Avoiding Bad Faith Wade G. Manor Scott, Sullivan, Streetman & Fox Jackson, Mississippi

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1 Who wouldn t take advantage of the chance to say an insurance company is evil? It is easy to blame an insurance company for not paying a claim, or doing something that is in its own best interest as opposed to its insureds. The perception the public has about insurance companies is so negative that Bad Faith actions can, and should, concern any company underwriting insurance policies. Add to that the uncertainty of different state laws, state court decisions, judges and, of course, juries, and you have a truly lucrative industry for the plaintiffs bar. There is no secret method of avoiding bad faith litigation. No one here can guarantee that a scorned insured is not going to find someone to write a check for a filing fee and draft a lawsuit on his behalf. All any company can do is conduct itself as honestly and openly as is reasonable, and hold its head high. The Handling of the Initial Claim The easiest (and most cliché) saying is to have all of your ducks in a row. The denial of a claim, or failure to settle a lawsuit within policy limits for your insured, is not typically something that occurs in a small window of time. The claims representative has plenty of time to create a good faith investigation with interviews, simple questions of the insured or his/her representatives and requests for information. All of this will ultimately show a court or jury that the insurer was making every attempt to review the claim and make the right decision. 1 P age

2 The key is always communication. If you are in regular communication with the insured (whether in a first-party claim or third-party claim) then it helps with the emotional aspect of it. It is amazing to see how the denial of a claim upsets an insured when it is a surprise. Realizing that the company may not be able to disclose everything that is going on in the process of the claim review, it still is important to let the insured know that the claim has been received, it is being evaluated and a decision will be coming within a reasonable degree of time. Communication can also buy the company time. As long as the insured is kept apprised of what is going on, then there is little chance for the insured to become frustrated. Of course, this is no guarantee to successful avoidance of bad faith. There are plenty of insureds that believe they should get the highest priority with their claim and a decision should be made within hours. There is little to do but maintain a good claims file, document activities, and do your best to appease the insured. However, you have to remember is that, all it takes is a phone call to some lawyer in a phone book, and a filing fee, and a bad faith lawsuit is born. Acknowledgment and initial evaluation. Every claim is different but all insureds want to know immediately that the company has received the claim. A letter is the standard method but making that personal phone call, when it is possible to do so, is a nice touch. The insured wants personal service and does not care that you have x number of files other than his or hers. If possible, if you can provide the insured with the questions you have about the claim (if any), or let the insured know what you will need to come to any decision, it is a good idea to get that 2 P age

3 out in the acknowledgment letter. This will place a burden on the insured to assist in providing information if the claim is going to be fully processed. Documentation. Keeping notes about activity in a claims file is key, but it can be a dangerous trap. Any time a claims files is requested in a bad faith lawsuit it is the plaintiff s attorney s intent to find that one little word, phrase, or even a gap in time, to show a judge or jury that the insurance company was doing whatever it could to deny a claim, or mis-treat the insured. Of course, the claims handler is caught in between the goal of documenting all activity (including opinions about the claim) and making sure nothing is said in the file (or in computer notes) that will inflame a jury. The investigation of the claim is where documentation is examined the most. What did the company do to find out about this claim? What questions did the examiner ask? What went into the denial of the claim? Most importantly, why would this company make this decision to not pay this claim on behalf of someone that has paid premium after premium after premium to this company, hoping that he would be protected in the end. Reservation of Rights. A reservation of rights actually confuses more people, including the adjuster, than it should. Due to the true fear of what this means to the insured, it can be over-sold. In other words, some companies put too much emphasis on making sure the protection is written in for the company, and it leaves the insured confused. The way to explain things is to keep it simple. Realizing that the company has to make sure it is protected, and every word it puts in a letter to the insured will be scrutinized, the company still has to avoid 3 Page

