2011 ANZIIF TurksLegal Claims Scholarship
Winner
Dealing with claims on the basis of “spirit” rather than terms Julie Harriss | CGU Insurance
Should an insurer deal with claims on the basis of the “spirit” of the contract rather than the terms ? What benefits or disadvantages might there be to insurers ,claims professionals dealing with claims and insurance customers in taking one approach or another? It would seem too many in the insurance industry that it is the lot of an insurer to be misrepresented and misunderstood in the media. It has become common place for insurers to be fair game to journalists and current affair programs. But as our nation grappled with devastating natural disasters in the early part of 2011, it was the highest offices of government that launched a stinging attack on the industry. The comments made by Bill Shorten in the Insurance News in April/May reinforced a message to the public that insurers were both uncharitable and litigious. More recently, the Queensland State Government has questioned the time frames in which claims were settled and suggested that insurers need to be forced to pay claims that have not been dealt with in a reasonable period. Premier Bligh weighed into the debate by suggesting insurers would not breach the Code of Practice if breaches were disclosed in the media. One can only wonder where the evidence is obtained that supports the notion that insurers are keen litigants or they have forsaken their duty of good faith. Indeed, one can only assume that very little research has been undertaken and the true intent of such comments is to detract from potential backlash. As insurers faced billions of dollars of additional claims, falling share prices and stretched resources, the rhetoric that insurers generally lack compassion and avoid claim payments was highly damaging. It had a profound effect on those working in front line claims response teams and added to the level of stress for those who had suffered loss.
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It is tempting to dismiss such attacks as lacking a basic understanding of insurance operations and indeed, insurance achievements. But as we face an increasingly uncertain future brought about by the impact of climate change, it is necessary for the industry to respond. As an industry we must be able to articulate claims management philosophy and a clearer position in relation to cover. The issue for insurers is not whether such attacks have merit but rather how to prevent the current debate from escalating. The comments of those in office have the power to cause great and lasting harm. At this critical juncture, positive action is needed to educate and ensure accurate representation.
The fundamental duty of good faith remains at the heart of every transaction and yet this is the very spirit that insurers are presumed to lack. Correcting the perception that insurers do not willingly pay claims or seek to rely on ‘black letter law’ may go a long way towards resolving the current gap in understanding. Whilst any debate as to whether an approach based on spirit of the contract or the terms will inevitably be viewed differently between policy holder and insurer, insurers must be on the front foot and demonstrate they willingly meet claims. It would seem that Mr Shorten and others hold the view that insurers should be adopting a more charitable view when losses occur for which no premium has been paid and which fall outside the terms of cover. This is separate and distinct to what is more commonly referred to as the underwriting intention. Many would agree that the spirit of the contract is indeed what was intended by the parties. The fall out from the Queensland floods is the real driver behind the current round of public criticism and perceptions of an over reliance on unfamiliar language and policy terms. Four government inquiries are investigating a common definition of flood and whether improvements can be made in relation to cover. A Parliamentary Standing Committee is inquiring into the industry’s response to extreme weather and disaster events with a particular focus on claims handling. Without question it has been a year of unprecedented natural disaster in the Asia Pacific region and 2011 will be the highest loss year on record. Local insurers were reeling after back to back weather events in Queensland, Victoria and New Zealand yet they were resilient and ready to process billions of dollars in claims. The flooding which devastated Queensland during late December 2010 and early January 2011 led to three quarters of the State being declared a disaster zone with thousands of homes and businesses flooded and large open pit mines temporarily closed. The heaviest rainfall for decades caused all 3 major rivers to flood simultaneously for the first time in Queensland’s history. Overall economic losses have been estimated by Munich Re at US$7billion.
