Settlement of Insurance Claims: Obligations of Insurer and Insured - Essay Example

Settlement of Insurance Claims: Obligations of Insurer and Insured Name of Student Institution Introduction The relationship that exists between and insurer and the insured is primarily a contractual relationship. The insurance contract is entered into on the premise of speculation. The insurer agrees to pay the insured, an agreed sum of money or its equivalent on the happening of an uncertain event, for the consideration of payable sums known as premiums. The relationship is based on uncertainty and, for this reason, both parties must exercise utmost good faith. The insurance relationship gives rise to various duties and obligations that the parties owe each other. These duties begin the moment the relationship is formed, and end when the relationship is terminated in any of the agreed methods (Pynt, 2011). The events contracted upon must have an aspect of uncertainty. The event that is the subject of the insurance contract should be clearly defined, but its happening should be uncertain. Uncertainty should relate to the event happening or not. When the circumstances are that the event is certain to happen, such as death in life insurance policies, the time when it is likely to happen should be uncertain (Pynt, 2011). The import of these principles into insurance contracts is that an insured cannot insure him/herself against events or occurrences that he/she is certain will occur, or whose time of occurrence is known. Doing this would beat the logic behind insurance contracts, which is to indemnify the insured person for loss that he/she is likely to suffer. The insurance relationship is governed by the Insurance Contracts Act (1984). The Act provides the skeletal framework upon which insurance contracts should be based. It also provides for various duties that are imposed on the parties to a contract of insurance. The Act’s coverage is, however limited and does not cover some insurance relationships such as Marine Insurance contracts. Other sources of the parties’ obligations may also be the common law, judicial decisions or common practice/culture in the insurance industry. The primary and most important source of regulation of the relationship is the policy document itself. It is the document that sets forth the obligations, rights and duties of each party to the contract. It regulates the relationship, and also governs issues regarding settlement of claims. The rights, duties and obligations of the parties when settling insurance claims are enumerated in the policy document. It is, however, drafted in accordance with provisions of the law and other legal principles, and conforms to their expectations in many aspects. This paper examines the duties and obligations of the insurer and the insured in the settlement of insurance claims. The writer focuses on duties that may arise from the policy document, legal provisions such as the Insurance Contracts Act (1984), the common law and common practices in the insurance industry. The duties and obligations of an insurer The insurer is the party who undertakes to pay the insured an agreed sum of money or its equivalent, for an uncertain loss likely to befall the insured. The insurer assumes and carries the insured’s risk on the agreement that the insured will pay to the insurer, periodical sums of money called premiums. The insurer’s duties in the process of settling claims take form the moment that the insured suffers loss. The writer’s contention assumes that loss in this case falls under the definition the parties attach to the term, and that requirements as to notification to the insurer have been met (Pynt, 2011). The insurance relationship imposes two primary duties on the insurer. The first is the duty to indemnify the insured (Pynt, 2011). This duty is not, however, a claim that the sole purpose of insurance contracts is to indemnify. Such a claim would hold false for insurance contracts such as life insurance. In spite of this, indemnification remains one of the primary duties of an insurer to the insured. This duty requires the insurer to pay on behalf of the insured, any amounts of money he/she may become liable to pay as damages resulting from loss of the nature contemplated in the insurance policy. This is what indemnification essentially involves. There are, however, other obligations that branch out of and arise from this duty and they will be discussed in detail later in the essay. The other prime duty of the insurer is the obligation to defend third party suits against the insured, arising from a covered liability (Pynt, 2011). This duty is also termed as a right that the insurance contract bestows on the insurer. Contrary to legal limitations imposed on suits in names of third parties, the insurer has a right to defend a suit in the names of the insured, arising out of the insurance contract. The insurer is duty bound to exercise this prerogative in an ethical and reasonable manner (Pynt, 2011). The duties to indemnify and defend also imply the duties to investigate and settle the claims made by the insurer. I will first discuss the duty to indemnify and other related duties, and then look at the right/duty to defend third party suits. The duty to indemnify The duty to indemnify is commonly understood to mean that the insured is entitled to reimbursement from the insurer, any monies he/she has paid out. The insurer should pay on behalf of the insured, all sums which he/she incurs an obligation to pay. This could be interpreted to imply that this duty arises when the insured incurs a legal obligation to pay. An insured can immensely benefit especially in cases where the damages awarded against him/her are substantial. In such cases, the failure to indemnify may potentially lead to the insolvency of the insured. The law treats this duty so seriously, that it prohibits post-loss agreements between the insurer and the insured, which could potentially absolve the insurer from its duty to indemnify. The insurance agreement defines the scope of the insurer’s duties. Definitions and exclusion clauses will usually provide the