4 the urge to over-lawyer the reservation of rights letter. It just seems to be explained best when the ROR letter acknowledges the claim, advises the insured of some questions about the coverage for this particular claim (adding the pertinent policy provisions), and then simply telling the insured what the company intends to do from this point. In some cases, this may call for the hiring of an independent attorney for the insured. In an ROR situation when the company does offer to accept the defense until a decision is made, there is an inherent conflict in the interest between the insurer and the insured. Will the attorney hired by the insurance company look for or develop facts that would allow the company to deny the claim? Who will that attorney protect? It is clear that the law goes to extreme efforts to make sure an insured under a policy is protected, at least until there is a determination of the existence of coverage. But the insured s attorney can never forget that the obligation is to the insured. At some point there may come a time that the attorney has to withdraw from the representation of the insured but, more times than not, most of the confusing issues are resolved. Denial of the Claim. The hardest decision that should ever occur is the final decision to deny the claim. Sometimes the claim is not big enough to cause too much concern but, regardless of the size of the claim, the denial has to be clear and unambiguous. It also is important to tell the insured that this claim isn t closed. Leave the denial open-ended. Let him or her know that, while the claim is officially denied, there is a chance that, if additional information is available, the company will be happy to reconsider, or re-evaluate the claim 4 P age

5 itself. Any letter of denial should be accompanied by a clear explanation of the facts used to determine the claim, the results of an investigation, and the decision itself. Leaving that opening for the insured to have the company re-evaluate the claim is very important. If the insured has an opportunity to call the adjuster, or even the attorney who may have been involved in the claim on behalf of an insured, then the company is, again, showing that it is not jumping the gun to deny the claim, but willing to re-consider its decision. Beyond the first step Should the company file a dec action? The dec action can be seen as an easy way out, but it is no guarantee of avoiding of a bad faith lawsuit. Typically, a company faced with a hard decision may choose the use of a Complaint for Declaratory Judgment to have a Court tell it whether or not the denial of a claim is appropriate. The problem can be costs. By the time the insurance company has decided to file a dec action, another attorney may have been retained by the insured under a reservation of rights. In order to file the Complaint for Declaratory Judgment, another attorney has to be retained. So the decision to file a dec action usually comes with a decision to spend more money. Of course, the litigation of a dec action is often less involved, and should be disposed of with a summary judgment motion filed by the parties. Many times, the choice to file a dec action simply rides on the cost of doing the same. Is it worth it to spend the money on multiple attorneys to find out if a denial is appropriate? What will the Supreme Court say about any adverse ruling? The point is, obviously, that the insurer will show that it was trying to do the right thing and, if it should pay, it will. 5 P age

6 Continued Investigation. Telling the insured no coverage will be afforded for the relevant claim is a difficult step to make, no matter what the facts. One thing a company can not forget is, if a lawsuit is filed as a result of a denial, then the company will owe the insured the duty to continue its investigation, unless and until a final decision is made. There will be new witnesses identified that may provide relevant facts. Experts may show the company new things to consider. While any denial should have been made with confidence, the insurance company is still going to be asked to keep an open mind and review any new facts the insured can produce. What to look for in the claim, before the lawsuit. As an adjuster, you have to ask some questions. Is this insured covered for this claim? What is the policy period? What are the limits? What is the plaintiff s attorney or claimant asking for? What information do I need to evaluate the claim? What can be provided to me by the insured, or the claimant? There are also considerations such as: What venue would this case be filed in? Who is the claimant s attorney? What Judge would be considering this case? What will the jury pool be? What is the cost of denying this claim and defending a lawsuit? 6 P age

7 In a Third-Party situation, the adjuster has to weigh the credibility of the insured. In other words, even if the facts seem to support the insured s story, what kind of witness will he make? Is the Plaintiff more likeable? What are my chances of a defense verdict vs. the likelihood of getting a judgment for less than what is being demanded? The adjuster must remember that, the inability to resolve a claim against its insured before the filing of a lawsuit, potentially exposes that insured to an excess judgment (depending upon the applicable limits). This, in and of itself, is not bad faith of course but should an excess judgment be rendered, an insured may be allowed to assign any rights he would have against the company to the Plaintiff in exchange for a dismissal of the excess verdict. At that point, everything that occurred in the life of the claim, from the very beginning and through trial, will be scrutinized. Handling the Claim File. The claims file is and will always be a very important witness for either the claimant, or the opposing party. As stated earlier, you can t be too careful about what you put in computer notes, progress notes and anything that a claimant will use to show the company was less than diligent in investigating the matter, or the adjuster ignored key issues that would have resolved the claim. The file will also show a claimant whether or not the adjuster returned calls promptly, responded to written requests, maintained periodic updates and requested information that was necessary to assist in resolution. The insurance company may also be criticized if there is no supervision over the claims handler with reviews of the pending files, and the offering of advice. 7 P age

