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

Harper is a first party bad faith claim arising out of an arson that destroyed Harry Harper’s auto-body shop. Auto-Owners Insurance Company (“Auto-Owners”) was the insurer and denied the claim. Harper filed suit, alleging that Auto-Owners’ denial of coverage constituted a breach of contract in bad faith because it had insufficient evidence that Harper was responsible for the arson. During litigation, Harper sought all of Auto-Owners’ claims files. Auto-Owners argued that because it routinely anticipates litigation with an insured when a fire is reported as incendiary, all documents that were produced after it received notice -- the day of the fire -- that the cause was arson are immune from discovery under the attorney/party work product rule, the expert work product rule, and the attorney-client privilege. The Court noted the classic issue of work product protections and the insurer's obligation to investigate claims in good faith:

Because insurance companies investigate claims as part of their regular business, but with an eye to litigation at the same time, the court saw the work product rule as creating a dilemma for the courts: protect all insurance company investigatory reports, thus unduly increasing the costs of litigation, or open all claims files for inspection, thus inhibiting the candor and reliability of investigatory/adjuster evaluations and allowing plaintiffs to acquire the litigation strategy of the insurance company.

The court began with the general principle that the party asserting the privilege has the burden of proving that it applies. The analysis started with the concept that work product protection is not absolute and is more accurately described as a “limited immunity” rather than a privilege. There are two components that must be met: reasonable anticipation and causation. For reasonable anticipation, the Court looked to whether the documents at issue were prepared in “anticipation of litigation.” But what does that mean? Does that mean that just because an insurer might get sued then the work product privilege applies? Does that mean that because the insurer and insured cannot agree upon the amount of the loss, litigation is anticipated? No, it does not. There is a higher threshold that must be met in order for a document to be considered to have been prepared in “anticipation of litigation.”

…[A] party must demonstrate that ‘at the very least some articulable claim, likely to lead to litigation’ has arisen [citation omitted], that the probability of litigation is ‘substantial and imminent’ [citation omitted], objective facts establishing an identifiable resolve to litigate [citation omitted], or ‘ an identifiable specific claim or impending litigation when the materials were prepared’ [citation omitted]…that a party has consulted or retained an attorney [citation omitted]…

Assuming that the party asserting the privilege satisfies the first component, the next step is that the material sought to be protected must have been produced because of that prospect of litigation and for no other purpose. As discussed a few weeks ago in Plaintiffs are Entitled to the Claims File in a Bad Faith Lawsuit, the mere preparation of a document in connection with the investigation of the claim does not entitle that document to protection by the work product privilege.

If documents and materials are produced in the ordinary and regular course of a party’s business, and not to prepare for litigation, they are outside the scope of work product.

The Court continued its analysis, stating that while a court’s identification of a point in time after which litigation is reasonably anticipated is a legitimate and useful exercise, the protection afforded by the work product rule does not depend solely on the fact that a document was produced after that point in time, but depends primarily on the reason or purpose for the documents’ production.

Even after litigation is justifiably anticipated, routine or ordinary investigations or reports are not work product and may be obtained as normal discovery without a special showing of need.

Furthermore, it is important to consider that insurers have an inherent duty to investigate and evaluate a claim and make a decision with respect to claims submitted by its insureds. As such, it does not make sense that an insurer’s entire file is protected by the work product privilege because it was prepared in “anticipation of litigation.” For those of you who have been following this blog, you’ve heard this before:

It is presumed that a document or thing prepared before a final decision was reached on an insured’s claim, and which constitutes part of the factual inquiry into or evaluation of that claim, was prepared in the ordinary and routine course of the insurer’s business of claim determination and is not work product. Likewise, anticipation of litigation is presumed unreasonable under [Federal Rule of Civil Procedure 26(b)(3)] before a final decision is reached on the claim. The converse, of course, is presumed for documents produced after claims denial.

So there you have it – there are Courts that find that unless and until the insurer denies coverage, the work product privilege does not apply. A carrier that wants to overcome these presumptions must demonstrate, by specific evidentiary proof or objective facts, that a reasonable anticipation of litigation existed when the document was produced, and that the document was prepared and used solely to prepare for that litigation, and not to arrive at a claim decision.

Based on the application of the foregoing analyses, the Harper court ordered the production of a number of documents for which Auto-Owners had asserted the work production, attorney-client and or expert immunities, including: invoices and statements from outside experts for investigations performed; reports of investigation results provided to attorneys; memorandum documenting Auto-Owners’ decision to deny the claim; and correspondence between the carrier and an attorney wherein the attorney was merely serving as a claims process supervisor.

When insurers assert the work product privilege, policyholder counsel should not simply accept the objection. Motions to compel should be the standard procedure after a close analysis of what it is and why it is the carrier is asserting certain information is work product. In this claims practice arena of litigation, the work product privilege is often asserted broadly and undeservedly. Motions to compel that are properly prepared often pleasantly lead to surprising evidence that usually shows that the damage of truth was what the opposition was attempting to protect. The general rule is that when in doubt, use the rules and law to your advantage - ask for an in camera inspection of the documents so that the court can see for itself that the privileges do not apply.

Happy Friday!

The post quoted from a legal filing that indicates State Farm made up its own flood adjustment rules:

The NFIP Claims Manual requires that “repair estimates should be prepared room-by-room,on a unit-cost basis, clearly indicating dimensions and unit costs, except when the building has been completely destroyed.” NFIP Director David Maurstad testified that prior to Hurricane Katrina, flood claims had to be adjusted using a line-by-line stick build estimate. Maurstad also testified that following Hurricane Katrina, he tasked the NFIP Director of claims to come up with a method that “I could ultimately approve that could guide the Write Your Own Companies to handle claims in an expedited process specific to this . . . disaster, to Katrina.”

Maurstad testified that FEMA Directive W-5054 embodied the only expedited claims procedures that he authorized. That directive allowed adjusters to use a square foot value estimator instead of a line-by line estimate in two very narrow circumstances: (1) when a home “had standing water in it for an extended period of time”; or (2) when a home was “washed off its foundation by flood water.”

Discovery revealed that State Farm ignored the NFIP and Memorandum W-5054. Rather than follow the NFIP’s rules, State Farm expressly applied their own rules, which directly conflicted with Memorandum W-5054. David Maurstad testified that that in developing W-5054, he solicited ideas from various insurance companies for FEMA to consider. As part of that process, State Farm submitted a proposal to the NFIP on September 13, 2005, just one week before David Maurstad issued the actual directive. Remarkably, Juan Guevara, State Farm’s principle contact with the NFIP, testified that unlike all the other insurers, State Farm did not have to follow Memorandum 5054, but rather could play by its own rules, as stated in State Farm’s September 13th proposal.

Specifically, Guevara asserted that “5054 is different than the document we received approval to use,” and in fact, that State Farm’s claims handling practices did not change as a result of W-5054 being issued because it continued to adjust claims based on the September 13th proposal. Guevara’s admission is an enormous and dispositive indictment because there is a very important difference between State Farm’s September 13 proposal and the actual directive that was issued by FEMA.

Under the September 13 proposal, State Farm sought permission to use Xact Total “where a site visit was completed and [the damage] appeared to exceed policy limits.” But that part of State Farm’s proposal was not adopted in Maurstad’s final Memorandum. Rather, under FEMA Directive W-5054, Xact Total could be used only if the home had been in standing water for at least five days, or if the home had been washed off its foundations. In addition to his testimony, Juan Guevara’s emails reveal State Farm’s intent to ignore FEMA Directive W-5054. On September 22, 2005, the day after W-5054 was issued, Juan Guevara emailed Jim Shortley because he wondered why State Farm’s proposal regarding the use of Xact Total for policy limit losses was rejected. Mr. Guevara quoted the language in W-5054 requiring all claims (other than those related to slabs or homes in standing water) to be adjusted using the company’s “normal claims handling procedures,” and he stated, “I read this as having to write a complete line by line estimate even if the repairs will exceed the policy limits.”

The Windstorm Insurance Network has national flood adjusters classes regarding flood adjustment methodologies. Indeed, adjusters normally have to be certified as flood adjusters. I, and probably many adjusters from other firms, find it amazing that State Farm would unilaterally set its own standards for the adjustment of flood claims.

Today is the five-year anniversary of Hurricane Katrina. My experience from most hurricane disasters is that it is pretty difficult to find evidence of a storm five years afterwards. It may be difficult for many to see signs of the Katrina disaster. But when you get along the Gulf Coast, there are still many slabbed structures and obvious indications that a catastrophe occurred. Since we have not solved the wind versus water coverage issue, we can expect this to repeat in the future. 

For example, Grange Mutual Ins. Co. v. Trude, 151 S.W. 3d 803 (KY 2004), is a bad faith case arising from a car accident. The bad faith claim alleged that Erica Barnes, the adjuster for Grange Mutual Insurance Company (“Grange”), undervalued the claim during negotiations and that she repeatedly delayed communicating with the plaintiff’s attorney. The plaintiff served forty-two discovery requests. Grange objected to sixteen of them on the following grounds: relevancy, privacy, improper motive, trade secret, and burdensome. The trial court overruled Grange’s objections and granted the plaintiff’s motion to compel. Grange sought a protective order and the trial court denied the request. Grange again requested a protective order, this time, requesting an in camera inspection of the materials to be produced. The request was denied. Grange then filed a petition with the Court of Appeals. The Court of Appeals denied the petition because it determined that Grange failed to prove irreparable harm. For those of you that are enjoying this already, the really good part is next…

When analyzing the discovery dispute, the Court started with this very basic principle:

…[P]arties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action…It is not grounds for objection that the information sought will be inadmissible at the trial if the discovery sought appears to be reasonably calculated to lead to the discovery of admissible evidence.

At issue first, were interrogatories and requests for production focused on obtaining information regarding bad faith claims brought against Grange by private plaintiffs or the Kentucky Insurance Commission. Grange argued the information was not relevant because it covered claims against adjusters other than the one who handled the plaintiff’s claim. The Kentucky Supreme Court disagreed with Grange, explaining:

It is enough for us to note that discovery of information and documents related to similar claims involving other adjusters could reveal a pattern of bad faith conduct on the part of Grange. This would certainly be relevant to Wilder’s [Plaintiff’s] bad faith claim, regardless of whether such information was admissible at trial.

Additional requests sought manuals containing Grange’s internal policies and procedures for evaluating and adjusting claims. Sound familiar? Grange again objected to this production based on trade secret concerns and that they were irrelevant. The court explained that the question was whether Grange’s own policies embody or encourage bad faith practices and compelled the production of the training and policy manuals. The Court went on to explain that Grange’s methodologies for setting reserves on claims were also discoverable, stating that their relevancy was “obvious.” Evidence of Grange’s procedures for establishing reserves could help show whether Grange was complying with statutory and regulatory requirements and whether Grange’s process for setting reserves was aimed at achieving unfairly low values.

Grange also argued that the plaintiff was seeking certain information for improper purposes, such as use in other litigation. Many of you are familiar with the insurer’s motto of “divide and conquer.” Insurers really don’t want plaintiff’s attorneys working together and sharing information. That’s why many carriers will seek protective orders and/or ask plaintiff’s counsel to enter into a confidentiality agreement at the outset of discovery. They don’t want the information produced in one lawsuit to be used against them in another. Fortunately, the Supreme Court of Kentucky saw right through this:

That discovery might be useful in other litigation or other proceedings is actually a good thing because it furthers one of the driving forces behind the Civil Rules by allowing the cost of repeating the discovery process to be avoided and thereby encouraging the efficient administration of justice.

That’s the last thing carriers want as law in discovery.

The insurers also objected to production of personnel files, but the Court held they were discoverable:

Job performance and disciplinary information can help show that the adjusters and their superiors had engaged in bad faith practices in adjuster Wilder’s [Plaintiff’s] initial claim or that they had engaged in bad faith practices at other times.

The Court ordered Grange to produce those portions of the personnel files regarding job performance, bonuses, wage, salary data and disciplinary matters. The Supreme Court of Kentucky also stated that internal company newsletters that relate to claims handling could contain evidence that Grange knew of or encouraged bad faith claims handling by its adjusters. Those documents were relevant and discoverable as well.

The “trade secret” objection is often raised. Again, the trial judge ruled against Grange on this objection for many of the discovery requests at issue. There were several bases for the Kentucky Supreme Court’s ultimate decision requiring the production: Grange did not introduce specific evidence for each document or category of documents for which it asserted the trade secret privilege; Grange never submitted nor sufficiently described the documents in question; and Grange did not provide a privilege log. But it doesn’t stop there. The party asserting the privilege has the burden of proving that it applies.

The big picture is that courts will require production of internal claims management documents, but policyholders have to be ready for repetitive objections and willing to file motions to compel. You can’t just sit back and expect the Court to hand you the ruling you want.

Happy Friday!

Debbie Maroy, of ClaimSmentor and Dimechimes, which are excellent educational sites for adjusters, made the following observation:

Chip- I posted a link to this on our claims group at Linkedin as even independent adjusters who work for roofing firms when independent adjusting assignments are low are often faced with this problem when roofing firms ask them to act as negotiators with the insurers. I always point them to this California insurance commissioner case as many of them were approached by the contractor to work for them. I had warned them it sounded like public adjusting and sure enough not many months later the CA insurance department issued a press release about their unlicensed PA work....

....

I hope this helps independent adjusters as well make sure they are not participating in unlicensed public adjusting when working for roofing firms or other contractors. Thanks for bringing up this important topic.

The press release she referred to noted:

A Palos Verdes company and its operators will pay $200,000 in fines for posing as insurance claims adjusters after the Angora fire in South Lake Tahoe last summer.

Insurance Commissioner Steve Poizner says Paramount Disaster Recovery also agreed to pay the state $75,000 in litigation costs.

Steve Slepcevic, 39, of Palos Verdes, and Matthew Todd, 48, and Charlie Rose, 43, both of Redondo Beach, were ordered to cease and desist operations in August.

Poizner's office said they acted as certified public insurance adjusters and signed contracts with Tahoe-area fire victims.

The contract language language at issue in this matter was similar to that I have seen in dozens of contracts used by non-public adjusters:

13. On or around March 2000, the Department was informed that PARAMOUNT offered customers or potential customers Contract/Authorization/Designations that included the following language: “If insured elects not to repair property, but instead receives loss settlement from insurance company, Paramount shall receive 20% of THE AGREED UPON ESTIMATE, without deduction for depreciation or Insured’s deductible.”

14. After interviews and discussions between Department personnel and
PARAMOUNT regarding the contract language identified in paragraph number 13 herein, PARAMOUNT represented to the Department, in written correspondence dated January 22, 2003, that at that time the only contract they were using did not include the language contained in paragraph number 13 herein, but instead included the following contract language: “Paramount will be paid for in full for repairing/replacing Client’s damaged property. Paramount will receive the full amount of the total agreed upon estimate (i.e. the estimate Paramount and the Insurance Company agree upon), without deduction for depreciation or Client’s deductible. Paramount shall perform all work according to the agreed upon estimate and will perform all work to meet
current uniform building codes and/or restore property to pre-loss condition.

If you think that you may be in violation of adjusting laws, see an independent attorney and get a legal opinion about what to do. Many private emails suggested that these occurrences are not isolated, but that the enforcement divisions do little about this issue. I would not count on that continuing in the future.

Here is the Motion to Dismiss Standard noted in Johnson:

In addressing a motion to dismiss a complaint under Rule 12(b) (6), the Court must “accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine, whether under any reasonable reading of the complaint, the plaintiff may be entitled to relief.” Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir.2008). At this stage, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal...129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 554, 556 (2007)). “[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not ‘show[n]'-that the ‘pleader is entitled to relief.’ ” Iqbal, 129 S.Ct. at 1950....

This how the Johnson court analyzed the plaintiff's pleadings:

The plaintiff asserts that the defendant “negligently failed to act in good faith and otherwise failed to exercise reasonable care in investigating and adjusting” her underinsured motorist claim...She fails, however, to provide sufficient factual support to accompany this assertion. (Id.) The Complaint does not indicate that the defendant has either denied payment without a fairly debatable reason for doing so or unreasonably delayed the processing of a valid claim. Rather, the plaintiff states that her underinsured motorist claim proceeded to arbitration, and acknowledges that it was her choice not to accept the arbitrator's award. (Id.) Although she contends that there are “facts that would lead to the conclusion that defendants [sic] acted in bad faith,” she fails to set forth those facts in the Complaint, and instead states they must be “gleaned through continuing discovery. (emphasis added)

Given what I have written so far, I bet you can guess what is coming next in the opinion:

Lacking any factual support, the plaintiff's claim of bad faith stands alone as a “bare averment” that she “wants relief and is entitled to it.”...Such conclusory statements are not entitled to be accepted as true and are not enough to survive a motion to dismiss. See Iqbal, 129 S.Ct. at 1950 (explaining that the “doors of discovery” are not unlocked for a plaintiff “armed with nothing more than conclusions”). Thus, even when viewed in the light most favorable to the plaintiff, the Complaint has “failed to raise a right to relief above the speculative level” as is necessary to survive a motion to dismiss...Accordingly, the plaintiff's bad faith claim will be dismissed.

Policyholders are usually not given the true details of the bad faith conduct that give rise to a valid bad faith claim. Can you imagine an insurance company that uses an outcome oriented expert to provide a false or unreasonable basis for denying or delaying a claim explaining to the policyholder that such conduct is what caused the claim outcome? Even the most jaded insurance adjusters know when real bad faith conduct occurs, everybody is trying to hide it. So, since the policyholder merely knows that the claim was not paid fully or promptly, how is the exact factual pleading supposed to be made to meet the standard?

Federal court judges will certainly be getting more insurance controversy removals from state to federal court. Motions to dismiss were usually not filed in federal court because they rarely prevailed. I predict they will be commonplace with insurance controversies involving claims practice violations.

A Product Line Manager for Safeco explained that there is more than one type of severity:

I have three severity goals, an APD which was property damage on auto for third parties; an ABI {Auto Bodily Injury} goal that’s capped for Colorado; and an ABI goal that is uncapped for Colorado.

(Deposition of Sean Vizyak, a Product Line Manager for the Personal Lines Liability Department for Safeco in 2005; in the matter of Brown v. American States Preferred Insurance Company).

He went on to explain that “capped” severity is where the insurer takes all the ABI payments and then ascertains whether any particular individual accounted for more than a certain dollar amount in an effort to get a more consistent look at how the payments are being made. “Uncapped severity” is looking at pure dollars paid, divided by the number of claims settled, over a certain period. Typically, these figures are monitored on a monthly basis and on a 12-month rolling basis. As mentioned last week, the lower the severity for an adjuster, the better the adjuster’s performance is deemed to be.

Liberty Mutual has implemented a program that works very much like Safeco’s severity. A claims Manager for Liberty Mutual defined severity as a “median of all claims” and went on to explain how it morks. (Deposition of Jay Anderson, at one time a Liberty Mutual Claims Manager for Property Claims, in the matter of O’Toole v. Liberty Mutual Insurance Company). Annually, Liberty Mutual makes sure that the property loss payments are within the goals or established limits. When evaluating the performance of a claims employee, one of the business objectives was to control property loss payments. The objective criteria used to evaluate how the claims operation was controlling property loss payments was called “pure premium.” “Pure premium” is the total amount paid on claims, exclusive of claims expenses, divided by the number of homes insured by Liberty Mutual. A reduction in pure premium is favorable to Liberty Mutual. As such, claims adjusters were evaluated upon how much they were able to reduce their pure premium payments within a particular time period.

Claims handling experts will tell you that programs like Safeco’s severity goals and Liberty Mutual’s pure premium criteria have both been used to measure company profitability and to evaluate employee performance. They are both well thought out processes that involve a very detailed analysis of claims handling. They may vary in terms of how the calculations and formulas are set up, but the end result is virtually the same.

The problem arises when those well thought out processes are aimed at increasing company profits at the expense of policyholders who paid a pretty premium for coverage. You can see the conflict: claims adjusters receive bonuses and job security by paying less on claims, while policyholders need prompt payment of the insurance they purchased so that they can put their home or business back together. It is this conflict that many find offensive and it is the reason claims handling experts opine that severity should not be used to evaluate the performance of claims personnel or as a basis for bonuses.

Texas Insurance Code Chapter 541 defines and prohibits unfair and deceptive insurance practices. The Texas Insurance Code prohibits a laundry list of acts by the insurer, but the most commonly used provisions are those relating to unfair settlement practices and misrepresentations of insurance policies.

With respect to property insurance, section 541.060 prohibits engaging in any of the following unfair settlement practices with respect to a claim by an insured:

1. misrepresenting to claimant a material fact or policy provision relating to coverage at issue;

2. failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim (a) with respect to which the insurer’s liability has become reasonable clear, or (b) a claim under one part of a policy of a claim with respect to which the insurer’s liability has become reasonably clearing order to manipulate the claimant to settle an additional claim under another part of the coverage, unless payment under one part of the coverage constitutes evidence of liability under another part of the policy;

3. failing to provide promptly to a policyholder a reasonable explanation of the basis in the policy, in relation to the facts or applicable law, for the insurer’s denial of a claim or for the offer of a compromise settlement of a claim;

4. failing within a reasonable time to (a) affirm or deny coverage of a claim to a policyholder, or (b) submit a reservation of rights to a policyholder;

5. refusing, failing, or unreasonably delaying an offer of settlement under applicable first-party coverage on the basis that other coverage may be available or that third parties are responsible for the damages suffered, except as may be specifically provided in the policy;

6. undertaking to enforce a full and final release of a claim from a policyholder when only a partial payment has been made, unless the payment is a compromise settlement of a doubtful or disputed claim;

7. refusing to pay a claim without conducting a reasonable investigation with respect to the claim;

8. requiring a claimant to produce the claimant’s federal income tax returns for examination or investigation by the person, as a condition of settling a claim, unless (a) a court orders the claimant to produce those tax returns, (b) the claim involves a fire loss, or (c) the claim involves lost profits or income.

As you can probably already tell, “unfair insurance practices” is a fairly loaded term. Although the list above contains eight different unfair settlement practices, it is not a complete list of what constitutes “unfair insurance practices.” Chapter 541 of the Texas Insurance Code also protects policyholders from an insurance company’s misrepresentations and it prohibits conduct described in the Deceptive Trade Practices Act. I will write about misrepresentations and the Deceptive Trade Practices Act in future posts, but the list above is a good start for understanding the type of insurance company behavior Chapter 541 prohibits.

I have never met the attorney that brought the lawsuit, to the best of my memory, but he is not a member of the American Association for Justice's Bad Faith Litigation Group. Had he been a member, he could have requested information about other instances and procedures Liberty Mutual has regarding its claims handling. Members of this group help their clients by sharing such information with one another so that claims practices of insurance companies are made transparent. Kelly Kubiak of our firm is the current Co-Chair of that organization.

The lawsuit involved an insurance claim for a leaky roof which started from the Hurricanes in 2004. Liberty Mutual was an insurer. The leak was apparently never fixed and the policyholder suffered from living in a mold infested structure. The judge noted these facts and the complaint as follows:

The insured obtained a homeowner's policy from the insurer, which policy provided coverage from 2004 to 2007. In August and September, 2004, hurricanes Charlie and Francis damaged the roof on the insured's home. In order to stop “minor leaking,” the insured employed a repairman to patch the roof. In 2005, under pressure from the homeowner's association, the insured hired someone to pressure clean the roof. However, the cleaner refused to wash the roof after discovering several loose tiles. The plaintiff submitted a claim to the insurer. Because of the insured's inability to locate a roofing contractor, the insured “hired people to remove the old roof and [ ]place [thirty] [pounds] [of] felt and tarp[ ]” on the roof. Excessive rain and wind blew the felt and tarp off of the roof and caused “extensive leaking.” The insured again called the insurer and requested benefits under the policy.

The leak in the roof resulted in “extensive damage” inside the house consisting of black mold in the attic and on the walls. The insurer refused to pay (1) for a repair of the roof because the roof “was not built to code” or (2) for mold remediation because the roof continued to leak. In 2005, the insured located a roofing contractor and agreed to pay $32,500 for a new roof. After the contractor replaced the roof, the insured sued and refused to pay the contractor because “the contractor had not fully replaced damaged wood [ ]or repaired fascia appropriately.” In due course, the insured settled the lawsuit and paid the contractor, because the insured wished to sell his home.

During this time, the insurer on four occasions offered “to settle the claims” of the insured. The insured refused each offer as inadequate. The insured alleges (1) that the insurer “with full[ ] knowledge” of the insured's “infirmities” and disabilities “engaged in a willful and outrageous pattern of delay and withholding of benefits ....;” (2) that, [n]otwithstanding the immediate danger presented by the increasing mold infestation, the [insurer] withheld payments and living expenses which forced [the insured] to live longer in the mold infested house and aggravated mold condition;” and (3) that the insurer's conduct “was outrageous and deliberate and, knowing [of] [the insured's] infirmities, designed to force [the insured] to discount the full value of his claim.” In 2007, due to the mold's effect on the insured's health, the insured vacated the house.

I wonder if the attorney would have changed the complaint if he knew of Liberty Mutual's claims practices as we noted in Liberty Mutual Claims Documents Ordered Produced. Many other attorneys, knowing of these practices, have sued Liberty Mutual with facts of those claims practices which some would suggest would give rise to "outrageous motives" to reduce the amounts paid on claims. Whether those facts would have been enough to convince a judge to let the matter proceed is not known because they were never plead. Instead, the Court ruled the following:

In order to state a claim for intentional infliction of emotional distress, a plaintiff must allege facts showing outrageous conduct by the defendant. See Dependable Life Ins. Co. v. Harris, 510 So. 2d 985, 986 (Fla. 5th DCA 1987). “Whether alleged conduct is outrageous enough to support a claim of intentional infliction of emotional distress is a matter of law, not a question of fact.” Gandy v. Trans World Computer Tech. Grp., 787 So. 2d 116, 119 (Fla. 2nd DCA 2001). A plaintiff fails to show outrageous conduct even if the plaintiff alleges that the defendant's conduct was (1) intentionally tortious or criminal, (2) intended to inflict emotional distress, (3) malicious, or (4) aggravated enough to warrant punitive damages. The defendant's conduct must qualify as “‘so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community.’“ Metro. Life Ins. Co. v. McCarson, 467 So. 2d 277, 278-79 (Fla.1985) (quoting RESTATEMENT (SECOND) OF TORTS § 46 (1965)).

In this action, accepting the insured's factual allegations as true, the insurer's conduct fails to rise to the level of outrageous conduct. The insurer offered four times in three years to settle the insured's claim. Even if the insurer's offers were either inadequate or “designed to force [the insured] to discount the full value of his claim,” the insurer's conduct fails qualify as “outrageous” for the purpose of stating a claim for intentional infliction of emotional distress.

I know that Vivian Persand will follow up with the attorney to provide him the information we have regarding Liberty Mutual. I hope he uses that information and joins the Bad Faith Litigation Group so the policyholder comes out better in the future.

In the world of insurance, some Safeco representatives will tell you the following:

Severity may be considered in the performance evaluation of an adjuster, unit manager and/or product manager... ’severity’ refers to the average paid claim.

Deposition of Michael Burton, a Large Loss Claims Property Unit Manager for Safeco in 2006; in the matter of Price v. Safeco Insurance Company of America, et al.

Another Safeco employee explains that:

Claim payment severity is used to monitor the performance of individual Safeco claims personnel.

Deposition of Sean Vizyak, a Product Line Manager for the Personal Lines Liability Department for Safeco in 2005; in the matter of Brown v. American States Preferred Insurance Company.

It doesn’t sound that bad, right? Kind of like when you first think about the reserves discussed a few weeks ago in Reserves Are Important in Insurance Coverage and Bad Faith Claim Disputes. At first blush, it might actually sound like a good idea: “reserves” - a safety net set up to make sure the carrier sets aside enough money to cover the claim; “severity” – a way for the carrier to monitor the performance of its claims adjusters. But why is the insurer monitoring severity? To make sure the adjusters are complying with applicable statutes and regulations? To make sure the insurance company is looking out for its insureds? Not really.

Unfortunately, severity does not evaluate whether the claims adjuster’s performance consisted of a timely and thorough investigation of a claim. Severity is not intended to make sure that the claims adjusters are looking out for the best interest of the insureds. A claims handling expert explains that some insurers have used severity to measure a claims employee’s performance based on his/her ability to reduce severity – in other words, a measure of how much a particular claims employee reduced the average amount paid on claims. You got it – the lower the average paid on claims by a particular employee means a greater performance by that employee. Now it doesn’t sound like such a good idea, right? Well, at least not for the insured…

A few weeks ago, in The Fantasy of "the Good Ole Days" When Insurance Companies Adjusted Claims Fairly and Paid on Time, I wrote about the way that insurers have extraordinarily diminished the human element in claims handling. Severity is another manner in which the human element of evaluating and investigating claims has been decreased. Claims handling experts explain that severity imposes artificial goals on an adjuster for the handling of claims. If severity is implemented, the claims handler is typically instructed to handle claims within a certain monetary range, and annual goals are set up raising the expectations for an adjuster to reduce severity year to year. Similar to performance based incentives and bonus plans that financially reward adjusters for paying less on claims, severity is also used by some insurers to improperly evaluate the performance of an adjuster.

So this concept of “severity” is probably not the first thing that came to mind when you read the title, right? Please tune in next week for a more on the severity of an insurance claim.

Happy Friday!

This point was emphasized again in a blog by Ronald D. Kent, Lawyer Cannot Testify as Expert in Bad Faith Case Where Lawyer’s Background Is Not Relevant To Issues in Case, where he noted a bad faith case Butler v. First Acceptance Insurance Co., 652 F. Supp. 2d 1264 (N.D. Ga. 2009), He quoted the significant part of the Court's ruling:

Mr. Jenkins is not qualified to provide expert testimony on the standard of care for a claims adjuster receiving a time limited demand letter. Mr. Jenkins is an attorney who has represented parties in personal injury and insurance litigation for over 30 years. He is co-author of Georgia Automobile Insurance Law, Including Tort Law. Mr. Jenkins was retained as an expert in a Georgia state court case involving a tortious failure to settle claim. The court notes, however, that Mr. Jenkins has never worked in the insurance industry, nor has he litigated a tortious failure to settle case. While an expert may be qualified based on "knowledge, skill, experience, training, or education," the court finds that Mr. Jenkins' extensive background is not relevant to the legal issues here. Mr. Jenkins' experience relates to personal injury and insurance claims in general. Mr. Jenkins admitted that he never litigated a tortious failure to settle claim and therefore his background does not match the subject matter of this suit. Further, because Mr. Jenkins lacks the qualifications necessary to opine in a tortious failure to settle case, Plaintiff cannot explain how Mr. Jenkins' experiences lead to the opinions he has offered in this case. Nor can Plaintiff show that Mr. Jenkins' testimony would offer the jury any more than what Plaintiff's counsel could argue in closing arguments. Finally, the court notes that the great bulk of Mr. Jenkins' proposed testimony sets forth legal standards for insurers under Georgia law. The jury, however, is not to receive its instructions of law from a party's expert, rather it receives them from the judge. For these reasons, the court concludes that Mr. Jenkins is not qualified to offer his opinion in this case because his area of experience is not relevant for the issues in the litigation and will not aid the trier of fact. (emphasis added)

I disagree with the Court regarding the jury instructions because experts can help prove the legal duties of claims adjusters and insurance companies which should be part of the jury instructions. As I indicated in Claims Magazine and the CPCU Designation are Worthy Educational Investments for Claims Professionals:

Imagine you wanted to find out how insurance adjusters are supposed to do their job. Insurance company attorneys argue an adjuster’s job is a legal duty, and not for determination by the adjusters. Their argument is circular and flawed: how does the law know what an adjuster is supposed to do without knowing the standards and duties from adjusters themselves?

The American Institute for CPCU provides the most recognized and important designation for claims professionals. The Society, with materials from the American Insurance Institute, has an intense learning process dedicated to a high standard of ethical and policyholder centered claims treatment. The Claims Magazine article notes that claims professionals "are often called upon to testify in legal proceedings."

Our firm often cites to CPCU educational materials as proof of insurance industry standards and interpretation of contracts.

Still, the opinion is warning about the types of experts needed in a bad faith case. Experienced Claims Adjusters May Make Better Insurance Claims Experts Than Attorneys. I have suggested to a number of experienced adjusters that they should study and apply for a CPCU designation so they could be more easily considered as an expert witness.

We all know that an insurer’s claims file will typically contain the following:

• Correspondence between the insurer and the insured or any representative of the insured
• A copy of the policy at issue
• A list of any payments made on the claim to date
• The adjuster’s log or a listing of entries for the adjuster’s notes
• For those claims where the insured retained a public adjuster, the estimate prepared by the public adjuster on behalf of the insured
• Receipts, canceled checks, invoices, credit card statements or any other documentation provided by the insured to support expenses incurred in connection with the loss
• Any estimate of damages prepared by the insurer’s adjuster regarding the loss
•  Reports by engineers, roofers or other tradesmen who inspected the insured property and prepared a report for the insurer regarding the loss
• Claims summary
• Whether the file was reported to the Special Investigation Unit

A claims file can also contain other information that can be helpful to you in developing your bad faith case against a carrier. Claims files usually identify all personnel who were involved in the claim. Charles Miller, Insurance Law Center, Discovery in Insurance Bad Faith Cases, Part I. You should be able to identify the adjuster(s), supervisor(s), or any other type or level of employee that was involved in the file and the level of each person’s participation. Once you obtain this information, you can decide whether it is necessary to depose one or more individuals regarding their involvement in the handling of the claim. If you decide that it is necessary to depose particular employees, you may want to serve additional discovery seeking the personnel files for each employee that you want to depose. Why would you want to do that? Wouldn’t you want to know how much experience the adjuster had and what training he/she received? It could be important to find out whether any employee was financially rewarded for reducing payments on claims. When handling your client’s claim, was the employee in compliance with industry standards? Was the employee following the insurer’s standards? These are all questions that you should ask yourself when you get the claims file. Based on the facts of your case, it may be crucial for you to delve into these additional areas in order to properly develop your case.

The carrier’s claims file will likely also identify the claims programs, procedures and/or software that were used in the handling of the claim. Charles Miller, Insurance Law Center, Discovery in Insurance Bad Faith Cases, Part I. The policies and procedures in place at the time your insured sustained the loss will help you understand what measures were implemented by the carrier to decrease payments in claims. The experts in the field provide examples of programs that have been used by insurers such as the following: “CCPR” (Claim Core Processing Re-Design) for Allstate; Quantum Leap for Safeco and State Farm; and “ACE” (Advancing Claims Excellence or Accelerating Claims Excellence - depending on who you ask) for Nationwide. Based on the carrier’s specifics, your expert can help you understand how the program the insurer implemented affected the handling of your client’s claim.

An insurer’s claim file might also include reserve information. Last week’s blog titled Reserves Are Important in Insurance Coverage and Bad Faith Claim Disputes discussed what reserves are and why they are important to a bad faith claim.

So why are we talking about what’s in a claims file? Because in many jurisdictions you are entitled to the claims file in a bad faith lawsuit. Of course, you can expect the usual work product and attorney client objections. That’s when you bring in your expert, do your homework and file a motion to compel, because the case law in many jurisdictions is on your side.

Courts must distinguish between reports prepared in response to an unfortunate event that might well lead to litigation, and materials prepared as an aid to litigation. The work product doctrine is not an umbrella that shades all materials prepared by the lawyer, the doctrine focuses on material assembled and brought into being in anticipation of litigation.

Clover Staffing, LLC and Johnson Controls World Services, Inc., et al., 238 F.R.D. 576, 579 (S.D. Tex. 2006); Citing U.S. v. El Paso Co., 682 F.2d 530 (5th Cir. 1982); See also, Electronic Data Systems Corp. v. Steingraber, No. 4-02-CV-225, 2003 WL 21653414 (E.D. Tex. July 9, 2003). Additionally, the work product privilege does not extend to the underlying facts relevant to the litigation. Furthermore, if the insurer assembled the materials in the ordinary course of business or pursuant to public or insurance requirements unrelated to the litigation with its insured, then the documents are typically not shielded by the work product privilege. Navigant Consulting, Inc. v. Wilkinson, 220 F.R.D. 467, 473 (N.D. Tex. 2004). In the insurance context, courts have routinely recognized that the investigation and evaluation of claims is part of the regular, ordinary and principal business of insurance companies. Lanelogic Inc. v. Great American Spirit Ins. Co., No. 3-08-CV-1164, 2010 WL 1839294 (N.D. Tex. May 6, 2010); Douga v. D & B Boat Rentals, Inc., No. 04-1642, 2007 WL 1428678 (W.D. La. May 10, 2007).

Even though litigation is pending or may eventually ensue does not cloak such routinely generated documents with work product protection.

Piatkowski v. Abdon Callais Offshore, L.L.C., No. 99-3759, 2000 WL 1145825 (E.D. La. August 11, 2000).

If the document would have been created without regard to whether litigation was expected to ensue, it was made in the ordinary course of business and not in anticipation of litigation.

Additionally, courts have explained that insurers cannot reasonably argue that the entirety of its claims files are accumulated in anticipation of litigation when the insurer already has an inherent duty to investigate, evaluate and make a decision regarding claims made by its insureds. Harper v. Auto-Owners, Inc. Co., 138 F.R.D. 655, 662 (S.D. Ind.1991); Pete Rinaldi’s Fast Foods v. Great American Ins. Co., 123 F.R.D. 198, 202 (M.D. N.C. 1988).

It is presumed that a document or thing prepared before a final decision was reached on an insured’s claim, and which constitutes part of the factual inquiry into or evaluation of that claim, was prepared in the ordinary and routine course of the insurer’s business of claim determination and is not work product. Likewise, anticipation of litigation is presumed unreasonable under [Federal Rule of Civil Procedure 26(b)(3)] before a final decision is reached on the claim. The converse, of course, is presumed for documents produced after claims denial.

Simply put, the work product privilege usually does not apply unless and until the carrier has denied coverage. In most jurisdictions the way to overcome the foregoing presumptions is for the insurer to demonstrate, by specific evidentiary proof or objective facts, that a reasonable anticipation of litigation existed when the document was produced, and that the document was prepared and used solely to prepare for that litigation, and not to arrive at a claim decision.

I hope you tune in next week for more bad faith discussions.

Happy Friday!

A recent case, Penford Corp. v. Nat'l Union Fire Ins. Co., 2010 U.S. Dist. LEXIS 60083 (N.D. Iowa June 17, 2010), demonstrates this frequent challenge regarding claims practice experts on various issues of testimony. Indeed, the policyholder and insurer challenged the ability of each others claim practice expert to testify.

Regarding the policyholder's expert, the Court found the following:

The court finds that its previous rulings do not preclude Jolstad's testimony on the issue of bad faith. Penford contends not only that Defendants acted in bad faith with regard to coverage, but also with respect to the timing of Defendants' payments on amounts undisputedly due under the policy. In its previous ruling, the court held that the policy language was ambiguous. Defendants argue that this ruling somehow moots Penford's bad faith claim, because Defendants' refusal to pay in light of the ambiguous policy could not be in bad faith. The court disagrees. "'To establish a first-party bad-faith claim, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.'" Vos v. Farm Bureau Life Ins. Co., 667 N.W.2d 36, 51 (Iowa 2003)...Defendants have not cited any authority suggesting that the existence of ambiguous policy language is a reasonable basis to deny a claim and precludes Penford from asserting a bad faith claim.

...Penford also alleges that Defendants acted with bad faith in delaying payment of certain sums that Penford was undisputedly entitled to under the policy. Thus, Jolstad's opinions are probative on the issue of whether Defendants acted in bad faith in handling Penford's claims. See Fed. R. Evid. 401 ("'Relevant evidence' means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence."). Accordingly, the court finds that its previous rulings do not bar Jolstad's opinion testimony on the issue of bad faith.

Defendants also ask the court to bar Jolstad's opinions regarding the timeliness of Defendants' payments to Penford. First, Defendants claim that Jolstad's opinion on this issue is based on nothing more than his "fertile imagination" and has "no basis in either the policy or the Iowa statutes." ... Second, Defendants argue that his opinions on this issue are irrelevant because Penford cannot quantify any damages as a result of any delay in payment.

