Guest Post: Professionalism in the D&O Claims Process -- Civil Behavior is Just Good Business
I am pleased to be able to print below a guest post from my friend and industry colleagueDonna Ferrara. Donna is Senior Vice President and Managing Director, Management Liability Practice Group, at Arthur J. Gallagher & Co. As Donna indicates, this guest post is the result of an email exchange between Donna and myself following one of my recent blog posts about to a recent coverage decision. Because I recognized the depth of Donna’s feelings about the need for professionalism in the insurance claims process, I invited her to submit a guest post on the topic, which she has done and which I have set out below.
I want to emphasize that I welcome proposed guest posts from responsible commentators throughout the industry. I also encourage readers who have reactions to Donna’s guest post to please add their thoughts using the blog’s comment function. Here is Donna’s guest post:
After I posted a comment on Kevin’s blog, he asked if I would write about the need for professionalism in our business. The following is my opinion and does not reflect that of my employer or colleagues. In the interest of full disclosure, I currently work for a major insurance broker. In the past, I have represented both insurers and insureds, which provides, I believe, an unusual point of view.
First, this is not a sniveling request for a return to the days of elaborately false good manners and courtly lawyering, if there ever were such a time.
Rather, this is an unscientific discussion of how civil – or Rational - behavior is good business.
Navigating the arcane world of D&O insurance requires a fairly high level of expertise. One would hope that this would be matched by a high level of professionalism and respect, but that is not always the case.
Rationally, D&O disputes should not create feelings of betrayal and personal peril. Unlike criminal or civil rights cases, the ultimate issue is money. Yet often disputes are ratcheted to an emotional level more appropriate for armed combat.
Recently, I looked at cases in which D&O coverage disputes had been litigated to appeals courts, an expensive and unusual event. Most litigation settles long before there is anything to appeal. At Kevin’s request, I am not including the names or identifying information of the litigants. I have no knowledge of the cases reviewed, beyond what is publically available.
In each case, someone was pressing an argument which was, at best, difficult. For example, in one case, a carrier asserted that even if a court ordered a litigant to pay plaintiffs’ costs, that litigant was not "legally obligated to pay" those costs. In another, the insured argued that the policy provided coverage for investigations of the corporation, although the policy limited such coverage to individuals. In a third, the parties claimed that a provision which provided only defense coverage actually provided no coverage (in the carrier’s view) or full defense and indemnity (in the insured’s view).
Unsurprisingly, these arguments did not succeed. After the parties had expended substantial legal fees, appeals courts found, in effect, that the policies said what they said.
Why did the parties fight so hard to reach what should have been an obvious conclusion?
The reason may be found in the pleadings and motion practice.
In each case, there was a substantial amount of money at stake, but probably not a "bet the company" sum for either party. Still, the dockets reveal extensive and vitriolic communications between the parties and their respective counsel. Carriers complained that their advice had been ignored. Insureds claimed deception and bad faith. Both sides bickered over discovery. Sanctions were demanded. The exhibits to the pleadings included emails and letters demonstrating that animosity had been the tone of the parties’ relationship from the beginning.
In short, the litigants subscribed to the Tough theory of business and litigation.
Probably the parties felt that the sums involved justified their mutually Tough stance. Possibly, they felt that "It was the Principle" – although, again, the issue was really only money. In any case, being Tough virtually assured that they would end up in court, yet in none of these cases did one side succeed completely.
Rationally, the parties might have realized that courts are poor places to make difficult arguments. Courts are not equipped to make decisions based on business considerations. With few exceptions, judges were litigators in their past lives. They come from an adversarial background and are limited to deciding specific issues. They cannot make compromises or force settlements (at least not overtly). Every issue has to be reviewed. At the end of the process, there has to be a "winner" and a "loser" on every point, even if no one actually "wins" the entire case.
Moreover, most judges have more cases than they can handle. Aggressive tactics slow the docket, annoying judges and magistrates. True, Tough tactics mean more money for lawyers who bill on an hourly basis. Clients, however, resent high legal fees that are not accompanied by clear success (and even those that are).
I suspect that, at the end of the cases reviewed, no one felt victorious or vindicated.
In a Rational world, the parties in this litigation would have met before a claim had even been made. The contract would have been openly discussed. There would be a Rational presumption that good coverage costs more than poor coverage, that no insurer wants to accept unlimited risk and that the insured would want the policy to respond as its words – and advertising - indicated it would.
It is unlikely this discussion ever took place.
D&O insurance is sold in a market where price is often the primary, if not the sole, consideration and that price is set by competition, not by risk.
Underwriters, pressured to write business, tweak their forms, but price according to what other carriers charge. Because D&O claims are historically infrequent, but relatively severe, claims handlers do not have the chance to manage and pay many claims. Insureds demand the broadest possible coverage, for the lowest cost - a Bentley for the price of a bicycle. Brokers are in the middle, often an untenable situation. They must be seen as Tough, or risk losing the business.