8 There is always the possibility that advice on a claim can be sought from an attorney. Whether this means the entire claims file is sent to the attorney, or just a discussion of the relevant facts is had, documentation of what was provided to that attorney, and the resulting advice can be helpful if called upon to show the insured (or a jury) exactly what resources the company used to assist it in making the ultimate decision. If the advice of counsel defense to a bad faith claim is used, then that attorney is now a witness, and all communications between the company and that attorney with regard to that claim will be discoverable. The Bad Faith Lawsuit Expect the lawsuit to be filed. As mentioned above, when a claim is denied, or an excess verdict occurs against an insured, it doesn t take much for the aggrieved party to find an attorney who will sue an insurance company. It is just a phone call and filing fee away. Retaining defense counsel is the obvious first step because removal to federal court needs to be considered. The federal court is generally a better venue for a corporate defendant but there are exceptions. Some state court venues have very excellent judges and conservative juries and the risk of keeping a case in state court has to be weighed carefully. From that point on, the most important thing a company can do is give its attorney everything, and then let him or her filter through it. Simply turning over the claims file isn t enough. Were there any round table discussions about the claim, and did the others involved take their own notes? Was there a second file kept by a supervisor? What about any other discussions, even informal ones, with other adjusters or attorneys? Were voic messages saved? If the messages weren t saved 8 Page

9 is there any record or memory of certain voic s from the insured or the insured s attorney? There has to be an expectation that the insured has everything and is just waiting to pull out that surprise document that was not produced by the insurance company for whatever reason. Active participation in the discovery process. Often times, and this may vary between companies, the handling adjuster is not in control of the bad faith lawsuit. Therefore, that adjuster (who is being blamed by the insured for mishandling) is not anxious to assist defense counsel. After all, the claim is off of his desk. He probably has a hundred other things that need to be done. Why not leave it up to the bad faith adjuster and the attorney? This attitude will cause serious problems as the lawsuit continues. The adjuster and defense counsel have to be a team. Every page of the claims file must be examined together so that defense counsel will have insight to not only the words on the paper, but to what was going on in the adjuster s mind as things developed. The simplest things, such as the adjuster was having personal problems, or dealing with a death in the family, could explain why a letter wasn t worded tactfully, or clearly. The same sort of teamwork must continue from the initial assignment and evaluation by counsel, through deposition preparation, and trial. There is nothing worse for defense counsel, and ultimately the company, than having a document, phone message, or anything else get pulled out as a surprise. Bifurcation. The ideal way to trial a bad faith lawsuit is to avoid the punitive conduct initially. Most plaintiffs attorneys will want to tell the jury not only that a decision was improper, but the insurance company acted inappropriately or recklessly or grossly negligent in 9 P age

10 coming to that decision. It is very important that those issues be separated and the jury first hear the facts relating to the claim, and the reasons why it was denied (or not settled in a thirdpart situation). The jury simply needs to decide, first, whether or not the insurance company s decision was correct. If they agree with the company, case closed. If not, then we move into the next phase which will be the allegedly egregious conduct, and the mistreatment of the insured. One very real problem with bifurcation is controlling the plaintiff s counsel. Inevitably, if the case is bifurcated, the plaintiff s attorney will try to slip in questions, comments, or even testimony from his witnesses that relate to the alleged punitive aspect. The first thing that must occur is addressing this with the Court prior to voir dire. Of course, even if the Judge warns counsel that there will be serious ramifications if the bifurcation order is not followed, the attorney is still going to take chances. For the most part, a Judge does not want to get halfway into a trial and then have to order a mistrial. Many judges (with some exceptions) will give the attorneys more than one chance to comply before taking any serious action. The problem becomes a situation where defense counsel now has to be prepared to object and request a conference with the Court whenever something is said that fails to comply with the Order. These pauses in a trial can frustrate a jury and defense counsel is now caught between protection of the client, and having the jurors roll their eyes each time he stands up and brings a halt to the proceedings. We can never forget that jurors, for the most part, do not want to be 10 P age

