AIC 30 #9 -- Good Faith Claims Handling

Opportunity to settle within policy limits:

-a demand by the claimant for settlement at or within the policy limits or, in some states, the likelihood of an excess verdict unless the insurer settled

The seven elements of good-faith claim handling?

1. Investigation. 2. Documentation. 3. Evaluation. 4. Good-faith negotiation. 5. Communication. 6. Competent legal advice. 7. Effective claim management.

1 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

1. Misrepresenting facts or policy provisions relating to coverage.

THE THREE ELEMENTS OF AN EXCESS LIABILITY CLAIM:

1. Opportunity to settle within policy limits, 2. Wrongful refusal to settle, 3. Final judgment.

Three factors affect the special relationship between insurers and insureds:

1. Public interest- 2. Unequal bargaining power 3. Control

special relationship between insurers and insureds #1

1. Public interest--Insurance involves the public interest.

Three factors create a special relationship between insurers and insureds:

1. Public interest--Insurance involves the public interest. 2. Unequal bargaining power--Insurers have greater bargaining power than insureds. 3. Control--Insurers control the investigation and the settlement of claims

The four benefits of effective communication with the insured?

1. The insured feels like a part of the defense and is more willing to offer help 2. The insured can participate in discussions about settlement and claim handling

BAD FAITH SUITS AGAINST INSURERS may be based on

1. claim denial, 2. excess liability, 3. unfair claims settlement practices acts, or 4. statutory bad faith

Under the NAIC Model Act, penalties and sanctions for wrongdoing include?

1. fines, 2. interest on overdue claim payments, 3. payment of other fees and costs, 4. injunctions or cease-and-desist orders, and/or 5. suspension or revocation of the adjuster's or insurer's license.

BAD FAITH includes any combination of

1. fraud, 2. intent to deceive, 3. neglect, and 4. refusal to fulfill a good faith duty or a contractual obligation.

Claimants who are not parties to the contract can bring suits based on?

1. the insured's assignment of rights against the insurer, 2. a statute that creates a direct cause of action for claimants, or 3. (in some states) the state unfair claims settlement practices act.

In assessing punitive damages, courts consider?

1. the insurer's state of mind, 2. the nature of the act, 3. the insurer's financial condition (the award must be large enough to hurt financially), and 4. the state's law.

A good faith investigation is?

1. thorough 2. prompt 3. objective

10 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

10. Paying a claim without stating the coverage under which the claim is paid

11 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

11. Delaying the investigation or payment of a claim by requiring the claimant or insured to submit a preliminary claim report and a substantially similar proof of loss form

12 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

12. Failing to provide prompt, reasonable explanations of the reason for denial of a claim or for the offer of a compromise settlement

13 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

13. Failing to provide the needed claim form and its instructions within 15 calendar days of a request.

14 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

14. Failing to adopt and to implement reasonable standards to assure workman-like repairs by a repairer the insurer required the insured to use

2 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

2. Failing to respond to and act promptly on communications regarding a claim

special relationship between insurers and insureds #2

2. Unequal bargaining power--Insurers have greater bargaining power than insureds.

special relationship between insurers and insureds #3

3. Control--Insurers control both the investigation and the settlement of claims.

3 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

3. Failing to adopt and to implement reasonable standards for investigating claims.

4 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

4. Not attempting in good faith to promptly and fairly settle a claim with clear liability

5 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

5. Forcing the insured to pursue litigation to recover amounts due under his policy by offering substantially less than the amount ultimately recovered in the lawsuit.

6 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

6. Refusing to pay a claim without conducting a reasonable investigation

7 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

7. Failing to affirm or to deny coverage within a reasonable time after completing the investigation

8 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

8. Attempting to settle a claim for less than a reasonable man would expect based on advertising material accompanying the application.

