfortunately, the chances of seeing this become a reality are slim because it can result in paper not moving through the system if an underwriter or two or three fail to maintain their certification.

This "opinion" is based on my experience as Director of Commercial Lines Training for a midsized Regional Carrier.

—Ken Ryan, President,
Suncoast Risk Control Associates, Bradenton, FL

I have been on both sides of the issue. My first 10 years as an underwriter and manager for a major insurer, and my last 25 as a broker. As an underwriter, I was usually more distressed by claims which were paid that I didn't believe were covered, and, of course as a broker feel the opposite. I have won my share of those battles, much due to my underwriting background, and have seen a marked turn in claims approach toward the "let's find a way out" viewpoint.

There are two problems, as I see it. The industry has systematically made the selling and purchasing of insurance infinitely more difficult. No customer can afford all the coverages, for even major exposures that face them. The industry has consistently carved out coverage, as either new or expanded exposures face them. In my mind, it started with ERISA. Rather than embrace it under a CGL, they put it in a new pot, fiduciary liability and bonds. Since then we've added earthquake, pollution, mold, EPLI, cyber, environmental, misc. E&O, etc. Remember the Y2K exclusions?

The second problem, of course, is creative plaintiff attorneys and judicial decisions. Unfortunately, there is fundamental self-interest on both sides which prevents a meaningful solution. Two economists just won the Nobel Prize based on there research in Game Theory. I suspect that if they analyzed these protagonists, they would determine it was to the advantage of both sides to maintain this adversarial relationship and continue to place the good of the buying public at risk.

—Stephen R. Abram, Senior Vice President,
Acordia, Sherman Oaks, CA

This very issue occurred in our office just last week. An insured with a garden center had a claim where some of his stock was stolen. The new ISO BOP doesn't specifically address outdoor trees and shrubs as stock, therefore limiting coverage. I spent several phone calls to the Underwriting department reviewing the policy and also our intention for coverage. They in turn documented our file and our case proving coverage. Even at that, however, the claims department was not going to pay the claim. Only after a supervisor came in did they reluctantly agree to pay, and indicated it was a "favor" to our agency that they were going to pay.

Your comments were exactly the same as mine. If I had agreement and intention of coverage with the underwriter, at what point does the claims department get the ability to deny coverage? It would be much more comforting if Underwriting would have the final say in these cases since they were the original creators of the coverage!!

—Christopher Lord, Agent,
Sheeley Ins. Agency, Ins., Stroudsburg, PA

I just had this situation arise with a very large client. An engine fire caused $140,000 damage in a $260,000 piece of heavy equipment. The carrier issued the policy using the then available replacement cost value at $200,000 from a qualified appraiser. They tried to take a 28% coinsurance charge because they claimed the unit had appreciated in value by $60,000 due to a recent rebuild of the engine. The underwriter sided with us, and ultimately with the branch vice president's help, the claim was resolved at full value. BUT, the resolution was done not so much because of a reevaluation of the adjuster's work, but because the vice president did not want to upset the client!!

The issue seems to be that at what point does a broker have to always be updating equipment values on large schedules? It seems to me the adjuster should use the original replacement cost values at inception, if they were the only ones available at that time, and the underwriter accepted those values.

—Tom Davis, President,
Davis American, Ltd., Oak Brook, IL

Seldom does the claim department know of a risk until the first claim comes in. Claims deals with what is written in the policy, not what the intent of the insured, the agent and broker might have been. Sometimes on the more complicated risks, it might be wise to have a knowledgeable representative from the claims department involved early on. Many times, insureds operate in more than one state and what may be covered in one state may not be covered in another.

—John Lane, Claims Specialist,
Mid Continent Group, Tulsa, OK

Prior to going to work for the Commercial Real Estate Finance Industry, I was a commercial property and casualty agent for various independent agencies. In that capacity, I wrote some accounts that were a bit more "complicated," so to speak. Therefore, it was not clear if certain risks and/or products would be covered if you were to just read the policy forms. I found that if I was completely open with my underwriters and maintained that kind of relationship with them, they were willing to write a letter for my file stating that it is their intent to provide coverage for "this particular risk or product in this particular manner." This letter then served as backup in the case of a loss. Often, they would also provide a copy of the same letter to their claims department to have on file.

