Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

How could this possibly help a policyholder’s attorney in a bad faith case? Here’s an example. Many, if not most, insurance companies are structured to include a special department to which claims are referred when there are concerns of insurance fraud. These departments are sometimes referred to as a “Special Investigations Unit” (“SIU”). It would seem important to find out whether the insurance company was justified referring the claim to SIU and demanding stricter scrutiny for that particular claim. Similarly, it would seem critical to find out whether the adjuster referred a claim to SIU merely because the adjuster was told that he/she was required to submit a certain percentage of claims to SIU regardless of whether there were legitimate concerns of fraud, as mentioned in Getting the Inside Scoop on Insurance Company Claims Practices. In Discovery in Insurance Bad Faith Cases, Part I, Charles Miller states:

Organization charts can be valuable in a number of ways. For example, a common form of claims department organization today is the pod or unit organization. In this form of organization, the claim department is divided up into several pods or units, with adjusters (frequently four to five) assigned to each pod. Each pod or unit will have its own supervisor. The pods or units may also be divided into the types of claims they handle, with some only handling property claims and others casualty or auto claims.

For example, there might be a first party property damage claim that was handled by a unit or pod that only works with property damage claims. Knowing that the unit or pod is limited to handling only property damage claims enables a policyholder’s attorney to draft discovery regarding that entire unit’s or pod’s policies, procedures and training materials geared toward the handling of property damage claims. If, on the other hand, a first party property damage claim was handled by a unit or pod that handles property, fire and auto negligence claims, discovery might have to be drafted differently so as to distinguish information, training and other documents regarding only the handling of property damage claims from the rest of the information. Additionally, the level or experience of the specific employee that adjusted a particular claim can be critical.

In each unit or pod, there might be a wide divergence of experience between its members. Therefore, if a particularly difficult or complex claim was assigned to a relatively inexperienced member, the organization chart will identify the other members of the pod and unit, and counsel can determine who in that unit had greater experience, and would have been more suitable for handling the particular claim. This type of information can be particularly important where the assigned inexperienced claims handler has made serious errors in the handling of the claim.

Discovery in Insurance Bad Faith Cases, Part I, Charles Miller.

The foregoing demonstrates another aspect of bad faith litigation that should be considered by every policyholder’s attorney. It might be more helpful in certain types of cases, but it should certainly be one of the factors that a policyholder’s attorney evaluates when sizing up a bad faith case against a carrier.

Please tune in next week for another bad faith evaluation.

Like claims adjusters, supervisors and other personnel employed by an insurance company, agents also need instruction from the carrier. Agents sometimes sell different types of policies for a single insurance company. Other times, agents sell various policies for a number of different and unrelated insurers. As a result, it would make sense that a carrier would want to ensure its agents understand the company’s policies and standards and the “ins and outs” of the policies the agents are selling to the public.

Agency manuals can be useful in cases involving interpretation of insurance policy provisions, requirements for underwriting new risks, or an agent’s responsibilities in the underwriting process. For example, an agency manual may specify when an agent is to personally inspect a new home for homeowner’s insurance, what that inspection is to consist of, and how the agent should determine the amount of insurance on the home.

Discovery in Insurance Bad Faith Cases, Part I, Charles Miller, Esq., Insurance Law Center.

An insurer, presumably, also wants to make sure that its agents are following its protocols for marketing the company and meeting business goals. Many agents are responsible for reaching out to existing customers to renew existing polices, increasing coverage on existing polices, and applying for other types of coverage offered by the carrier. Although these responsibilities are quite different from those of a claims adjuster, an insurer would likely be just as interested in providing proper training to its agents. For this reason, many insurance companies publish manuals, guidelines and other materials to assist their insurance agents in handling the carrier’s clients and policies.

These manuals, which are provided to agents, provide guidance on the criteria for obtaining new business, renewing old business and a number of other matters.

Discovery in Insurance Bad Faith Cases, Part I, Charles Miller, Esq., Insurance Law Center.

