Adjustment of Claims is 100 Percent Policyholder Service--Is The Insurance Industry Providing This Service?

Property claims adjusters are supposed to promptly evaluate damage, investigate coverage, and provide full benefits to policyholders. Adjustment is about giving the customer the service promised and paid for when the policy was purchased. This service is not paid with "indemnity dollars," but with insurance company claims expense dollars, which insurance companies must spend to make certain their policyholders are promptly and fully receiving benefits.

The insurance industry recognizes this obligation of customer service. Here is a recent quote from Carl Van, President and CEO of the International Insurance Institute, Inc.:

Claims is a 100-percent customer service business. We don’t build anything. We don’t make anything. We don’t fix cars; someone else does that. We don’t mend wounds; someone else does that. We don’t rebuild houses. We arrange for those things to happen, and that is the customer service component. Sometimes we pay people, and other times we don’t pay them but at least explain why. Even doing that is part of the customer service we provide.


...I will be speaking on these three areas: Creating a culture of customer service awareness; setting a standard that improvement is part of the job; and providing the training and support for people to reach their potential.

Many claims organizations will say they do all this already, when in truth it is their greatest weakness. (emphasis added)

No joke. Consumer Reports made the following revelation regarding insurance company claims performance in an article, "In Sandy's wake, roll up your sleeves—for possible fight with your home insurer":

As survivors of Superstorm Sandy start cleaning up the estimated $20 billion in destruction, homeowners need to prepare for another possible squall—with their insurance company, according to the latest data from the Consumer Reports National Research Center.

When disaster strikes, your home insurer might not live up to your expectations, especially if you have a large claim, based on the results of our 2011 survey of 11,250 subscribers who filed claims in the past few years. The greater the damages, the greater the likelihood that home insurers paid less than expected, we found...


Overall, almost 10 percent of respondents reported disagreements with their insurer over the amount of a claim payment. But when damage was $25,000 or more, 19 percent disagreed with their insurer's assessment of what was due. That was more than three times the disagreement rate for claims worth less than $2,500.

My experience is about the same. Last week, I again asked for construction estimates and analysis Zurich Insurance Company consultants made last fall regarding a governmental claim. You would think the response would be, "Gee Chip, we thought we gave that to your client months ago and will email them right away." Instead, everybody has to wait for Zurich claims management to give the "okay."

In my speech last week in Manhattan, I referred to many claims organizations as the Three Monkeys (--see no damage, hear nothing from the policyholder explaining damage, and never ever speak about all the benefits available under the policy and how to maximize recovery).

No wonder the public insurance adjuster industry has seen tremendous growth over the last decade. Policyholders need help, and many do not perceive it coming from their insurers. Perhaps the insurance industry should consider the pictorial maxim of the Three Wise Monkeys sometimes has a fourth monkey symbolizing the principle of do no evil.

Policyholders Routinely Burned by Citizens Property Insurance Corporation

It’s no secret that Citizens Property Insurance Corporation routinely treats policyholders like numbers on a page. Despite its title as the state’s largest property insurer, Citizens consistently gets the most complaints from policyholders, earning a reputation as the worst property insurance company in the state -- and in a state like Florida, that’s really saying something.

Early this week I was asked by Fox 13 in Tampa Bay to discuss a situation involving a client represented by my colleague Kelly Kubiak at Merlin Law Group. The case is a sad one -- Karina Wilson, who lives in Plant City, lost her house and everything she owns in an accidental fire. Now, 8 months later, she has yet to see a dime from Citizens -- the insurance company she dutifully paid claims to for years. Sadly, stories like this are not uncommon.

I urge you to keep up the fight on behalf of policyholders like Karina. By faithfully representing clients against insurance companies like Citizens, you’re helping those who need it most. I assure you I’ll be doing the same.

Insurance Company Profits Soar Despite Alleged Insurance Fraud "Epidemic"

Insurance companies and insurance industry advocates consistently point to insurance fraud as a reason for higher insurance premiums. But, if insurance fraud is such a problem, why are property insurers still reaping massive profits? With profits like these, is there really justification for consistently raising premiums?






Fortune 500 rank

$ millions

% change from 2009

$ millions

% change from 2009


State Farm Insurance Cos.








Berkshire Hathaway








American International Group







Liberty Mutual Insurance Group*














Travelers Cos.







Hartford Financial Services














United Services Automobile Assn.*



































American Family Insurance Group*






Are insurers increasing profits by instituting a program of delaying, denying and litigating against legitimate insurance claims?

CNN’s Anderson Cooper provided a report detailing Allstate Insurance Company’s delay, denial and lengthy legal battle against its insureds to avoid paying relatively small insurance claims. Reporter Drew Griffin interviewed insurance insider, Jim Mathis, who stated that during his time in the insurance industry some insurers took a position of delaying, denying, and then forcing legitimate claims into litigation, and reaped billions in profits in doing so.

Often, the insurer’s reason for delaying or denying payment of claims is alleged insurance fraud by the claimant. However, in the Allstate cases discussed in the CNN report, the insurer’s allegation of insurance fraud was pretext for denying payment of small, legitimate claims. Given insurers’ enormous profits and ever increasing premiums, it may be that insurance fraud isn’t actually a problem for insurance companies—rather it is a convenient pretext for delaying, denying and litigating legitimate insurance claims.

Chubb Insurance Company -- Networking Regarding Claims Practice Claims

In Chubb Calls Competitors Cheap And Unfair, I congratulated Chubb for pointing out claims handling problems within the insurance industry. Anybody can advertise in a certain way to make profits. Who knows the truth?