—Sonia Fabbri, Insurance Manager,
Cohen Financial,Chicago, IL

In spite of one's experience or judgment call (from an underwriter or insurer), it is the contract that will respond to an incident. If the coverage is under dispute, then arbitration could be necessary. However, the Producer's responsibility is to offer the coverage menu and make recommendations based on the risk and whatever the insured orders we provide. If a loss occurs, we go to bat for our client and work diligently with the insurer to verify coverage. My hope is that agents are not merely taking and accepting an insurer's decision to say "it's not covered" as gospel and never take the time to read the coverage forms themselves. Our clients depend on us for this action.

—Brian Crawford, Smith & Crakes, Inc.

I agree completely. Over the years, this separation of underwriting and claims processing seems to lack any thought process that relates to the quality of customer service everyone wants to sell.

—Jack Cassell, Principal,
Brooke Insurance (Cassell), Wichta & Emporia, KS

I have worked as a property and casualty underwriter in both large and small companies. I always tried to make sure that underwriter intent for coverage was either very clear in the policy form or in file documentation. However, I think a good working relationship with a claims dept is very important and if there is a question on the contract. Why wouldn't you talk to the underwriter? We are all on the same team. Aren't we?

—Sandy Holmes, Underwriter,
Alaska Premier Underwriters, Anchorage, AK

I agree 100%. We recently had 2 instances where a claim was denied when we felt it should have been covered. One was the theft of a digital camera—the insured included the value of their cameras in the EDP hardware since the cameras are used to upload pictures onto computers. They paid a premium for this under the EDP. Yet, when the theft occurred, the claims adjuster said that the camera did not "process information" and was not considered EDP. The adjuster wanted to put the cameras under the contents coverage which had a much higher deductible. The underwriter refunded the EDP premium and added a camera floater, and with the refunded premium, the insured basically got their money back for the camera. But it should not have come to this, and the insured was upset enough to tell us to find them a new carrier at renewal time!

—Donna McCormick, CPCU, AAI, AIS, CPIW, CRIS,
McCormick Insurance Agency

Yes! Underwriters should have a say. I am seeing more insurance company claims departments denying coverage or stalling for long periods of time when it in not appropriate.

—Lamar Wilson,
Wood Wilson Company, Inc., Dallas, TX

While it may appear desirable to involve underwriters in the claim decision process, it often is unrealistic after a claim occurs. Interpretations of coverage may vary between underwriters, and handling the same claim differently for two different clients is considered a discriminatory action by state regulators. In practice, any questions regarding claims handling are best responded to by the claims department. Before an underwriter makes any agreement regarding certain claims handling issues, they should be discussed with the claims department during the sales negotiation process.

As in all things, communication is the key to making it all work.

—Tim Hamilton, Product Manager,
Liberty Northwest Insurance Corp., Portland, OR

On your latest editorial: I think what you propose would be a very good policy. As well, I think the claims department should test various scenarios with underwriting as the policy is written—to ensure the limits of coverage are well spelled out. Get claims and underwriting on the same page as the policies are written, not as they are interpreted once a claim is filed.

—Jim Robinson, News Editor,
American Rental Assn., Moline, IL

I totally agree, Jack. My experience in the past several years has been with a captive arrangement where third-party administrators (TPAs) are used. When there is a situation such as you describe, the TPA will inquire of the underwriter if their intent was to provide such coverage. As the "insured" was party to the coverage creation initially, there is rarely such conflict. Perhaps this is a model that all insurance companies should consider.

—Nancy Benson, Principal,
Risk Analysis & Insurance Consulting, PA

Been there, done that, even have a commemorative T-shirt. I agree wholeheartedly that underwriting needs to have a voice in these types of decisions. Deals are made with underwriting and are often undone by claims/legal. The net result is that honor and integrity are ignored. Carriers are critical of clients who approach the purchase of insurance as a "commodity." Yet, at the most critical of times (post loss), they themselves often reduce their product to nothing more than just that, and we insureds often find that the product that was sold to us is defective and does not respond to our particular needs that were discussed with and, we thought, successfully negotiated with underwriting. We need risk partners, not commodity brokers.

—Jim Boone, Risk Manager,
Alberici Group, Inc., St. Louis, MO

This newsletter contains an observation from Jack Gibson that we at Garrett-Stotz Company have shared for years: It is CRITICAL to your risk management plan to have your insurance underwriters and claims personnel on the same team and on the same page! We work hard to make certain this is consistently accomplished.

