Bad faith legislation: Good for insurance policyholders?

William G. Passannante | PropertyCasualty360 | September 12, 2019

When an insurance company violates its duty of good faith and fair dealing, a policyholder should have a remedy for the insurance company’s breach of duty.

In order for insurance purchasers to receive the benefit of their insurance policies, bad faith behavior by insurance companies requires that a remedy be available. A July 2019 NU PropertyCasualty360 column by a lobbyist for the insurance industry articulated an insurance industry creed: “Plainly and simply, bad faith legislation is solely for the benefit of the plaintiffs’ attorneys.”

Is that somewhat alarmist declaration really so?

Skewed incentives require bad faith balancing

When an insurance company violates its duty of good faith and fair dealing, should a policyholder have a remedy for the insurance company’s breach of duty? The answer must be “Yes.” Bad faith legislation, like common law duties, helps policyholders obtain the benefit of the policies they buy. In the absence of such a remedy, insurance companies will breach their obligations with virtual impunity, because breaching their duties will be almost without cost.

Commentators addressing the damages available for breaches of contracts have been noting the need for a remedy for over half a century. When a contracting party willfully breaks its promise to perform because performance, as promised, would cost more than the damages recoverable in an action for breach of contract, courts have shown a willingness to take the willfulness of the breach into account in determining the damages awardable against the breaching party.

Because the insurance product is in the nature of an aleatory (that is, uncertain) promise — the insurance policy is sold and paid for long before performance of the insurance company is needed — an incentive is created for an opportunistic breach of that long-term promise to pay. Over the years commentators have observed that this “money for promise” arrangement in insurance provides a powerful strategic tool for insurance companies to use against their customers.

The argument that insurance purchasers should have remedies that balance this distorted strategic advantage has been updated continually, including this year, as noted in the Restatement of the Law of Liability Insurance. Though insurance companies and their lobbyists would prefer that policyholders not have redress for such wrongs, such redress remains available. Even the American Law Reports (ALR), not a policyholder advocate, concedes as much:

[I]t has been held that the intentional, bad-faith refusal of an insurer to make payments due under an insurance policy constitutes a tortious interference with a protected property interest of its insured, for which damages may be recovered to compensate for all detriment proximately resulting therefrom, including economic loss… resulting from the conduct or from the economic losses caused thereby. Further,… it has been held that,… punitive or exemplary damages may be recovered from an insurer guilty of wrongfully delaying or refusing to make payments due under an insurance contract, in addition to the awarding of consequential damages. [What Constitutes Bad Faith on Part of Insurer Rendering It Liable for Statutory Penalty Imposed for Bad Faith in Failure To Pay, or Delay in Paying, Insured’s Claim — Particular Conduct of Insurer, 115 A.L.R. 5th 589.]

Consequential damages and attorneys’ fees

Among others, three types of damages available to policyholders help correct the strategic imbalance between insurance company and policyholder at the time an insurance claim is made:

  1. Damages for a failure to settle;
  2. Recovery of attorney’s fees in the insurance recovery action; and
  3. Consequential damages from the breach of the insurance policy.

Even New York, which remains a jurisdiction protective of insurance companies, recognizes claims against insurance companies for bad faith failure to settle. In New York, “a bad faith case is established where the liability is clear and the potential recovery far exceeds the insurance coverage.” [DiBlasi v. Aetna Life and Cas. Ins. Co., 147 A.D.2d 93, 98 (App. Div. 2d Dep’t 1989).]

[T]he law imposes upon the carrier the obligation of good faith which is basically the duty to fairly consider the insured’s interests as well as its own in making the decision as to settlement.  In arriving at a workable standard so that the concept could be clear to a juror,…  Was it highly probable that the insured would be subjected to personal liability? [DiBlasi, 147 A.D.2d at 99.]

Further, many jurisdictions have awarded attorneys’ fees to policyholders forced to litigate with their insurance companies when coverage was clearly indicated. A policyholder “who is ‘cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations’ and who prevails on the merits, may recover attorneys’ fees incurred in defending against the insurer’s action.” [Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979)]. In fact, as my colleague Vivian Michael and I previously have written, most states provide some form of potential recovery of attorneys’ fees when a policyholder is forced to litigate with its insurance companies.

Consequential damages for breach of an insurance policy also are available to policyholders facing wrongful denials. [See Bi-Economy Market, Inc. v. Harleysville Ins. Co., 10 N.Y.3d 187 (2008).] In the Bi-Economy Market case, an insurance company’s long delay followed by partial payment of a claim following a fire loss was found to have led to the company’s death. The New York Court of Appeals awarded consequential damages.

Most policyholders battle adverse claimants and the plaintiffs’ bar. The availability of remedies for insurance company breaches of duty is far from a radical benefit solely for plaintiffs’ attorneys. Rather, in the system of risk transfer embodied in the Western insurance and liability markets, the availability of such remedies corrects a strategic imbalance and un-tilts the playing field somewhat, permitting policyholders to obtain the benefits of the insurance product that they paid hard-earned premium dollars to obtain.

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.

Insurance Companies Must Perform in Good Faith Regardless of Their Customer’s Imperfect Actions

Chip Merlin | Property Insurance Coverage Law Blog | September 21, 2018

Insurance companies routinely argue for immunity from their wrongful actions because acts of their customers are not perfect following a loss. Policyholders are not claims specialists. Policyholders generally are not in the insurance claims business much less the civil litigation business which the insurance industry is the number one participant by far.

