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					Assignment 4
Assignment 4 – Avoiding and Handling Coverage Disputes

REVIEW PRIOR ASSIGNMENT WITH STUDENTS TO MAKE SURE THEY ARE
PREPARED TO GO FORWARD
his assignment should take less class time than the first three assignments which would may have
taken two hours or more to complete. You may want to spend some time completing exercises from
prior assignments and check the student’s educational objectives from earlier assignments. Some
instructors review puzzles or exercises may be helpful with this review.

EDUCATIONAL OBJECTIVES REVIEW
Estimated time required to present the Educational Objectives for this assignment: 90 minutes
 E.O.   1      Avoid common mistakes that claim representatives sometimes make that can
               lead to coverage disputes.

 PRESENT:      Refer the students to Handout/Transparency #1. Ask students to identify the type(s)
               of mistakes that the character made in her decision (such as making a decision
               without all the facts and basing the coverage decision on an emotional response.)

               Follow this by asking students to provide real world examples of coverage decision
               mistakes that claim representatives might make. To help student remember, it might
               be helpful to categorize them using Handout/Transparency #2.

               Ask students to complete the second column of the matrix, offering solutions to the
               mistakes that claim representatives sometimes make, listed in the first column. Lead
               a discussion of the mistakes and their solutions as you complete the matrix.

 CONFIRM:      Bring the discussion back to the E.O., and confirm that the students can identify
               mistakes and suggest solutions.



 E.O.   2      Investigate coverage issues while protecting the insurer's rights.

 PRESENT:      Lead a discussion on the effects and importance of waiver and estoppel in
               investigating or defending claims for which coverage is questionable.

               If students can’t come up with an example, read Case 1 from Handout/Transparency
               4 and ask students what a claim representative should do in that situation. (Hopefully
               a student will recognize and suggest the need for a nonwaiver agreement or
               reservation of rights letter. Explain the difference between the two. Discuss the
               potential results of an insurer not reserving its rights (waiver and estoppel).



                                       AIC 36 Course Leader's Handbook                                  1
Assignment 4 – Avoiding and Handling Coverage Disputes
    CONFIRM:    Bring the discussion back to the E.O., and confirm that the students know the
                consequences of failing to protect the insurer’s rights (waiver and estoppel) and
                understand what is required to protect an insurer’s rights.


    E.O.   3    Write an effective reservations of rights letter.

    INSTRUCT:   Refer the students to Handout/Transparency #3. Instruct groups to review the
                elements of a reservation of rights letter, (The Content of Reservation of Rights
                Letters p. 4.9), then work as a team to identify and discuss the problems with this
                reservation of rights letter.

                Assign a case from Handout/Transparency #4 to each student (or group of students).
                Ask students to “compose” a reservation of rights letter based on the given case.
                Rather than writing a complete letter and quoting from the policy as in a genuine
                reservation of rights letter, have students note the coverage issues and elements that
                should be included in their case.

    CONFIRM:    Bring the discussion back to the E.O., and confirm that the students can write an
                effective reservation of rights letter.



    E.O. 4      Understand the issues involving the insurer's duty to defend the insured when
                coverage questions exist. In support of this educational objective, you should
                be able to:

                •   Determine what events trigger the duty to defend

                •   Write a reservation of rights letter when defending a lawsuit

                •   Explain the need for separate legal counsel

    INSTRUCT:   Lead a discussion of the issues. What events trigger the duty to defend based on the
                PAP and the CGL policies? What lawsuit allegations might trigger the duty? (The
                Duty to Defend and Coverage Disputes pp. 4.12-4.15)

                Refer to Handout/Transparency #4 again and review the facts of Case #1 with the
                class. Assume for this exercise that the investigation of Clyde’s insurer exposed that
                Greg did have an automobile liability insurance policy with Risk Rite Insurance that
                was in effect at the time of the accident; however, coverage was questionable because
                of the allegation that Greg had been DUI. On learning about the policy, Clyde
                retained legal counsel and sued Greg for the damages to his car. Risk Rite defended
                the suit, but required a reservation of rights letter to be sent to Greg. Ask the class to
                “compose” a letter for the Risk Rite’s claim representative as a group project. Use a
                blank overhead transparency, flip chart, white board, or chalk board to write the
                major elements of such a letter.