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Queensland subsequently endured a Force 5 storm when Cyclone Yasi made landfall in the far north of the state on 3 February, 2011. The agricultural sector was hardest hit with the widespread loss of banana plantations. Munich Re assessed these losses to be in the vicinity of US$2 billion. The Insurance Council of Australia (ICA) compiled industry statistics for the 2010/2011 Queensland floods and Cyclone Yasi. As at 29 September, 2011, insurers had received 129,166 claims with an estimated value of $3.70 billion. Of those claims, 76% had been paid by means of goods being replaced, repairs completed or cash settlements processed. The remaining 24% remained open for progress payments to builders or because quotes were still being obtained. In the 6 months following February, 2011, insurers paid $2.03 billion in claims. Current disaster statistics for Australia from late December,2010 show the industry has responded to 186,329 claims and the current estimates for claims payouts exceed $4 billion. As we know, the devastation in Queensland was overshadowed by the 6.3 magnitude earthquake which struck Christchurch, New Zealand on February 22, 2011. The earthquake claimed the lives of 182 people and demolished over 240 buildings. The city requires a total rebuild and estimates for the recovery phase are put at between 3 to 10 years. The total cost of rebuild is estimated at $NZ15 billion with insurers expected to contribute $NZ10 billion to the recovery. Buildings that were partly damaged by an earthquake in September, 2010 were completely destroyed by the February earthquake and subsequent tremors. To date, 350,000 claims have been lodged. Homes damaged in the earthquake have been divided into four zones according to the level of land damage. Homes in the worst affected zone will not be rebuilt. The government will elect to buy those properties and assume all rights to insurance or purchase only the land and homeowners will deal directly with their insurer. With forecasts of further earthquake activity, the task of rebuilding Christchurch is one of enormous complexity. Whilst the Christchurch earthquake is clearly the most devastating event to hit New Zealand, it is not the only event to cause significant damage. Flooding in January this year around the Bay of Plenty region left insurers with losses exceeding $NZ25 million whilst storms in Southland in September, 2010 hit insurers for a further $NZ 49.3 million. Storms, floods, tornadoes, snowstorms and the earthquake threat in New Zealand pose risks and claim volumes that are becoming increasingly difficult to address. Munich Re has described 2011 as a year of exceptional accumulation of very severe natural catastrophes and suggests 2011 will produce the highest ever loss year. The earthquake in Japan is the costliest natural catastrophe on record and will account for US$210 billion. The Japanese earthquake on 11 March 2011 was the strongest ever recorded in Japan at 9.0 magnitude.
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Over 15,000 people lost their lives and thousands remain listed as missing. Overall losses are significantly more devastating than Hurricane Katrina in 2005 which swept across the Gulf of Mexico and into New Orleans causing losses of US$125 billion. Based on this record and the fact that the price and availability of insurance remains favourable, it is indeed curious that insurers are not viewed in a more favourable light. Exposure to catastrophic events is a major concern for insurers globally and they are right to be cautious when it comes to paying claims for which no premium has been recovered. Despite the difficulties in recent years, insurers have not seen a multitude of claims referred to the Financial Ombudsman Service (FOS). The Ombudsman provides an independent dispute resolution service for consumers and financial service providers. All participating financial service providers are required to pay an annual base levy. They are also charged a fee per notified case which adds a further incentive to resolve disputes internally and provide the widest possible claims response. As insurers adhere to the Insurance Contracts Act and seek to comply with the industry Code of Practice, it is necessary to consider just how often the terms or applying the spirit of the contract fails to provide cover. FOS reports covering the 2008-2009 period confirm that consumers and businesses lodged a total of 3,872,618 claims with their respective insurers. Liability was accepted in 98% of claims in a year when insurers faced an increased volume of claims from the Victorian Black Saturday bushfires and severe storms in Melbourne and Perth. In the aftermath of the worst bushfire in Australia’s history, it was the turn of the Victorian Government to comment that insurers should not seek to avoid claim payments. Yet insurance assessors were amongst the first on the ground with $1billion paid out in claims where rebuilding options were unclear and an accelerated payment process would have been counterproductive. In the commercial classes which include liability, commercial motor, business and industrial special risks, 70% of disputes addressed by FOS were finalised in favour of the insurer. Of the 22,643 disputes received by FOS, 15,085 were found to have been correctly assessed. Commercial motor is the biggest contributor of claims overall and liability was accepted in more than 99% of all claims lodged. The statistics would suggest the current claims management practices of the industry, whether based on strict policy interpretation or more generously, are working to good effect. The Insurance Contracts Act was introduced to achieve a fairer playing field and it enshrines the requirement for both parties to act openly, honestly and fairly towards each other. The compelling evidence suggests that insurers are doing a fine job of assessing claims for indemnity and following the legislation.
