Many of our litigation management audits involve complex environmental cleanup cases. In these cases, it is important to first evaluate the underlying matter, including the fact patterns of the various lawsuits, in relation to the contested coverage provisions. Then we examine the manner in which the tendered fees and expenses were incurred, including the legal and consultant work performed. Many of our audits involve excess liability indemnity policies with large self insured retentions often in excess of $30 million. Subject to the terms and conditions of the policies, the insurer typically has no payment obligation until and unless the self insured retention is appropriately exhausted by the appropriate payment of covered claims. The insurers obligation arises for expenses in excess of the policy’s self insured retention.
Evaluation of the Policy
It is important to thoroughly evaluate the definition of "Defense Costs" when reviewing the applicable policy language. In addition, the policies may also contain exclusions for property damage which is owned, occupied by or rented to the insured. These claims need to be carefully evaluated.
An insurer may find it beneficial to hire an independent consultant or expert to assist in the review of the insured’s fee and cost claim. We can analyze the back-up submitted by the insured, including information contained in databases which may have been submitted in support of insured’s claim. In addition, we can review any independent investigation of the facts and circumstances concerning the underlying incident.
Burden of Proof is on the Insured
Generally, the burden is on the insured to demonstrate that a loss falls under the coverage provisions of the insurance contract. (“The burden is on the insured to prove that a loss falls within the policy’s coverage”; “An insured seeking to recover for a loss under an insurance policy has the burden of proving that a loss occurred and also that the loss was a covered event within the terms of the policy.”).
When part of the loss is covered under a policy and part is not, the insured typically has the burden of proving the proper allocation.
In our audits, we often find that many questionable costs require further investigation. For example:
Inefficient and Unreasonable Cleanups – The environmental cleanup conducted by the insured and the insured’s contractors may have been conducted in an inefficient manner, resulting in potentially unreasonable costs. We can review the total dollar amount expended in comparison to the work performed in other similar environmental cases to see if inefficiencies exist.
Work Conducted by Specific Contractors - Specific contractors (vendors) may need particular scrutiny. For example, environmental remediation work performed by a particular vendor may need to be validated in detail and distinguished from other work. Also, specific work may be excluded by the policy (such as work conducted on a right of way) or may be covered under the primary coverage obtained by the insured.
Community Information – Our review of underlying documents related to the matter may result in finding a document, such as a letter from a neighbor or community member, that highlights the inefficient nature of the environmental cleanup. In addition, the insured may cleanup property that was not impacted by the event or was not in the immediate vicinity. Such “aggressive” cleanup work may have been done for “public relations purposes” to ward off potential lawsuits. If so, this work may not be covered by the policy since it may not be a covered defense cost. In addition, contractors sometimes overcharge for inefficient work.
Vendor Documentation - The documentation submitted by the insured in support of the charges for environmental remediation contractors may be deficient and the insured may fail to meet its burden of establishing that these particular charges are covered by the policy. Often a review of one contractor will result in findings that are equally applicable to the other contractors.
Charges Previously Submitted to First Party Insurers – A review of the invoices may also show that the charges were previously submitted to the insured's first party insurers before submission to the liability carrier. This may be an attempt to “double dip” on recoverable costs or fees.
The examples set forth above are just a few illustrations of the potential unreasonable costs and activities that may be identified from a careful analysis of the bills and supporting documentation.
After reviewing all the foregoing, including the applicable correspondence relating to the claim, we often are able to reach conclusions on whether the expenses are reasonable and were necessarily incurred as required by the applicable policy provisions. We can also determine whether a portion of the expenses were also incurred for activities which are excluded from coverage. We can quantify this amount in both our charts and report. These documents may provide support for negotiation, settlement or the insured to submit additional information for review.
Please feel free to contact us if you have questions about the protocol referenced above.
Jeevan Subbiah also contributed to this article.