Blog # 1(a)

Ambiguity Loss Control For Insurers

by: R.P. “BOB” GADDIS, JD

Curriculum Vitae

November 26, 2021

(Blog 1(a) and 1(b) replace and re-number previous Blog #1 dated November 9, 2021)

1.) This blog discusses a way that insurers can reduce their losses that are caused by their policy(ies) being found to be ambiguously worded by the courts. A successful claim asserting an ambiguity in a policy is typically a result of something being done wrong in the insurer’s underwriting department in the issuance of the policy or any endorsements throughout the term of the policy. Conversely, a successful claim asserted at the insurer’s claims department’s conduct is a result of something being done wrong in the way a claim is adjusted. And those claims aimed at the claims department’s conduct are far more familiar to the insured and his/her attorney since most insureds’ initial complaint starts with something the adjuster did or didn’t do in their claim adjusting interaction with the insured. Since ambiguity suits asserting underwriting errors are virtually always pled in tandem with an alternate count of an error in claims adjusting, the clear distinction between the two is often blurred and generally lumped into a general category called extra-contractual claims which most jurists tend to think of as a basketful of claims errors. Since ambiguity claims arise from alleged underwriting errors, not claims errors, their inclusion in that basket tends to obscure the root cause of those claims. Consequently, insurers seemingly have failed to address correcting the cause of ambiguity claims.

2.) Since insurers’ focus misses the mark when it comes to ambiguity claims, most (if not all) insurers Loss Control efforts expend their resources in trying to control the conduct of: 1.] the insured and 2.] the claims representatives. However, what their Loss Control effort doesn’t seem to include is controlling the conduct of underwriters in an effort to stem the tide of the ambiguous policies. While underwriters usually have an underwriting guide and policies and procedures manual, those documents are not usually written to stem the tide of ambiguous policies.

3.) Ambiguous policies are every insurer’s Achilles heel. While the vast majority of insurers know that; to date, I have found none that will acknowledge it to policyholders or their counsel. It seems as if there is an unspoken agreement among insurers that any insurer whom is so unwise to acknowledge the fact that ambiguity claims are insurers’ Achille’s heel will pay the consequences. It is likely there is this unspoken agreement because of a perception among insurers that any acknowledgement could trigger a landslide of ambiguity allegations, especially since most use the same or similar policy forms. Consequently, many insurers have adopted a method of disposing of ambiguity claims in a manner (more particularly described below) that sidesteps any acknowledgement of that vulnerability.

4.) Insurance policy interpretation is governed in most states by the doctrine of contra proferentem which is more commonly known as the ambiguity rule. The ambiguity rule requires that courts favor an insured’s reasonable interpretation of an insurance policy, if there is more than one reasonable interpretation (insured’s and insurer’s). And, in most states, it doesn’t matter if the insurer’s reasonable interpretation is more reasonable than the insured’s, so long as the insured has any reasonable interpretation.

5.) The purpose of the ambiguity rule is to recognize the inequity in allowing insurers the right to control the creation of the policy wording and, for the most part, allow no input from the insured. Without the ambiguity rule there would be no legal procedure available to encourage insurers to create the policy wording using clear language.

6.) The method used by most (if not all) insurers to dispose of ambiguity claims leaves a false impression in the Court records that the insurer wins all their ambiguity cases, no matter how many they paid to settle. And, as condition of those settlements, the insurer will usually require that the policyholder agree to submit a proposed Agreed Final Judgment for the trial Court Judge to sign and enter, thereby ending the case. That Agreed Final Judgment will contain language to the effect that the policyholder gets no recovery for his/her/its claim against the insurer, even though the reality is that the insurer simultaneously paid the policyholder significant money. And the Judges are always glad to sign and enter those Agreed Final Judgments, closing the case file. In addition, a similar type transaction occurs when the case is on appeal, but it is signed by the Court of Appeals rather than the trial Court. So, whether an ambiguity claim is settled early on at the trial level or at the appellate level the Courts’ files normally reflects settlements as being that the policyholder received nothing for the claim, even though the policyholder was paid significant money. That Agreed Final Judgment will also normally state that the insurer was absolved of wrongdoing and prevailed over the policyholder, when that is not, in reality, what actually happened.