A claims handling expert in the insurance industry also explains the following:

The insurer may also have its own exposure for failure to provide sufficient insurance. In some homeowner’s policies, the insurer may assume a responsibility to inspect the home and/or to determine the amount of the policy limits. In such cases, the insurer’s liability for an alleged failure to provide sufficient policy limits should not be overlooked.

Discovery in Insurance Bad Faith Cases, Part I, Charles Miller, Esq., Insurance Law Center.

Policyholders’ attorneys should carefully evaluate all aspects of a bad faith case. An investigation of whether an insured’s claim was properly handled should not be limited to the date of loss and after. Just like insurance companies are frequently trying to void policies in their entirety due to a “material misrepresentation” on the insurance application, policyholders’ attorneys should investigate whether the insurer’s actions were proper from the very beginning. Taking that into consideration, discovery requests should be carefully tailored to seek information which could be relevant to the claim and affect the insurer’s liability.

A few months ago in "Going through the Motions" Is Usually Not Enough to Compel Bad Faith Discovery From an Insurer, I referred to a plaintiff’s attorney who took extra time and patience in carefully preparing discovery requests. The attorney conducted legal research when planning his discovery and modeled his requests after the requests in another case -- requests that had been found to be reasonable by a Court when challenged by the insurer. Similarly, when drafting discovery that seeks information on an insured’s prior claims or other insureds’ similar claims, very careful attention must be given to each request. If a plaintiff’s attorney is faced with an objection by the carrier that the discovery request is burdensome, that extra effort in drafting the requests can go a long way later.

[C]ounsel may mitigate the burdensome objection by requesting similar files for only a particular time period, within a particular jurisdiction, or files with reserves over a certain amount.

Discovery in Insurance Bad Faith Cases, Part II, Charles Miller, Insurance Law Center.

For example, limiting the time frame for the information sought will reflect that careful consideration was given to either a more recent time frame or to a time frame that has particular significance for the issues presented in the case at hand. It might also be appropriate to limit the types of claims files requested.

…[I]n a residential fire case the request may only be for claims arising out of residential fires under similar policies…

Discovery in Insurance Bad Faith Cases, Part II, Charles Miller, Insurance Law Center.

It is important to determine whether the insurer is consolidating certain categories of claims into groups. For example, a carrier might separate claims into environmental claims, construction defect claims or claims for the special investigations unit. If so, then it will be important to find out how those claims are categorized so that the request can be narrowed or broadened to include groups of claims that are similar to the one at hand. If a request is limited, the limitation must be carefully tailored to the type of information sought and the legal and factual issues that are important in the case.

I am not implying that all discovery requests should be limited in some fashion or that requests which do not include some sort of restriction are not reasonable. I am proposing that these types of adjustments to discovery requests might help a policyholder’s attorney overcome an objection that the request is burdensome. I am also suggesting that drafting specifically tailored discovery requests at the outset can help keep the parties focused on the legal and factual issues at hand and could possibly bolster credibility in the courtroom. Furthermore, putting this much thought into the manner in which requests are worded forces an attorney to think ahead and to give due consideration to all aspects and strategy of the case.

Please check in with me next week for another bad faith discussion.

Let’s start with what we mean by “reserves.” Well, of course, there is lots of room for argument there, too, but let’s try to keep it simple for purposes of this week’s blog. In the insurance context, a reserve for a claim is basically an estimation of the money that will eventually be paid for the costs associated with that claim. Charles Miller, Insurance Law Center, Discovery in Insurance Bad Faith Cases, Part I.

Modern statutes, including Colorado statutes, require insurers to maintain reserves to assure the insurer’s ability to satisfy its potential obligations under its policies…The insurer must reasonably estimate the amount necessary to provide for the payment of all losses and claims for which the insurer may be liable [citation omitted]. The reserves must also reflect all potential claim expenses and any claim the insurer undertakes to defend since the insurer will have claim handling expenses, including attorney fees and court costs [citation omitted]. The reserve requirement therefore reflects a desire on the part of the states and the insurance companies themselves to ensure that resources are available to cover the insurer’s future liabilities…

Silva v. Basin Western, Inc., 47 P.3d 1184, 1189 (Col. 2002).