One example is of this is the interaction of claim personnel with underwriters at Amerisure, one of the major insurance carriers in our region for contractors. Attached is a copy of Amerisure's Agency Bulletin dated 6/3/05 regarding recent Kentucky legislation on indemnification, which happens to be the subject of the Risk Tip topic of this same IRMI newsletter. By proactively advocating the appropriate and timely contract/subcontract language, our mutual clients can avoid claim disputes and misunderstandings that could arise from conflicts between contract language versus statutory positions.

—Jeffrey Brown, Partner,
Garrett-Stotz Company, Louisville, KY

Speaking as an advocate for our clients, I wholeheartedly agree with the comments here. Unfortunately, with the increase in bad faith litigation against insurance carriers, they have become reluctant to take a position with one client that may SEEM contrary to a position taken in another case. Therefore, carriers are trying to protect themselves and only allow certain individuals (coverage counsel) to make these calls. This all started when pollution liability claims started pouring in and has just migrated to all other lines of coverage and in some cases can be very specific. For example, we had one carrier tell us that they were denying any claim that was reported more than 24 days after the date of the accident! When we questioned them about this, indicating that they needed to look at each claim on its own merits, they advised they were involved in litigation on this issue and needed to maintain a "consistent position." While I can sympathize with their position, the fact of the matter is that their underwriters are making deals every day and the clients need to be able to rely on what they say and have their claim evaluated on the facts pertaining to their situation and the current law.

—Karen Kestle, Director—Claims Services,
Rutherfoord, Richmond, VA

We are a managing general agent for a very specialized book of program business. My boss has long held the position that underwriting and claims should work as a team, although we take the opposite approach from what you suggested—the vice president of Risk Mgmt./Claims is very involved in the underwriting process. He has authority to override the Underwriting department on certain types of coverages. Our carrier thinks it might be a conflict of interest, but it seems to work well in the long run. After all, he knows what he will and will not pay.

—Joan Lumpkin, Underwriting Manager,
LIPCA Insurance Group, Baton Rouge, LA

The claims dept. should be involved in the beginning, not after there is a claim and everyone finds out that the underwriter did not know the account and the agent hid some of the items that should have been brought out at the beginning. Should be a team approach for all.

—William Brooks, Manager,
Old Republic, Houston, TX

It is important to remember that the insurance policy is a contract. The underwriter may know what coverage is intended, but must construct a policy that actually provides that coverage.

To that end, it is more important to have good communication between claims and underwriting before the policy is issued rather than after a claim has occurred. A reputable claims department should always be reviewing a policy to find coverage rather than to disclaim. Still, they can only work from the contract that is written.

Historically, claims and underwriting have been set up with their own chain of command to avoid conflicts. The underwriter is too close to the situation both in terms of customer relations and work product to provide the final decision on a coverage issue. On the other hand, the claims department should be considering underwriting intent as part of the analysis, but in the end, the policy must reflect coverage for the loss to be paid. Good communication between the departments before the policy is issued is the most proactive way to make sure the appropriate coverage is in place.

—John Wick, Corporate Risk Manager,
Insurance Office of America, Longwood, FL

Managing claims and underwriting is a difficult process. That is why you choose a quality insurance company to manage your insurance program.

The claims adjusters are trained to first deny the claim and then worry about how to manage it. This is because once you accept the claim, you cannot later deny it even if there were valid coverage or other issues. That is why a reservation of rights letter is sent out. Not absolutely the right thing to do, but that is the legal climate we live in.

Underwriting is a process. Generally, one person does not make a decision to underwrite or not to underwrite. Various documents (financial reports, loss control reports, prior history, etc.) are obtained and analyzed. Input from various interested parties is obtained, and then a decision is conveyed to the policyholder. Since underwriting is a process, how can you have it be involved in the decision to pay or deny? The claims are generally assigned to one person. So is legal defense. That is why you see this disconnect. You raise a valid question, every claim should be managed in a fair and equitable manner.

—Michael Saujani, Corporate Safety Director,
Fort Dearborn Company, Elk Grove Village, IL

Although there are many "disconnects" like you talk about in the insurance industry, I do think that many situations of where claims are denied by the adjuster when the underwriter thinks there should be are brought about by the fact we have "area code" law and immediate transmission of cases through the Internet. A particular jurisdiction may make a ruling on some fact, insurance language, contract, etc. Although this ruling is on a particular point, it is immediately accessible on the Web. Adjusters read this ruling and then react too quickly and deny coverage in any claim they have that might be similar to that ruling. EIFS was a clear example of this. One ruling on some bad facts caused turmoil, denials, endorsements, etc. Thus, the industry has to learn that one case that gets out on the Web and commented on by lawyers, carriers, and yes, even consultants, must be taken with a grain of salt and without a rush to judgment.

