Litigated Claims – When a Lawsuit Is Filed Against an Insurance Policy
In plain language: A litigated claim refers to a situation where an insurance matter is taken to court. In other words, when a policyholder or a third party isn’t happy with how an insurance company handled a claim, they might decide to litigate, initiating a lawsuit to seek a resolution that’s more favorable to them.
Technical definition: Within the insurance industry, a litigated claim is a claim in which legal action has been taken by a party involved in the claim process. This often occurs when disputes arise regarding the nature of the loss, the coverage of the policy, or the amount of the settlement offered by the insurer. Common in claims handling, this term is frequently seen throughout all lines of business, from personal auto and homeowners to commercial general liability and professional liability.
Navigating through the litigated claims process can be a tricky and daunting task. Misunderstandings regarding these situations can cause unnecessary stress and possibly result in costly litigation expenses.
TL;DR
- A litigated claim involves a lawsuit related to an insurance matter.
- Awareness of these claims can help reduce potential agent E&O exposures.
- A common misunderstanding is assuming all claims eventually end in litigation when most do not.
- Agencies can assist by setting clear expectations about the claims process and possible outcomes from the start.
What Is a Litigated Claim in Insurance?
A litigated claim in the insurance context refers to a claim in which a lawsuit has been filed due to a dispute arising from the way an insurer processed a claim. During the claims process, disagreements can occur between the policyholder, insurer, and other involved parties over the cause of loss, the scope of policy coverage, the denial of a claim, or the offered settlement amount.
While policy language and specific conditions stipulated in the insurance contract play a critical role, certain circumstances might fuel the need to litigate. It’s also important to note that although the idea of litigation might sound threatening to some, it does not necessarily mean the situation is unmanageable. The filing of a lawsuit might simply be a part of the journey towards resolution of complex claims.
Key Related Terms to Know
- Claims Adjuster – A professional who investigates, negotiates, and settles insurance claims.
- Subrogation – The process by which an insurance company seeks recovery of the amounts paid to the insured from a third party that caused the loss.
- Bad Faith Claim – A lawsuit alleging that the insurer acted unreasonably in handling, denying, or failing to promptly settle a claim.
- Coverage Dispute – A disagreement over whether an insurance policy covers a specific loss.
- Duty to Defend – An insurer’s obligation to provide legal defense for an insured in a lawsuit.
Common Questions About Litigated Claims
Why does a claim get litigated?
A claim may be litigated if there’s a disagreement between parties about the extent of damage, policy coverage, cause of loss, or the proposed settlement amount. This often happens when these complexities cannot be resolved through standard adjuster negotiations.
What happens when a claim is litigated?
Negotiations turn into formal legal proceedings. Attorneys on both sides present their arguments and evidence to a judge or jury. It’s important to manage client expectations throughout this process, as litigation can extend the claim resolution timeline significantly.
What role does an insurance agent play in a litigated claim?
An insurance agent assists in demonstrating coverage, explaining the claims process, and coordinating communications between the client and the insurer’s claims department. They can also help draft a formal denial letter if a claim is not covered, which can aid in preventing a possible lawsuit related to a disputed claim.
How can an agent prevent a claim from being litigated?
Clear communication is key. Setting client expectations about policy coverage and claim outcomes can prevent misunderstandings that may lead to litigation. Education about policy terms and swift claim reporting can also discourage needless lawsuits.
Litigated Claims vs. Regular Claims
While both types of claims involve a request for compensation under an insurance policy, they diverge in how they are resolved.
Comparison Area | Litigated Claims | Regular Claims
|
Primary use case | Address disputes during claim process | Claim resolution without legal action |
Coverage / concept type | Legal process involving a lawsuit | Standard claims handling and resolution |
Typical exclusions | Coverage may be disputed, affecting defense | Coverage exclusions outlined in policy |
Who is most affected by errors | Everyone – policyholder, insurer, third parties | Primarily the policyholder and insurer |
Common mistakes | Miscommunications or policy misunderstandings | Delays in reporting, insufficient documentation |
Real Claim Examples Involving Litigated Claims
Scenario 1: A homeowner filed a claim after a fire damaged his home. The insurer’s settlement offer didn’t cover his estimate of damages. The homeowner litigated, claiming the insurer undervalued his loss. After lengthy court proceedings, the judge ordered a higher settlement.
Scenario 2: A motorist with state minimum auto liability was sued by an injured third party who claimed damages beyond the policy limit. The insurer initially defended the motorist but ceased its defense after paying out the policy limit, leaving the motorist to litigate the remaining amount.
Scenario 3: A business owner filed a liability claim after a customer slipped in her store. She believed her liability insurance should cover the expenses, but her insurer disagreed, stating that her policy excluded such incidents. This dispute led to a litigated claim, with the court ruling in favor of the insurer based on policy language.
Limitations and Common Mistakes
- Fire Legal Liability Coverage – This is coverage under a CGL policy held by a tenant to cover for damages to a rented premise due to fire caused by negligence or actions.
- Commercial General Liability (CGL) Policy – It’s a policy that covers businesses from liabilities arising from injuries or damages to the property of others.
- Per Occurrence Limit – The maximum amount an insurer will pay for all claims resulting from a single incident.
- General Aggregate Limit – The maximum amount an insurer will pay for all covered losses during the policy period.
- Property Damage Coverage – Coverage in a liability insurance policy paying for damage to a third party’s property.
How to Explain Litigated Claims to Clients
Personal Lines client: “Think of a litigated claim as a dispute over a claim that’s ended up in court. It’s like when neighbors can’t agree on a boundary line, so they ask a judge to decide.”
Small Business owner: “If there’s a disagreement over an insurance claim that we can’t sort out through normal processes, the claim could end up in court. That’s what we call a litigated claim.”
CFO or Risk Manager: “A litigated claim is a complex insurance claim where legal action has been taken due to disagreements over the claim process, often requiring an extended timeframe and more resources to resolve.”