The amount of the reserve established for a particular claim can change throughout the life of that claim. Lipton, et al., v. Superior Court of Los Angeles County, et al., 48 Cal.App.4th 1599 (2d DCA Cal. 1996). The insurer can increase or decrease the amount of a reserve as new information is revealed. As a result, a particular reserve amount may be substantially more or less than the amount ultimately paid on a particular claim.

You are probably thinking to yourself, “Ok, so I can think of a reserve as a safety net – a savings account set up by the insurer to make sure there’s enough money to pay on a claim.” It sounds like a good idea. Statutory and regulatory reserves are probably set up in an acceptable fashion. So where does the problem lie? How can reserves can play a critical role in a bad faith claim against an insurer? How is it that insurers have used this as a way to pinch pennies? I’m going to let the courts explain this one to you…

Evidence of an insurer’s reserve setting procedures can show whether the insurer was following statutory and regulatory requirements. Grange Mutual Ins. Co., v. Trude, et al., 151 S.W.3d 803, (Ky. 2005). If an insurer is not complying with applicable statutory and regulatory requirements, the failure to comply can constitute bad faith per se. Past blogs have discussed performance based incentive plans for adjusters and software implemented by insurers, all of which are designed to cut payments on claims across the board. An insurer’s reserve setting procedures can also demonstrate whether the specific system for setting reserves is aimed at achieving unfairly low values. Like the incentive programs and cost-cutting software, this type of information is relevant to a bad faith claim.

It is important to remember that an insurer owes its insureds a common law duty of good faith and fair dealing. At first blush, it might not be obvious why reserves are important to a determination of bad faith against an insurer. The Supreme Court of Colorado explained that the establishment of reserves can be relevant and reasonably calculated to lead to admissible evidence regarding whether the insurance company adjusted the claim in good faith or made a prompt investigation, assessment or settlement of a claim. Silva v. Basin Western, Inc., 47 P. 3d 1184 (Col. 2002).

…[E]xamination with respect to the reserve may develop evidence on the issue of defendant’s [insurer’s] bad faith. Bad faith is a state of mind which must be established by circumstantial evidence. The actions of defendant [insurer] in respect to the reserve are relevant. Negligent investigation and uninformed evaluation of the worth of the Rosen [insured’s] claims go to the heart of the case since serious and recurring negligence can be indicative of bad faith.

Groben v. Travelers Indemnity Co., 266 N.Y.S. 2d 616, 17 (N.Y. 1965).

In cases where there is an excess judgment in the amount of the reserve, this may serve as an indicator of what the company thought the claim was worth. Charles Miller, Insurance Law Center, Discovery in Insurance Bad Faith Cases, Part I. This is even more important in those instances where the insurer never offered an amount equal to the reserve. In a case where the insurer denied coverage or took the position that a claim was not covered, a substantial reserve may indicate that, despite the insurer’s arguments otherwise, the insurer actually considered the claim covered.

So, if many insurers are required to establish reserves on certain claims, then why don’t they just pay the claim? Clearly, they have the money-- not to mention the fact that they statutorily obligated to follow specific guidelines for reserves. But why don’t they pay? Your guess is as good as mine. I think it goes back to the unfortunate perception that claims handling should be a profit center for insurance companies. Harsh, but unfortunately true for many insurers.

In your bad faith cases, please don’t overlook reserves. Ask for this information in discovery and find cases in your jurisdiction to support your requests. You are entitled to it. So go get it!

Happy Friday!

Vivian Persand has been busy in our efforts to obtain information about how Safeco and Liberty Mutual operate their claims departments and make decisions on claims. I recently noted and published some of her efforts in Liberty Mutual Claims Documents Ordered Produced. As soon as we learned of the last minute deposition cancellations, we flew her from our Coral Gables office to review the discovery and documents produced by Safeco in Houston.

