9. What are the common provisions in an insurance contract subject to legal dispute?
State law requires that insurance contracts contain certain provisions protecting the rights of the insured against the insurer. These provisions are commonly the subjects of litigation. An insurer that fails to pay an insurance claim for which it is legally obligated may be subject to a “wrongful dishonor” action by the insured. Some of these common provisions in many types of insurance policy include:
• Incontestability Clauses – An “incontestability clause” protects the insured by preventing an insurer from denying coverage based upon certain misrepresentations by the insured when applying for the policy. These clauses generally do not protect against fraudulent statements made with the specific purpose of deceiving the insured into granting a policy. Incontestability clauses are effective after a stated period of time, the “contestability period”. The theory is that a misrepresentation that does not give rise to an issue in coverage within the stated period was not material at the time of the application for coverage.
• Anti-Lapse Clauses – An “anti-lapse clause” prevents an insurer from automatically canceling an insurance policy at the end of a specific policy term. In addition, state statutes require that the insurer give the insured sufficient notice of the policy’s termination date and inform the insured of what is required to continue coverage for a future coverage period. If the insurer fails to meet the notice and information requirements, the insured may be able to claim coverage or renew the policy beyond the posted termination date.
• Appraisal Clause – Appraisal clauses seek to avoid litigation of disputes as to the replacement or repair value of covered items. Specifically, these provisions require that the insured and insurer submit any disputes as to valuation to qualified third-party appraisers. These appraisers arrive at a value that binds both parties. The parties split the cost of hiring appraisers to determine the dispute.
• Duty to Preserve Clause and Notice of Claims – Nearly all insurance contracts require that the insured seek to preserve evidence surrounding a particular claim and provide notice to the insurer as soon as the insured has a reasonable belief that a claim has arisen. This is particularly true in an indemnification situation where the insurer is responsible for defending and paying any losses awarded through civil litigation.
⁃ Preserve Evidence – The insured must preserve any evidence relevant to the situation once the insured reasonably anticipates litigation on the matter.
⁃ Notice of Claims – These provisions require an insured to provide notice to its insurer of any circumstance that may give rise to a claim under the existing policy. Failure to provide a notice of claim prior to the end of the policy may diminish the ability of the insured to make a claim for injuries or losses incurred.
• Co-Insurance Clause – These provisions require that an insured purchase separate insurance on insured property up to a specific percentage of the insured property value. An insured who fails to purchase insurance to meet the required percentage of the property value may forfeit any or all of the coverage under a particular policy.
• Multiple Coverage Clause – These clauses limit the insurer’s responsibility to pay for losses when multiple insurance policies cover the same property or loss. Generally, these clauses provide that an insurer will be a secondary insurer to any existing insurance. Alternatively, these policies state that the insurer will pay only a pro rata share of losses along with the other insurer.
• Dispute Clause – Dispute clauses are provisions aimed at curbing insurance litigation. These provisions require the insured and insurer to submit any dispute to binding arbitration, rather than initiating a civil action. Many states will not enforce these provisions and allow parties to initiate litigation.
• Discussion: Why do you think the above-listed clauses are frequently the subject of litigation?
• Practice Question: ABC Corp has an insurance policy with 123 Corp. It also has a policy with XYZ Corp. If ABC suffers an insured loss, what are some of the issues it may encounter when submitting a claim to ABC or 123 Corp?