Six (intuitive) ways to derail your commercial insurance coverage

Apr 28
8 min read

In many areas of life, we get advance guidance about correcting otherwise reasonable instincts in precarious situations: “Put your own mask on first”; “Avoid braking when losing traction”, or “Just say no to drugs”. Commercial policyholders/insureds may stand to benefit from similar guidance.

This article identifies some sensible instincts by commercial policyholders that may undermine their opportunities for coverage in the aftermath of a loss:

1. "We probably don't have coverage for this anyway" or "the deductible is higher than it's worth."

This instinct seems reasonable. Why waste time and effort making out a claim that will likely yield no recovery? The flaw here is less about a misapprehension of probabilities and more about what it means in the short term: You choose not to notify your insurer of a potentially insurable circumstance based on your understanding of how a policy will not react; if the situation escalates or becomes aggravated down the road (e.g. cumulative weather impacts), you’re faced with explaining a delayed notification.

This instinct does not save you hours of phone tag with an adjuster, requests for information, and claim preparation (that’s what happens when you have a viable claim!). Particularly for ‘claims made and reported’ policies, this instinct does create the circumstances for a potential denial.

This instinct is also a close cousin to “The deductible is too high for this claim anyway”. If a deductible applies (and it may not always apply), the loss may escalate to overcome that deductible well after notice could have been given to the insurer.

The similarly unfounded “Our premiums will be impacted if we report this” oversimplifies how commercial underwriting works and seemingly justifies paying premiums for the sake of paying premiums.

Best practice #1: If insurance has entered the conversation, you probably have a good reason to report it. Commercial insurers can typically receive insurance notifications as either formal claims or notice-only notifications. The former engages the insurer/adjuster to action the claim; the latter presses the ‘pause’ button and preserves the insured's right to pursue the claim down the road without a denial for late notice.

2. “We don’t need to involve insurance yet. We can work out a business solution.”

This instinct could be considered 1(b), since the underlying flaw is akin to that in the prior section: Treating insurance as a detrimental process, inconsistent with alternative paths, to be avoided unless necessary. This perspective deserves to be called out separately because it is incredibly common.

Best practice #2: If a loss occurs that invites a business solution, this should be your cue to consider whether it could be insurable and report the claim as a notice-only notification. This preserves your right to pursue and open the claim formally down the road if the business solution fails and enables an insurer to investigate while the circumstances are fresh. This is especially important for claims made and reported policies (e.g. E&O).

3. “We have to get going on addressing this loss. Insurance can catch up.”

Particularly for first party property losses: When an insurable loss occurs, the desire to undertake the remedy quickly peaks. What was the cause? What resources do we need to react? How do we get the fires (metaphorical or literal) under control? Most insurance policies account for steps taken in the aftermath of an event to mitigate further losses (e.g. sue and labor clause).

The issue for policyholders arises when the ‘fires’ have been put out, and the commercial needs come to the fore. Particularly on construction projects with multiple stakeholders managing a critical path, inaction can feel like moving backwards. What costs can reasonably be incurred, and when? Moving ahead without regard for your insurer’s right to evaluate the costs before they are incurred risks a denial. Settling a liability without insurer approval is often a guaranteed denial (rightly or wrongly).

The time between reporting an insurance claim and waiting for an insurer to provide a position on coverage is never as soon as it needs to be. Add to this the frequency of insurers hedging their initial position with Reservation of Rights letters, and insureds are rarely left with enough clarity to keep pace with commercial realities.

A related issue here is testing failed components that are believed to have caused a loss. Testing (particularly destructive testing) can be a fast track to a denial of coverage and should be avoided without insurer participation.

Best practice #3: Incurring costs without approval from an insurer depends on the circumstances. After notice of the claim has been communicated to the insurer(s), an insured would be well served to clearly, and in writing, provide the insurer with every opportunity to understand and weigh in on the path ahead. If the pace of the insurance process is on a collision course with some commercial realities, the insurer should be informed at the earliest opportunity.

4. “Our typical documentation procedures should be followed for insurable losses.”

Internal review processes to identify root causes, corrective actions, and lessons learned, are standard fare in the context of quality control. Whether an issue is insurable or not, taking corrective steps without a paper trail can create unmanaged risks that can manifest as repeated errors, more rework, disputes based on “your word vs. mine”, and indeterminate liability.

That said, an incident that attracts both an internal review process and an overlapping insurance claim process requires a more scrupulous information gathering strategy that does not compromise one process for the other.

Fundamentally: Once an issue enters the realm of insurance, it is no longer internal. You can assume an insurer will receive otherwise ‘internal’ documents. If you knew those documents were being shared externally, including with potentially adverse parties, how would you prepare them?

