What did the insurance company agree to cover? This is typically found in the front of the policy and is usually called the "insuring agreement." For example, a liability insurer may agree to pay for all covered "losses" that the "insured" is legally obligated to pay. Of course, each word used in the agreement is important and must be checked under the policy's "definitions" section. This guide will use liability policies as an example for simplicity. The more complex your policy is, the quicker you should obtain counsel.
Do You Qualify Under the Insuring Agreement?
Using the example above, the policy's definitions of "insured" and "losses", which the insurer can restrict as it sees fit, are the first hurdle. Under a typical liability policy, the insured may be defined as the "named insured" (the policy holder) and all employees; or the named insured and "all relatives living at the declared premises." An insurer would further restrict coverage by defining what types of "losses" it agrees to pay. For example, a liability insurer may agree to cover all losses arising out of an insured's negligence and exclude losses arising out of intentional acts; or, from a business owner's perspective, covered losses may be restricted to any loss arising out of your employees' acts within the scope of their employment, but exclude obligations under contract and fines. If you qualify as an insured, and the loss or occurrence qualifies for coverage, you must still satisfy all of the conditions under the policy.
What Are the Conditions to Coverage?
Insurers will impose "conditions" on coverage and your failure to meet those conditions vitiate any obligation to pay. The most common "condition" is your duty to report a loss, occurrence, or suit under a "notice condition." All insurers need to be notified that they may be called on to pay and have the right to place conditions on how and when they are entitled to notice. Using the liability insurer example, a typical notice condition may require the insured: (i) to give notice of any occurrence that may result in a claim under the policy, (ii) to report any claim made; and (iii) to forward all copies of suits or claim documents. Each condition is fact specific and governed not only by the language of the contract, but by statutory and case law of the state, which not only interprets the contract language but may restrict the insurer's right to put conditions on specific losses or policies in the first place.
What is Affirmatively Excluded?
An insurer will include a section in the policy itself called "Exclusions". This is a list of things, losses, occurrences, events, claims and so forth that the insurer will under no circumstances pay. For example, if the definition of a covered "loss" does not exclude penalties or fines, there is a good chance a typical liability policy will contain an exclusion for "fines". A homeowner's policy will exclude damage to non-declared houses, for example, or an auto policy will exclude non-declared autos and so forth. A business owner's policy that provides employee dishonesty coverage will likewise probably exclude losses caused by an employee with a history of dishonesty or theft if the insured knew about that history prior to the loss.
Check the Endorsements.
Increasingly so, a policy will be issued with a number of endorsements, all of which should be listed on the policy's declaration page. These endorsements change the terms and scope of coverage and must be thoroughly reviewed. Some endorsements merely adjust limits whereas others change definitions and add exclusions to further restrict coverage. For example, a commercial property policy may provide coverage for "valuable records and documents" but come with an exclusion that bars coverage for "electronically stored information and data" and you would have to buy additional "ESI" coverage if you are concerned about such losses.
The Role of Waiver and Estoppel
Maybe you haven't performed a condition correctly but the insurer has always paid when asked? This is not uncommon and creates a fact intensive problem. An insurer may "waive" a condition of coverage -- such as reporting. If you report a claim late, the insurer may waive it and provide a defense. Waiver is usually defined as a voluntary relinquishment of a known right. Estoppel is like waiver but usually arises out of conduct on which the insured must reasonably rely to its detriment. For example, a commercial liability insurer may require claims reporting procedures or format, but always accepted a simple summary report. It may not later retract coverage if it changes its mind about accepting summary reports, even if it decides to enforce the strict term going forward. It is important to understand that while an insurer may "waive" a condition of coverage, it cannot be estopped into providing coverage for a loss that is not covered in the first instance.
The Disclaimer, Reservation of Rights Letter, and Defense Counsel
If your insurer sent you a disclaimer letter denying coverage, it must tell you why and list all the reasons for non-payment -- they cannot later add reasons. You should double check its work under your policy. Remember that if an insurer wants to exclude something, it must do so with clear language so that you understand your rights under the contract you bought. If you disagree with their reading, you should consult with an attorney. Finally, if your insurer has "reserved its rights" to disclaim coverage, you must cooperate with its investigation but, in some states, like New York, if the insurer is obligated to provide you with defense counsel and reserves its rights to disclaim coverage, you may have the right to demand the insurer pay for your attorney of choice rather than accept the one the insurer picks for you. This is to prevent a potential conflict of interest between the attorneys' loyalties to you, his or her client, and the insurance company, which is paying the bills.
Declaratory Judgment Suits and Enforcing Your Rights
if you made it this far you probably need an attorney. The rules vary greatly state by state and it is important to know them backwards and forwards to protect your rights. For example, in New York if your insurance company denies coverage wrongfully, and you sue it and win, you may not be able to get your attorneys' fees -- but if your insurance company sues you and loses, you can. Other states (New Jersey for instance) have statutes which will grant your attorneys' fees if you win regardless of which side you are on. For these reasons, it is especially a good idea to get counsel familiar with coverage litigation involved early if you have a serious dispute with your insurance company.