limits and extents of this duty. The declarations contained in the policy provide guidance on measuring the magnitude of the insurer’s duty to indemnify. Limits may be set by the policy’s statement of liability, or the claimant’s recovery limits. The damages that an insurer is supposed to pay for loss arising out of a single occurrence are limited by “per occurrence limits”. Other types of limits may be imposed by provisions on the limit per person or property. Aggregate limits apply to the agreed time frames, usually 12 months periods or as the parties agree. Under such limits, the insurer has an obligation to pay up to the agreed sums regardless of the number of occurrences during that period. Amounts included in the insurer’s extent of indemnification may at times, include sums not agreed upon in the policy document. Such sums may arise from judicial decisions or the application of law. For example, if the insured incurs extra limit obligations such as pre-judgment interest because the insurer failed to settle a claim, the insurer has a legal obligation to pay these sums. Other costs falling under the same category include; costs incurred in the release of attachments or to acquire bonds, expenses incurred to defend a suit or investigate a claim and post judgment interest among others applicable amounts. If an insurer insists on appealing from a judgment, it bears the cost of this appeal (Pynt, 2011). The duty to indemnify starts running from the moment the parties make the contract. However, the insurer will only be required to indemnify the insurer once loss has been suffered, and a claim has been made. The onus is, therefore, on the insured to inform the insurer about the occurrence of events that may cause a claim to arise. The duty of the insurer to defend When the insured dutifully pays his/her premiums, what the insurer gives in return is the promise to indemnify and defend him/her in suits brought as a result of covered losses. This promise covers reimbursement of costs incurred in the defense of a suit brought against the insured (Pynt, 2011). This obligation stems from both the insurance agreement and the duty to pay supplementary sums. The insurer’s duty to defend comes alive when a suit is instituted and there is need to defend it. It arises from the alleged facts of the suit (plaint). This is different from the duty to indemnify. The obligation to indemnify arises from a set of facts that have been proved. The duty to defend subsists until the suit has been concluded. The insurer’s obligation is not discharged by an outcome showing that the allegations lie outside the insurance cover. When the insurer undertakes to insure the policy holder, it impliedly assumes the obligation to perform all other duties in a reasonable manner. The law requires the insurer to perform its duty to defend reasonably (Pynt, 2011). This includes taking all reasonable steps to make sure that the insured’s legal interests are adequately protected. In order to perform this duty satisfactorily and ethically, the insurance company needs to do certain things; The insurer should advise the insured on steps that he/she may take to avoid the possibility of an excess judgment. The insured should also be advised on possible and available settlement avenues, and the possible outcomes of litigation. There are suggestions that the duty to perform this obligation reasonably lies in tort, and not strictly within the confines of the policy. In addition, it is suggested that the insurer will be deemed to have discharged this duty by appointing a lawyer in defense of the claim. This is a point on which no settled position has been reached. Most of the literature examined, however, seems to suggest that if the insurer does not perform this duty reasonably, then the duty has not been discharged. The defense provided to the insured should be proper and competent, giving due regard to his/her legal and commercial interests. Sometimes, the extent of the obligation to defend is not very clear. The obligation to defend and insured automatically arises when it is apparent that if the allegations are proved, they clearly fall within the ambits of the policy. There are instances, however, when there is a mixes claim, and some contentions clearly fall outside the insurance cover. The question arising at such moments is whether the insurer is bound to defend the insured on all allegations, or only on those that fall within the cover of the policy. The answer to this question may not lie in legal provisions or principles of law alone. The position is not very clear, and courts also offer differing opinions on the same. An insurer’s obligation to defend may not stretch to extents outside the insurance cover, but the practice followed by many insurers is to defend the whole suit. Clearly, factors beyond the legal requirements come into play here. Business and image considerations are top most on this list. The other reason is that, some authorities suggest that the insurer may have a right to recoup the expenses incurred defending extra counts from the insured. If such restitution rights exist, it would be difficult to determine if they are of any value to the insurer, considering the demands of business efficacy. Many insurers would be inclined not to take up a chance to enjoy these rights, for obvious reasons. The duty to defend also implies directing and controlling the defense (Pynt, 2011). This is a right that is of significant value to the insurer. The reason is that having control of the defense may have far reaching implications on its liability to indemnify the insured. However, if the insurer retains the right to be in control and give direction of the defense, this may give rise to a conflict of interests. For example, if the claimant alleges that the insured caused the damage by the commission of an intentional tort, successful proof of this allegation may benefit the insurer. This is because unlike negligence, the proof of an intentional tort does not give rise to a claim for indemnity. If the claimant proves that the insured committed an intentional tort, then the insured will have a legal