In fairness to other insurance companies, we are making a bibliography of cases, witnesses, and evidence regarding Chubb's claims and litigation pracitces. We are making a survey of all bad faith cases pending against Chubb over the past decade and will only share the information with attorneys representing policyholders in litigation with Chubb.

We are hopeful that Chubb has little litigation or claims practice problems to report. For those with information regarding claims practice problems regarding Chubb, please contact Kelly Kubiak, who is co-chair of the American Association for Justice Bad Faith Litigation Group, or Ruck Deminico at 813-229-1000.

Avoiding Bad Faith Accusations: Practical Suggestions From a Veteran Commentator

Dennis Wall is a veteran commentator on various claims practice issues and on advice to avoid bad faith accusations. In Hurricane Report: Acting in Good Faith,I found his point regarding what every insurance company should do when faced with partial payment situations following catastrophes to be dead-on:

The clear lesson from these recently enacted and revised state laws is this: Good faith claim handling -- particularly of claims for policy benefits and proceeds in the aftermath of a hurricane or another catastrophe -- requires prompt payment for any part of a claim that is reasonably covered.

What constitutes "prompt" payment? It may vary from place to place, depending upon the local law, but the same concept still holds true. A claim should be paid within either a reasonable amount of time or within a specific time period dictated by local laws -- usually 30 days -- of that portion of any claim that is reasonably proven as covered by the proof-of-loss statements. (emphasis added)

In an article published this week, Avoiding Bad Faith When Handling Catastrophe Claims, Wall makes a number of excellent points that are sometimes overlooked in the rush of adjustment that follows widespread disasters. While I suggest reading the entire article, one aspect of his analysis particularly caught my attention; it explains "comparables," which is a line of inquiry I routinely make when helping similarly situated policyholders:

One thing not yet mentioned in the decided case law is the use of “comparables” to determine the cause of loss. It is predictable and, in my opinion, it is likely. “Comparables” is a term used here similarly to how a real estate broker or agent probably used the term when you may have bought a house, if you received a comparison to the value or supposed sales price of other houses in the same neighborhood so that you could make a better informed offer.

In determining the cause of loss in a catastrophe, insurance companies and their claims departments are likely to be asked to go beyond “vertical” comparables, which they already use. “Vertical” comparables refers to the policyholder’s or other insured’s own loss history from a given event. In contrast, “horizontal” comparables describes a comparison to other damaged persons or entities that may or may not also be insureds of your company, but may instead be insureds of other companies.

There is an argument that is perhaps unique to handling catastrophe claims, that failure to consider horizontal comparables, for example, failure to consider similar damages claims of similarly situated claimants, may in itself constitute “bad faith” and unfair dealing. This can potentially include failure to request, investigate or evaluate information obtained and payments made on such other similarly situated claims.

Certainly, residential and commercial neighbors with claims talk about their experiences. I often ask public adjusters what type of treatment or practice a particular insurance company may undertake with policyholders who are similarly situated to my clients. I can often find this information regarding insurance company practices and patterns within our firm. These types of inquiries are not novel, but they are rarely discussed in writing, as Dennis Wall properly observed.

The information these inquiries reveal can be quite helpful. If a policyholder has access to this type of information at the time of the claim, wrong claims decisions can more easily be determined. I know that many good insurance claims managers debrief their field adjusters and have up-to-date roundtables to raise information about claims issues. These informational sessions make the claims group better and more knowledgeable about how to properly handle claims issues. So long as it is used properly, I think this type of claims information-sharing helps prevent less experienced adjusters from making major mistakes and should be a regular part of catastrophic claims management.

Claims Handlers Versus Claims Management

Adjuster Lisa sent me a video from The Incredibles which demonstrates a far too common occurrence at some insurance companies:

Experienced adjusters have explained to me privately how they use similar techniques to help insurance customers get paid, despite company protocol which would mandate otherwise. Unfortunately, as discussed in yesterday’s post, Florida Senate Passes Anti-Consumer Insurance Legislation, many private insurers provide economic incentives that are tied to the amount paid on claims to encourage claims management to underpay or deny claims. The Incredibles also has a scene regarding that ethical dilemma:

How and Why An Insurance Company Might Make Money By Dissuading Policyholders From Hiring an Attorney

In several of my older posts, I wrote about different ways some insurance companies have tried to make a profit by changing the way a claims handling department is operated. The following posts touched upon ways that claims handling employees can be compensated for meeting different types of goals set up by the insurer that, in effect, turn a claims handling department into a profit center: The Big Picture in Discovery of Insurer Claims Practices; Don't Forget to Consider the Severity of Your Claim; Don't Forget to Consider the Severity of Your Claim: Part II; Plaintiffs are Entitled to the Claims File in a Bad Faith Lawsuit. Some insurance companies also determined that they generally pay less on claims when the policyholder or victim is not represented by an attorney. As a result, it has become more appealing to an insurance company to resolve a claim with an unrepresented individual, and some carriers have spent money, time and energy implementing policies or procedures with the goal of dissuading policyholders or victims from hiring an attorney.

The decision to hire an attorney can be a difficult one for policyholders, particularly for those who really have not had much exposure to the legal system and have never been involved in any sort of lawsuit or court proceeding. I can only imagine how daunting it could be to stand in the shoes of a policyholder who has paid hard-earned money for premiums only to find that it is necessary to sue the carrier to recover the benefits rightfully owed. In some instances, homeowners have had policies with the same carrier for years and have never previously filed a claim, but, when they do, their claim is denied or the insurer fails to pay funds sufficient to conduct the necessary and covered repairs. Unfortunately, many homeowners find themselves in a situation where the only options they have left is to let the claim go or file a lawsuit and pursue payment.