While not counsel to Safeco or Liberty Mutual, Vivian represented other insurance companies before coming to work with us. She is familiar with the practice of many insurance counsel to object to, rather than turn over, discovery that could otherwise help prove the policyholder's case. This discovery abuse is a significant problem in civil insurance coverage litigation, and there is usually no consequence. Despite the obviousness of the potentially important evidence, many insurance company coverage and claims counsel base objections on  trade secret or work product privileges.

After spending a day with Vivian and coming across three other cases where attorneys obtained affidavits from a claims expert supporting motions to compel the production of evidence against Safeco or Liberty Mutual, we decided that Vivian will post every Friday on the Property Insurance Coverage Law Blog regarding lessons and experiences gleaned from Safeco and Liberty Mutual claims practice cases.

Many of the insurance coverage litigation techniques and practices in these cases are just as applicable to other insurance carriers and insurance coverage cases. Vivian's weekly posts will also provide some recognition to the efforts and creativity of other insurance coverage and claims practice attorneys with whom we have the privilege of collegial discussion and learning.

An example of an insurance discovery technique which leads to evidence is a discovery declaration by insurance claims practice analyst Charles M. Miller of California. Policyholder attorneys should obtain these affidavits as a normal part of their insurance discovery practice. This type of affidavit can help courts understand why requested discovery is relevant and important in insurance coverage litigation. Regarding Safeco, Miller noted the following:

...the documents sought in Plaintiff’s First Request encompass documents which describe Safeco’s programs and policies, such as Quantum Leap, which are directed at reducing Safeco’s claims payments in order to improve Safeco’s profits. Programs which emphasize profit in the handling of claims put the claims handler in a conflict of interest, wherein the claims handler can either fulfill the insurer’s full obligation to its insured or act in the insurance company’s interest because the claims handler will be financially or other wise rewarded if he/she does so. In my opinion, and based on my experience in reviewing handling thousands of claims files, when placed in such a conflict claims handlers will handle a claim in a manner that benefits the insurance company to the detriment of the policyholder. Such conduct is directly contrary to any claims handling standard and practice that I am aware of, and would be, in my opinion, bad faith. This information would be relevant to evaluating Safeco’s claims handling in this case.
...

Plaintiffs also seek information concerning Safeco’s bonus and compensation programs...Bonuses are available to Safeco claims department employees depending on how the company as a whole does in reaching its corporate goals...Bonuses play an important role at Safeco in providing motivation to claims department employees to improve Safeco’s profits. As pointed out in Respondent’s and Cross-Appellant’s Brief in the matter of Parks v. Safeco, “[Safeco] claim representatives were instructed that they could increase profitability as well as increase their retirement benefits and personal bonuses by reducing claims payments.

The financial incentives and motivations of insurance claims managers and employees can be extremely important when explaining claims behavior. This discovery tool teaches what to look for and why the evidence impacts good faith claims conduct. Sharing these lessons, helping colleagues, and promoting justice, is why Vivian Persand's posts will be important to read every week.

This week, Miller testified before the National Association of Insurance Commissioners that damages caused by Chinese drywall are covered under first party property insurance policies. Dan Luby of the Florida Insurance News forwarded an article, Lawyer Sees Insurer Vulnerability To Drywall Claims, that indicated:

Charles Miller, of the Insurance Law Center in Berkeley, Calif., made his remarks here at a hearing on drywall issues by the National Association of Insurance Commissioners Catastrophe Insurance Working Group at the NAIC’s Winter National Meeting.

Mr. Miller drew upon language contained within Fire, Casualty & Surety (FC&S) bulletins, a publication within National Underwriters parent Summit Business Media, to raise questions about whether exclusions apply.

If you want to read the FC&S Bulletin Miller is referring to, I wrote about it in a prior post, Chinese Drywall Losses Covered Under First Party Property Insurance Policy.

The article also noted:

Mr. Miller said FC&S - resource for insurers for interpretation of both commercial and personal lines coverages - notes that many courts have found the pollution exclusion in homeowners policies only applies to “traditional environmental damage.”

Mr. Miller said, “The release of gases inside of a residence is not normally considered to be traditional environmental damage.