The court disagrees with Defendants claim that Jolstad's opinion must be barred because it allegedly has no basis in the policy or Iowa statutes... Under Iowa law, a plaintiff may prevail on a bad faith claim if he or she can show that "the insurer 'lacked a reasonable basis for denying or delaying payment of the claim.'" ...Jolstad's opinions are based on his extensive experience in the insurance industry, and his testimony as to whether Defendants conduct constituted bad faith--when judged against the customs, practices and standards of the insurance industry--will be helpful to the jury in assessing Penford's bad faith claim. Defendants can appropriately test Jolstad's opinions, and the basis for them, on cross-examination and through the presentation of contrary evidence, including their own bad faith expert, Peter Evans. (emphasis added)

I almost started laughing at the first part of the reasoning. An insurer acting in "good faith" is supposed to construe ambiguous language in favor of the policyholder and thus pay. Only if coverage is unambiguously excluded or not owed does an insurer escape that responsibility. This is what is taught to adjusters in basic claims school, although the insurance attorneys then try every means possible to prevent juries from learning of this duty.

Obviously, the second highlight was a preview of the Court’s ultimate holding on the admissibility of the expert testimony:

Penford argues that Evans' bad faith opinions are unverifiable because they are not based on anything other than Evans' "word" and are therefore inadmissible...The court disagrees. As with Penford's expert, Jolstad, Evans' opinions regarding Defendants' alleged bad faith are based on his extensive experience in the insurance industry, particularly as a loss adjuster. The court finds Evans to be sufficiently qualified as an expert on the handling of insurance claims based on his knowledge, skill and experience ... The court also declines to exclude Evans' opinions based on Penford's contention that they cannot be measured against any "authoritative body of governing principles." Penford's arguments are appropriate subjects for cross-examination or the presentation of contrary evidence, such as opinion testimony from its own bad faith expert...

Penford also asks the court to bar Evans' bad faith testimony because he purportedly failed to apply the appropriate standard for bad faith under Iowa law. As previously stated, a plaintiff may prevail on a bad faith claim if he or she can show that "the insurer 'lacked a reasonable basis for denying or delaying payment of the claim.'"... Evans testified that the claims handling process should be judged by "objective standards of reasonableness."... He later described the standard as "promptness and reasonableness." ... Evans' report includes his opinion that Defendants did not "unreasonably" delay payments...The court finds that Evans' opinion is sufficiently based upon the correct ... standard for bad faith claims under Iowa law. Accordingly, Penford's Motion is DENIED to the extent it seeks to bar Evans' testimony regarding Penford's bad faith claim.

Experts can help in discovery and at trial of bad faith cases. However, there is no certainty that a Court will allow all the evidence or opinions about insurance conduct to be explained by an expert at trial because those challenges are now the rule, rather than the exception. Accordingly, the lessons are:

1. Retain experts who have experience in the industry,
2. Retain experts who can help with discovery matters,
3. Retain experts who have the time to write thorough and documented reports based on the legal claims conduct standards and burdens.

All this discussion of "bad" brings to mind a classic as the weekend nears: 

Examinations under oath are often not needed if the insurance company has only non-fraudulent concerns. Discussion and exchange of information is far quicker and much more in depth than the typical questions and answers in most examinations under oath. Insurance adjusters, claims managers and their attorneys must know must know this, so the only real reason for examinations under oath is to help the insurance company attorneys make final coverage suggestions before their claims managers make the decision.

Corey Harris wrote an excellent piece in When Can An Insurer Require An Examination Under Oath? Readers should note that this post involves Florida law and many states have different case law, regulations and statutes that may apply. Most regulations and statutes require insurers to quickly invoke examination requests or lose the right. United Policyholders remarked in Examinations Under Oath on the various consumer protections regulations and statutes that are needed to keep insurers acting in good faith:

Companies use this procedure to screen out fraudulent claims and test a policyholder’s credibility and/or evaluate what kind of a witness he or she will make if a claim or coverage dispute goes into litigation. The EUO procedure was abused by insurers after past disasters to intimidate and frighten policyholders. So United Policyholders helped pass legislation in California to stop the abuses and protect policyholders. (empahsis added) But the EUO procedure is still a legal and valid requirement in homeowners policies, and the law in most states is vague on the subject. A homeowner who makes a claim for policy benefits must cooperate when an insurer makes a reasonable request to examine them under oath or risk losing the right to recover the funds they’re entitled to. Courts have traditionally been hard on policyholders who refused to cooperate in EUOs.

In California and in most states there are “Fair Claim Handling Regulations”, and there are laws that tell insurers what they must, can and cannot do. Above all, your insurance company has the legal duty to investigate and process your claim fully, promptly and in good faith and deal with you fairly.

Florida and other states in the Southeast need more consumer protections to prevent and discourage the delays that routinely occur when some insurers’ investigations seem to last forever and do not lead to a claims decision, but further excuses for more delay--- usually the excuses of needing and analyzing more information. Some insurers are trying to avoid this by re-writing policies with increasing and detailed conditions precedent.

Nevertheless, Corey Harris correctly notes the general majority rule: Examinations Under Oath should be demanded timely, before payment or denial, and definitely before a properly filed lawsuit where the insurer had not reqested an examination. His discussion gets to the heart of the matter:

...the Court ruled that because the insurer had requested the examination under oath prior to the lawsuit, the examination under oath was a condition precedent to filing suit. Therefore, the Court determined that the insured had breached the contract and was not entitled to payment under the policy.

A much different scenario exists when the insurer does not request an examination under oath prior to the lawsuit being filed. This situation arose in Willis v. Bankers Insurance Company, 736 So.2d 1272 (Fla. 4th DCA 1999). In Willis, the Court distinguished the facts in Goldman because of the time when the examination under oath was requested. Since the insurer did not request the examination under oath until after the suit was filed, the court held that the examination under oath was not a condition precedent to filing suit. Therefore, the insured in Willis did not breach the contract by refusing to sit for the examination under oath.

In The Mind Of The Insurance Fraud Adjuster And Investigator, I made the following remarks:

Some may question why I spend time studying the insurance company's perspective. From my viewpoint, even a broken clock is right twice a day. And, I need to understand the mind of my opponent and anticipate his actions to do a better job for my clients.
...

Guy "Sandy" Burnette invited me to speak at the International Association of Special Investigation Units over a decade ago. I was the token insurance attorney for policyholders. During my presentation, I cautioned that the two major human problems facing fraud investigators would be the issue of wrongly accusing innocent people of fraud and the tendency of some in an investigative role to view everybody as a potential crook. Well meaning or not, seventeenth century witch hunts can be repeated by modern groups. If all you concentrate upon in life is uncovering fraud, you may start seeing signs of it everywhere.

When I get called about possibly working on a case where a claim is dragging along and a possibility of an examination exists, getting the insurance company to act promptly and in good faith becomes paramount. Asking who opposes the claim, why the claim has not been paid, whether there is any concern about fraud and, if so, what those fraudulent issues are, and demanding that information be exchanged informally or through a prompt examination under oath moves the matter along. These demands should be made politely and cooperatively, trying to get payment while still pointing out the seriousness of not having a prompt adjustment.

So what happened? Think “technology” – think “software.” In the “good ‘ole days,” the adjuster would come out, inspect the damages, prepare his calculations based on his observations and could sometimes write you a check right away. So who does the calculations now? Probably a computer. There is a significant chance that the insurer you are dealing with uses one of several software options to handle your insured’s claim. Unfortunately, these programs are designed to reduce claims payments and increase profits for the insurer. Some software programs can be used to evaluate the claim in general –a program that sets forth the different areas of the insured property that were damaged, the types of materials that will be needed to conduct proper repairs, the amount and cost of repair/replacement materials, labor, etc. Another program can be used to calculate the reserves that should be set up for the claim. There is a program that can establish settlement parameters. Other programs are designed to “calibrate” adjusters’ handling of claims so that there is a more uniform manner of adjusting claims. Want examples? Colossus, “ICE” – Injury Claim Evaluation, “COA” – Claims Outcome Advisor, PowerClaim XML.

So you might be thinking that it doesn’t sound so bad to try to apply general rules across the board. But it does pose a few very obvious problems off the bat. The insurer owes each insured a duty to investigate and fairly adjust each claim. How can an insurer say that it fairly adjust a claim when the software used to adjust the claim was specifically designed to pay less on claims? How can an insurer properly evaluate each claim if it the adjuster is merely plugging data into a system that does not allow for modification for unique circumstances that make the claim more expensive? Do such programs, made for a one size fits all mentality, individually evaluate and investigate each claim? Do these generalized practices make it appear that the insurer is looking out for its insured or "dumbing down" claims processes to make implementation by less experienced and less costly adjusters the claims management response for appeasing those in charge of the company calling for greater profits?

The modern management of many insurers is creative and motivated towards "profitability." Many will spend a considerable amount of money on consulting services to find and implement computer adjustment tracking and methodologies that generate the least expense and most profit rather than training and motivating adjusters to fully pay claims and look for ways to fairly maximize the benefits available under the insurance product. Insurers are willing to invest significant money to make even greater profits at the expense of the insured, who does not get the full benefit otherwise available.

What does that mean for attorneys representing insurance consumers? They need to be proactive, creative and join forces to win cases. Policyholder attorneys should follow steps outlined in Speech Tips Proving Bad Faith Insurance Company Claims Practice and Patterns:

1. List the insurer and all their subsidiaries.
    
2. Do a Lexis or Westlaw search on all their Active Cases and Bad Faith Cases.
    
3. Contact the other attorneys, experts, etc. Travel to meet them to exchange information.
    
4. After getting a Core Group, have seminar/information sharing session regarding that insurer.
    
5. Join the Bad Faith Litigation Group of the AAJ.
    
6. Visit and retain multiple insurance claim experts early.
    
7. Advertise for information.
    
8. Hire Investigators to seek whistleblowers--from secretaries to claims executives.
    
9. Push on formal discovery with affidavits and other cases showing need and relevance.
    
10. Bold and Creative Wins--Example--Closed Claim File Review.

Happy Friday!

The Court noted the basic facts:

This is the third case to come before this court involving plaintiff Victoria Migaldi (Migaldi)'s homeowner insurance claim for windstorm damage caused by Hurricanes Frances, Jeanne and Wilma. Defendant Safeco Insurance Company of America ("Safeco") did not dispute coverage of the claim, but instead declined to pay the full amount claimed and invoked the policy's mandatory appraisal provision to determine the sum payable for losses that were disputed as to value.
...

On February 9, 2009, the court granted Safeco's renewed motion for summary judgment, concluding that Florida's VPL did not apply to Migaldi's claim because there was no "total constructive loss" of her residence, and that without a VPL override both parties remained bound by the appraisal award. Accordingly, the court entered final declaratory judgment in favor of Safeco in Migaldi I declaring that Safeco's full payment of the appraisers' award satisfied its indemnity obligations toward its insured under the policy...

On February 24, 2009, Migaldi filed a second action, Migaldi v Safeco Insurance Company of America,..."Migaldi II," seeking to hold Safeco liable for breach of contract for failing to pay further sums allegedly due under the policy for the same loss. In her second filed suit, Migaldi acknowledged that these claims were previously submitted to appraisal, but contended that "[t]he appraisal process failed to address all of the damages caused by the hurricane [sic] as they inappropriately applied a $ 10,000 mold cap to the building and personal damages."... On August 11, 2009, this court dismissed Migaldi II, with prejudice, finding the suit barred by the doctrine of res judicata because it involved a scope of coverage issue which was actually litigated and necessary to the judgment entered in Migaldi I....

On January 12, 2010, Migaldi filed the present suit, "Migaldi III," alleging a Florida Statute § 624.155 bad faith claim against Safeco relating to the same insurance claim. Here, Migaldi alleges that Safeco engaged in bad faith in the appraisal process by misrepresenting pertinent facts relating to coverages and facts of the loss at issue, including misrepresentations regarding the applicability of the policy's mold cap, and misrepresentations regarding damages from the first appraisal of the claims, leading to a "mishandling" of plaintiff's second appraisal. Migaldi also charges Safeco with improper delay in the adjustment of her losses through use of multiple independent adjusters, and improper delay in the appraisal process itself. Thus, in part, the current complaint attacks the validity of the appraisers' award on ground of "improper" procurement through bad faith claims handling techniques and tactics on the part of Safeco, and seeks to charge Safeco with liability for the alleged resulting diminution in the appraisers' valuation of her claim under the Florida first party bad faith statute.

This matter is currently before the court on Safeco's motion to dismiss on ground of res judicata. Safeco essentially contends that because Migaldi failed to challenge the appraisers' award or to appeal the judgment which confirmed the award in Migaldi I, her subsequent bad faith suit relating to Safeco's handling of her original windstorm claim is barred under principles of res judicata.

The Court granted Safeco's motion in part, but allowed much of the wrongful claims practice action to continue:

...the court concludes, in the context of the instant appraisal proceedings, that Migaldi may pursue a statutory bad faith claim against Safeco based on alleged unreasonable delay: (1) from the time Migaldi initially submitted her claim to the time Safeco initiated the appraisal proceedings; (2) for the time during the appraisal; and (3) for the time between confirmation of the appraisers' award (i.e. entry of final declaratory judgment in Migaldi I) and the time that Safeco tendered full payment the award to its insured...On the other hand, Migaldi may not challenge whether information submitted by Safeco to the appraisal panel regarding policy coverages and limitations, or facts relating to the losses at issue was relevant or accurate, or properly within the panel's scope or authority...

...the prior appraisal proceedings and declaratory judgment entered in Migaldi I do not preclude her current bad faith claims to the extent premised on allegations of unreasonable delay in the adjustment of the loss, appraisal of claim, or payment of claim, as more specifically articulated above. See Dadeland Depot, Inc., supra; Bullard Building Condominium Association, Inc. v Travelers Property Casualty Co. of America, 2009 U.S. Dist. LEXIS 70663, 2009 WL 2423436 (M.D. Fla. 2009).

The Court noted and followed authority from another jurisdiction:

As observed by the court in Wailua Associates v Aetna Casualty & Surety Company, 27 F. Supp. 2d 1211 (D. Hawaii):

[The insurer's] submission to the appraisal does not absolve it from liability for bad faith as 'the trier of fact could reasonably conclude that .. [the insurer] intentionally delayed the appraisal process.' Green v International Ins. Co., 238 Ill. App.3d 929, 179 Ill. Dec. 111, 605 N. E.2d 1125, 1129 (Ill. App. 1992). … '[I]f an insurer could utilize the apprisal process to shield itself from the consequences of failing to make a reasonable settlement offer … it would defeat the principles' underlying a separate cause of action for liability outside the insurance policy. Smithson v United States Fidelity & Guaranty Co., 186 W. Va. 195, 411 S.E2d 850 (W. Va. 1991) 27 F. Supp. 2d at 1220. Thus, an insurer who ultimately pays a claim may be held liable for bad faith in the event of unreasonable delay in the processing and adjustment of the claim. Id., citing Best Place Inc. v Penn America Ins. Co., 82 Hawaii 120, 920 P.2d 334, 347 (Haw. 1996). (emphasis added)

Delay is the number one complaint about claims adjustment from policyholders. It is caused by a number of actions and failures to act by insurance companies. Insurance companies have a legal duty to provide a sufficient number of motivated, trained and experienced adjusters with authority to promptly investigate facts of coverage, evaluate damages, explain the benefits and options available to the , and quickly pay those benefits to the policyholder. Lately, some insurers have been hiding unfair claims behavior of failing to conform to this duty by conducting a second adjustment through appraisal. This holding by Judge Hurley is important because it recognizes that payment of a disputed claim resolved by appraisal and paid within the time permitted by the policy following an appraisal does not provide an insurer immunity from wrongful claims conduct.

As one may discern, Safeco is battling a policyholder attorney that does not easily give up. Kelly Kubiak of Merlin Law Group represents the policyholders in this case. I am very proud of her zealous advocacy.

Kelly will be sharing our Safeco and Liberty Mutual claims practice materials with other policyholder attorneys at the Bad Faith Litigation Group meeting at the Annual Convention of the American Association for Justice next week. Please call her or David Pettinato for information about joining this organization if you represent policyholders who have been subject to delayed or improperly handled insurance claims.

In what proved to be a successful effort to flesh everything out for the judge, the attorney provided detailed information about the type of programs that likely affected the manner in which the client’s claim was handled:

During the time period when the underlying claims were at issue and being handled by Safeco, it [Safeco] developed institutional policies aimed an increasing profits through their claims handling practices. This includes development and implementation of various ‘new’ programs created in consultation with Accenture. These various programs, called ‘Safeco Way’, ‘Quantum Leap’, ‘Calibration Program’ and more have been the subject of discovery in other cases.

What is the first thought that comes to mind?

• “This attorney sounds like he knows he’s talking about”?
• Are you wondering “What is ‘Safeco Way’? Or
• “What is ‘Quantum Leap’ about?

Yes, this attorney does, in fact, know what he’s talking about, so does Safeco, and now the judge does as well. This attorney did his homework and learned about the various programs that were implemented in the insurer’s business. Then he educated the judge about programs and how their implementation directly affected the way his client’s claim was handled. He showed the judge why these documents were directly relevant to the issues before the court and demonstrated the client’s right to see them.

For those of you who are first learning about these programs by way of this blog, these are the types of programs and policies that the right expert can help you with. My June 18, 2010, blog titled “Getting the Inside Scoop on Insurance Company Claims Practices,” discussed the type of expert that you should consider retaining in a bad faith case. This kind of expert can tell you about these programs and explain in careful detail how your client’s claim was affected by each. It is only when you understand the intricate and strategic workings of the insurer and the goals set for the adjuster who handled your client’s claim that you will understand exactly what you need to obtain through discovery and how to get it. When you understand that there were multiple programs very carefully crafted, each with its own very effective manner of chipping away at the amount paid on your client’s claim, then you will understand that your client was very likely fighting a losing battle from very beginning. That is, of course, until someone like our plaintiff’s attorney came to the rescue.

Getting back to our attorney, the judge entered an order compelling discovery. The Order states:

Safeco shall supplement production in compliance with this Court’s prior order compelling, without protection, all responsive documents, including but not limited to documents related to Accenture, Quantum Leap Initiative, Caliber, Safeco Way, LEO, best practices, PDFR etc…

But the court did not stop there.

Safeco shall submit declarations in 30 days explaining why these documents were not previously produced pursuant to this Court’s September 2005 order.

For this judge, it wasn’t enough for Safeco to produce the documents. The judge wanted an explanation for Safeco’s failure to produce the documents pursuant to the court’s previous order. No, courts don’t take kindly to parties who do not comply with their orders. Again folks, judges are taking notice and they are not always pleased with what they see insurers doing or trying to pull off.

So don’t let the insurer or its attorneys intimidate you. Defense counsel is human, just like you. And the insurer is a business that has rules to follow just like all the others. Help your judge see through the insurer’s unfounded objections, its plethora of meaningless production and defense counsel’s circular arguments.

Had enough of motions to compel for now? Me too.

Tune in next week for another discussion of bad faith litigation.

Happy Friday!

In Florida Guaranty Association, Inc. v. The Olympus Association, Inc., 34 So. 3d 791 (Fla. 4th DCA 2010), FIGA successfully argued to have a challenge to coverage following an appraisal award. Insurance coverage attorneys should read the case in its entirety because it is important. For everybody else, the holding is significant:

…we conclude that the trial court erred by entering final judgment in favor of Olympus and awarding it the amount set forth in the appraisal (less the deductibles), without first deciding the issue of coverage liability. When FIGA filed its affirmative defenses in response to Olympus's complaint, the trial court should have first decided FIGA's liability. As explained in Kennedy and supported by Fisher, FIGA could contest part of the liability without challenging coverage as a whole. The appraisal award itself indicated the amount could change as the award was made without consideration of the policy's provisions of coverage.

Accordingly, we reverse and remand for the trial court to determine FIGA's liability with regard to the contested claims, and then enter the appropriate amount based on the appraisal.

Appraisal used to be a quick and inexpensive method of resolving claims. FIGA now uses it as a first step before litigation begins in earnest to prevent, or slow, payment. Unlike other insurers that have to act in good faith, FIGA has no penalty for contesting claims. It can do so with impunity. And, based upon the number of inquiries from others, it is taking advantage of the law and doing so.

The Florida Legislature and the Office of Insurance Regulation need to address the issue of who is investigating the claims process at FIGA and how its claims operations are run. These are the same complaints that were being made about Citizens Property Insurance in the past which lead to claims reform at Citizens. It is bad enough that policyholders have their insurer go broke and have to wait for payment. They do not expect a claims catastrophe which they can do little about.

Dan Reynolds, from the insurance industry on-line news, Risk & Insurance ran a story, La. Insurance Commissioner, ESIS Deny Claims-Hiring Rumor. He did a terrible job investigating the facts if he wanted to get it right. He helped BP white wash an investigation of the claims process by interviewing only Donelon and then the company in charge of the process, ESIS. He failed to do what any reasonable junior investigative reporter would have done--dig for the other viewpoint and their information. As such, the story is a sham and reflects poorly on an insurance industry news publication that people should be able to rely upon for accurate information.

The article noted:

The claims-adjusting blog Dimechimes ClaimSmentor was one online source that on June 7 mentioned a rumor that BP had instructed ESIS, the oil company's TPA for Deepwater Horizon oil spill damage, not to hire any adjusters with experience resolving claims from the Exxon Valdez oil spill of March 1989.

"It's the first I've heard of it," James J. Donelon, the insurance commissioner for the state of Louisiana, said when Risk & Insurance® queried him on the rumor on June 16.

More experienced claims adjusters were subsequently hired, according to a June 9 post from Dimechimes ClaimSmentor.

Over the past two weeks, BP has booked full-page ads in newspapers and television featuring claims representatives to reassure claimants that it is fairly and timely resolving claims.
...

Donelon said that members of his staff have investigated some BP-related claims centers throughout Louisiana. "We have done some visits to claims centers and found them to be operating smoothly, but that is not all of the claims centers and I do not know how many adjusters there are." he said. A surge of complaints would trigger an examination of the claims operations, Donelon added.

Because BP is self-insured, however, an insurance company is often not the ultimate payer of the claim. As a result, Donelon said, it is possible that irate claimants may not be bothered with alerting Louisiana regulators about poor service.
...
"We can share that the claims professionals working with or for ESIS are experienced in crisis situations and distributing funds to people affected by catastrophes as quickly as possible," Carla Ferrara, a Philadelphia-based spokeswoman for ESIS parent company ACE USA told Risk & Insurance® in an e-mailed response to questions.

Donelon said his department has become skilled at knowing when claims are mishandled given the department's experience of settling claims related to hurricanes Katrina and Rita in 2005. "We had a million claims in connection with Rita and Katrina five years ago, so yeah, we do know when things are not being handled as they should be, I believe, and we are knowledgeable and experienced and staffed enough to monitor this situation from an insurance regulatory perspective, no doubt," he said." (empahsis added)

Two weeks ago, I wrote Is BP Hiring Ignorant Claims Handlers with Little Dollar Authority to Pay Claims? That following Monday night, I was in Destin, Florida, for an emergency City Council meeting and wrote about my thoughts in Oil and Hurricanes: Here Comes the One Two Punch:

I am writing this post late Monday night, flying home from Destin, Florida. I was in Pensacola earlier, and debated for BP contributing to a $20 billion oil spill trust fund on Fox Business News. Cash is the lifeblood to businesses. If BP does not get money it owes to Gulf Coast businesses soon, business death in the form of bankruptcy will quickly occur to many businesses with resultant harm to employees and their families.

In Destin, the City council convened an emergency meeting which I attended. Fishermen reported oil slicks 4.5 miles from Fort Walton Beach. Given this development, Destin City Hall was the scene of democracy in action. Out of frustration, the Okaloosa County Commission defied federal officers and voted to take self help measures to preserve their water and beaches, claiming they would willingly go to jail, rather than do nothing.

For those who may be critical of President Obama for alienating the British regarding the BP Oil Spill, I suggest that the people of the Gulf Coast really don't care. The Gulf Coast way of life has been damaged and more is threatened by BP's lukewarm reaction. Earlier in the evening, elected County officials joined the angry crowd and took measures into their own hands. They voted to take action not approved by the Federal Government. One official threatened use of their own police to implement their own remedy and battle BP oil spill responders.

Others not from the southern coastal states should get the feeling that many local leaders and people of the Gulf Coast don't care who is upset. They require any action which will keep the oil out of their local waters and off their shores. They are tired of hearing nothing can be done to fight the oil. A comment was made at the emergency meeting that people from Washington D.C. and Chicago don't enjoy or go on the water or beaches, but spend their time in fancy restaurants. To say that there was "anger in the air" caused by frustration would be an understatement.

If Insurance Commissioner Donelon or reporter Dan Reynolds attended these type of meetings, they would hear numerous examples of delayed and inept claims handling. The group of attorneys that we are working with on our class action cases obtained a recording of that meeting, and just this one example of dozens that indicate the claims payment problems and disconnect between those damaged by BP and the BP claims administrators:

My name is Steve Travin, I am a small business owner and I have some direct questions for Jay, BP. I want to know when they are going to stop spending their multi-millions on their image and advertisements and pay the poor fishermen, the people who work the docks, the waitresses and for everyone and all the hoops that they make you jump through, you go through their office and they make you file paperwork 10 times over and everyday they have another piece of paper for you to file, we get no money to pay our bills. We get promises and we get nothing back out of that. I have a boat that I have put in with BP and I cannot even get a call me to put the boat back in the water.

BP Claims Rep (Jay Prothro): I do understand the frustration of the vessels of opportunity program, it has not been without many faults. It is on its 5th or 6th iteration right now trying to improve the process because it has been just a big calamity of errors. There have been issues with contracts, issues with activating existing vessels, issues with the commercial vehicles versus the private owned vehicles that are just pleasure boats. All of those things are being addressed and they are attempting to call out the pleasure boats now. They are attempting to create a situation where they rotate boats so that the boat owners and the commercial folks who has not had an opportunity to get in the program yet that can be rotated in, that they boats and vessels can be used and they can earn some money as well. We do understand there are some problems with it, and what I would like to suggest, is if you have had an issue with the VFO program that you contact us at the office in Fort Walton and we will do everything we can to help you straighten out those issues.

President Obama understood the problems after meeting with people who live and work in the Gulf, and he forced BP to put $20 Billion in a claims fund and independent review of the claims program. How could any reporter or Insurance Commissioner miss the problems? Numerous other journalists wrote articles on the these problems that were supported by Congressional testimony, as explained in BP Trying to Limit its Payouts, Lawyers Say:

But, in a letter Tuesday to BP head Tony Hayward, Allen expressed "ongoing concerns related to delayed processing times for larger loss claims, claims pending with no action taken, payment calculations for individual loss of income claims (particularly for seasonal workers), translation of claims material and accessibility for the hearing-impaired." Allen also told Hayward, "We would like more information about BP's plan for continuing loss of income claims, the mediation program BP is putting in place, and BP's placement of claims coordinators in each state and how these liaisons will engage with local officials."

Allen also informed BP he was appointing Tracy Wareing, who has been working as part of the National Incident Command, to oversee the claims process. Wareing met with BP officials Wednesday and on Thursday reported progress in making the claims process more responsive and open.

"During the meeting, we directed BP to provide clear public information on the entire life cycle of the claims process that they have produced, and ensure that we have greater accountability for the American people," Wareing said.

On the length of time it takes to pay businesses for losses, she said, "we indicated that -- and they recognize -- that their previous approach of waiting until basically after the books have closed for each month to calculate losses will not work. It won't get dollars out quickly enough for the businesses that are struggling on the ground."

She said BP promised "a more expedited claims process for these larger-loss business claims that will basically take into account the ability to allow for those businesses to pay their expenses for the upcoming month as opposed to reflective to the last month."

She said Willis, who was at the meeting, would be participating with her in a series of meetings across the Gulf in the next several days to hear concerns about the process.

And she said that they are going to meet with BP's claims contractor "to ensure that we can make some changes to better explain to the American public what claims are being paid, what the status is of pending claims, and ensuring that they're being paid timely and fairly." (emphasis added)

I think there has been some progress on getting larger lost income claims paid. Our firm is following up with those success stories, so accountants can learn to put together claims packages that will be approved and paid quickly, for much greater amounts.

Following my speech on Understanding Valuation Issues of Gulf Oil Spill Claims Thursday in Atlanta, an accountant thanked me for explaining that BP needs to hire a legion of accountants who understand and can quickly calculate the amount of money businesses are losing as a result of the oil spill. He then told me that a hotel for which he calculated a lost income analysis was denied a claim because BP’s claims representative thought lost revenue projections had to be performed on a room by room basis. That is a stupid demand and it shows the ignorance of the BP claims representative. Significantly, the claims adjuster did not use the "D" word for denial, but asked for it to be "resubmitted." No wonder BP can claim it has not denied any claims.

Until our elected officials and the reporters get on the ground in the impacted areas and talk with enough people involved with the particular issue, it is hard to get a story correct. Of course, if you want a white wash for BP propaganda purposes, Donelin and Risk & Insurance have done a marvelous job of portraying BP as running a "smooth" claims process. 

More and more courts are realizing that insurers have gone too far for too long. Those same courts are applying laws that hold insurance companies responsible for their improper claims handling procedures. How? Courts are granting plaintiffs’ motions to compel and ordering insurers to turn over their top secret “attorney-client” “work product” “confidential” and, sometimes, “trade secret” materials. So how do you get your hands on the goods? Remember the “time, extra effort and investment” from last week’s blog? Well, we here are a few more examples of how that works.

Our first insightful plaintiff’s attorney started planning his Motion to Compel against Safeco before he even drafted his discovery requests. This attorney researched extensively until he found a case compelling an insurer to produce the kind of materials he needed in his case. The opinion he found included details of the specific discovery requests at issue, and he modeled his own discovery requests after those in the opinion. After serving his discovery requests, he got the usual “work product” and “attorney client” objections, along with a few others that you can expect to see when insurers respond to discovery. Our colleague then filed his Motion to Compel citing, as persuasive authority (and among other things), the case upon which he had modeled his discovery requests. His “merely persuasive” authority consisted of facts and issues so similar to those in his case and presented an analysis so precise that the Judge ordered Safeco to produce a complete and unredacted portion of its claims file. 

The Court’s Order compelling production from Safeco explained that in a bad faith case, an insured is entitled to the insurer’s work product and attorney-client material containing information relevant to how the insured’s claim was handled. This information that is discoverable includes the insurer’s internal determination to deny benefits, its evaluation as to how a jury may value the insured’s claim and the insurer’s approach to settlement. The Order also ruled that the materials within the claims file that were generated before the date of Safeco’s denial letter are not protected by either the attorney-client or work product privileges because those materials bear directly on how and why Safeco handled the insured’s claim the way that it did. As such, the Court ordered Safeco to produce, in their entirety, any and all materials from the claims file that are dated up to and including the date of Safeco’s denial letter.

The Judge in our colleague’s case also ordered the production of certain materials after the date of Safeco’s denial letter because they were relevant to the plaintiff's bad faith claim and were not protected by the attorney-client and work product privileges. This ruling, however, is not one of a kind.

A few weeks ago, Chip mentioned in his blog post, Liberty Mutual Claims Documents Ordered Produced, the similar success of a second plaintiff’s attorney in West Virginia who has a case against Liberty Mutual. The Court Order in that case compelled Liberty Mutual to produce the following: the insurer’s employees’ performance evaluations; the manuals containing explanations and abbreviations and other claims handling procedures; the personnel files of employees who worked on the case, no matter how small their role, including, bonuses, job descriptions, work responsibilities, training, experience on the job, work qualifications/history and any discipline relating to work. Great progress, right?

It gets better.

The Court also ordered Liberty Mutual to:

…disclose the McKenzie [sic] documents, upon which defendant bases its claims handling procedures…and other documents relevant to defendant’s business model of claims handling…

Courts are now forcing insurers to divulge documents and information regarding consulting services that they received for their claims handling practices. Remember, in a bad faith case, how the insurer handled the claim is at the heart of the lawsuit. It only makes sense for the plaintiff to obtain any and all materials regarding the manner in which the adjuster(s) handled the claim. It makes even more sense to obtain information regarding how the company, as a whole, evaluates, implements and provides training for claims handling practices and what consulting services, if any, were used in doing so. If a plaintiff’s attorney is not entitled to such critical discovery, then what’s the point of allowing a plaintiff to file a lawsuit for bad faith? It’s like putting a chef in a kitchen with a stove that doesn’t boil water and an oven with a maximum temperature of 200 degrees.

These attorneys are only two examples of colleagues across the country who are putting their nose to the grindstone and making discovery work in their cases. Keep in mind, though, that these motions are not your “form” motions. Remember that our first plaintiff’s attorney started strategizing and preparing his case to win on a motion to compel discovery from day one. For our colleague in West Virginia, it took five (5) motions to compel to get the order compelling the production of discovery that he was entitled to.

Strategic planning and perseverance were the secret to these attorneys’ success and there is no reason why you can’t succeed in a similar situation. (By the way, wouldn’t you like to know which one of these brilliant attorneys also worked closely with one of the experts we talked about in last week’s blog?)

Bottom line folks: it works, and it can work really well for you too.

Tune in next week for a continued discussion of rulings across the country regarding information that is discoverable in a bad faith lawsuit.

Happy Friday!

So how do you battle devious discovery tactics? First, do you have an expert? Let me guess - you’re thinking “sure, I have a great roof engineer who put together a detailed report with pictures and a thorough calculation of damage to the property….” Well, that’s not the kind of expert I’m thinking about. Get yourself someone who knows the insurance business – someone who knows the tricks of the trade - someone that is going to stump those smart and cunning defense attorneys. Find an expert who has some particular knowledge about the insurer you are up against. If it’s State Farm, you might want to give Steve Strzelec a call. If it’s Safeco or Liberty Mutual, consider Charles Miller.

Now, what can folks like the masterful Mr. Strzelec and the very capable Mr. Miller do for you? First, they can educate you on what you can and should be looking for and why it is critical to your case. You must first become educated about your client’s insurer and its internal policies that affect the way your insured’s claim was handled. Let your expert teach you about the types of policies and procedures that the insurer implemented to decrease payments on claims in general and to provide incentives to employees for paying less. Is each adjuster required to turn over a certain percentage of his/her claims to SIU? Is each adjuster required to turn over a certain percentage of his/her claims to the subrogation department? What type of monetary bonus does an adjuster get for meeting the SIU referral goals? How much does an adjuster get for each claim referred to subrogation? These types of internal policies will almost certainly reflect the menial amount paid on your insured’s claim, and whether your insured’s claim was turned over to SIU or subrogation merely for the purpose of meeting the adjuster’s quota. Once you learn about the specific procedures for the insurance adjuster or claims handler, work with your expert to draft specific discovery requests which target the policies and programs (by name, no less) that will help you demonstrate to the judge and jury how your insured’s claim was improperly and unfairly handled by the insurer.

Once you have served your carefully tailored discovery requests, get ready for the “overbroad, unduly burdensome and not likely to lead to the discovery of admissible evidence” objections. And prepare yourself for the production of a plethora of useless documents, as discussed in last week’s blog. But never fear - this is where your expert comes to the rescue, again.

In a number of cases across the country, expert affidavits have been instrumental in the discovery battle against insurers, including Safeco and Liberty Mutual. Charles Miller, for example, has provided both deposition and affidavit testimony regarding claims practices for insurers, including but not limited to, Safeco and Liberty Mutual. The overriding theme in his affidavits is how the insurer intentionally and brazenly implemented practices and policies to cheat insureds.

In one of his affidavits in a case against Safeco, Mr. Miller’s affidavit reflects, in part, as follows:

Based on my thirty plus years of knowledge and experience regarding insurance company claims handling it is my opinion that the documents and information requested…are highly relevant to the operations of a claims department including the handling of individual claims such as this one…The documents and information that I reviewed with regard to several other insurers describe their respective programs to reduce claim payments in order [to] improve corporate profitability. Such programs are improper when it comes to the handling of insurance claims [footnote omitted]. 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 otherwise 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.

In a case against Liberty Mutual, Mr. Miller’s affidavit reflected, in part, the following:

Through consultation with consultants like McKinsey and Accenture, insurers have sought to turn their claims operation into profit centers by seeking to reduce claims payment through artificial measurements such as leakage coupled with goals to reduce average paid claims and/or the combined ratio.

Mr. Miller artfully creates a very real and accurate picture for the judge and jury. What picture is that? The reality of the situation – the insurer will stop at nothing, will spend as much as it takes and will consider any opportunity to devise unprincipled, cost-cutting methods aimed at giving its insureds the shaft. So once your expert has taught you the particulars of the insurer’s internal procedures, and once you’ve applied what you learned to drafting carefully constructed discovery, don’t stop there. Take it to the next level. Work with your expert to prepare an expert affidavit that will provide the court with a thorough, precise and undeniable explanation for why the internal documents you seek are directly relevant to the claim(s) at issue.

So, what’s your “take away” from today’s blog? Your expert is your friend. Allow your expert to enlighten you and maximize the skills he has to offer. Be like the insurer – be creative and stop at nothing to get your hands on the discovery to which you are entitled and that may very well prove your case.

Your expert is one of many effective and powerful weapons at your disposal. Next week, I will write about how discovery motions and perseverance can win the case.

Happy Friday!

Rumors on the streets or email highway in the independent adjuster world are saying that BP has instructed the ONE adjusting firm assigned to handle the claims not to deploy anyone experienced in handling the Exxon Valdez oil spill claims. Please look into this and assure us that is not true and the thousands upon thousands of independent adjusters sitting at home not deployed to help are not being excluded because they have experience handling claims. That is just unimaginable and I hope proves not to be true. The numbers of people who have applied directly to ESIS and to independent adjusting firms who have heard nothing might prove what you are told when investigating this that it is a fact. Let us know please. Rumors can destroy you. Facts posted on the ever popping up response websites would be helpful. Also, I suggest you not believe one rumor that we have run out of independent adjusters available. A quick check of the number of licensed resident and non resident independent adjusters will prove this is impossible even if 10,000 are already deployed yet we hear less than 1,000 are now in the BP field claim offices.

This blog displays links for search terms adjusters use that leads them to our blog. Since the BP oil crisis, search terms are at least 50% of all search hits on this site where adjusting firms and adjusters are looking for information as to who is handling the BP Oil spill claims.

Thus far the information circulating in our discussions is that ESIS has only appointed ONE adjusting company to assist their personnel. ONE-and that firm fortunately is a reputable adjusting firm- Worley Catastrophe www.worleyco.com. Rumor on the street is that they are inundated with resumes flowing in but many many of us have not even gotten a reply to email and resume submissions.

There was also a response to my post, How to Value an Oil Spill Claim--Not an Easy Task:

Chip Merlin, a consumer attorney wrote a blog this week suggesting BP use CPA’s and accountants on the loss of income claims. While he provides good reasons, we in the claim industry are plenty capable of helping issue the $5,000 advances and there are thousands of adjusters trained in business interruption claims for loss of rents, tourism cancellations, and much more but I do agree CPA firms are often used by insurers for proper determination of amounts due for large commercial business interruption claims. In fact, my brother in law is a retired IRS CPA and has huge resources to other CPA’s who are also interested in deploying. In fact, this week I will post a large number of online business interruption links for some great information on business interruption claim training.

Any money paid to those with lost profits and earnings is better than no money. If full and prompt payment is really its goal, BP needs to hire and send legions of adjusters to DimeChimes business interruption night school, hire accountants and bookkeepers, and retain a significant number of independent economists motivated to determine the full extent of projected lost revenue. Lost income projections and continuing expense recovery have not been something typical claims adjusters have been trained to do. Other than my experience and numerous depositions, additional proof is in the internal insurance company claims manuals that instruct insurance company adjusters how send business income claims to insurance industry forensic loss accountants.

The problem is that BP has never been in the business interruption and lost income business. This is something insurance companies and adjusters do. The truth is that the insurance adjustment community is much quicker to count the sticks and bricks following catastrophic loss and traditionally take months to determine the business interruption loss. I bet that if I put a gun to the current BP liability claims adjusters and asked them how to determine the typical continuing expenses and extra expenses of a retail fish store, shrimp fleet operator, condominium, hotel, restaurant, seafood wholesaler or association of commercial fishermen whose members can no longer pay dues, most would start crying and beg for mercy.

I use this example to show how criminal it is for BP to suggest that it is taking care of claimants by simply spouting statistics of claims adjusters hired, claims offices opened, and partial monies paid. A second financial catastrophe is happening as I write because only a few in the claims industry have ever undertaken complex business loss of income analysis. I routinely have to teach my clients’ regular accountants how to do these types of claims calculations and often suggest specialized consultants help them. How are liability adjusters going to learn accounting and business to competently do this job without a plan? Telling them to read all of Michelle Claverol's Sunday posts on this blog regarding business interruption claims will not help, although it is better than nothing.