A policyholder’s or victim’s decision to retain an attorney, however, does not seem to be in accordance with how many insurance companies would like for a claim to proceed.

In his book Delay Deny Defend, author Jay M. Feinman addresses the goal behind various cost saving methods implemented by carriers, and he writes about yet another way that carriers can cut costs and keep more of the premiums paid by homeowners.

He explains that McKinsey & Company was a “megaconsulting firm” who redesigned claims handling.

The focus of the claims process was no longer on paying a fair amount promptly but on paying – or not paying – in amounts, at times, and under conditions that increase the company’s profits. “Our [McKinsey’s] change goal is to redefine the game…to …question, improve and radically alter our whole approach to the business of claims.” The game would be radically altered by making the claim process a key to increasing Allstate’s profits and at every step the focus would be on reducing the amounts paid to policyholders and accident victims. Every element of the claims process would be transformed.

And, it seems that in the claims department of many insurance companies, every element of the claims process was, in fact, transformed. Today’s post addresses one of McKinsey’s ideas for saving the carrier money. The various evaluations conducted by McKinsey of the different aspects of claims handling at Allstate revealed an important factor: whether the claimant was represented by a lawyer. McKinsey’s studies showed that attorneys help injury victims recover higher amounts. One of the examples in Mr. Feinman’s book is that for some uninsured motorist claims, policyholders who were represented by a lawyer recovered ninety percent (90%) more than those without lawyers. For cases involving minor impact, soft tissue type injuries, unrepresented claimants recovered an average of $3,464, as compared to claimants who retained an attorney and recovered $7,450. The insurance company’s objective then became “keep attorney out” for those claims where the policyholder or victim did not initially have an attorney. Another related objective was to “focus on reducing the need for attorney representation.”

As an example the approach taken by at least one carrier, Allstate included in its Claims Manual a “Recommended Attorney Economics Script.” This was a script for claims representatives to follow when speaking with a policyholder or victim.

Quite often our customers ask if an attorney is necessary to settle a claim. Some people choose to hire an attorney, but we would really like the opportunity to work directly with you to settle the claim. Attorneys commonly take between 25-40% of the total settlement you receive from an insurance company plus the expenses incurred. If you settle directly with Allstate, however, the total amount of the settlement is yours. At any time in the process you may choose to hire an attorney. I would, however, like to make an offer to you first. This way, should you go to an attorney, you would be able to negotiate with the attorney so his/her fees would only apply to amounts over my offer to you.

Although the foregoing might sound like Allstate is willing and open to discussing with a policyholder or victim his/her option of hiring an attorney, it is important to consider this, as pointed out by Mr. Feinman:

The adjuster is not advised to tell the claimant that the attorney will not just take part of the recovery but will earn it, because claimants who are represented by an attorney receive two to five times more money from the company. The advantage of having Allstate make an offer with the suggestion that the claimant negotiate for an attorney fee only above that offer is that it makes it practically impossible for the claimant to get a lawyer, an example of McKinsey’s suggestion that Allstate “exploit the economics of the practice of law.”

These are very compelling issues that policyholders and victims should be aware of and strongly consider when pursuing a claim against an insurance company.

I like this topic and plan to write some more about it next week, so please tune in.

Insurers Track Overpayments

A very fine insurance defense attorney, Brian Hunter, made a comment to yesterday’s post, Do Insurance Companies Overpay Claims? with the following observation:

"Second, not only can claims be overpaid, they can be underpaid...."

Assuming this is true, and it probably is based on the law of averages, how can we have any meaningful data? What is the standard against which a claim is judged over- or underpaid? Is it the proof of loss, or the public adjuster's estimate, or the appraisal award, or something else? Even if we use the most presumably objective of these, i.e., an appraisal umpire's award, as a standard, then a good many claims I have seen resolved in that manner have been simultaneously underpaid by insurers and grossly inflated by the insured and/or public adjuster.

Of course, in most cases, an appraisal award is a legal fiction that may or may not bear a rational relationship to the amount necessary to repair the property; but it is certainly and merely an estimate. Frequently, the umpire's award is an average of two competing estimates. Regrettably, few court-appointed umpires have any specialized training in the construction fields, and many have never written an estimate of their own nor done any kind of construction work. Maybe a better standard is needed.

What we do not have is reliable data in Florida during the past several years comparing claim payments with amounts spent by policyholders to actually accomplish like kind and quality repairs. (If I am wrong, I would love to see a source.) Changing the law to require insurers to pay actual expenditures, and not mere estimates of replacement cost (some honest, some not, all estimates nevertheless), would bring greater certainty to all the parties, I think. Yet this is opposed by the same folks, i.e. public adjusters, bemoaning the lack of accuracy in claim adjustment.

In my reply, I noted the following:

However, many insurance companies have adopted a claims management practice which rates and audits claims handlers for overpayment of claims---these are often called "leakage" reports, analysis, etc. So, the major insurers do try to prevent overpayment of claims through various processes. These claims management techniques are not often reported in the press.

It is foolish to think that insurance companies do not track and audit closed claims files. They do so, in part, so they can minimize overpayments.

In Is Claims Management Only Concerned About Overpaying Claims?, I made a very important point regarding the purpose of “leakage” reports that track these overpayment statistics:

Nowhere in the article is there any mention of a problem caused by adjusters underpaying their customers' claims. I first came across the term "leakage" in a McKinsey and Company analysis of the USAA claims organization done in the late 1980's. The analysis focused on various changes which needed to be made so that USAA could recover "opportunities" caused by "leakage" in the claims handling process. Again, the study never discussed any problem with adjusters cheating customers by underpaying claims. In all the management metrics that I have ever read, I have never seen one where a claims manager received a bonus because the unit or group he supervised had the lower "underpayments" to customers.