Regarding latent defect and inherent vice exclusions some insurers have cited, Mr. Miller noted the FC&S bulletin states the exclusion applies to “a loss due to any quality in the property that causes the property to damage or destroy itself that results from something in the property itself.”

The drywall, he noted, is not destroying itself, but rather causing ensuing damage to its surroundings, which should be covered.

Mr. Miller said regulators should look to protect consumers by conducting multistate market conduct exams to ensure proper investigations into Chinese drywall are being conducted. Mr. Miller said there is a “critically important relationship between a timely and thorough investigation and a proper evaluation of the coverages.”

Amy Bach of United Policyholders was at the same lecture concerning Chinese drywall coverage issues that I wrote about earlier this week in Ensuing or Resulting Loss, and the Burden of Proving Causation Explained Simply. I talked briefly with Amy about my concerns over the coverage analysis and whether courts would misconstrue "ensuing loss" language.

Amy Bach also testified and was quoted with a rather unique suggestion for helping out policyholders with coverage issues:

"Ms. Bach indicated that insurers should assist policyholders and cover their claims now, and if they are found not liable later, they could then subrogate against those entities."

I personally do not know any first party insurer that has afforded any coverage for Chinese drywall losses. I seriously doubt they would do so because insurance companies love to hold money. Further, if there truly is no coverage, they may lose their subrogation rights as a volunteer rather than a party obligated to pay a debt.

One trend seems to be more coverage gurus stating that coverage exists to some extent for first party Chinese drywall claims. As a result, more claims are going to be made. We will see how they play out after denial and litigation ensues.

I referenced this conference in a previous post. And, being a student of human nature, I expect most delayed making a decision about attending. So this is your reminder.

A number of commentators and I have made remarks about the need for adjusters to better themselves through education. Unless you are a "know it all," I believe that every professional involved in first party property insurance claims can learn something from the panel of experts assembled for this conference.

I look forward to seeing you in Providence for this special event.

The Scope of Expert Testimony in Insurance Bad Faith Cases: Can the Expert Testify on the Meaning of the Insurance Policy? has a significant amount of information beyond what the title implies. Policyholder attorneys can use it to educate judges and juries to better decide insurance coverage and insurance bad faith cases. I will comment on this in greater detail later, but wanted to post this now because many of us can use Miller's article right away.

Slabbed is probably going nuts because I am indicating that another case may be resolved confidentially and without public scrutiny. So, to help Slabbed understand a little (there is more) of what we do and provide Dimechimes with some more adjuster training lessons, I am publishing the Reports of the Claims Expert and the CPCU expert in the case.

If this post is not removed, I would appreciate any ideas on this case and would love to share information about AIG and Lexington Insurance Company with those who are having claims problems with them.

Deborah Trotter in our Gulfport office is the primary attorney on this matter. She has flown from one side of the country to the other working on this case. We are on a contingency fee and we report to a receiver in the Bankruptcy Court. The client went into bankruptcy long before we were retained and the Court approved as counsel.

The mediator for the case is Jim Perry. He has an excellent reputation and was the mediator in our Port of New Orleans case. From my one experience with him, he deserves the reputation.

One commentator with personal knowledge about our firm in replying to The Parable of Hurricane Ike Insurance Claims, indicated that our files are "thick" when we go to settlement conferences. Our experience is that most good counsel prepare their cases thoroughly.

However, there is significant debate whether all facts should be used as leverage at a mediation. Even in our law firm, I have seen a strategy that "less is more" at mediation since the lawyers just end up arguing about which case is factually better. As mediation is purely about money, the attorneys following that theory do the trial analysis and simply give a one page summary: pay or go to trial.

I prefer to provide information prior to the mediation and discuss the facts less while there. As indicated in a post last week, our firm is discussing trial technique because we expect that more carriers will try to delay their day of reckoning through trial and appeal as the current economic climate worsens. Still, I have my trusted presentation advisor, Jack Stein of Trial Exhibits, with me because I feel compelled to make a few more points.

Will this case settle? Who knows? If it does, you may be one of the few who will know it existed.