obligation to indemnify him/her. The legal position is that if such conflict of interests comes up, the insured has a right to retain the control of his/her defense and not cede it to the insurer. If the insurer happens to breach its obligation to conduct a defense, the insured acquires a claim against it in contractual breaches. The insured can recover against the insurer for expenses incurred while conducting own defense and establishing the insurer’s duty to defend. Such a breach will also have implications on the duty to indemnify. An insurer who fails to defend the insured may be estopped from enforcing policy exclusions and limitation for the purpose of avoiding its obligations to indemnify the insured. The insurer’s duty to investigate and settle the claim When the insured person suffers loss and lodges a claim with the insurer, the insurer must undertake the task of investigating the claim (Pynt, 2011). The investigation must be done in an ethical and reasonable manner that does not prejudice the insured’s claim to indemnification. The insurer must be prudent so as to ascertain the facts establishing liability and damages, from which an intelligent decision on whether to settle on not will be made. An insurer’s findings after investigations have a direct impact on its liability towards the insurer. It is important to conduct the investigations ethically, so that the settlement is done fairly, and to ensure that either party’s interests or rights under the policy are not prejudiced. Once the investigations establish the insurer’s claim, the insurer has to indemnify him/her. Duties and obligations of the insured At the point of handling a claim, the insured owes the insurer various obligations. The main aim of these obligations is to give optimal assistance to the insurer to enable it to correctly determine its coverage obligations. The discharge of these obligations also assists the insurer to perform its duties. This is especially important when conducting the defense of the insured and investigations into the claim. This section of the paper examines the duties that are imposed on the insured under the insurance contract. The insured’s duties after occurrence of a covered event are not strictly substantive, but are mainly procedural. It is important to follow the procedures or steps set forth in the policy document for various reasons. The most important of these is that failure to adhere to these instructions has the potential of precluding the insured from recovering his/her benefits under the policy. The duty to give notice to the insurer of loss or claim This duty is closely related to the duty of disclosure that is discharged at the negotiation stage when the contract is being made. This particular duty deals with facts and situations that are likely to affect the settling of the claim. The insurer is under obligation to give notice to the insurer about the occurrence of an event that potentially gives rise to a covered claim (Pynt, 2011). When an event covered under the policy occurs, the insured is under obligation to notify the insurer as soon as the event takes place. When a suit has been instituted, this notice should be give immediately that event becomes known. This duty assumes that notice will be written. The Insurance Contracts Act (1984) requires notice to be given in writing. However, the proposed changes to this law are more flexible. The proposed Amendment Bill provides that notice required to be in writing may be given electronically. These changes give sense to business practice and efficacy, and respond to the changing business and technological environment. Giving notice is material to the contract of insurance (Pynt, 2011). This duty, therefore, primarily arises out of the policy document. Delay in giving the notice may discharge the insurer of his duties to indemnify the insured. Unreasonable delay in giving notice of the occurrence of covered events may prejudice the insurer’s interests (Hawke, & Burke, 2011). For this reason, the law protects an insurer who may suffer damage as a result of inaction by the insured. Section 54 of the Insurance Contracts Act (1984) allows the formation of contracts which enable an insurer to avoid its duty to indemnify, because the insurer failed to take a material step after loss. The proposed changes in the insurance law have an impact on this position. The Amendment Bill proposes that an insurer should not be allowed to avoid its obligations without first proving actual prejudice. This means that for the insurer to refuse to settle a claim on this basis, it must show that it suffered prejudice as a result of the inaction of the insured. The proposed law also provides that the insurer should not avoid the whole claim. Changes to S. 54 of the ICA propose that the insured should only be allowed to adjust its liability to in proportion to the prejudice it suffered. These amounts reduce the insured’s claim against the insurer. The insurer may prevent this adjustment if he/she can show that the failure to act was necessary to protect property or life. As seen from the above discussion, the law penalizes an insured person for giving late notice or failing to act as prescribed after loss occurs. However, amendments to the Insurance Contracts Act are set to change this. At present, an insurer can reject an insured’s claim if it is made after the policy expires. Proposed changes to Section 40(3) state that the insurer should not be allowed to reject a claim merely because it is made after the expiry of the policy. Various conditions are attached to these changes. For example, the insurer should have advised the insurer about such circumstances during the life of the policy. This means that the insurer should already be aware that such a situation may arise, requiring it to discharge its duties. Changes to Section 54 introduce an additional 28 days for late notifications of claim to be made. The proposed amendments seem to introduce new protections on the rights of the insured, by reducing the circumstances under which the insurer can refuse to settle claims. Time limits have been enlarged, and the duties of