Instead, claims management is for reducing claims severity or lowering the loss ratio to premiums. Indeed, has anybody seen an industry article questioning that the claims industry should be concerned about underpaying claims? The entire culture seems to be about driving down claims payments rather than getting the payment right. I am not picking only on State Farm. Most major insurance carriers have some form of re-inspection. The former re-inspector explained it to me in his videotape.

Typically, he would go out with less experienced adjusters or adjusters whose "severity payments" (the average amount paid on claims) was above levels acceptable to management. He would critique the claims handler's activities to show where claims payments could have been reduced so that new adjusters would learn and the higher paying adjusters would be brought back in line with the group. I asked him if State Farm ever returned money to a policyholder where he found a mistake that resulted in an underpayment. He responded:

“Chip, you don't get it. My job was not to make certain that the payments were right. My job was to make certain that the problem of overpayments was stopped.”

People often ask me how our law practice stays so busy. With a claims management overly concerned about one side of claims inaccuracy, the answer is pretty obvious.

Do Insurance Companies Overpay Claims?

A blog, Overpaying Insurance Claims, caught my attention. The premise was described as follows:

I recently began questioning how much money insurers hand out needlessly because their adjusters don't have enough training or are so overloaded with work that they can't possibly handle all of the files they are assigned due in part to a claim a family member recently made.

A few months back, my sister's dishwasher piping burst, which flooded her finished basement and the kitchen sub floor. She filed a claim and received immediate action because the loss was deemed an "emergency" by her insurance company's claims triage unit. The field adjuster came out, estimated the damage, and made arrangement for repairs under the company's preferred contractor program.

The glitch arose when she decided to replace the floor in the basement bath/laundry room with ceramic tile instead of the linoleum that existed before. Being the most honest person on the face of the earth, she was willing to pay the difference on the upgrade.

That's where the insurance company lost out.

The repairs were made to everyone's satisfaction and the contractor was paid. My sister called the adjuster and the claims office a number of times to ask how much she had to repay. After a number of excuses — waiting for paper work, too many other emergencies, “we'll get back to you,” the adjuster is over booked — she resigned herself to accepting more than she felt entitled to.

A comment to that post was interesting as well:

This is not an uncommon situation. You are correct when you say "under trained and over worked".

The upper management of the carriers do not care about the overpayments occurring. They are indemnity payments and can be used as evidence for a rate increase. Besides, people are a cost against the bottom line and the ivory tower wants as low a cost as possible. The line folks have always said bottom line is more important than doing the job right.

Only when the state department of insurance can staff up to verify if a payment is proper and begin to allow the actual costs involved to be included in the rate proposal will carriers maybe start increasing staff to make sure. payments are proper. Still not sure if even then would the carriers upper management staff up properly the needed underwriters and claims staff.

Insurance companies have an obligation to provide a sufficient number of competent and motivated adjusters to promptly and thoroughly investigate coverage, evaluate damages and pay the full benefits available for losses. The example and the comment point to a recurrent claims practice which is not often discussed--many insurance companies do not have a sufficient number of adjusters. This situation creates a number of problems if not corrected.

First, claims payments will be delayed. Without a sufficient number of adjusters, proper adjusting cannot be accomplished. The steps leading to payment--investigation and evaluation-- are protracted. Money is usually not provided to the policyholder promptly.

Second, not only can claims be overpaid, they can be underpaid. Adjusters are supposed to explain all benefits available to the policyholder. Policyholders may make decisions to their detriment if they do not understand all their options and all of the benefits the product was designed to provide.

Third, oversight by an adjuster actively working on a claim makes it more likely that that fraud will be caught. Good adjusters usually have good communications with customers, so that customers do not feel they need to pad their claims to get the full amount of benefits they purchased. Without good communication between the adjuster and policyholder, many policyholders believe that an adjustment is a bargaining process and that that they have to make a claim higher than what is fairly owed because an adjuster will simply bargain the amount down.

Fourth, factors affecting the coverage and amount of loss are likely to be overlooked. Without a sufficient amount of time to properly investigate the damage and review the policy, adjusters will not be able to get the job done correctly. Determinations of coverage and damages may be inaccurate. As a result, claims are over-paid or under-paid. Both results are bad for the business and its customers.

My impression is those in the insurance industry acknowledge this is a recurrent problem. The question is what the industry is doing to correct it.

Flood Adjustment Methods Discovered in Qui Tam Case

Slabbed has been dogged regarding its reporting on the Mississippi qui tam litigation involving State Farm. A recent post, Rigsbys file “Motion to Reconsider Scope of Proceedings in Light of Evidence Adduced in Discovery” – ask Court for additional time to conduct Discovery into “the Scheme,” provides some insight regarding the flood adjustment techniques required by National Flood versus how flood adjusters in the field actually do their job.

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. 

The Big Picture in Discovery of Insurer Claims Practices

In recent conversations with attorneys representing homeowners against insurance companies in claims practice disputes, a number of recurrent themes in discovery arise. Insurers typically raise relevancy, privacy, trade secret and burden objections when policyholders attempt to find internal documents explaining the how, what, and why of an insurer's claims procedures. Policyholder counsel must make motions to compel in spite of these common objections or those claims procedures and the motives behind them will never see the light of day.

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!

Don't Forget to Consider the Severity of Your Claim: Part II

Last week in Don't Forget to Consider the Severity of Your Claim, I wrote about what severity means in the insurance context. We also started to talk about how severity can affect whether the insured’s claim was handled fairly by the insurer. Let’s hear a little more about what some of these carriers have to say about it and whether it makes sense to you.

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.

