When purchasing an insurance policy, are consumers merely buying the right to sue? That’s likely the view of those who are convinced their carriers acted in bad faith by unfairly rejecting, intentionally low-balling, or maliciously stalling legitimate claims.
Such individuals—and their attorneys—often litigate not only to get what’s owed to them under their coverage, but also to reap punitive damages, if their state tort laws allow such added punishment against wayward carriers.
I learned a lot about the topic at a fascinating conference this past Leap Day called “Bad Faith and Beyond,” hosted by the Rutgers School of Law in Camden, N.J.
The conference, co-sponsored by the school’s new Center for Risk and Responsibility, featured as speakers and attendees both plaintiff and defense attorneys, as well as some who have argued both sides over the years, making for a lively give-and-take discussion of bad-faith claims in theory as well as in practice.
Good-faith claims resolution on the part of insurers remains the rule rather than the exception, but it’s the exceptions that get litigated. Regardless of whether an insurer is actually at fault, bad-faith claims can tarnish and even ruin a carrier’s reputation for fairness and top-notch customer service, especially with the way such disputes can go viral via social media.
The biggest concern for insurers these days is not necessarily individual bad-faith claims, but allegations of systemic abuse—an institutional transgression versus a sporadic screw up. In product liability terms, it’s more like a design defect than an isolated malfunction. In such instances, it’s not that some claims adjuster “went rogue,” but that the insurer’s entire claims operation is “rotten to the core,” according to the plaintiffs.
The question in any bad-faith dispute is not whether a claim is debatable but whether it has been evaluated reasonably, fairly, and objectively. Adjusters and special investigators have a right, even a duty, to be on the lookout for questionable claims—often supported nowadays by predictive analytics.
Insurers owe that level of due diligence to their other policyholders since payment of fraudulent or inflated claims ends up raising rates for everyone. But if adjusters are told, steered, or incentivized to consider claims with a closed mind, leaving them determined to find a way not to pay, that’s where an institutional bad-faith claim could arise.
Bad faith is a major issue with our industry because insurance—at least in the eyes of plaintiff attorneys—is seen as a special relationship that goes beyond a simple contract transaction, meaning there are more rigorous obligations on the carrier’s part. Fundamentally, it’s a promise to pay, and mutual trust lies at the heart of the bargain. Without it, the system cannot work.
In this context, insurers are held to a higher standard because of the role they play in society. It is a privilege of sorts to be in the insurance business (which, along with baseball, enjoys a rare exemption from many antitrust restrictions). Insurers get to share data and use standardized policy language, for example—a level of cooperation among competitors not enjoyed by many other businesses (yet permitted for the public good). The question is whether insurers abuse their privilege from time to time, which is where bad-faith claims arise.
In addition, insurance is often mandatory (in states that require the purchase of auto liability or workers’ compensation coverage, for example) or quasi-mandatory (with banks requiring coverage as a condition of granting a loan), making policyholders a captive market of sorts and leaving them theoretically at the mercy of insurers. As such, it’s as if insurance is quasi-public in nature, with the carrier-policyholder relationship perceived as closer to the government-citizen dynamic than to the private sector’s manufacturer-consumer model.
Indeed, the plaintiff attorneys at the conference kept emphasizing that insurance is not primarily a commercial transaction but is instead the sale of “peace of mind,” allowing buyers to sleep at night knowing that if they suffer a loss their insurer will make them whole again—or at least as close to whole as their policy limits and terms permit.
The claimant is portrayed by plaintiff counsel as vulnerable to the discretion and will of the insurer, since the carrier can really put a policyholder in a bad spot by carelessly, deliberately, or even innocently mishandling a claim. This is particularly problematic since, unlike with other “defective” products, one cannot simply buy a substitute in case of a breach. Individuals and small businesses cannot insure losses after the fact.
In addition, plaintiff attorneys point out that most buyers—not just those with auto and homeowners’ coverage, but also small businesses purchasing commercial policies without a full-time risk manager in place—are usually not lawyers, let alone experts in contract law and insurance.
And since relatively few policyholders ever file one let alone multiple claims, many have little or no experience with the claims management process. Plus, claimants are often vulnerable and emotional following a loss event. All of this puts them at a disadvantage in dealing with insurers that have full-time claims professionals representing their interests.
Meanwhile, insurers and the industry at large are the ones setting the terms and conditions of coverage, while policyholders (except for large commercial buyers) generally cannot negotiate much beyond how high of a deductible or limits to carry. That’s the reason why courts resolve ambiguities in policy language in favor of the policyholder—in this game, it’s the insurer that typically holds all the cards.
In this David-versus-Goliath context, the threat of bad-faith litigation is portrayed by plaintiff attorneys as quasi-regulatory, designed to discourage insurers from risking a lawsuit and even more costly bad publicity by dealing with claimants unreasonably or unfairly.
Of course, there is a more crass economic incentive for plaintiff attorneys to pursue systemic rather than individual claims—that’s where the big money is. Bad-faith claims targeting an insurer’s standard operating procedure hold the potential for much higher “pot of gold” punitive damage awards at the end of the litigation rainbow than any particular policyholder’s beef with their carrier.
Making matters worse for the industry is that defense attorneys at the conference appeared to be convinced that the bad-faith litigation system is stacked against insurers. Given the common lack of understanding about how the industry works among the general public, it’s likely that at least a few people on any given jury of an insurer’s “peers” will be skeptical about a carrier’s “good faith” even before hearing the evidence.
Defense counsel can try to weed out potentially hostile jurors in pre-trial selection, but it’s probable some will slip through who are already predisposed to believe the worst about insurers and side with the plaintiff. For that reason, many such claims are settled regardless of their merit so insurers can cut their losses and prevent wider reputational damage, defense counsel addressing the conference reported.
Eliminating a jury entirely might not be the answer, either, since judges can at times be as uninformed about insurance claims practices as regular jurors. Some have been openly hostile towards the industry, suggested one defense attorney at the conference, citing the possibility of facing a “hanging judge” in a bad-faith case.
Of course, bad faith is not a one-way street, given the estimates about the number of fraudulent claims that are either maliciously falsified by a hardcore criminal element in our society or involve padding of some sort by otherwise law-abiding policyholders looking to recoup their deductibles or past premium payments—a particular hazard in this slowly recovering economy.
Be that as it may, the bottom line is that insurers probably shouldn’t expect much sympathy if they are charged with bad faith. Perhaps the best insurers can do is to make sure they are able to document how their claims management systems, people, and processes give policyholders not only a fair shake but the benefit of the doubt. What more could a policyholder—or their attorney—ask for?
Sam Friedman is insurance leader with Deloitte Research, part of Deloitte Services LP in the U.S. He has been a Fellow with CLM since 2011 and can be reached at samfriedman@deloitte.com.