AIC AIC Litigation & Legal Proceedings 1 — Questions and Answers
Question 1: What is the primary purpose of a reservation of rights letter in claims litigation?
- To deny the claim outright
- To notify the insured that coverage may not apply while the insurer continues to investigate (Correct answer)
- To settle the claim quickly
- To request additional medical records
Correct answer: To notify the insured that coverage may not apply while the insurer continues to investigate
A reservation of rights letter allows the insurer to investigate or defend a claim while preserving the right to deny coverage later if a policy exclusion applies.
Question 2: In the context of claims litigation, what does 'subrogation' allow an insurer to do?
- Deny a claim based on fraud
- Pursue recovery from a negligent third party after paying a claim (Correct answer)
- Increase the insured's deductible
- Assign the claim to another insurer
Correct answer: Pursue recovery from a negligent third party after paying a claim
Subrogation gives the insurer the legal right to step into the insured's shoes and seek reimbursement from the party responsible for the loss.
Question 3: What is the 'duty to defend' as it applies to liability insurance claims?
- The insured's obligation to cooperate with the insurer
- The insurer's obligation to provide a legal defense for covered claims even if the claim may be groundless (Correct answer)
- The insurer's right to settle without insured consent
- The duty to report all claims within 24 hours
Correct answer: The insurer's obligation to provide a legal defense for covered claims even if the claim may be groundless
The duty to defend requires the insurer to defend the insured against lawsuits alleging covered losses, regardless of whether the suit ultimately has merit.
Question 4: During litigation, what is the purpose of an Examination Under Oath (EUO)?
- To finalize settlement terms
- To allow the insurer to formally question the insured about the claim under oath (Correct answer)
- To assign liability to a third party
- To conduct a physical inspection of damaged property
Correct answer: To allow the insurer to formally question the insured about the claim under oath
An EUO is a formal, sworn proceeding where the insurer questions the claimant or insured to gather facts and assess the validity of the claim.
Question 5: What does 'bad faith' mean in the context of insurance claims handling?
- Filing a fraudulent claim
- An insurer's unreasonable denial or delay of a valid claim without a legitimate basis (Correct answer)
- An insured's failure to cooperate
- A claimant's exaggeration of damages
Correct answer: An insurer's unreasonable denial or delay of a valid claim without a legitimate basis
Bad faith occurs when an insurer unreasonably refuses to pay, delays payment, or fails to properly investigate a valid claim, exposing the insurer to extra-contractual damages.
Question 6: What is an 'excess judgment' in insurance litigation?
- A judgment awarded only for punitive damages
- A court verdict that exceeds the insured's policy limits (Correct answer)
- The amount the insured must pay before coverage applies
- A judgment against a third-party claimant
Correct answer: A court verdict that exceeds the insured's policy limits
An excess judgment is a court award that surpasses the insured's policy limits, potentially exposing both the insured and insurer to personal liability claims.
AIC AIC Litigation & Legal Proceedings 1
What is the primary purpose of a reservation of rights letter in claims litigation?