Coverage Dispute Handling Has Evolved in 25 Years

Changes in response time, the way research is conducted and the sources of bad faith have all impacted how coverage is evaluated, according to a panel discussion conducted by the American Bar Association’s Trial and Insurance Program Session. The program was held recently at the Arizona Biltmore Resort in Phoenix, Ariz. To coincide with its 25th anniversary, panelists discussed the way coverage dispute handling and evaluation has changed during that time.

Jill Berkeley, a Chicago-based partner and chair of Neal Gerber & Eisenberg’s Insurance Policyholder practice group, said that coverage evaluation has evolved from assessing basic issues to the importance of strategic thinking. She also noted the increased pressure to respond immediately to coverage questions, despite the necessity to sometimes mull complex issues.

Research is a necessary and time-consuming component of any coverage evaluation. The ability to access research, even if it was available electronically, could still be time intensive because it couldn’t be accessed via every device, said Tampa-based attorney Lisa Oonk. She recalls that when she began in the business, a firm she worked in used a teletype machine to communicate with Lloyd’s of London. With email, there is no need to wait days or hours for a response, she added.

Oonk also noted the increased expectation that communication should be instantaneous.

Boston-based insurance coverage counsel Barbara O’Donnell, with the firm of Zelle McDonough & Cohen, said that bad faith has changed significantly in the 25 years since the committee began. She explained there has been significant changes in statutory penalties, excess judgments and attorneys’ fees relating to bad faith lawsuits. In addition, the potential sources of bad faith have widened, she said. Jurisdictional awareness, including the careful consideration of statutory requirements as they relate to claims handling, the burden of proof, potential penalties and recoverable remedies are now all considered important in case evaluation, she added.

Robert Westerfield, a senior partner with Bowles & Verna in Walnut Creek, Calif., said that the biggest change in practice is the initial choice of law while the reasons why a policyholder files bad faith lawsuits remains unchanged. Bad faith allegations offer the plaintiff the opportunity to broaden discovery, providing a chance to try the case in front of a jury. In the past 25 years, he’s seen less cases where insurers refuse to defend insureds and noted there have been major changes to California’s statutory penalties related to bad faith.

The panelists also discussed reservations of rights (ROR), allocation and privileged communication.

According to Berkeley, in the past, there was more emphasis placed on how to write an ROR letter. She explained that more thought now goes into analyzing its impact on the case and whether it could have an impact on the defense.

In terms of allocation, the insurance policy language, relating to indemnity and defense costs, needs to be reviewed, Berkeley said, and attention needs to be paid to determine how both are allocated as well as whether all of the primary policies have to be exhausted prior to triggering excess policies.

Oonk said that defense costs aren’t subject to the allocation rule, though a couple of cases have applied time on risk for defense costs for uninsured time periods, if the insured can prove that it couldn’t buy any more coverage.

According to Westerfield, in recent years, issues dealing with privileged communication have put claims adjusters in the precarious position of having to be deposed. When insurers assert privilege, it prevents them from explaining any part of their evaluation at trial. He added that claim adjusters can’t be prepped for deposition because counsel can’t show them documents deemed privileged.