the “EX GRATIA” payment

The concept of the “ex gratia” payment has been around since the first claim was denied. An “ex gratia” – or “by virtue of grace” – payment is typically requested when a loss has occurred and the claim may not be covered under the conditions of the policy.

In the “old days” prior to industry consolidation, it was easier for brokers, and sometimes even insureds, to have a personal connection with their insurance company. These were the “high days” of the “ex gratia” payment request. Then, insurance company branch managers had greater discretionary authority, and it was not unusual for policy conditions to be over-written at this level.

Has anything changed since these “good old days”? I do not believe so. Consolidation within the industry over recent years may have reduced the number of underwriters, but competition among the remaining “mega companies” remains extremely fierce – to the extent that the market is once again seeing the return of the “ex gratia” payment as insurers scurry to retain premium volume and maintain relations with the growing broker cluster operators.

Broker pull

As we well know, larger brokerages, and the so-called “cluster” broker networks, promote themselves to customers as having greater influence with insurers. So, when a loss occurs and it is highly dubious to whether the claim is indeed covered, these larger brokerage operations typically attempt to lean on anyone and everyone connected in the claims handling process. This usually starts with the adjuster, and if no ground is given, the attempt of influence is made all the way up the corporate ladder to the insurer’s vice president of claims. And, still facing a “denial of payment”, the ever-inventive broker then applies all his “powers of persuasion” to convince the insurer’s branch manager to pay the insured’s loss. In his anxiety to retain the rest of the insured’s business (14 vehicles, three restaurants, two toxic reclamation plants and a factory manufacturing wood-burning stoves), the broker points out how much premium he will lose if the insured goes elsewhere for coverage.

The branch manager, having determined that the insured’s 240% loss ratio is only that high because one of his restaurants burnt down (right after it was closed by the local health authorities), leaps up, like the commanding executive he yearns to be, and orders the claims department to “pay it”. The loss is paid “ex gratia” and, as such, the insured’s loss ratio and the brokers’ profit sharing will not be adversely affected – a good decision all round? Not so – once a loss is paid “ex gratia”, the insurer has set an undesirable precedent for broker and insured alike. What happens the next time the insured has an uncovered loss? What will the broker’s competitors say when their claims of a like kind are rejected by the same insurer? What about insureds who believe that they might be covered in similar circumstances? As I have yet to see an “ex gratia” clause inserted in any policy – let alone all policies – I believe the time has come to stamp out this practice of selective “business favoritism” before the cheese is indeed “gone”.