Good Faith in Handling First Party Property Claims

If there is one thing that is the scourge of claims handlers, it is the allegation of bad faith. And contrary to what insured attorneys want their clients to believe, breaches of good faith are rarely on purpose.

It’s “usually a sin of omission, rather than commission,” according to Michael A. Troisi, a partner at Rivkin Radler. “It’s not one thing. It’s usually a perfect storm, a confluence of events that allows a lawyer down the road to spin it.”

Carriers have a duty of good faith because the policy of insurance is an adhesion contract that is non-negotiable, according to Troisi.

Typically, bad faith occurs as a result of a delay in decision or action, an unfair or unreasonable value or as a result of a coverage issue, he added.

With regard to day-to-day claims handling, it is difficult to have every piece of paper and log entry dissected.

“It’s not possible to do everything perfectly,” Troisi said. “It’s what is reasonable. There is no such thing as a perfect claim file.”

If bad faith is alleged, it is usually the result of an error, something missed or a mistake, he said. “The goal is to try to minimize those things.”

In addition, there is the difficulty in dealing with insureds who may have unreasonable demands, according to Tony Clark, vice president of the property claims department for Allianz. He recommends claims handlers discuss a difficult situation with a supervisor, even if an adjuster may be operating within his or her authority, when an insured disagrees with an insurer’s stance.

Adjusters must know an insurer’s claim handling guidelines. “Know them, study them,” Clark said. If a task is set out in the guidelines and an adjuster has failed to do it, the adjuster risks having that error caught in a deposition.

It is important to approach each claim with an open mind. “Too many times I see pre-determination made in log entries,” Troisi said. “Avoid pre-determination of coverage until the investigation has been conducted and evaluation has been made.”

Common Bad Faith Issues

Some issues related to bad faith allegations include claims involving engineers. While both parties may retain an engineer, some adjusters choose to ignore findings of an insured’s engineer. “What you do with that report and how you handle it and what you say about it reflects a fair and balanced investigation,” Troisi said.

Bad faith allegations frequently arise out of undue delay. “Delay is the killer,” Troisi said. “Half or more involve delay.”

Some carriers are reluctant to pay anything until all issues are resolved. “[Carriers may be] reluctant because some believe it funds a lawsuit against you, doesn’t matter, you don’t want to be in bad faith,” Clark said.

Yet another issue involves lowball offers during settlement negotiations. “Pay the insured what you think the claim is worth,” Clark said. “If you don’t, the first thing they will do after a [bad faith] lawsuit is filed is ask. Statutes will put you in bad faith.”

As adjusters gain experience, there can be a problem with documenting the file. While many claim scenarios appear to be similar, it’s important to note the facts unique to the loss under investigation. “When you go into a claim, you know what you have seen … Make sure to document facts,” Clark said.

To assist adjusters in avoiding allegations of bad faith, consider the following tips on good faith claims handling:

• Don’t ask the insured to do your job. Although there is a cooperation clause, Troisi said an adjuster “still needs to investigate a claim. If you can get something as easily as the insured can, do so.” This is where undue delay can be avoided.
• “Pay undisputed amounts early and often.” Troisi emphasizes the importance of reserving rights when there is a question involving coverage. “There is no justification for lowballing an insured in the context of a first party claim,” Troisi said. “Don’t offer less than the estimate.”
• Avoid crossing into the underwriter’s role. This happens when there is a crossover between claims and underwriting.
• Avoid repetitive and duplicative investigation. According to Clark and Troisi, this is a favorite of policyholder lawyers because they will use it as a sign of undue delay. It frequently happens when there is a change in adjusters or when a file is referred out to counsel. To avoid this, Troisi recommends reviewing the claim file and communicating with counsel on what investigation has been completed and what is still needed.
• Provide fair evaluation of the evidence. A claim file should reflect a thorough and fairly balanced investigation. “The file should always reflect how an adjuster has dealt with the evidence an insured has presented,” Troisi said.
• Don’t handle a claim too fast. Troisi recommended avoiding unexplained delays in a claim file by documenting the cause of the delay. If a claim is handled too fast it could be a sign of pre-judgment, as in a no coverage letter prepared prior to a site visit.
• Remember loose lips sink ships. The claim file should include facts and reasons why certain action is taken, free of editorial comment. While every company may have a different decision methodology, problems arise when decisions come through in stream of consciousness written emails.
• Do what you promise. If an adjuster tells an insured to expect a call, then the adjuster should keep his or her word.
• Document. If it is not written, it did not happen, Troisi said. He recommends documenting the file in real time because it reflects that an adjuster is keeping current in the investigation and responding to correspondence in a timely manner.

In the end, handling a claim fairly and in a timely fashion reflects an insurer’s respect for its customer. “Good faith claims handling is absolutely synonymous with good business,” Troisi said. “You have a right to be wrong about coverage analysis. It doesn’t mean you committed bad faith. Slipshod investigation, without a fair and balanced investigation equals bad faith.”

Clark and Troisi were speakers at the Property Loss Research Bureau’s Large Loss Conference in Chicago.