9 of 14: Conduct provisions that violates the unfair claims practices if committed flagrantly (if committed with such frequency as to indicate a "general business practice)

9. Attempting to settle a claim based on an application altered without the insured's knowledge

Defense to Bad Faith: Lack of Right to Sue (Lack of Standing)

A claimant or an excess insurer that has no standing to sue under state law may still bring suit if the policyholder assigns the right to sue. In such cases, defense lawyers should ascertain whether the assignment is legal; an illegal or improper assignment can be a valid defense.

A debatable question?

A debatable question exists if a jury could conceivably determine the coverage question in favor of either party

A good faith investigation is thorough-

A recorded statement gathers information, preserves facts, obtains admissions, and may impeach the testimony of a witness who later changes his story. Note: Claim reps do not have time to take statements in every claim and must use their judgment to determine the amount of investigation needed to satisfy the good faith requirements.

All states require what circumstances beyond mere failure to act in good faith?

All states require circumstances beyond mere failure to act in good faith ... circumstances such as malicious, fraudulent, oppressive, gross, reckless, wanton, or recklessly indifferent behavior. In assessing punitive damages, courts consider

Examples of Consequential Damages

Amount of an excess verdict over policy limits Verifiable business losses Expenses associated with filing the lawsuit and participating in the litigation process Interest or other statutorily prescribed damages for delay Lawyers' fees

How should CRs should respond to lawyers' exaggerated demands?

CRs should respond to lawyers' exaggerated demands with realistic offers supported by documentation.

bases of bad-faith claims:

Claim or coverage denial Excess liability Statutory bad faith Unfair claim settlement practices acts

Consequential damages are?

Consequential damages are money-quantifiable 'out-of-pocket' damages that result from the breach of contract, such as the amount of the excess verdict, the verifiable business losses, any interest, any attorney fees, and the extra expenses arising from litigation

Contractual damages

Contractual damages are the amounts payable under the contract according to the contract's terms. For example, in a coverage lawsuit, contractual damages are the full amount of coverage up to the policy limits.

Contractual damages pay?

Contractual damages pay the policy's benefits.

Legal Remedy for Breach of Contract

Damages in amounts up to the policy limits.

Documentation in each claims file demonstrates?

Documentation in each claims file demonstrates how insurers conduct the claims investigation, evaluate claims, and negotiate claims.

A good faith investigation is objective

Documentation of prompt contact provides evidence of good faith claim practices.

Examples of Third Party Bad Faith Lawsuits include?

Examples: improper defense, inadequate investigation, and failure to settle that results in an excess judgment (award that exceeds the policy limits).

Excess insurer

Excess insurers provide coverage limits above the policy limits provided by underlying policies.

The NAIC model act allows regulators to impose one or more of these penalties and sanctions on insurers found guilty of violating the act:

Fines Interest on an overdue claim payment Payment of other fees and costs Injunctions or cease-and-desist orders Suspension of a claims representative's or insurer's license Revocation of a claims representative's or insurer's license

Defense to Bad Faith: Reliance on Lawyers' Advice

For the defense to be successful, some courts require proof of these assertions: The insurer disclosed all the facts to the lawyer. The insurer acted or relied on the lawyer's advice in good faith.

Good-faith claims handling practices and supporting evidence can help defend bad-faith lawsuits by?

Good-faith claims handling practices and supporting evidence can help defend bad-faith lawsuits by establishing that insurers have dealt fairly with the insureds and claimants.

Bad Faith: Gross Misconduct Standard

Gross misconduct must show signs of 1. dishonest purpose, 2. moral obliquity, 3. conscious wrongdoing

Contributory Negligence

If the insured contributed to the damages, the insurer's bad-faith damages are reduced by the percentage that the insured contributed. Generally, a contributory negligence defense is available only in states that permit negligence as a basis for a bad-faith claim.

Insureds bring first-party bad faith suits against?

Insureds bring first-party bad faith suits against their own insurers for bad faith breach of contract in handling first-party claims. Example: failure to pay a claim in a timely manner.