In a third party “bad faith” case, the Florida Supreme Court yesterday reiterated these practical issues by stating:

To take the Fourth District’s reasoning to its logical conclusion, an insurer could argue that regardless of what evidence may be presented in support of the insured’s bad faith claim against the insurer, so long as the insurer can put forth any evidence that the insured acted imperfectly during the claims process, the insurer could be absolved of bad faith. As Harvey argues, this would essentially create a contributory negligence defense for insurers in bad faith cases where concurring and intervening causes are not at issue. We decline to create such a defense that is so inconsistent with our well-established bad faith jurisprudence which places the focus on the actions on the insurer—not the insured.1

It is unfortunate that we call these cases “bad faith” cases when they are really “lack of good faith” cases. Just read the ethical rules that historically called for insurance companies and their employees to act in the “utmost of good faith and fair dealing” with their customers.

My mother used to remind me that “Chip, two wrongs never equal a right.” The above-mentioned ruling emphasizes this idea. I often find myself reminding attorneys in my firm, as well as myself, that this is true regardless of what the other side is doing in a lawsuit, appraisal or insurance claim. Professionalism and ethical behavior call for honest, legal, proper and civil conduct regardless of how poorly a party on the other side behaves. Still, it is sometimes difficult to turn the other cheek, but it is also not proper for a professional to get walked over by those using improperly aggressive and unprofessional behavior.

I am writing, researching and preparing for a speech at the Georgia Association of Public Adjusters Association (GAPIA) Fall Meeting in Atlanta next week regarding insurance and public adjuster professionalism. My belief is that the most successful adjusters for insurers or pubic adjusters for insureds in the long run are extraordinary examples of consummate professionals. They know much more than others, are vested in becoming personally even better at what they do and are above the fray of any one claim.

These extraordinary performing claims handlers appreciate the other side and understand the other point of view. They look at the policyholder just as importantly a customer following the loss as before and that the insurance company is an important part and has an important societal responsibility of taking care of the policyholder and claimant’s problems promptly. They look at their personal insurance claims work as involving the public trust, do not game the system and look to act fairly, regardless of personal incentives and company objectives not aligned with honesty or fairness.

From the insurance company standpoint, claims educator Ken Brownlee CPCU wrote in Winning By The Rules:

Why, then, do so many insurers and their claims representatives treat third-party claimants and injured employees as if they were an enemy? Why do so many third-party claimants and employees seek attorneys to represent them in their claims against the insurer? Could it be that insurers have been treating these product users as if the insurer were in charge instead of the injured or damaged party?

If adjusters got back out on the streets and met with folks immediately after their accidents or losses, which is what used to occur forty of fifty years ago, the public might begin to trust the insurance industry again. It might not be so prone to sign up with those television-advertising attorneys. It might also reduce the number of lawsuits that have to be defended at great expense, because when the adjuster knows the claim is valid it would be quickly settled, and when the adjuster knew it wasn’t valid, the denial would be quick, authoritative, and well-documented.2

Little has been written about public adjusters and their obligations to the insurance industry, the public, and their clients. There are very fine public adjuster organizations now at state level promoting professionalism. NAPIA certainly has been stalwart in the growth of licensing the public adjusting profession. It has also been instrumental with The Institutes regarding certification for those seeking to be recognized for knowledge and expertise in their public adjuster profession.

Yet, I tell my Merlin Law Group lawyers to vet every case from every public adjuster. It is not just that we have an ethical obligation to do so. Some public adjusters do not tell their clients what they estimate the loss amount to be because they either overestimate the loss on purpose and do not want to create unrealistic expectations, or they are so poor at negotiating an exact estimate of loss that they leave fairness behind to collect their fee quickly, regardless of the consequence to the client policyholder.

Sometimes, both the public adjuster and insurance company adjuster play the Xactimate game of “who knows what the magic method is to control the Xactimate process” for determining loss. Sometimes, outcome-oriented engineering opinions from either side seem to be the critical suspect issue between the battling interests.

As lawyers for the policyholder, there is one way we now look at to build and repair damaged buildings, and that is legally. What are the contractor specifications to do the job? What is required for labor by the materials needed to be used to make the repair? What do the manufacturer’s specifications call for? What do laws require for safely performing the demolition and construction? What taxes and permits have to be paid? What professionals have to be hired to do the job legally and practically? What do Building Codes call for? What is required so that somebody inspects the job to ensure the people doing the job have done it right—meaning legally and to the specifications demanded?

I now often consult with and hire contract specification experts because there is so much gamesmanship and ignorance displayed by overworked adjusters and public adjusters that I cannot trust either side to get the construction scope and pricing right. I am finding myself saying to experts, “are you sure?” “Are you saying this just because you think I want to hear it?” “Please, do not embarrass me in front of a jury or judge—is this your honest and hard worked upon opinion?”

Again, two wrongs do not make a right! The insurance company is the long-term entity required to always investigate, evaluate and promptly settle or pay claims in good faith. I think that is the practical point of the Florida Supreme Court case from yesterday. Still, the rest of us also owe the public and our clients a duty to do our jobs as professionally as we can.


Thought For The Day

“Always place the best interests of your clients above your own direct or indirect interests.”
—True Blue Life Insurance Code of Ethics