After almost 20 years handling liability claims, I have definitively settled on one “tried and true” master formula. From this formula, a claims analyst can begin handling any liability claim regardless of the exposure or industry. Knowledge, understanding and consistent application of this formula sets apart the claims professional from the transient. Without it, a claim has a high risk of being mishandled.
The Coverage-Liability-Damages (CLD) Formula
The formula may seem obvious on its face. In practice, it is frequently ignored. Like most formulas, this one has a step-by-step priority. The tendency across the industry is to either fail to recognize this formula or fail to apply it correctly. Many give in to the temptation to start evaluating and investigating liability or damages as their starting point. Liability is often more interesting and colorful. Damages often appeal to the financial instincts of the claims staff.
Further, coverage is seen as either really easy to determine or ridiculously complicated. Some claims professionals come from areas where coverage is rarely an issue or where coverage is “assumed” until proven otherwise. Many assume the agent submitting the claim already determined there was coverage so “why should I question that?” That mindset can lead to serious mistakes.
The Simple Road Map for Claims
The three main issues of Coverage, Liability and Damages act as a road map. The formula also communicates the proper order for resolution. There are many sub-issues to analyze, and each topic has its own workflow and checklists for getting through those sub-issues.
But, all issues essentially fall within the “Coverage, Liability, and Damages” formula. Whether the claim stems from an auto accident or a multi-party, multi-occurrence sexual harassment matter, the framework offered by the formula still applies.
Why does the order matter? Focus on these steps out of order and the handling of the file is in jeopardy. Of course, parties in a dispute can certainly agree to litigate issues of liability and damages first and preserve arguments over coverage until the liability determination is made. In cases where the potentially high cost of a coverage dispute dwarfs the cost of litigating the underlying claim, it may be wise to proceed with a damages determination.
To be clear, the formula does not mean that an analyst should delay or fail to preserve evidence related to liability and damages just because coverage questions are looming. If physical evidence or witnesses are involved, consideration must be given to the need to gather items and statements that may not be available after a delay. And, the formula does not signal that an adjuster must make an immediate decision on coverage before even examining and analyzing liability and damages.
An effective practice is to put a formal placeholder on a coverage position while reserving the right to argue later. Reservation of rights letters are commonly used to address delays involved in coming to firm conclusions.
Nonetheless, the order in which these issues are concluded can have an impact. Take the example of the hasty insurance claims adjuster. The hasty adjuster skips over issues of coverage and moves straight into the collection of witness statements and records on issues of liability and damages. Perhaps this rush is an unintended consequence of a misguided initiative to post case reserves before “X” number of days. The adjuster may assign defense counsel without first reserving rights to later assert a coverage position.
In asking for damage estimates and assigning defense counsel without first warning of non-coverage, the adjuster sets up an expectation in the policyholder’s mind that the matter is under the control of the insurance company and covered. These actions can be misleading and create an estoppel argument for the policyholder seeking coverage. In many companies, coverage work is handled by a separate claims professional in order to avoid these very issues.
Another example is the case of the “operations-oriented” General Counsel. Eager to get the production facility up and running after a fire, the General Counsel directs plant management to proceed with the removal of a large piece of food processing equipment that caught fire. The problem is that the disposal occurred prior to a cause and origin investigation. Could this move jeopardize coverage under the plant’s excess liability policy? Could it also impair loss recovery efforts if negligent wiring by the equipment maker was the cause? The answer is “yes” to both of these questions.
Self-Insured Claim Handling
Does the CLD formula apply to self-insured claim handling? Yes. The practice of first starting with coverage questions applies no matter what perspective you have as a file handler. You may simply be the oversight adjuster working on behalf of a self-insured that outsources files to a TPA. You may be a claims attorney working in the legal department of a self-insured university. This formula still applies.
Even self-insureds must first be concerned with policy coverage at the excess layers or rights to indemnification by other contracting parties where risk is shared or transferred.
Notice to excess carriers is a critical responsibility of every self-insured. While the duty to report a claim may be determined by the agreements in place, the analyst must consider the notice requirements. Secondly, the self-insured claims analyst should understand that taking certain positions during the pendency of claim defense may hamper the ability to take an alternative position for the purpose of coverage litigation.
An example is the situation where a self-insured company argues that an employee acted ‘outside the scope’ of employment in order to bolster its liability defense. However, that position creates a problem if a defense duty hangs on the question of whether the employee was acting inside the scope. Simultaneously taking two positions that are incompatible are bound to be problematic.
Even if damages are assumed to be well within the Self-Insured’s retention, coverage matters. Certain policies may contain aggregate limits on the SIR such that coverage attaches after a certain aggregate dollar limit is reached. In other cases, numerous events may be considered related such that a final determination of coverage cannot be made until after more claims have come to light. In such a situation, a self-insured failing to properly identify coverage issues or failing to provide notice to all potential insurers will undoubtedly face coverage challenges.
Conclusion
The Coverage-Liability-Damages approach to liability claims is time tested. It has served many managers and adjusters in their ability to competently present recommendations before a claims committee. It dictates some level of organization in workflow and analysis.
Those who do not use the formula wind up gathering dozens of “claim-bits” on issues without putting the full claim story together. With disjointed pieces as the finished product, there is little chance of getting the right resolution strategy together.
