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Common Pitfalls of Extra-Contractual Risk Exposure

How to spot potential problems, including those caused by COVID-19

May 06, 2021 Photo

In recent years, there have been changes across jurisdictions, expanding the scope of potential liability for bad-faith damages. In addition, there are challenges in navigating the continued erosion of the attorney-client privilege in bad-faith litigation. We also cannot forget how the COVID-19 pandemic has impacted litigation, creating uncertainty as to when civil trials will commence with regularity.

Savvy plaintiffs’ attorneys are looking to build up the claim value by posturing the claim early on for potential extra-contractual exposures. This all starts with the adjuster’s handling of pre-suit demands. Let’s look at some of the recent trends and provide practical solutions for how to avoid common pitfalls from acknowledgement of the claim through resolution.

Pitfalls and Pandemic

One area in which bad-faith claims arise is when an insured is exposed to an excess judgment. In that instance, plaintiffs’ attorneys often argue that the carrier should have settled the claim had it acted honestly and fairly toward the insured.

Carriers, via their adjusters, have an ongoing obligation to act in good faith during the life of the claim. They must take the appropriate actions to protect the interests of the insured when evaluating and settling claims. Bad-faith claims can come to life when a carrier fails to defend or reasonably settle a third-party liability action based upon a belief that a valid defense to insurance coverage exists.

The most common pitfalls arise in the context of timely and clear communication with all parties, continuing to collect all critical information needed to evaluate the claim and coverage defenses, handling multi-conditional demands, appropriate handling of claims involving multiple claimants, responding to civil remedy notices and statutory insurance information demands, timely notice to any potential excess carriers, and navigating the potential future production of communications between outside counsel and the carrier.

Additionally, the COVID-19 pandemic caused great uncertainty surrounding when civil trials will resume with any sense of normalcy. With that in mind, carriers have noticed an upward trend in the volume of time-limited settlement demands. These demands are also being made much earlier, often right after an incident occurs and without the opportunity for a complete investigation, or without regard to the severity of claims or damages.

Since the pandemic, many insurance carriers have implemented mandatory or voluntary work-from-home policies, which can complicate response times. It is critical to prioritize any time-limited demand to avoid the potential pitfall of an untimely response. If you need more information to evaluate the claim, seek an extension before the original settlement demand deadline expires, but be specific about what information you need and why you need it. In addition, always keep the insured informed of any demand received as well as your response to it.

Good-Faith Claims Handling Practices

When a claim is first acknowledged, carriers and claims professionals need to be proactive, timely, and diligent in investigating and handling it. As we all should know, communication is king. It’s critical to keep insureds informed of your efforts and potential excess exposures; and apprised of all settlement opportunities, including all demands made. Prompt and continued communication with insureds is important to not only keep them advised as to the status of the claim, but also to create a record demonstrating good-faith claims-handling practices. With that said, communicate clearly and simply. By remembering that a judge or jury may ultimately read the file, claims professionals must remember to be professional, accurate, and proactive with all communications.

Additionally, now more than ever, internal and external collaboration is essential since many claims professionals are still working remotely. Internally, managers and supervisors are a great source of information and can provide the benefit of perspective and experience to ensure good-faith handling of a claim. Externally, it is imperative to ensure that timely notice is given to any excess carriers of a claim that potentially implicates an excess policy and ensure they are kept apprised throughout the process. Here are a few other suggestions for ensuring good-faith claims handling.

Thorough Investigation. It is important to conduct a diligent and thorough investigation early, including requesting and gathering all critical information needed to evaluate both coverage and liability from the insured, fact witnesses, and claimants. The manner in which an investigation is conducted, both as it relates to liability and coverage issues, depends on the facts and circumstances of the particular claims being asserted against the insured, the procedural posture of the claim at the time of investigation, and the availability of information and documents, among other factors. Adjusters should maintain the timely communication chain without large and unexplained time gaps in the investigation.

Evaluate Coverage. If there are potential coverage issues, it is important to act promptly to resolve them, including initiating a declaratory judgment action, if necessary. In bad-faith litigation, it is important to note that not only is the claim file potentially discoverable, but also any potential communications made with outside counsel. All correspondence related to a claim should be made with the expectation that it may be discoverable.

Organization Is Key. Organization and communication go hand in hand. Keeping a well-organized claim file includes calendaring all time-limited settlement demands and memorializing within the claim notes all requests for documentation and information from all parties. It is also important to create a record for things that may not be documented, such as verbal communications with the claimant, plaintiff’s counsel, the insured, and the insured’s outside counsel.

Evaluating the Claim Value. As the investigation of a claim unfolds and more information becomes known, it is important to document the information being considered and evaluated. Should facts ever develop that warrant a tender of limits or payment of an undisputed amount, the payment should be made and the file should be documented either with the settlement or the attempts made at settling. Do not delay a settlement offer simply to complete an investigation. Any information used or considered in determining the offer should also be included in the file.

Ultimately, when navigating the risks and uncertainties surrounding extra-contractual exposures, it is important to be mindful of the common pitfalls and to consider these tips when acting in the best interest of an insured. 

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About The Authors
Multiple Contributors
Heather Gutkes

Heather Gutkes, CLMP, IICRC WRT, is the commercial auto and liability unit manager at Amerisure. hgutkes@amerisure.com

Sanaz Alempour

Sanaz Alempour is an attorney and partner at Cole, Scott & Kissane.  sanaz.alempour@csklegal.com

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