Jeff Sistrunk | Law 360 | March 21, 2016
For policyholders, bad faith claims are perhaps the strongest tool to deter insurance companies from denying coverage without proper justification or unreasonably delaying its decision on a claim. However, definitively proving that a carrier acted in bad faith can often be an uphill battle.
Here, experts dive into what types of evidence can strengthen a policyholder’s bad faith case.
Inconsistent Communications
If an insurance company has taken a different position on coverage for a claim in internal communications than the one it has expressed to the policyholder, records of those communications could provide compelling evidence of bad faith, according to experts.
“This may sound like I am stating the obvious, but spend the time, and look aggressively for internal documents and communications, and then compare them to what the insurance company is saying externally,” said Pillsbury Winthrop Shaw Pittman LLP partner Joseph D. Jean. “For insurers that are acting in bad faith there is often a dramatic difference, and that can be one of the best indicators of bad faith, because a jury or a court can see firsthand that the insurer is elevating their own interests above the policyholder’s.”
Jean’s client, pipe-joining company Victaulic Co., won $46 million in punitive damages at trial last summer in its lawsuit against American International Group Inc. subsidiaries over coverage for product liability actions by presenting evidence showing that the insurers flip-flopped in their coverage positions.
Witness testimony and discovered materials revealed that AIG had, at certain times, reached conclusions on coverage internally, then turned around and told Victaulic something different.
In one instance, according to court records, an AIG claims handler found that a claim against Victaulic constituted a covered occurrence. When AIG wrote to the company 15 days later, though, it indicated that the insurer didn’t have enough information to determine whether an occurrence had happened.
“That case involved a perfect example of the carrier’s internal communications being 180 degrees opposite of what it told the policyholder,” Jean said. “We had to fight tooth and nail to get the insurer’s claim files and internal documents to prove this.”
Contrary Claim Decisions
When faced with an uncooperative insurance company, it is important for a policyholder to review how the insurer has responded to its past claims for coverage under the same policy or similar policies, experts say.
“If you have filed multiple claims with an insurer and have had the insurer handle one differently from the others, demand a clear explanation as to how that happened,” said Sherilyn Pastor, leader of McCarter & English LLP’s insurance coverage group. “Does [the insurer], for example, apply a different and more critical level of inquiry and analysis when the amount at issue is greater?”
If possible, policyholders should also obtain records regarding how a carrier has handled claims filed by other similarly situated insureds, according to attorneys.
“Certainly, having access to claims decisions that a carrier has made for other policyholders will be helpful in developing a bad faith case,” said Lowenstein Sandler LLP partner Lynda Bennett. “If a carrier paid a claim in one case and not in yours, that can be helpful.”
In some jurisdictions, however, it is not enough to show that an insurer mishandled only one particular claim to prove bad faith. Rather, a policyholder may have to show that the carrier engaged in an extensive pattern of bad faith claims handling, Bennett said.
“It may be useful to show that a carrier has collected premiums but has never paid a claim under a certain policy,” she said.
Insurers will likely fight requests for documents pertaining to their claims handling history, citing privacy concerns or the heavy burden of producing the records, but policyholders can pursue a number of strategies to push back, according to experts.
“Press the carrier to prove that the request for other policyholders is really too burdensome or voluminous,” Pastor said. “Have them identify the number of claims, and how information is stored regarding them. If there are a fair number, it may nonetheless be possible to get sampling of the other policyholder claims, perhaps the last 10 or so claims.”
If an insurer has concerns about privacy, a court can enter protective orders or allow the insurer to redact certain information, Pastor said.
“A court can enter orders to ensure that relevant and discoverable documents are provided and that privacy concerns are overcome,” she said.
Claims Handling Manuals
When pressing a bad faith claim, a policyholder should also seek copies of the carrier’s claims manuals and written claims handling procedures, according to attorneys.
“It’s important to assess [the insurer’s] performance against what these documents require,” Pastor said.
If a carrier says that it doesn’t have standard or accepted procedures, that, too, can be an important revelation in proving a bad faith case, according to Pastor.
“It can show that the insurer lacks a fair, reasonable and systematic or unified approach to its claims handling,” she said.
Many insurers will resist producing their claims manuals or procedures on the grounds that they constitute trade secrets or proprietary information, experts say. Again, policyholders may still be able to compel insurers to produce those materials, according to Pastor.
“Push the insurer to explain what it regards as some sort of trade secret or proprietary, and why,” she said.
For instance, a policyholder can question whether the carrier gives out the manual and written procedures to all of its claims handlers and, if so, what measures it takes to safeguard those materials, Pastor said.
“Most insurers take the position that claims manuals are protected but can offer no basis why they cannot be produced, particularly if there is a confidentiality agreement in place,” she said.
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