To further my point regarding the catastrophe training that Worley offers its adjusters, look at their training schedule. The typical BP Oil Spill claims handler has experience in car and structure claims. Even maritime adjusters usually turn over the financial income loss claims to insurance accounting firms like Campos & Stratis, a company I have long battled.

The BP Oil Spill will probably be the greatest loss event in terms of business income loss claims in my lifetime. Many of the BP claimants have never contemplated business loss insurance, but that is essentially what the OPA and corresponding state laws have provided. Adjusters, accountants and claimants need a quick education into the nuances and considerations of these types of losses.

Examples of reasonable mitigation expenses which will help commercial enterprises survive during the revenue loss need to explained and paid for immediately. Many of those businesses that could be expected to survive will not because BP is not proactively paying costs of survival mitigation. Most businesses simply do not have the cash or credit to front these costs themselves.

Time is of the essence for the entire Gulf Coast community when it comes to preventing this second financial catastrophe. This is truly an extraordinary situation where large scale economic ruin can be prevented if timely systems of remedy are put in place now. I believe our jurists need to appoint special masters who can listen to the concerns I have raised and put in motion a working claims process that will address the unique nature of business interruption and mitigation claims.. Everyday we fail to address the claims payment process properly, the greater the long term implications of economic damage in our Gulf Coast Community.

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.

I stumbled upon this information because of a Twitter follower of mine, Angela Russell. Her Twitter account STATEFARMSUCKS and website indicate she is not happy with the State Farm’s claims handling. She posts on State Farm’s various activities, one post involved a television report concerning hail damage testing conducted by State Farm:

(click here to view video): Hail Damage Testing 

Information regarding insurance, insurance perils, insurance company activities and claims handling practices come from various sources. Researching social media cites and networking with those involved with common interests is something those in the insurance business cannot afford to miss. If you want to keep up, turn on to social media.

This video is all you need to understand why many of us believe you and State Farm cannot afford to miss out:

An important aspect of this study for adjusters and insurance coverage counsel is that these duties of good faith claims handling are not found in the contract. They are taught as the ethical requirements to which all adjusters must adhere. Again, I applaud State Farm for these written standards and its instructional course.

In all contracts, courts recognize an implied covenant of good faith and fair dealing. It's not written in the contract, but it is implied that in a contract situation, neither party will do anything that will injure the right of the other to receive the benefit of the agreement.
. . .
Insurance is a "business affected with a public interest."

The foregoing points suggest certain responsibilities to inform and assist insureds in first party claim situations.
. . .
An insurer should make a reasonable attempt to effectuate prompt, fair and equitable settlements of claims whenever coverage, liability, and damages have become reasonably clear.

An insurer should conduct a thorough and comprehensive investigation of claims in order to determine all possible bases for payment of policy benefits. A denial of insurance benefits should be based upon verifiable facts and evidence, and not mere conjecture or supposition.

An insurer should not delay resolution of a claim by requiring an insured to produce information which the insurer already has or can reasonably obtain.

An insurer has an implied duty to resolve a claim once it has acquired enough evidence and information to establish the validity of a claim.

An insurer is required to pursue resolution of insured's claims with reasonable diligence.

Claim investigations should be objective and designed to acquire information that is reasonably related to the claim.

When necessary for claim resolution, an insurer should select objective experts...to assist the insurer in making claim decisions.

Insurers have a duty to disclose policy terms, conditions, and obligations to insureds. (emphasis added)

The instructor's manual follows up on the documents posted in State Farm Agrees With Chip Merlin Regarding Claims Handling Obligations:

Our Commitment to Our Policyholders

It is the responsibility of the State Farm claim staff to implement Company philosophy with respect to claim handling. Our commitment to our policyholders is to treat them like a good neighbor. We should:

• Listen, be fair, be open, and carry out our part of the bargain under the contract in good faith.
• Be familiar and in compliance with those laws and regulations that impact claims in the appropriate state, and treat policyholders consistent with the requirements of the law.
• Explain all relevant coverages under the policy. Encourage policyholders to report all losses and avail themselves of all benefits under their coverages.
• Diligently investigate the facts to determine if a claim is valid, reasonably evaluate the claim and act promptly in resolving the claim. If it is necessary to reject a claim for coverage or damages, it should be done promptly and courteously, with an explanation for the decision.
• Make an objective evaluation of the facts and circumstances supporting our policyholders' claims. Doing so helps ensure our policyholders obtain all benefits available provided by the insurance policy.
• Give insureds a reasonable opportunity to comply with their responsibilities under the policy. If a claim is rejected, be willing to listen to subsequent input from the insured. Complete any necessary follow up in a timely fashion, giving due consideration to any additional findings.
• Communicate with and be responsive to inquiries from insureds and their attorneys by promptly answering letters and phone calls.

The post from yesterday resulted in a number of private emails to me suggesting that I was wrong. I did not write that State Farm is adhering to these standards-- I merely indicated that State Farm should be given credit for recognizing these insurance claim handling standards and for teaching them. As I indicated in Failure to Have Specific Written Claims Standards is Bad Faith, these written claims standards are required to be made and implemented.

I will be exploring each of these obligations in greater detail this week.

The important aspect of these internal documents is how close State Farm comes to complete agreement with me regarding the obligations of good faith claims conduct. Susan Hood, the top claims official for State Farm indicated in part:

• Explaining coverages. It's such an important part of our job in Claims to explain to our policyholders all coverages available to them. This can be complex sometimes, but we must take time to thoroughly review the policy and circumstances of the loss in order to ensure our policyholders receive the full benefits of their coverages according to the terms of their policy. This is just the right thing to do. When a claim is not covered, we must promptly and courteously explain why.

• Investigation and evaluation. Thorough investigation, evaluation, and timely resolution of a claim also are critical parts of what we do. By knowing the facts of the loss and understanding the terms of the policy, we are able to make sure our customers receive the benefits available to them. Our evaluations must be objective, and each claim must be evaluated on its own merits.

State Farm should be congratulated for teaching its adjusters these ethical practices. It is important for attorneys, judges and the public to appreciate that insurers recognize they owe these good faith obligations to their customers.

We are proud to announce the retention of attorney Vivian Persand, who will coordinate the networking and collection of information regarding Safeco and Liberty Mutual Insurance Company on a full time basis. I strongly encourage anybody with information about the claims practices of Safeco or Liberty Mutual, who may have a claim, former employees, vendors with problems, and those attorneys trying to help customers of Safeco or Liberty Mutual to contact Vivian at:

As previously indicated in Should Liberty Mutual and Safeco Insurance Company Customers Expect Great Rates for Poor and Wrongful Claims Performance:

"As a result of Safeco and Liberty Mutual delaying turning over information about reports and estimates...we have now uncovered over 150,000 claims manual operation procedures and guidelines which address how Liberty Mutual and Safeco go about their claims procedures and documents evidencing Safeco's profit oriented program of "quantum leap."

We think this information can be very important to explaining Safeco’s claims practices of Safeco and strongly encourage others to contact Vivian for them. There is no reason to reinvent the wheel and go through costly litigation when others have already blazed the trail. In addition, we have other evidence collected such as Charles Miller's affidavit, which explains some of Liberty Mutual's claims programs. We had an investigator obtain this from an Arizona Court.

Information is power. Transparency demonstrates whether insurers walk the walk, or simply talk the "good faith" talk, while routinely delaying or underpaying claims.

Genuinely helping others to the best of your ability at a time of catastrophic trouble is “noble.” The insurance industry recognizes that its claims adjusters obtain a satisfaction in their occupation that goes beyond a mere paycheck because of the importance of properly conducting the claims function. Many of the books written by insurance companies which explain their history proudly describe instances where claims activities were carried out, despite great personal hardship to the claims adjusters, so that the promise of the insurance contract-- prompt and full indemnification—
was fulfilled.

Claims representatives are taught honest and honorable ways to handle claims. The standard textbook for claims handlers, which leads to an Associate in Claims designation, was historically James J. Markham, et al., The Claims Environment (1st ed., Insurance Institute America 1993). There is now a revision to that book. Doris Hoopes, The Claims Environment (2d ed., Insurance Institute of America 2000). These textbooks for claims handlers and students of insurance set forth simple, clear claims handling principles that highlight duties of ethical and good faith treatment owed to policyholders.

Indeed, the Insurance Institute of America has published a treatise dealing exclusively with this basic relationship. William Park Rokes, Aggressive Good Faith and Successful Claims Handling (1st ed., Insurance Institute of America 1987). In another claims management reference which specifically discusses ethical behavior, the Insurance Institute of America provided:

The business of insurance, perhaps more than any other, is based on trust and commitment. Insurance products are intangible and simply reflect a promise on the part of insurance companies to indemnify insureds for financial losses if an insured event occurs in the future. The contract between the insurer and the insured is a contract of utmost good faith and requires honesty and trust from both parties.

George A. White, Ronald Duska & Victor D. Lincoln, Organizational Behavior in Insurance, vol. 1, 62 (1st ed., Insurance Institute of America 1992).

Many, if not most, executive claims managers possess the Society of Chartered Property and Casualty Underwriters designation, CPCU. A CPCU agrees to abide by the Canons of the CPCU Code of Professional Ethics, which include, in part:

CANON 1: CPCUs should endeavor at all times to place the public interest above their own.

CANON 2: CPCUs should seek continually to maintain and improve their professional knowledge, skills and competence.

CANON 3: CPCUs should obey all laws and regulations; and should avoid any conduct or activity which would cause unjust harm to others.

CANON 4: CPCUs should be diligent in the performance of their occupational duties and should continually strive to improve the functioning of the insurance mechanism.

CANON 5: CPCUs should assist in maintaining and raising professional standards in the insurance business.

CANON 6: CPCUs should strive to establish and maintain dignified and honorable relationships with those whom they serve, with fellow insurance practitioners, and with members of other professions.

So, to those who suggest that claims handling is not supposed to be a “noble” occupation, you may be unfamiliar with these guidelines or may not have witnessed noble conduct.

For public adjusters, I did not mean to suggest that the public adjusting certifications were not to be obtained. Instead, I would also suggest public adjusters obtain the AIC and CPCU designations as well either the CPPA or SPPA designation. What is the downside to being better educated? Public adjusters should strive to obtain the NAPIA sponsored certifications which are described as follows:

The Certified Professional Public Adjuster (CPPA) and Senior Professional Public Adjuster (SPPA) designations are awarded to public insurance adjusters who have met specific experience and educational requirements, completed a qualifying examination prescribed by a Board of Examiners, and subscribe to a code of ethics for business and professional conduct. The program is sponsored by the National Association of Public Insurance Adjusters (NAPIA).

The Certification program requires experience and credentials—it is not as easy as simply taking a test:

The CPPA/SPPA designations are awarded by NAPIA. The American Institute for CPCU / Insurance Institute of America (AICPCU/IIA) is responsible for administration of the examinations.

Candidates are required to have at least five (5) years experience in adjusting on a full-time basis to sit for the CPPA examination. Ten (10) years full-time adjusting experience is required to sit for the SPPA examination.

Applicants must have a college degree or its equivalent in education, experience, or knowledge. Applicants who are not college graduates or who cannot obtain acceptable educational credentials should write to the Board of Examiners at NAPIA regarding methods of establishing the equivalent.

Obtaining and maintaining peer reviewed certifications is not easy, but I feel that it is worth every penny and minute spent. I believe my own experience in becoming a Florida Bar Board Certified Civil Trial Lawyer is well worth the time and money. Attorneys are ethically prohibited from advertising as being “specialists” except for few exceptions. This is what the Florida Bar says about my Certification:

While all lawyers are allowed to advertise, only certified attorneys are allowed to identify themselves as "Florida Bar Board Certified" or as a "specialist." Certification is the highest level of recognition by The Florida Bar of the competency and experience of attorneys in the areas of law approved for certification by the Supreme Court of Florida.

A lawyer who is a member in good standing of The Florida Bar and who meets the standards set by the Supreme Court of Florida, may become a "Board Certified Civil Trial Lawyer."

Certified lawyers in civil trial law deal with litigation of civil controversies in all areas of substantive law before state and federal courts, administrative agencies and arbitrators. In addition to actual pretrial and trial process, civil trial law includes evaluating, handling and resolving civil controversies prior to the initiation of suit.

Every board certified civil trial lawyer has practiced law for at least five years and been substantially involved -- 30 percent or more -- in the area of civil trial law during the three years preceding application. To be certified, the lawyer is required to have conducted at least 15 contested civil cases in courts of general jurisdiction during the lawyer's practice, including cases before a jury and as lead counsel….

Each certified lawyer must also have passed peer review, completed 50 hours of continuing legal education within the three years preceding application and passed a written examination demonstrating knowledge, skills and proficiency in the field of civil trial law to justify the representation of special competence.

Board certification is valid for five years, during which time the attorney must continue to practice law and attend Florida Bar-approved continuing legal education courses. To be recertified, requirements similar to those for initial certification must be met. Not all qualified lawyers are certified, but those who are board certified have taken the extra step to have their competence and experience recognized.

When you are engaged in jobs that are intertwined with helping others in distress and at their most vulnerable moments, why wouldn’t you want to be as well trained as you can be? Why would anybody suggest that the alternative is better? Do yourself, your career, and the public a favor and invest in educational and ethical training that promotes the highest ideals of your profession. 

Hartwig said that since the middle of 2008, employment in the P&C insurance industry has hit a record low as a result of the economic downturn. As a whole, he said that employment in the P&C industry was down almost five percent since the recession began, nearly matching the 6.1 percent decrease in employment in the overall U.S. economy.

For claim professionals, however, the news was grimmer, as statistics show the adjusting profession is taking the biggest hit.

"We have seen a very, very sharp drop in the claim adjusting area, the sharpest drop of all P&C positions in percent terms, around 14 percent since the recession began," said Hartwig. "I do not know precisely what the driver of this is at this point, but the number of people employed in the claim adjuster position today is roughly where it was in 1995."

So, what can you do if you are in the claims industry and want to stay there? I am asked career advice from a number of adjusters, regardless if they are company, independent, catastrophe or public insurance adjusters. Except for experience and reputation, the single most important and easiest thing any claims adjuster can do is prove dedication and passion to this noble business through education. The claims insurance industry "calling card" that everybody recognizes is the CPCU designation. If you enjoy what you do as an adjuster, I strongly suggest you watch this video and then sign up for the courses needed to become a CPCU: 

This comment was absolutely correct. Many agents and carrier representatives are knowledgeable and capable of guiding an insured through the basic requirements of mitigation, and with a smaller loss that might be all that is necessary.

Unfortunately, as I mentioned in last week’s post, An Insurer’s Actions May Excuse Mitigation Requirements, many times we run across individuals who may lack some of the fundamental knowledge necessary to guide a policyholder through the maze of provisions included in a policy. A comment that I have been mulling over for the past week is this:

Your article only serves to reinforce my continuing comment that education is sorely lacking if an adjuster working for a carrier makes that type of inane comment. Even a rookie should not make such a stupid comment. I guess this situation is like manna from heaven for litigators it however illustrates the industry wide lack of commitment to properly educating claims personnel. With the disappearance of veterans from the field this is unfortunately what the future looks like.

I guess this comment stuck in my head because, even though I recently found a grey hair, I am part of the generation which will attempt to carry this field into the future. I have been extremely blessed to have had the opportunity to learn so much from so many people over the past years, but I understand that not everyone is so fortunate.

While the point of my post last week was to explain how carriers could be estopped from asserting a mitigation defense if its actions cause the insured to not properly protect the property, it definitely highlights the fact that there is a lack of training and education out there. As the comment says, the veterans are beginning to disappear, and, many times, new adjusters are thrown into the mix before they are ready.

While the ideal situation would be for everyone in the industry to have an experienced mentor to show them the way, the reality is that this is not feasible. Therefore, it is important for people who are new to the industry to completely immerse themselves and learn something new at every opportunity.

I recently ran across the following post on Dimechimes:

We receive hundreds of emails yearly if not monthly from new adjusters specifying they now have their adjuster’s license and are ready to go as they look for independent adjuster assignments. Many will have great backgrounds in construction, auto repair backgrounds, insurance agency, and other related fields.

What they do not have that they do not understand is a grasp on the functional essentials to properly adjust a claim. They may have learned state ethics requirements for adjusters, some basic policy to pass the adjuster’s license exam, but little regarding practical file requirements, carrier claim handling guidelines, forms required, proper communication tools and appropriate forms of communication.

If you think you are ready…try taking this self assessment and see how many questions you are comfortable with before you go out on assignments and see if you are ready!

Whether you take our 50 Hour Fundamentals of Claims Class or obtain training elsewhere, please do not go out on assignments without taking much needed training from PROFESSIONAL sources.

The post goes on to provide a 125 question test to help new adjusters determine if they are “ready for action.” While the test is intended for independent adjusters, I think it is helpful for public adjusters, attorneys, and agents as well. To succeed in this business, you need to understand all of the different parts, and finding the answers to these questions is a great place to start.

You can find the Dimechimes post and test here.

Regarding the ”insured person” issue, the policy precludes coverage if “any insured person” under the parties' insurance policy engaged in or directed an intentional or criminal act in setting the fire or concealed or misrepresented any material fact or circumstance to Allstate during the claim investigation. Allstate argued that the Shoopmans’ son, Michael, resided in their home at the time of the fire and is an “insured person” as a matter of law. The Shoopmans argued that Michael was staying in the house temporarily to recover from injuries from a motorcycle accident, so he is not an “insured person” under the Policy. The Court concluded that the evidence supports more than one reasonable inference, so summary judgment was not appropriate on that issue.

Allstate also alleged that Michael misrepresented facts and concealed pertinent information about his father's mandolin, his criminal background and his activities on the day of the fire which were “material” to the investigation. As the jury could find Michael was not an “insured person,” the Court declined to consider that argument.

Allstate also argued that the Shoopmans included a Gibson mandolin on the Proof of Loss but did not tell Allstate that the mandolin had been pawned and did not notify Allstate that the mandolin had been recovered until months later. The Shoopmans argued that Michael pawned the mandolin and they did not know of it until after Michael was arrested, well after they filed the Proof of Loss. The Shoopmans further contended that any alleged “misstatements” on the Proof of Loss related to the mandolin did not affect Allstate's investigation. The Court held that whether the Shoopmans actually misrepresented or concealed information, and whether that information was material to the investigation, are questions for a jury and denied summary judgment.

As for the Shoopmans’ bad faith claim, the Court granted summary judgment in favor of Allstate. The Shoopmans argued that Allstate’s predisposition to blame Michael for setting the fire, failure to comply with its corporate adjusting requirements, and rude behavior towards them constituted more than “mere negligence” and were deliberate acts and reckless disregard for their rights as insured persons. The Court disagreed. “The Shoopmans' assertions simply do not amount to outrageous conduct absent some affirmative act of harassment or deception.” The Court held that to prove a bad faith claim regarding a delay in claims handling, there must be proof or a reasonable inference that that the purpose of the delay was to extort a more favorable settlement or to deceive the insured regarding coverage. Allstate’s adjuster’s and investigator’s bad manners or errors in judgment were not sufficient to support a bad faith claim, nor were its technical violations of its procedures and rules.

Read the full opinion here.

Numbers one and four seem to answer this post's question about the frequency of delay. The strong probability is that number two is not the result of paying too much. It does not take a genius to figure out that it is more expensive to properly and promptly adjust claims because an insurer has to hire and train enough motivated adjusters looking for all the damage that a catastrophe causes. Not finding all the damage because adjusters do quick and insufficient investigations would seem to save claim expense dollars and claim indemnity dollars that should have gone to the policyholder.

Adjuster Don Phillips and Gary Greenfield had an interesting exchange in their comments to Frank Artiles guest post, Everyone Must Participate In The Political Process. Their observations mirror my impression of the inherent profits that are wrongfully gained as insurers fail to spend a sufficient amount of time and effort looking for all the damages or by placing roadblocks to recovery which lead to many policyholders simply giving up. Here is what Phillips first wrote:

I agree with the statement that it is the dishonest Floridians that cause problems. However that sword cuts both ways:

Isn't it also dishonest for an insurer to fail to promptly investigate a claim and pay for everything covered under the policy?

I disagree with the suggestion that if a claim is made more than 3 years after a loss it is somehow "dishonest". My experience as a claims manager of many years for insurance companies and now as a public adjuster with the people making these claims is that they are far from dishonest. What I have found in the majority of these cases was that the policyholder was always in disagreement with the original adjustment of their claim. However, those policyholders felt powerless to dispute the insurer's hired "experts".

Policyholders are not litigious by nature. They often do not bother to seek legal counsel and insurance companies often end up not paying claims because policyholders simply give up and drop the matter. Until recently, most policyholders did not know what a public adjuster was or how public adjusters could help them. They certainly do not understand the full rights and benefits afforded to them under the policy. Many insurance company adjusters forget to explain those benefits, and the "forget" is being polite.

Does the delay in pursuing these claims cause a hardship on the insurer? I would say yes. Does that hardship trump the insured's right to be compensated for legitimate covered damage? I would say no.

As long as the delay has not prejudiced the insurer's ability to investigate the claim, than all this ruckus about late reporting is nothing more than an attempt by insurers to not fairly compensate their policyholders. Often, the delay in reporting the full amount of damage is brought about by insurance company adjusters not closely inspecting structures for all the damage. And, I often wonder if that failure to closely look for and then pay all the damage is by mistake or a calculated method of underpaying a claim. (emphasis added)

Public adjuster Gary Greenfield then challenged Phillips:

You ask, "Does the delay in pursuing these claims cause a hardship on the insurer?" And you answered "yes."

What hardship is that? Please explain that to me.

From my view, the insurer benefits significantly from the delay. It has been getting premiums paid and investing those funds between the time of the loss and when the claim is paid.

Significantly, if the delay is the result of systematically not finding loss and the full amount of damage as you suggest, delaying payment is a carrier's claim profit strategy.

Insurers, by not spending the time and effort to find and test for all the damage, especially the subtle damages done to roofs and the fastening systems caused by high wind events, then they are leveraging the scale of economics hugely in their favor at the expense and hardship to their policyholders.

Sadly, policyholders pay for these wrongly unpaid damages by having roofs that wear out and need replacing far before their useful life would normally run. (emphasis added)

The reason the Florida legislature passed the pro-consumer legislation following the 2004 and 2005 storms was because of the various claims problems caused by insurance companies. Delay was rampant and so was underpayment. These laws should not be changed, but strengthened. The insurance industry's own consultants say that "basic" changes could stop the delay and underpayment of claims--which has not stopped, according to their own vendors and consultants.

On Friday, I started my "going to the client" campaign that will start to show how insurers really operate. In that case, Hartford delayed, dictated how a fire loss would be repaired, and then underpaid a significant commercial developer. If insurance companies act wrongfully in the claims of policyholders with affluence and influence, insurers will act wrongfully on any claim. My client’s story will be videotaped, shown on this blog, and sent to his representatives. I suggest that my colleagues and public adjusters start a similar campaign to explain what is really going on in the claims industry rather than do nothing and listen to or read propaganda of insurance lawyer lobbyists.

Indeed, Representative Dean Cannon, a Republican leader in the Florida legislature, told me a story of how his homeowners carrier caused difficulty and delayed paying his claim. Things have changed since my discussion with him, and the question now is whether our elected leadership is going to do something about insurer transgressions and protect their constituents or continue the trend that started a year ago by placating the insurance lobby that has been funding many of the campaign coffers of our elected leadership.

It does not take much experience to learn that most of my clients purchase insurance on price alone. Therefore, insurance companies that continue to underpay or delay payment as inexpensively as possible, and not get caught at too great a price, will be in a better competitive position than honest insurers that promptly pay, pay fully, and provide excellent customer service. Does anybody dispute this-- other than the insurance defense counsel when my claims practice experts provide this opinion?

I mentioned The Claims Spot in yesterday's post, Failure to Have Specific Written Claims Standards is Bad Faith, as providing an insurance industry view of insurance operations. I followed up reading other interesting posts and a reference one made to a report from the Ward Group, Ward Group Identifies Top Performing P&C Insurers. This report supports what some view as an inherent wrongful conflict that many insurers sometimes cross when it comes to making the claims department a "profit center" rather than the department to fulfill the promise to the customer. Profits are good and necessary for insurers. Yet, how do insurance companies keep their executives from making goals for claims managers that result in performance criteria to wrongfully lower severities? As Ward noted:

Top performers understand that efficient operations result in pricing advantages passed on to the consumer and keep the customer at the center of every key business decision.

The reason much discovery in claim practice litigation centers on internal claims management goals, reports, performance analysis, and objectives is because "efficient operations" in the claims department easily translates to paying less on claims to policyholders. When an insurer pays less on claims as a result of wrongful claims practices or a sharp claims culture, it can easily gain a competitive edge. From this view, honest insurers should support valid claims practice lawsuits and strong consumer protection laws.

It is important for insurance claims counsel to read and learn as much about the insurance industry, its management, its lore, and its operations as possible to be an effective insurance litigator. Some attorneys would try to make clients believe that they are insurance coverage experts because they can recite insurance law. Any attorney can do that. Nobody becomes an expert on insurance law, insurance coverage, and claims practice litigation based on reading insurance coverage or bad faith cases for the same reason nobody becomes an expert on medical procedures law by simply reading medical malpractice cases.

My insurance coverage practice tip of the day is to read insurance industry published information and materials on a regular basis. My suggestion to honest and ethical claims executives is to question whether their "efficient operations" is jargon being translated into performance measures that result in wrongful claims practices and attitudes that you would not want practiced upon your mother if she had a claim.

Lanzko, who is an insurer's advocate, comes to a similar conclusion, regardless of whether the lack of standards apply to reinsurance claims or other claims in Absence of procedures to notify reinsurance is a basis for bad faith:

There is an ongoing debate in the insurance industry about maintaining claim policy manuals as a potential risk in a bad faith action. The view is that if you have specific written procedures, and your claims staff does not follow them, then that could be used against them in a bad faith action. Here a court specifically states that failing to have procedures could be considered bad faith in the reinsurance notice situation....

...failing to have procedures or follow them can have a costly outcome. Claim handlers need some kind of guidelines to understand expectations, and to establish a baseline to measure performance. When handlers are trained on good practices, and are measured on those practices for compliance through and internal review or audit program, risks are diminished.

Since insurers have the obligation to have written claims standards and procedures when reporting to their reinsurers, why shouldn't they have the same obligations to their customers?

Citing the following language from Unigard Sec. Ins. Co., Inc v. North River Ins. Co., 4 F3d 1049 (2d Cir. 1993), Lanzko suggests that by not having controls and standards, an insurer will be hard pressed to argue that a failure to act was a mere mistake:

However, if a ceding insurer has implemented routine practices and controls to ensure notification to reinsurers but inadvertence causes a lapse, the insurer has not acted in bad faith. But if a ceding insurer does not implement such practices and controls, then it has willfully disregarded the risk to reinsurers and is guilty of gross negligence. A reinsurer, dependent on its ceding insurer for information, should be able to expect at least this level of protection, and, if a ceding insurer fails to provide it, the reinsurer’s late loss notice defense should succeed.

The Claims Spot provides some very interesting articles and references to other insurance management concerns and issues. I will follow up with how policyholder counsel can use insurance industry information to better understand and win cases for their clients in Monday morning's post.

The January Claims Tips explained how policyholders can effectively communicate with their insurance company adjusters following a loss. For many policyholders, ineffective communications leads to delayed claims or underpaid claims. The tips provide some practical suggestions that I recommend all claimants consider:

Effectively communicating with your insurance company is an incredibly important part of the claims process. Many insurance companies will try to handle your claim by telephone, with no records. You must make sure that everything in the claim gets documented in writing. How you communicate makes a world of difference in the amount of benefits you collect and how fast you collect them. We recommend that you:

1. Document every communication with your insurance company in a notebook or diary so you can keep track of the status of your claim.

2. Create a paper trail. Confirm representations and promises made in person or over the phone by insurance company personnel by sending them a short follow-up email or letter.

3. Use good grammar, punctuation and capitalization. Promptly respond to letters and requests if they are unreasonable. If they are, say so, in writing.

4. Be proactive: Give your insurer proof of your losses and ask for the dollar amounts you are entitled to. Don’t wait for them to tell you how much they owe you.

5. Use specific instances of improper conduct by your adjuster or insurer as leverage to negotiate the settlement you need. Your diary will come in handy.

6. Don’t mistake a friendly claim adjuster for a friend. Remember you’re in a business negotiation. Keep it professional.

7. Don’t use your insurance company as an outlet to vent frustrations and emotions related to the original cause of your loss.

8. Remember that everything you write and say may be noted in the insurance company’s records. Even if you’re frustrated, avoid saying or writing things that will make you seem uncooperative or the cause of delays or problems.

9. Don’t sign a confidentiality or non-disclosure agreement without consulting with an attorney. Agreeing to an overly broad or premature non-disclosure agreement can significantly reduce your leverage and ability to obtain full policy benefits.

10. Attitude is Everything: Be Polite, Be Prompt, Be Persistent.

This is great advice. I would add to number 9 that a policyholder should never sign a release without first consulting an attorney. Policyholders filing a claim with their own insurance company for a property damage are almost never required to sign a release to obtain payment, unless the matter is in litigation.

The United Policyholders site has hundreds of valuable tips and information about every imaginable type of claim. I consult it on a regular basis and have spent hours reading its seemingly unending library of claims information. Amy Bach, United Policyholders Executive Director, has accumulated and organized a very valuable site for anybody with a claims question or who may be looking to become more involved in the advocacy for policyholders.

Let's set the stage for how this happens. After a theft or a fire, the insurance company adjuster comes to the loss. One of the items orally requested from the policyholder is a list of all the lost, stolen or destroyed personal property along with all receipts. Exactly what is said becomes a major issue and some of my clients in the past have indicated that they did not make a claim for personal property items because the insurance adjuster said they had to have receipts to verify ownership, value, age, etc. Sometimes, my clients hear the instructions and think they are required to have receipts or they will not get paid.

I have always felt that the proper instruction from an honest insurance adjuster knowing that most people do not keep records or receipts of their covered "stuff" is:

The insurance policy allows us to ask for all the documents you have that help verify the loss. If you have any receipts for the items you are claiming, I would like to see those originals. If I need a copy, I will pay you for the cost of the copy. Please do not think that you have to have a receipt of the purchase of any personal property item you are making claim for, but if you do, I have to see it as soon as possible. Regarding your purchase of replacement items for those that are lost, the policy does require you to keep those documents of purchase and those receipts. You have to keep those post-loss purchase receipts as a condition under the policy to get replacement cost benefits."

(Note: In Florida, a homeowner insured with an admitted carrier gets replacement cost of personal property right away, so that instruction is not entirely accurate in Florida.)

Some insurance adjusters fail to make the highlighted portion clear to the policyholder. Some policyholders fail to hear it. And as a result, invoices are made up or somehow obtained that are not the original but a fabrication. Special Investigative Unit (SIU) adjusters love this game of finding the fraudulent invoice. While I have no problem of them catching frauds, I hate when otherwise honest people are baited into a needless situation of committing a fraudulent act just to get what is already owed to them.

The Claims Magazine article could be such a case or it could be a case of a person trying to justify an intentionally inflated claim:

When Gayland Anthony Oliver suffered a structure fire to his Greensboro, N.C., home in May 2009, he is alleged to have used the opportunity to pad his claim with some pretty fancy duds.

...Oliver claimed that $8,100 in custom-tailored suits had been destroyed in the structure fire. However, State Farm Fire and Casualty Company found the claim suspicious and conducted an investigation. They discovered that the invoices submitted for payment were fraudulent and did not reflect the true cost of the suits.

Oliver was arrested for submitting false claims to his insurance company....

Corey Harris' post was accurate, but there are many of the same traps for the honest policyholder in the theft scenario. The insurance company has many valid reasons to require that the police are notified following a theft loss. Three of those are:

1. Theft is not only a crime against the owner, but one against society. Finding thieves and placing them behind bars helps everybody, including insurance companies and their customers.
2. The police often recover stolen items. To that extent, the recovery of stolen items mitigates the insurer's loss and if recovered soon enough, the policyholder's loss as well.
3. Theft always has a component of a moral risk to the insurer. A few policyholders stage, hide or otherwise claim that a loss occurred as a result of theft caused by a third party when it simply is not true. Unlike a natural disaster, there is always a possibility of fraudulent theft. The requirement to notify the police helps prevent such from occurring, increases the probability of finding it, and therefore reduces the "moral hazard."

The police may ask for a list of what was stolen and the "value" of those items. The important thing for the honest policyholder is to get a revised list to the police if either the items or values change so that the SIU guys do not start asking about discrepancies. They will often check, and they may inquire as to significant differences. If numerous items are stolen, most people will not realize what is missing until they conduct an inventory of what is left and try to remember what may be missing. Sometimes, people simply forget what items they owned or realize that items in another part of their structure were also stolen until they look for them. The important thing is to keep the insurance company and police informed and with the same information about the changes and why the changes are being made.

And always remember, two wrongs never make a right. Never make up an invoice and never claim more than the full value of an item just because the insurance company may threaten not to pay or pay enough. When the insurer does not conduct itself in the right manner, I bet you can guess the type of professional that should be called to do something about that.

The inspection and re-inspection process by the insurance carrier serves many purposes. The initial inspection serves to provide the carrier with information about the damage immediately after the loss, and the re-inspection serves to educate the carrier about what repairs if any have been done, what materials were used, how much money was spent in the repairs, as a means for the carrier to bolster their case for an upcoming negotiation, and finally, it serves as a means to wear down and further frustrate the insured. Sometimes, cases can be settled shortly after a re-inspection, many times this is not the case.

It is imperative that the public adjuster control the inspections/re-inspections at all times, particularly when it involves a multi-family condominium or apartment complex. A great deal of preparation is involved in controlling the inspection process and it all begins with a written understanding between the public adjuster and the carrier’s adjuster as to what exactly will take place during the inspection process, when the inspection process will begin, who will be present, and how long the process is expected to take. Answering the question of how long it will take is sometimes impossible, but there should be a minimum timeline. Answering some of the questions:

• What - We have agreed to inspect the interior and exterior of buildings A and B, each building has approximately 55 condominium units each. The inspections will consist of only visual observation and photographs of each unit. There will not be interviews or questions of unit owners or insured’s employees, all questions will be answered by me during the inspection or after the inspection.
• When- The inspections will begin at 9:00 AM on Tuesday February 16, 2010, we will meet in the parking lot in front of the club house located at 1 Clear Pool Lane, Miami, FL.
• Who - You have agreed to provide me the names and title of all individuals who will be attending the inspections with you including the name of the company that employs each individual no later than 3 days prior to February 16, 2010.
• How long - We expect the inspections will take 3 days, but will re-evaluate whether this process can be accomplished sooner after the first day of inspections.

Before the meeting takes place, the property manager or other representative at the property must give notice to the unit owners, in many cases, the notice must be provided at least ten days in advance. The maintenance person should be easily accessible during the inspections to ensure that there is access to the roofs and other portions of the buildings usually locked to avoid accidents or vandalism. The maintenance person should not have direct contact with the carrier’s adjusters if the insured is being represented by a public adjuster or attorney, many times there is a lack of communication between the maintenance person and the carrier’s adjuster and all of sudden the insurance carrier begins to analyze the damages relying on the misinformation provided.

The public adjuster should have plenty of people present to ensure that if the carrier’s adjuster wants to divide the group into two or three separate groups, this can be accomplished while still having the ability to control the inspection process. When you first meet with the carrier’s adjuster and his group of people, make sure that you get business cards from everyone. If the individual does not have a business card, ask that person the same information that you would expect would be on his business card.

You must set the ground rules, one team or two teams, who is in charge on their side for each team, no one goes inside the unit until you have had an opportunity to go inside first and speak with unit owner confirming they can come in, re-affirm no questions or comments to the unit owners, it is expected that all involved will be polite and respectful of unit owners and their property. There have been too many times when ego’s clash during inspections and the process fails, this should be avoided at all costs, the carrier has a right to the inspections, and you do not always have to agree to scope or pricing. If the case is one that should not be resolved in appraisal, then there should not be any attempt to agree on the scope during the inspections. An agreement on scope during inspections will allow the carrier to argue the case belongs in appraisal because the scope was agreed to during the inspections and the only thing left to argue about is value. If the case is one that should be resolved in appraisal then getting an agreement on scope works in your favor.

If the carrier’s adjuster seems to be conducting an inspection that exceeds the agreement in writing, then a judgment call must be made on whether to allow for such inspection or testing because the carrier may claim lack of cooperation. However, because you have documented ahead of time exactly what the carrier will do and not do during the inspection process, you will have the documentation to avoid this problem and refute their defense.

I agree with this observation in the article:

In terms of bad-faith worries and claim manuals, it is often better to explain one miscue than to tell a judge or jury that the insurer has nothing in writing for claim personnel to use as their guide, and that there are no minimum performance requirements.

At its best, a superb claim manual is current; addresses known issues; and offers guidance for lesser-known issues. It can be an excellent education tool for adjusters and can represent a company’s best effort to comply with legal and ethical standards. The shelf life of a claim manual deserves recurring attention, though. Competent legal counsel should review and finalize the document, assuring consistency with local laws.

Some tips regarding these manuals were also addressed:

• Review, update, and "vet" the claim manual regularly. It should not be a static document or a "credenza decoration" that gathers dust. Drafting a claim manual is a job that is never "done" or completely finished. Company management should update it to reflect current practices and standards.
• Make the manual available in an electronic format, on-line to adjusters. Corporate intranets are effective for this. Further, electronic versions lend themselves to easy updating and revision. Adjusters are more likely to click an on-screen tab to access a claim manual than to walk down the hall and physically pull a book off of a shelf.
• In any document preface, include verbiage stating that the claim manual is simply a guide, rather than a book of rules to be followed mechanically or blindly, no matter what.
• Incorporate ongoing training and "refresher" courses with the claim staff periodically using the manual as a resource. A claim manual should be an ongoing cornerstone of continual staff training, not a one-time project that is checked off a list and then forgotten.
• Have outside legal counsel visit the claim department periodically for training sessions, round-table discussions, and Q&A exchanges. Themes here can relate to points and principles contained in the manual, whether they apply to three-point contact, handling suit papers, or drafting reservation-of-rights letters. Ambitious offices could arrange for a bad-faith attorney to visit and speak to what gets insurers and claim departments in trouble. In turn, this might generate ideas about new areas to incorporate in the claim manual, or existing areas to excise.

The best insurance companies train their adjusters constantly. Adjusting concepts are taught, repeated, and reinforced. I know that my rhetoric and that from my colleagues can be very pointed regarding any individual case or when claim decisions are being determined by economic considerations detrimental to a policyholder rather than the merit of a particular loss. As a result, many routine and very good claims practices are often never mentioned by anybody from the policyholder's side. This is because it is easy to simply stereotype an opponent insurer rather than to understand, appreciate, and acknowledge meritorious and well meaning attempts at training and preparing adjusters to provide outstanding service to customers after a loss. Many of my policyholder colleagues do not appreciate that this effort exists in many claims departments because they do not take time to study claims management and adjustment.

The article noted a growing trend of delay and nonpayment many months following a loss:

A large property insurance claim can turn into a soap opera, with dozens of high-end, big personalities trying to steer the plot line. It's not a secret to claims experts, or any risk manager who's faced one, that settling a large loss has only gotten more dramatic, and difficult, in the last couple decades....

...34 percent of physical damage claims are settled before the property is repaired or replaced and 37 percent up to six months after.

Only 17 percent of time/element claims, on the other hand, were settled before the end of the period of liability, while 68 percent took one to 12 months after the period for settlement.

The general trend, however, is that larger, complex losses are taking more time to settle...

As Harvey Goodman often does, he disagreed in part with the article's conclusion that more complex claims require various claims experts or consultants that slow the claim process. He made an important point that the survey never considered public adjusters, which is kind of interesting since they are the only legally licensed individuals who can adjust the loss for policyholders. Goodman commented:

"Take the question about what types of outside professionals were hired by the insured. Goodman took umbrage with the fact that he and his colleagues--public adjusters--weren't even an option...

Insureds bring in Goodman and his colleagues to make sure their interests are being represented as the claims resolution plot unfolds. And we're not just talking about large Fortune 1000 clients. He's dealt with $50 million companies with multimillion dollar losses and no in-house risk management.

"They are so thinly staffed they often have no resources to dedicate to the insurance claims process," he said.

Goodman disagreed with the survey's finding that insureds' expectations about the extent of their insurance coverage diminish significantly during the course of claims settlement. His experience is that expectations increase the longer a settlement takes.