Lawyers may exacerbate the situation: Often both client and lawyer perceive attorneys as the "hired gun". As a brash young attorney once said, "If my clients wanted to make nice, they would have called a florist." D&O is especially fertile ground for disputes: policy language varies and insurance is governed by the state law. Whatever position a party takes can find support somewhere.
The present economic climate increases the pressure on everyone: "bad" results can have bad personal consequences. Carriers’ personnel may be fired, lawyers dismissed and brokers replaced. Rationality may be perceived as weakness or lack of commitment.
Rather than suggest that the other side may have merit, parties feel compelled to press every point against equally committed adversaries.
In my own experience, there can and should be a Rational approach to D&O issues. While difficult and even counterintuitive, it is possible for insurers and insureds to listen to each other, discuss differences and come to appropriate business decisions. Everyone should know that their position had been heard. Lawyers can recognize that their clients might benefit more from compromise than scorched earth. Although we are bound to be advocates for our clients, we can and should be counselors as well.
This is just good business.
In the cases discussed, it is easy to imagine that the relationships among the litigants were damaged irreparably. The insureds were unlikely to ever purchase insurance from the carriers again, but the brokers and lawyers may have lost their clients as well.
I am not so naïve as to envision a world in which carriers and their insureds are "partners", in the sense that they will both benefit from the same outcome. While I passionately serve my clients, I know that insurance is a business of trading services for money. As with any business, rational, civil behavior can be mutually beneficial.
Donna's post was spot on and was an extremely good read. She has a number of very valid points, but unfortunately once the insured receives the dreaded "reservation of rights letter" the battle has begun. I understand all of the reasons that the letter must be written in that fashion, but an actual conversation between the insured and the carrier would probably be less intimidating.
Donna has touched upon a very important subject and there are a few additional observations I have in this area.
1. Oftentimes, the communication problem is more in the nature of absent or too infrequent communication, rather than vitriol. Many issues and concerns raised by both insurers and policyholders are in the nature of questions or requests for information and documents. Many disputes can be obviated altogether or at least minimized if the parties would just respond substantively to each other - by any combination of written, telephonic or in-person communication.
2. Having been a D&O claims executive for over 15 years, I can attest to the fact that insurers are not monolithic in their approach to claims handling. There are poor communicators and some who take unreasonable claim positions within every company. I have seen first hand where one or two zealots can be responsible for the overwhelming majority of a company's bad faith exposure.
3. Where there is unduly contentious and aggressive claims practices, in many instances these practices and seeming aberrations emanate from the business or underwriting side of the house. While it may be perceived that there is no resolution until a business unit executive steps in and corrects the maverick claims handler or outside lawyer, it may well be that these claims handlers have been doing the executive's bidding all along.
4. I agree with Donna that this is a two-way street and not all, or maybe not even most, of the bad actors are on the insurers side. While not every dispute should result in a compromis settlement, this is often the wisest cost when one side or the other does not achieve a relatively quick win on motion practice. Even those wins are not without attendant high cost, particularly if discovery is running amok while motions are pending.
While I agree with the spirit and intent of Ms. Ferrara's suggestions, I can't envision fixing a system that is so broken on so many levels. Yes, I am a cynic from experience: The insurance companies will use every exemption they can muster, they are in business to make a profit, not pay claims, the lawyers stoke the flames of unfair treatment, and the client either eats the cost of the event or goes after the carrier. Who always wins? The Lawyers! Perhaps if the losing side and had to pay all the prevailing side's fees, we might see some restraint, otherwise it remains the Wild Wild West.
Thank you all for the thoughtful comments. I am especially struck by Mr. Kingsley's comment on the reservation of rights letter. I have often seen policy holder clients react as if a claim has been denied, rather than reserved.
Many London and Bermuda carriers say that they do not send such letters unless there are serious grounds. US carriers send them as a matter of course. Certainly more open communication would help here. (In my past life, I wrote those letters, blissfully unaware of the concern they would raise).
To Mr. McGraw's point, I certainly feel his frustration. I'm not ready for "loser paye", but it is tempting sometimes.
As for Joe's thoughtful observations - I return to something we have discussed: why don't carriers advertise - even generally - how much money they actually pay on claims, especially defense costs? We have reams of information about how much corporations pay on D&O claim settlements, but why don't carriers want to take credit for paying their share?
I'd like to see someone like Advisen or RIMS conduct a survey on this subject. It would be eyeopening, even if done on a no-name basis. Carriers could use it to rebut, in some degree, the notion that they never pay claims.
Insureds could take some comfort in the fact that there might be a response under the policy they're purchasing.
Brokers, of course, would welcome such information.
Some final comments on my part.
In my work life experience examples, the reader should not assume the bad behavior occurred in or was solely confined to one or more of my former employers.
I have not personally witnessed bad faith at the highest levels of a claim organization. I have not been party to any "no pay" or "slow pay" conspiracies. I do, however, stand by my comments that one or two zealots can undeservedly tarnish an insurer's professional reputation.
Finally, there are some bad actors in the brokerage community as well, especially when they sit quietly on the sidelines when individual directors can use their constructive advocacy.