Don't Forget to Consider the Severity of Your Claim

Many of you probably think that I am referring to the extent of damage of a claim or a claim involving a total loss. The word “severity” naturally conjures up the thought of something that is serious or grievous. But I’m actually writing about something many of you probably don’t know all that much about. In the arena of bad faith litigation, severity is a way that insurers measure claims employees’ performance. And, of course, it doesn’t stop there - you knew there was an angle, right? Yes, severity can affect whether your insured’s claim was properly handled by the insurance company. Severity is one of the many, important factors that you should consider in your bad faith case against a carrier. Let me tell you more…

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!

The Fantasy of "the Good Ole Days" When Insurance Companies Adjusted Claims Fairly and Paid on Time

Remember back in the day when an insurance adjuster arrived at your house to inspect the damage and the adjuster wrote you a check on the spot? Some of you may, but most do not because it probably rarely happened. There may have been a day when most insurance companies paid claims immediately and in a manner respectful of the policyholder. Many claims departments required adjusters to help the insured find coverage. But, this is rarely the case today. Chip Merlin has even written about one insurance company currently calling out its competitors for not properly servicing policies in Chubb Calls Competitors Cheap And Unfair.

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!

Getting the Inside Scoop on Insurance Company Claims Practices

(Note: This guest blog is by Vivian Persand, an attorney with Merlin Law Group in the Coral Gables office).

Last week, I wrote about some of the things you can expect to see, and not see, when Insurers like Safeco and Liberty Mutual respond to discovery requests. This week, I want to explain one of the steps you can take to combat these evasive discovery tactics. Some of the most effective and successful methods have been used across the country by large and small firms alike. What makes these plaintiffs’ law firms stand out is not the type of claim they pursue, the amount of the claim or the kind of insured they represent, but their commitment to not letting insurers get away with stonewalling discovery tactics. These attorneys go the extra mile, invest wisely, and do their homework. Sure, it might take some time; it’s going to take extra effort, and, naturally, nothing is free. But in the end, plaintiffs’ attorneys who obtain adjuster’s diaries, employee training manuals, and documents showing incentives for employees to put money into their own pockets instead of the insureds’ pockets, are going to go a long way in proving how their insured’s claim was improperly handled by the insurer from day one. This type of evidence can show your judge how the insurer never really intended to pay anything near a fair amount on your insured’s perfectly legitimate claim, if anything at all.

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!

Is BP Hiring Ignorant Claims Handlers with Little Dollar Authority to Pay Claims?

Dimechimes ClaimSmentor had an interesting post on its blog which partially supports my opinion that the BP claims process has an insufficient number of qualified people attempting to figure out and pay the full amount owed to those damaged by BP. An Open Letter to Admiral Thad Allen, President Obama, White House News Correspondents, ESIS Insurance, and All involved in the BP Oil Response- We Can Help Address Your Claims Concerns- Lead, Follow, or Get the Heck out of our Way!!!! stated this:

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 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.

State Farm Recognizes that Good Faith Requires It to Inform and Assist the Policyholder to Fully Obtain All Benefits

This is a continuation of State Farm Agrees With Chip Merlin Regarding Claims Handling Obligations and State Farm Claims Handling Standards. These are some of the standards, which are the recognized insurance industry obligations of good faith claims handling, that State Farm teachs to its claims adjusters.

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 assist the insurer in making claim decisions.

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

State Farm Claims Handling Standards

State Farm has a First Party Coverage Seminar which sets forth the claims handling standards that are fairly standard throughout the insurance industry. The instructor's manual to this seminar should be studied by insurance coverage counsel. It sets forth very explicit claims adjustment standards and even explains the purpose for many of them. I will be going over these claims standards because they are extremely important in understanding how an adjuster is supposed to go about handling a first party insurance claim.

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.

Failure to Have Specific Written Claims Standards is Bad Faith

An insurance claims blog, The Claims Spot, sponsored by an insurer claims consulting firm, Lanzko Consulting, made a point that the failure to have specific written claims standards could lead to a claim of bad faith. This is the same finding I suggested in Should Insurance Companies Have Claims Manuals Explaining Procedures and Standards for Adjustment?:

From a policyholder's advocate viewpoint, I think an insurer would be crazy not to have a claims manual or claims procedure guidelines. Most state unfair claims trade practice laws generally require insurers to adopt and implement those standards and procedures.

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.

Should Insurance Companies Have Claims Manuals Explaining Procedures and Standards for Adjustment?

This question was the topic of an article in Claims Magazine, Putting Procedures in Writing: Is a Claim Manual an Asset or a Liability?  From a policyholder's advocate viewpoint, I think an insurer would be crazy not to have a claims manual or claims procedure guidelines. Most state unfair claims trade practice laws generally require insurers to adopt and implement those standards and procedures. Still, I can appreciate an insurer's claims management wondering whether such procedures, if violated or followed, could give rise to liability. I found the article to be thought provoking and worth consideration by many of the readers of this blog who represent insurer interests.

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.

Should Liberty Mutual and Safeco Insurance Company Customers Expect Great Rates for Poor and Wrongful Claims Performance?

Imagine if you were a corporate Risk Manager that selected Liberty Mutual or Safeco and the insurer did not pay fully or promptly on a claim. What would you say to your CEO after that happened? Your job should be at risk if you could not answer that question.

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?

Allstate Loses Claims Core Process Redesign Trial

Allstate Insurance Company lost a bench trial involving the claims practices employed in its Claims Core Process Redesign program first implemented in the 1990’s. The findings by the trial court are significant because the Court indicated that those claims practices violate standards which are routinely violative of unfair trade and claims practices in most of the states. The findings indicate these were done as a general business practice.

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.

