Why Did the Insurance Company Reject My Claim?

The following article is the fourth in a series of 9 articles that explain the different concepts involved in insurance policies as they relate to personal injury in automobile accidents.  This article focuses on situations in which insurance companies may not provide coverage for specific types of claims, and their processes for denying coverage and recovering their expenses in providing a legal defense for their policy holder.

Reservation of Rights

In reviewing claims in personal injury cases, there are sometimes situations where an insurance company will take the stance that there may not be coverage for a claim. If the insurance company believes an alleged claim may not be covered by the insurance policy, the policy holder may receive a “reservation of rights” letter.

This is how the insurance company delivers written notice that it will provide a defense for the policy holder, but it will retain the right to withdraw the funding to pay for a legal defense in the event it decides there is no coverage for the claim. This stance allows the insurance company to have “one foot out the door” so to speak.

In some instances, the amount of the injury claims exceeds the coverage limits of the policy. When this happens, the insurance company will typically inform the policy holder that its obligations are only to cover the policy holder up to the limits of the policy and advise the policy holder that they should hire personal counsel. In these situations, the personal counsel is hired to put pressure on the insurance company to settle the case within the policy limits in order to protect the policy holder from personal financial liability.  The failure to protect the policy holder may result in a bad faith claim against the insurance company.

Because insurance companies are required to defend all claims, there are times when an insurance company will attempt to recover the money it has spent on providing its policy holder with a legal defense if it is found that there is no coverage for the awarded claim. For example, in a claim where there were allegations of both negligence and battery. Negligence is covered under the policy, but battery is not. If the jury upholds the battery claim and rejects the negligence claim, the insurance company may bring a claim against its policy holder to recover the money it has spent on the legal defense.

To date, Georgia courts have not been clear in their decisions related to these types of claims from insurance companies. The courts that allow these types of recoveries by insurance companies have taken the position that the insurance company was required to defend both covered and non-covered claims but did not receive premium payments for the non-covered claims. Courts that have decided against the insurance company recovering the funds have taken the stance that the company cannot make this claim unless it has sent out a reservation of rights letter to the policy holder and that there is a specific provision in the policy allowing this reimbursement.

Declination

Once the insurance company reviews the claims made against the policy holder, it may determine that the policy does not provide coverage for the claims being asserted. In these situations, insurance companies tend to send out a “Declination Letter,” which states that it declines to provide coverage to the policy holder in this matter. When this happens, the policy holder is exposed to personal financial risks and needs to hire their own lawyer. In situations where the policy holder has little to no financial resources, they may be unable to hire their own attorney.

However, if the insurance company incorrectly declines coverage, the policy holder can most likely sue the insurance company for breach of contract and bad faith claims.

In some declination of coverage matters, the policy holder and the insurance company may enter into an agreement in which the policy holder agrees to allow a judgment against the insurance company for a set reasonable amount. However, the policy holder will also agree that they will not attempt to collect the judgment from the insurance company personally but will only recover money from any insurance proceeds of the liability insurance carrier. In this type of example, the insurance company will assign all rights of the insurance contract to the policy holder.

When the policy holder believes the insurance company’s position of declining coverage is incorrect, the policy holder will sue the insurance company to collect the monetary judgment agreed to by the insurance company and the policy holder, and the court will decide the coverage issue as part of the claim.

Declaratory Judgment

One final avenue the insurance may take when it believes there is not coverage for a claim is to file for a declaratory judgment. These types of motions ask the court to decide, or declare, the rights of one or more parties. In motions seeking declaratory judgment over insurance coverage, the facts are not typically in dispute. One party or both parties may ask the court to make a summary judgment.

From the insurance company’s point of view, defending a reservation of rights stance while simultaneously requesting a motion for declaratory judgment is typically the most expedient in order to get the coverage issue resolved while still acting in good faith to its policy holder.

Conclusion

As a practical matter, liability insurance is the usual means by which an injured plaintiff is compensated for a tort injury.  When insurance coverage is in question or outright denied, it can dramatically effect how a car accident claim is handled. Sometimes, a car insurance provider improperly denies coverage when they should not have.  When that happens, the insurer may be sued for “bad faith.”  To learn more about bad faith, click here to continue to the next article in this series.  If you want to learn about a different topic, the titles of and links to all the articles in this series are listed below:

 

1. When Can I Recover from Someone’s Else’s Insurance?
2. The Declarations Page
3. Duty to Defend
4. Reservation of Rights (this article)
5. Bad Faith
6. Commercial General Liability
7. Direct Actions Against Insurance Companies
8. Uninsured Motorists
9. Underinsured Motorists