7.) As a result of payment of ambiguity claims in this manner, there is very little public documentation to establish the precise number or amount of ambiguity claims that were paid after the insurer took the public position to the contrary. Since payments of any and all types of claims are allowed by Court rules to be disposed of in this manner, I do not find fault with insurers for utilizing the Court rules in this manner. However, since the effect of disposing of ambiguity claims in this manner creates a false impression in the Court’s own files that in every case the insurer prevailed, there needs to be a mechanism for requiring insurers to report ambiguity claims and details of their settlements and Judgments to appropriate States’ agencies (e.g. States’ Boards and Departments of Insurance). From that governmental agency’s files, anyone from the public could access those files both before and after purchasing insurance, thereby correcting the record that the Court’s records have skewed.

8.) Those insurers using the claims department to pay for mistakes of the underwriting department, without having a Loss Control Plan in place to cure the defective policy issuance procedures of the underwriting department, is like putting a band-aid on cancer. Such an approach not only does no healing, but it also hides the truth from top management and stockholders of how much money is being paid for ambiguous documents being issued by the underwriting department. And that, in turn, makes top management incapable of performing its function of understanding problems well enough to take the necessary action to prevent recurrence of the damaging conduct.

Blog # 1(b)

1.) So, that brings insurers to the point of asking themselves this question: How can we structure and implement a plan to cut back our losses from ambiguity suits? The short answer is pretty obvious-educate and re-educate the underwriting management and staff with heavy emphasis on what conduct causes ambiguity to occur and how they can change that conduct. While this short answer may be obvious, the specific method of implementation will be more complex and different from insurer to insurer. But they all would likely include implementation by periodic follow-up checks on the quality of the policies and endorsements going out of the company to the agent or insured such as through random samples of the policies and endorsements being issued.

2.) Insurers could do a phased-in approach that starts with those areas that are fairly obvious. For example, consider this; Amazingly, a number of those ambiguity issues, I have seen, involved language that was completely blank (such that altered the policy meaning) or completely unintelligible. Both blank forms in the policy and unintelligible policies are usually typographical errors that should have been caught before the insurance contract left the insurer’s office. In one case that I tried in the 1980s, this is how that well-seasoned Judge described the contract he was trying to interpret: The wording used looks like some secretary went mad on the typewriter! Certainly, at the very least, as a starting point, all of those secretary went mad on the typewriter errors could be identified and avoided fairly quickly with a ground-level Ambiguity Loss Control plan. Consequently, the first area for creating an Ambiguity Loss Control plan is making the sole area to be addressed being those that are caused by some secretary went mad on the typewriter type conduct. In a trial, the Judge or jury will form opinions about an entire case, by seeing a policy that looks pathetic to the naked eye. Whatever role the Judge or jury plays in the case, many times they cannot disregard their feelings about a party once they are formed. And when insurers are sued, the policy becomes Exhibit #1. So, even when a judge or jury is not dealing with the ambiguity question, if they see a policy that would confound an average person, they are much more likely to not go with that insurers’ position. So, that is some of the collateral damage an insurer retains by refusing to tackle the problem by issuing an unambiguous policy.

3.) Unfortunately, the types of documents in which insurers issue ambiguous documents go beyond their policies. And while insurers issue those other ambiguous documents at a rate similar to policies, those other documents get less notoriety. Nonetheless those other ambiguous documents can create as much damage to insurers’ bottom lines as can ambiguous policies. In an effort to keep focus on the central issue of ambiguous policies and to do justice in explaining those other ambiguous documents, this blog will only deal with ambiguous policies. Subsequent blogs will address those other ambiguous documents.

4.) If insurers will undertake this effort in earnest, it is very likely to cut that insurers’ losses, allow the insureds to have a more understandable policy, have much happier claims department, have much happier agents, and certainly garner a level of image enhancement and resulting public favor to those insurers willing to undertake this effort. And, it might reduce reinsurance costs and be a factor in those insurers’ A.M. Best and other ratings.

5.) Whether an insurer would phase-in an Ambiguity Loss Control plan that starts with some secretary went mad on the typewriter type cases, or structure such a plan in a completely different way, just the simple act of getting some type of Ambiguity Loss Control plan started should reduce a noticeable amount of their ambiguity losses over continuing without any plan whatsoever.