TWIA Receives Litigation, Media and Regulatory Critical Analysis for the Manner it Treats Customers During Adjustment

Does anybody think that TWIA is doing a "good job" of adjusting hurricane claims other than the private member insurance companies on TWIA's Board of Directors? In a prior post, TWIA Insurance Claims Under Investigation by Regulators and Media, I noted that the Texas Department of Insurance attorneys are conducting an investigation into activities of TWIA's claims conduct. The Houston Chronicle’s Purva Patel has been doing her own outstanding investigative reporting which is providing shocking and needed transparency into the real world activities that have gone on in the field concerning TWIA's claims conduct and the motives behind it.

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.

Claims Management by Computer: Analytical Data Mining and Claim Oversight is a Trend

Claims management and operational review for claims efficiency are truly sciences. The study and management of these are becoming increasingly computerized and intertwined with analytical data mining. I had dinner with a public and independent adjuster this week, where we discussed the process of litigation case handling and standards within my own law firm. As we were analyzing my operation, I kept imagining how much more difficult and complicated it would be to manage an insurance claims organization, and how computers were changing the claims organization.

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. 

Cooperation Clause Does Not Require the Policyholder's Slavish Obedience

It is curious how some insurance company claims managers allow their insurance defense counsel to treat their customers with an arrogant, demeaning tone, along with long requests for largely irrelevant lists of information following a loss. Any objection to the treatment is usually met with a threat the claim will be turned down for a failure to cooperate. The “threat” letter is usually in a similar tone requiring the policyholder to obey…or else. For insurance adjusters that do not act this way or allow their insurance defense counsel to do so, this treatment may shock you. Yet, many policyholder representatives see this as a growing trend in claims treatment following a loss.

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.

An Invitation To Jim Oliver and TWIA To Attend Our Hurricane Ike Seminar This Friday In Houston

As a follow-up to my post on Saturday, TWIA Insurance Claims Under Investigation by Regulators and Media--An Invite to TWIA Claims Executives to a Public Meeting in Houston Next Friday Regarding Those Accusations, where I extended an open invitation to Texas Windstorm Insurance Association (TWIA) executives and claims managers to attend the seminar my firm is presenting this Friday in Houston, I sent a letter to Jim Oliver, General Manager at TWIA.

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:

Click on image to read the entire letter

TWIA Insurance Claims Under Investigation by Regulators and Media--An Invite to TWIA Claims Executives to a Public Meeting in Houston Next Friday Regarding Those Accusations!

I have been involved in a lot of disputed property insurance claims in many venues over the past twenty-five years where emotions run high, but the Texas Windstorm Insurance Association (TWIA) is the blue ribbon winner in Texas for policyholders that hate how they have been treated. And, it is not just limited to the customers of TWIA. A number of independent adjusters representing TWIA are ready and willing whistleblowers in lawsuits against TWIA regarding these practices. They are upset as well.

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.

Should the Rust Family Stay in State Farm's Power and Ownership Given the Recent Record of Policyholder and Corporate Citizen Ethics

State Farm lost its most significant claims case while Ed Rust Jr. was the "owner/manager" of State Farm. Ed Rust Jr. was the person who ultimately decided that thousands of State Farm policyholders would be underpaid or denied benefits in Mississippi. He is the chief corporate leader of State Farm Mutual, the corporation that allows its wholly owned subsidiary, State Farm Florida, to essentially lie about its financial situation. Everybody—especially Rust--knows that State Farm Florida is paying millions that would otherwise be profits to State Farm Mutual. I suspect a number of highly qualified agents and claims adjusters wonder why there has been no change in the top management for two generations. After all, in the United States, we believe in earning leadership rather than being born into it.

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?

The Obligation of Good Faith Claims Handling and Policyholders' Perceptions of Why it Does Not Happen

"How did you come up with that amount for my (or my client's) claim?" I was thinking of that question while taking the deposition of an Allstate corporate representative in an Indiana claims practice case, and how an insurance adjuster should honestly answer it. It is the same question millions of other policyholders, public adjusters, and attorneys ask insurance company representatives every day.

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.

Citizens May Eliminate Appraisal

Suppose you were not such a good person and tried to pay less than you owed on several debts. There was a process to resolve those debts, and you repeatedly lost and eventually had to pay the debts. What would you do? Well, if you are Citizens Property Insurance Corporation and its Board of Governors, you change the rules, looking for a different resolution process to avoid paying the debt and the publicity of underpaying claims.

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:



MAY 11, 2009


 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.


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.”


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.


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.

David Berardinelli's Fight Against Allstate's Claims Culture

David Berardinelli made a presentation at NAPIA's Convention on Friday. His topic, "From 'Good Hands' to Boxing Gloves: How Allstate Changed Casualty Insurance in America," was an excellent and updated version of a speech I have seen before. Many of his points are important to understanding why the claims culture has changed so much over the past twenty years. Sadly, part of the story he tells reflects the greed of some executives in the financial industry.

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."


QBE Insurance Company Bad Faith Case Moves Forward

Amy Boggs has an interesting case against QBE Insurance Company which has recently moved from the contract portion of the case to the claims practice a/k/a Bad Faith case. The condominium client we represent is The Dorsett House Condominium Association which was damaged from Hurricane Wilma. QBE Insurance Company insured many condominiums in Florida and has been the subject of much criticism. It recently lost a trial where the verdict on the contract damages was over $20 million.