                Ask class the question, “When is an insurer obliged to provide separate legal counsel



2                                     AIC 36 Course Leader's Handbook
                                                  Assignment 4 – Avoiding and Handling Coverage Disputes
            for an insured?” Use the case above as an example.

CONFIRM:    Bring the discussion back to the E.O., and confirm that the students understand the
            issues with the duty to defend.



E.O. 5      Explain the advantages and disadvantages of using negotiation or arbitration
            to resolve coverage disputes.

INSTRUCT:   Refer the students to Handout/Transparency #5. Instruct the groups to complete the
            matrices, making notes on the advantages and disadvantages of negotiating coverages
            and arbitration.

DEBRIEF:    Display a blank copy or facsimile of Handout/Transparency #5 as an overhead, or on
            a flip chart, white board, or chalkboard. Invite the students' general participation and
            discussion while completing the matrices.

CONFIRM:    Bring the discussion back to the E.O., and confirm that the students can identify the
            advantages and disadvantages of each.



E.O.   6    Write an appropriate denial letter.

INSTRUCT:   Refer the students to Handout/Transparency #3. Review Case #3 with the class.
            Explain that in Nancy’s state, a cancellation notice is considered effective provided
            the insured received proper notice from the U.S. Postal Service of the mailing.
            Nancy’s post office retained evidence that Nancy was notified of receipt of the
            certified letter from Nantucket on two occasions, but had failed to sign for the letter.
            The letter was returned to Nantucket as undelivered. Have groups compose a denial
            letter for Nancy’s claim based upon the cancellation.

DEBRIEF:    Have each group leader read the group’s letter.

CONFIRM:    Bring the discussion back to the E.O., and confirm that the students can write
            effective denial letters.



E.O.   7    Explain when and how to use declaratory judgment actions to resolve
            coverage disputes.

PRESENT:    Lead a discussion on declaratory judgments. Under what circumstances might an
            insurer use a declaratory judgment? List the circumstances on a blank overhead
            transparency, flip chart, white board, or chalkboard. Why might an insurer use a
            declaratory judgement rather than deny coverage on a claim?

CONFIRM:    Bring the discussion back to the E.O., and confirm that the students know how and



                                  AIC 36 Course Leader's Handbook                                      3
Assignment 4 – Avoiding and Handling Coverage Disputes
                when to use a declaratory judgment.



    E.O.   8    Define and describe the Key Words and Phrases.

    INSTRUCT:   If time permits you might take an opportunity to confirm the comprehension of the
                following. These are also covered in the crossword puzzle that students can take
                home as a review exercise.
                •   Waiver, estoppel, detrimental reliance
                •   Reservation of right letters, nonwaiver agreements, policy buy-back
                •   Plead into coverage, look beyond the four corners of the complaint
                •   Prejudiced, declaratory judgment action (dec action)
                Instruct the groups to define or describe, in the members' own words, the words or
                phrases in their assigned group.



    DEBRIEF:    Have each leader report on the group's definitions and descriptions.

    CONFIRM:    Bring the discussion back to the E.O., and confirm that the students can define or
                describe each of the Key Words and Phrases for this assignment.




4                                     AIC 36 Course Leader's Handbook
                                                  Assignment 4 – Avoiding and Handling Coverage Disputes
ADDITIONAL EXERCISES

Note to Instructor: These additional exercises have been provided to supplement the material found
in this assignment. You may wish to use these exercises as tests or assignments, or you may wish to
have students use them simply as a review of what they have learned.