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Insurers have an implied duty of good faith and fair dealing with settling claims. Most bad faith claims for breach of the implied duties arise from insurance-related contracts.

Lawyers' fees and court costs include?

Lawyers' fees and court costs include amounts the insured paid to bring the bad faith lawsuit and to defend the underlying lawsuit. Recovery might be allowed by statute or by common law or as consequential damages

A few jurisdictions determine bad faith based on the negligence

Most jurisdictions apply a gross misconduct standard, (which varies among states but could involve anything from reckless indifference and intentional disregard to conscious wrongdoing)

are punitive damages automatically awarded in bad faith cases.

No. Punitive (exemplary) damages are not automatically awarded in bad faith cases.

Is Advice of Counsel a complete defense to a bad faith claim?

No. The advice of counsel is not a complete defense, but a claim manager can argue justifiable reliance on the advice of competent, legal counsel if the insurer disclosed all facts to its lawyer and acted in good faith reliance on the lawyer's advice

Insurers generally support limits on punitive damages:

Punitive damages should not exceed the amount of compensatory damages awarded except in unusual cases. Higher punitive awards are appropriate only in cases in which the plaintiff has not received a substantial award of compensatory damages and the defendant's conduct is outrageously reprehensible. Evidence supporting punitive damages must be specific to the harm suffered by the plaintiff and should not be based on misconduct occurring in other jurisdictions or at other times.

OTHER BASES FOR BAD FAITH-

Such claims might be based on fraud, deceit, conspiracy, defamation, libel, slander, and/or violation of privacy rights.

Enforcement

The NAIC model act specifies that its provisions are to be enforced by state insurance departments. The stated purpose of the act is not to punish insurers and claims representatives, but to elevate the standard of conduct for claims handling by insurers for the benefit of all involved and to avoid bad-faith claims.

NAIC Model Act

The NAIC model act specifies wrongful claim settlement practices. Violations are those "committed flagrantly and in conscious disregard of the Act" or "committed with such frequency to indicate a general business practice." Therefore, a single instance of carelessness or indifference typically does not violate the act. To comply with the model act, reps should treat both insureds and claimants with respect and professionalism.

Bad Faith: Intentional Misconduct Standard

The complaint must show that the claims representative intended both the misconduct and the consequences.

The gross misconduct standard could involve anything from?

The gross misconduct standard could involve anything from reckless indifference and intentional disregard to conscious wrongdoing.

Third-Party Bad Faith Lawsuits

The insured sues his or her own insurance company for bad faith handling in a third-party claim. In some cases, the insured can assign its rights to sue over to a third-party claimant for the right to sue.

First Party Bad Faith Lawsuits

The insured sues his or her own insurer for bad faith in handling a claim involving the insured's own personal loss.

The law of bad faith developed in response to?

The law of bad faith developed in response to perceptions of insurers' abuses of their power over insureds.

The negligence standard is based on?

The negligence standard is based on failure to exercise due care.

The three elements of an excess liability claim:

The three elements of an excess liability claim: 1. opportunity to settle within policy limits, 2. wrongful refusal to settle, and 3. final judgment in excess of the policy limits.

These are some of the primary elements of good-faith claims handling:

Thorough, timely, and unbiased investigation Complete and accurate documentation Fair evaluation Good-faith negotiation Regular and prompt communication Competent legal advice Effective claims management

A good faith investigation is prompt

Timely contact with the parties makes them more likely to remember details and to share information.

Bad Faith Claim

a claim that implies or involves actual or constructive fraud, a design to mislead or deceive another, or a neglect or refusal to fulfill some good-faith duty or some contractual good-faith obligation

Excess Liability Claims

a final judgment or settlement must have been entered against the insured, and the amount of the judgment must be in excess of the insured's policy limit. The insured is not required to have paid the judgment before bringing suit; the judgment alone is enough for a bad-faith claim to be pursued.