The Order allowing the Dorsett House case to move forward was filed after our client successfully won additional amounts QBE failed to pay following Hurricane Wilma. The Court noted that despite the matter moving through appraisal, the Statutory Bad Faith claim could move forward:

“QBE argues that the proposed amendment is futile because it is entitled to judgment as a matter of law based on the fact that it issued payment in the amount of the appraisal. For this proposition, QBE relies on 316, Inc. v. Maryland Casualty Company, 2008 WL 3926863 (N.D. Fla. 2008), in which the district court granted summary judgment to an insurer as to a § 624.155 bad-faith claim where the insurer timely paid the amount of the appraisal to its insured.

Although QBE’s payment of the appraisal certainly hinders its insured's bad-faith claim, I agree with Dorset House that denying the proposed amendment as futile would be inappropriate at this juncture, given the scant record. Indeed, there are a wide range of settlement practices which would subject QBE to liability for bad faith under Florida law notwithstanding the eventual payment. See Fla. Stat. § 626.9541(l)(i)(3). I therefore find that the proposed bad-faith claim does not fail as a matter of law based on the record as presently constituted. QBE is free to raise this argument again after Dorset House has had the benefit of discovery.”

The case is currently in discovery with a relatively quick mediation scheduled in late June. In Florida, proving that an insurer engages in a general business practice of improper claims conduct is important. We are actively engaged in this fact-finding process. Accordingly, if there is anyone who has information or knows where there may be information regarding QBE claims conduct, please call our office or Amy Boggs at 813-229-1000.

Claims Magazine and the CPCU Designation are Worthy Educational Investments for Claims Professionals

Motivated claims adjusters need to study, improve, and be noticed for their skills and dedication. The May edition of Claims Magazine featured two stories I found interesting for different reasons. One article every adjuster should read is "Designation Envy-Why CPCU Should Matter to You." The other article, "Emerging Transformed-New Challenges Create Opportunities for Independents," should be read by claims practice attorneys and experts because it provides a glimpse into claims cultures designed to reduce amounts paid to policyholders.

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.

State Farm Whistle-Blower Suit Regarding Altered Expert Reports Continues

There are still a number of Hurricane Katrina cases we are actively litigating in Mississippi. One of the cases being followed closely by Slabbed is the Qui Tam litigation, brought by the two Rigsby sisters that worked for State Farm following catastrophes. The Rigsbys claim that the federal government paid more in National Flood payments than what was owed because State Farm altered engineering reports and made outcome oriented adjustments, which maximized flood related damaged so that the amounts paid under State Farm's policies would be minimized.

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.

Former Claims Supervisor Confirms Insurance Companies Wrongfully Delay and Deny Legitimate Claims

Richard Dietz, a former claims supervisor with Farmer's Insurance Group, has taken to the airwaves to confess the sins of his former employer, co-workers and himself. His video is being broadcast in the state of Washington in support of a consumer protection referendum which would provide financial penalties for insurers that wrongly delay or deny claims.

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.

Slabbed Reports on a Blockbuster State Farm Bad Faith Case

This week I noted the recurrent problem of outcome oriented insurance company claims conduct in Adjusters Cannot in Good Faith Rely Upon Biased or Outcome Oriented Opinions. In Does It Stay or Does It Go? State Farm's Assault on Florida, I then noted a finding regarding State Farm's fitness to conduct insurance which stated:

"State Farm’s actions raise serious questions regarding the fitness and trustworthiness of its officers and directors to engage in the business of insurance."

State Farm is challenging that finding by asking for an administrative review.

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.

Adjusters Cannot in Good Faith Rely Upon Biased or Outcome Oriented Opinions

Would you expect Americans to get a fair trial in Iran? Probably not, because most would believe that the judge and jury would rule against Americans no matter what the evidence showed. Many policyholders first call our office while waiting for a conclusion from the insurance company's expert. Usually, the expert becomes involved after the policyholder complains about the insurance adjuster’s first conclusion. The policyholder, now worried about cementing an already bad situation with a bad finding from an alleged expert, calls to see how we can help.

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.

Structural Damage Claims Caused by Wind Apparently Mean a Fight with TWIA and other Texas Insurers

My posts which discussed the roof damage claims denied by TWIA (See Internal Texas Windstorm Roofing Claims Memo Explains Damage is Not Covered, The TWIA Roof Damage Memo: Checking Basic References to Resolve Adjustment Questions, Roof Repair Methods Prove TWIA is Wrongly Denying Roof Claims, and "Physical Direct Loss" Caselaw and TWIA's Roofing Memo) resulted in a number of comments. The author of the internal TWIA memo is Reggie Warren. He is in TWIA’s claims management of TWIA and gave powerpoint presentations to Hurricane Ike catastrophe adjusters. We are in the process of collecting as much information as possible about Mr. Warren, since he appears to set TWIA’s claims policy.

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.

Katrina Policyholders that Hired Attorneys Came Out Far Ahead

I was honored to be given the Policyholder Attorney Honorable Mention Award from the Insurance Law Center. It was meaningful because I am a policyholder attorney in every case. However, some who read the comment posted by the Insurance Law Center with the award might have the wrong impression about the success that our firm, not just me, had in the Katrina Cases we litigated. This is what was said:

"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.

State Legislators React to Bad Faith Claims Practices

We all know that the insurance industry is one of the biggest lobbyists around. However, as Brian Albright’s recent article, New legislation challenges ‘bad faith’ claims practices, notes, New Jersey, Connecticut and Montana are considering legislation that significantly improves consumers’ legal rights against insurers who act in bad faith. Colorado is considering legislation that could prohibit insurance companies from rewarding employees for making claims determinations against their customers. Let’s hope this is a trend, and that legislators throughout the country find the integrity to enact similar legislation.

"Physical Direct Loss" Caselaw and TWIA's Roofing Memo

For those of you that read something and you think it is dead wrong, do your eyes squint and head start shaking? Mine did when I first read the internal TWIA roofing memo. As I read it, I was thinking:

"Does the TWIA claims executive who wrote this not understand the basic insurance principle of what constitutes a direct physical loss?"