the insurer have become more flexible. Millions of insured persons will be in a position to benefit from their policies, even after they have expired, as long as they meet all the conditions set by the law. The duty to cooperate During the process of settling a claim made against the insurer, the insurer is under obligation to fully cooperate with the insurer. The duty to cooperate imposes various obligations on the insured. The first part of the cooperation duty requires the insured to give notice to the insurer, of an event from which a claim may arise. This duty to notify is discussed in the foregoing section of the paper. The duty also imposes an obligation to assist the insurer in the defense or settlement of a claim (Pynt, 2011). This duty imposes an expectation on the insurer to work closely with the insurer during investigations into the claim. Sections 13 and 21 of the Insurance Contracts Act (1984) impose the duties of utmost good faith and disclosure on the parties respectively. These duties are stretched to this point, and the insured is expected to act in good faith when cooperating with the insurer. Section 60 of the ICA allows and insurer to avoid an insurance contract if the insured makes a fraudulent claim. He/she is not supposed to do anything to prejudice the rights and interests of the insurer. When investigating the claim, the insurer will require information from the insured. This duty imposes an obligation on the insured to answer all the insurer’s questions truthfully. All material facts that will be useful to the insurer in the settlement of the claim should be disclosed. The insurer should also provide the insurer with all the required documents for this exercise (Pynt, 2011). Full disclosure is also required for purposes of conducting the insured’s defense. If the insured fails to provide the necessary information or gives misleading information, the insured’s interests may be prejudiced. In the event that such circumstances arise, the insurer may have cause to claim against the insured. A claim against the insured for prejudice may have the potential of supporting an insured’s bid to forfeit coverage. Cooperation in relation to the conduct of the insured’s defense also requires his/her presence. The insured must be available to give evidence during proceedings, and cooperate in other ways that will enable the insurer to discharge its duty to defend, investigate and settle claims. Duty to mitigate damages The insured is under obligation not to do anything that may prejudice the insurer’s interests or position. In addition to this, the insurer is under duty to mitigate the loss suffered (Pynt, 2011). When loss occurs, the insured should take steps to ensure that further loss does not occur. For example, if an accident occurs, it is the duty of the insured to take reasonable steps to prevent loss of any property through theft or other forms of destruction. If it is possible to take corrective measures to reduce the loss suffered, the insured has a duty to do so. Traditionally, the position of the law was that expenses incurred by the insured in measures to mitigate loss or prevent further damage should be from his/her own pocket. These amounts were not recoverable under the policy. However, this position has evolved, and the insured is no longer expected to meet these costs from his pocket. They are now covered under amounts for which the insured should be indemnified by the insurer. The withdrawal of provisions requiring the insured to meet mitigation costs from his/her pockets does not imply a withdrawal of the duty to mitigate. Such action would not make business sense. The current global situation demands that business enterprises must do all they can to reduce their overheads. This includes reducing their losses. The absence of such a duty in an insurance contract would give rise to situations that potentially prejudice the interests of the insurer. Conclusion The obligations owed by the insurer and the insured to each other are aimed at ensuring that the insurance contract serves its business objectives, and that no party’s interests are prejudiced by the actions of the other. Most of the duties imposed by the ICA must be satisfied before, or at the making of the insurance contract. These include; the requirement to fully divulge to the insurer, all material facts, and to observe good faith. However, these duties are also applicable when the parties are in the process of settling a claim. The duties that an insurer owes an insured have to be discharged to give meaning to the essence of insurance. The insurer must investigate and settle claims as required by law. It must also defend any claims made against the insured if they arise out of a covered event. If there was no legal obligation on the insurer to carry out these duties, then insurance contracts would make no business sense. The insured, on the other hand, is required by law to inform the insurer of any event leading to a claim. He/she must also prevent further damage after loss occurs, and is also expected to cooperate with the insurer in efforts to settle claims. It is only on rare occasions that an insured will be in a position to know about the occurrence of a covered event, without notification from the insured. Business efficacy demands that the insured must give notice as soon as the event occurs. The duties owed by the insured assist the insurer to discharge his duties under the contract. Both the insured and insurer benefit from the discharge of their respective duties. If one of them does not, then it prejudices the other’s interests. It also makes it difficult to perform their part. For example, an insurer may not be able to carry out investigations successfully if the insured does not cooperate fully. A defense may also not be conducted satisfactorily if the insured does not avail himself to give evidence. References Hawke, F. & Burke, L. (2011). Pitfalls of Claims Made Insurance in Large Scale Financial Liability Cases. Insurance Law Journal. 22(1). 203 Pynt, G. (2011). Australian Insurance Law: A First Reference. 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