Excess insurers bring bad faith claims based on:

a. equitable subrogation--which transfers the insured's rights to the excess insurer who paid the claim. b. direct claim--resulting from the primary insurer's duty to protect the excess insurer from an unnecessary excess judgment.

STATUTORY BAD FAITH

arises from violation of state bad-faith statutes that define the acts that constitute insurers' bad faith and allow a bad-faith cause of action

Common bases of bad-faith claims include c

claim denial, excess liability claims, statutory bad faith, and violations of unfair claims settlement practices acts. CRs must stay informed of those changes, else they put their employers at increased risk of bad-faith claims

extracontractual liability claim

claim for damages outside the insurance policy) as part of the bad-faith claim or under other state and federal statutes and regulations

extracontractual liability claims

claims for damages outside the insurance policy. Insurers found liable for bad faith or responsible for extracontractual liability are required to pay damages to the harmed party such as: Compensatory damages Punitive damages Lawyers' fees and court costs Prejudgment interest

Comparative Bad Faith

comparative bad-faith defense permits dismissal or reduction of a bad-faith claim if an insured failed to deal fairly with the insurer by breaching one or more implied duties.

Final judgment

court-awarded damages in excess of the policy limits. Some insureds have attempted to bring bad-faith claims based on strict liability, which would make the insurer liable for any excess settlement or judgment regardless of fault if the insurer had the chance to settle within the policy limits and did not do so.

Consequential damages

damages awarded by a court to indemnify an injured party for losses that result indirectly from a wrong such as a breach of contract or a tort. They can be out-of-pocket expenses that can be quantified and itemized,

Punitive damages

damages imposed in order to punish the wrongdoer, can result in very large monetary awards.

Wrongful refusal to settle

either a. outright denial of a covered claim or b. unreasonable or unjustifiable refusal to settle or c. negligence in the settlement process

Defenses to Bad Faith: Statute of Limitations

generally ranging from two to six years from the date the bad faith occurs. For a bad-faith claim based on an insurer's refusal to defend an insured, the statute begins when the insurer refuses to defend.

Compensatory Damages

monetary compensation to a victim for harm actually suffered. Compensatory damages can include contractual damages, consequential damages, and/or emotional distress damages.

Statutory Bad Faith

plaintiffs have the right to pursue claims against insurers if they fall within the statutory definition of bad faith. For example, Pennsylvania has a statute providing for recovery of punitive damages, interest, attorneys' fees, and costs when an insured can prove bad faith.

BAD FAITH CLAIMS ARE MADE BY

policyholders--who bring first-party bad faith suits third-party bad faith suits claimants--who are not parties to the contract, but bring suits based on a. the insured's assignment of rights against the insurer

The goals for state unfair claims settlement practices acts relate to

promptness, honesty, responsiveness, fairness, and equity

GOOD FAITH

requires the insurer to give its insureds' interests at least as much consideration as given to its own interests

Unfair Claim Settlement Practices Acts

specify what a claims representative can and cannot do when handling a claim.

To prepare for a possible bad-faith lawsuit:

the CR should thoroughly document the reasons for partially or fully denying a claim

If a court finds that liability coverage does apply,

the insurer must pay the insured's defense costs and, in some jurisdictions, the entire judgment (even judgment in excess of the policy limit) regardless of bad faith.

UNFAIR CLAIMS SETTLEMENT PRACTICES ACTS ARE ENFORCED by

the state insurance departments, not by the state courts.

The standard for awarding punitive damages

varies by jurisdiction but generally requires proof of insurer behavior that is worse than ordinary wrongdoing, such as malicious, fraudulent, or oppressive behavior.

UNFAIR CLAIMS SETTLEMENT PRACTICES ACTS

vary by state but are usually based on the model Unfair Claims Settlement Practices Act of the National Association of Insurance Commissioners (NAIC).