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Clayton Carr
Username: Clayton

Post Number: 77
Registered: 11-2001
Posted on Sunday, July 28, 2002 - 12:52 am:   

Jim 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".
Jim Flynt
Registered User
Username: Jimflynt

Post Number: 372
Registered: 6-2001
Posted on Thursday, July 25, 2002 - 1:16 pm:   

Now let's take a look at the situation you described and see if it rises to the level of 'bad faith' claims handling by the insurer.
I must first post a Disclaimer that I am not an attorney nor do I practice or attempt to practice law. Further, state laws and case laws vary from jurisdiction to jurisdiction around the U.S., and what may be considered an actionable tort in one state may not be actionable in another.

Bad faith is said by some to be the exact opposite of good faith.

Bad faith is also described variously as follows:

"The breach of the implied-in-law covenant of good faith and fair dealing"

"The legal/insurance term used to describe wrong doing by an insurance company in handling a claim. Failing to treat an insured fairly and in good faith

Black's Law Dictionary (1990, 6th Edition) defines: "Bad faith is the intentional failure by an insurer to perform the duty of good faith and fair dealing implied by law. Generally, an insurer may be acting in bad faith when it refuses to pay a claim and (1) has no reasonable basis for refusing to pay and has actual knowledge of that fact, or (2) has intentionally failed to determine whether it had a reasonable basis for so refusing."

The American Insurance Institute suggests that bad faith exists when there is evidence of fraud, malice or oppression by an insurer.

I personally hold to the belief that bad faith is constituted by egregious behavior by an insurer: Acts or failure to act in unreasonably denying coverage, improper or inadequate claims investigation, and deliberately, willfully and knowingly underpaying or offering to pay what is known (by a carrier) to be less than actual damages.

A carrier denying a claim for rightful cause is NOT bad faith.

Denying a claim when an insured fails to adhere to the insured's requirements under an insurance policy is NOT bad faith.

A carrier denying coverage for a non-covered peril is NOT bad faith.

Insurer adherence to reasonable and customary practices of the industry and following local/ state law and applicable case law in policy interpretation is NOT bad faith.

From the scenario you presented, I am first going to make a few assumptions which I will make clear before specifically answering your question.

You noted that the policy was "modified" to remove policy exclusions limiting sewer back-up limits. I assume this modification was done prior to issuance of the policy. (As a note, Insurers have the right to modify policy langauage AFTER issuance of a policy as long as the effect of the modification is to EXPAND coverage).

Assuming that the modification was done prior to issuance, I take it you are trying to make some relevant connection to other earlier langauage in similar policies; yet by the expansion of benefits to an affected insured, I find this point to be irrelevant to this discussion other than in understanding that general sub-limits for sewer back-up do not apply.

You do not mention in your post, that any other portions or language within the sewer back-up wordings are changed or expanded, so I am left to conclude that generally similar exclusions for "generalized flooding" would still apply, thus excluding any coverage under the specific policy for flood damage.

Subject to state laws and case laws for the state or jurisdiction in which your claim is located, "concurrent causation" is generally considered as a valid and reasonable cause for denial of an otherwise excluded cause of loss.

I now assume, that what has really occurred in the situation which you describe quite briefly is that the affected insureds suffered a loss due to general conditions of flooding which are reasonably excluded from most if not all homeowner's insurance policies.

Because of the general condition of flooding, excessive water infiltration into the public sewer systems ALSO caused sewer back-up, and your insureds are trying to make the argument and claim that sewer back-up and not general conditions of flooding caused damage to their risks.

Assuming that I am correct, a blanket denial by a carrier for damages caused concurrently by a general condition of flooding AND sewer back-up would NOT constitute bad faith.

Even were my assumption to be incorrect with regard to assuming both flood and sewer back-up were concurrent, any similar paradox involving one covered and one non-covered cause of loss, would still apply in principle in denial of a claim by a carrier (subject of course to state statute or jurisdictional case law).

I further assume that the issue of concurrent causation was known to all parties at the time the initial loss report was made or approximately at the time of the initial first visit and inspection of the loss by the adjuster. Such being the case (and again assuming applicable state statute and/or case law), what you describe as "very little investigation" may well have been proper given usual and customary (and I might add reasonable as well) practices of similar carriers and insurance professionals in dealing with claims of a concurrent causation nature.

That it only took "several weeks" instead of several months for the carrier to issue a "blanket denial" would not appear to be unreasonable, especially in light of an oblibgation to investigate, evaluate and analyze all pertinent facts in the claims investigation process.

On my first impressions from the scant information which you have provided, as well as some of the assumptions which experience teach me as likely, I would cling to the belief that the claims handling by your hypothetical carrier do not begin to rise to the level of a bad faith tort or unfair claims handling practice.

Please feel free to share any additional information which you may feel sheds more light on my approach to your scenario or to ask any questions which you or others feel valid.
Jim Flynt
Registered User
Username: Jimflynt

Post Number: 370
Registered: 6-2001
Posted on Thursday, July 25, 2002 - 11:35 am:   

To answer your last question first, the best textbook on how to avoid bad faith claims practices by adjusters (cat, casualty or otherwise) is entitled The Claims Environment and is available for ordering online through the American Institute of CPCU website (for which I have included a hyperlink below).

