Bad Faith Claims Handling-What Constitutes?

 im has responded to Jerry's question with some great information useful to us all on bad faith claims.

I'm a quasi "court watcher". It is a habit I picked up some 30 years ago while brown bagging my lunch as a new adjuster inside the warm confines of a carrier. As every insurer has in their claims library, we had a court reporting subscription that cross referenced evey conceivable type of action and reported cases. In later years it became an everyday tool in claims handling or management.

I'd like to supplement Jim's dealings with the topic by discussing with case law some of the issues of bad faith. The jurisdictions may be different, but the actions or inactions of the parties giving rise to bad faith claims are universal to North America.

The landmark case now in Canada was heard by the Supreme Court of Canada (SCC) this year, it is "Whiten vs Pilot Insurance Company" (W vs PIC).

A homeowners policy issued by PIC provided coverage for the W home. In 1994 a fire totally destroyed the dwelling and contents. PIC denied the claim in its entirety, alleging arson. PIC maintained the arson defense through trial at the lower court and at the first appeal level.

A Justice of the court addressed the two requirements that must be met to permit an award for punitive damages.

1. The defendant must have committed an independant or separate actionable wrong.

It is well settled in our case law that a contract of insurance is one of the utmost good faith, imposing on the insurer an implied obligation of good faith and fair dealing with its insureds. This is a contractual obligation.

2. The defendant's conduct must be sufficiently harsh, vindictive, reprehensible and malicious as to offend the Court's sense of decency.

The court went on to analyze the conduct of the insurer to justify the bad faith award as punitive damages. Here are less than half of the reported reasons;
(a) the insurer deliberately ignored the opinion and recommendations of an experienced adjuster to concluded the fire was accidental
(b) the insurer never provided the adjusters reports to the experts it later retained
(c) the insurer ignored the opinions of its engineering expert who provided three reports that the fire was accidental
(d) At every step the insurer considered that it could safely deny the claim because the insured would not refuse a reduced offer in the future

The Court therefore concluded that the above two requirements had been met.

The majority opinion of the Court looked to the USSC for enumeration of the factors to be considered in determining whether an award is reasonably related to the punitive goals of deterrence and retribution. It looked at "Pacific Life vs Haslip (1990) 499 US1". for the criteria for appealate review of punitive damages awards.

"Whiten vs Pilot Insurance" has generated a lot of discussion and commentary. The trial verdict of $1,000,000 punitive damages for bad faith, plus every cent of the Whiten's financial loss set a new and unprecedented Canadian threshold for punitive damages in first party insurance claims.

California is truly the bad faith litigation power house, especially related to third party bad faith claims. It began in the 1970's with "Royal Globe vs Superior Court" and led to the rampant rise of bad faith cases that insurers were settling short of trial due to fear and costs. In 1988, the California SC in "Shall vs Firemans Fund", reversed the "Royal Globe" decision and ruled that third party claimants had no standing to bring bad faith actions against insurers.

I think it was in 2000, that California created legislation to try and balance the field - The Fair Insurance Responsibility Act - but re-introduced the concept of punitive damages in thrid party bad faith cases. In effect it is a legislated Code of Conduct for insurance claims handling practices with twelve provisions. It would be interesting to hear from an adjuster in California who can comment on the applicability of this Code as to how it relates to their actual claims handling practices. Does it eliminate an insurer from facing both a civil action for bad faith as well as a penalty imposed by the governing body?

Claims for bad faith punitive damages have been tagged as "windfall litigation". This wind has blown strong in America for years. Here in Canada, the legal fraternity has noted some troubling changes since the appeal court decision of "Whiten vs Pilot Insurance";
(a) every personal injury suit launched contains allegations based on a claim for punitive damages
(b) every discovery has been lengthened by several hours to deal with these allegations
(c) documentary productions have increased tremendously

All this has significantly increased the cost of litigation, lengthened trials, and created more delays.

However, the majority of our "work" with property claims exposes us only to first party bad faith claims. Case law is clear in its last 10 years of development that the insurer's duty of good faith (and that of the adjuster) might arise not only out of contract with the insured, but also might be found to exist as a separate duty in tort distinct from the implied contractual covenant.

Consider the following reasons for judgement summarized from numerous bad faith cases. Consider your actions as an adjuster within the parameters of the reasons given and the actions of others also involved in the claim "above or below" you.
(a) ignoring the opinion and recommendation of the adjuster
(b) replacing an adjuster to one more "sympathetic" to the company "line of thinking"
(c) using the untenable excuse that the insured is difficult to deal with
(d) basing a recommendation for denial solely on the allegation an insured is inflating their claim
(e) participating in the untenable reasoning that "sqeezing the insured" with a denial will allow for a cost effective settlement later
(f) being judged in the opinion of others as conducting the adjustment of the claim in an unfair way
(g) failure to properly handle all aspects of the claim
(h) the judgemental error to "stereotype" insureds to conclude irrationaly that they "could not have had all those contents" lost in a claim
(i) the withholding of an interim payment in an effort to obtain a lower overall settlement
(j) refusal to negotiate, except and only to tell an insured you must provide receipts for each item claimed
(k) attempts to undermine an insureds credability to support an otherwise unjustified conclusion
(l) an adjuster allowing his file to remain in a "perpetual diary" awaiting instructions from the insurer, without following up with the insurer
(m) failure to recommend or to pay other claim elements that are not in dispute, hoping this leverage will force the insured into a lower settlement of the disputed elements

However, in conclusion, be pro-active in your dilligence to avoid getting involved in a bad faith claim. Read and adopt the guidelines sourced by Jim in the companion thread "How to avoid bad faith claims".

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