December 23, 2019 Articles

Modeling Your Way to a Successful Coverage Outcome

How to clarify and simplify complex insurance coverage disputes with effective modeling

By William Downs

Insurance coverage disputes often involve numerous open-ended variables and competing arguments about, among other things, which policy should respond to the underlying matter. This dynamic can make it difficult to calculate the value of any individual coverage argument, much less to accurately assess how the combination of several arguments affects valuations. Complex insurance coverage cases frequently involve multiple insurers and policyholders, each advancing opposing arguments about how to categorize and allocate costs, with each argument affecting individual parties differently. In the context of settlement negotiations, an effective model to assess these disputes should consider a variety of factors. This article highlights some, but not all, ways to create a successful model that may improve the chances of an effective outcome.

Why Are Coverage Disputes So Complicated?

Although insurance coverage disputes may arise in nearly any context, there are particular complications in many types of bodily injury and product liability matters, such as medical device, pharmaceutical, asbestos, environmental pollution, construction defect, and sexual abuse cases. These cases often involve extensive and complex data and competing arguments over which insurer or policy should respond to specific claims, creating a potential range of values for unresolved or future claims. These factors increase the degree of variability in the calculation or allocation modeling of costs among insurance carriers and the policyholder. Common coverage complexities include multiple insurance carriers; multiple coverage lines; a voluminous number of claims; and complex coverage terms such as “non-cumulation,” varying defense cost treatment, aggregate limits, number of occurrences, trigger disputes, potential coverage exclusions, or other coverage arguments.

How Can a Model Help Navigate These Complexities?

Useful valuation and allocation models aim to assess the elements of a complex coverage dispute and provide clarity to the parties about the impact of various coverage arguments. Such a model can work by first determining either actual or estimated values for the claims, then allocating those values to different potential coverage options (among the various insurers and policies) using theories that mirror the various coverage arguments as advanced by counsel. The resulting model brings into focus how different claim values or different coverage assumptions could affect the amounts allocated to each insurance carrier and the policyholder. In essence, modeling allows one to dynamically assess which policies might be triggered under various valuation levels and coverage allocation assumptions.

For example, consider a situation where an insurance carrier argues that its policies contain “non-cumulation” clauses, reducing multiple years of coverage to a single policy limit. A possible model to use during settlement negations could evaluate the allocation outcome to all carriers by, first, accepting the single policy limit argument advanced by the carrier and, second, by assuming there is no single policy limit. The model would account for the impact on the carrier (the one that is advancing the single policy limit argument), as well as on all other insurance carriers and policyholders. In mediation or settlement discussions, the model could be helpful to create a decision-tree framework evaluating the likelihood of success of various coverage arguments and the respective value of the claim, depending on which argument succeeds. Similar modeling can be done to assess other coverage disputes such as coverage of defense costs, quota share exhaustion, gaps in coverage, or treatment of insolvent carriers (or how these disputes may affect one another).

Will Models Assist with Mediation or Settlement?

This type of model, especially when it has easily adjustable inputs, can be especially useful in mediation or settlement discussions. Having a dynamic model that allows one to assess the impact of a particular insurance allocation theory while, at the same time, applying different overall claim liability exposures provides clarity during settlement negotiations, especially when claim values are not yet determined. In addition, such models can help to clarify which coverage and valuation arguments greatly affect the allocation of costs and which arguments do not, focusing attention on substantive issues essential to the resolution of the dispute.

What about Mass Tort Coverage Disputes?

In mass tort coverage disputes, allocation models can be run claim by claim, using the facts of each individual claim to determine how the costs associated with that claim are allocated. The underlying individual claim characteristics can affect which policy or policies are potentially triggered. Creating a model that provides flexibility to modify the underlying inputs in the allocation can be important in creating a useful settlement model.

Conclusion

Resolving underlying matters in insurance coverage disputes can involve careful consideration of the implications of the allocation among policyholders and insurers. In circumstances with voluminous data, multiple policies and insurers, and uncertain allocation methodology, effective modeling helps counsel assess the value and impact of different scenarios, increasing the chances of a successful resolution of such disputes.

William Downs is a managing director at Ankura Consulting, based in Washington, D.C.

Ankura is the Litigation Advisory Services Sponsor of the ABA Section of Litigation. This article should not be construed as an endorsement by the ABA or ABA Entities.
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