TRUE/FALSE EXERCISE
Estimated time required to complete the True/False exercise: 10 minutes (5 to complete; 5 to review)
Indicate with a check mark whether the following statements are TRUE or FALSE.
TRUE    FALSE

  ?        ?      1. A policyholder’s interpretation of the policy is as valid as that of the claim
                     representative. (p. 4.3)

  ?        ?      2. Claim representatives should perform investigations to prove that their
                     preconceived notions are true. (p. 4.7)

  ?        ?      3. When a claim representative tells a claimant to have repairs made to a car
                     damaged in an accident, this act could waive the insurer’s right to deny
                     coverage and cause the insurer to be estopped from later denying coverage.
                     (p. 4.8)

  ?        ?      4. A reservation of rights letters should contain a description of any information
                     needed from the insured. (p. 4.9)

  ?        ?      5. If the allegations in a lawsuit fall within what is covered under the policy,
                     regardless of what the true facts might be, then the insurer must defend the
                     insured even if the allegations are false. (p. 4.13)

  ?        ?      6. When a conflict of interest occurs between the insurer and an insured facing
                     a suit by a third party, the insured must pay the costs incurred in hiring legal
                     counsel of his or her choice. (p. 4.15)

  ?        ?      7. Because insurers generally pay some award when coverage disputes are
                     settled through arbitration, negotiating coverage is almost always the more
                     preferred and effective option. (p. 4.19)

  ?        ?      8. When composing a coverage denial letter, the risk of being specific about the
                     coverages denied is that the insurer might forfeit the right to raise any other
                     policy defenses later. (p. 4.20)

  ?        ?      9. Insurers are justified in delaying claim payment to insureds who are late
                     reporting their claim. (p. 4.22)

  ?        ?      10. A declaratory judgment action that focuses litigation strictly on the coverage
                      issue might help avoid costly litigation that involves the defense and
                      investigation of all liability and damages facts of the a claim. (p. 4.23)



                                   AIC 36 Course Leader's Handbook                                      5
Assignment 4 – Avoiding and Handling Coverage Disputes
SHORT ANSWER EXERCISE
Estimated time required to finish the completion exercise: 15 minutes (10 to complete; 5 to review)

Briefly answer each of the following questions.

1. For what reason should even experienced claim representatives review policy wording before
   making a coverage decision? (p. 4.2)


2. Besides analyzing viable alternatives to coverage interpretations, what should claim
   representatives do when a policyholder interprets coverage differently than the insurer? (p. 4.4)


3. How can a claim representative assure that the insured understood the insurer’s position in a
   conversation? (p. 4.5)


4. What is the effect of a nonwaiver agreement, signed by the insured, on a claim investigation? (p.
   4.7)


5. When writing an effective reservation of rights letter, why should the insurer mention every
   conceivable reason that the insured may not ultimately be entitled to coverage? (p. 4.9)


6. What actions trigger the duty to defend in a CGL policy? (p. 4.13)


7. What is the insurer’s duty to an insured when providing a defense for a third party claim under a
   reservation of rights? (p. 4.15)


8. What two reasons do jurisdictions that do not enforce the uninsured motorist arbitration
   provision offer? (p. 4.20)


9. How should a claim representative deal with an uncooperative insured? (p. 4.22)


10. Give an example of an insured’s detrimental reliance on advice from a claim representative. (p.
    4.8)




6                                     AIC 36 Course Leader's Handbook
                                                    Assignment 4 – Avoiding and Handling Coverage Disputes
MATCHING EXERCISE
Estimated time required to complete the matching exercise: 10 (5 to complete; 5 to review)

Match each term with the appropriate definition, description or explanation.

