The Murky Waters Between “Good Faith” and “Bad Faith”

Theresa A. Guertin | SDV Insights | August 1, 2019

In honor of Shark Week, that annual television-event where we eagerly flip on the Discovery Channel to get our fix of these magnificent (and terrifying!) creatures, I was inspired to write about the “predatory” practices we’ve encountered recently in our construction insurance practice. The more sophisticated the business and risk management department is, the more likely they have a sophisticated insurer writing their coverage. Although peaceful coexistence is possible, that doesn’t mean that insurers won’t use every advantage available to them – compared to even large corporate insureds, insurance companies are the apex predators of the insurance industry.

In order to safeguard policyholders’ interests, most states have developed a body of law (some statutory, some based on judicial decisions) requiring insurers to act in good faith when dealing with their insureds. This is typically embodied as a requirement that the insurer act “fairly and reasonably” in processing, investigating, and handling claims. If the insurer does not meet this standard, insureds may be entitled to damages above and beyond that which they could otherwise recover for breach of contract.

Proving that an insurer acted in “bad faith,” however, can be like swimming against the riptide. Most states hold that bad faith requires more than just a difference of opinion between insured and insurer over the available coverage – the policyholder must show that the insurer acted “wantonly” or “maliciously,” or, in less stringent jurisdictions, that the insurer was “unreasonable.”1

There are, of course, many different types of insurer behavior which exist in the murkier waters between “good faith” and “bad faith” of which policyholders should beware. The following list provides some examples of this questionable behavior.

  • Aggressive use of case law. When new case law is published, carriers race to the smell of blood and attempt to implement the law in new, overly aggressive ways. We saw this after the New York Court of Appeals issued its decision in the Burlington2 case in 2017. The true impact of the decision was fairly limited; the court found no coverage for an additional insured where it had been judged that the named insured was not at fault and the additional insured was solely at fault. That didn’t stop insurers from attempting to use Burlington to deny defense coverage to additional insureds. Policyholders should be sure they review insurer communications thoroughly and evaluate whether the insurer’s basis for disclaiming coverage is valid and appropriate.
  • Changes to insurer personnel. For policyholders who have been with the same insurer for years, there may be a sense of security that claims will be investigated, defended, handled, or settled a certain way. While it is certainly beneficial for corporate insureds to develop partnerships with their insurers, risk managers should always be on the lookout for change which could spell disaster. Sometimes a personnel change – especially when it comes to “legacy” claims like asbestos matters – could signal a shift in the insurer’s treatment of those claims.  Risk managers should insist on dedicated claims personnel whenever possible and hold regular stewardship meetings to maintain relationships and ensure that the insurer is aligned with their goals and strategy as much as possible.
  • Shifting Retroactive Dates. Claims-made policies, such as professional, directors & officers, and pollution insurance, often contain retroactive dates which limit how far back in time the insurer’s obligation to pay attaches. Sometimes, at renewal, the carrier may bump up that date to the start of the policy period – a change that may go by undetected, but can result in a major coverage gap. Retroactive dates should almost always be as far in the past as possible, coinciding with the start of the insured’s business if feasible or, at least, as far back as potential losses may have occurred which would give rise to current liabilities.
  • Refusal to disclose policies, claim numbers, and other non-privileged information. Upstream parties, such as owners and general contractors, have a right to see a copy of the policy on which they have been added as additional insureds. Insurers sometimes inappropriately refuse access to the policy, which hampers the additional insureds’ ability to pursue their rights. Similarly, other non-privileged information stored by the insurer should be accessible to the insured, including loss runs and other claims data. Redacting sensitive information (i.e., premiums) is acceptable, but complete withholding of policies on which you are insured is not.
  • Delay by document request. Another common tactic employed by insurance companies is delaying their coverage analysis until substantial documentation has been submitted to the insurer. Although this may be understandable in the first-party context (i.e., providing back-up documentation to support the cost of repairs for a builder’s risk claim) it is rarely valid when the insured is seeking defense from a liability insurer. Voluminous document requests for contracts, communications, job-site reports, and the like sometimes serve as a hidden means for insurers to delay providing defense, which should be determined based on the complaint’s allegations. 

Staying safe in shark-infested waters takes an educated and dedicated team of professionals. Risk managers should stay afloat by keeping up-to-date on current market and legal developments.

What Will a Denial of Costs Actually ‘Cost’ You?

Lori Bethea | Chartwell Law | September 6, 2019

Jennings v. Habana Health Care Center, 183 So. 3d 1131 (Fla. 1st DCA 2015), has been the law for almost five years, but many claims adjusters are still routinely denying entitlement to costs when responding to a petition. If you’ve been in this industry for a while and feel confident you have provided the requested benefits timely, you know it’s second nature to answer a petition indicating “costs and fees are not due or owing.” However, following the Jennings opinion, this blanket denial of entitlement to costs can have significant consequences, including exposure for attorney’s fees where fees would not have otherwise been due.

In Jennings, the First District Court of Appeal held that a claimant can be entitled to litigation costs even when the requested benefit has been timely provided. A quick recap of the facts in Jennings:

  • September 9, 2014 – claimant filed a PFB for authorization of the orthopedic evaluation;
  • September 11, 2014 – the carrier received the claimant’s PFB; and
  • September 12, 2014 – the carrier notified the claimant’s attorney of an appointment with an orthopedic physician (to occur on September 15, 2014).

