Real claim. A dentist’s office computer system was hit by ransomware that encrypted all of his customer files (personal information, xrays, insurance information, accounting records, etc.), including backups. The dentist experienced a significant business income and extra expense and accounts receivable loss.
The adjuster’s voluminous denial letter cited almost every exclusion in the policy, from “wear and tear” and “mechanical breakdown” to “faulty workmanship,” none of which stood up to challenge. Finally, the adjuster conceded coverage and was prepared to pay the claim.
However, the agent knew that there was no “direct physical loss” as required by the policy’s insuring agreement, being aware of relevant case law that affirmed that.
Should the agent provide this information to the adjuster?
A similar dilemma…
A building contractor assembled a carport and left for the weekend, promising to return Monday morning for some final adjustments, mainly adding a couple of bolts. During a weekend storm, the carport flew away causing a lot of damage. The adjuster wouldn’t pay for damage to the carport under the contractor’s CGL, citing several exclusions, including:
“Property damage” to “your product” arising out of it or any part of it.
However, “your product” is defined as “Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by….” So, the agent argued that the carport, now affixed to the land, was real property, so the product exclusion did not apply.
The adjuster then cited the following exclusion:
“Property damage” to…That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it…this exclusion does not apply to “property damage” included in the “products-completed operations hazard”.
The agent pointed out that the “products-completed operations hazard” said that “…Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed,” arguing that this was a completed operations claim and the exclusion, therefore, didn’t apply.
At this point, the adjuster conceded that the claim was covered and was prepared to cut the check.
However, the agent knew that a so far unmentioned exclusion applied:
“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard”…
Does the agent bring this to the adjuster’s attention or let him pay the claim?
March is Ethics Awareness Month. How would you handle these two ethical dilemmas? What would Ace Insura, Claims Detective, do?
Bill Wilson
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I’m wondering why the agent was arguing for coverage to begin with if they already knew it was excluded??
Teresa, there wasn’t a lot of agent involvement until the declination process began. In both cases, the agent agent discovered the exclusion, frankly, when I told them. I got involved at their request when the declinations began and each one was countered as inapplicable. I kept waiting for the adjuster to hit the right exclusion but it never happened. That created the ethical dilemma…there was no coverage but the adjuster hadn’t figured that out.
These are not ethical questions at all the agent represents the company his master is the company he has a duty of loyalty and utmost good faith to the company therefore by contract and by law he is required to notify the adjuster that the claims are not covered and why his master is the insurance company not the insured
Not my job to interpret the policy coverage for an adjuster.
For the first one, the policy (I’m assuming CP00 30 04/02) states, ‘The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.’ I will assume the covered cause of loss covers cyber breaches–that would have to be an endorsement. Or else the whole thing is moot.
The insureds litigated the “direct physical loss” topic. They questioned whether coverage was triggered by a “loss” when there is no “damage” to the tangible property. The term “direct physical loss or damage” was thought to be ambiguous because “direct physical” only modifies “loss,” not “damage” according to the insured. However, the Southern District of New York opined in The Philadelphia Parking Authority v. Federal Ins. Co., 385 F. Supp. 2d 280 (S.D.N.Y. 2005) (finding that “direct physical loss or damage” is unambiguous and requires direct physical damage to insured property). What state are we in? Have they made a ruling???
ISO has changed the wording (above) in an attempt to make it more clear the insurers’ intent, but I’m still not certain. I still say there is an ambiguity. And if there is one, coverage should go to the insured. If everyone wanted to be clear the policy should read, ‘The “suspension” must be caused by direct physical loss of tangible property or damage to tangible property at premises which…’ For the want of a comma, so the saying goes.
Finally, how do we know the insurer has not told the adjuster they have made a “business decision” and will pay the claim in an act of good-will?
Great points. Direct physical loss may mean different things in different legal jurisdictions. This claim was in a state where electronic information was found to not trigger coverage, but I don’t recall the specifics without researching it. I presented this claim anecdotally just to make the point that, while most agents are pushing FOR coverage for their customers, there are situations where they face an ethical decision, especially given the agent/principal relationship with the carrier.
Bill: The first case rests on “direct physical loss” which is undefined in Property, Computer, and Mechanical Breakdown forms. In my successful involvement with similar computer claims, this is vandalism. So few people, and the adjusters of these claims, don’t want to understand that computers are manufacturing equipment just like compressors, pumps, and generators. Modern computer forms recognize that; but older forms can also recognize that when properly interpreted. So this is RTFP, not an ethical dilemma,
The second case presents as: but for “adding a couple of bolts” by the contractor, the contractor was negligent and the structure blew away. Hogwash. The mere lack of a couple of bolts would not have rendered the structure defective because there are a whole bunch of bolts connecting the structure rendering the structure useful IF the manufacturer properly produced a product to withstand a certain volume of sustained or gusting wind or snow load. The structure could not function based on the installation location; so was defectively designed and distributed. Products liability claim to the manufacturer, not an ethical dilemma for the contractor and his/her agent.
Thanks for adding other coverage-related issues. These are claims where the final resolution may involve much more detail about the facts of each case, along with legal liability issues evidenced by existing case law. I did not intend to present these as definitive coverage analyses, but rather to point out the dilemmas agents may face with regard to coverage. Sometimes uncovered claims are paid and covered claims are denied. When one is certain, in their own mind, that a claim is or isn’t covered and that certainty conflicts with how they’d LIKE the claim to be resolved, an ethical dilemma may arise.