___1. Declaratory judgment        A. An advisory notice to the insured, similar to a reservation
      action                         of rights letter, except that the insured assents to and signs
                                     the notice (p. 4.8)

___2. Detrimental reliance        B. A legal bar precluding a party from asserting a right; an
                                     insurer is barred from asserting coverage defenses (p. 4.8)

___3. Waiver                      C. The practice of artfully wording a complaint (lawsuit) so that
                                      coverage is triggered (p. 4.13)

___4. Policy buy-back             D. Occurs when an insured takes actions, based on
                                     information or actions of the insurer, which adversely
                                     affects the insured (p. 4.8)

___5. Estoppel                    E. The practice of insurers in considering facts outside of
                                     those stated in the complaint filed by the plaintiff (p. 4.14)

___6. Reservation of rights       F. The relinquishment or refusal to accept a right (p. 4.8)
      letter

___7. Pleading into coverage      G. An insurer's ability to investigate, settle, or defend a claim
                                     is adversely affected by an insured's late notice of loss (p.
                                     4.22)

___8. Looking beyond the          H. Written notice sent to the insured advising that the insurer
      four corners of the            is investigating a claim but protects the right to deny
      complaint                      coverage later, once all of the facts have been gathered (p.
                                     4.8)

___9. Prejudiced                  I. A lawsuit seeking judicial determination of whether policy
                                     coverage applies to a claim (p. 4.22)

___10. Nonwaiver agreement        J. A complicated legal maneuver whereby the insurer
                                     purchases the insurance policy back from the insured in
                                     exchange for an agreed upon sum of money (p. 4.17)




                                    AIC 36 Course Leader's Handbook                                     7
Assignment 4 – Avoiding and Handling Coverage Disputes
SAMPLE EXAM QUESTIONS
Estimated time required to complete the sample exam questions: 20 minutes
Circle the most appropriate answer for each question.
1. (E.O.1)

     All of the following are common mistakes that claim representatives make in coverage decisions,
     EXCEPT: (p. 4.1)
     a.   Failing to read and/or understand policy provisions
     b.   Assuming policy wording is clear and unambiguous
     c.   Basing coverage decisions on emotional reactions
     d.   Hesitating in taking a coverage position

2.   (E.O. 2)

     When coverage issues arise, a claim representative should protect the insurer’s rights by sending
     the insured (p. 4.7)

     a.   An exculpatory contract.
     b.   A reservation of rights letter.
     c.   A hold harmless agreement.
     d.   A detrimental reliance notification.

3. (E.O. 3)

     Which of the following statements is true concerning reservation of rights letters? (p. 4.9)

     a. Most insurers believe that they should mention every conceivable reason that the insured
        may not be entitled to coverage, even those which are purely speculative.
     b. All states require that they be mailed by registered or certified mail.
     c. Insurers should cite all of an insured’s duties whether or not they were violated.
     d. Insurers must communicate properly by sending a letter that contains sufficient legalese to
        sound professional, and include veiled, but not direct threats, about the potential for a
        coverage denial.




8                                      AIC 36 Course Leader's Handbook
                                                   Assignment 4 – Avoiding and Handling Coverage Disputes
4. (E.O. 4)

   In addition to the usual requirements for a reservation of rights letter, when coverage disputes
   involve a third party claimant, the letter to the insured should include a statement about the
   separate legal counsel hired to defend the insured and a statement (p. 4.15)

   a. Explaining the use of a declaratory judgement action.
   b. About the insured’s right to hire a lawyer at the insurer’s expense, to review the insurer’s bad
      faith excess exposures.
   c. Advising the insured of the potential for a judgment in excess of the policy limit and the
      insured’s responsibility for any award in excess of the limits.
   d. Explaining the insurer’s obligation to resist payment to the third-party claimant.

