Category Archives: Claims Settlement Issues

Understanding The Available Insurance Is The Key To Settling A Liability Dispute

Getting to “Yes” requires dealing with the coverage issues that stand in the way

“What’s the problem here?”, the CEO demands to know. “They were wrong. They are liable. We should be paid for our damages. What is holding this up?”

The answer often is, “their insurance”.

More accurately, the answer would be: “They have insurance, but there is a dispute between them and their insurer as to how much of this is covered and who has to step up and settle the claim, and with whose money.” In other words, your valid claim is hung up in “insurance gridlock”—often honest internal debate—on the other side. Your CEO’s frustration is justified. But there are solutions.

Step One: Be Sure Your Recovery Expectations and Your Strategy Are Realistic and Aligned to the Insurance that May be Available—“Follow the Money” and “Be Careful What you Ask For”

Hopefully, your claim is against a well-financed company that can satisfy a judgment or pay a settlement whether it has enough insurance to do so or not. But if your claim is large and that other company is not, you may well face a situation where—realistically—you are settling with their insurer and not with them. The insurance is where the money must come from, because there isn’t enough money in the liable company itself to get you to settlement.

We are surprised at how often very able legal counsel for the plaintiff in a commercial case pays scant attention to this “fact of life”. Litigation strategies are often built around nailing down the liability of the defendant in as many ways as possible, but little thought is directed to “who is going to pay for the liability we prove?” A litigation approach that does not put a primary focus on understanding the insurance available to the defendant is, in our view, inefficient and maybe even counterproductive to full recovery.

First, the litigation expense that is run up in pursuing every alley of legal liability quickly erodes the net recovery obtained at the end of the day. But—even worse—your own work in establishing valid legal liability of the defendant may be just the demonstration the defendant’s insurer needs to validly deny coverage and shut off the funding needed for a realistic settlement. This is because you may develop facts, by asking for them or proving them in discovery, that walk straight into explicit exclusions in the insurance policies of the defendant—such as by showing that some conduct was intentionally wrongful, or may have occurred slightly before or after the stated periods of effective insurance, or a myriad of other possible exclusions, depending on the kind of insurance involved.

An independent insurance content expert can help you and your legal team to understand the fine print of the available insurance so that your litigation strategy is aligned with it.

Step Two: Deal Directly With the Defendant’s Insurer and its Coverage Advisor

We often find that the most valuable thing we can do for a company is speak directly—in a non-confrontational way—with the persons within the insurance company dealing with the available insurance question, and with the outside legal counsel on coverage that has usually been engaged by the insurer. These are not the same people that are working against you in the underlying liability case, and they will normally never personally encounter your own litigation team. But they are the individuals who will make what we call “the wallet calls”, and, most importantly, “how much money is in it”.

A settlement facilitator, such as Bauer Advising (or others!) can deal directly as non-combatants with these decision makers and influencers to discuss the nuances of coverage and move you towards a much prompter resolution.

Settlement facilitation is not the same as so-called mediation. It is a very different process in which the facilitator acts as an envoy moving between the parties and making proposals for settlement in an iterative process over—normally—60 days or so. The facilitator can be retained by all of the parties, some of them, or only one of them.

For a more complete description of how this process differs from mediation, see the article on this site dated January 6, 2015.

Protecting Your Right to be Made Whole from a Subrogation Recovery

It seems simple. The insurance company has stepped up and settled that nettlesome liability claim you faced.

Your product, a furnace replacement part, was off spec and ruined an expensive furnace into which it was installed. It was made with zinc instead of the nickel that was necessary for proper operation. The settlement was $500,000. You contributed your SIR (or deductible) of $250,000 and your carrier paid the rest. It’s pretty clear that a third party was really to blame for the loss—a supplier that mistakenly sent you the zinc instead of the requested nickel in the first place. Your insurer chooses to exercise its subrogation rights and pursue the supplier for as much as possible. You sign a “subrogation receipt” or “assignment” entitling the carrier to make the claim in your name.

Neither the insurance policy nor the subrogation assignment is specific about how the proceeds of a subrogation recovery will be divided between you and the insurer. And nothing is said about the insurer’s legal fees to be incurred.

Six months later your carrier comes back to you. Good news. The supplier and its insurer want to avoid a suit and have offered to settle the subrogated claim for $400,000. Your carrier’s legal fees incurred in pursuing the subrogated claim have been $50,000. So your carrier proposes that those legal expenses be paid off the top of the settlement funds, leaving $350,000 in remaining proceeds ($400K-$50K). Since your insurer paid $250,000 to fund the underlying case, the carrier suggests that it receive $250K and you receive the remaining $100K. After all, the policy and subrogation receipt or assignment, while not addressing allocation of recovery proceeds per se, do say the insurer will be subrogated to the extent it paid the loss. (There is certainly nothing unethical about an insurer making a proposal on a point left open in the policy or assignment. When terms are silent, an issue becomes a point of negotiation.)

In our experience, many policyholders accept the offered settlement distribution without much, or any, question. But in most states, and under most liability insurance policies, they are shortchanging themselves when they do. A large majority of states are clear on the point—either by statute or judicial precedent—that in any subrogation recovery under general liability policies the policyholder is entitled to be made whole on its financial loss before any proceeds go to the insurer. And that the legal expenses of the insurer in pursuing subrogation are its own burden, and do not reduce the amount available to make the policyholder whole. (There are exceptions when Medicaid, Medicare, or consumer auto liability subrogation is involved.)

In the example above, the policyholder in most places would be entitled to all of its deductible/SIR back from the $400K subrogation recovery. In other words, it should receive $250,000, and not the $100,000 proposed. The carrier should receive the balance of $150K, and should pay its subrogation legal fees from that.

All of the above can be—and in good practice should be—spelled out in a simple subrogation proceeds agreement, or in the policy itself by endorsement. By simply stating that “[t]he Policyholder will be made whole for its entire loss from the proceeds of any judgment or settlement, including for the full amount of any SIR or deductible that it paid in connection with the claim that is subrogated, before the Insurer is paid from the proceeds of any judgment or settlement, or reimbursed for its legal expenses incurred”, you can avoid any arguments and get the proceeds you are entitled to.

Far too often, subrogation terms—both in the policy and after loss in a subro receipt or assignment—are treated as insignificant boilerplate. Treat them with the care they warrant and you will receive more for the insurance you have purchased.

Joe Bauer is the Principal of Bauer Advising LLC. Bauer Advising is an independent advisor and receives no commissions from any insurance company or broker, but assists policyholders, carriers, and brokers as settlement facilitators of disputed commercial insurance claims and related issues. Read more about Bauer Advising’s approach.