Insurance Bad Faith
10 Tips for Navigating the Bad Faith Maze
Kevin Quinley
August 12, 2013
What's hot in the world of insurance bad faith?
In June, I (along with about 300 participants) attended the Defense Research Institute (DRI) conference on “Bad-Faith and Extra Contractual Liability” to find out the answer. There, at the Waterfront Westin in Boston, Mass., we gleaned some excellent insight from a panel of astute speakers.
Information overload is always a peril at such conferences. Nevertheless, I highly recommend this event to any claims professional, although the attendance was heavily weighted toward defense attorneys and in-house counsel for insurance companies—as in I was one of few non-lawyers attending.
Despite the information overload, I walked away with ten “nuggets” from the conference. I'd like to share them below in no particular order of importance:
1. Beware of bad faith hellholes. The toughest states for insurance bad faith are Florida, California, and Washington. Sure, adjusters must mind their P's and Q's in any state; however, lawyers view this unholy trinity as the most exacting from a pro-plaintiff/policyholder standpoint. While the saying goes, “don't mess with Texas,” the lone star state is surprisingly below these bad faith hellholes.
2. Roll the dice more. Houston, Texas-based lawyer Christopher W. Martin of Martin Disier Jefferson & Wisdom gave a riveting presentation on winning bad faith cases, imploring insurers to take more of these cases to trial, arguing that insurers were unduly cautious and afraid. I suppose this is easy for him to say. He guesses wrong. As the attorney moves on to the next case, the (losing) insurer must pick up the monetary pieces.
3. Trade secrets in claims manuals? Really? In many cases, plaintiffs often pursue production of insurer claims manuals in the hopes they will provide fertile grounds for bolstering a bad faith claim. One is example is “Our mission in claims is to preserve the company’s financial health and settle for the lowest possible amount.” Um, ouch! Insurers typically balk at this, objecting to such production on the grounds that the claims manual contains trade secrets. If you fight the production of such manuals and the like based on trade secret arguments, though, prep your claims staff to be able to explain what secret and proprietary information is actually included in such documents.
4. Avoid “game-day” deposition prep for adjusters. Too often, defense attorneys defending bad faith cases schedule prep time with the claims adjuster on the morning of the deposition. This does not represent a best practice. Prepping the adjuster for his or her deposition is not something to designate for completion on the morning of the event.
Generally, adjusters are tense and distracted the morning of the deposition. Therefore, they cannot possibly absorb all of the information and advice when defense counsel does a “data dump.” A better practice is to arrange for the claims adjuster to meet with counsel several days or even a week ahead of the deposition.
5. Small—but growing—storm clouds. A “growing minority” of courts are finding bad faith even in the absence of coverage. Some courts have held that, even if an insurer prevails in proving no coverage, it can still be sued when its claims handling was deemed unreasonable and went beyond good faith mistakes. Still, even in those jurisdictions recognizing bad faith in the absence of coverage, the putative insured must still prove damages.
6. Do eroding policies equate to eroding good faith? Defense-within-limits policies pose interesting (and volatile) bad faith potential. Should those policy dollars be spent more on settlement than defense? Do these policies entitle policyholders to a greater say in selecting their defense counsel? Does the insurance company have a heightened liability exposure for mismanaging legal fees if they deplete the policy limits? This could be a burgeoning subset of bad faith in the future. Refer to the sidebar at the end of this article for clarification.
7. No easy wins for policyholder attorneys. Despite fears of runaway verdicts or bad-faith lawsuits against insurance companies, these are simply not easy cases for plaintiffs to win. Don't just take the word of the defense bar, either.
“Good bad faith cases are relatively rare and hard to win,” explains David White, a Boston attorney who typically represents policyholders. “Even if the plaintiff wins, two-thirds are reversed on appeal.” This observation dovetails with the theme sounded by Martin, who thinks too many insurers are afraid of their own shadows in defending bad faith cases all the way through trial.
8. Watch the “ear test” as a barometer of insurer bad faith. Plaintiff attorneys read body language of the claim adjusters and executives in deposition. They infer signs from the body language of key insurer personnel. Opposing lawyers read such body language as poker players use “tells” on others sitting around the card table. It allows them to gauge whether or not they have a promising bad faith claim.
According to White, the odds of a punitive award “correlate directly with the redness of the claims manager’s ears during deposition.” Therefore, the takeaway for adjusters and claims executives is this: Manage your emotions during testimony. Expect to be hit and hit hard, as in tackle football.
9. You win or lose a bad faith case long before trial. As in other matters, preparation pays off.
“Most bad faith cases are usually won or lost long before trial starts,” says Rick Hammond, a Chicago-based attorney at Johnson & Bell. “Problem areas are investigations that identify information adverse to the insured’s interests as ‘good news’ in the claims file.”
Another adjuster pitfall, he adds, is choosing to believe someone other than the insured. Yet another landmine is adjusters hanging out dirty laundry in the claims file. Hammonds has seen supervisor comments about adjuster performance in the claims file, which is appropriate. He cites claims file entries to the effect that, “… the line unit screwed up this claim” or “looks like we are in bad faith due to the long delay.” These are the bad faith equivalents of dynamite sticks.
10. From Facebook to…Bad Faithbook? Social media use in claims handling will become a new wrinkle in bad faith cases in the future, according to Lancer Insurance Company's Paul Berne. While claims people initially got very excited about social media tools as a game-changer, Berne cautions that jurors may view an insurance company’s use social media on claims as an invasion of privacy. This includes improper “friending” using pretexts or accessing information that jurors feel should be private.
As a final thought, if you want to guarantee that attorneys will stay until the bitter end of a conference, hold the ethics presentation until the very last session. Many attorneys must have a certain minimum number of hours of annual ethics CE as part of their ongoing requirements. You could say that periodic ethics training is one safeguard against … bad faith.
Do Self-Eroding Policies Heighten Bad Faith Risks?
William Kobokovich of Travelers (Hunt Valley, Maryland) and the Hon. Enrique Romero of ADR Services (Los Angeles, California) commented on potential perils of defense-within-limits liability insurance policies. Four observations that impact adjuster case-handling are:
- Communicate with the insured. There may be a duty to keep the insured informed of defense costs incurred.
- Watch the meter. Avoid unreasonable defense costs that deplete the coverage at an accelerated rate.
- Explore settlement early. Such policies may put a heavier onus on adjusters to explore early settlement, to avoid ballooning defense costs.
- Brace yourself for demands for Cumis-type counsel. Some argue that such policy features create an inherent conflict between insureds and insurers, which creates a right of independent counsel for the policyholder.
The content of this article is intended to provide general information and as a guide to the subject matter only. Please contact an Advise & Consult, Inc. expert for advice on your specific circumstances.
SOURCE: www.propertycasualty360.com