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Nathan Golia
Nathan Golia
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Lawsuit Against XL Proves CEO's Admonition Correct

The electric car company Fisker is suing its insurance provider, XL America, over issues the company's CEO recently warned threatened the insurance industry.

Gigaom blogs today on a lawsuit by electric car manufacturer Fisker Automotive against XL Insurance America, alleging that the insurer is in breach of contract for refusing to pay on 338 cars stored at the Port of Newark during Sandy.

Via Reuters, which was Gigaom's source and has more information on the suit:

The Anaheim, California-based startup said it submitted a timely claim to XL Insurance America Inc, whose policy entitled it to a maximum $100 million of coverage for named storms such as Sandy, subject to a deductible and other provisions, only to have it denied on December 20.

David Klein, a partner at Orrick Herrington & Sutcliffe which represents Fisker, said in a phone interview that the dispute centered on whether the cars were in "transit," and which sublimits may apply, if any.

Here's a twist: XL Group CEO Michael McGavrick said this week at the Property/Casualty Joint Insurance Forum that insurance companies need to do a better job of demonstrating their value to businesses. McGavrick said that the industry is "carefully excluding and picking our way to the future" and even though there's more economic activity and more complexity of risk, "those companies are saying they don't find us useful."

"There's a reason BP didn't have insurance, and they lost the value of us looking over their shoulders," McGavrick added. "We have got to get our heads around innovation. The products are getting stale."

Some might be tempted to say that this shows the insurer taking a "do-as-I-say, not-as-I-do" approach. After all, nitpicking policy language about what constitutes "transit" or not sounds like "carefully excluding and picking." But without knowing the details of Fisker's policy with XL, I don't think that's fair.

I think the relevance of McGavrick's quote to this suit lies in the frustration with which he spoke. I interpreted McGavrick as saying that insurance coverage is in danger of becoming less relevant to businesses because the products offered don't match the risk they feel they're incurring. For example, what else is Fisker buying coverage for if not to ensure that if something happens to cars "awaiting shipment to dealers across the country," according to the article? If XL isn't offering a product that's priced or worded correctly to cover this kind of situation, why should the company even have the policy?

There also was a component to the panel discussion on whether or not insurance companies do a good enough job explaining to their clients — in both personal lines and commercial lines — what exactly is covered. Notably, The Hartford's Liam McGee said, "We have to do a better job as underwriters an agents of educating our customers that flood is not a covered peril… We also need to do a better job of educating entrepreneurs what causes business interruption coverage and what doesn't. Many people had no comprehension of what was covered."

So, while it is perfectly likely that XL has a case for denying the claim, the suit speaks to an issue that is cropping up all over the insurance industry, most notably with the Progressive kerfuffle earlier this year and several post-Sandy complaints: There is a perception that at claim time, the "moment of truth for our industry" according to McGee, insurance companies turn their back on their policyholders, hiding behind captious, legalistic interpretations of policy language.

On the personal lines side, bills were introduced in New York and New Jersey this month aiming at legislating a one-page policy summary for homeowners insurance and improving that big "T" word, "transparency," in the insurance purchase process. But I am certain McGavrick and others don't want to wait for government to step in on this issue. In fact, P&C consultant Jonathan Farris on Twitter called these bills "adversarial" and called (sarcastically, I assume) for "legislation to mandate insureds read their insurance policies."

But even that wouldn't do much good if the insured party and the insurer don't see eye-to-eye on what the policy says. That's where McGavrick's original point comes in: The insurance industry needs to create and offer products that price and cover accurately the risk the customer hopes to transfer. This may mean pricing changes that, in an industry where "discount" has been the watchword, may seem counterintuitive. Raising prices now, though, especially if accompanied by better coverage, could mean many fewer headaches and court challenges down the road from angry policyholders. The question is, who is ready to make the first move?

Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio

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