The veteran adjuster also didn't agree with the key takeaway, that property insurance can never fully cover a loss. Sure, there might be disagreement over numbers. But there is coverage out there to cover other economic hits, like loss of value and potential damage to business relationships: for instance, extended business income coverage.

Most importantly, Goodman stressed, it's up to insureds to properly measure their loss. If you don't ask for the right amount, you're not going to get it."

It has been my impression that many get around state licensing requirements by calling themselves "consultants." These "consultants" are out of control in the insurance claims business. Insurance regulators and State Legal Bars need to start prosecuting so called unlicensed "loss consultants" and "claims consultants" for adjusting without a license and practicing law. Legal rules regarding licenses need to followed and those responsible for enforcing the rules need to do their jobs because the rules were made to protect the public from exactly what is going on in the claims industry.

Policyholders should hire licensed, experienced, and dedicated professionals. They should be careful about any individuals or organizations claiming to be "loss consultants." These “loss consultants” are violating the regulatory, and often criminal, laws of most states and have no regulator looking over their ethics and work to determine whether they are acting in accordance with the law.

If you are involved in hurricane claims in any manner, you need to register and go to the 2010 Windstorm Insurance Conference. It will be held from January 25 through 28, at the Hyatt Regency Riverfront in Jacksonville, Florida. It is the only Conference devoted solely to windstorm insurance issues.

The Conference has special training sessions for those seeking Umpire Certification in appraisal disputes. There is also a special Flood Adjusters program leading to certification as well.

The bottom line is that the Conference offers valuable instruction on how to handle windstorm insurance claims from a number of different perspectives. If you want to know what the top people working in the insurance industry are doing, go to this conference.

A January 6, 2010 article in Claims Magazine, "Conference Preview: Go With the Wind," had an interesting question and answer section with the Executive Director of the Windstorm Network, Michelle Griffin:

What sessions/speakers are you most excited about this year?

We offer a fresh group of workshop topics each year, which is a source of excitement and pride for us. This year is no exception. The presenters and educators leading the workshops are among the top in our industry. Each of our 30 workshop classes will be fair and balanced, with at least one representative from the insured/plaintiff side and another from the carrier/defense side. Our general session speakers will offer a range of topics to appeal to varied professional backgrounds. Aside from the new classes, we always strive to offer additional continuing education credits for as many states and professional organizations as possible.

Last year, you noted that the Umpire Directory and Certification Program was an area you desired to expand. Have you made headway?

Our WIND Umpire Program is constantly evolving to reflect industry needs. In fact, we’ve made some updates and additions to the WIND Umpire Directory, which we will be announcing at the conference. Long term, we are analyzing ways to move the program forward to reflect industry changes and concerns. I expect these areas to be announced in the near future.

What’s the typical profile of a Windstorm Conference attendee?

Our attendees come from all facets of the insurance industry, from senior management to the independent adjuster. Attorneys, engineers, underwriters, contractors, as well as other related professions attend the WIND Conference to obtain information about industry trends and accumulate continuing education credits. This year marks our 11th annual conference, and it’s important to note that in such a short time, it has become a national event, attracting professionals from more than 35 states and Canada, and England. About 1,400 professionals from all areas of the windstorm insurance industry attended last year’s event.

In what areas of training are you seeing the most demand?

We are always listening to our members and attendee suggestions for classes, and of course we keep abreast of industry hot topics in order to offer relevant and timely educational sessions. One topic in particular is estimating software training. Each year, new claim professionals join our organization and seek out training about how to use the most widely employed estimating software programs. We also receive feedback to provide better training about general claim issues, for a range of experience levels, from the beginner to the well-seasoned professional. These areas include scoping property damage, large loss adjusting, sink holes, and appraisal/umpire training.

I was a little disappointed that she did not feel that my seminar topic, "Gulf Coast Case Law Update: Texas, Mississippi, and Louisiana," was one of the more exciting workshops. Compared to the "Advanced Building Code Update," my seminar presentation with co-presenter, Steve Pate, will be thrilling. Just show up, and you'll see why. 
 

The job of a public insurance adjuster requires a great deal of knowledge of the law, but an adjuster must be careful not to practice law; a great deal of knowledge about insurance policies and principles; a thorough understanding of negotiation principles; the skill of insurance estimating; perfection in his/her analysis of damages; satisfying the needs of the property owner during one of the most difficult times that property owner will ever face. An adjuster is often required to negotiate against some of the most powerful companies in the world. This will be the first of several blogs that I will have the privilege of writing with respect to this topic, in hopes of assisting public insurance adjusters in their difficult and complex profession.

Insurance provides a great benefit to society, and in this day and age, it is extremely difficult to think about any profession or type of business that is not insured. However, if an insurance company is to remain in existence, it must make a profit. In making profits, insurance companies are insuring businesses and properties with the hopes of earning an underwriting profit. The property insured is referred to as a risk, and if the expenses and claim payments do not exceed one-hundred percent of the insurance premium, then the insurance carrier has earned an underwriting profit. In fact, many underwriters earn large bonuses at the end of the year after the insurance company has determined that the policies they underwrote have earned an underwriting profit. Insureds and public adjusters face a very difficult task, sometimes monumental, when filing an insurance claim in light of the insurance companies business motives and need for survival/profits.

The first step in preparing a claim for a property owner is to carefully interview the property owner about the ownership, maintenance, damage, and yes, even the cause of the damage. In today’s market, real estate ventures, investment properties, and even the homes of many families have gone into foreclosure, or are only a few months away from being served with foreclosure papers. Sometimes, resolution of the insurance claim is what’s needed to keep some of these properties from going into foreclosure, and time is of the essence. Other times, the public adjuster enters into a contract with a property owner that is too far into the foreclosure process and the property is lost before the claim can be resolved. In that instance, the only winner is the insurance company and the underwriter, because it may never have to pay claim--keeping the expenses below the underwriting premium and earning a profit.

In every property insurance policy, lack of maintenance is an exclusion to insurance coverage. Every insurance company adjuster is trained to look and identify potential maintenance problems. If the field adjuster does not identify this condition, his supervisor will question his ability to properly scope a loss. If the issue of maintenance is addressed up front during the public adjuster’s meeting with the insured and inspection of the property, then the issues of maintenance can quickly and easily be addressed during the first meeting with the field adjuster. Telling the adjuster that your interview with the property owner revealed that there was regular maintenance of the roof with documentation or names of service providers, for example, could dramatically shorten the time it might otherwise take to get a claim paid. If the issue of maintenance can be addressed during the first inspection, the filed adjuster will be satisfied that he has met his duty to address the issues of maintenance and will no longer be concerned about his/her ability to do their job.

A public adjuster should NEVER write their estimate in a way that the total damages do not result from damage caused by a covered peril. We cannot look back in time, but the property owner is one very important source when walking the property and preparing your scope of damage. Many times I hear, “I gotta write it as I see it”; I submit to you that this approach is taking a big risk and the bigger the property, the bigger the risk of having your own estimate used against you by the field adjuster, the claims supervisor, and the defense attorney in an EUO, deposition or trial. The credibility of a public insurance adjuster in the eyes of a jury, and even the field adjuster, is only as good as the accuracy of the estimate and detailed notes kept by that public adjuster. When it comes to negotiating with an insurance adjuster, you have the power of knowledge because you have total access to the owner and the property. The more accurate you are in providing the correct information to the field adjuster, the more powerful you become to that field adjuster. The easier it is for the field adjuster to make his/her recommendations for payment, the faster the claim should be resolved.

I suggest that every customer of Liberty Mutual and Safeco ask in advance what type of claims payment philosophy the insurer will follow before signing on the dotted line. Would you want to be a customer of a company that had its claims department taking a corporate "quantum leap" to bring back profits into an insurance corporation? That is exactly what Safeco and Liberty Mutual have been doing, and it is time that the insuring public is made aware of what type of treatment the public can expect with that company and its subsidiaries.

Every insurance company selling first party insurance has an obligation to investigate coverage and evaluate damages. That obligation requires the insurer to do so promptly, at its own expense, and in a completely honest manner. There are a lot of insurance company adjusters and insurance company attorneys that subscribe to this blog. Does anybody disagree?

If not, why don't Safeco and Liberty Mutual turn over all consultant reports to their customers in first party claims? Are they afraid to be honest? Why do Safeco insurance adjusters refuse to turn over draft reports of consultant reports, citing "work product" privilege? Maybe every Safeco and Liberty Mutual customer should do the following every night before a loss occurs:

We have had a number of Liberty Mutual policyholders, public adjusters, and policyholder attorneys contact us following our post, Safeco and Liberty Mutual Claims Practices Questioned on a National Basis: Policyholders Organize Against Wrongful Claims Practices.

Here is what one had to say:

Last year, my house caught on fire and liberty mutual has refused to pay invoking appraisal within one month without ever properly presenting or looking over the claim. Detectives, police, and their own cause and effect engineers say we had no fault in the fire. Yet, they have repeatedly used stall tactics.

This past year (they said) they didn't receive receipts or information that I have faxed verification showing successfully doing so. And then, they later admitted they had it the whole time saying "this is what we already had." While they have had beds to sleep in and warm food on the table, they have left me and my four kids homeless sleeping on the cold hard floor of one of the rooms that caught on fire. [They were] spending more money for detectives and fighting the claim than if they had paid and now because the adjuster that invoked appraisal and then found out the umpire sided more towards me and my children, they are arguing his decision [is wrong] and them selecting him. DSS is about to take my kids due to the living conditions and everyone is dragging their feet...what can be done??

This afternoon, I spoke with another Texas corporate policyholder attorney with a similar story. I have a corporate policyholder client whose CPA consultant has accused the Safeco adjuster of lying to her about facts of the adjustment.

As a result of Safeco and Liberty Mutual delaying turning over information about reports and estimates in that case, we have now uncovered over 150,000 claims manual operation procedures and guidelines which address how Liberty Mutual and Safeco go about their claims procedures and documents evidencing Safeco's profit oriented program of "quantum leap."

When I have asked Liberty Mutual and Safeco adjusters and attorneys if they agree they have an obligation to adjust in good faith and act honestly, promptly and in cooperation, they say, "yes." When I ask for them to do so or why they have not, this is the type of response I get and what others are reporting to me when they ask the same question:

If you are an insurance customer, I suggest a few companies that compete on service. For example, here is what I have had to say about Chubb in Chubb Calls Competitors Cheap And Unfair. Buy from companies you can trust. How cheap is insurance from Liberty Mutual if it does not pay fully, promptly or in good faith?

Here is an excerpt of the Court proceedings:

I find with respect to each of the Plaintiffs, Roxanne Martinez, Charlie Jimenez, Adan Carriaga, and Christa Okon, I find by a preponderance of the evidence that Allstate has violated Section 59A-16-20E and G. It violated Section G by compelling each of the Plaintiffs to litigate their insurance claims through a jury trial to obtain final judgment, and to recover amounts due under a policy by offering substantially less than the amounts they ultimately recovered when they went through trial.

I find that Allstate violated Section 59A-16E by not attempting to effectuate a prompt, fair, and equitable settlement of their claims in which liability had become reasonably clear.

I find that each of the Plaintiffs suffered actual damages as a result of Allstate's willful violations of Sections 59A-16-20E and G, and that each of the Plaintiffs are, therefore, entitled to recover their actual damages under Section 59A-16-30.

I find that each of the Plaintiffs' claims for damages will be taken under advisement by me, and I did consider the Plaintiffs' presentation this afternoon about what you claim the actual damages are for those claims. I'd like to take some time and think about that and determine, after considering the evidence, what the actual damages are for each of the Plaintiffs under their claims under the UCPA.

The Court also found these practices amounted to an abuse of process:

I also find in favor of the Plaintiffs with respect to malicious abuse of process. I find that Allstate has used the judicial process in New Mexico and with these Plaintiffs, the jury trial process and judicial proceedings, for each of the Plaintiffs with the primary motive to accomplish an illegitimate purpose and not intended by that process, and in a manner suggesting the wrongful use of the jury trial system; an attempt to delay or extort each of the Plaintiffs into accepting less than the full value of their benefits under their policy, their MFRA policies, providing coverage for their claims.

The transcript is available here.

My hat is off to David Berardinelli. I gave him kudos in a prior post, David Berardinelli's Fight Against Allstate's Claims Culture.

I have often indicated that when insurance company claims executives start developing attitudes of ensuring no overpayments occur, there is only one way for a claims adjustment to go. Implied threats to field adjusters' financial incentives through a number of methods is one method claims executives use to create a culture of underpaying claims. This appears to be the case as disclosed in the article which referred to internal TWIA documents:

Worried About Overpayment

But when USAA, a private insurer that also handled some claims for TWIA, used prices from industry software, a TWIA manager worried that USAA was paying more on losses than other adjusters. “This could create a problem at TWIA in the long run if it is discovered that USAA was allowed to do something different than the other” adjusting firms, Reggie Warren, vice president of claims, wrote in an e-mail to USAA.

In the same e-mail, he grants USAA permission to use the software, but suggests the association should rethink its contract with the company. A spokesman for USAA declined to comment.

The implication is obvious to USAA--"lower your prices or risk the possibility that your catastrophe adjustment contract will be terminated." Can there be any other reasonable implication meant by the email from the TWIA claims executive to USAA? Such an email is far different than:

We have very different pricing numbers for construction. We need to meet with you to go over how you have determined your numbers to reconcile the differences. If you are right and we are wrong, TWIA has been severely underpaying our customers for amounts owed and we will have to start re-opening claims to make certain our customers get every penny they deserve.

The documents referred to in the article are far from that type of attitude. Yet, such an attitude should be easily apparent from claims executives memos and training if an insurer truly has a claims culture based upon "good faith."

Instead, TWIA attorneys are spinning the claims attitude as TWIA executives being responsible for preserving assets. Those same attorneys are also seeking to avoid accountability for the wrongful claims conduct as indicated in Purva Patel's article "Windstorm Insurer Seeks Immunity in Lawsuits."

...lawyers for policyholders say the association is effectively a private company, and that immunity would let the insurer escape consumer protection laws. More than 900 lawsuits against TWIA could hinge on how courts rule on the immunity question.

Nearly all of the lawsuits seek punitive damages, attorney fees and other amounts beyond what policies provide, Mike Wilson, an attorney representing the insurer, said in a written statement.

“TWIA wants to pay all claims that are owed under the policy,” he wrote. “For claims that seek money damages beyond policy benefits, the association has a duty to conserve TWIA's assets so that affordable windstorm and hail insurance is available to all policyholders.”

See the clever "spin?" Those attorneys suggest it is better to break the obligation of good faith because they have an obligation to other customers to preserve money. They seek to avoid accountability for mistreating customers under a worthy, but false, pre-text--making certain there is money in the treasury for other losses. The effect is that while rules of good faith apply, there is no penalty for breaking any of the rules. I wonder if those other customers think they will be treated differently and in good faith when they eventually have a claim? Is it right to cheat people out of money or not pay fully on a debt to make certain there is money in the treasury?

Some political leaders in Texas have caught onto this claims mess and are also calling for regulatory action.

One lawmaker found the allegations and documents so alarming he called for an investigation of the insurer and its oversight by the Texas Department of Insurance. “The documents demonstrated a callous attitude toward insured families of the Texas coast,” Sen. Rodney Ellis, D-Houston, said in a written statement.

“These documents demonstrate a pattern of deception resulting in wrongful underpayment and denial of Hurricane Ike claims by TWIA.”

I made a comment yesterday to some insurance industry executives serving with me on the Windstorm Network's Board of Directors that 'TWIA claims executives make you guys look like pussycats when it comes to hardball claims practices.' They were amused by TWIA's practice of refusing to pay for adjusters time and work when a file was re-opened. I know of no other insurer with such a scheme from trying to get the full amount paid as reported by the Houston Chronicle:

By November, TWIA was getting hit with requests from policyholders asking for their homes to be reinspected. If an adjuster finds more damage upon additional visits, they submit what’s known as supplements to the claims.

...

In an e-mail to an adjusting firm in November, Warren noted that many of the adjusters it used were inexperienced and “not getting the job done.” If adjusters had done a better job the first time they visited a site, there would be fewer files to reopen, he noted.

Despite acknowledging TWIA could face many reopened claims because of adjuster mistakes, the insurer made it hard for homeowners to get their claims reexamined, according to the lawsuit. Warren told adjusters in a memo that homeowners had to have credible evidence to force the reopening of a claim. An estimate from a public adjuster — independent adjusters hired by homeowners — was not enough, according to the memo.

To make matters worse, in late 2008 TWIA restructured how it paid adjusters for re-inspections, effectively discouraging them from looking for more damage...After Dec. 1, adjusting firms earned $105 plus time and expenses if they denied a claim....If they found more damage, they risked not getting paid at all if TWIA determined an adjuster erred during the first inspection...

I recently read an interesting engineer's report attacking the opinion of a Safeco engineer's report. In it, the engineer was so upset with the Safeco's engineer that he wrote that Safeco was "peeing on my leg, but telling me it was raining." I suggest that many of TWIA's customers feel the same way when reading the responses from TWIA's claims management.
 

The organizational claims directives and processes are significantly more complicated for insurers and independent adjusters than most realize unless you are at a management level within a claims organization. We make it a point at our firm to find and study these to understand why adjusters act the way they do and what the insurer's motives are that drive the claims handling behavior.

Insurance and Technology had a recent article, Claims Analytics: Using Predictive Analytics to Optimize Your Claims Processes, which defined claims analytics as:

...the process to analyze the structured and unstructured data at all stages in the claims cycle (first notice of loss to payout to subrogation) to make the right decision, at the right time to the right party. Rather than analyzing one case at a time -- based only on currently available information -- analytics gives you added perspective by allowing you to view this one claim "in context" by comparing it with previous claims settlements in your database.

It seems common sense to use data and computers to be more efficient and accurate in any business process. I would be interested to see how the data is used and the actual results, given what the article indicated in part:

The power of claims analytics is that it works in conjunction with your existing claims management systems. Whenever claims data is entered or updated, analytics can be used to reevaluate the claim for loss reserve amount, fraud or subrogation opportunities. The ultimate strength of those evaluations, of course, lies in the amount and quality of available data.

…

Another challenge insurers facing today is the inability to accurately forecast loss reserves and ultimately predict outcomes once a claim has been submitted. Using analytics it is possible to calculate an accurate loss reserve amount and benchmark each claim based on similar characteristics and hence reduce the propensity for loss padding. For example, data mining techniques have helped insurers identify that the size of a claim payout grows significantly based on the number of days between when the claim occurs and when it's reported. In most instances the size of a claim can increase by approximately 50 percent if the insured does not report the claim within the first four days.

Following up on this article, I found an excellent presentation on the topic at the 2009 Accord/Loma Envision Conference by Karen Pauli of the TowerGroup, an analytic advisor to insurance and financial companies. “Predictive Analytics for Claims Operations: Beyond Fraud” is an excellent update on why data should be considered as a means to more efficiently handle all claims and make the claims operation more efficient. While listening to her, I noted that Pauli made the following comment:

Claims is the one single point where the insurer and the customer come face to face.

She indicated that during the claims process, the insurance company has the opportunity to cement the relationship between the customer and the insurer. I would imagine that if it does not go well, claims can also sabotage the relationship and damage the reputation of the insurer. Depending on the motivation for data mining and how it is calibrated, I would suggest that computerized claims analytics can be used as a means to lower payments to less than full recovery.

Of particular concern is the concept of “claimant management.” I would suggest that this notion is to keep the claimant in a state of ignorance, so that the insurance adjuster and the insurance companies’ vendors are the sole source of information for restoration and settlement of the property insurance loss. Indeed, the “quick response” aspect of claims handling seems to be not only for the valid purpose of accomplishing prompt adjusting, but more importantly, to keep the policyholder from seeking different opinions regarding how the matter should be handled and gain greater benefits that otherwise would not be claimed due to ignorance.

We’ll see how the claims managers use the increasing trend of data mining as a tool to influence claims handling decisions. As with most things in life, tools can be used for ethical purposes or as devious methods of unethical conduct. If the claims managers and their analytical computer vendors are trying to quickly and efficiently provide the full benefit of the insurance product as promptly as possible to their customers through the use of claims analytics, they will not have to worry about criticism from policyholder advocates or regulators. Otherwise, I am going to be learning a lot about this new claims tool. 

An attorney colleague of mine, Arden Lea, asked me to co-counsel with him on a case where the cooperation clause was a central issue. He coined a phrase which I often use and teach regarding the definition of cooperation. He indicated that it does not mean “slavish obedience.” He is right. If you seek a definition of the word “cooperation,” the idea of those working together, such as in a team, for a mutual benefit seems to best define the word. If the insurer had placed the word “obey” into the policy, the entire purpose of the mutual good faith performance of an insurance policy would be changed.

A case decision last month, Coconut Key Homeowners Ass'n v. Lexington Ins. Co., No. 08-60640, 2009 U.S. Dist. LEXIS 83652 (S.D. Fla. Aug. 28, 2009), demonstrates the very high burden that insurance companies have to prove regarding the policyholders failure to cooperate before coverage is denied on that basis.

The alleged failure to cooperate apparently centered on the condominium not providing access to all the units damaged by wind. Here is what the Court found regarding the “cooperation clause” and burden of proof required to show a breach of such a requirement:

Most insurance policies have "cooperation clauses" providing that the insured "shall cooperate with the insurer, attend hearings and trials upon the insurer's request, and shall assist in effecting settlements, in securing and giving evidence … and in the conduct of suits."… Cooperation clauses are less onerous on insured parties because courts will reject defenses based on alleged material breaches of cooperation clauses if the insurer cannot demonstrate "substantial prejudice" from the breach. While "an insurer need not show prejudice when the insured breaches a condition precedent to suit,"… the burden is "on the insurer to demonstrate substantial prejudice before a breach [of a cooperation clause] would preclude recovery under the policy."…

Case law regarding insurance policies indicates the inspection provision at issue in this case is a cooperation clause. First, the inspection provision helps Lexington obtain evidence, which is one of the key purposes of cooperation clauses identified above. Second, Lexington has not presented a case indicating that inspection provisions are typically considered to be a condition precedent, nor has the Court identified any Florida case suggesting Lexington's assertion that the provision is a condition precedent could be correct. Finally, the rule that "policy provisions limiting liability are to be construed in favor of the insured," State Farm Fire and Cas. Co. v. Metropolitan Dade Cty., 639 So.2d 63 (Fla. 3rd DCA App. 1994), weighs in favor of holding the provision is a cooperation clause because a holding that the provision is a condition precedent would make it harder for Coconut Key to recover.

As a result, to prevail on its motion for summary judgment, Lexington must show as a matter of law 1) that Coconut Key materially breached the inspection provision, and 2) that Lexington has been substantially prejudiced as a result of that breach. (emphasis added)

The fact pattern and issues of cooperation seem growing and numerous in other cases that I am aware. Condominiums are trying to prove that windstorm damages occurred and insurers are trying to disprove the same. Accordingly, the facts the Court noted are also important for many fighting damages in hurricane or other windstorm claims:

Here, Coconut Key has presented sufficient evidence for the jury to decide whether it has sufficiently cooperated with Lexington to allow Lexington adjusters to inspect the premises. The parties do not dispute that Coconut Key has extended invitations for re-inspection four times. Furthermore, the record presented to the Court indicates the blame for Lexington's inability to access units lies chiefly with unit owners and there is no evidence that Coconut Key can compel the owners to assist Lexington. As a result, Lexington has not shown as a matter of law that Coconut Key has materially breached the inspection provision.

…

Even if it could demonstrate Coconut Key's material breach as a matter of law, Lexington could not prevail unless it could also establish substantial prejudice resulting from its inability to access the units at issue. While it may be possible that Lexington needs access to the units at issue to address particularly contentious damages issues, Lexington has not offered any evidence showing that a meaningful amount of Coconut Key's damages are located in the inaccessible units or explained why it must access each and every unit to respond effectively to Coconut Key's claims. Furthermore, Lexington's assertion that it has not found any additional damage to unit interiors during re-inspection tends to shows that its inability to access the remaining units has had little impact on its assessment of Coconut Key's claimed damages. Accordingly, Lexington's motion also fails because it has not come forward to demonstrate substantial prejudice. However, if it chooses to do so, Defendant obviously still can present evidence on this issue at trial.

I suggest that policyholders work with the insurance company to provide information for the insurer so that payment can be made as quickly as possible. Similarly, insurance adjusters should work with and assist the policyholder to get as many benefits which are owed to the policyholder following the loss.

It is my impression that there is a growing trend in claims where delay ensues; the policyholder asks for money; months go by; and then the insurance company demands all kinds of information and access that it should have started on Day One. Then, when the policyholder asks why the insurance adjuster did not ask for the information or do the work much sooner, the question is answered with a harsh letter threatening a lack of coverage for a long list of reasons which include the failure to cooperate.

While not the case all the time and maybe I would have a different impression if I were an adjuster, it seems that many adjusters are not being taught that cooperation means working with, and not against, the customer of the insurance company.

At first this seems reasonable, but when one considers the individual insurance company, it may not be so.

Prior to 2004, Federated National Insurance Company ("Federated") had 2 adjusters handling property claims and no written standards for them.

Federated relied on independent adjusting companies to adjust its losses, and it selected the independent adjusting companies by word of mouth. Federated did not check their qualifications.

As you can imagine, when the hurricanes hit Florida in 2004 and 2005, BOOM!!!!! The insurance company was receiving approximately 4,000 calls a day and was handling five times the claims it handled prior to 2004. Federated had less adjusters/supervisors per claim. Go figure, sometimes the independent adjusters didn't know which Federated claims employees were assigned to the file.

When did Federated realize there was a problem? Why didn't it realize there was a problem earlier than 2004? When did anyone look at the Florida claims handling statutes to make sure Federated was complying with same?

When I addressed these issues with one of Federated's attorney, I was told these facts would never establish a claims handling violation. I truly believe the attorney believes this, but I completely disagree.

The reality is that the insurance company attorneys are coming up with many creative arguments to avoid facing a jury. They argue meaningless technicalities so that no homeowner can properly fill in the Civil Remedy Notice form necessary to file a claims handling lawsuit. Most courts have ruled against the insurance companies’ arguments, but not all.

Hopefully, a jury will be able to decide whether Federated's excuses are valid.

Indeed, this issue does not get raised just by insurance adjusters. My experience is that when insurance defense counsel hire engineers, the engineering report repeatedly notes the lack of “structural” damage to a building. A noted example of this is with roof claims. HAAG engineers often repeat in their reports and at seminars that there is no structural or functional damage to shingles or parts of the roof. The result is insurance company attorneys saying that they are not paying for anything unless there is proof of “structural damage.”

I am going to provide just one example to show how absurd this position is. The FC&S Bulletins discuss the issue and use the same example of vandalism that I usually provide. Interestingly, the question posed involved a roof with cosmetic damage, and I bet the insurance company had a roofing expert say there was no functional or structural damage to the roof:

Direct Physical Loss and Cosmetic Loss

Hail stones have created dents to a copper roof. The section of roofing is located over a second story bay window. It does not appear that the hail has compromised the life span of the roof's surface or otherwise affected or decreased its useful lifespan.

Our HO policy provides coverage for direct physical loss. If the roof's integrity was not compromised by the hail stone impact, has a physical loss occurred?

We believe that some carriers view this type of damage as cosmetic and do not provide coverage for replacement of the copper roof. Does FC & S have an opinion?

ANSWER

Whether or not the dents are cosmetic or affect the roof structure, they are still direct physical loss. The policy doesn’t define damage so standard practice is to go to a desk reference. Merriam Webster Online defines damage as loss or harm resulting from injury to property, person, or reputation. The roof now has dents where it didn't before; that's direct damage. The policy doesn't exclude cosmetic damage, so direct damage, even if it is cosmetic, is covered. It's the same as if vandals had painted the side of the house purple. While cosmetic, it's damage, and is covered. The principle of indemnity is to restore the insured to what they had before the loss, and this insured had a roof with no dents.

I am raising this issue in part because there are so many Hurricane Ike disputes where the insurers are not paying for roof damage. One of the arguments is that they do not pay for “cosmetic damage” which is wrong. The vandalism example made by the editors of the FC&S Bulletin clearly shows that the property policy covers for damages to the appearance of structure or property so long as it is by a covered peril.

Ginger Loeffler, the Texas Department of Insurance attorney who attended the seminar, and Steve Augustine, of the Texas Department of Insurance, need the help of TWIA customers, independent adjusters, public adjusters, experts, contractors, and anybody with information regarding TWIA claims handling and conduct to contact them as soon as possible.

Their contact info is:

Texas Department of Insurance
333 Guadalupe, P.O. Box 149104
Mail Code 110-1A
Austin, TX 78701-9104
Phone: (512) 322-3428
Fax: (512) 4751772
Steven.Augustine@tdi.state.tx.us

I urge consumers and others with complaints and information about adjusters and experts in the field saying one thing and TWIA claims managers saying another to contact the TDI attorneys as soon as possible.

I also urge those who are contacted or who anticipate being contacted to tell the truth and not do anything to destroy evidence. Advising others not to provide information, to destroy internal information, or to lie can be a criminal act. I suspect that some claims managers are subtly suggesting that those involved with claims provide a "sanitized" version of reality. This is not an insignificant investigation or a civil lawsuit where all kinds of "gamesmanship" seems to be allowed and encouraged to protect the company. Doing anything in a conspiracy to avoid the truth when authorities are investigating matters could result in criminal prosecution.

I hope that Jim Oliver or others from TWIA can attend the seminar and engage in a civil discussion of the concerns many have over the handling of Hurricane Ike claims. I truly believe an honest and open dialogue would be helpful for all involved.

Click on the image below to read the letter:

I reported on this last January in my post, Citizens And TWIA Bad Faith Exposed. I further documented it last February in my post, Views From Hurricane Ike TWIA Insurance Adjusters. I made a sarcastic report of it in The Parable of Hurricane Ike Insurance Claims. Then, I suggested that my current client and Ike protest leader, Brenda Cannon Henley, had a valid reason to protest against TWIA in, Texas Windstorm "Slabbers" and Policyholders March on Austin. Indeed, we ran over three separate posts regarding how TWIA was wrongfully adjusting roofing claims. If you simply type “TWIA” in my keyword search to this Blog, TWIA shows up 37 times in 2009. Virtually all of my posts are negative regarding the reports of TWIA claims handling. TWIA makes State Farm and Allstate look like angels regarding claims ethics and satisfaction.

It finally seems as if the local media and Texas regulators are learning what all of us in the claims administration business believe--TWIA claims executives are out of control and its claims management needs to be replaced. Purva Patel of the Houston Chronicle recently reported in, HURRICANE IKE: State Looking into Roof Damage Policy, that Texas regulators started an investigation of TWIA roofing claims:

State regulators are investigating how the Texas Windstorm Insurance Association handles certain roof claims related to Hurricane Ike.

At issue is whether unsealed asphalt shingles are considered damaged, and if so, whether Ike was the cause.

The windstorm association doesn't always think so. But some homeowners say they have valid claims because Hurricane Ike lifted the shingles on their roofs, breaking the seal that binds shingles to each other.

The Texas Department of Insurance notes that although the association claims such shingles are not necessarily damaged, unsealed shingles would not pass a home inspection that's required to obtain coverage from the association and to keep coverage if a home is repaired after a storm.

“Because we see that discrepancy, and we think that when a homeowner's shingles have been adhered, that does constitute damage, we're pursing an investigation,” said Catherine Reyer, an associate commissioner of enforcement at the department.

The insurance department began investigating in late July and has received 23 complaints against TWIA on the issue.

Yesterday, reporter Mark Greenblatt, of station KHOU published an excellent article regarding an investigation by Texas authorities into TWIA’s unfair and deceptive claims handling:

The Texas Department of Insurance has filed a formal complaint against the Texas Windstorm Insurance Association , accusing it of “unfair or deceptive” handling of claims.

In a letter to the State Office of Administrative Hearings, the Department of Insurance says the insurance company could be subject to disciplinary action if the complaint is upheld.

Texas Windstorm is the only insurance option against windstorm damage or hail from hurricanes for consumers who live along coastal sections of the state.

 The complaint specifically criticizes how the company handles claims related to wind-lifted roof shingles.

The department’s action comes as KHOU continues its ongoing, two-month investigation of Texas Windstorm’s claims handling practices, and one week after we asked the State why no enforcement action had been taken against the company. At that time, KHOU cited the 724 consumer complaints we found that the Department of Insurance upheld against the company since Hurricane Ike.

You can watch the video broadcast of Mark Greenblatt’s news story by clicking here.

Next Friday, September 11, 2009, our firm will host a seminar for licensed public adjusters in Texas. This event is titled “Hurricane Ike-What a Difference A Year Makes?” and Texas Department of Insurance representative Jack Evans will be a featured speaker at lunch. I will introduce Brenda Henley who will discuss some of the events planned for the memorial of Hurricane Ike.

While I plan to finish teaching public adjusters how to help policyholders prove and present claims at 2 pm, I will finish early if any TWIA executives or claims managers wish to have a civil discussion with experienced and licensed claims adjusters about how they may better adjust TWIA customer claims. The planned informational meeting of the Texas Association of Public Insurance Adjusters (TAPIA) can certainly be delayed to allow for such an important exchange of information.

Everybody who knows me understands that this will not be a lynching, but a civil discussion of issues and concerns. The question is whether TWIA claims executives have the stomach to engage in civil debate with skilled and knowledgeable public adjusters as to how policyholder claims should be handled and paid and about their claims practices that are now under public scrutiny.

My first thought is that readers to my blog with questions should do a “keyword” search. If you were to put “matching” into the keyword search form, a number of posts would come up on the topic. One post, Provide the Right Proof so Your Insurer Will Pay Costs to Repair or Replace to Match Texture, Color and Likeness, had particular application to the question with cases—public adjusters should not be arguing case law because it is practicing law. Another post, Texas Hold 'Em": Merlin Law Group's Seminar for Texas Public Insurance Adjusters, indicated that we covered this topic at a previous seminar. Nobody falls asleep at my seminar, so the person writing the comment must not have been there.

Since this is a frequent question and Texas insurance adjusters seem to have a “we just aren’t gonna pay for matching” attitude, I will address in detail what you can do about it at the Hurricane Ike-What a Difference A Year Makes? Seminar on September 11 for public insurance adjusters.

For what it is worth, the FC&S Bulletins also noted that the topic of “matching” is a frequent coverage dispute. A question was posed to their editorial board:

I have an insured with a homeowners (3) policy who had a wind loss that took a few strips of aluminum siding off the front of his house and few from the back side of the chimney. The siding can not be matched color or grain and the carriers solution is to take a few strips off one of the lower sides of the house put those in where the damage is, where it will not be so noticeable and put the new ones back on the lower sides. What thoughts do you have on this claim?

The answer may be helpful to many with these issues:

The solution offered by the insurer is not in keeping with the HO 00 03 (such as the standard ISO form), which promises to pay "replacement cost of that part of the building damaged with material of like kind and quality and for like use; or the necessary amount actually spent to repair or replace the damaged building." By putting on old siding to replace old siding, the insurer is effectively providing an "actual cash value" settlement, which allows depreciation.

But that is not what the insured has been paying for. The replacement cost policies have traditionally been sold to give "new for old." Yes, this violates the principle of indemnification, but that is how the policies are marketed and that is what the insured pays additional premium for.

So, in this case, the insured had matching siding prior to the loss, and is entitled to new matching siding following the loss.

I am going to have a lot more about this at the seminar, and do not ask for the materials if you cannot go. Just be there.

For policyholders that read this, I hope it is useful. You should also get the feeling that only attorneys and public adjusters that subscribe to the on-line edition of the FC&S should represent you. Those people will go the extra mile for you because they know the value of investment in knowledge regarding a very specialized area of insurance.

For insurance company claims managers and their attorneys reading this, pay my clients while you have the chance!

A public insurance adjuster asked that the following question be addressed at our September 11 Seminar, Hurricane Ike-What a Difference A Year Makes?:

When the insurer calls in the Engineer for an opinion and the insurer uses that opinion as an excuse to drag out a claim for several more months, is the insured and the insured’s public adjuster entitled to the engineer’s report? What is a reasonable time to wait for a report to be completed? We were told that we have no right to the report.

Instances such as this demonstrate why there is a strong need for laws that protect insurance consumers. Without fair claims laws, some insurers give into the temptation to cheat their own customers at the most opportunistic time—following a loss. Most insurance companies that are truly consumer oriented and honest have no trouble turning over these reports and even the drafts. For them, good faith is part of their company claims culture. Honesty requires transparency rather than one party to a contract advantageously keeping secrets. Does anybody disagree?

The Restatement (Second) of Contracts § 205, Duty Of Good Faith And Fair Dealing provides:

Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

At comment d., the Restatement provides:

Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty.

These are legal principals many would anticipate the law requires. The problem is that many of my colleagues and I fail to discuss them, and the insurance company attorneys are not about to do so, since they are trying to defend their client’s bad faith actions. It is their job to protect those types as much as it is my job to call them out.

Courts in states throughout the nation have concluded that all contracts-- including insurance policies--impose on each party an implied obligation to act fairly and in good faith. For example, in 1930, the Wisconsin Supreme Court stated that the rights of the insured “go deeper than the mere surface of the contract written for him by the defendant” and implied obligations are imposed “based upon those principles of fair dealing which enter into every contract.” The New Jersey Supreme Court's decision in Bowler v. Fidelity & Casualty Co. of New York, which involved a time limitation on the right to sue under a disability insurance contract, provides an excellent summary of how some courts view this duty:

Insurance policies are contracts of the utmost good faith and must be administered and performed as such by the insurer. Good faith “demands that the insurer deal with laymen as laymen and not as experts in the subtleties of law and underwriting.” In all insurance contracts, particularly where the language expressing the extent of the coverage may be deceptive to the ordinary layman, there is an implied covenant of good faith and fair dealing that the insurer will not do anything to injure the right of its policyholder to receive the benefits of his contract.

So, the answer is that insurers should turn over those reports. They should make certain those engineers are working as fast as possible knowing that claims require promptness. They should not hire consultants that are overtaxed, given the nature of the promptness required of claims investigation and evaluation. My experience is that many consultants never get asked this question regarding the promptness of work, but instead have other criteria which seem to be more important to many claims departments.

To be fair, in situations where the insurer legitimately has reason to be concerned about fraud, the timing of turning over reports and information can be somewhat changed. A bad actor may be given additional opportunity to change or escape the scheme if the reports or information are promptly turned over. Many courts have recognized various “work product” protections in similar situations and especially when insurers have retained counsel to help protect them. I am certain that expert insurance fraud attorneys such as Barry Zalma and Sandy Burnette could provide much greater information on that topic.

State Farm gets bashed too often at times. In March 2007, I took the deposition of one of its Home Office Bloomington based claims consultants, Stephan Hinkle. He indicated that he expected all reports, including drafts before modifications, to be turned over to policyholders. As I recall his deposition, I felt he understood that honesty was important to State Farm’s customer although the final decision might not be favorable. The transparency of the logical basis for denial of a claim or part of it is extraordinarily significant and will usually be found in the information Hinkle expected would be turned over.

In my experience, many adjusters refuse to operate this way. Therefore, the question posed above is repeatedly asked.

Being Fair And Balanced, I first became aware that my post, Partial and Advance Payments--An Insurance Company Attorney Claims that There is No Legal Obligation to Pay Undisputed Benefits, may have been a little too harsh when my former legal assistant wrote the following comment:

According to the "Tennessee Insurance Litigation Blog" website which contains Mr. Chastain's Resume, he certainly holds himself out to be an "expert" defense attorney in advising and representing insurance companies.

I just viewed the site for about a 1/2 hour and found it to be a very nice and informative site. One day it "gives the floor" to a defense attorney (like Mr. Chastain) to write an article and offer advice to insurance companies and the next day it "gives the floor" to a Plaintiff's attorney (can't recall his name) to write an article and he, in turn, offers his advice and opinions for the Plaintiffs/policyholders. I enjoyed the site.

Finally, I would venture to say that (maybe) Attorney Chastain takes this "hardnose" approach to attract insurance company clients. In #1 of his article that you cited, Chip, he says:

"1. Generally speaking, MOST insurance policies do not require the insurance carrier to make an advance..."

He's not saying that they SHOULD NOT make an advance. He just wrote that "...MOST insurance policies do not require the insurance carrier to make an advance." Indeed, it could be that, behind closed doors, he's advising and suggesting to the carrier that they should make an advance to help the insured during their time of need to avoid (or minimize) the potential of a bad faith lawsuit down the road.

Just my thoughts.