—Frank Keres, President,
Construction Risk Associates, Inc., Northbrook, IL

Underwriters and claims adjusters should work more closely together. There have been several instances where this would have been most helpful in settling a claim in a timely manner. When coverage is provided and intended under a policy, it is our duty to be sure that the insured is paid!!! I agree that exclusions are included in the policy for a reason, and coverage should NOT be provided when it is expressly excluded under a policy. Many times the agent and underwriter agree that coverage will be provided when the policy is written, and an overzealous claims adjuster is trying to deny coverage. In my opinion, claims adjusters should not receive additional compensation for denying claims which should be covered under the policy. Working with the underwriter would make claims adjusting more fair to both the client and the insurance carrier.

—Janice Dovidio, Account Manager,
Felten & Associates, Vero Beach, FL

Perhaps the underwriters should talk more with claims adjusters to be sure their conception of the insurance policy is in accordance with how the agreement actually functions in reality (after a loss).

—Rich Rozman, Comm. Mktg. Mgr.,
Talbot Insurance Agency, Willoughby, OH

I am happy to report that our claims department works very closely with the underwriting department. The underwriters receive a phone call or special Investigative Report when there are questions or items that need to be brought to our attention. While we do not want our claims to be excessive, we have been trained to do the right thing, and if there is money owed, to pay it. Our guidelines are exceptional with regard to contacting our insureds in a timely fashion and getting the claim resolved as quickly as possible. There have been times when an underwriter will note a payment is being considered when there is no payment due. This does not happen often, but it has happened.

—Anne Crabbs, Commercial Specialist II,
State Auto Insurance Companies, Columbus, OH

I agree with your observation and comments regarding the disconnect between the underwriters and the claims people. I don't know of any other industry where the customer pays for the product and then the company tries to figure out a way not to deliver it.

—Norman Newman, Dann, Pecar,
Newman & Kleiman, P.C., Sr. Member, Indianapolis, IN

Having been involved in many insurance coverage matters (representing both insurers and insureds) where underwriting was an issue, I believe that routinely involving underwriters in the claims process would not be good for insurers, for two reasons. First, many courts will not look beyond to the language of the contract when determining whether a claim is covered. For example, I was involved in a case where memos from the insurer's own underwriting department advocated a completely contrary interpretation then that asserted by the insurer in coverage litigation. Nevertheless, the court looked to the language of the insurance contract, determined that it was not ambiguous, and thus refused to consider any evidence of a contrary interpretation.

Second, one of the underwriting department's roles is to bring in and keep business. I have seen this result in tension between claims and underwriting over the disposition of a claim. Formal consideration of underwriting's position on a claim—which may not have any legal basis, but may be based on business development considerations—could be unnecessarily detrimental to an insurer's ability to appropriately resolve the claim.

There certainly are cases where the prudent claims person will interface with underwriting. Such circumstances include where there is manuscript policy language that the insured claims is ambiguous or interpreted differently, or where the insured states the policy language at issue was not part of the policy. Of course, in every case, a prudent claims person would be wise to consider underwriting's intent, but that intent usually is self-evident from the language chosen. Where the claims person is less certain, an underwriting inquiry should be made, as such evidence might prove relevant—and potentially disastrous to the insurer if initially ignored.

I believe that the main issue for insurers is not underwriters being formally and regularly involved when a claim comes in, but rather the failure of underwriting to consult with the claims department when policy language is drafted. The failure to involve seasoned claims professionals and counsel in the drafting of policy terms and modifications can result in claims headaches for all.

Finally, on the insured's side of the fence, the problem is the failure to ensure that its expectations are sufficiently documented somewhere—usually (but not necessarily always) in the policy itself. Often, the insured's counsel should be involved, especially where there is a manuscripted or nonstandard provision, or a crucial negotiated policy term. (See, for example, the "Cutter & Buck" district court opinion, describing the insureds' erroneous understanding of the negotiation and meaning of the policy's severability provision.)

—Nate McKitterick, DLA Piper, Attorney, Palo Alto, CA

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IRMI Update—Issue #123

In This Issue

Message from the Editor

Risk Tip

New Expert Commentary

Your View—Underwriting versus Claims

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