“I suppose I could have just used a Confundus Charm.”
– Harry Potter
Lawyers, for lack of a better analogy, have been lobotomized to a certain extent. Not the Nurse Ratched kind of lobotomy, mind you, but rather a bloodless one that begins in law school.
During their initial re-education, law students are trained to no longer see things through binary lenses. This ultimately leads to the super-human, if not sometimes eye-rolling, ability to view positions from multiple angles. This skill is further honed over the course of years in practice, where clients pay them to advocate positions on their behalf in various settings. This includes developing creative interpretations of otherwise innocuous words and phrases (cue eye-roll).
Insurance coverage disputes are fertile grounds for battles over what particular words or phrases should mean. For purposes of transparency, in my past life, I served as in-house coverage counsel for a large insurer and have also been retained by both businesses and insurers in coverage settings. I’ve seen both sides of the fence and how unexpected interpretations can have consequences.
Here are a couple real-life examples, based on true stories.
A Gap Analysis
A product company made a certain type of implantable medical device. Since these products could potentially cause injuries to end users (i.e., patients), the company astutely purchased a Products-Completed General Liability policy to cover any claims made by said users. This policy had an overall limit of $10 million, with a deductible of $100,000 per occurrence. An “occurrence” was defined in the policy as “the continuous or repeated exposure to substantially the same general harmful conditions, all of which will be deemed to arise out of the same occurrence.” Clear as mud, right?
Fast-forward a few months to one particular surgeon who had been implanting the company’s device in numerous patients at the same hospital over the course of several weeks, but had misinterpreted certain guidance provided in the surgical technique manuals developed by the company. Unfortunately, this resulted in 52 patients suffering similar injuries from the product failing after surgery. These patients then sued the surgeon, the hospital and ultimately the company.
The company determined there was significant exposure and believed each case could be worth at least $100,000, or $5.2 million in the aggregate. The company breathed a sigh of relief and patted itself on the back for having the foresight to purchase $10 million in coverage, which should have been more than enough insurance to adequately cover these lawsuits. It then notified the insurer and requested coverage under the policy.
And then it happened.
The insurer sent the company a response letter initially containing good news that it would be covering the claim. The good news turned catastrophic in subsequent paragraphs, where the insurer advised that it was interpreting the definition of “occurrence” in the policy to mean that with 52 separate lawsuits, 52 separate deductibles would therefore be triggered before any coverage would attach.
After quickly doing the math, the company realized that the insurer’s interpretation meant its coverage would not kick in until at least $5.2 million ($100,000 x 52) in aggregate losses had occurred. In other words, the insurer had artificially created a $5.2 million gap in coverage. The reality set in that there was effectively no coverage for these claims after all, and the company would be left to pay everything out of pocket.
The company decided to send a letter back to the insurer arguing that the group of claims clearly “arise out of the same occurrence” under the definition. Specifically, the same surgery was performed by the same surgeon at the same hospital using the same product, repeated 52 times. As such, the company asserted, there was “continuous or repeated exposure to substantially the same general harmful conditions.”
In the end, the insurer refused to back off its position, and the company was left contemplating whether it should spend additional hundreds of thousands of dollars suing the insurer over its interpretation of this definition.
Locker Room Talk
Another product company had at times exhibited a locker-room mentality, and there was a growing perception that inappropriate and discriminatory comments were being tolerated at certain levels of leadership. In fact, the Director of Human Resources had received several messages from employees about the behavior of a certain VP of Sales over the prior couple years.
Company-wide training on appropriate workplace conduct had little apparent impact on this particular officer. One subordinate ultimately had enough of the mistreatment and sued the company for harassment and discrimination, requesting a substantial damages award. Unfortunately for the company, it was located in an area renowned for pro-claimant and anti-company juries, and damage awards in this amount sought by this employee were not out of reach.
The company dusted off its Employment Practices Liability policy and noted there was coverage for harassment and discriminatory claims, so it notified the insurer of the lawsuit. The insurer sent the company a response letter with the good news that it would be covering the claim, albeit subject to its standard reservation of rights (i.e., a list of provisions in the policy that could potentially trigger a reconsideration of coverage during the course of the claim).
The insurer then provided the company with one of its “panel” lawyers to defend the lawsuit. This lawyer also reported back to the insurer on status and strategy items, which helped the insurer determine the appropriate amount of money to reserve for defense costs such as attorney’s fees, as well as losses in the event of settlement or verdict.
A few months into the lawsuit, which had been largely forgotten by some of the senior executives, the insurer sent a letter advising that it would no longer be covering the lawsuit. The insurer pointed out that the company had not provided notice of the claim within the same policy year that the claim was made, a necessary pre-condition to coverage.
In the policy, explained the insurer, a “claim” was defined as “a suit or demand made by a current, former or prospective employee.” Of course, the terms “suit” and “demand” were further defined. A “suit” was defined to include traditional lawsuits and administrative claims such as EEOC charges. On the other hand, a “demand” was broadly defined to include “a request for monetary or non-monetary relief.”
The insurer went on to explain that, during the discovery stage of the lawsuit, the plaintiff had requested and was provided e-mails from the company demonstrating several instances of the VP’s problematic conduct that had preceded the policy year. In at least two of these e-mails, employees had specifically threatened to sue the company if the conduct did not improve . . . which the insurer was interpreting to be “a request for non-monetary relief.”
The company was blindsided by the fact that the insurer was now denying coverage based on late notice. As a result, it was now left in the unenviable position of considering whether to spend significant sums suing the insurer, while simultaneously defending the employment lawsuit out-of-pocket.
And Knowing is Half the Battle
Insurers can and will interpret policy language in their own favor to avoid coverage. Because of this, businesses must be proactive before any sort of claim or loss occurs. More specifically, identify and clarify vague, ambiguous and confusing language in the policies up front with your insurer.
Where possible, test the insurer on potentially problematic language with situations and hypotheticals like the ones above, and then see if those scenarios would be covered. If the answer is yes, get that confirmation in writing, as you may need that golden ticket later. If not, find out what you need to do to get coverage, even if that means going back to the market. Alternatively, consider developing internal procedures to minimize the exposure and impact to risks which you ultimately accept.
This process doesn’t just apply to insurance contracts. Any contract involving a business dealing your company enters into should be reviewed to ensure it is balanced and that your interests are being adequately represented and protected.
Seasoned Preventive Lawyers have been around the block in various transactional, litigation and insurance settings. This enables them to spot and fix issues with certain seemingly innocuous words and phrases that could wind up blindsiding you. All of this minimizes exposure to unnecessary business and legal risks.
KEEFER is your ounce of prevention.