The JCC found the claimant was not entitled to costs because the employer/carrier timely responded to the petition pursuant to §440.192(8) and §440.34(3)(d), F.S., and, therefore, she was not the prevailing party. Unfortunately, the First District Court of Appeal found that timeliness is irrelevant in addressing entitlement to costs, as the statute specifically distinguishes between entitlement to costs and entitlement to attorney’s fees. Pursuant to §440.34(3), F.S., “if any party should prevail in any proceedings before a judge of compensation claims or court, there shall be taxed against the non-prevailing party the reasonable costs of such proceedings, not to include attorney’s fees.” The court found that, pursuant to the statute, there is not a time limitation for determining entitlement to costs and, based on the record, the claimant was the prevailing party since her petition included certification that she made a good faith effort to resolve the dispute over benefits, prior to filing her petition, and the employer/carrier did not challenge that certification.

In light of this decision, it is crucial for adjusters to take an extra step, upon receipt of a petition, to confirm whether or not the claimant made a good faith effort before filing the petition so the adjuster can accurately respond on the issue of cost entitlement. If the claimant made a good faith effort, the carrier should concede entitlement to costs associated with the filing of the petition even if the benefit is provided timely. Otherwise, entitlement to costs remains an issue to be litigated, which has recently led some judges of compensation claims to award attorney’s fees for securing the “benefit” of proving entitlement to costs. In these cases, denying cost entitlement (where costs were due) resulted in carriers paying thousands of dollars in attorney’s fees for benefits they timely provided.

Insurance Claim Payment Delay Following Expected Disasters is Epidemic

Chip Merlin | Property Insurance Coverage Law Blog | August 19, 2019

Crawford has acknowledged that the insurance industry it serves is not living up to its good faith claims obligation in a recent publication. Here is the confession about the 2017 Hurricane season which it reported in Today’s Large & Complex Claims Landscape: Preparing for the Perfect Storm:

To adequately respond to today’s evolving catastrophe landscape, insurers need to be prepared with contingency plans for their contingency plans to make sure the “perfect storm” of 2017 doesn’t happen again. Through streamlined, coordinated team response, expert scenario planning and the vast knowledgebase of worldwide claims expertise, insurers can rest easy knowing they’re getting the best possible resources working on the frontlines of catastrophe.

This scenario should never have happened in 2017 or 2018. We had four hurricanes in Florida alone in 2004, and then three major hurricanes in 2005. The insurance industry, including Crawford, learned that it needed extra capacity for adjustment of their customers losses. Field adjusters needed greater line item authority to pay for significant partial amounts of undisputed loss. Florida requires insurers to have these plans in place, but these plans must be made with a wink and a nod that they are being followed or expected to work.

The typical business interruption adjustment does not start for months. Insurers no longer have staff adjusters who have any training about determining the amount owed for a coverage they sell with virtually every commercial policy issued. Instead, the entire claim industry sends their customers’ business interruption claims to third party accounting firms who rarely go to the business loss site, but then ask for financial information months following a loss. Why don’t insurance companies have these accountants immediately go to the business, speak with the policyholders, their bookkeepers, managers and accountants on site and then issue a payment right away? Can you imagine any other industry in the emergency response business saying, “hey, sorry this happened to you, thanks for telling us and we will fix your problem six months from now?”

Crawford knows that quick response is needed for business interruption claims:

Timely, expert response is critical, particularly as business interruption claims account for a larger percentage of loss than property damage. According to one 2015 report, the average large BI property insurance claim now exceeds $2.4 million, 36 percent higher than the average property damage claim.

The report also noted:

‘Bringing forensic accountants into the process early on can ease the ultimate cost burden on the insurer,’ said Morgan. ‘We can assist with the mitigation planning. . .we can be instrumental in [key] decisions early on in the process.’

Furthermore, the value of a closely aligned adjusting team—from accountants to adjusters to outside expert consultants—cannot be oversold when it comes to cost mitigation. Whether or not the team works together on the ground or maintains communication remotely, the 2017 hurricane season demonstrated that a dedicated, knowledgeable team response is essential for fast recovery, with the best possible outcomes for the insured and the insurer.

The insurance claims industry knows what to do. It simply does not pay enough people to do it or it fails to take the actions needed when the moment of truth comes for delivering prompt adjustment.

Meanwhile, the business customers are drained of cash and the executives in the claims industry ignore the obvious ethical problem—they are knowingly delaying cash claim benefits needed right away because of their intentional delay of investigating and adjusting ongoing business interruption losses. Maybe these claims executives should pretend to have no cash income coming personally to them for six months after a hurricane. They will better empathize about why their commercial customers are mad as hell about claim delay.

I encourage readers of this blog to take a few minutes to read through the Crawford report. For public adjusters and policyholders with Crawford claims personnel working their claims, you may want to send this to them as a reminder they have an obligation for prompt payment of benefits and the only way to do that is by giving enough time, effort, and authority to those to work the claim properly.