 5. (E.O. 5)

   Negotiating the settlement of coverage is a complex legal matter. All of the following are issues
   to consider when obtaining a release from the policyholder, EXCEPT: (p. 4.17)
   a. The wording and scope of the settlement agreement
   b. The specific parties bound by the agreement
   c. The need to amend the insured’s policy
   d. The confidentiality of the settlement agreement

6. (E.O. 6)

   To protect insurers from defamation of character suits, claim denial letters based on arson or
   fraud should be (pp. 3.7-3.8)
   a. Hand delivered.
   b. Delivered using certified mail only.
   c. Delivered directly to the agent of the insured.
   d. Marked “personal and confidential” on the envelope and sent only to the insured.

7. (E.O. 7)

   A declaratory judgment action (p. 3.40)

   a.   Can determine coverage in a tort claim if the underlying issues can be separated.
   b.   Addresses the issues of fault and monetary damages, reducing litigation costs.
   c.   Enables a court to render “advisory opinions” on coverage without a case dispute.
   d.   Is the most common form of alternative dispute resolution (ADR).




                                    AIC 36 Course Leader's Handbook                                    9
Assignment 4 – Avoiding and Handling Coverage Disputes
ANSWERS TO THE ADDITIONAL EXERCISES
TRUE/FALSE
1. T                2. F
3. T                4. T
5. T                6. F
7. F                8. T
9. F                10. T


SHORT ANSWER
1. Few have memorized every word of an insurance policy. The consequences of being wrong, if
   they have even the slightest doubt, makes the risk of not referring to the policy too great.

2. They inform claim management of the interpretations.

3. The representative can follow up all oral conversations with letters or e-mails to the insured.

4. It enables the claim representative to reserve the insurer’s rights to deny coverage later, while
   thoroughly investigating the claim.

5. Courts, generally, do not permit insurers to later assert additional policy defenses that they knew
   or should have know about when the letter was written.

6. Formal lawsuits, informal civil proceedings, and arbitration proceedings trigger the duty to
   defend.

7. The insurer has a duty to investigate the underlying claim thoroughly and to inform the insured
   of all information relevant to the insured’s defense, including realistic, periodic assessments of
   the insured’s chances to win or lose the pending lawsuit.

8. Reasons not to enforce uninsured motorist arbitration:

     •   Binding arbitration is contrary to public policy because it denies parties access to the courts.

     •   Binding arbitration is contrary to the state’s uninsured motorist statutes.

9. The claim representative should consistently and continually seek cooperation from the insured
   until coverage is denied or the claim is transferred to legal counsel for litigation.

10. (Answers will vary). An insured house burned in a fire. The claim representative told the
    insured that the policy covered fire damage so they should move into a motel, temporarily, until
    the investigation was completed and the damage was repaired. The insured family had incurred
    $1,000 in motel expenses when the investigation revealed that one of the insureds had
    intentionally started the fire that caused the damage.




10                                    AIC 36 Course Leader's Handbook
                                       Assignment 4 – Avoiding and Handling Coverage Disputes




MATCHING
1. I       2. D
3. F       4. J
5. B       6. H
7. C       8. E
9. G       10. A


SAMPLE EXAM QUESTIONS
1.   D     2. B
3.   A     4. C
5.   C     6. D
7.   A




                        AIC 36 Course Leader's Handbook                                   11
Assignment 4 – Avoiding and Handling Coverage Disputes
HANDOUT/TRANSPARENCY #1




12                                    AIC 36 Course Leader's Handbook
                                          Assignment 4 – Avoiding and Handling Coverage Disputes
HANDOUT/TRANSPARENCY #2
Mistake                                            Solution
Failing to read and/or
understand policy
provisions




Making a decision
without all of the facts




Failing to consider
jurisdictional
differences




Assuming clear and
unambiguous policy
wording




Basing a coverage
decision on emotional
reactions




Improperly or
inadequately
explaining coverage




Overcommitting to a
coverage position




                           AIC 36 Course Leader's Handbook                                   13
Assignment 4 – Avoiding and Handling Coverage Disputes
HANDOUT/TRANSPARENCY #3
Sample of Poorly Written Reservation of Rights Letter


Fred Smith
119 Mockingbird Lane
Mystic, CT


Dear Mr. Smith:
This letter serves as legal notice that coverage may not exist for your claim. Henceforth, any activity taken by
this writer or others shall not be construed as a waiver.