SHIRLEY HEFLIN

Shirley was no friend of any insurance company, its attorneys or assistants when in my employ. So, I was a little concerned when she appeared critical of my post.

Parks Chastain then responded to my post with Policyholder's Advocate's Blog Questioning Misconceptions on Advances Shows Extent of Misconceptions, and the Reasons Why They Are Problematic. He stated in part:

“Anyway, thanks to Chip for pointing out exactly why we needed to clear up misconceptions. His blog demonstrates my point exactly, although I really had not thought that anyone would have these misconceptions.

And, let me add this, my blog notes that some carriers do make advances and some do not. It is not a condemnation of advances, but rather an attempt to clear up misconceptions to which some policyholder attorneys contribute. These misconceptions evidenced by Chip’s posting cause a problem, when the attorney for the policyholder convinces the insured that a company is treating them unfairly by not making advances. The insured often decides to become adversarial, to the benefit of the policy holders attorney, when it is often not necessary. If attorneys would be objective in their assessments as to policy obligations, much litigation could be avoided.

I enjoy the challenge of litigating with lawyers who know the rules, and understand the issues involved. When I deal with lawyers new to coverage litigation, I find that they have many of the same misconceptions I have set forth, and perhaps those that Chip has evidenced. In many cases, the companies I have represented have made advances, but the insured claimed they were not enough. The policyholder’s attorney usually writes a letter demanding an advance, copies to his client. That creates a perception it the mind of the policyholder that an advance is required, when it may not be. Things are never the same after that, as the policyholder is convinced the carrier has failed to do something required. In most cases, nothing could be further from the truth.”

I agree with Parks on the sentences I have highlighted, especially the latter sentence. The action and risk of my job is fun, if you enjoy competition. The former needs some explanation.

For a decade, I have been teaching that public adjusters and policyholders need to be smarter and more professional about their rhetoric when confronting insurers. I did so as a result of some criticism in 1995, which pointed out that I needed the same advice. After learning from the criticism and seeing the positive results, I firmly believe that one can win and still be nice, direct, tough, gentleman-like, and a fierce advocate, without being a jerk or a lot worse. Aggressive can be accomplished in a very professional manner. Lessons like these took me from a few million dollar cases to a few hundred million dollar cases—with many in between. Giving up one’s ego in front of others may be hard to do for some of us insecure types, but if you accept Harvard educated attorney Rick Friedman’s teachings, it opens up an entire new world of positive possibilities and results.

The point I want to emphasize as I close this post, and where I disagree with Parks Chastain, is that we are not dealing with “advance” payments. The word “advance” implies that insurers are giving policyholders something to which they are not entitled. What I strongly detest is the practice of some insurers to delay payment for parts of undisputed claims owed. This is an effort to leverage the disputed portions of a claim debt downward. The insurer plays the “let’s make them suffer” game of nonpayment of partially agreed amounts to force a lower overall payment through settlement. I never use the word “advance” because that implies the wrongful insurer is doing the policyholder a favor by promptly paying "partially owed" amounts. Instead, insurers have an almost universally recognized good faith obligation to pay undisputed amounts of a claim promptly. If they do not, they should get the brunt of legal accountability.

1. Generally speaking, most insurance policies do not require the insurance carrier to make an advance. Rather, the policies provide a timeframe for investigation and the insured’s compliance with conditions precedent to recovery. With only a couple of exceptions, there is no right to payment until the policyholder has complied with policy conditions.

2. Therefore, there is no “right” or “entitlement” to an advance.

3. Advance payments do not constitute an admission of liability. I direct your attention to T.C.A. § 56-7-131, a statute that seems to address both first and third party advance payments. To download a PDF copy, click here.

4. If a verdict results in favor of the insured, the advanced amount should reduce the amount awarded to the plaintiff. T.C.A. § 56-7-131.

5. Subsection (c) of T.C.A. § 56-7-131 specifically provides that any payments made by an insurance company shall be deemed to have been made pursuant to the limits of the policy, and shall be credited against the insurer’s obligation to the insured arising from the policy.

6. If an advance is made, and there is no coverage, the carrier should be entitled to recover that advance.

7. The statute also provides, as does most case law, that an advance does not toll any statute of limitations or contractual suit period.

I am not an expert in Tennessee insurance law-- yet. But if this is the mentality of Chastain’s clients, we should open an office in Memphis or Nashville because Tennessee policyholders need some help.

An insurance company that does not promptly pay undisputed benefits that can be determined under a property insurance policy is not acting in good faith. If any insurance company claims person wants to dispute this, please comment and let’s publish it here. I am not suggesting that insurance companies pay when there is no coverage or no additional amount of benefits that can be determined as owed. But, few states and few courts will let anybody get away with paying nothing by simply relying upon the clause in the standard property policy that says payment is not due until 30 or 60 days after one of three things happen:

1. We reach agreement with you.
2. An appraisal award is entered.
3. A Judgment is entered.

Some of the commercial forms, such as those found in FM Global, specifically refer to payments in advance of final agreement of the loss and when those are due. So, policy language is important.

Most states have regulations, statutes, and case law which make the practice of doing what Chastain suggests illegal and would probably subject any insurer to a market conduct examination with penalties by a Department of Insurance. Could you imagine the onslaught of lawsuits if Chastain’s clients followed his suggestion that it is a myth that they have to pay “advance payment” before making one big final payment that could come months or years after a loss?

I find it curious that in all the years I have been taking depositions, I have heard only a couple of times an adjuster or claims manager testify that they had no obligation to pay undisputed portions of a claim. Most of the time, it comes from attorneys not trained in adjustment practices who are straining reliance upon the aforementioned clause. The cases become humorous as judges start asking, “so Mr. Chastain, you mean to tell me that your client has no legal accountability for not paying for anything on her hundred thousand dollar home because she disputed fifty dollars regarding the price of carpeting in the basement bathroom?”

I will do some more research on this topic. In the interim, insurance companies can help with the poor economic climate for attorneys by following Parks Chastain’s post.

By electing Frank Artiles, a Florida public adjuster, for the Florida House of Representatives in South Florida, I don't see those kinds of things happening. My law firm is dedicated to helping this become a reality, and we need your help.

On Thursday, August 13, we are co-hosting a fundraiser for Frank Artiles with Miami-Dade County Commissioner Jose “Pepe” Diaz in our Coral Gables office from 6 pm to 7:30pm. Frank is a wonderful person and will make a devoted public servant. We need more bright individuals like Frank Artiles in our legislature who are willing to stand up for the average insurance consumer as Senator Mike Fasano does.

The Merlin Law Group is also presenting a continuing education seminar for public adjusters earlier the same day. At 4:00, I will make an hour-long presentation, Ethical Issues in Presenting Claims. I expect this class to be very interactive, as they usually are when a roomful of public adjusters come together to learn and share with fellow professionals. I have applied for 1 ethics credit for public adjusting continuing education for this class. The following topics are on the agenda:

• Unauthorized/Unlicensed Practice of Law: How to recognize it and to ensure you do not do it

• Unauthorized/Unlicensed Public Adjusting: The legal ramifications of contractors and others associated with the building trade who are not licensed public adjusters and who negotiate insurance recoveries with insurance adjusters

• Code of Ethics: Discussion of the public adjuster's ethical requirement to "put the duty for fair and honest treatment of the claimant above the adjusters own interests in every instance."

• Public Adjusting Contracts: Discussion of waiting periods, signing proofs of loss, appearing for EUOs, excessive fees, and all questions you may have on these topics.

The seminar is in the Westin Colonnade Hotel immediately adjacent to our Coral Gables office. We will host a cocktail party/fundraiser thereafter in our Coral Gables office at 6.

Everybody is welcome to attend the fundraiser. All public adjusters along Florida's east coast should make their way down that afternoon for education, political support, and fun.

You never know what can happen in life until you try. We need your help on this endeavor for Frank.

Public Adjusters can register for the Ethics Seminar by clicking here.

Ed Rust Jr. is very capable and bright, but is he earning the position or does he just get to keep it because of his dad and long standing family ownership of State Farm's management?

For example, in the 2001 case of Campbell v. State Farm Mut. Automobile Ins. Co., the Utah Supreme Court in 2001 found:

"2. The Nature of State Farm's Misconduct

This factor specifically analyzes the nature of the defendant's conduct in terms of its maliciousness, reprehensibility, and wrongfulness. It mirrors the "reprehensibility" factor described by the United States Supreme Court in BMW of North America, Inc. v. Gore, 517 U.S. 559, 134 L. Ed. 2d 809, 116 S. Ct. 1589 (1996). There, the Supreme Court stated that the defendant's misconduct is "perhaps the most important indicium of the reasonableness of a punitive damages award." ...Repeated "trickery and deceit" targeted at people who are "financially vulnerable" is especially reprehensible and worthy of greater sanctions. ... Moreover, "deliberate false statements, acts of affirmative misconduct, or concealment of evidence of improper motive" also warrant larger awards. ...

With these standards clearly in mind, the trial court made nearly twenty-eight pages of extensive findings concerning State Farm 's reprehensible conduct. We summarize here three examples from those findings of State Farm 's most egregious and malicious behavior.

First, State Farm repeatedly and deliberately deceived and cheated its customers via the PP&R scheme. See Court's Findings, Conclusions and Order Regarding Punitive Damages and Evidentiary Rulings, Campbell, at 17-27. For over two decades, State Farm set monthly payment caps and individually rewarded those insurance adjusters who paid less than the market value for claims... Agents changed the contents of files, lied to customers, and committed other dishonest and fraudulent acts in order to meet financial goals...For example, a State Farm official in the underlying lawsuit in Logan instructed the claim adjuster to change the report in State Farm's file by writing that Ospital was "speeding to visit his pregnant girlfriend." ...There was no evidence at all to support that assertion. Ospital was not speeding, nor did he have a pregnant girlfriend. Id. The only purpose for the change was to distort the assessment of the value of Ospital's claims against State Farm's insured. As the trial court found, State Farm's fraudulent practices were consistently directed to persons--poor racial or ethnic minorities, women, and elderly individuals--who State Farm believed would be less likely to object or take legal action.

Second, State Farm engaged in deliberate concealment and destruction of all documents related to this profit scheme....State Farm's own witnesses testified that documents were routinely destroyed so as to avoid their potential disclosure through discovery requests....Such destruction even occurred while this litigation was pending... Additionally, State Farm, as a matter of policy, keeps no corporate records related to lawsuits against it, thus shielding itself from having to disclose information related to the number and scope of bad faith actions in which it has been involved.

Third, State Farm has systematically harassed and intimidated opposing claimants, witnesses, and attorneys... For example, State Farm published an instruction manual for its attorneys mandating them to "ask personal questions" as part of the investigation and examination of claimant in order to deter litigation... Several witnesses at trial, including Gary Fye and Ina DeLong, testified that these practices had been used against them... Specifically, the record contains an eighty-eight page report prepared by State Farm regarding DeLong's personal life, including information obtained by paying a hotel maid to disclose whether DeLong had overnight guests in her room...There was also evidence that State Farm actually instructs its attorneys and claim superintendents to employ "mad dog defense tactics"--using the company's large resources to "wear out" opposing attorneys by prolonging litigation, making meritless objections, claiming false privileges, destroying documents, and abusing the law and motion process...

Taken together, these three examples show that State Farm engaged in a pattern of "trickery and deceit," "false statements," and other "acts of affirmative misconduct" targeted at "financially vulnerable" persons.... Moreover, State Farm has strategically concealed "evidence of [its] improper motive" to shield itself from liability, which was furthered by State Farm's treatment of opposing witnesses and counsel.... Such conduct is malicious, reprehensible, and wrong.

State Farm responds by arguing in its brief that even if its conduct was wrong, it does not "after all, involve murder, torture, or deliberate poisoning of the environment," and thus cannot warrant millions of dollars in punitive damages. Additionally, State Farm argues that under Crookston II, willful calculated fraud was not sufficient to justify a higher than ordinary ratio of punitive to compensatory damages...

State Farm fails to realize that, while Crookston II held that fraudulent conduct alone was insufficient to justify a large punitive damage award, it also observed that fraud combined with other factors justifies a higher award....the company's 'calculated and calloused attitude' toward settling valid claims." ...In this case, the jury was convinced, and the evidence shows, that State Farm engaged in a widespread pattern of fraud. Moreover, the evidence of its PP&R scheme demonstrates that State Farm specifically calculated and planned to avoid full payment of claims, regardless of their validity. Thus, the nature of State Farm's conduct supports the imposition of a higher than normal punitive damage award."

The United States Supreme Court reversed the amount of punitive damages and sent the case back further review of State Farms's claims culture. This occurred in 2004, before Hurricane Katrina, and the conservative Utah court held:

" In insurance each party must take a risk. But it is inaccurate to assert that if the insured event does not occur then the insured receives nothing in return for the premium payment made. Each insured receives at the time of contract formation present assurance of compensation if the loss occurs which is a valuable peace-of-mind protection.

....

Insureds buy financial protection and peace of mind against fortuitous losses. They pay the requisite premiums and put their faith and trust in their insurers to pay policy benefits promptly and fairly when the insured event occurs. Good faith and fair dealing is their expectation. It is the very essence of the insurer-insured relationship. In some instances, however, insurance companies refuse to pay the promised benefits when the underwritten harm occurs. When an insurer decides to delay or to deny paying benefits, the policyholder can suffer injury not only to his economic well-being but to his emotional and physical health as well. Moreover, the holder of a policy with low monetary limits may see his whole claim virtually wiped out by expenses if the insurance company compels him to resort to court action.

....As the facts of this case make clear, misconduct which occurs in the insurance sector of the economic realm is likely to cause injury more closely akin to physical assault or trauma than to mere economic loss....When an insurer callously betrays the insured's expectation of peace of mind, as State Farm did to the Campbells, its conduct is substantially more reprehensible than, for example, the undisclosed repainting of an automobile which spawned the punitive damages award in Gore....

...

This deceitful conduct can only be explained as part of a scheme to reduce State Farm 's economic exposure. The possibility that its dissembling would expose the Campbells to an excess judgment must have been apparent to State Farm . To react as it did when the excess judgment became a reality only confirms the toxicity of State Farm 's behavior.

...

When considered in light of all of the Gore reprehensibility factors, we conclude that a 9-to-1 ratio between compensatory and punitive damages, yielding a $ 9,018,780.75 punitive damages award, serves Utah's legitimate goals of deterrence and retribution within the limits of due process."

Unlike the vast majority of American corporations whose boards and regulatory audit committees would have cast out a CEO after such findings, State Farm's board of directors and audit committees did nothing. This financial and independent giant thumbed its nose at regulators and the courts. It made no change. I would be more than happy to share anything that anybody has to offer to explain how such a small amount of punitive damages changed one of America's largest corporations (allegedly non-profit).

Utah has Mormon conservatives, but what about Florida, where people from the north and south, liberal and conservative, must agree upon ethics? Is State Farm honest in Florida? How about this finding, which I reported in "State Farm's Freakoutnomics:"

"The recommended Order from the Judge who reviewed the rate increase explains how State Farm’s theory of loss is sham economics. Starting at page 15:

"...State Farm Florida also paid State Farm Mutual $12.8 million for a credit risk provision....
...
Of the total $700 million paid to private re-insurers, State Farm Florida paid approximately $151 million to private re-insurers other than State Farm Mutual. State Farm Florida paid $549 million to its parent company, State Farm Mutual.
...
Payments to unrelated private re-insurers represent arms-length transactions between a willing buyer and willing seller of reinsurance coverage. However, the fact-finder is unable to determine from a preponderance of the evidence whether either the cost of reinsurance purchased from State Farm Mutual or the cost of the credit risk provision purchased from State Farm Mutual is excessive or reasonable....

The economic reality is that State Farm Florida is merely the legal form in which State Farm Mutual chooses to do business in Florida. State Farm Mutual and its wholly-owned subsidiaries, including State Farm Florida, comprise a "group or combination" that the Legislature defines as a "person" ...

Transactions between State Farm Mutual and State Farm Florida for reinsurance and credit risk provisions totaling approximately $561.8 million, when viewed in the light of economic reality... may be transactions which State Farm Mutual engages in with itself and which lack any independent economic significance. Transactions with no independent economic significance would be sham transactions which may distort the economic costs... Such economic distortions may enable the group to derive a rate advantage from the legal form in which State Farm Mutual chooses to do business in Florida."

That is what the judge said and this is what I said:

"The above findings cannot be overstated. The judge made these findings after State Farm and Florida's Office of Insurance Regulation fought over the details of State Farm's request for a rate increase. The bottom line is that what State Farm Florida wishes to report as expense, is largely payments made to its parent company. Essentially, it is moving income from one pocket to another, while claiming it as an expense.

If the media would report on this finding with headlines such as, "Judge Rules State Farm Engages in Sham Transactions," I do not think that State Farm's explanation of financial loss and threats to leave Florida would have such an impact. If people knew the whole story, they would know State Farm’s tales of financial loss in Florida are nothing more than propaganda."

In Mississippi, so many clients had altered engineering reports that it was obvious the problem was not just a mistake. Every time the change was made, it was to lessen the amount owed. Who in any position of leadership would allow this to wrongfully happen without picking up the phone and asking to quietly resolve the matters? I have never spoken to Ed Rust Jr. Other insurers have been understanding enough to have their officers call their policyholders who have catastrophic claims. Slabbed and Anita Lee are reporting events necessary for an understanding of State Farm's litigation culture.

This week, the Florida Appellate Court decided the issue against State Farm and for Florida policyholders and for Kevin McCarty. The important thing is that a "sham" transaction and argument has been made to Florida Regulators and judges. Why should State Farm be able to hold a license in any state given the findings here and in Campbell? Because they have a tremendous amount of money and lots of really nice and friendly local agents? Maybe to keep the license throughout the rest of the country, State Farm should have to change culture at the very top. Do any of you think that you should run your family's business by birthright? Why should Ed Rust, Jr.?

What do you think?

This is the California Law she referred to:

Cal Ins Code § 10082.3 Provisions regarding loss requirements, appraisals, and adjusters; Applicable policies

 Notwithstanding any other provision of law, the following provisions regarding loss requirements, appraisals, and adjusters shall apply to the following types of policies originated or renewed on and after January 1, 2002: all policies of residential property insurance, as defined in Section 10087, all policies, endorsements, or certificates of insurance providing coverage for loss or damage caused by the peril of earthquake issued pursuant to this chapter; and all policies of basic residential earthquake insurance issued pursuant to Chapter 8.6 (commencing with Section 10089.5).

...

 The insurer shall notify every claimant that they may obtain, upon request, copies of claim-related documents. For purposes of this section, "claim-related documents" means all documents that relate to the evaluation of damages, including, but not limited to, repair and replacement estimates and bids, appraisals, scopes of loss, drawings, plans, reports, third party findings on the amount of loss, covered damages, and cost of repairs, and all other valuation, measurement, and loss adjustment calculations of the amount of loss, covered damage, and cost of repairs. However, attorney work product and attorney-client privileged documents, and documents that indicate fraud by the insured or that contain medically privileged information, are excluded from the documents an insurer is required to provide pursuant to this section to a claimant. Within 15 calendar days after receiving a request from an insured for claim-related documents, the insurer shall provide the insured with copies of all claim-related documents, except those excluded by this section. Nothing in this section shall be construed to affect existing litigation discovery rights. (Emphasis Added)

I love the "including, but not limited to" language. Why shouldn't these documents be turned over? It would stop much of the gamesmanship and deceit that commonly occurs. Honest claims adjustment should be transparent--does anybody disagree?

I recently wrote on the noble work United Policyholders does on a very limited budget. Amy Bach's suggestion that this law become a national standard is well founded. It would prevent some of the needless insurance coverage lawsuits because the insurer's analysis would be truly transparent to the customer. I know of at least one major insurer, FM Global, that claims to have this good faith standard in place throughout the country.

For consumer interest attorneys attending the American Association of Justice Convention in San Francisco next week, Merlin Law Group, with a number of other policyholder law firms, is co-sponsoring a cocktail party to benefit United Policyholders. It will be held on Monday, July 27, in the private library at Bourbon & Branch, a 1920’s inspired San Francisco speakeasy located one block away from the AAJ convention hotel. It starts at 5:30 p.m.

Since the party is sponsored by a number of consumer interest law firms, including: Daley, DeBofsky & Bryant; Goldstein, Gellman, Melbostad, Gibson & Harris; and the Merlin Law Group, there is no cover charge and your first drink is on us. If you wish to support United Policyholders or add your firm as a sponsor of this FUNraising?? event, a minimum (tax deductible) contribution of $500 is required. Please contact Emily Cabral at (415) 393-9990 or emily@uphelp.org to sponsor, donate, or obtain an invitation.

The work of a handful of policyholder advocates such as Amy Bach help keep policyholder interests in front of state legislatures and Departments of Insurance despite an extraordinarily well funded opponent. I find it ironic that the major players in the insurance industry spend so much time and money trying to prevent passage of laws, such as the one above, which would ultimately protect them, as well as their consumers, from unscrupulous competitors. Maybe that says something about the claims culture of many insurers...and something they should think about when they reflect on business ethics and lobbying

Could you imagine what would happen if a wife asked her husband, "Honey, where were you," and one of two answers were given:

1. "I am not going to tell you where I was because there is no law or regulation that says I have to tell you."
2. "I stopped by the Alibi Lounge to have a drink with the guys." Which may have been true, but only after also seeing "my girlfriend" for an hour outside the lounge.

You can imagine the response. Do insurance company managers understand how their policyholder customers feel with an analogous answer? Yet, it is commonplace.

Even when corporate and commercial policyholders ask if the property insurance adjuster or the insurance counsel can provide drafts of reports or whether they are editing drafts of an alleged expert engineer, the questions are unanswered. Many insurers refuse to answer claiming such information is "work product." Many send the "last" draft which is allegedly the most accurate. It is amazing how often the last draft lowers claims payments.

There are claims managers that mandate full transparency of issues and questions. One State Farm senior claims manager even said that his company has an obligation to provide all drafts to policyholders. This type of transparency in the claims process should be applauded, even if it eventually ends up in a dispute. Honest and good faith differences of opinion can occur. Why not be honest about those?

Even in Great Britain, I notice that policyholders perceive that the claims process is "gamed" against policyholders. While trying to put myself to sleep last night, I read a book from the Oxford University Press, "Policies and Perceptions of Insurance Law in the Twenty-First Century," M. Clarke (Oxford Univ. Press 2007), that verified people in England have the same perceptions regarding an insurer's honest reasons for claims decisions:

"First, it has been doubted whether adjusters come to claims with an open mind. Secondly, why, when the adjuster's investigation is complete, is the report drawn up by the 'independent' adjuster available to the insurer but not to the claimant? The answer is that, in reality and in law, adjusters are the agents of the insurer. The perception of many claimants, who view adjusters with resentment and distrust, is that adjusters are brought in only to beat the claim down."

I can imagine that Slabbed and my policyholder friends in Texas, Mississippi, and Florida can take some refuge in the fact that other legal systems, even one much older than ours, are battling the same problems.

I made a point in Unethical Conduct by Public Insurance Adjusters and Policyholders Cannot be Tolerated that:

“Policyholders need these skilled professionals immediately following a loss so that evidence can be collected and assistance provided to help soften the financial blow of a catastrophe. I have found that if retained within hours of a loss, skilled public adjusters make the insurance product work far better for the insured and there are far fewer re-opened claims because the claim is adjusted right the first time. But this only happens if the public adjuster is trained, skilled, motivated and has sufficient resources to get the job done right.”

I caught flack from some public adjusters for suggesting in the post that any public adjusters act unethically. Maybe they did not read the paragraph above. I was also criticized for my view that binding appraisal is unconstitutional when conducted as an “informal” process in Citizens May Eliminate Appraisal :

“Still, appraisal is not a “right” for policyholders. Citizens management and in-house attorneys made an excellent point that appraisal has no written rules and is subject to abuse. I am surprised that the Florida Supreme Court has allowed appraisal, an informal process, to bind parties. I have long felt that an informal process of binding resolution violates due process. At one time, Florida Courts ruled that the appraisal process was subject to the Arbitration Code. This is no longer the case, and Citizens correctly pointed to the deficiencies of appraisal in its report to the Board of Governors.”

I view issues from the standpoint of my client, the policyholder. In the vast majority of cases, the interests of public adjusters and policyholders are aligned. In the case of the 48 hour rule, public adjusters will love me. One of them, Laura James, who used to work in the insurance restoration field and whose husband worked as a property claims adjuster for Nationwide, wrote two comments in response to Unethical Conduct by Public Insurance Adjusters and Policyholders Cannot be Tolerated. The first stated:

“Chip - Interesting points as always. Like Shirley, I am curious about how to raise public awareness about the existence of Public Adjusters and the fact that we are here to help them through the claims process?

Thanks for all your work on the blog!”

The second is much more in-depth and deserves to be fully quoted. Laura and her husband have extensive field experience. She makes an excellent argument against this ill-conceived law:

 “You make such a good point about the benefit of Public Adjusters being retained right away to represent the policyholder. Two of the biggest challenges Public Adjuster’s must deal with today are the appalling lack of public awareness about our industry and value of services we provide as well as the “no solicitation for 48 hours” law recently enacted in Florida. Both of these problems harm not only Public Adjusters, but also the people they serve---policyholders.

I do not think the Florida Office of Insurance Regulation and those in the Florida legislature realize what actually happens in the first 24 hours of a property loss and subsequent claim and why the “48 hours rule” needs to be changed immediately for the benefit of policyholders as a result of that important time frame. From personal experience previously working from the insurance repair and restoration contractor side of the insurance claim business and now as a Public Adjuster – it is best for the policyholder to immediately retain a public adjuster to ensure that their policy benefits are protected and the evidence of their claim is preserved.

Generally, an insurance restoration contractor who immediately comes to a loss, often at the request of the insurance company's adjuster, starts making suggestions and decisions that dramatically effect coverages and the benefits available following a loss. A typical example of this issue is a water intrusion loss. The insurance repair contractor comes to the loss, sees one small area of what is believed to be mold, and without proper testing, throws on a Ty-Vek suit and then calls the company adjuster to report the entire claim is a "mold claim." This action by the contractor severely limits the coverage available for the policyholder to whatever the mold limitation of the policy happens to be- assuming it is not totally excluded.

In this water loss example, the insurance restoration contractor is, by their actions in the field, “adjusting” the loss without a license. They take these actions often without proper training or even looking at the policy coverages. At the same time, the insurance company, who often sent the contractor to the loss in the first place, now has to pay only a limited loss and one which may be partially or totally excluded. The policyholder ends up with a partially repaired structure, and according to their insurer, limited or no more coverage.

However, IF the policyholder knows there is such an insurance professional as a Public Adjuster that can be retained immediately, a Public Adjuster can be initially consulted and a huge battle over coverage and otherwise lost benefits can be avoided merely from the manner that the loss is linguistically reported and benefits provided for full repair. Public Adjusters are trained to help provide the policyholder with facts and preserve evidence that supports coverage rather than leading to proof and evidence leading to denial or limitation of otherwise available benefits through ignorance.

Some may argue that the policyholder must take responsibility for their claim. Let’s try to remember that these various types of policyholders are dealing with a crisis. The "48 hours rule" generally limits the only advice these policyholders receive as being from the insurance company’s adjuster or the insurance restoration contractor that normally has a longstanding relationship with the insurance company. It is a situation where a policyholder, not trained in the fine technicalities of the policy and not usually being experienced in practical insurance claim decisions, is forced to rely upon the insurance company for guidance. The rule acts so there is no independent advice whether, and under what terms, the policyholder sign the work authorization for the insurance contractor.

The irony is that while all these significant decisions are being made with the help of only the insurance industry representatives immediately following the loss, the "48 hours rules" implies that these policyholders are "too fragile" to be approached by Public Adjusters – who are solely licensed and trained to look out for their rights. Meanwhile, an unlimited number of insurance restoration contractors can approach, solicit, and discuss significant aspects of the loss that will impact the policyholders claim and there is no concern in the law for that. Further, though the policyholder signs the work authorization with the insurance restoration contractor, everybody recognizes who signs the claim checks and who the insurance contractors depend on for repeat business – the insurance companies. The unknown truth to many is that the insurance restoration contract business is a referral industry with insurers and based upon good relations with the insurance companies whom they have repeated and longstanding relations.

There are some very hardworking, ethical restoration contractors who really are trying to do the best thing by the policyholder. I just think that some adjusters rely too heavily on contractor input and "control" the claim benefits through contractors with whom they have longstanding relationships. You cannot serve two masters.

Coverage issues should be handled by adjusters on both sides, and policyholders should be afforded public adjusters at the most crucial stage of the claim--right after it occurs. I believe the "48 hours" law and the insurance industry taint the perception the public has of Public Adjusters. The insurance industry has every financial motive to change the reality of public adjusters as being professional helpers and advisors to consumers of insurance to being portrayed as opportunistic vultures. Checks and balances need to be in place for both sides, and the policyholder should be protected from anyone who could stand in the way of them being fully indemnified after a loss.”

Currently my favorite case on the topic of an insurer's obligation to investigate fully for facts supporting coverage (rather than facts supporting only denial) is Jordan v. Allstate Ins. Co., 148 Cal. App. 4th 1062 (Cal. App. 2d Dist. 2007). The case has language which seems very even handed. Indeed, defense attorneys often cite this case. The facts and legal history are a little confusing. However, the "Readers Digest" version is that a claim was submitted for water related damages including fungus, wet rot, dry rot, and collapse caused by hidden decay. On the coverage issue, the Court found:

"First, we could conclude that a collapse due to ‘hidden decay’ would be covered, but not if such decay was caused by ‘wet or dry rot’; or, second, we could conclude that coverage for a collapse due to ‘hidden decay’ was provided, but noncollapse damage caused by ‘wet or dry rot’ was excluded. Each of these constructions of the policy language is reasonable. The first is consistent with Allstate's contention that the exclusion for ‘wet or dry rot’ precludes coverage irrespective of whether there is a basis for coverage under the exception to the collapse exclusion. On the other hand, the second interpretation is advanced by Jordan and supports her claim for coverage under the collapse provisions of the ‘additional coverage’ section of the policy. Thus, when read in the context of the entire policy, particularly the provision granting coverage for a collapse caused by ‘hidden decay,’ the effect and application of the exclusion for a loss caused by wet or dry rot is not at all clear.”...

Applying settled principles of policy construction, we resolved this ambiguity by looking to the insured's objectively reasonable expectations and construed the policy language against Allstate and in favor of Jordan.... This meant that Jordan could demonstrate the existence of coverage for her loss if she could show that an “entire collapse” had occurred. Because the record was unclear on this issue, we remanded the matter back to the trial court to give Jordan an opportunity to prove that an actual collapse had occurred and had resulted in her claimed damage."

After reading that, most of you can imagine why I sometimes take an afternoon for a little wine. Yes, I read this all day, and it sometimes seems that what I am reading is in the Choctaw language with logic from Jimmy Hendrix. Admittedly, I enjoy it; I am a little bit of a nerd.
 

But, the point Jordan was making is that Allstate should have been looking for facts supporting a collapse loss which was covered. In deciding the issue, the Court first provided some general rules regarding good faith investigative obligations:

"An insurer is said to act in “bad faith” when it not only breaches its policy contract but also breaches its implied covenant to deal fairly and in good faith with its insured. “A covenant of good faith and fair dealing is implied in every insurance contract.... The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the agreement's benefits. To fulfill its implied obligation, an insurer must give at least as much consideration to the interests of the insured as it gives to its own interests. When the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort. And an insurer cannot reasonably and in good faith deny payments to its insured without fully investigating the grounds for its denial.... Indeed, in Egan v. Mutual of Omaha Ins. Co... the Supreme Court emphasized that, in order to protect the interests of its insured, it was “essential that an insurer fully inquire into possible bases that might support the insured's claim.”

...[I]t must be remembered that “an insurer is not required to pay every claim presented to it....Such a practice inevitably would prejudice the insurance seeking public because of the necessity to increase rates, and would finally drive the insurer out of business. Indeed, analysis of the leading first party cases demonstrates that a rule has never been applied which holds under any circumstances that an insurer which refuses to pay benefits claimed to be due under the policy did so at its own risk. Clearly, both logic and good policy dictate that no such rule ever be applied in first party cases.”

Then, the Court explained the legal ramifications for failing to fully investigate the claim:

"...an insurer owes a duty to its insured to investigate all of the possible bases of an insured's claim. The insurer's duty to give as much consideration to the insured's interests as it does to its own obligates it to investigate a claim thoroughly. An insurer must fully inquire into the bases for the claim; indeed, it “cannot reasonably and in good faith deny [benefits] to its insured without thoroughly investigating the foundation for its denial.... An insurance company may not ignore evidence which supports coverage. If it does so, it acts unreasonably towards its insured and breaches the covenant of good faith and fair dealing...see also Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 882 [93 Cal. Rptr. 2d 364] [the record “suggests that [the insurer] looked the other way when confronted with facts revealing the possibility of first party coverage, resisting both reasonable interpretation of policy language and a compelling history of negotiation to secure this coverage”]; Amadeo v. Principal Mut. Life Ins. Co. (9th Cir. 2002) 290 F.3d 1152, 1163 [even assuming the insurer's interpretation of its policy was not adopted in bad faith, its failure to investigate the facts surrounding the claim was evidence of bad faith].)

...where an insurer denies coverage but a reasonable investigation would have disclosed facts showing the claim was covered, the insurer's failure to investigate breaches its implied covenant. The insurer cannot claim a “genuine dispute” regarding coverage in such cases because, by failing to investigate, it has deprived itself of the ability to make a fair evaluation of the claim....Thus, although Allstate's interpretation of a policy exclusion was reasonable, it also had a duty to investigate Jordan's coverage claim that was based on the “additional coverage” provisions relating to an “entire collapse,” which we held, in Jordan I, was also reasonable and consistent with Jordan's objectively reasonable expectations."

The Jordan case is not over. The Court sent it back again for trial. It looks like some damage may be covered and some not, but the facts are not fully developed. However, the Court correctly noted that every adjuster has a good faith obligation to fully and honestly investigate all facts: those supporting coverage and those suggesting no or limited coverage.

The seminar topics and speakers are:

Topic: “Appraisal - Appraising Large Losses”
Presenters: W. Wesley Baldwin of The Baldwin Company and Jonathan Wilkofsky, Esq. of Wilkofsky, Friedman, Karel & Cummins

Topic: “Builder's Risk Program and Coverages” (part 1)
Presenters: Samuel Bergman of Rolyn Companies, Inc.; Stephen R. Figlin, SPPA of Stephen R. Figlin & Associates, Inc., and Peter Kahn of Matson, Driscoll & Damico

Topic: “Builder's Risk Program, Coverages and Adjustments” (part 2)
Presenters: Samuel Bergman of Rolyn Companies, Inc.; Stephen R. Figlin, SPPA of Stephen R. Figlin & Associates, Inc., and Peter Kahn of Matson, Driscoll & Damico

Topic: “Introduction to Building Code Coverage” (part 1)
Presenters: Mark Friedman, Esq. of Wilkofsky, Friedman, Karel & Cummins, and Fred Yutkowitz, Esq. of Fairview-Licht Company, LLC

Topic: “Building Code Coverage Requirements for Repairs” (part 2)
Presenters: Mark Friedman, Esq. of Wilkofsky, Friedman, Karel & Cummins, and Fred Yutkowitz of Fairview-Licht Company, LLC

Topic: “Business Income - Primary Analysis and Authentication”
Presenters: Brad White & Max Flynn of Meaden & Moore, and Hayes Walker, III of Rollins Accounting & Inventory Services

Topic: “Business Income & Extra Expense - Measuring Small Losses” (BI part 1)
Presenters: Don Dragony, CPA of Alex N. Sill Company; Paul McGowan, Jr., CPA, CVA of Matson, Driscoll & Damico, and Ronald Papa, SPPA, of National Fire Adjustment Company, Inc.

Topic: “Business Income & Extra Expense - Extended BI Coverages, Application and Calculation” (BI part 2)
Presenters: Don Dragony, CPA of Alex N. Sill Company; Paul McGowan, Jr., CPA, CVA of Matson, Driscoll & Damico, and Ronald Papa, SPPA, of National Fire Adjustment Company, Inc.

Topic: “Business Income & Extra Expense - Manufacturing Losses” (BI part 3)
Presenters: Don Dragony, CPA of Alex N. Sill Company; Paul McGowan, Jr., CPA, CVA of Matson, Driscoll & Damico, and Ronald Papa, SPPA, of National Fire Adjustment Company, Inc.

Topic: “Commercial Property Forms and Endorsements”
Presenters: Dennis Perlberg, Esq. of Perlberg & Speyer, LLP, and David Karel, Esq. of Wilkofsky, Friedman, Karel & Cummins

Topic: “Deposition ABC's - Preparation is Key to Survival”
Presenters: Mary Kestenbaum Fortson, Esq. of Merlin Law Group and William F. Burke, Esq. of Adler, Pollock & Sheehan

Topic: “Ethics”
Presenters: Nicole S. Figlin, SPPA of Stephen R. Figlin & Associates and W. Richard Burr SPPA of Young Adjustment, Inc.

Topic: “Homeowners Coverages”
Presenters: Randy Goodman, SPPA of Goodman-Gable-Gould/AI and Joel Gumbiner, Esq. of Gumbiner & Eskridge, LLP

Topic: “Insured's Cooperation and Duties - How to Prevent a Problem”
Presenter: Robert P. Rutter, Esq. of Rutter & Russin, LLP

Topic: “Science of Roof Damage Claims”
Presenters: William F. Merlin, Esq. of Merlin Law Group and Timothy Marshall of AT Designs, Inc.

Topic: “Subrogation Opportunities Do's and Don'ts”
Presenter: Jean Niven, Esq. of Merlin Law Group

Topic: “The Adjuster as an Expert Witness”
 Presenters: Dave Pettinato, Esq. of Merlin Law Group and Jonathan Wilkofsky, Esq. of Wilkofsky, Friedman, Karel & Cummins

Topic: “Vacancy and Occupancy Defenses - Its Many Faces”
Presenters: Tina Nicholson, Esq. of Merlin Law Group and Ronald Reitz, CPPA of Quality Claims Management, Inc. 

Dr. Therese M. Vaughan, CEO of the National Association of Insurance Commissioners, will give the keynote address. Dr. Vaughan was Iowa State Insurance Commissioner from 1994 through 2004 and also the Robb B. Kelley Distinguished Professor of Insurance and Actuarial Science at Drake University.

This conference is open to the entire insurance community. Insurance company adjusters, brokers, agents, attorneys, accountants, and public adjusters are invited. I expect the First Party Claims Conference will be an excellent resource and provide practical tools and answers to a variety of insurance related matters. If you adjust roof claims, you simply cannot afford to miss that presentation with its all-star speakers.

Information on the education program (topics & speakers), exhibitor/sponsor opportunities, conference registration, and hotel accommodations is available at www.firstpartyclaims.com

While following up on Saturday's Post, "Fireworks are Loved by Americans--and Insurance Companies Seeking Not to Pay Fourth of July Fires," where I quoted Barry Zalma at length for the proposition that insurance companies often advertise one product but sell another, I came across a related article on the LexisNexis Insurance Law Center written by Stempel. His article, March Madness Makes It "Official: State Farm Embraces the Reasonable Expectations Doctrine and Rejects Linguistic Literalism, is a must read for those trying to prove that even the industry leader recognizes what it advertises is not what it sells. This is the point I was trying to make in my post, "Is the State Farm Policy Really Worth Anything?"

I felt the following paragraphs best sum up Stempel's points:

"...State Farm's television advertising has moved from warm-and-fuzzy image polishing to consistently more concrete promises that the company will provide insurance that meets the policyholder's reasonable expectations and will give the policyholder treatment that goes beyond mere fairness or accommodation. Although the company's marketing mavens probably never set foot in court or attended law school, they have in effect embraced the reasonable expectations concept as well as the standard of good faith and fair dealing that requires an insurer to give equal or better consideration of the policyholder's interests rather than favoring the insurer's interests. The company has now made these commitments to the world at large. It logically should have a hard time should it make contrary arguments in court.

...

...the State Farm ads go beyond the company in that they lay down a gauntlet for the entire insurance industry, one that suggests that insurers should not say one thing to market their products and then say inconsistent things when trying to avoid providing coverage or paying a claim. At the very least, lawyers, judges, and juries should not let them get away with it. Beyond this, it seems that insurers themselves recognize that they are not selling mere words on parchment. They are selling risk management products designed to accomplish a particular purpose. In light of this reality, one might expect to see at least a little restraint among insurers in their attempts to take a hyper-literal approach to policy text (particularly exclusions that are supposed to be strictly construed against insurers) when it serves their purpose. For example, perhaps State Farm may not want to push the envelope so much in arguing that the anti-concurrent causation clause in its policies allows it to escape a considerable amount of responsibility for hurricane-related damage to policyholder property."

