To successfully avoid and defend against bad faith, insurers must focus on four key areas of exposure: coverage, investigation, evaluation, and initiating settlement.
Every adjuster knows that the first step in handling any claim is to confirm coverage. This usually involves ordering a copy of the policy or putting together forms and endorsements of the policy that reflect what was actually issued to the policyholder. Once that task is done, the next step is to review the coverages, including determining whether a court would be likely to hold that there may be coverage for the particular claim and so require a defense to be provided.
In order to avoid bad faith claims, further steps are required by case law. Here is a case that illustrates the need for further steps in the process of confirming coverage, in order to avoid bad faith.
An automobile liability insurance company’s claim file contained multiple entries by adjusters and their supervisor—as well as by other representatives retained by the insurance company—that a “permissive user exclusion” should apply to the developing facts of a particular underlying claim against several policyholders.
However, there was no testimony offered at trial and there was no document in the claims file showing that the insurance company representatives reviewed the actual forms and endorsements issued to the policyholders, which did not contain the permissive user exclusion.
Simply put, there was no language in the insurance policy that stated all liability coverage was excluded for the policyholders whenever they did not give permission for another person to use their vehicle. A brief review of the policy would have shown this clearly.
A jury verdict found the insurance company in bad faith in that case, which included delays in making a settlement offer when the company’s representatives thought there was no coverage.
The surest way to avoid bad faith over a potential coverage dispute is to retain experienced coverage counsel and require a report from them. The report should focus on not only the opinions of counsel as to how a court is likely to rule on the coverage question, but also address the actual policy forms and endorsements along with all other facts known at the time of the report. For a jury in a bad faith case, there is no clearer way to show that insurance company representatives acted reasonably and in good faith concerning their coverage questions.
A lot has been written about the so-called “duty to investigate” on the part of insurance companies, liability and first-party insurers alike. What this means is of course translated into concrete results in actual cases decided in particular jurisdictions. Some requirements are universal, however.
An investigation must lead to an evaluation in any claim. Courts give no weight to investigative steps that do not lead to the insurance company’s evaluation of the claim.
For example, if the third party’s claim involves an automobile accident with grave injuries, there should be a demonstrable reason other than expense for not retaining an independent adjuster when there is no local claims office, or for not retaining defense counsel to investigate the law under which the claim is made against the insured.
Here is everything you need to know about what the courts require of adjusters who are evaluating claims for insurance companies: Evaluate the claim how jurors would likely decide the issues.
Third-party bad faith claims can be avoided—or if made, far more easily defended—when the testimony of adjusters, coverage counsel, defense counsel, expert witnesses, and the documentary evidence contained in the claims file all tend to establish that the insurance company representatives evaluated the claim after they asked and obtained favorable responses to two key questions: “Is liability probable?” and “Are damages great?”
The majority of the courts that have decided bad faith cases indicate that liability is “probable” whenever a jury is more likely than not to determine that the policyholder or other insured is liable to the injured claimant. Damages are seen as “great” by the courts when damages are reasonably evaluated to be awarded by a jury in excess of the policy limit on the liability policy.
Illustrating how to avoid bad faith in addressing the insured’s underlying liability exposure in particular, a jury found bad faith in a case in which a liability insurance company’s claim file and the testimony of its representatives did not reflect an awareness that there were court cases decided two and three decades before the date of accident, interpreting the statute under which the policyholders’ liability was claimed. The claim file did not show that representatives of the company had read the opinions in those cases before the insured’s underlying liability went to trial. However, the claim file did reflect the personal opinions of the company’s representatives that the liability risks facing the insureds were minimal.
First-party bad faith claims also can be avoided and more easily defended when they are made if the adjusters and expert witnesses evaluate damages as a jury would evaluate damages. Ask yourself, “What would a jury likely do?” In the area of first-party insurance claims, perhaps more so than in the handling of third-party or liability claims, the focus of avoiding bad faith should be on what a reasonable figure to pay for all or any part of the claimed damages would be.
More specifically, in the area of first-party claims handling according to case law, a policy-specific question arises on whether any part of the claim is actually or potentially covered. In first-party claims handling, then, an integral part of claims handling in order to avoid bad faith claims is to ask, “What damages would a jury award for the parts of a covered first-party claim that might be separable from the rest of that claim?”
In sum, the identical key in handling both third-party and first-party insurance claims is this: Evaluate the claim the way that jurors would likely decide the issues.
Initializing Settlement: When and How
In many jurisdictions, the courts require that liability insurers ask whether their insureds’ liability is probable and whether damages are great. These are the same questions that courts require to be asked in the handling of all kinds of insurance claims, not just liability insurance claims.
In the handling of liability claims, however, if the answers to both of these questions come back, “yes,” then many jurisdictions impose a so-called further “duty to initiate settlement negotiations.” The courts absolutely do not require liability insurance companies to initiate settlement negotiations by offering their policy limits. Many attorneys representing injured claimants would have the law require that policy limits be offered whenever liability is probable and damages are great, or else the law should impose bad faith, extracontractual liability on the liability insurance company. No court has ever imposed such a requirement.
Instead, courts have imposed a requirement to initiate settlement negotiations. Parenthetically, in June of 2012, a panel of the Ninth Circuit Court of Appeals tried to stretch the requirement from “initiate” to “effectuate” in a decision under California law. However, even in that case, the requested jury instruction in the trial court was that the insurance company owed a “duty to initiate settlement negotiations,” not to “effectuate” them.
In practice, the courts have uniformly left it to the third-party insurance companies to determine by their conduct the actions that qualify as initiating settlement negotiations, short of offering policy limits. In other words, the courts have left this determination to a case-by-case platform.
How to initiate settlement negotiations can include universally recognized behaviors by and on behalf of insurance companies. These behaviors include:
Disclosing the company’s policy and the limits on that policy, whenever doing so would or could make it easier to negotiate settlement of the underlying claim against the insured;
Asking the injured claimant or her lawyer about their demands, and why;
Offering something toward settlement of the claim. (Even though the current discussion in this article is necessarily focused on the handling of third-party claims, always offer to pay for covered parts of the claim under a first-party policy, a rule of conduct that applies equally to the insured’s own claim to coverage, if any, under a liability policy.); and
Be open at all times to the injured claimant’s and her counsel’s settlement demands and their own settlement conduct.
Defending Bad Faith Claims
A company’s claims file should be Exhibit One in any bad faith litigation. This observation is based upon a review of nearly 5,000 cases and statutes and other authorities on insurance bad faith claims. If your claims file is not your company’s Exhibit One, then most likely it means that the handling of that claim left your company exposed to bad faith or extracontractual damages, including penalties and possibly punitive damages.
Involve the same defense team that you involved in the handling of the underlying claim early on—both adjuster and counsel—to the extent that there are no conflicts that would prohibit this practice. They will already be familiar with the facts and the laws of the underlying claim. If necessary, they are in a good position to “try a case within a case.” In other words, to try the facts of the underlying claim if necessary to establish the defensible exposure of the insurance company to the later bad faith claim.
Finally, when retaining experts, you should consider their experience in reviewing the handling of the entire claim. This usually requires the expert’s familiarity with such industry practices as to how the claim file is put together and the level of follow up displayed in the file on requests to claimant’s counsel for damages information.
Dennis J. Wall is an attorney, expert witness, and consultant on the subjects of insurance coverage and insurer bad faith. He has over 34 years of insurance practice and can be reached at (407) 699-1060, DJW@dennisjwall.com.