This textbook is used as the primary learning text and resource for the AIC 33 course and exam.

It is worthy to note that bad faith is not addressed in the AIC property course (AIC 35) or in the CPCU property textbooks (CPCU 2 Personal Insurance or CPCU 3 Commercial Insurance).

Vale National Training Centers also have an excellent three week casualty course where they exclusively spend 2 days educating adjusters on the topic of Bad Faith: What it is and How to avoid it. If you are nearby one of their three locations (Fresno, CA, Richardson, TX or Harrisburg, PA) you might check with them and see if you can arrange to take the two day portion of the casualty class dealing with Bad Faith. Their instructor Ron Smith, is one of the most authoritative and knowledgeable speakers on this topic I have ever met, and their course is unequalled anywhere.

You are correct that bad faith is generally considered within the context of liability claims handling rather than property, although not exclusively.

You might want to purchase and read a law school textbook on Torts which will cover negligence as well as the Tort of Bad Faith. If you need the title of one of the better Tort books, let me know.

You may also want to check with an attorney in your local area and state to find out how to explore recent case law in your applicable state. From my own experience, a trip to the closest law school library, will generally find the law school librarians willing to help you explore legal resources available and learn more without charge.

I will now proceed to address your more specific question involving the scenario you have presented under a separate post under this thread.
Todd Summers
Registered User
Username: T4summ

Post Number: 15
Registered: 12-2001
Posted on Thursday, July 25, 2002 - 10:33 am:   

Gil, your post didn't offend me, I just don't quite understand what you were trying to say...please continue.
Jerry Enebo
Registered User
Username: Jerry_enebo

Post Number: 3
Registered: 2-2002
Posted on Thursday, July 25, 2002 - 8:37 am:   

The case I have reviewed involves several insureds and one insurance company. The policy was modified to take out the exclusions for sewer back up, and in affect caused the policy limits to apply to that cause of loss. A blanket denial was made after several weeks and very little investigation as to the proximate cause. Some reference was made to Concurrent Causation. I guess that what I am searching for is some reference material regarding Bad Faith Claims handling in property losses. When I left the employee claims handling business in the early 70's the word Bad Faith was always talked about in the Casualty fields. As a Cat Adjuster I have not paid much attention to it in the last 15 years. Thanks for any advise I get-good or bad!
Gil C. Newton
Username: Newt

Post Number: 13
Registered: 7-2002
Posted on Thursday, July 25, 2002 - 8:14 am:   

Sorry bout that Todd, if this offended you. I am not making myself very clear, maybe I'll get better posts out if I take a little more time .
Better yet, maybe I shouldn't be posting if my comments are causing problems. Thanks for letting me know. There is a lot of educating going on here and I really enjoy this group and putting my two cents in where it is misunderstood or offends
someone is the last thing I want to do.
Todd Summers
Registered User
Username: T4summ

Post Number: 14
Registered: 12-2001
Posted on Wednesday, July 24, 2002 - 10:51 pm:   

Gil... What ????
Gil C. Newton
Username: Newt

Post Number: 12
Registered: 7-2002
Posted on Wednesday, July 24, 2002 - 3:47 pm:   

Jim, I have read most of your posts and really trust and admire what you are teaching, and believe me you are doing just that. Correct me if I am wrong, "PLEASE". Without knowing the circumstances of this post, and if this "Questionable Coverage" has been arbutriated. If it was decided in favor of the insured. It would have to be shown that it was indeed a calculated refusal on the part of the insurer to settle a claim, and that may or may not be proven in court. Mights ,ifs and may or may nots wont float a horseshoe in court. Seems
like the dude with the deepest pockets is going to loose in front of a jury. I don't think many
Insurers would take a risk, thats not to say some individuals wouldn't. Is this a jump to conclusions? I have found all big companys have
honorable intentions and within those big companys you will sometimes have a maverick.
Crooks don't get big except on paper and smoking
mirrors and the size of their debt.

Jerry Enebo
Registered User
Username: Jerry_enebo

Post Number: 2
Registered: 2-2002
Posted on Wednesday, July 24, 2002 - 1:29 pm:   

Thanks-I will get more specific on my question in a few hours. Jerry
Lee Mushaney
Registered User
Username: Red

Post Number: 12
Registered: 3-2001
Posted on Wednesday, July 24, 2002 - 12:59 pm:   

That question can't be answered with the info you have provided in your post.
Jim Flynt
Registered User
Username: Jimflynt

Post Number: 368
Registered: 6-2001
Posted on Wednesday, July 24, 2002 - 12:58 pm:   

Obviously, you have a situation in mind which you may feel rises to the level of bad faith. Why don't you describe your situation and then ask for comments.

The important word which adjusters should not miss in your post, was when you described a loss of QUESTIONABLE COVERAGE. Please explain the circumstances of your questionable coverage.

There is no one size fits all definition of bad faith which can fit each and every situation, and a number of factors would enter into discovering whether bad faith exists.
Jerry Enebo
Registered User
Username: Jerry_enebo

Post Number: 1
Registered: 2-2002
Posted on Wednesday, July 24, 2002 - 12:21 pm:   

What do you consider to be Bad Faith on an insurance companies side when directing the handling of a loss of questionable coverage?

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