You gotta be kidding me! Our insurer denied coverage. We sued. We settled. The insurer paid. Now the insurer has billed us for the settlement payment. Help!
Many businesses have large deductible (e.g., $500,000, $1,000,000, or more) casualty insurance programs encompassing commercial general liability, product liability, business auto or workers comp/employers liability insurance coverages. Depending on the program structure, the insurer may provide first dollar coverage and charge the business client back for the deductible. Under this structure, the business client usually must provide a letter of credit as financial security for its deductible reimbursement obligation.
Sometimes business insurers wrongfully refuse to provide insurance coverage. When that happens to our clients, we often sue those insurers. In many cases, we resolve these lawsuits by settlement. The essential terms of the settlement agreement usually require the insurer to pay money to the business (the “settlement payment”) in exchange for the business’s release of claims and dismissal of the lawsuit.
After the parties sign the settlement agreement, there shouldn’t be any problems: the insurer makes the settlement payment, the business dismisses the lawsuit, and the dispute is resolved. Sometimes, however, the insurer of a large deductible casualty insurance program will turn around and bill the business for part or all of the settlement payment under the guise of “deductible reimbursement.” If the business protests and refuses to pay, the insurer may ignore the protest and draw on the business’s letter of credit.
It’s crazy. But, no kidding, this thing actually happens all too often. We’ve experienced it. Our business clients that suffer this insurer behavior are incredulous.
Perhaps it’s inadvertent, a function of the insurer’s left hand not knowing what the right hand is doing. Even so, to avoid the inappropriate charge, the business has to spot the issue, persuade the insurer of its error, and prevail upon the insurer to cancel the bill. If the insurer intentionally negotiated the settlement assuming that it would recoup some part of the settlement payment, you can bet that the insurer won’t give up without a fight.
While it’s hard to prevent this ridiculous behavior altogether, it’s relatively easy to minimize the impact. A business settling a dispute with an insurer under a large deductible program should insist on language in the settlement agreement specifying that any applicable deductible has been satisfied and that the settlement payment is made in excess of any such deductible. After the settlement payment is made, the business should be vigilant in monitoring to catch any illegitimate deductible billing by the insurer. If the insurer engages in illegitimate billing, armed with the language of the settlement agreement, the business should be able to persuade the insurer to cancel the bill under threat of a lawsuit.
Contact Scott Hecht for more information.