An Act of (Bad) Faith/Articles/CLM Magazine

May 01, 2009

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A claimant, an adjuster and an attorney meet at the courthouse… The beginning of a joke or a horrifying premonition? If you are denying—or even limiting—first party insurance coverage, justifiably or not, be prepared to face a bad faith claim. And a high-stakes claim at that.

Given the potential cost of contractual and punitive damages attending bad faith decisions against insurers, it pays for claims professionals to be on the alert from the get-go. Even when the insurance company is in the process of reasonably investigating a potential coverage issue, the insured or the insured’s counsel may start accusing the insurance company of bad faith.

Accusations of bad faith against insurers usually involve allegations that the insurance company has been unreasonably delaying either its investigation or announcement of its coverage position; that the insurer has been making unfair or excessive document requests or requests for examinations under oath; or that the insurance company has “already made up its mind” before the investigation is even complete. Such accusations may be accompanied by a formal letter of complaint to the state insurance department, which has the potential to raise eyebrows at all levels within the insurance company and create even more hassles for the claims person working in the trenches.

Avoiding bad faith claims by promoting “good faith” at all points in the investigation and claims handling process is key. So is adequately documenting good faith facts, in case anyone later questions how the claim was handled. It may also be expedient to hire a skilled and experienced insurance coverage attorney to assist with communications with the claimant, either directly or through materials ghost-written by coverage counsel and then printed on the insurance company’s letterhead.

The following four actions should set the stage for defensible denial of coverage and assist in combating bad faith claims.

Fully Reserve Rights and Preserve All Possible Defenses
Whenever there is any question regarding coverage or the amount of the loss, an insurer should always proceed under a full reservation of rights and preserve all possible defenses. It is sometimes difficult to know at the very beginning of a claim exactly which policy provision may come into play later, so be sure your Reservation of Rights letters include an appropriately broad “catch-all” provision. Language similar to the following may be suitable:

There may be other policy provisions, conditions, limitations, and exclusions that are applicable to this loss yet not explicitly set forth in this letter. This letter is not intended to be a waiver of any provisions, conditions, limitations, or exclusions in the policy. Read the policy carefully. No waiver or estoppel of any kind is intended nor should be inferred.

Thank you.

Lastly, be sure to provide the insured with updated Reservation of Rights letters as the investigation progresses and additional facts or coverage issues come to light. In order to minimize your coverage counsel from becoming a witness later in prospective litigation, Reservation of Rights letters should be signed by the company’s adjuster.

Employ Good Faith Claims Handling Practices
There are a number of basic claims handling practices that communicate good faith on the part of the insurance company. In addition, an adjuster should be familiar with claims handling regulations and any special time requirements in the state whose law applies to the loss.

Maintain an open mind while the investigation is pending. Do not start the investigation knowing what the result will be. Investigate the claim in a light favorable to the insured. Consider all possibilities and remember that both the preponderance of case law and juries will construe most “ties” in favor of the insured.

Prepare every written communication with the expectation that it may someday be viewed by a judge or jury. Do not presume that your claim file is privileged or confidential, even if you have labeled it as such. Privilege and confidentiality are legal determinations that are not your decision. Assume that your file will be read by others. Also assume that any embarrassing language will be seen on a very large screen by a curious and sometimes hostile jury. Accordingly, take care to document “good faith” in every written communication you prepare in relation to a file.

Always treat the claimant with courtesy and respect. Aside from basic customer service issues, your good faith and respectful treatment of the plaintiff will be good evidence against any later claim of bad faith claims handling. On the other hand, any treatment of the claimant that appears to be bullying could be viewed harshly in a later bad faith claim.

Promptly respond in writing to letters or calls from the insured or the insured’s representative. While it is important to respond promptly to telephone messages, a follow-up letter explaining the company’s position should always be sent.

View every letter and written communication as an opportunity to demonstrate your good faith and reasonable investigation. Your letters should be clear and always move the investigation process along. Be proactive. Keep the insured advised of all developments and remind him that the company is doing all it can to move the claim along and reach a determination as quickly as possible.

Provide the claimant, in a timely manner, a blank proof of loss form that complies with state law. Do not unreasonably insist on several rounds of proofs of loss if the information necessary to evaluate the claim fairly has been provided.

Grant the claimant’s reasonable requests for extensions of time in which to file proofs of loss, find replacement items, submit requested documents, or submit to examinations under oath. The goal is to be reasonable at all times. When the spotlight is on your actions and someone asks, “Who did that?” you want to be able to confidently raise your hand and say, “I did and let me tell you why.” Granting requests for extensions provides another opportunity to document the insurance company’s continuing good faith. Be sure to document that, while the company is pleased to accommodate the request for extension, the company does want to move the claim along as quickly as possible, and that the delay necessitated by the extension should never be unfairly claimed by the insured as a delay for which the insurance company should be responsible.

Deal Firmly But Respectfully with an Uncooperative Claimant
In this scenario, the insurance company has reserved its rights and informed the insured that there is a potential issue with coverage and requested documents and an examination under oath in order to investigate the claim. The insured resists producing the requested documents and does not provide dates on which the examination will take place.

This insured needs to be politely reminded that the insurance contract’s provisions regarding duties in case of loss are preconditions to any potential coverage and that, if the insured continues to resist complying with its contractual duties, it may lose whatever rights it might have had under the policy. Of course, a documented pattern of the insured’s non-compliance with contractual duties could support denial of the claim on that basis, if such a denial is warranted, and should provide a very powerful defense to any future claim of bad faith.

Clearly State that an Investigation Does Not Mean a Denial
Some claimants may insist that they need not produce documents or otherwise cooperate with the insurance company’s investigation because the company has already announced it has a coverage question and therefore nothing the insured can do will change the company’s mind. It is imperative that communications with the insured during the claims handling process make clear that the investigation is continuing and that the company has not yet reached a decision, but also that the company would like to conclude the investigation as soon as possible.

In all claims, remember the rule of reasonableness. Bad faith exposure can be minimized by maintaining good communication with the insured, treating the insured respectfully, moving the claim along as quickly as possible, and maintaining a claims file that demonstrates the company’s good faith efforts throughout the process.