Best practice #4: This is a complex, and context specific, issue ripe for oversimplification. Some key considerations include the following:

Know your audience: Your internal audience is likely more technically fluent and understands the stakes. Your insurance audience will almost certainly not understand things as well as you do. Assume they do not understand your industry, your climate, your contract, or your business.
Opinions are for third party experts: It is this author’s impression that internal written speculation (particularly about root causes) rarely assists the policyholder. If it serves the insurer’s position, this speculation will usually find itself cited in the letter denying coverage. If it serves the insured, it will be ignored until a third-party opinion is given. Opinions and speculation are for paid, third party, experts instructed by legal counsel.
Legal privilege: Privilege, as a basis to avoid document disclosure, can arise on two fronts in the context of an insurable loss: (1) A coverage dispute about the insurer’s duties; and (2) A non-insurance dispute or prosecution about the underlying circumstances (contract, tort, regulatory, criminal). Privilege may be waived intentionally or unintentionally including by mere reference: CNOOC Petroleum North America ULC v ITP SA, 2024 ABCA 139 at paras 46-50.

Internal reports for insurable losses should differentiate what is true, not true, and unknown and should be prepared on the assumption they will be disclosed to third parties.

In short, insurable losses (particularly complex or higher value) ought to be treated more like litigated matters than internal matters: This includes using litigation holds where necessary, document management through the lens of privilege, and being organized for the path ahead.

5. “We have to notify [someone other than the insurer] to submit this claim.”

It is a common industry practice to notify the broker that placed a policy to submit a claim on that policy. For owner-placed policies in the construction context, an owner may insist that insurance claims be reported by the owner. These two practices are often benign and can facilitate claim reporting in the ordinary course. However, this author has witnessed multiple instances in which these practices—when mandated—have yielded problematic outcomes to the detriment of the party incurring the loss.

There is an added layer of trouble when the party tendering the claim on behalf of the insured decides to represent the circumstances of the claim in their own words, making representations that the insured incurring the loss may not have preferred.

Best practice #5: Whenever possible, insureds should tender claims to the insurer directly. Tendering claims through intermediaries can be undertaken as a redundancy.

Insureds should also obtain full copies of their policies before a claim occurs as an important precondition to the best practice recommended here.

6. “After the claim is reported, the insurer or adjuster will ask for what they need and otherwise drive the process.”

While there are certain basic steps an insurer must take after a claim is tendered, they are not required to help the insured prove their entitlement to insurance proceeds. The same goes for any adjuster handling a claim.

This means an insurer or adjuster will typically not determine for the policyholder what they need to establish their claim any more than they will identify what the policyholder expects from the policy. The policyholder is responsible for both.

A related misconception is assuming the adjuster represents or advocates for the interests of the insured. While adjusters are required to engage the insured in good faith, they neither represent the insured’s interests nor advocate for them.

A policyholder failing to proactively drive the insurance claim process can lead to a loss of key documentation, personnel, and even missed limitation periods.

In that regard, policyholders would be well served to see the insurer’s role as less like that of a police service investigating a crime and more like a court evaluating whether a crime (or claim) has been proven.

Best practice #6: A proactive claim submission strategy that is cognizant of the audience receiving the information is essential. Unstated assumptions and a lack of communication will only hurt the insured’s position and lead to delays. Being organized and proactive is essential: This includes working with your insurer to set deadlines for feedback, requests for information, and even requesting partial prepayments where feasible.

This guidance is not meant to steer policyholders towards a defensive disposition. Viewing the claims process as a cooperative undertaking is critical.

7. Bonus - In the aftermath of your vendor, customer, subcontractor, or neighbour, causing you a loss you say to them: "We want you to admit your liability to us now (and sign our settlement agreement)!"

Nearly all liability policies contain two provisions that read something like the following:

No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense without the insurer’s consent.

The insured agrees to cooperate with us in the investigation, settlement or defense of the suit.

From the standpoint of the party suffering the loss, the insurance at risk here is not your own. It is the insurance of your defendant which requires some measure of foresight to avoid spoiling. Particularly in emotionally charged losses, or with uneven power dynamics, the instinct of an aggrieved party may be to quickly solicit concessions from their tortfeasor around liability, particularly in writing. They do so at their own peril because the above clauses may operate to undermine recovery altogether. This means actions that explicitly or implicitly determine liability could be detrimental to the interests of a plaintiff faced with a tortfeasor with a small balance sheet.

Best practice #7: If the loss may be insurable, your defendant should be given the opportunity to speak with their carrier without being persuaded to immediately concede their liability.