The Company reserves the right to deny your claim for any sufficient reason. I will be conducting an
investigation under the aforementioned reservation without prejudice to the Company.


Sincerely,


Bea N. Frank
Claims Adjuster


cc. Joe Agent
121 Main St.
Mystic, CT




14                                      AIC 36 Course Leader's Handbook
                                                   Assignment 4 – Avoiding and Handling Coverage Disputes


HANDOUT/TRANSPARENCY #4
Case 1
   Clyde was involved in an automobile accident on February 24. Clyde’s friend, Greg, was
   driving on a suspended license and failed to stop at a stop sign. Clyde was pulling into the
   intersection and Greg’s car struck the passenger-side fender of Clyde’s 1995 Taurus. Greg
   claimed that his automobile insurance had lapsed. Clyde didn’t want his friend to get arrested
   for DUI, so he agreed not to call the police, file an accident report, or report the loss to his
   insurance. He believed that the damage to his fender was cosmetic and, because the car had
   some damage from an earlier accident, he was not concerned. Four months later, Clyde learned
   that his car’s cooling system had been damaged in the accident. Additional damage resulted
   because the original damage was not repaired. Clyde filed an uninsured motorist loss with his
   insurer on June 29.

Case 2
   Amanda claimed she was driving alone one night when a dark colored sedan flew up behind her
   and ran her off the roadway. Her car struck a series of mailboxes along the edge of the road.
   The post of the last mailbox flew up into her windshield, shattering it before she got her car
   stopped. Amanda said she avoided collision with the other car and there were no known
   witnesses to the accident. The laws of Amanda’s state do not permit claims for uninsured
   motorists when there is no evidence of contact or other supporting evidence of a phantom
   vehicle.

Case 3
   Nancy’s automobile insurance premium was due on July 14. Her insurer, Nantucket Casualty
   mailed her a certified letter on July 15 stating that her coverage would end on July 14 unless they
   received her premium within ten days of the letter, according to the laws of Nancy’s state. On
   July 18, Nancy’s car sustained considerable hail damage. She filed a claim under her
   compensation coverage the next day. On July 25, Nantucket had not received a signed receipt
   from the post office acknowledging that Nancy had received their cancellation letter.

Case 4
   Stan owned a 1998 Berretta and carried full coverage on the car through Midwest Insurance. On
   March 5, he traded the car for a 2000 Berretta. According to the laws of his state, coverage for a
   newly acquired vehicle would be provided for the first 30 days after purchase, but he must notify
   his insurer for coverage to continue beyond that point. On April 3, Stan notified his agent of the
   trade. On April 4, Stan was driving home from a friend’s house early in the morning when he
   swerved to miss several deer that ran into the roadway. His car careened into a steep ditch where
   the nose and passenger fender of the car hit the bank. The car swung around damaging the
   driver’s side. Finally, the rear of the car came to rest against a tree stump in the ditch. The car
   was a total loss. There were no known witnesses to the accident. Stan escaped with relatively
   minor injuries. Stan called the Midwest Insurance claim office later that day to report his
   accident. They had not received notice from the agent of the trade.



                                    AIC 36 Course Leader's Handbook                                   15
Assignment 4 – Avoiding and Handling Coverage Disputes




16                                    AIC 36 Course Leader's Handbook
                                       Assignment 4 – Avoiding and Handling Coverage Disputes
HANDOUT/TRANSPARENCY #5

                         Negotiating Coverages
           Advantages                                      Disadvantages




                                Arbitration
           Advantages                                      Disadvantages




                        AIC 36 Course Leader's Handbook                                   17

				
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Description: Sample Reservation of Rights Letter - Lawsuit document sample