Policyholder Pulse
This summer, the courts dealt Harvard University a brutal one-two punch.
First, in June, the U.S. Supreme Court ruled against Harvard in the Students for Fair Admissions lawsuit—bringing nearly a decade of expensive litigation to a close by gutting affirmative action practices in student admissions.
Then, less than two months later, Harvard lost a related $15 million insurance coverage dispute with its excess insurer, Zurich American Insurance Co., as the U.S. Court of Appeals for the First Circuit ruled Zurich was not required to pay any of Harvard’s Students for Fair Admissions legal costs on the ground that Harvard had not provided Zurich with timely notice of the claim.
But Harvard isn’t done fighting. Unable to recover from Zurich, Harvard recently filed suit in the Suffolk County Superior Court against Marsh USA Inc., its insurance broker, for alleged malpractice in handling the Students for Fair Admissions insurance claim.
Specifically, Harvard alleges that it timely reported its claim to Marsh in 2014, but that Marsh failed to give notice to Zurich until May 2017—more than 2½ years later, and long after the claims reporting period expired.
Harvard further alleges that such delay constituted a breach of Marsh’s “obligation to exercise and act upon its independent judgment as to which insurers should be placed on notice, and to then place those insurers on notice,” and that such breach obligates Marsh to indemnify its loss.
This case is unfortunate as it pits policyholder against broker—two entities that were long aligned in their efforts to obtain coverage for otherwise covered losses.
What is more, the parties arguably find themselves in this situation not because of any wrongdoing on either of their parts, but because of a First Circuit decision that deprived a policyholder of coverage when the insurer had actual notice of the loss, even though the insurer could not demonstrate how it was prejudiced by the alleged late notice.
But regardless of liability, the Harvard coverage cases raise some interesting questions. How active a role should policyholders take in their own risk management? Where is the line between reasonably relying on a broker’s professional guidance, versus failing to monitor one’s own claim and ensure that one’s interests are protected?
Let’s face it: Consumers frequently rely on professionals to handle complicated matters that fall outside their general knowledge, e.g., plumbing, auto mechanics, financial planning, etc. And then, even if one has sufficient knowledge about an issue, they often lack the resources to handle the situation on their own, e.g., wrong tools, not enough free time, etc.
This is why most policyholders do not purchase insurance coverage, negotiate policy language or manage claims on their own. Instead, policyholders generally rely on insurance brokers to procure the best available coverage for their businesses, or to report and manage claims arising under those policies.
Simply put, the insurance market is foreign to many policyholders, and it is often most effective to rely on the guidance of insurance brokers when navigating such unfamiliar territory.
The complexity of these matters cannot be overstated. Depending on the particular claim and circumstances, determining whether and when to give notice may require understanding the scope and terms of multiple lines of insurance coverage to assess which coverages may potentially apply; considering the facts of the particular claim and how they match up with the four corners of policies; and assessing the potential financial loss associated with a claim.
In other words, it involves legal analysis, business judgment and a healthy dose of crystal ball gazing. Even corporate risk managers proceed at their own risk in such circumstances. As such, the experience of seasoned brokers is a critical resource that policyholders are entitled to rely upon.
But at the same time, many states hold as a matter of law that policyholders are presumed to know the contents of their insurance policies, including the notice provisions that govern how to provide notice of claims. (See Mission Viejo Emergency Med. Assoc. v. Beta Healthcare Grp., et al., Amarco Petroleum, Inc. v. Tex. Pac. Indem. Co., Shindler v. Mid-Continent Life Ins. Co. and Brownstein v. Travelers Co.)
Also, insurers tend to highlight that corporate policyholders often engage professionals to develop risk management programs and to leverage those programs to obtain coverage. They contend that corporate policyholders do not deserve heightened protection against insurer hegemony because they employ specialists who can help navigate insurance-related issues.
Regrettably, a few courts have credited these arguments over the years and recognized a so-called sophisticated insured exception to the usual canons of policy interpretation, tilting the balance of equities in cases that involve corporate policyholders. (See, e.g., Baxter Int’l, Inc. v. American Guarantee & Liability Insurance Co., Newport Associates Development Co. v. Travelers Indemnity Co., Fountain Powerboat Indus., Inc. v. Reliance Ins. Co.)
This is decidedly not the general rule, and many courts expressly reject such reasoning, considering insurers always have a built-in advantage over policyholders in drafting and construing policy language.
Indeed, many courts recognize it is inappropriate to interpret policies differently for sophisticated policyholders and hold that the proper construction should always favor the policyholder.
For example, as the Washington Supreme Court emphasized in 1990 in The Boeing Company v. Aetna Casualty and Surety Co.:
[I]t is questionable whether these standard rules of construction are no less applicable merely because the insured is itself a corporate giant. The critical fact remains that the policy in question is a standard form policy prepared by the [insurance] company’s experts, with language selected by the insurer. The specific language in question was not negotiated, therefore, it is irrelevant that some corporations have company counsel. Additionally, this standard form policy has been issued to big and small businesses throughout the state. Therefore it would be incongruous for the court to apply different rules of construction based on the policyholder because once the court construes the standard form coverage clause as a matter of law, the court’s construction will bind policyholders throughout the state regardless of the size of their business.
Nonetheless, insurers continue to expect corporate policyholders to work arm-in-arm with their insurance brokers to actively manage their risks, and to be up to date on the status of pending claims. They accuse policyholders of simply sitting on their hands and expecting their brokers to handle all aspects of their claims on their behalf.
Of course, sophisticated businesses frequently outsource services, product development and even manufacturing. But that does not mean they should refrain from actively monitoring quality.
The same is true for insurance claims, not because insurance brokers are unhelpful, or because they are likely to mishandle a claim—just the opposite, in fact. Rather, it is because risk management is simply too critical a matter to outsource in total.
Playing an active role in the claims management process ensures that policyholders will obtain the information necessary to conduct informed analysis of the risks that they face, which enhances their ability to give informed directives to those helping them manage those risks.
This helps avoid exposure on two fronts—both to the risk itself, and to the potential consequences of failing to respond to the risk appropriately.
Conversely, if policyholders fail to play an active role in the claims-handling process, they lose the opportunity to leverage their knowledge and experience with that of their risk management partners, leaving them exposed to suboptimal claims outcomes.
Admittedly, no two policyholders are the same, and therefore, playing an active role will look different depending on the nature of the insured and the claim.
And to be sure, brokers, who are hired for their superior expertise and ability to provide resources and attention that most policyholders simply lack, have important duties of care toward their clients, to which they owe unstinting attention.
But risk management is a team sport, and it requires the concerted effort of many skilled partners to protect against disastrous losses.
The best policyholders seek information; the best brokers keep their clients informed. Working together, they can avoid devastating mistakes.
(A version of this article originally appeared in Law360.)