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Of course, it is highly likely there will always be a small number of disputes which attract media attention. Insurers and their service providers must continue to be mindful of the wider industry reputation when assessing more controversial claims for indemnity and avoiding the ‘Today Tonight’ headline stories. A major benefit in accepting claims that arguably fall outside policy terms is the avoidance of legal costs. Claims managers have long known there is little advantage in litigation which comes with risk, unrecoverable cost and a tendency of supporting the consumer over the larger financial institution. Well before tort reform and pre-litigation measures were introduced, insurers generally pursued alternative dispute resolution and settlement of claims by way of informal conferences. Matters that proceed to contested hearing appear to be those where there is clear divergence in policy interpretation, a precedent needs to be established or there are a multitude of issues in dispute. It is often far preferable to maintain a relationship with a valued customer than adopt a technical indemnity defence or engage in a time consuming, protracted debate. Perhaps the real issue lies in how claim assessments are communicated. One of the main lessons emerging from the Queensland floods appears to be the need for improved communication. NRMA Insurance has advised the Queensland Flood Commission that it has identified the need to record the customers preferred method of contact at the point of lodgement. Other insurers had introduced weekly text messaging to update customers. Many disputes are resolved when clearer explanations are provided and insurers can always look to improve communication strategies, particularly following major weather events. Consumers generally do not have a detailed understanding of insurance issues. The industry has also suggested the regulations, standards and building codes formed over time and based on historical assumptions are no longer appropriate. Sea levels, wind gusts and drainage systems were designed on historic data instead of present day climate change modelling. The ICA proposed minimum standards for flooding risks, risk appropriate selection for land development, zoning for coastal storm surge risks and cyclone resistant building standards Flood studies and plans would also identify the types of developments suited to specific locations and delineate pathways for the safe passage of floodwaters. Insurers have called on the government to invest in central and consistent sources of information to clarify exposure to natural disasters. The community also needs to access this data and understand where the risks lie. Such measures are difficult but must be pursued or insurers will continue to be seen as avoiding claims based solely on technical arguments and complicated interpretations. It might also lead to discussions which can more clearly depict the work of insurers in managing risk.
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Of fundamental importance to the future of the industry is how insurers capture and pass on the knowledge and experience of their more senior claims managers. The evidence suggests it is not a case of preferring one claims management approach over another, but rather continued emphasis on training claims consultants on the broader principles of insurance. It is imperative that claims consultants have the confidence to make the right decision on a case by case basis. The best investment for the industry is to ensure claims professionals can balance technical or complex indemnity arguments with policy intention, relationship management and commercial pragmatism. Insurers are in the business of collecting sufficient premium to meet claim payments. They must also meet prudential regulatory requirements and in most cases, return profit to their shareholders. Insurers make an enormous contribution to the economic wellbeing of the country. Their efforts to rate risk and guard against unsustainable exposures should not be treated as poor business practice or evidence a lack of compassion. Clearly, a balance is required for the collective interest of insurers and the community to be met in a sustainable way. All parties must continue to work towards common understanding. Claims management requires the duty of good faith to be upheld whatever the circumstances and this practice will continue to underpin a proud and noble industry.
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Bibliography 1. Accumulation of very severe natural catastrophes makes 2011 a year of unprecedented losses. (2011, July 12) Retrieved from http:///www.munichre.com/en/media 2. Carlyon, P. (August 13,2011) Limboland. Herald Sun pp.24-27 3. Christchurch insurance rebuilds $NZ10 billion and rising.(2011, June 15). Retrieved from http:/// www.icnz.org.nz/news 4. Cost of Disaster Events . Retrieved from http://www.icnz.org.nz 5. Deadliest tsunami in history.( 2005, January 7). Retrieved from http://news.nationalgeographic. com/news 6. Insurance Council of Australia.(2011) Historical & current disaster statistics. Retrieved from http://www.insurancecouncil.com.au 7. Langstone,C. (2011,August) Quakes dominate NZ landscape. AILA News,p.4 8. Reinsurers seek partnerships. (2011,August) AILA News, p.13 9. Understanding Floods (2011,July 13). Retrieved from http://www.chiefscientist.qld.gov.au 10. General Insurance Code of Practice Yearly Overview. Retrieved from http//:www.fos.org.au
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