I hope the jurists and their clerks faced with deciding insurance coverage cases read Stempel's article and contemplate how the insurance industry is using the "letter of the contract" to defeat the promise they sell.

Another great lesson from one of our country's finest teachers of insurance law. I suggest every attorney have two books of Stempel's in their library: Litigation Road: The Story of Campbell v. State Farm (West 2008), and Stempel on Insurance Contracts, Third Edition (Aspen Publishers).

After yesterday's post, I received a number of private questions as well as a public comment from Eric Hyman, an experienced public adjuster. I replied to his comment:

Eric,

I really have no idea how they go about classifying what you have stated. I have no idea how much Citizens pays in attorney’s fees to defend its cases nor how much it pays policyholders for attorney’s fees when it loses. Do you have any evidence to support your allegations? Send it to me, and I would be more than happy to share it.

I appreciate that you are upset that the manner in which you resolve cases with Citizens may no longer be available. You have told me that most of your cases go to appraisal because Citizens never comes close to agreeing with amounts you provide. And, you get significantly more money back for the policyholder.

Indeed, I predict there will be considerable "push back" because a cottage industry of appraisers for each side and umpires may no longer be making fees from the number one source of appraisal--Citizens.

Still, the process is inherently flawed. There is no due process. I have said that since there are no rules, the only rule is to be honest, but do everything you can to win.

In Florida, when the appraisal result is unfair, there is little either party can do about it. Unfairness may occur in arbitration or litigation, but I can assure everyone that they will be able to present their case, subject the opposing view to critical review, and submit the matter to a somewhat independent panel or jury. All of this guaranteed by the due process clauses of the United States and Florida Constitutions.

The other truth is that Citizens management may feel that the appraisal process results in unjust awards favoring policyholders. If so, they should explain why and how the appraisal process favors policyholders over insurers.

My impression is that the cases going to appraisal now have a policyholder who knows to get evidence and make a presentation to show the validity of the claim amount. In the past, insurers would run over policyholders, thinking their appraiser would do all this work. The appraisal process is no longer a "winning" proposition for insurers as it was in the past, and now some insurers are seeking other ways to game the system to lower claims payments to customers.

Citizens makes several valid points in its report, although I disagree with its publicly stated motive for requesting eliminating the appraisal clause.

Given that public adjusters are obtaining more money for policyholders through appraisal and that so many others, such as appraisers and umpires, have made careers in the appraisal process, you can bet those individuals with such significant financial interests oppose Citizens’ move. This is a normal reaction to the possibility significant change.

My opinion of appraisal has not changed much over the past fifteen years since I chaired a sub-committee of the American Bar Association's Property Loss Insurance Committee involving a study of the fairness and procedures of the appraisal clause. The procedures vary by state. Many states have noted the due process concerns and have required the process to be more of an arbitration. Florida's procedure for appraisal is what I call the wild west method. There are no rules. Shoot 'em out, and you better be standing when the smoke clears because there are no second chances for the dead.

I essentially said this when I was asked to be on a Keynote Panel regarding the appraisal process at the Windstorm Conference. While various attorneys, umpires, appraisers, and insurers have tried to set rules through a "Memorandum of Appraisal," that is not required under the terms in insurance policies, statute, or common law.

As an attorney, I always point out that the United States has long held many informal methods unconstitutional. One of the great protections to individuals is a right to have a jury decide controversies. This is a fundamental right with a longstanding history. Alternative methods to resolve controversies must satisfy due process safeguards. I have questioned how a system with no rules does this. Some States, like Florida, allow the informality without addressing constitutional concerns.

Dan Luby, of Precision Adivisors, sent me a private follow-up. It is pertinent to this issue:

"I read your blog today concerning the changes to the Citizens Appraisal clause. I appreciate the attribution.

As a follow up, attached is an excerpt from a recent Citizens filing with the OIR that details the proposed changes to the Appraisal clause in the ‘Homeowners 4 Contents Wind Only Form.’

Appraisal will now be an option available to either party provided that both parties agree to the “terms of a written agreement” to be determined at a later date.

I read this to mean a negotiated ‘Memorandum of Appraisal’ detailing what would be submitted to appraisal, how the appraisal would be conducted and the form of the award. Either party is not obligated to accept a “request” for appraisal.

Scroll down to page 10 of 12 in the policy form. While this filing deals with only one policy form, I would speculate that all of the Citizens policies will be similarly amended.

The complete filing (No. 09-11984) is available at http://www.floir.com/edms/temp1/SessionsPDFs/OnlyOrig09-11984.PDF

Additionally, this new form would require that “any one you hire in connection with your claim” must submit to an EUO if requested. I assume this is targeted towards public adjusters."

This is an important issue and will likely significantly change the way many claims are handled and resolved. I will try to keep everyone informed of these changes.

Of course, that is not how Citizens’ in-house attorneys and management try to spin what they are doing by removing the appraisal clause from their property insurance policies. After all, if the Board of Governors really wanted to know why Citizens loses at appraisal, it would not make an in-house inquiry. The claims managers would just make excuses for losing. If the Board of Governors wanted to know the embarrassing truth, they would ask their opponents, “why are our claims handlers losing these appraisals?”

Citizens is a part of Florida’s government. So how embarrassing would it be for our elected representatives and our appointed Board of Governors if the media reported that Citizens lost so many appraisals because it severely underpays claims and battles its policyholders regarding how much is owed? What if the media reported that this is the true reason that Citizens wants to end appraisal?

Citizens usually loses badly in appraisal because its adjustments are not correct and reflect a bias to underpay policyholders. It delays claims and battles policyholders rather than engaging in a dialogue about resolution and why a dispute occurs.

For example, I have invited Citizens senior management to speak on a multi-million dollar claim that has been pending for several years with another attorney in our firm. They refused to even speak with us, cancelled settlement meetings, refused the less expensive alternative of appraisal, and forced us to file a lawsuit to force a resolution. All this, despite our client’s hope that the matter could be resolved amicably, without a lawsuit. When claims managers refuse to talk and discuss differences, lawsuits are the only option. Citizens customers must wait and then fight for money that is rightfully theirs.

Many of Citizens’ claims are handled so poorly that almost anybody reviewing a closed claim can find significant amounts that were not paid. I hear this all the time. It is the major reason Citizens has re-opened claims--it underpays the initial adjustment.

Still, appraisal is not a “right” for policyholders. Citizens management and in-house attorneys made an excellent point that appraisal has no written rules and is subject to abuse. I am surprised that the Florida Supreme Court has allowed appraisal, an informal process, to bind parties. I have long felt that an informal process of binding resolution violates due process. At one time, Florida Courts ruled that the appraisal process was subject to the Arbitration Code. This is no longer the case, and Citizens correctly pointed to the deficiencies of appraisal in its report to the Board of Governors.

Citizens did not report to its Board of Governors the true reason management wants to change the rules and take appraisal out of the policy. Somebody on the Board of Governors should question whether Citizens management is being truthful and the media should start an inquiry. Everybody in the business knows that the true reason for removing appraisal from the policy is because Citizens underpays many claims, and appraisals embarrassingly prove it.

Dan Luby of Precision Advisors forwarded me the following story of Citizens’ change to eliminate the appraisal clause:

It would appear that Citizens Property Insurance Corporation is changing their previous position on amending the Appraisal process and is now recommending the elimination of the Appraisal process.

 The following are the minutes from the Citizens ‘Actuarial and Underwriting Committee Meeting’ held on May 11, 2009:

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

 DISPUTED CLAIMS/APPRAISAL – POLICY FORM CHANGES

MAY 11, 2009

 EXECUTIVE SUMMARY

 Staff seeks approval to amend Citizens’ policy forms (1) to eliminate appraisal as a mechanism to resolve disputed property claims, and (2) to improve certain claims adjusting processes. The elimination of appraisal is a change from the recommendation made last year to reform appraisal policy language. See minutes of Actuarial & Underwriting Committee, May 29, 2008; Board of Governors, June 19, 2008.

Background

Citizens’ property policies generally provide that, in the event of a dispute related to the “amount” of a loss, either Citizens or the policyholder may demand an appraisal of the loss. Citizens’ policies currently use industry standard language. The principal advantages of a disputed claims appraisal are that it generally resolves claims disputes more quickly and with less expense and fees than litigation. But its advantages are overshadowed by its disadvantages.

Notwithstanding significant and meaningful operational reforms that Citizens and its Litigation & Disputed Claims Unit (“LDCU”) have instituted, appraisal remains very flawed and subject to abuse by third-party stakeholders. The standard language used by Citizens and the industry is problematic because it provides virtually no rules for the process. As a result, insurers (including Citizens) are legally required to pay damages that may not be covered by the policy form, nor caused by a covered peril, nor supported by substantial evidence, and without recourse to meaningful judicial review. The process is so problematic that some carriers have eliminated appraisal from their policy forms (and some others are in the process of doing so).

In its January 2009 report on Citizens, the Auditor General recognized the flaws of the appraisal process and the challenges of third-party stakeholders, and further encouraged Citizens to complete its work on this issue, by stating: “Citizens’ staff is reconsidering whether to move forward with these amendments or, instead, whether it should eliminate appraisal from its policy forms (in which case these disputes would be resolved through litigation). . . We recommend that Citizens continue to evaluate its options . . . and select an option which ensures the fair treatment of policyholders and full disclosure of all decisions made relative to the claim amounts ultimately paid.”

Recommendations

Staff recommends the following changes to its various property policy forms, as applicable: 

• Eliminate the provision for appraisal of disputed property claims. 

• Provide Citizens with the option to require examination under oath and recorded statements for all property claims. When the insured is an association or corporation, require that certain representatives must submit to examination under oath and recorded statements.

• In multi-peril policies, conform the “duties after a loss” provisions to those in wind-only policies; and modify the “duties after a loss” provisions of all policies to improve the claims adjusting process.

 Staff recommends elimination of the appraisal provision principally for the following reasons: 

• Citizens has more confidence in the judicial system than in the appraisal process. Litigation has known rules and procedures. Whereas appraisers and umpires are essentially unregulated, opposing attorneys and judges are subject to the Florida Code of Professional Responsibility (essentially, an enforceable code of ethics and rules of compliance), as well as supervision by The Florida Bar Association and the Florida courts (including discipline by the Florida Supreme Court).

• Alternative dispute resolution (ADR) is important from consumer perspective, but stakeholders are skipping statutory mediation and filing appraisals as the ADR of choice. By eliminating appraisal, statutory mediation favored by the Florida Legislature will again be the ADR of choice. Should Appraisal be eliminated, there will remain multiple opportunities for mediation and early settlement. Citizens may institute other ADR if the insured agrees.

• For policyholders, appraisal is a secretive process, with the basis of the award outside the scrutiny of the policyholder and the insurer. Like Citizens, policyholders have virtually no way to seek judicial review of an appraisal award. In litigation, a policyholder is able to recover its attorney fees, while its appraisal expenses generally come out of the award. 

• Elimination of appraisal meets the objectives suggested by the Auditor General’s office (fair treatment of policyholders and full disclosure of all decisions) because the courts are very attentive to policyholder rights, and because judicial decisions and jury verdicts are fully disclosed.

RECOMMENDATION

Citizens’ staff requests that this Committee recommend to the Board of Governors that Citizens amend its policy forms and submit appropriate filings to the Office of Insurance Regulation to: (1) eliminate disputed claims appraisal, and (2) improve claims adjusting as described in this Executive Summary.

Problems occur when insurance company management initiates claims programs and cultures where full and prompt payment is difficult for the field adjuster, or first line of claims management, to obtain. When upper management sets goals to pay less on claims, they do so at the expense of customer service. Does anybody believe insurance executives would accept higher claims payments in order to obtain the alleged goal of great customer service when their bonuses are based on paying less?

This is the part of the insurance industry that needs cleaning up. Everybody should support the consumer measures suggested in Part One of this post --especially honest insurance companies and attorneys who are fed up with wrongful, slow, and underpaying claims practices which violate the law. Why would honest insurers support cheaters in their own business or tolerate their competitors doing so?

Good faith claims rules are known and often enforced by in-house and outside insurance company attorneys. These attorneys recognize that their clients owe policyholders a legal and regulatory duty of good faith. We often cite to this in our cases when our clients have not been treated fairly.

For example, our firm's Knowledge Manager, Ruck DeMinico, was researching Zurich Insurance Company's position of good faith claims handling for an upcoming mediation of mine. He came across some information demonstrating that Zurich insurance attorneys do not teach adjusters how to underpay or delay claims. To the contrary, his research came across a number of articles about and by Zurich's in-house claims counsel, Daina Kojelis, which show a very sophisticated and behavioral side to good faith claims philosophy. This philosophy is also found in courses leading to the CPCU Designation--probably the most ethical coursework and professional designation in the insurance business. Kojelis gave a presentation at the 2005 Defense Research Institute, "Insurance Bad Faith: What Are We Facing and How Can We Avoid It?" She and Janet Brown presented a paper titled, HURRICANE UPDATE: CASES ARISING OUT OF CATASTROPHES, at the September 2008, "Critical Issues for Senior Insurance Executives and In-house Counsel," sponsored by the by Property Loss Research Bureau and the Federation of Defense and Corporate Counsel's Property Insurance and Insurance Coverage Sections.

In the Defense Research Institute presentation, she wrote:

“I. The "Bad Faith" Case is Won or Lost Before Your Counsel Ever Sees the File

a. The seeds of success or failure are in your file.

b. There are no silver bullets to avoid bad faith litigation, nor is there any absolute rule to avoid bad faith.

c. Common sense is the insurer's most important ally."

I do not disagree. Common sense tells most in claims management that they cannot increase corporate profit and executive compensation through loss ratio "improvement" initiatives and expect that customers are going to be fully and promptly paid.

Policyholders should be told before purchasing insurance what they can expect from a corporate insurer when faced with a significant loss. If insurers, like Zurich, were obligated to disclose their internal claims handling guidelines, that are designed to maximize corporate profit at the expense of full and fair payments to their customers, they would have no need to spend money advertising customer service and care. The truth would be known.

I do not mean to pick on Zurich alone, there are a number of other carriers with similar issues. However, I suggest you review Zurich's public presentations regarding claims practices just before Hurricane Katrina at this link:  http://zdownload.zurich.com/reports/en/20050630_investors_day_en.pdf. For an experienced insurance claims analyst familiar with the old "leakage" term used by McKinsey & Company since the 1980's, the Zurich PowerPoint presentation appears similar to many other insurance company claims initiatives which are all designed to do one thing--make the claims department function better by, in part, paying its customers less on average per claim. The Zurich charts look like many of the Allstate Core Claim Process Redesign PowerPoint slides Allstate published on the internet last year.

Both of these programs assume that by doing claims with a "Best Practice," the insurer will pay less on claims. I think that an ethical insurer should adopt a hypothesis that if there is implementation of new claims procedures, claims payments may even go up. Why? Because as you teach adjusters what to look for so they do not overlook damage and benefits available under the policy, the amounts paid may go up even though they are also doing activities that make claims payments reduced. Yet, the vast majority of these newly implemented management themes have one basic goal--to pay less on average per claim-- but do it giving great customer service and to not get caught in any regulatory compliance problems.

I have yet to see a claims initiative in any of these claims management programs that start off with something like this:

"we are conducting an extensive review of closed claims looking for new claims processes and methods to fairly pay our customers more benefits owed, educate them as to all the benefits available, and to look for instances when we have underpaid claims. We will then send all those customers we short-changed checks for the money owed, and tell our shareholders we truly are giving our customers great customer service, even though we make a little less money in the short run by doing so."

Nope, paying the full benefits is not the purpose or result. Every time a new claims initiative is implemented, it is about paying less and showing that the claims department is doing better than its competitors at paying less--just go through the Zurich claims management presentation for an example. Even though well meaning legal counsel may teach the good faith option, I think most get the picture that executive managers are trying to drive greater profit and personal compensation.

As the great Bob Dylan said, "You don't need a weatherman to know which way the wind blows."

For property insurance claims, Allstate has adopted a procedure called Claims Core Process Redesign. Following Allstate's battle with Florida's Office of Insurance Regulation, several documents discussing Claims Core Process Redesign were made public. For those of us engaged in Allstate claims and coverage cases, Allstate's new claims program has been dubbed, "NEX Gen." We had somebody take notes during a speech given by two Allstate claims executives about this new program at the recent ACE Claims Conference in Las Vegas. We will post on that later.

At the end of Berrardinell's speech, he showed an Allstate television ad that had the most bizarre sounding but (most likely) unintentionally accurate pitch:

"Just Because You Have Insurance Doesn't Mean You Are Protected...That's Allstate's Stand."

Amen.

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.

Imagine you wanted to find out how insurance adjusters are supposed to do their job. Insurance company attorneys argue an adjuster’s job is a legal duty, and not for determination by the adjusters. Their argument is circular and flawed: how does the law know what an adjuster is supposed to do without knowing the standards and duties from adjusters themselves?

The American Institute for CPCU provides the most recognized and important designation for claims professionals. The Society, with materials from the American Insurance Institute, has an intense learning process dedicated to a high standard of ethical and policyholder centered claims treatment. The Claims Magazine article notes that claims professionals "are often called upon to testify in legal proceedings."

Our firm often cites to CPCU educational materials as proof of insurance industry standards and interpretation of contracts.

Virtually all recipients of the CPCU say that the designation helps further their career. I encourage all adjusters, company, independent or public, to take the courses and achieve the designation. There is no downside in doing so, and the result should make everybody aware of a commitment to being the best adjuster one can be.

The other article is written by a Senior Vice President for Crawford & Company, an independent adjusting firm. Crawford & Company has long been on our firm's radar because they advertised about controlling "claim severity."

"Claim severity" is the average amount paid on claims. "Controlling claims severity" through targets and goals was a basis for implementing punitive damages against State Farm in the landmark case of Campbell v. State Farm. This claims management typically leads to all kinds of harsh claims practices designed to lower policyholders’ payments following a loss. Many insurance companies try to change the rhetoric of what and why they are making "targets" of claims severity. Nevertheless, everybody, especially the jury, gets the message it is a justification for paying less on claims.

This article identifies what I have often felt to be the dilemma of adjusters--providing outstanding service to the customer while, at the same time, lowering the loss ratio for the insurance company. While efficiency and innovation can theoretically save some marginal amounts for the insurer, cutting the amount paid to claimants will significantly reduce the loss ratio.

I once asked an Allstate manager if he was ethically handling claims in a year before Allstate established its "target" severity goals. Of course, he answered "yes." I then asked him exactly how Allstate intended for him to meet the next year "target" severity without taking a harder line on the customers.

If Allstate and other companies making "severity targets" were really being transparent and worthy of trust with their customers and regulators, they would publish these goals as a warning to all that have to deal with them or consider purchasing their products. Customers deserve to be paid as promptly as possible and without the hassle of dealing with a claims department that has arbitrary "targets" for the average amount paid on a claim. Such "targets" necessarily effect management's attitudes on its field claims staff, including independent adjusting firms, since every claim is part of the average and part of the "target."

Insurance company claims executives are not dumb by any means. Knowing that these severity targets and goals are very profitable, but result in a claims culture of paying as little as possible, Allstate and its competitors have simply changed their rhetoric without changing what they do to.

Quite a few senior adjusters in the field, who truly care about getting the full amount of benefits to the policyholder, privately admit they "game" the company claims process to do what is ethical and right for the policyholder. This is not as easy as it used to be because claims processes are more closely monitored using computers. Further, insurance company vendors know the claims culture is to never over pay.

If a claims culture is focused purely on never over paying, there is only one way to go. It is no wonder I have never read or heard of an Allstate adjuster criticized by claims management for under paying a claim.

One of the central figures in many of the State Farm cases is Lecky King, a State Farm adjuster. For a period of time, she invoked her Fifth Amendment privilege and said nothing at depositions relating to her role in adjustments. There were criminal investigations underway after dozens of altered engineering reports surfaced; each initial report was changed to reflect greater flood damage and less damage that would be covered under State Farm policies. Lecky King was allegedly at the center of this controversy, in part, because she reviewed a stack of engineering reports that were subsequently modified.

State Farm did not voluntarily reveal the original engineering reports showing greater wind related damage to its policyholders or the federal government. A State Farm claims executive has rightly indicated that those reports should have been disclosed to the policyholders, along with the "modifications." While Slabbed has a tendency to poke and demonize insurers, there are many in the claims function that understand honesty and good faith mean a complete explanation of the truth, not just a disclosure of information supporting denial or less payment.

In a recent post, Slabbed noted an email from the Rigsby’s counsel that the deposition of Lecky King had been taken. It should be interesting, and we will attempt to get a copy of it. This is a coverage related case worth following because it provides some glimpse at the pressures that claims supervisors demonstrate when faced with a claims organization that never wants to "overpay" a claim. If you never "overpay," there is only one way to go.

The general rule for determining loss payment where a deductible applies is:

Total amount of covered loss less deductible, subject to the policy limit. If the amount of the damage-- minus the deductible-- is greater than the policy limit, the insurance company's liability is only the policy limit. The policy limit is the amount of coverage purchased.

I am writing this because of a recent Texas Appellate insurance case, Bruton v. Underwriters at Lloyd's, London, 2009-TX-0407.431, 2009 Tex. App. LEXIS 2189 (Tex. App. April 2, 2009).

Our firm's computerized legal research supplier, LexisNexis, summarized the case as follows:

“The insured's trailer damaged, and a claim was reported to the insurer. It was determined that the trailer was totaled due to the amount of damage, and it was placed up for salvage bids and sold. However, the insured wanted the trailer back. He filed a lawsuit against the insurer and others. Judgment was entered for the insured in an amount less than what he sought, and this appeal followed. In reversing, the appellate court determined that the trial court erred by holding that the insurer obtained equitable title to the trailer upon tendering payment of the policy limits. Although the insurance policy unambiguously provided the insurer with the right to take possession of the property, the policy failed to mention when that right attached. There was nothing in the policy that would have put the insured on notice that once the insurer tendered him a check, he would have lost all rights to his property. Because the appellate court was to resolve any ambiguity in favor of the insured, the insurer did not have the right to sell the trailer until the insured had negotiated a check and executed a power of attorney.”

This scenario interested me because we commonly encounter situations where insurers try to take salvage when they are not entitled. Commercial insurance policies typically allow the insurer to take salvage on personal property when they pay the full agreed value of the article. The situation is different if the insurer does not pay full value, where the policy does not allow for salvage, or where the policy limits for property is less than the value.

I almost fell out of my chair when I read how the parties in Bruton calculated a policy limit case. It is simply wrong, although that was never an issue in the case; when issues are not raised, judges have no reason to question them. These facts relate to the deductible issue:

“Bruton…bought a…trailer in August 1999 for $12,500 [This amount reflects a subtraction from the total price of $ 19,300 for the trade-in value of a 1969 Hobbs trailer]. Soon thereafter, he purchased a $10,000 insurance policy for the trailer from Underwriters. Around October 17, 2001, the trailer tipped over. Bruton reported a claim to Underwriters and advised them that certain repairs were necessary for the trailer to dump again.

The adjuster, employed by Marshall Contractors, Inc, determined that the cost to repair the trailer would be approximately $14,600. Based upon this estimate, Marshall Contractors, Inc. declared the vehicle totaled and through its agent, Rocky Engblad, placed the trailer up for salvage bids.

On October 31, 2001, Bruton received payment in full under the policy in the amount of $9,000 [$10,000 (policy amount) - $1,000 (deductible)].”

The policyholder should have insured the trailer for $19,300, assuming this was the fair purchase price and the trade-in was fair. At a minimum, assuming the trade-in had no value, the insurable value should have been $12,500.

The repair value of $14,600 is the basis to then determine whether the repair costs exceed the value of the trailer. The facts are not clear regarding the value of the trailer at the time of the loss. Generally, the insurer pays the lower of the cost to repair or the value of the damaged article less the deductible—subject to the policy limit.

In this case, the Court is wrong to indicate that Bruton received “payment in full under the policy.” He received $1,000 less than the amount available under the policy. He should have been paid $10,000, the policy limits, so long as the repair costs and the value at the time of the accident were greater than $11,000.

This is often referred to as “absorbing a deductible.” For all adjusters studying this, and those that want to point out that they have been wronged, there is an excellent discussion in Property Loss Adjusting (Insurance Institute of America 3rd Ed 2004), section 2.17.

I wonder if Bruton’s attorney knows that his client may have been shorted $1,000? What if it were a large commercial loss with a million dollar deductible? If you are a policyholder with a complex loss, consult somebody who knows what they are doing.

In the 30-second video, Dietz states:

"I used to be an Insurance Claims Supervisor. When I started out, it was human beings making decisions. Now insurance companies use computer programs to automatically cut 20 percent from what they know they owe on a claim.

I was forced to use it. You even got bonuses for denying claims.

In Washington state, it’s not illegal for insurance companies to delay or deny legitimate claims. They want you to give up. And they’re getting away with it."

You can view the video by clicking below:

If you have trouble accessing the video through the link above, try clicking here.

Anticipating that this post may cause an uproar in the insurance community, as it likely will be copied and sent to those same Texas adjusters, I will simply quote Texas cases on the rule. These cases were instances where judges were faced with this issue in partial loss situations.

In Gulf Ins. Co. v. Carroll, 330 S.W.2d 227, 233 (Tex. Civ. App. Waco 1959), the Court discussed this issue at some length. The Court first quoted the policy language:

"* * * Liability hereunder shall not exceed the actual cash value of the property at the time of loss ascertained with proper deduction for depreciation; nor shall it exceed the amount it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss."

This is the fairly simple actual cash value language still followed in some fashion in most policies. The Court then started its analysis:

"... The second clause would apply to an insured standing in the shoes of the plaintiffs where they have sustained a partial damage to their building. Plaintiffs elected to fix their damages under the latter clause. They did it by pleading their partial loss and by tendering proof as to the reasonable cost of such repairs, using material of "like kind and quality." The Court submitted the damage issue, absent the burden of proof clause, substantially: What sum of money, if any, would be the actual and necessary cost of repairing and replacing the plaintiffs' property so damaged, if any, with material of like kind and quality within a reasonable time after such loss, if any? And the jury answered, $850. The record shows without dispute that repairs to a house under such conditions cannot be made without using new material, and we think the appellant's criticism of the Court's charge in this behalf is strained and without any justification whatsoever.

...
"We are not in accord with this view of the contract. First of all, the property was not destroyed and it needed only to be repaired. It is without dispute that the damage could be repaired only by the use of new material of like kind and quality. In the second place, we see nothing in the liability clause to indicate that a deduction for depreciation is required to be applied to the damage accruing for repairs made under the second clause, and we so hold. We have found no case in the books expressly touching upon this exact situation. The nearest cases are: Texas Moline Plow Co. v. Niagara Fire Ins. Co., 39 Tex.Civ.App. 168, 87 S.W. 192, er. ref.; and [*234] Southern National Ins. Co. v. Wood, 63 Tex.Civ.App. 319, 133 S.W. 286. See also Fidelity & Guaranty Fire Corporation v. Ormand, Tex.Civ.App., 62 S.W.2d 675, w. dis.; Maryland Motor Car Ins. Co. v. Smith, Tex.Civ.App., 254 S.W. 526, n.w.h.

In 45 C.J.S. Insurance § 915, page 1014, we find this statement of the rule:

"If the value is to be arrived at by replacement or reproduction cost, it has been held that depreciation may not be deducted from the cost of replacement and restoration."

In Third National Bank v. American Equitable Ins. Co. of N.Y., 27 Tenn.App. 249, 178 S.W.2d 915, certiorari denied by Supreme Court, we find this statement of the rule, Pt. 14, at page 925 of 178 S.W.2d:
"While replacement cost is a dominant factor in fixing the amount of recovery for total loss of a building, it plays an even greater part in fixing the amount of recovery for a partial loss to a building. It would seem that the only practical way to measure the extent of partial damage to a building would be to inventory its damaged parts, and the only way to express such damage in terms of money would be to count the cost of replacing such parts, so as to restore the building to the same condition it was in just before the fire. And the view which we think supported by the better reason and the greater weight of authority is that HN3depreciation may not be deducted from such cost because that would make the sum insufficient to complete the repairs and would leave the building unfinished; and this would fall short of the indemnity contracted for in the policy." Citing many cases." 

Carroll, 330 S.W.2d at 233

This decision was approved by a subsequent case, Farmers Mut. Protective Asso. v. Cmerek, 404 S.W.2d 599, 600-601 (Tex. Civ. App. Austin 1966), which stated:

"We believe that appellee properly proved his loss, by proving the amount it would cost to repair or replace the property in accordance with a provision of the policy for the limitation of liability, which is as follows: "Subject to Article 6.13 of the Texas Insurance Code, 1951, as amended, liability hereunder shall not exceed the actual cash value of the property at the time of loss, ascertained with proper deduction for depreciation; nor shall it exceed the amount it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair, and without compensation for loss resulting from interruption of business or manufacture; nor shall it exceed the interest of the insured, or the specific amounts shown under 'Amount of Insurance.

...

The insurer is not entitled to a deduction for depreciation in the event of a partial loss, as distinguished from a total loss. In Gulf Insurance Company v. Carroll, Tex.Civ.App., 330 S.W.2d 227, n.w.h., a case very much like the instant case, discussed in detail the authorities in cases of this character and we do not deem it necessary to review such." (emphasis added)

A more recent federal case involving a broken sewer and plumbing, Unity/ Waterford-Fair Oaks v. Fireman's Fund Ins. Co., 2001 U.S. Dist. LEXIS 24818 (W.D. Tex. June 20, 2001), followed the same rule in a partial loss situation:

"In the context of the language relating to damages in the Fireman's Fund policy, it is proper to measure damages for a repairable injury to a building as the amount necessary to restore the building to its condition immediately prior to the injury. See Imperial Ins. Co. v. Nat'l Homes Acceptance Corp., 626 S.W.2d 327, 329-30 (Tex. App.--Tyler 1981, writ ref'd n.r.e. Ins. Co. v. Nat'l Homes Acceptance Corp., 626 S.W.2d 327, 329-30 (Tex. App.--Tyler 1981, writ ref'd n.r.e.)."

My suggestion to Texas policyholders not being paid under this rule of law is to copy this post, send it to your adjuster, and ask for your money or why the insurance company is not following this law.

Yesterday, Slabbed reported on a blockbuster Hurricane Katrina case where State Farm's conduct is at issue. Allegedly, State Farm attorneys threatened their own appraiser:

 "Tucker and Spragins, both through their representations and their omissions to Minor, attempted to “set up” the Kuehns (as well as Minor; see Exhibit “B,” Second Deposition of John Minor, p. 108) in such a way as to further interfere with the appraisal process as outlined by the policy language, delay the payment of the Kuehns’ claim, and pursue their own anti appraisal agenda on behalf of State Farm. According to Minor’s testimony, the attorneys communicated with him during the appraisal process in such as way as to make him feel they were trying to “blackball” him, or “play dirty pool,” and he felt threatened. See Exhibit “B,”Second Deposition of Minor, pp.159-161. This is the man that State Farm, through Lucky Tucker and Scot Spragins, hired. The only specific instructions regarding the appraisal which Minor could actually remember were squarely in contradiction to what is actually provided for by the subject policy."

State Farm's counsel, Scot Spragins has opposed us in a number of cases. While tough as nails, sometimes confrontational, and very competitive, I have never found him to be unethical. To me, Scot is very typical of the strong stable of attorneys State Farm retains in its defense. While I wholeheartedly applaud Slabbed for bringing this important case into the public awareness, I think their post was a bit strong and premature regarding the alleged findings. Proof is another matter which everyone deserves before making such serious final judgment of someone's character.

I noticed a few trends worthy of note. The number of restoration companies and disaster contractors has significantly increased. This industry has boomed in the last decade. Their business model before the large catastrophes led them to market adjusters and insurance claims departments for leads to policyholders with losses. It was not uncommon for them to arrive, arm in arm, with an insurance adjuster. In response, insurance companies obtained the promise of a bid proposal and work which would be less than local contractors. Insurance companies essentially controlled the scope of work and therefore, the adjustment by having a "favored vendor" do the repair work. Whether the work was excellent or left something to be desired is hard to tell when covered up with paint. If the policyholder did not want to choose that contractor, the adjuster would simply use the lowball estimate of that contractor against the policyholder. These contractors wined and dined field adjusters and claim departments to get these leads.

After the 2004 storms, these restoration contractors more frequently directly marketed their services to policyholders. They claim to be "insurance recovery and restoration" firms and go so far as to claim that they will negotiate the policyholder’s rights with the insurance company. This is illegal, but this is how many, not all, market their services. They will contract to do the work for whatever the insurer will pay.

This scenario sets up a situation where the insurance company often is overcharged on pricing, especially labor charges, and the policyholder gets inferior work. There is no bidding and negotiation regarding quality and price. Insurers are overpaying for what is done and policyholders are not getting enough done and in the quality the policy provides. But, that industry, unlike other aspects of construction, is booming.

Computerization of claims and the sophistication of database mining is evolving. Before long, insurers will be able to profile very private and subtle aspects of every policyholder. "Good" policyholders will be those who pay premiums and never call an agent, much less report claims. Your risk as an insured will be tracked on your property and how aggressive you are expecting payment. CSC Corporation is a leader in this insurance computerization field.

The message is clear--"if you make a claim, you are not as good a policyholder as one that does not. Do not rock the boat or we will make you somewhat uninsurable." Risk managers are often evaluated on how well they keep premium costs down. They should also get evaluated on how much courage and effectiveness they have getting the insurer to pay promptly and fully.

Mega-disasters and the effects of global warming was the subject of prominent discussions. The concern is that the floods, tornados, and hurricanes are getting stronger and bigger. Whether this plays out over the long term or is just something which appears as a trend, is something we will find over time. Yet, there were many more "disaster preparation" seminars and vendors at the convention.

Trends are important to me as I try to analyze the decisions and circumstances that affect my clients. Many lawyers seem to think you become an "expert" (lawyers do not ethically call themselves "experts" in certain types of cases) in a field of law by reading cases and doing enough of them to advertise some experience. The truth is that the best in my field know what has, and is, going on with our opponents and their motivations for various activities. This is learned by talking with people at various levels and in different disciplines of the insurance industry and by observing--not by reading insurance case law, which a second year law student could do.

From large corporate policyholders to young newlyweds in modest residential structures, here is the truth about how most insurance company experts are hired:

Most insurance experts, regarding cause and amount of loss, are in the business of providing repeat opinions for insurance companies. If they give opinions which lead to a larger recovery than acceptable or appear to find ways to maximize the recovery for the policyholder, they are not hired again. Because insurance companies offer significant repeat and continuous business, many experts in the insurance business depend on insurance companies for their livelihood. The opinions of most insurance industry experts reflect the language of the policy to help the insurance company reduce the amount owed on claims. This is a major problem in the insurance adjustment culture, and most claims departments avoid the obvious implication.

Every now and then, an expert will jump sides and provide an honest and accurate opinion. I have retained a few with the understanding they could only do it quietly or on a very limited basis. This takes significant courage because the financial consequences are great--if found out by the wrong person, most would find they have been removed from the "approved" lists found in the claims offices.

A fairly recent Texas appellate decision, State Farm Lloyds v. Hamilton, 265 S.W.3d 725 (Tex. App. Dallas 2008), demonstrates how the Courts should treat this all too common situation. The policyholder's masterful appellate brief started off with the most damning evidence in the case:

"In October of 2003, Mark Ogle, a twelve-year veteran with State Farm, stood in the middle of the Hamiltons' living room and personally viewed a two foot hole in their living room floor full of water from a corroded, deteriorating cast-iron metal pipe at the bottom. He personally observed the defects with the house and immediately hired George Perdue & Associates, the engineering firm that State Farm had hired 1,440 times in the last four years and paid over $ 3.3 Million in that time period."

Appellees’ Brief at 1, Hamilton (No. 05-06-01032-CV).

It does not take a rocket scientist to correctly guess who won the appeal. The policyholder, if he knew of the relationship the engineering firm had with State Farm, would probably feel a lot like an American on trial in Iran. The point is that insurance adjusters and their managers know their customers deserve honest and good faith treatment. Just like in Iran, the system breaks down when outcome oriented conclusions are inevitably reached.

The Texas appellate Court made the following observation of law:

"an insurer breaches its duty of good faith and fair dealing when the insurer fails to settle a claim if the insurer knew or should have known that it was reasonably clear that the claim was covered...[A]n insurer's reliance on an expert report, standing alone, will not necessarily shield the carrier if there is evidence that the report was not objectively prepared or the insurer's reliance on the report was unreasonable... Whether an insurer acted in bad faith because it denied or delayed payment of a claim after its liability became reasonably clear is a question for the fact-finder."

State Farm Lloyds v. Hamilton, 265 S.W.3d 725, 734 (Tex. App. Dallas 2008).

The Court then noted the facts presented to the jury to uphold the bad faith verdict:

"Evidence of an investigator's biased views, standing alone, will not always be evidence of bad faith...But the Hamiltons deny that their bad-faith claims are limited to the biased-investigator point. In their briefing, the Hamiltons make eight more specific charges that allegedly support their claim of bad faith:

*

Perdue and State Farm did not rule out other possibilities.

*

Perdue and State Farm stated the east side of the home was wet, but their soil sample showed it was dry.

*

Perdue and State Farm had no soil samples on the west side of the house to support their contention that the west side of the house was dry.

*

Perdue and State Farm say flow tests support their contention that the plumbing leak did not cause the problem, but there was no flow test on the living room leak.

*

Perdue and State Farm's conclusion of no liability is not supported by facts.

*

Perdue and State Farm's conclusion that the house being four inches out of level is acceptable.

*

Perdue and State Farm fail to identify stress signs.

*

The face of the report had problems with the honesty of the report."

Hamilton, 265 S.W.3d at 735.

These issues were prevalent in Hurricane Katrina litigation. There, many expert reports originally favoring coverage were changed to findings limiting or denying the claim. This issue will undoubtedly be raised during Hurricane Ike litigation; this problem is rampant throughout the property adjustment community. So long as the insurance adjustment community is looking for “conservative” (which is different from the social or political context) experts to provide “favorable” (which means paying less or not at all) conclusions, policyholders should know to get their own experts and consultants.

His questions and the article reminded me of the first prize paper in the 2008 Student Writing Competition of the Tort Trial and Insurance Practice Section of the American Bar Association: Whitney Mauldin’s Good Business/Bad Faith: Why the Insurance Industry Should Adopt a Good Faith Model, 43 Tort & Ins. Prac. J. 151 (Summer 2008). It is an excellent paper which should be studied by all in this field. Claims managers and adjusters should reflect upon the author's findings.

The paper noted "most insurance companies...are for-profit corporations, and their desire to increase profits frequently results in the implementation of business practices that are adverse to the insured." It went on to note four modern claims trends which were made to increase profits but have "gone awry" to the detriment of the insurance industry's customers. Those listed are:

1. Computers in Claims Handling.
2. Compartmentalization of Claims Handling.
3. The Use of Outcome Oriented Experts.
4. Use of Corporate Consultants that do not Appreciate the Ethics of Good Faith Claims Handling.

The author's conclusion is worthy of quoting:

CONCLUSION: A CALL FOR A GOOD FAITH MODEL

Part of the problem documented here is the result of a fundamental change in the insurance industry. Insurance companies used to be, at least primarily, mutual companies, meaning that they were owned by policyholders, for the benefit of the policyholders. However, since the 1970’s there has been a shift toward a for-profit corporate structure, with insurance companies being owned by shareholders. This puts the company in the position of deciding whose interests to serve, that of the shareholders or those of the policyholders. It has a fiduciary duty to both.

The laws of the fifty states regarding bad faith are inconsistent. Therefore, if insurance companies want to avoid costly litigation and want to fulfill the role they were created to fulfill, then the industry should adopt a good faith model. Clear, common sense guidelines designed to build solid business practices would eliminate the uncertainty of claims handling and protect the insureds as well as the insurer. It could be argued that the current profit driven model not only leads to a breach of the fiduciary duty of good faith to the insured but also to the company’s duty to its shareholders. To the extent that these expensive and highly publicized bad faith law suites cause damage to not only the profitability but the reputation of the insurer management may have caused long term damage to the share holders by lowing the overall value the corporation.