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:

" 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. 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. 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.... 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


Roof Repair Methods Prove TWIA is Wrongly Denying Roof Claims

Previous posts highlighted TWIA's secret internal memo (Internal Texas Windstorm Roofing Claims Memo Explains Damage is Not Covered and The TWIA Roof Damage Memo: Checking Basic References to Resolve Adjustment Questions) which wrongly orders denial of coverage for roofing damage. In response, we received a technical manufactuer's bulletin from a certified roofing contractor which helps explain why this is factually a covered loss.

Here is the two page technical memo regarding Re-Sealing Shingles:
Click to open technical memo in PDF format
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.

How Adjuster Reference Materials Can Help Change the Law

After finishing yesterday afternoon's post, The TWIA Roof Damage Memo: Checking Basic References to Resolve Adjustment Questions, I recalled an Amicus Brief we filed in the Florida Supreme Court in the case of Fayad v. Clarendon Nat'l Ins. Co., 899 So. 2d 1082 (Fla. 2005). An Amicus Brief is a brief filed by a someone who is not a party to the court action to help the Appellate Court make the right decision. It is supposed to address factors which may not be fully addressed by the parties to the dispute.

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.

The TWIA Roof Damage Memo: Checking Basic References to Resolve Adjustment Questions

The post from this morning, Internal Texas Windstorm Roofing Claims Memo Explains Damage is Not Covered, raised a number of interesting methods to research this coverage issue. Many risk managers and public adjusters will simply call me to get a quick opinion regarding many day to day coverage issues. I thought it might be interesting to see what adjusters may have in their basic training materials to answer the questions raised in the memo. I have no idea if the TWIA claims executives looked at any reference materials. I hope they authored the claims memo in ignorance, because the opposite poses a different set of problems.

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.

Internal Texas Windstorm Roofing Claims Memo Explains Damage is Not Covered

The independent adjusters for Texas Windstorm Insurance Association may end up being some of the best witnesses for policyholders in the litigation that is starting. The desk TWIA adjusters in Austin are not listening to them and do not trust them to determine what is damage and what is not.

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.

Can Insurance Adjusters Appreciate and Learn From The Policyholder's Perspective?

Some in the insurance industry may read my blog and believe that I am on a crusade against the insurance industry. That is absolutely false. I love insurance. I get upset when insurers violate their good faith duties to customers--probably the vast majority from any perspective do too.

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 ) 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.

Protecting the Blown-Away Hurricane Dolly and Ike Policyholders: Discussions of Texas Hurricane Insurance Claims Practices

If you want to find a bunch of irate policyholders with plenty of stories to tell, hang out with Tina Nicholson and Javier Delgado in our Houston office. Commercial and residential policyholders have had enough frustration trying to do it themselves and are seeking legal counsel to fight the delays and denials from their insurance carriers. Anger at the insurance company and the adjusters working their claim is the prevalent emotion. Over the next several weeks, I plan to write much more on Texas property insurance law and protection it provides because Texas is the hottest new venue in the insurance litigation war. We are in the middle of it.

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.

The Insurance Adjuster's Dilemma: Tell the Truth and Face the Consequences By Raising Claim Practice Misconduct

Mark Phillips recently posted a comment in Surplus Lines Insurers, Sinkholes, and the Law of Mars, which would probably terminate his employment as an adjuster for telling the truth if he were still an Independent Adjuster:

"I handled numerous loss adjustments for a South Florida MGA broker who had arranged his own "excess surplus lines" authority overseas. Due to this flexible "hand-shake" authority and with his own customized and approved manuscripted policy designs, he was actually controlling the underwriting data and policy issuance. He was bold and daring enough to "check off" certain boxes misrepresenting building characteristics and histories inaccurately on applications, so that, at time of loss investigation he could promptly deny coverage when it was noted in the adjusting routine that certain building events and maintenances had not occurred as were required to be validated in order to acquire the policy coverage and issuance. He could thus accurately void the contract on grounds of misrepresentation, and have the underwriting questionnaire in the file to back up the denial. His incentive was of course to sustain his flexible contract arrangement and limit his loss ratios, thus enriching his commission contingencies. Worth noting is that many of the insureds represented a class of Hispanic consumers who had no ability to know what was authentically being stated on their final application and were thus caught by surprise when struggling to communicate in English, back to me the adjuster, that they had not confirmed certain property realities that had been "checked off" on their application.

Another compromised policyholder left at the curb." 

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.

Claim Delay, Claim DeniaI, and Underpayment Issues Dominate Consumer Complaints About Insurers

The National Association of Insurance Commissioners released its Top Insurance Complaints for 2008. Poor claims service is the primary reason customers complain about their insurance companies. More than half of all complaints about the service or actions of an insurance company concern claims issues.

Here are the top five reasons with percentage to total complaints:

Claim Handling Delay 19.4%
Claim Handling Denial 18.43%
Claim Settlement Unsatisfactory 14.27%
Claim Handling Other   6.01%
Underwriting Premium and Rating   4.74%


What Is Good Faith Insurance Claims Handling?

Hurricane Ike insurance claims are getting to the point where people are upset that their insurance claims have not been paid. They are seeking answers and looking for help. This is common following disasters.

Usually, the upset policyholder has been through the following: provide notice of the claim, hope the field adjuster gets the Home Office to pay, wait, provide more information, wait some more, call, provide more information, receive a letter (maybe with a small payment) that explains that the investigation is continuing, write a letter in response, wait, call, wait, and then nothing or a denial letter.

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.