11 in the courtroom and they want to keep things moving. Therefore, we have to balance the company s rights, with the jury s needs. Recent Trends State Farm vs. Campbell, 538 U.S. 408 (2003). The Campbell decision was extremely important to not only the insurance industry as a whole, but to any defendant, corporate or otherwise, faced with a punitive damages claim. The life of this case began with an automobile accident wherein Curtis Campbell allegedly was negligent and caused the death of one person, permanently disabling another. According to the Court, State Farm s own investigators and other witnesses came to the conclusion (and testified) that Campbell was at fault. Nevertheless, State Farm chose to contest liability and declined settlement for the policy limits of $50,000. A Utah jury returned a verdict for $150,000. State Farm would not appeal the decision and the Utah Supreme Court denied Campbell s own appeal. State Farm paid the entire judgment. After the judgment was satisfied, Campbell sued State Farm for bad faith, fraud and intentional infliction of emotional distress. Id. at 408. There were several phases that followed, including a reversal of summary judgment in favor of State Farm. Ultimately, a Utah jury awarded Campbell $2.6 million in compensatory damages and $145 million in punitives. The trial court reduced the verdict to $1 million and $25 million, respectively. The U.S. Supreme Court, reversed and, in upholding its previous ruling in BMW of North America vs. Gore, 517 U.S. 559, stated that, Under Gore s guideposts, this case is neither close nor difficult. The Court felt that Campbell was using this case as a platform to expose, and 11 Page

12 punish, the perceived deficiencies of State Farm s operations throughout the country. Id. at 409. The Court maintained that State Farm, or any defendant, should only be punished for conduct similar to that which injures the plaintiff. As was stated in the very beginning, it is easy to argue an insurance company is an evil entity when you can use any act, from any state, from any claim, take it out of its context, and then tell a jury why the company needs to be punished. The Campbell Court also, as in Gore, examined the ratio between the harm, or potential harm, and the punitive damages award. Specifically, the Court stated in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process. Id. at 410. This decision is most important for two things. First, it held that a plaintiff can not introduce evidence of other bad acts of a defendant from other states that have no relation to the alleged wrongful conduct at issue. Second, the court strictly upheld Gore and ruled that due process is a vital consideration when considering the appropriateness of a punitive damages award. A court should not forget that, when a plaintiff has obtained a compensatory damage award, it should be presumed that he or she has been made whole for the injuries. Punitive damages should then only be awarded if the defendant s culpability is so reprehensible as to warrant further sanctions for punishment. Lessons from Katrina. Without reliving the catastrophe known as Hurricane Katrina, and its devastation, it is important to analyze what went wrong from the insurance companies perspective. It all honesty, it appears as though the companies, in trying to get things done as 12 Page

13 quickly and as efficiently as possible, probably skipped too many steps. After the storm, in Mississippi and Louisiana, there were so many insureds homeless and/or evacuated that these insurance companies were bombarded with phone calls. This, when combined with the extremely negative press, probably led some companies to panic and take a few shortcuts. Independent adjusters with absolutely no experience in hurricanes were called in to deal with insureds. Claims advocates were sent to agents offices to offer assistance, often with no real guidelines of what to do or say. Insureds felt they were being ignored when their property was not inspected quickly. Day after day more and more people were getting frustrated. Then the protocols were developed. The most controversial protocol was Wind-Water. This was the issue which arose when a homeowner had a flood exclusion in an insurance policy and there was some question as to whether or not the home was destroyed by wind or water. Some companies decided, in an effort to provide swift resolution, that homes in specific areas were definitely destroyed by water, or a combination of both wind and water, which were excluded perils. Therefore, the investigation did not require as much work, time or detail. Other companies actually held conferences with defense counsel in Louisiana, Alabama and Mississippi to advise them of their plan for handling all cases in a consistent way. However, the major lesson learned is that there could be no consistent handling of these cases except to treat everyone as separate and independent claims. No two cases were alike and trying to speed things up with a plan, protocol or outline just caused more headaches. 13 P age

14 Of course, there were other problems that come up not just in catastrophe situations but in all types of cases with insurance companies. Some companies actually had analyzed the risk of denying claims and the costs of defending those cases vs. actually paying the claims and determined that it would be more profitable to deny the claims when there was sufficient evidence. This is a reasonable business practice but when you are dealing with such an emotional issue, all potential pitfalls have to be considered and a company has to simply tread lightly. Conclusion As a wise cooler/bouncer from the movie Roadhouse once said, even when a customer who is being unruly, and talking about your mama, Be nice. It is a simple phrase but it has to be a philosophy as well. Being nice means choose your words carefully, maintain open and honest dialogue, continue searching for answers to all questions and document your activity. This actually can apply to many professions in a general sense but it definitely applies to the actions of an insurance company for each and every claim. There are no definite answers to avoiding bad faith claims, but there are certainly ways to show that you maintained good faith. 14 P age