There are some basic concepts that will form a foundation for a good faith claims handling model. First, avoid the use of any mechanism that will standardize claims. Claims are unique and efforts to rubber stamp them, will likely lead to a breach of the duty of good faith. Second, maintain communication with the insured through the claims handling process. Ensure that the adjuster can access the insured personally and that one person is in charge of all correspondence with the insured. The adjuster should have an integral role and therefore a holistic understanding of the investigation as it proceeds so that they can communicate progress to the insured. Third, use experts appropriately. Do not use them to create a one-size-fits-all investigation and do not ignore them when they provide evidence of a valid claim. Finally, make the policyholder more important that the shareholders. The duty is owed to policyholder.

Companies should establish protocols that alert the company when they are making increased sums of money and are not paying claims. Efforts to increase profits are a part of business but those efforts should be directed towards planning the business carefully, changing marketing strategies, selling more policies, and carefully selecting reinsurance. These strategies should leave the good faith claims handling model alone. This model is necessary, because the courts have repeatedly shown that in the war between shareholders and policyholders, the policyholders will win every time, whether it is initially by a fair settlement of the claim or later with loss of customers or punitive damages.

While researching concepts of "windstorm" coverage, I recently came across an older Texas case and fact pattern that made me smile-almost laugh. I am certain the attorney first hearing it must have felt the same way. I assume the insurance adjuster was not so amused by the facts.

Howsley, an avid outdoorsman, lost his personal property consisting of camping and fishing equipment, clothes and camera equipment when two rubber boats or rafts overturned while floating down the Rio Grande River in New Mexico. The only evidence concerning the accident is found in Howsley's deposition. Howsley and a friend were in the two rubber boats which were attached to each other as they floated down the river at the place he referred to as the "Rio Grande Gorge". They experienced difficulty in rowing the boats because of a current which was "split by a large rock". The currents apparently caused the two boats to float "sideways". The boats washed up against the large rock "one of them went on this side and the other on this side". The men were rowing against the wind which Howsley described as "a terrifically strong wind". He testified that when the boats came to rest on the rock the wind "flipped it over like flipping a match or something". His testimony was to the effect that the force of the impact of the boat upon the rock did not overturn the boat but that it was caused by the wind. The equipment was lost in the river when the boat capsized.

Employers' Fire Ins. Co. v. Howsley, 432 S.W.2d 578, 579 (Tex. Civ. App. Amarillo 1968) (emphasis added).

Howsley's insurance policy covered his personal property for "windstorm" loss. Howsley's insurance company took a position that I am going to hear hundreds of times from TWIA and other Texas insurers in the near future, just as in Hurricane Katrina litigation:

One of the exclusions of the policy provides: "This insurance does not cover a loss caused by or resulting from:

(1) flood, surface, water, waves, title water or title wave, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not."

Howsley, 432 S.W.2d at 579.

Howsley won. The Court upheld the trial court's finding that the lost was not excluded and that a "windstorm" caused the loss:

One of the perils insured against was "windstorm", which has been defined as "something more than an ordinary gust of wind, no matter how prolonged, and though the whirling features which usually accompany tornadoes and cyclones need not be present, it must assume the aspect of a storm." Fireman's Ins. Co. v. Weatherman, Tex.Civ.App., 193 S.W. 2d 247 (ref'd n.r.e.). The case cites other authorities approving similar or identical definitions. Howsley described the wind as "terrifically strong" and said the wind was "blowing up the canyon". We think the record is sufficient to bring the loss within this insured peril of the policy, and that the "terrifically strong wind" was the dominant and efficient cause of appellee's loss. The evidence does show the split or divided currents were instrumental in forcing the raft upon the rock. Although this condition did contribute to the circumstances leading to the loss it was not the efficient cause. It has been held that if a windstorm is the dominant or efficient cause of loss the insured may recover notwithstanding that another cause or causes contributed to the damage.

Howsley, 432 S.W.2d at 580.

Texas Slabbers and others should get the same result so long as they do not give up the fight. Maybe there is some good that arises out of a situation which may seem terrible at first. That is an idea which should be contemplated since many of us have just celebrated Passover and Easter.

An internet article provided to me contained an open letter to Reggie Warren about improper roof adjustments two years before Hurricane Ike struck: 

“Let's review;
~ Allstate has 35,000 South East Texas Hurricane Rita claims.

~ Allstate, using Pilot Claim Service, sets the stage for invisibly transferring their liability for paying claims.

~ Allstate denies/pretends that the most common and abundant 90-100+ MPH wind caused damage* to fiberglass shingles, is really not damage they recognize, and owe for.

~ Allstate claims to contractors and claimants, through Pilot Claim Service cooperation, that Allstate engineers do not (now) recognize what the most historically common wind damage* is, to shingles.

To Jim Oliver, Randy Wipf and Reggie Warren at the TWIA -

Many thousands of people and their children have been effectively 'duped' by Allstate's/Pilot Claim Service (and State Farms') synthetic damage assessment / pseudo indemnification scheme.

* The wind damage denied consists of partially, or completely, wind lifted shingles that can not reseal because of wind debris contamination. Wind damage evidence is very different from workmanship or manufacturing flaws.

To the untrained eye, and without checking by hand, shingle integrity can look fine from the ground.

Being [debris packed], they won't thermally lock down again, and leave a property very vulnerable to wind and water damage, and all that that means.

Too, the abrasive action of hours and hours of 90-100+ MPH wind borne debris slamming across and into the body of a fiberglass shingle, can greatly damage the outer layer, even down to the fiberglass mat.

Allstate, Pilot Claim Service and State Farm know these historical storm damage issues are true, and also know the general public may not, and by systematically denying common damage, have shifted their liability back to their customers, or other unsuspecting property owners, and to the TWIA / General Public in Texas.”

Properly investigating and evaluating roof damage takes time and money. Indeed, evaluating structures for damage to shingles, walls, roofs, brick ties, fasteners, in attics and under roofs, and all windows takes a significant amount of time and training. Many of the effects of windstorm, including wind borne debris, are subtle. Still, these types of damage result in significant depreciation and breakage of a structure’s component parts.

The problem is that most catastrophe adjusters do not spend enough time looking for damage. This is because most catastrophe adjusters are paid on a percentage of estimated covered damage. Many insurance company attorneys try to argue that such a payment method provides an incentive for the adjuster to find more damage rather than less on a claim. However, in practice, the adjuster has an incentive to complete as many estimates as possible. From the catastrophe adjuster’s financial viewpoint, why do one eight hour structural estimate for $665,732.47, when eight superficial estimates in one day can yield $2.4 million in damages. Many catastrophe firms require five to ten estimates a day from an adjuster rather than paying based on thoroughness and accuracy of work.

From the policyholders’ viewpoint, catastrophe adjusters can be wildly inaccurate. It is possible to be overpaid, but I never hear about those instances. I hear of the opposite because policyholders typically only call me when they have not been paid enough. By then, the insurer has usually responded to my clients’ first complaints with a more concerted attempt to justify the quick and inaccurate work of the first field adjuster. This is accomplished by hiring outcome oriented adjusters and “experts” that fail to comprehend any opinion other than those very close to the original estimate.

Catastrophe adjustment firms need more and better trained adjusters, who focus on accuracy rather than expediency. Re-inspectors should be available to look at losses without an attitude of correctness based on previous adjustment. Where the amount of disagreement is relatively small, I think that most policyholders must simply drop the matter, because most cases brought to us involve disputes with a significant percentage disagreement.

It is no wonder why Hurricane Ike policyholders are so upset and our phones are ringing off the hook. The insurance companies had their opportunity to get their job right and they failed. The policyholders not properly paid by this time are furious and upset. While civil lawsuits are about money, quite a few Texans have asked if we can arrange for ten minutes in a closed room with a manager from their carrier.

"Although the litigation spawned by Hurricane Katrina tells a tale that overwhelmingly favors insurers, Chip Merlin’s fine representation of many policyholders in Katrina litigation merits an honorable mention in this award category. The legal arguments raised on behalf of policyholders in the various Katrina cases did not for the most part prevail, but the recognition afforded to members of the insurance bar isn’t always about winning. In the Board’s view, Chip Merlin’s dedicated and ethical work on behalf of policyholders is a true measure of success that merits an honorable mention in this Policyholder Attorney category."

My concern is that most reading this would think policyholders that hired attorneys lost. In fact, the opposite is true. In almost every case we handled, the policyholder won significantly more than what was paid by the insurance company before retaining counsel and significantly more than alternative dispute resolution processes set up by the Mississippi Department of Insurance. While it is true that the anti-concurrent causation legal arguments did not prevail, this did not mean that policyholders did not win. Our statistics indicate policyholders with attorneys "won" in the high ninety percent range despite some poor legal appellate decisions. The Katrina cases were successful where it mattered most to the policyholder--it's about getting paid.

My impression from Hurricane Katrina is that the insurance companies could have avoided much Katrina litigation. Indeed, the lessons from Katrina claims do not seem to have been learned by all insurers. Much of the treatment being experienced following Hurricane Ike by our large commercial and residential clients seem much worse. Delay is rampant and customer service is poor--these may be understatements. The Texas legislature has significant penalties for insurers that act in such a manner if policyholders hire counsel and press their rights.

I delivered a paper, WHY CAN’T WE JUST GET ALONG? A CRITICAL REVIEW OF PROFESSIONAL CONDUCT OF THOSE ENGAGED IN INSURANCE ADJUSTMENTS AND DISPUTES, at the 2004 Windstorm Conference in New Orleans which made suggestions for better claims handling. It also shows what the insurance company customers should expect:

"The following summarizes the appropriate behavior to expect from an insurance company and its adjusters:

1. Train, promote and encourage adjusters to promptly, honestly and thoroughly determine coverage, evaluate damages, fully pay the insured and help the insured.

2. Abolish claims performance guidelines/bonuses/standards based upon controlling indemnity payments. Claims management goals of claims severity should be avoided because it is establishing unethical, biased claims conduct.

3. Promptly pay what is owed. Do not wait for all the paperwork or other coverages.

4. Promptly evaluate all damages under all coverages with the policyholder. Explain in person and in writing the coverages, explain the process and provide status up-dates. These “joint meetings” prevent disagreements and distrust.

5. Explain to the policyholder all coverages and provide practical examples to policyholders so claim recoveries may be maximized rather than minimized.

6. Give the benefit of the doubt to the policyholder when interpreting policy language.

7. Sharp claims practices should be based on obvious policy language and disclosed at the point of sale.

8. Provide enough adjusters, with enough time and enough support to adjust all coverages.

9. Conduct closed claim file reviews – looking not just for over-payment – but especially looking for areas of underpayment and non-disclosure of policy benefits.

10. Prevent fraud after the claim by “hands on” claims adjustment. Policyholders who (1) know a “hands on” adjuster is currently adjusting the loss and (2) that the adjuster appears to be acting in his/her interests will be far less likely to conduct fraudulent activity."

Many good insurance companies are doing these activities, and even more. However, there are so many complaints from new Hurricane Ike clients, that every claims department doing business in Texas should review some of these basic adjustment points if they want to avoid the unpleasant, embarrassing, and costly scenario of explaining away failures under the process of law. Many of our Hurricane Ike clients have far more colorful language to explain what they want to have happen to the adjusters that fail to fulfill the "peace of mind" purchased with the policy.

Many people received a letter from Texas Windstorm Insurance Association explaining how TWIA determined the value of damages to their property. The TWIA letter states:

“You are hereby notified that an appeal of the Texas Windstorm Insurance Association’s decision must be filed with the Commissioner of Insurance at the Texas Department of Insurance … no later than the 30th day after receipt of this letter.” [emphasis added]

The letter further states that a policyholder can appeal or file suit.

TWIA’s letter implies that a policyholder can appeal and file a lawsuit for violation of unfair settlement practices under Section 541.060 of the Texas Insurance Code. THIS IS NOT TRUE. Texas Statutes Section 2210.552, of the Insurance Code states that a person may appeal the decision with the Texas Department of Insurance OR file a lawsuit under Chapter 541. A policyholder cannot do both.

A person who appeals gives up his or her right to file a lawsuit against the insurance company for unfair settlement practices, such as misrepresenting a material fact or policy provision relating to covered loss, failing to attempt a prompt, fair, and equitable settlement of a claim after the insurer's liability has become reasonably clear, unreasonably delaying a settlement, requiring a release when only a partial payment has been made, or refusing to pay a claim without conducting a reasonable investigation. There is a very good chance that you have faced one of these situations or know of someone who has.

The TWIA letter gives the false impression that if a policyholder does not appeal within 30 days, the decision is final, and the policyholder has no other options or remedies. Texas has some very good consumer protection laws:

• Texas allows an insured to recover attorney fees and costs under Chapter 38 of the Civil Practices and Remedies Code.
• Tex. Ins. Code Section 542.060, Prompt Payment Statute, entitles the insured to collect 18% interest plus additional attorney fees and costs if the insurance company does not promptly pay the claim in violation of the statute.
• Tex. Ins. Code Section 541.152, punishes the insurance company by forcing them to pay the full amount of damages, attorney fees, expenses, and, if the violation is done knowingly, the damages owed by the insurance company are three (3) times the actual damages.

In addition, as some of you already know, an order has been entered in Galveston County directing that all homeowner Ike cases be stayed for 100 days to allow plaintiff and defense counsel to exchange discovery and set mediation. This order is very specific and holds the insurance company in contempt of court if its attorneys attend this mediation without full authority to settle the case or if they fail to settle in good faith. Mediation is not binding, and the insured decides whether to accept or reject the insurance company’s final offer. In my opinion, entering this order was a very wise decision by District Judge Susan Criss and will result in many more settlements. In this instance, mediation is not an alternative but a method within the litigation process, again another great example of consumer protection in Texas. Hopefully, a similar order will be entered in neighboring Harris County, helping to expedite settlements there.

Each policyholder has the right to contest TWIA’s decision through either an administrative hearing or by filing a lawsuit. Policyholders should carefully consider each option before making a decision.

It is important to note that policyholders who have already filed for an administrative hearing may, prior to the hearing date, ask to withdraw their administrative appeal, cancel the hearing and pursue remedies through the courts. A person wishing to do so would be well advised to contact an attorney to make sure that the proper procedure is followed in withdrawing the administrative appeal and preserving the policyholder’s right to file suit.

Texas provides some of the best consumer protection laws in the nation; I truly see no reason not to take full advantage of them.

On the Central Gulf Coast we know all too well that after a catastrophic event, it is deeply comforting and reassuring to have the support of our family, friends, neighbors and extended neighbors. In addition to knowing that the replacement or repair of our homes and personal or business property will be taken care of, we should also be able to rely on our wise decisions to cover those additional and necessary expenses for the time period it takes to put our lives back together without the need to stretch our budgets and burden our families, friends and communities.

Some of the most overlooked and underused benefits are Additional Living Expense Coverage, Loss of Rents Coverage, Business Expense Coverage and Business Interruption Coverage. Though these coverages are often reimbursed after the actual costs have been incurred, many insurance carriers will make partial payments to policyholders to assist them on their way to recovery.

The only way to know if you have these coverages is to review the policy. We strongly encourage all of those affected by these recent storms to thoroughly review their complete insurance policy, including riders and endorsements. If you no longer have, or never had a policy, seek one from your insurer immediately.

A typical benefit under the Coverage for Additional Living Expense is coverage for rental or temporary housing when a covered event renders the covered primary home uninhabitable. Other additional expenses can also be covered, such as the additional expense in travel to and from work due to the new living location.

Often owners of residential rental property will have coverage under their rental dwelling policy that covers loss of rents when the covered property is made uninhabitable by a covered event, as a renter has no obligation to continue to make rental payments due to force majeure. A lease or a rental agreement will be helpful in documenting the amounts to be paid under this provision.

A benefit of Business Expense Coverage under a commercial policy may allow a covered business to take the necessary steps to continue the business at another location during the period of restoration to the covered property. This coverage is much like the Additional Living Expense Coverage in that it is intended to offset the “extra expense” associated with returning to the normal operation of the business.

Another valuable coverage to businesses is the Business Interruption Coverage, a.k.a, Time Element Coverage. This coverage often helps prevent a business affected by a covered event from going out of business or into bankruptcy by its receiving the benefit of lost income payments for the period of restoration or replacement of the damaged property.

Though many of these coverages are limited to a 12 month or 24 month period, unless there is an endorsement for an extension, these coverages should be explored and understood at the outset of any insurance claim. Policyholders should read their policies carefully to determine which coverages are available to them and to determine the duties and obligations of policyholders in order for them to make a proper claim for those coverages. Policyholders should also have their insurance carrier verify and commit to coverage early to ensure prompt reimbursement.

At this year’s annual Windstorm Conference held in Orlando, FL [link], there were many vendors in attendance that offer insurance policy related services. Temporary housing services can prove to be very beneficial to policyholders who have been displaced when their home is rendered uninhabitable by a covered event.

While visiting with some of the temporary housing vendors at the Windstorm Conference, we discussed the dilemma for many policyholders with regard to obtaining the temporary housing benefit under their Additional Living Expense Coverage. In the aftermath of a catastrophic event most policyholders are thrown in to a time of uncertainty and do not have the savings or resources immediately available to them to secure temporary housing.

The temporary housing services work directly with the insurance company. The hotel or rental bills are paid by the insurer on behalf of the policyholders directly to the temporary housing service. Informing policyholders that this kind of service can be available could lead to the benefit of temporary housing for policyholders at the time most critical in the recovery—the initial, emergency stages.

Insurance policies can be very difficult to understand. Policyholders should consider making an extra copy of their policy so that they can mark the areas that need further clarification. Policyholders should then consider discussing the meaning of these provisions with a claim representative as soon as possible. If policyholders are not fully satisfied with the answer(s) given, they should consider asking to speak to a Claims Manager or asking to be referred to someone who can assist them. If policyholders are still dissatisfied, have been wrongly denied, or have been told there is limited or no coverage due to exclusionary language, policyholders should consider seeking legal counsel to protect their interests.

Our hearts and prayers go out for all of those affected by these tragic storms and tornadoes and we send our wishes for a speedy recovery.

Best to All,

Deborah

Insurance policies are contracts conferring rights and responsibilities on all parties to the agreement. "All parties" being the operative term. An insurer has an obligation to conduct reasonable investigations and never approach investigations, adjustments, and settlements in a manner prejudicial to the insured. How does that comport with the reality of the insureds who are still trying desperately to resolve claims from the 2004 and 2005 hurricane seasons? A new wrinkle has emerged, a demand to prove to the carrier's satisfaction its insured DID NOT sustain damage sufficient to file a claim. In addition to providing competent evidence the insured sustained a covered loss during one hurricane, the insurer may want proof its insured DID NOT sustain a covered loss in excess of its deductible for an event NOT claimed! That is a creative delay tactic which can be very costly to overcome. For example, the insured may be forced to incur the cost of an operational meteorologist to demonstrate a weather event did not have the magnitude to cause significant damage at the insured's location--truly an expensive exercise in futility. It is a daunting prospect to prove a negative. The insurer may make that allegation without having any supportive facts or a competent professional opinion that multiple losses occurred, and even when the weather event didn’t cause any significant damage in the geographic area of the insured’s property. This is disingenuous adjustment at best.

Hurricane seasons frequently have multiple events such as Frances and Jeanne in 2004, Katrina and Wilma in 2005, and Dolly and Ike in 2008. Instead of just feeling relief their property wasn't devastated, an insured should document their property’s well being as soon as practicable after the event occurs. At a minimum, still photographs and a video depicting an intact roof, windows in place, and interior dry walls should be taken and preserved in case a successive disaster strikes. A camera showing the date of filming precludes the argument the photographs were shot pre-event.

The necessity of documenting a non-event is particularly important for a commercial property where there are layers of coverage. An insurer seeking to avoid liability for a covered claim may argue the property sustained damage during successive events, requiring layers below theirs to pay for multiple losses before that carrier's obligation to pay is triggered. That situation occurs even when an insured denies their structure sustained multiple losses. Insurance policies contain provisions regarding what an insured must do after a loss. Noticeably absent are instructions regarding what to do after a non-loss. Practicality requires an insured to prepare, not only to present his claim, but to defend against accusations his loss is not related to the event. How can one do that?

Commercial owners and high end residential owners should consider retaining a licensed contractor to inspect and document the condition of their property every year, if financially feasible. That type of documentation will diffuse the argument damage was caused by wear and tear, deterioration, dry rot or any other non-covered peril the insurer asserts caused damage rather than the hurricane force winds. Insureds should keep all receipts of repairs to their property. For example, a roof invoice may contain information that a moisture test was performed and the roof did not leak. Or it might state only a minor repair was required. A chronology of repair will be established, which is always helpful after a property loss.

Insurance was intended to be a partnership. The insured paid his premiums, kept his property in good repair, and filed a claim only when he sustained damage. In return, the carrier fairly and promptly adjusted the claim paying dollar for dollar the value of the claim. Reading the true life stories of hurricane survivors, it is evident they are victims of more than a natural disaster. Having had the opportunity of handling the claims of numerous insureds during the past 26 years, it is all too apparent many are more distraught by the treatment they have received from their trusted insurer than from the destructive event itself.

-Jean Niven

To put this in proper context, my roots are in the entertainment industry which I thought was as far away from insurance as the East is from the West. Little did I know that the stories I would hear and the characters I would meet would rival even the most gripping Grisham novel or a Steven King thriller. My opinion may also have a little to do with my perception that the insurance industry was filled with unexciting, low-energy people and was a rather boring subject. This isn’t a far-fetched conclusion for people like me who tend to view life like a golden retriever in a world full of tennis balls.

On December sixth and seventh, 2008, everything changed! Merlin Law Group held a “Meet ‘N Greet” event that was targeted toward the Hispanic community. As a company we were growing more and more annoyed with the rumors we were hearing regarding abusive treatment dished out by the insurance companies to a particular demographic. We decided to see first hand what was really going on. I can tell you with absolute conviction that the stories I heard from this fantastic community made me appreciate and become interested in insurance… almost immediately!

The massive impact that insurance has on individuals, communities, economies and world governments should not be underestimated. With companies like AIG dominating headlines, we have learned how far and wide insurance companies’ tentacles reach. And this is where insurance becomes exciting. I am drawn to the human-interest stories that are plentiful in this dramatic theatre of property and casualty loss. Stories like the 92 years young woman that has paid her homeowner’s insurance for more than 60 years and lost almost everything. She is now living in a one room dwelling and cooking on a hot plate. The non-English speaking family with a total value policy of $30K that lost their roof and received a check for $46.00. These stories move me!

I find it mind boggling how legislators and states are controlling organizations like Texas Windstorm Insurance Association (TWIA) and Citizens Property Insurance Corporation. It’s intriguing how some of these individuals manage political careers while the people who elected them sift through their rubble, hoping to salvage a photograph. It’s dramatic to meet with people that are hurting and hear the lip service offered by the very insurance company that excitedly sold them a promise and now goes to great lengths to avoid honoring that commitment.

I suggest that insurance isn’t a boring subject at all. When you peel back the layers, it is based on all the elements of great theatre- deceit, destruction, conflict, good guys, bad guys, winners and losers. I’m confident that policyholders will ultimately prevail and even more hopeful that the opinion leaders and politicians will recognize their responsibility toward their constituents and get engaged in the fight for people’s rights. I admire the public insurance adjusters and attorneys who play a recurring role.

Insurance is about people, promises and profits and frankly, I think that’s very interesting!

- Frank Chimento

In the post, The TWIA Roof Damage Memo: Checking Basic References to Resolve Adjustment Questions, I showed that the TWIA claims memo is wrong based upon the most basic insurance training available to rookie adjusters. Then, in the post preceding this, Roof Repair Methods Prove TWIA is Wrongly Denying Roof Claims, it was shown how roofers and the manufacturer's of shingle roofs appreciate the need to repair shingles that have seals which are broken from a hurricane's high winds and how to fix them. Maybe the TWIA claims executives sitting behind desks in Austin do not know that adhesive seals are a tangible substance or their purpose on roofing shingles. Or, maybe they have been going to HAAG Roofing Seminars and learned a new trick on how to avoid paying for roof shingle damage. HAAG Engineering is good for my business, but not good for policyholders with an insurance claim.

What about the insurance coverage caselaw regarding "direct physical loss?" The case discussions I like best to help those understand "direct physical loss" are Ward Gen. Ins. Services, Inc. v. The Employers Fire Ins. Co., 114 Cal. App. 4th 548, 7 Cal. Rptr. 3d 844 (2003) and Meridian Textiles, Inc. v. Indemnity Insurance Co. of North America, 2008 U.S. Dist. LEXIS 91371, 2008 AMC 1411 (C.D. Cal. 2008).

The facts of Ward involved loss of the insured's computer data which was mistakenly deleted. The insured filed a claim to recover the cost of recovering the data and the business loss incurred from temporary loss of data. The insurers denied the claim on the ground that the policy required a direct physical loss before there would be coverage. The court held computer data was not a tangible or physical item and a physical loss, which did not happen, was required in order to trigger coverage.

The Court first provided a definition for direct physical loss:

"Neither party submitted any evidence suggesting that the phrase "direct physical loss" has some technical meaning or special meaning given by usage. Accordingly, we interpret these words in their ordinary and popular sense to determine whether they impart a clear and explicit meaning in the context of the losses claimed against the insurance policy. We conclude they do.

The word "physical" is defined, inter alia, as "having material existence" and "perceptible esp. through the senses and subject to the laws of nature." (Merriam-Webster's Collegiate Dict. (10th ed. 1993) p. 875.) "MATERIAL implies formation out of tangible matter." (Id. at p. 715.) "Tangible" means, inter alia, "capable of being perceived esp. by the sense of touch." (Id. at p. 1200.) Thus, relying on the ordinary and popular sense of the words, we say with confidence that the loss of plaintiff's database does not qualify as a "direct physical loss," unless the database has a material existence, formed out of tangible matter, and is perceptible to the sense of touch."

The Court then ruled against the policyholder under reasoning that other courts, including one in Texas, disagree:

"...the loss of a database is the loss of organized information, in this case, the loss of client names, addresses, policy renewal dates, etc.

We fail to see how information, qua information, can be said to have a material existence, be formed out of tangible matter, or be perceptible to the sense of touch. To be sure, information is stored in a physical medium, such as a magnetic disc or tape, or even as papers in three-ring binders or a file cabinet, but the information itself remains intangible. Here, the loss suffered by plaintiff was a loss of information, i.e., the sequence of ones and zeroes stored by aligning small domains of magnetic material on the computer's hard drive in a machine readable manner. Plaintiff did not lose the tangible material of the storage medium. Rather, plaintiff lost the stored information. The sequence of ones and zeros can be altered, rearranged, or erased, without losing or damaging the tangible material of the storage medium."

However, the Court also noted a number of examples of "direct physical loss" that provide coverage:

"...in Hughes v. Potomac Ins. Co. (1962) 199 Cal. App. 2d 239 [18 Cal. Rptr. 650], heavy rains caused the backyard of plaintiff's insured dwelling to slide into a creek, but the structure of the building itself was not damaged. The court held the first party insurance policy covering physical loss and damage to the "dwelling" covered plaintiff's loss. This decision does not stand for the proposition that loss of or damage to intangible property can constitute a physical loss. Quite clearly, the loss of the backyard was a physical loss of tangible property. The essential question decided by the Hughes court was whether the insured "dwelling" included the ground under the building.

...in Western Fire Ins. Co. v. First Presbyterian Church (1968) 165 Colo. 34 [437 P.2d 52], gasoline had accumulated in the soil around the insured building, infiltrating and saturating the foundation and making the structure uninhabitable. The court found the loss of use was covered by an insurance policy insuring against the consequential results of a direct physical loss. ( Id. at pp. 38-39.) Again, this case does not stand for the proposition that loss of intangible property can constitute a physical loss. A physical loss occurred when the foundations became saturated with gasoline. The essential question decided by the First Presbyterian court was whether the resultant loss of use could be recovered under the policy.

...in Azalea, Ltd. v. American States Ins. Co. (Fla.Dist.Ct.App. 1995) 656 So. 2d 600, a sewage treatment plant was vandalized by the dumping of an unknown chemical into the system. Inter alia, the chemical destroyed a bacteria colony, which was an integral part of the sewage treatment facility. ( Id. at p. 602.) The court found the loss was covered by a policy insuring against direct physical loss....

...in Retail Systems v. CNA Ins. Companies (Minn.Ct.App. 1991) 469 N.W.2d 735, a third party liability policy covering "physical injury or destruction of tangible property" was held to cover damages for the loss of a computer tape containing the results of a voter survey conducted by a political party. The computer tape, together with the data it contained, was found to be "tangible property," and the measure of recoverable damages was enhanced by the value of the lost data stored on the tape. But the condition of coverage, the loss of tangible property, was plainly satisfied by the loss of the tape.... "

In Meridian Textiles, the Court's discussion is even more helpful to our roofing situation:

"[t]he requirement that the loss be "physical," given the ordinary definition of that term is widely held to exclude alleged losses that are intangible or incorporeal, and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental impact unaccompanied by a distinct, demonstrable, physical alteration of the property.

10A Couch on Ins. § 148.46 (3d ed. 2005) (citing Commercial Union Ins. Co. v. Sponholz, 866 F.2d 1162 (9th Cir. 1989) (finding that marine insurance policy did not cover defect in title, which did not constitute physical injury)....see e.g., Farmers Ins. Co. v. Trutanich, 123 Ore. App. 6, 8, 858 P.2d 1332 (Or. Ct. App. 1993) (concluding that under Oregon law odor from methamphetamine "cooking" "was 'physical' because it damaged the house"); Yale Univ. v. CIGNA Ins. Co., 224 F. Supp. 2d 402, 412-13 (D. Conn. 2002) (concluding that while plaintiff could not seek coverage under an all-risk policy for "mere presence of asbestos-and lead-containing materials in its buildings," it could seek coverage for the "contamination of its buildings by the presence of friable asbestos and non-intact lead-based paint").

For example, in Glens Falls Ins. Co. v. Covert, 526 S.W.2d 222 (1975), the insurance policy provided coverage against "ALL RISKS OF PHYSICAL LOSS OR DAMAGE" to certain vehicle safety stabilizers owned and sold by the insured. Id. The stabilizers fell from a storage area to the floor. Id. However, because the stabilizers were sealed units, they could not be inspected for damage. Id. Thus, it was not known if the stabilizers suffered any physical or internal damage. Id. The manufacturer of the stabilizers withdrew its warranty, and the insured decided not to sell the units, concluding that the units lost their merchantability. Id. In affirming the trial court, the Court of Appeals held that although the insured decided that the units could not be sold without their warranties, "under the clear language of the policy of insurance . . . , that was a type of loss not covered." Id. The court concluded that because "there was no physical loss or damage," the insured could not recover...

Similarly, in Columbiaknit, Inc. v. Affiliated FM Insurance Co., 1999 U.S. Dist. LEXIS 11873 (D. Or. 1999), relied upon by defendant, the court held that under an all-risk insurance policy providing coverage for physical loss or damage, the plaintiff must "show that a physical loss occurred to covered property."....

The court noted that "if an article of retail clothing has an odor strong enough that it must be washed to remove it, (and the garment therefore cannot be sold as new) it has sustained physical damage and would be covered under an 'all-risk' property insurance policy."... The court reasoned that on the other hand, a retailer's "decision not to sell the garment as new, in the absence of distinct and demonstrable physical change to the garment necessitating some remedial action that would preclude honestly marketing as first quality goods, is not a covered loss."... The mere "alteration of property at the microscopic level does not obviate the requirement that physical damage need be distinct and demonstrable." Id. The court thus held that to recover, the plaintiff had to demonstrate that its garments and fabric had been water-soaked, that they had developed an odor, mold, or mildew, or that the goods had been physically changed in such a way that the goods would develop an odor, mold, or mildew." 

From this legal perspective, the substance which makes up the adhesive material on or applied to roofing shingles is tangible. It can be felt, measured, and seen. Roofers tell me that the adhesive property of the "seal" can even be measured. Policyholders will need to prove that the winds and debris carried in the winds from Hurricane Ike caused an alteration to the adhesives which formed seals to the roofing shingles. I suspect that many newer and better maintained roofs suffered less of this damage than older and less maintained roofs and shingles.

Adjusters and policyholders need to understand that finding shingle damage is not done from the ground--unless you do not want to find any damage. You have to closely inspect the shingles. Roofers tell me that one does pull up the shingles with your hand to see if the seal is broken, unlike the directions in the TWIA memo. But, be careful. Inspections can damage the roof; and, possibly damage you, if you fall.

One last warning to all who are not attorneys: do not take this post, or copy it, and start practicing law by arguing what cases mean to the insurance company or TWIA. This warning is especially applicable to public adjusters.

I am off to Rome celebrating my fiftieth birthday. Guest Bloggers will take over for the next two weeks

Ciao. 

Here is the two page technical memo regarding Re-Sealing Shingles:

The point of the technical memo is that hurricane strength winds will lift and blow shingles so that the seals are broken. Generally, the older and more worn the shingle, the more likely this breaking will occur. Good adjusters are aware of this and will carefully and closely inspect roofs to see if the shingle seals show signs of breakage or non-adherance.

Following a major hurricane such as Ike, insurance companies with a culture of good faith claims handling instruct the field adjusters to anticipate this type of damage and determine whether the shingles are "lifting." TWIA's instructions were just the opposite:

"Shingles that show no signs of damage other than they are not sealed and can be raised with your hand are not considered windstorm damaged. Some call these "lifted" shingles. Some call them "blown up" shingles. Some call them "unadhered". Regardless of the terminology, these are not considered windstorm damaged. The shingles are mostly laying flat and are continuing to do as they were intended…….to repel water."

Why would TWIA say the shingles are fine when everybody in the roofing industy would fix them? We will find out as the Hurricane Ike insurance litigation gets underway.

Policyholders should not give up. Justice will prevail for those who seek it.

Mary Fortson and I were asked by the policyholder's counsel if we could file such a brief. After looking at the issues, we started laughing because our library had an insurance industry manual about this topic. It clearly indicated that coverage existed for the type of "earth movement" that damaged the policyholder's property. Why would the insurance industry publish an adjustment manual on something that was not covered?

If you have the time and want to learn how to better interpret insurance policies, read the Amicus Brief we filed. The portion involving the reference materials is quoted below:

"The construction applied by the Third District suggests that coverage for “blasting” damage will never be covered. Yet the American Insurance Services Group publishes a pamphlet entitled Blasting Damage and Other Structural Cracking, a Guide for Adjusters and Engineers (3d ed. 1990) that teaches first party property adjusters how to adjust for the type of damages appellant’s are claiming. It states, in part:

If possible, inspection of the damage should be made jointly by adjusters representing the liability carriers and property insurers. The adjusters should always make a point of telling the property-owner who the company representatives are, what companies they represent, and what the purpose of the visit is.

If the casualty interests agree that liability exists, they may be willing to take over the adjustment. But if the direct property adjuster is convinced that the blasting did not cause the damage, his company may wish to consult and cooperate in the investigation and defense of the claim with the blaster and his insurance carrier, if any.

In those cases where the adjustment is concluded by property insurance carriers, the company may wish to ascertain from counsel whether the blasting took place in an absolute liability state, or whether it is necessary to prove negligence before the blaster can be held liable….

Blasting Damage and other Structural Cracking at 4-5. Thus, it is obvious the insurance industry recognizes that blasting type damages are covered under their standard policy terms or they would not make a specialized booklet for their property adjusters and engineers dealing with the nuances of such losses, including subrogation recoveries after paying their policyholders.

In this case, the all-risk homeowners policy should have been construed so that the exclusion would be found ambiguous, as it reasonably could be construed. Thus, the exclusion will apply to only naturally-occurring, widespread disasters, which is the construction found to apply in a multitude of instances in other jurisdictions, as set forth in the Petitioners’ Initial Brief. In this manner, the public (and insurers) are protected from insurers becoming insolvent when widespread damages from earthquakes, volcanoes and the like occur. Yet, the small number of isolated “blasting” claims can be paid, eliminating devastating financial damage to isolated policyholders.

Further, as to the named peril personal property portion of the policy relating to “explosion”, rather than finding the inconsistencies to favor non-coverage, the court should have, again, construed the policy in favor of the policyholder.

Significantly, in a treatise published by the National Underwriter company, when discussing homeowners policy coverage interpretation, the author notes that, in the ISO policy form, the term “explosion” is: “neither defined in the policy, nor is there any modifying language following the word so that a broad range of ‘explosions’ may be covered.” Diane W. Richardson, Homeowners Coverage Guide Interpretation and Analysis 48 (National Underwriter Co. 1999). Again, the interpretation adopted by the Third District in its opinion is incorrect. Even the insurance industry recognizes a different interpretation of “explosion” than that interpreted by the Third District."

I credit New York attorney Eugene Anderson and claims consultant, Gary Fye, for encouraging me to build a law library with insurance industry reference materials. Every good policyholder attorney needs to make this type of investment if he or she is serious about doing this line of legal work at the highest level.

We have books about the history of various insurance companies, advertisements, claims manuals, treatises, and current and ancient industry magazines. We even have a record with advertising songs State Farm has used to sell its insurance. Those songs come in handy when we show State Farm’s promises at the point of sale.

The bottom line is that courts and insurance defense attorneys have little to say when the insurance industry publishes materials which demonstrate that an insurance policy covers a loss.

Property Loss Adjusting is the most elementary treatise in my law firm’s library regarding property insurance adjusting. The American Institute of Insurance uses it, and it is mandatory reading for those obtaining a designation as an Associate of Insurance Claims. I will cite this treatise to demonstrate that the orders TWIA executives are providing to those in the field do not comply with standards in the industry.

The TWIA memo stated in part:

“It is important to note that we only cover direct, physical, loss from windstorm. Direct means it happened during Ike or Dolly, physical means the damage to the property is clearly visible and there must be a loss (destruction or damage to property) involved. Shingles that show no signs of damage other than they are not sealed and can be raised with your hand are not considered windstorm damaged. Some call these “lifted” shingles. Some call them “blown up” shingles. Some call them “unadhered”. Regardless of the terminology, these are not considered windstorm damaged. The shingles are mostly laying flat and are continuing to do as they were intended…….to repel water.”

Property Loss Adjusting has the following discussion on this topic:

1.18 Determine Whether the Loss Is a Direct Physical Loss

The first step for determining coverage for a particular loss is to review the insuring agreement and determine whether the loss is a direct physical loss. This section of the chapter explains the meaning of this threshold requirement of policy coverage…

Property insurance policies (other than those for time element losses) protect against direct physical loss only. Any loss that is not a direct physical loss is not covered. This is true under both special-form and specified-perils policies. To be covered, a loss must be both a direct loss and a physical loss, as well as to clarify the meanings of other insurance policy terms, see the following box.

Identifying a Direct Physical Loss
Policy forms do not define the phrase “direct physical loss”. However, policies do define the meanings of many terms in an insurance policy. To determine or clarify a term’s meaning, the following four sources should be consulted in order of priority

• 1. Definitions listed in the policy
• 2. Definitions given to the term by previous court decisions
• 3. Definitions found in dictionaries or other references
• 4. Meanings from common usage

Because “direct physical loss” is not defined in insurance policy forms, a definition must be found elsewhere. Black’s Law Dictionary defines “direct loss” as “one resulting immediately and proximately from the occurrence and not remotely from some other consequences or effects thereof.” One dictionary definition of “direct” is “marked by absence of an intervening agency, instrumentality, or influence.” An example of a direct loss is a store burning down. An indirect loss associated with the fire would be the loss of market resulting from the store’s being closed for six months to rebuild.

Direct Loss
All losses must be “direct” (as defined above). Indirect losses, if covered by insurance, are separate from direct losses. The most important type of indirect loss is the loss of use of property. Whenever property is damaged or destroyed, it cannot be used. Property insurance covers only the value of the damaged or destroyed property, not the loss of use of it while it is repaired or replaced. Coverage for loss of use is separate…

Physical Loss
A loss is “physical” if it involves tangible property’s damage, destruction, or disappearance. Nonphysical losses, if covered by insurance, are separate from physical losses. Nonphysical losses include all kinds of financial loss, such as value to an inventory caused by changes in fashion or obsolescence, loss of value to a financial investment such as stocks or bonds, loss of income from an interruption on a business’s operation, or loss of customer’s goodwill. Likewise, embezzlement, swindling, and other forms of financial fraud are not physical losses and would be covered, if at all, only by special fidelity policies.

