How Insurers Think About a Claim

A denial letter is written to sound final, but it rarely is.

Before opening my own firm, I litigated insurance coverage disputes on behalf of insurers against policyholders ranging from individuals to Fortune 500 companies. What struck me most was how differently the two sides approached the same claim.

The insurer treated it as a series of positions, each taken with the next in mind. The corporate policyholders who did well learned to approach the claim the same way, usually with the help of experienced coverage counsel. Those without representation, however, often approached the dispute as a question of fairness.

The First Notice Shapes the File

The insurer's approach starts with the policyholder's first notice of loss, which becomes the foundation of the insurer’s file. The strongest notices state specific facts and precise language. For instance, a leak that ran for months (standard exclusion in property policies) and a pipe that burst (covered) may describe the same event, but only the first characterization gives the insurer an exclusion to work with. It is safest to assume that someone will read the notice looking for a reason to deny, because someone eventually will.

Every Policy That Might Respond

The notice should also go to more than one insurer if more than one might be on the risk. That includes policies from prior years, excess layers, and any policy that names the policyholder as an additional insured. No insurer will point the policyholder toward another carrier’s coverage. When several are involved, each will usually argue that another should pay first. That argument is between the insurers, and it should not hold up the claim. A policyholder can reasonably ask the insurers to fund the defense or settlement now and sort out their shares later.

The Person Who Decides

A coverage dispute can involve several layers of decision-making. An adjuster evaluates the claim. Coverage specialists and in-house counsel consider the policy language, and outside coverage counsel may analyze the law and/or prepare for litigation. This means that by the time a dispute reaches court, the insurer may have already considered the arguments the policyholder is likely to make, the evidence needed to support its position, and the consequences of losing a particular issue.

The file also drives the reserve, the insurer’s early estimate of what the claim will cost. Reserves are difficult to raise once set, and a settlement well above the reserve has to be justified internally (and a lot of phone calls). However, thorough documentation early on tends to produce a higher reserve, and that figure quietly shapes every offer that follows.

Where the Denial Sits

If a denial comes anyway, the first task is to identify which part of the policy it relies on. Coverage is analyzed in a fixed order, and each step shifts who must prove what.

The insurer starts with the insuring agreement. The policyholder bears the burden of showing the claim falls within it. A CGL policy, for example, covers suits seeking damages for bodily injury or property damage caused by an occurrence; a suit seeking only lost profits under a contract may not qualify, and the insurer will say so first.

If the claim clears the insuring agreement, the insurer turns to the exclusions, including those added by endorsement. The burden of proof now falls on the insurer to show that the exclusion clearly applies.

If it does, the burden swings back to the policyholder to show an exception. A contractor’s CGL policy, for instance, generally excludes damage to the contractor’s own completed work, but an exception restores coverage when a subcontractor performed the damaged work or the work that caused the damage. To invoke the exception, the policyholder must prove the subcontractor’s role, which makes subcontracts and invoices among the most important documents in the claim.

Conditions, such as late notice and cooperation come last, usually as a last resort. Courts are reluctant to let a procedural lapse forfeit coverage, so a denial resting on a condition alone is often the insurer’s weakest.

Denials as Leverage

Whether the insurer denies or reserves, its position is often a starting point for negotiation rather than a final word. An insurer may deny on any reasonable argument, even one it is unsure of, and a denial nobody challenges costs it nothing. Some denials, and some lawsuits insurers file against their own policyholders, are meant mainly to bring other parties to the table. This is most common when another carrier may also owe coverage, as when the policyholder is an additional insured on someone else’s policy. The pressure pushes the other insurer to contribute, and these cases often resolve with each carrier paying a share.

Reading a Reservation of Rights

Sometimes the insurer does not deny at all and instead agrees to defend under a reservation of rights. Many times, this letter is written from a very risk averse perspective. Indeed, a wrongful denial can cost the insurer its coverage defenses and expose it to bad faith claims, including penalties under Section 155 of the Illinois Insurance Code.

So when the answer is uncertain, it reserves rather than denies, and it often reserves every defense it can find. However, a letter that simply recites the policy may not protect the insurer, since a vague reservation can cost it those defenses entirely.

A reservation of rights may identify several potentially applicable exclusions or conditions without committing to a final position on every issue. The policyholder needs to understand not only what the insurer is asserting today, but also what arguments may become important later. If a reserved defense turns on facts being litigated against the policyholder, such as whether the conduct was intentional or negligent, the policyholder may be entitled to choose its own defense counsel at the insurer’s expense.

Insurers do not have unlimited freedom to change their positions. Waiver, estoppel, statutory requirements, and other rules can restrict particular defenses, depending on the jurisdiction and circumstances. Identifying those restrictions can itself become an important part of the policyholder's strategy.

Illinois Law Favors the Policyholder

The policyholder who pushes back in Illinois also has the law on its side in several respects. Ambiguous policy language is construed against the insurer; and an insurer that refuses to defend, rather than reserving its rights or asking a court to decide, can lose its coverage defenses altogether. Further, section 155 of the Illinois Insurance Code allows a court to award fees and a penalty when an insurer’s delay is vexatious and unreasonable. And because most coverage lawsuits turn on what the policy means, courts can often resolve them without a trial. Confident insurers frequently move early for judgment on the pleadings, betting that the complaint and the policy alone will end the case. When that motion fails, or a later summary judgment ruling goes against them, insurer positions tend to soften.

Protecting the Policyholder's Position

None of this helps if the policyholder gives the insurer a new defense along the way. That means obtaining the complete policy, including every endorsement, and continuing to meet every condition while the dispute is pending. It also means checking the deadline to sue, which property policies often shorten. Counsel is most useful early, ideally before the second letter, because the early record is the hardest part of a claim to change later.

Matching the Insurer’s Approach

The insurer handles a claim with a plan from the first day. A policyholder who does the same, by documenting carefully, tendering broadly, and reading each letter for what it actually says, is in a far better position when the dispute comes to a head.

We help businesses and individuals respond to denials, reservations of rights, and disputes among insurers. If your insurer has denied or reserved on a claim, we can review the letter and the policy before you respond. Contact us to discuss your matter.

This article provides general information and does not constitute legal advice. For guidance concerning a specific matter, see our insurance recovery services. Coverage depends on the policy wording, the facts, and applicable law. To discuss potential representation, request a consultation. Submitting an inquiry does not establish an attorney-client relationship.