Nowhere in Property Loss Adjusting have I found TWIA’s requirement that damage is “clearly visible.” Indeed, the physical nature of the loss seems to indicate that “damage, destruction, or disappearance” is all that is required. Property Loss Adjusting does not discuss TWIA’s requirement that a “utilitarian function” of the property not work as well after alteration to classify it as a “loss.” An independent adjuster sent me a note that made fun of the TWIA claims memo by indicating that paint blown onto the roof would not be “direct physical damage” because the shingles work just as well as before the windstorm.

Property Loss Adjusting also has sections on roofing damage and repair:

9.33 Roofing Damage and Repair

Strong winds (generally in excess of 40 miles per hour); hail; and falling objects such as tree limbs are the usual causes to loss to roofs. Steep pitched roofs are less likely to sustain wind damage from significant wind. Slate and tile roofs are unaffected by wind unless it is hurricane or tornado force.

Exposure to heat from the sun and normal wear and tear exact a heavy toll on common roof coverings. The average life of an asphalt composition shingle roof is fifteen to thirty years, depending on the roofing material’s quality. Worn granular surfaces, curling of the shingle ends, and leaks into the interior are signs of age and damage that accumulate over time. Insurance does not cover wear and tear, but it might cover a new roofing job as part of an insurable loss to a home with replacement cost coverage. Because of their composition, asphalt roof shingles might sustain several slight incidents of damage that go unnoticed. The first indications of leakage usually signal the need for a new covering.

A roof can sustain a great deal of damage from a hailstorm, depending on the roofing material and the size of the hail. Large hailstones can shatter Spanish tile and slate. Light gauge metal can be severely dented. Wood shingles can be dented or split. Even asphalt shingles can be dented by large hailstones.

Inspection of Roofs

When inspecting damage to an asphalt roof, adjusters should, if possible, climb onto the roof. Wind might have broken the shingles, but unless the shingles are visibly torn, damage can be observed only by close inspection. Even if broken, the shingles will lie flat once the wind has subsided and will not appear to be damaged. Roofs of slate, tile, fiber panels, or wood can be damaged if walked on. Adjusters can go up on a ladder to get a good vantage point for inspection and should take photos from the edge of the roof.

Most building codes allow only two layers of asphalt shingles on a roof. This amount is based on the roof structure’s capacity to bear the cumulative weight of the material. Some adjusters believe that if the roof already has two layers, an allowance should be made to remove only the top damaged layer. The underlying layer, though, will almost certainly be damaged while the top layer is being removed, resulting in a need to replace parts of the underlying layer. The care needed to minimize underlying-layer damage can make the job take longer, increasing the labor cost. Whether both layers should be removed therefore becomes a matter of judgment.”

It was interesting that Property Loss Adjusting noted that “strong winds” only needed to be in excess of 40 miles per hour. I guess insurance industry engineers like HAAG and Rimkus had not influenced the author at the time this edition was written in 2004. Those companies typically call for much higher wind speeds for expected damage to roofs.

Pursuant to the memo, “damage” can be excluded. I saw no exclusionary language in the Property Loss Adjusting which followed the logic of the TWIA memo. However, I thought the discussion of excluded types of damage could be instructive:

“9.62 Damage to Exterior Paint

Because exterior paint is exposed to weather, it can be damaged in ways that interior surfaces cannot be. Wind-driven rain, dust, and debris can chip or pit surface paint and can wear off its protective coating. Intense direct sunlight and heat and very cold temperatures and accumulations of ice and snow can peel and crack exterior paint and shorten its lifespan. Improper methods of construction, which prevent proper ventilation, can create a moisture buildup causing wood siding to remain wet and paint to peel away from the surface. Problems such as these, caused by normal wear and tear, are not covered by insurance and are handled through regular maintenance.

The two basic adjusting considerations in handling damage to exterior paint are (1) distinguishing normal wear and tear and deterioration from insurable damages and (2) determining an allowance for appearance. Physical damage caused by fire or exposure to heat from fire at an adjoining property, hailstone damage, strong winds that propel objects into the exterior finish,

The complete exterior may be treated as one unit. Because paint can change color as it ages, new paint can rarely be perfectly matched to the old. Adjusters must carefully judge the situation after inspecting the property. Building interiors are segmented and are generally a variety of colors, but exteriors are usually one color and should present a consistent appearance. The adjuster must decide among painting only the damaged area, painting the entire side where the damage is present, or painting the entire building. Many states have claim practices regulations that dictate how the situation should be handled.”

I will write more on the TWIA memo tomorrow. For policyholders, risk managers, and attorneys, a partial point of this discussion is that the field of adjustment is studied. There is significant information outside the case law regarding how an adjustment is done. One of the most basic questions in every case is what is and is not covered. We use the adjustment reference material to help courts and insurers get the coverage decision right.

An internal TWIA Claims Memo helps show this. In part, it says:

"Shingles that show no signs of damage other than they are not sealed and can be raised with your hand are not considered windstorm damaged. Some call these "lifted" shingles. Some call them "blown up" shingles. Some call them "unadhered". Regardless of the terminology, these are not considered windstorm damaged. The shingles are mostly laying flat and are continuing to do as they were intended…….to repel water." 

 The rationale sounds familiar to me because it has been raised before. TWIA wrongly finds that part of a structure that has been physically changed, altered, or what most adjusters are trained and consider "damaged," is not damaged because the item functions as it did before the event. I bet TWIA executives have hired outcome-oriented engineers to help provide an alleged basis for this fabricated argument and adjustment standard not found in the policy.

I will go into a more in-depth discussion of this Tuesday afternoon. However, the memo is instructional because it helps show the mindset of the claims executives reviewing the field adjustment. The "slabbers" were right to March on Austin because the delay and denial of claims are coming from there.

I strongly urge any policyholder to see an attorney before agreeing to the administrative remedy because you give up very valuable rights by doing so. There are many fine and experienced attorneys that are available for a free initial consultation. If denials are based on the type of logic shown above, you will have attorneys wanting to represent you.

Representing policyholders in the presentation and adjustment of a claim is very demanding. Public adjusters have to be experts at coverage interpretation, construction methodologies, construction pricing, contents pricing, understand how statutes and case law effect recovery, negotiation, and hundreds of other technical fields. A person could spend a lifetime on just one aspect. It takes dedication and experience to do the job right.

A number of the public adjusters in the audience were former insurance company adjusters. The experience of working for, and being trained by, an insurance company is invaluable to a public adjuster. I paid former State Farm adjusters who switched to the "side of angels" a compliment by remarking that I believe State Farm has more thorough training available for its first party property adjusters than any other personal lines insurer. States need to make certain Public Adjusters have rigorous requirements for continuing education. As in any trade dealing with the public where serious issues are at stake, the consumer can be harmed by those who ineffectively perform their job. Public adjusters need more education--especially those with minimal experience in the insurance industry.

Ethics was the first topic of the seminar. Public adjusters have a tendency to practice law without realizing they do it. It is hard to prevent because insurance contract interpretation requires an understanding of statutes and cases interpreting insurance regulations and policies. Public Adjusters must understand insurance contracts. Knowing how they effect an adjustment can be used to provide greater benefits to the policyholder, and is the public adjuster’s job. However, the interpretation and providing legal advice to consumers is not adjustment, but the practice of law.

Many insurance adjustment issues involve overlapping practical and legal coverage issues. Here are some of the other topics we covered in Friday’s seminar:
 

• Flood Insurance Claims and Regulations
• Proofs of Loss
• Replacement Cost
• Replacement at Another Location
• Overhead and Profit Calculations
• Increased Cost of Construction Calculations
• Roof Losses
• Getting Coverage for Matching of Damaged Structural Parts
• Depreciation
• Actual Cash Value Determinations
• Sales Tax of Labor
• Building Codes
• The Use of Engineers and Architects in Claim Submittal
• Appraisal
• Selection of the Best Appraiser for a Claim
• Appraisal Process, Procedures and Forms
• Question and Answer on Adjustment

Based on past experience and seeing the misinformation regarding wind speeds from Hurricane Ike, we thought a presentation by a meteorologist would be interesting and relevant. We are finding that some insurance companies are providing engineers with low estimates of wind and gusts in the Houston area. The insurance company engineers seem to rely upon these outcome-biased reports of wind speed to come up with improper findings that damages were not caused by Hurricane Ike . We wanted to show the public adjusters the value of having an experienced meteorologist who can dispel those reports.

Texas has some unique issues regarding construction, building codes, and building regulations. An engineer with experience in certified wind inspections gave a presentation on these issues. Retaining engineers, meteorologists, architects, estimators, and other experts should be common place in claim presentation of serious loss cases. Frankly, the insurance companies should be doing this as well, if they truly want to fulfill their obligation to conduct a full investigation.

Most policyholders hope their company insurance adjusters have the motivation of public adjusters to fully investigate a loss to find every penny that should be paid under the policy. Our seminar was intended to help public adjusters with the tools to use that motivation. While the listed topics may seem strange and boring to most, they must be fully understood if policyholders are to receive full coverage benefits. I believe that most policyholders have no business trying to learn these issues by themselves when so much is at stake.

The next wind insurance event for insurance adjusters and vendors of all types will be hosted on April 2nd in Houston by the Windstorm Network. I strongly urge those in the industry handling Hurricane Ike claims to register for this symposium of experts analyzing many of the day to day issues adjusters face in the field.

One of the leaders, Brenda Cannon Henley, recently spoke with me at length regarding her perceptions and anger over the situation TWIA has caused businesses and residents. She is an investigative journalist by training and has experience with the media. My prediction is that her considerable organizational talents and the determination of those from Bolivar are going to land much of this story in the media. Brenda also has a fabulous Blog, where she shares her perceptions of being a coastal Texan. She recently wrote about her experiences with Hurricane Ike and her community's frustration with TWIA:

"I can also still see great piles of debris, parts of fallen in houses, abandoned vehicles, lawn mowers, boats (did I mention boats?), pieces of trailers to move those boats, blown sand piles, heavy equipment, tools of various degrees and flying American and Texan flags. Bolivar, for all of the hard work by so many, still resembles a war zone where much combat took place. It is discouraging at times and heartening at other times. Clean up is dirty work and our beloved Peninsula will remain in this stage for a long time to come. The cleared areas, for whatever reason that they have been worked, are encouraging and new growth is appearing here and there.

Many of our people cannot come home because many of them have no home left to come to. Most are in a battle for their life against the huge Texas Windstorm Insurance Association and we've found that this sad group is not playing by the rules. More than 100 (at this point) of our friends, neighbors and family members are protesting their action (or lack of) in Austin in front of TWIA's offices on Friday, March 13, the exact anniversary of the day our lives changed so drastically. Many have come home — sort of, anyway — to RVs, fifth wheels, and partially repaired properties. We laughingly call ourselves "slabbers" the name TWIA dubbed us early on after the storm. Many others we know simply cannot face coming here to the Peninsula where they believe their dreams of a lifetime died violently six months ago. One of our neighbors has never been back and her husband says she cannot come back. She has developed a raging fear of the water, a fear of diseases she surmises are here, and a fear of losing her life, as at least four of our immediate neighbors did.

For me, personally, once I see the Gulf, with her lazy waves rolling in, or even on a windy day, when the waves beat their way to the shoreline, hear the cry of the gulls, watch the ships come and go, and see little children playing in the sand, I remember vividly why I nailed my mast to the staff here in this place and why I will fight to the bitter end to have my life continue where I choose to live. Bolivar Peninsula is for me the very closest place I've found to the heart of God and what I most imagine Heaven to be like. Until I change locations, love me, but don't worry about me. I am a survivor. I have good friends and a husband who are also survivors. We will be back strong, vibrant, happy, peaceful and content, and, hey, you can come see us on vacation or any time you get an off day from your work. We'd love to have you — as long as you behave yourselves, don't dirty up our beaches, treat the land and water respectively, and join us in our effort to get fair treatment at the hand of our insurance companies. We need your support and involvement as this battle continues."

As I read this, I felt a sense of déjà vu. It was like the Mississippi Gulf Coast following Hurricane Katrina. SLABBED welcomes Texas Windstorm Association and Ike victims to “the scheme” predicted this last year.

Brenda Cannon Henley reminds me of my former Diamondhead, Mississippi client, Judy Dutruch and her organization, "The Slingshot Gang." Slabbed reported on Judy's case in Insurance News You Can Use.

One of TWIA’s preposterous findings in nearly every case is that "slabbers" have exactly the same amount of damage to the estimated replacement cost of the structure--11.2%. Ms. Henley told me she has seen 53 adjusters’ estimates to total loss structures and each of them show only 11.2% damage. All our clients have only 11.2% estimated damage as well. Last week, I posted a sad joke about this, The Parable of Hurricane Ike Insurance Claims.

An adjuster comment was posted to Views From Hurricane Ike TWIA Insurance Adjusters which helps voices additional causes for the anger and need to protest TWIA’s disgraceful claims handling:

"You cannot imagine the hurdles TWIA put property adjusters through on "Ike" claims. I really felt sorry for the Texans that had to suffer three times for one storm. (the actual hurricane), (the TWIA claims process), (contractors repairs)

I hope that Texas can get its act together when it comes to state windpool. When an adjuster calls the carrier regarding a claim, you would think the carrier would understand that it must be an important call for the adjuster to stop what he is doing and contact them. Phones turned off at 3PM, no return phone calls, no communication on payments to insured, and the best excuse is "We have 50 file reveiwers and it will take some time to get to each file." This is a clear misunderstanding of logistics for a storm that created more than 75,000 claims. They should have tried for 500 file reviewers and provide the service the policy holder paid for."

Honest and fair claims handling requires adjusters to fully and honestly explain how an estimate is calculated. None of these TWIA customers have been given this information. I do not expect the full, honest reason will be revealed until TWIA management is put under oath to explain the adjustments. Until then, maybe the protest will spur some action from the Texas Department of Insurance. Hopefully, those good regulators will start investigating the absurd claims behavior, and encouraging TWIA to follow the rules required of all insurers.

I wrote in response to a comment in The Value of Networking and Sharing Insurance Claim Information:

"The truth is that there are many fine and outstanding adjusters that do a fantastic job getting money to policyholders. The problem in my line of business is that I never hear of those stories because my clients have claim problems."

 

I have watched hundreds of hours of insurance training videos from various major insurance companies such as State Farm, Allstate, Nationwide, and GEICO. Our library is full of insurance claims manuals and training guides. Most of this training is excellent and teach principles of good faith. The public rarely gets to see this. The attorneys in my firm see it because it is our job to question what is taught and learn what is being done in the field.

I often talk with adjusters on cases before litigation--especially when corporations retain us to consult and help prepare their insurance claim with public insurance adjusters. Most of the adjusters are fairly well meaning individuals, but the adjusters in the field always seem to report to managers. Much of an insurance adjuster's claims attitude is determined by the culture and attitude of the claims supervisors. With some notorious exceptions, the attitudes and cultures are usually not in the training videos.

In those commercial losses where we are retained before the need for a lawsuit arises, the dialog becomes somewhat strained as we point out various benefits the insurance product can pay to help reduce the impact of the loss to the corporation. The adjusters seem bewildered because most of the time, they control their conversations with less knowledgeable and experienced policyholders. Even corporate risk managers and loss consultants rarely understand the full benefits available under a policy and leave millions on the table. Usually, after discussion and delay, the field adjuster gets approval for our view of the loss and the adjustment moves on with far greater payment.

The bottom line is that, from the policyholder perspective, there seems to be very little attitude from the insurance claims management to train field adjusters to use the insurance product to soften the financial blow as much as fairly possible. There seems to be little direction from managements to field adjusters to inform policyholders of information which would reduce their loss. If the training and attitude were otherwise, I probably would not have a job in this field of law.

Assuming that insurance claims management really does want its adjusters to help customers as much as the insurance policy allows, training adjusters to understand the product from the customer’s viewpoint is paramount. An example is Factory Mutual, where they specifically train their adjusters in the industry for which the insurance product is written. However, the vast training is not that way. Dimechimes recently explained in its Blog:

"I have been following consumer advocate attorney, Chip Merlin’s blogs since Hurricane Katrina. Rather than present blogs from an “ambulance chaser” perspective, I have watched him try to educate consumers about coverage issues and warn them about looming statute of limitations coming, for instance in MS post Katrina.

While it may be strange to study from free information from an insured plaintiff trial attorney website and standpoint, I have found it quite educational. Just don’t wear your feelings on your sleeve when you view his blogs as there are comments you may not agree with from an adjuster, adjusting firm, or insurance company standpoint.
......
The value I have found in viewing his blogs (there are several on his law firm site at www.merlinlawgroup.com ) is the fact that first he has an insurance defense background prior to becoming a consumer advocate trial lawyer so he knows both sides of the fence. Second, he posts links to active cases involving current claim litigation with links to important court documents we can learn from. I often link to his blog posts on this adjuster information blog when training new adjusters on Bad Faith as he has many great postings and articles there on the subject as well as other issues we need to know about."

So, for all the company and independent adjusters that read this, I understand that it is tough to hear criticism. Many of my clients never read their insurance policies before the loss happens. When they try to read it, they do not fully understand what it says. They certainly do not know how to use it to soften the financial loss they have suffered and how to measure the loss for complete indemnity. You have an important and demanding job to get them paid fully and quickly. They are in your hands.
 

The great teacher John Wooden said, "It's the little details that are vital. Little things make big things happen." So, let's start this discussion of Texas insurance claims practices law at the beginning, with some fundamental insurance concepts.

The special nature of insurance and the role it has played in society has been recognized by courts and legislatures for many years. An insurance policy is not obtained for commercial advantage. It is obtained by people and entities to protect against unknown calamities which may, or may not, ever occur. Often, the policyholder, after paying the premium and expecting protection against calamity, is in an especially vulnerable economic and personal position when a calamity loss occurs. The entire purpose of insurance is defeated if insurance companies and adjusters can refuse or delay the prompt and full payment of monies contractually due.

Hurricane, tornado, and other windstorm losses often involve widespread catastrophic damage. Management of insurance companies anticipate these catastrophes and are often prepared to send armies of adjusters referred to as “CAT” teams to areas devastated by these widespread loss occurrences. Without proper training, incentives, attitude, authority, and support of adjusters in the field, proper adjustments will not occur.

Modern insurance companies are in a much more favorable legal and financial position than the purchasers of their products. An insurance policy contains mutual obligations. Unlike other general commercial contracts, the insurance company promises that it will provide financial security in the event of a catastrophe. It further promises that the policyholder has “peace of mind,” that in the event of a catastrophe, such as a Hurricane Ike, the policyholder will be fully and promptly indemnified. Unlike a typical commercial contract, a non-breaching party (the policyholder) cannot replace the performance of the breaching party (the insurance company) by paying the then prevailing market price for counter-performance. Instead, the policyholder is completely dependent on performance by the insurance company when he or she is most vulnerable. If the insurance company fails to fulfill its obligations completely, the policyholder will likely suffer contractual and extra-contractual damages. Unfortunately, many insurance companies and adjusters delay, refuse, or fail to uphold their part of the bargain.

Newspapers, television and individuals on the internet have picked up this bad faith conduct during the claims handling process following the 2008 Texas hurricanes. These reports indicate that insurance companies are refusing to provide insurance coverage or engaging in sloppy, slow, or deliberate bad claims handling. It does not take a financial genius to figure out than an insurance company can make more money by collecting premiums and not paying claims, than it can make by collecting premiums and paying claims. I recently noted this inherent incentive in Playing the Float and the Wisdom of Warren Buffett. 

“[T]he bargaining power of an insurance carrier vis-à-vis the bargaining power of the policyholder is disparate in the extreme. Unless an insurance company is confronted with the prospect of paying all damages caused by its wrongful conduct, it will have no economic incentive to honor its obligations under its existing insurance policies:

Unlike most other commercial actors fighting for supremacy in a world where possession is nine-tenths of the law, insurers always have the nine-tenths advantage: They hold the money. Consequently, insurers always get to play “play the float” in any dispute. Even where the judicial system acts rapidly and efficiently to provide compensation to wronged policyholders, the carrier may find that it made money by delaying payment of the claim. If its investments have been good, it may even have made money to cover any prejudgment interest, costs, or consequential damages award, or counsel fees collected by the policyholder."

 Jeffrey W. Stempel, Interpretation of Insurance Contracts: Law and Strategy For Insurers and Policyholders § 19.3, at 466-67 (1994).

The insurance industry recognizes its duty of good faith and the scope of the remedies available for breach of that duty. For example, a mandatory text studied by prospective Chartered Property and Casualty Underwriters (CPCUs) discusses the current state of the law of wrongful insurance company conduct: 

1.All insurance contracts contain a covenant of good faith and fair dealing.

 2. If bad faith is a tort in a third-party claim, it should be a tort in a first-party claim as well.

 3. Insurance is a matter of public interest and deserves special consideration by the courts to protect the public.

 4. Insurance contracts are not like other contracts because insurers have an advantage in bargaining power. Insurers should therefore be held to a higher standard of care.

 5. Recovery for breach of an insurance contract should not be limited to payment of the original claim.

 6. The public’s expectations are elevated by the insurer’s advertising, slogans, and promises, which give policyholders the impression that they will be taken care of no matter what happens.

 7. Policyholders buy peace of mind and are not seeking commercial advantage when they buy a policy. In addition, they are vulnerable at the time of the loss.

 8. Policy language is sometimes difficult to understand. The benefit of the interpretation should be given to the policyholder.

 A.E. Anderson, et al., Insurance Coverage Litigation, 11-7 (2nd ed. 1999), citing James J. Markham, et al., The Claims Environment 277-78 (1st ed.1993).

By passing laws which penalize insurers for delay and shoddy claims practices, the Texas Legislature has attempted to level the playing field by making it less profitable and far riskier for insurance companies to breach their insurance policies. These laws make an insurer financially responsible for breach of duty to a customer. Businesses and people that break rules should be held accountable. Accordingly, insurance claims management must emphasize fair, prompt and honest conduct, or pay the price for not doing so.

Policyholders should take action and exercise their valuable legal rights. Insurance companies that act wrongfully should be held accountable for breaking their contractual obligations and the law. Anything else would unfair to insurance customers and the many honest adjusters and insurers that play by the rules.

One legal treatise noted the value of sharing information:

“The value of information sharing among plaintiffs in similar cases has been broadly recognized in a growing body of case law in state and federal courts and in the legal literature. A review of the authorities makes clear that a consensus of legal opinion, from a wide variety of perspectives, strongly advocates the practice. Judges and scholars agree that sharing of discovery among plaintiffs is necessary to promote full, fair, and efficient access to information, to deter and detect stonewalling, and to advance the truth-finding function of the judicial system. A restrictive confidentiality order that precludes information sharing among counsel with similar cases.”

Francis H. Hare, Jr., et al, Full Disclosure: Combating Stonewalling and Other Discovery Abuses, 161-62 (AAJ Press 1994).

One reason I wrote Insurance Settlement Preparation, and very publicly posted the information about our case against Lexington Insurance Company, is because we are trying to find out from others if they are having any better luck at figuring out why Lexington seems to be taking such a hard line on claims in Louisiana. We have already learned of other cases with similar problems which we have encountered. It saves a lot of time and money to not have to make a trail that another has already laid. We try to return the favor.

Even the media has picked up on Lexington's claims litigation. The Times-Picayune published a story in Sunday's paper, Court Issues String of Policyholder-Friendly Rulings in Insurance Cases. The article noted how many cases Lexington is involved and losing:

"Another explanation, of course, is that the trend is simply a consistent set of decisions on one company's behavior, since three of the four cases dealt with Lexington, a unit of AIG. Lexington did not respond to phone and e-mail requests for comment."

Examples of how sharing information helps everybody (except the insurers) are plentiful. Much of the discovery concerning State Farm’s claims practices following Hurricane Katrina came about as a result of information coming to light in other lawsuits. For example, we published as exhibits to a complaint a client’s original engineering report which would have provided coverage and also the altered report with the forged signature. Before that, spokesmen for the insurance industry asked Dickie Scruggs to "back up" his allegations with proof. As a result, everybody knew to ask for an original report and not accept what the insurer was providing as the absolute truth.

Any attorney that represents policyholders and is interested in sharing information regarding claims practices of insurers should contact our law firm. We will provide information for joining the American Association of Justice's Litigation Group dedicated to this. And, for any others that might have information that may provide me a better understanding of Lexington and AIG, I am only an email or call away from you.

We get told similar stories by other adjusters so long as it is "off the record."

A person with significant experience in the insurance industry, Deborah Moroy of Dimechimes,  wrote in response to Playing the Float and the Wisdom of Warren Buffett:

"I am fiercely committed to improve claims handling in the insurance industry while maintaining positive networking environments. I do not allow any negative posts or adjusting firm or carrier specific "blasting" among our members. I promote the discussion of claim handling in general but regularly post links to great blogs and articles found on the Internet. It has been 3 years of extremely hard work since I cannot post carrier information or ask adjusters to upload file samples so they don't violate carrier code of conduct requirements. So, my sole source of info is through training info I find on the web. The info found on the majority is worthless except in generic format........"

It should be against public policy for insurance companies to have any trade secrets regarding claims practices and there should be even a stronger public policy regarding any codes of conduct which prevent any adjuster or employee from disclosing improper methods or activities of claims adjustment. If we allow insurers to hide behind these shields, all we do is silence the otherwise courageous adjusters because the attorneys for the insurers will threaten them with civil action.

The classic example is the civil prosecution of the Rigsby sisters. They told a story of a State Farm adjuster holding numerous reports which were not being sent to policyholders but were "revised." The revised reports were always worse for the policyholders because they allowed for State Farm to deny claims. Had their story stopped there, they would have been terminated. But their actions went further with Dickie Scruggs, and the rest has been fodder for demeaning posts by the insurance industry.

Still, the message is clear from the insurance industry: We have a Code of Silence that you violate at your own risk.

We have initiated discussions with legislators at the state and federal level regarding these concerns. I could probably use the experience of Congressman Gene Taylor as an example. I took one of the Rimkus engineers to Washington to explain and show how his report was changed and signed without his permission. He did this in front of Taylor. In the civil action, the engineer called just before his deposition to tell us that Rimkus was getting him an attorney. At the deposition, he could barely recall the meeting with Taylor.

While there are legitimate reasons for adjusters and insurance company vendors to remain silent regarding the private information of customers and claimants, laws and contracts which further goals or activities of claims misconduct should never be allowed and there should always be exceptions to any arguments of privacy. The insurance industry should never be allowed to take any retribution against those that publicly make others aware of wrongful claims conduct. Otherwise, the insurance industry is acting like another illegal industry with a code of silence. 

If the insurance industry were really trying to stop bad claims practices, they would be up with me in Washington and in Tallahassee trying to help. I will write and call them to let you know where they stand. Stay tuned.

“Further, Jay had no training in meteorology, structural engineering, civil engineering, or other expertise for differentiating between wind and water damage. Audubon also failed to provide Jay with standard meteorological data, a consulting meteorologist, or any other consulting expert in adjusting the Fontes’ claim.

In State Farm Mutual Automobile Insurance Company v. Grimes, 722 So. 2d 637 (Miss. 1998), this Court addressed the issue of punitive damages for denial of an insurance claim, determining that: [t]he issue of punitive damages should not be submitted to the jury unless the trial court determines that there are jury issues with regard to whether:

1. The insurer lacked an arguable or legitimate basis for denying the claim, and
2. The insurer committed a willful or malicious wrong, or acted with gross and reckless disregard for the insured’s rights.

The Fontes’ adjuster, John Jay, made an arbitrary determination that he was “going to adjust this claim based on the top half of the home being damaged by wind,” and he thinks it would be correct to say “that this estimate did not take into account possible damage to the lower portions of the home that would have been caused by the loss of the roof or breaking of the windows on the upper portion of the home from the ingress of rainwater or wind driven water.” Jay’s determination was made with limited expertise, without meteorological data, without a consulting expert, and based on the instruction not to pay one hundred percent of the Fontes’ policy limits. Whether an arguable or legitimate basis for denying the Fontes’ claim existed for Audubon’s decision not to pay the policy limits must be examined by a jury to determine if there existed a gross and reckless disregard for the Fontes’ rights.”

 I was in Judge Senter's Courtroom when he directed a verdict against State Farm regarding its claims handling. He seemed emotionally upset regarding the handling of the claim. State Farm established a Wind Water Protocol for handling cases where the structure was damaged and nothing remained. I wrote about the arbitrary nature of State Farm's decision in a prior post, Broussard Oral Argument: Warming The Bench Is No Easy Task: 

"Judge Senter noted that State Farm admitted that a "windstorm" damaged the property. While the claims management in Bloomington may disagree, the wind/water protocol and the creative, after the fact effort, to prove the amount of "possible" damage by wind through statistical experts is where State Farm damned its customers.

Before Katrina, the issue about paying or not paying for physically damaged homes which were destroyed through a covered cause of loss, wind, or by an excluded flood had not arisen frequently enough for State Farm to make an operational guide. I assume, following the aforementioned principals, that State Farm previously paid those claims. Faced with the dilemma of paying for hundreds, if not thousands, of "slab" homes, upper management of State Farm made a new claims standard known as the "wind/water protocol." In short, it stated that in absence of physical evidence demonstrating wind damage, the claim should be denied. Since slab cases had no physical evidence remaining, the entirety of those claims were denied.

Unfortunately for many along the Mississippi Gulf Coast, other insurers, but not all, followed the example of the industry leader. State Farm and many other carriers started denying claims en masse approximately six weeks after the storm. Many of these denials were based on simple and quick field observations by the claims representatives following "marching orders" from home office executives. Indeed, since many engineering reports undermined the analytical basis for complete denial, many companies ordered engineering investigations stopped.

A former CEO of Allstate, Jerry Choate, once said that Allstate would be judged when it came to "moments of truth." Those are the instances where hard decisions would be made to do the "right" thing regardless of the economic consequences. I have remembered those words every time these issues arise because ethical claims behavior calls for a different standard. It is hard for me to believe that somebody in Bloomington did not have the backbone to raise it. It is why have I have frequently asked claims management to reconsider what they have done and possibly have a change of heart.

Nevertheless, Judge Edith Jones commented that nobody paid much attention to the "wind/water protocol" in the briefs and nobody mentioned it in argument until she raised the topic during Clark Holland's rebuttal on behalf of State Farm. Judge Senter, who appears to be of a similar mind to my firm, found this written standard as evidence of bad faith because it violated long standing good faith requirements requiring full investigation and it wrongly changed the burden of exclusionary proof the insurer had under traditional all risk coverage analysis. Holland claimed that the protocol correctly guessed the proper standard which Judge Edith Jones wrote about in Leonard vs Nationwide. While I have publicly criticized portions of Jones' opinion previously, there is nothing in it which comes close to what State Farm made up as a reason to deny slab claims.

From a practical standpoint, it is a ridiculous standard. The strongest winds with the most damage were within the first several miles of the Coast. Many of these structures also sustained flood and storm damage. However, State Farm was paying tens of thousands and sometimes, hundreds of thousands per claim on losses which occurred twenty, fifty and a hundred miles further inland with far less wind strength. Many of these losses were caused by homes that lost shingles, roofing and windows allowing rainwater to soak the inside of the structures and contents. Thus, State Farm created an arbitrary standard resulting in no payment to those who had the highest amount of wind force and knowing that it was paying millions for structures losses which in all probability had sustained much less wind damage than those along the Coast. At the Broussard trial, this was an apparent reason for the grant of punitive damages. However, it was never discussed at oral argument." (emphasis added)

Fonte's factual case seems very similar to what State Farm did to its customers--assumed the cause of damage with an arbitrary standard. In many cases, Mississippi policyholders had adjusters with a similar background and experience as the adjuster assigned in Fonte. I suggest that the federal judges are going to have to revisit their claims practice cases and not simply rely on Broussard when interpreting Mississippi law. 

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Policyholders should be concerned when experts for the insurance company are getting business by advertising: 

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As I read the advertisement, I remembered my old post, Policyholders File RICO Suit Against State Farm In Handling Of Katrina Claims, where the pressure by State Farm upon engineers was brought to light. I recently posted in Why Causes Of Loss Are Important To You, that:

“Unfortunately, it is sometimes my experience that insurance company adjusters are experts in telling policyholders how little damage occurred following a loss, and they fail to describe how such perils often affect parts of structures which are not readily available for inspection. Indeed, HAAG, an engineering consultant company retained by insurance adjusters, even has courses for adjusters which demonstrate to the adjusters how HAAG can prove that the damage is less than what meets the eye or common sense may expect. The reason other engineering firms generally do not get insurance company business is because they typically lack an orientation to find ways to minimize claims or refuse to accept the low rates insurance engineering firms charge. Guess whether the low rates correspond to low quality work?”

My observations are supported in numerous cases and complaints by policyholders. For example, Slabbed reported in Aiken V USAA Casualty Insurance Company Day 3: The Experts, that Rimkus changed its engineering report with no notice to its policyholder and without even asking permission from the engineer that authored the first report.

The point is that judges and regulators need to understand that the insurance experts hired by insurance companies are often not there to provide truthful opinions but to help underpay claims. Policyholders need to be forewarned about the reality of the experts hired by many insurance claims adjusters.

For an insurance company, ignorance can be bliss. For example, last week our law firm spent two hours in a in-house seminar regarding how winds can damage the glazing, fastening, and frames of glass windows and doors. The gentlemen teaching us spend their entire time inspecting glass windows and doors for all kinds of reasons.

I wonder how many insurance company adjusters have received any training regarding the effects of wind on glass doors and windows? I suspect that many Houston policyholders are going to be left with glass windows and doors that will deteriorate quicker, leak more often, and not work as well as a result of Hurricane Ike. Ignorant claims adjusters can wrongly save an insurer a lot of money at the policyholder's expense.

Most catastrophe adjusters receive little technical training regarding how a hurricane affects a structure. I took a deposition of a State Farm catastrophe adjuster that had no construction or adjustment experience before Hurricane Katrina. He was previously a minor league hockey player. Want to take a bet on how often his estimates for damage were accurate?

I was thinking about the ongoing Hurricane Ike insurance claims during a deposition this week. The insurance company attorney at the deposition didn't appear to get it--but his adjuster client understood exactly what I was asking. Yesterday's post, Rules of Good Faith Claims Handling, listed the rules of claims adjustment. The adjuster agreed that his good faith training recognized every one of those claims rules about which I inquired.

Many catastrophe insurance adjusting firms pay lip service to the rules of good faith claims handling. There is little training and even less emphasis placed on getting the estimate right in the sense that the policyholder is getting the service promised and owed. The emphasis of most catastrophe adjustment services is to simply get the estimate done.

As a result, claims problems are commonplace following a catastrophe.

Hurricane Ike claimants are in the same boat Floridians were in following the 2004 hurricanes and other Gulf Coast residents were in following Katrina. As a result, it should come as no surprise that people hire attorneys like us--the insurance industry has invited Hurricane Ike policyholders to do so by failing to provide the service our clients bought.

Sometimes when I talk at conferences on this topic, an insurance adjuster or insurance attorney will challenge me. He or she will say that I never see the hundreds of examples of satisfied policyholders. In response, I ask if he would be willing to let me re-inspect and reopen ten claims files to see if I can prove that nine out of ten claimants did not receive entitled benefits. They get quiet pretty darn fast.

And the sad part is that insurance companies should have  programs doing exactly what I proposed. After all, shouldn't the insurance company be trying hard to pay every penny it is supposed to pay? That is how Hurricane Ike claims are supposed to be handled.
 

Most of the time, policyholders tell me the field adjuster either apologizes for Home Office decisions or acts as if the policyholder has done something wrong by filing a claim.

Inevitably, they ask the same question:

"Doesn't the insurance company have some type of duty to treat us right?"

The short answer is yes. The insurance company has an obligation of utmost good faith and fair dealing with its policyholders. But, what is good faith? What is good faith in the adjustment of a property damage claim?

Let's start at the top--with claims management. A good faith duty of claims management is:

"To provide a sufficient number of properly trained and motivated claims adjusters with sufficient resources and authority to promptly and fully investigate coverage and evaluate damage so that the policyholder promptly receives all benefits contemplated under the insurance product."

I have never had a claims executive deny that this is a good faith during a deposition. The senior Claims Executive for FM Global agreed, saying that good faith is the "DNA" of the claims organization he oversees. It is a high standard, and it should be.

Claims adjustment is the performance of the insurer's promise made long before any loss occurred. It occurs when policyholders are most vulnerable.

Following catastrophic and widespread disaster, policyholders are numb. Many go about emergency repairs, picking up pieces, consoling one another, and rendering aid to those less financially or emotionally equipped to deal with devastating loss. They generally are thankful for help and even strangely embarrassed to be in a position of vulnerability. Just under the surface, often suppressed, are feelings of sadness and loss. These emotions are often revealed in increased domestic violence, suicide, and drug or alcohol related events.

The insurance industry knows about these human responses. Good companies make certain their adjusters are trained to deal with people under such strain. Several years ago, the Windstorm Conference had a keynote speaker address this very issue.

The insurance industry knows that the last thing a policyholder needs is a hard-line claims attitude and technical claims ineptitude. Yet, in the field, I routinely hear examples of it.

I will have much more on this topic in the future. There seems to be a significant disconnect between the obligations of good faith and the performance of those duties.

Last week, the Citizens Property Insurance Corporation's General and Assistant General Counsel met with me regarding a number of claims topics. At the time, I knew my blog regarding recent complaints about Citizens and TWIA was about to be published. I told them about the complaints. They seemed bewildered. They explained their belief that the recent change in claims management had been very positive and a good move towards improving Citizens. I promised to send them examples of our findings so we could determine if what I was hearing from others is accurate.

The point is that my views are largely shaped by an upset or wronged policyholder's view. My livelihood is made representing them. My most significant daily activities are trying to figure out how to prove that insurance companies act in bad faith and why our firm's clients are entitled to more money.

Comments to this blog, are often "atta boy" cheers from policyholders and colleagues when I write about or expose instances of insurance company misconduct. Sometimes, my colleagues criticize my comments regarding the good business of insurers or when I empathize with an insurer point of view. I am certain that these cheers and jeers have some impact upon my view.

I am writing this at the 2009 Windstorm Insurance Conference. It is the most diverse claims conference in the country because the 1,300 plus attendees represent both sides of the claims process. The debates and viewpoints regarding claims handling and insurance coverage interpretation are fascinating because the panelists and attendees are policyholder representatives and the insurance industry. To the extent possible, the ability to share different views makes the Windstorm Conference a fair and balanced opportunity to learn and share information about windstorm coverage and claims.

My viewpoint is not so balanced. If you make your living from insurance companies, you probably will never admit it is fair--at least not publicly. I receive plenty of private "atta boy" praise from insurance adjusters and attorneys for writing and saying what some are afraid to say. Many insurance company adjusters, attorneys and vendors will not be seen with me or acting friendly towards me because they fear retribution by their insurance company clients. Some insurance executives view the claims world as an "us versus them" scenario; the customer with a claim problem and the customer's attorney is "them."

So, similar to Bill O'Reilly, I am making a fair and balanced report on the world of insurance. If the insurance industry would show more instances of good faith claims conduct for me to write about, I am certain it would seem more balanced. Perhaps the executives running the insurance companies should adopt my view and see things from the view of their customers. What a novel approach to running an insurance enterprise that would be.

The truth is that most insurers at an executive level kept an open mind regarding initial claims decisions following the 2004 and 2005 storms.  Everybody is in a rush following a catastrophe and mistakes happen.  Whether the low-balling of hurricane damage claims since 2004 is truly a mistake or a result of studied or inept claims management is a topic of significant debate. The individuals that run major claims organizations are not stupid.  Depending on their culture of claims honesty and ethical perspective, many get it right with hardly a trace of litigation or emotional bickering over payments. Even dishonest insurance company management learned from the 2004 and 2005 storms. A rapid and overwhelming manpower response can benefit both ethical and unethical adjustment cultures.

If a company is interested in "controlling a claim" (an adjustment term meaning to keep the policyholder from hiring his own expert, public adjuster or attorney) and documenting evidence for lower amounts owed, getting out there fast with such a mindset can save money.  That is how Allstate and others approach their car accident cases. Some property insurance companies do act ethically and most sincerely try.  However, trying is not the same as doing, and just about everybody I know thinks they are "trying," and will not publicly confess when they do not.  It is easy for me to be a critic after problems arise and attribute wrong decisions and actions to unethical conduct. However, handling insurance claims for policyholders is an endeavor with very high ethical standards,  and meeting those standards can be difficult without hard work and zealous dedication to the job. Society should stand for nothing less. So, my hat is off to State Farm. It sounds like they have prepared well. I wish the adjusters God's speed and a fair heart. Hopefully, all Ike adjusters understand ethical standards and the insurance vendors and alleged experts will take them to heart.  Time will tell.