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

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

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

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

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

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

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

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

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

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

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

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

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

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

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!

For example, have you ever seen a Safeco "Round Table," where your insured’s claim was discussed or evaluated? What about internal training materials suggestive of steering insureds away from retaining counsel? Have you ever seen documents regarding compensation programs that are set up to reward claims management who, on average, have their departments pay less on their claims? Have you ever seen the Safeco Accenture Consulting documents that changed the profitability of Safeco? Has any discovery made you aware of Safeco's PDRF or Lost Economic Opportunity claims management programs? No, you probably haven’t.

What you can expect NOT to see are the insurer’s internal claims handling procedures, internal claims department goals, discussions on how the claims department is performing, and items specifically explaining how an insured’s claim was handled. Many policyholders, policyholder counsel, and judges are not even aware that insurance companies have internal documents that reveal how claims decisions and actions impact the insurer's management goals.

What most policyholders and their counsel probably have seen in response to discovery requests are wordy, lengthy and completely useless privilege logs reflecting vague descriptions of otherwise relevant documents. Is the document about the amount of loss? Does it discuss an independent estimate/report such as an engineering report on a roof? Does the document contemplate the need for an expert? Is the document related to compliance with post-loss obligations? Does it address the expected outcome of a potential claims decision or action?

If you find yourself nodding your head thinking – “gosh, I know exactly what you’re talking about” – then it’s time to exchange some ideas and techniques to change this litigation gamesmanship. Tune in for weekly fun Fridays, when I will share about what I have learned from others on these matters. My weekly discussion will be about combating evasive discovery tactics, explaining what is found in these internal documents and how they impact good faith obligations and duties of insurers.

My job is to network around the country with other attorneys involved with Safeco and Liberty Mutual claims practice cases. In doing this, I have learned there are legions of practical examples of how others have successfully obtained important discovery which proves that claims actions and decisions were not done in good faith attempts to fully and promptly pay a claim. Also, internal insurance company documents reflect that insurers acknowledge broad duties of good faith conduct. Obtaining this information and evidence is crucial if policyholders are to be protected from wrongful claims handling.

In this battle against very bright insurance attorneys who are doing their best to protect their clients, it is important to remember that you are never going to get every piece of evidence which will prove your case. However, the wisdom of the Rolling Stones gives some optimism:

"You can't always get what you want,
You can't always get what you want,
You can't always get what you want,
But if you try sometimes, you might find,
You get what you need."

Have a great weekend.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our Commitment to Our Policyholders

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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?

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.

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

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

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

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

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

At comment d., the Restatement provides:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Just my thoughts.

SHIRLEY HEFLIN

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

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

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

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

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

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

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

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

First, "bad faith" is a wrong term. Bad faith cases are truly a breach of the obligation of good faith. So, what is an insurer's obligation of good faith in a first party property insurance claim?

Most insurers would agree this describes their good faith obligations:

"Provide a sufficient number of properly trained and motivated adjusters with sufficient authority to promptly, honestly, and fully investigate facts at its own expense to find, and evaluate, all coverages, damages, and benefits of loss so that the amounts of all covered benefits are paid as soon as possible."

Don't hold your breath for this to happen in the field, but a number of claims managers agree. Why not--unless you are an insurer that wants to advertise that you consider profits a higher obligation than your legal duties to your customers?

I think this is enough to answer the question. What do you think?

I have the honor of representing a number of complex commercial policyholders in this category. The business owners and corporate officers not being paid promptly on undisputed portions of claims can be just as upset and frustrated as individual policyholders feeling they have been “jerked around” waiting for monies. Indeed, when you have responsibilities to others as most businesses do, cash is the blood that keeps businesses alive. Benefits from commercial insurers should be especially prompt.

A recent federal court ruling in Penford Corp. v. National Union Fire Insurance Company of Pittsburgh, PA, No. 09-CV-0013, 2009 WL 2030377 (N.D.Iowa July 13, 2009) highlights the fact that an insurer can be subject to a bad faith lawsuit for wrongfully delaying payment of an undisputed portion of coverage, even if it correctly denies coverage on other parts of a claim.

The facts of this property damage claim indicated that:

“ …In June 2008, Penford's Cedar Rapids plant was flooded and suffered substantial property damage. Defendants provided insurance coverage for Penford's facility…Defendants have paid Penford $20 million for flood damages…

In addition, the policy contained certain “time element coverages,” providing coverage for losses caused by business interruption. The policy also provided additional coverages for debris removal, decontamination costs, contaminant or pollutant clean up, and professional fees. Penford claims that it is entitled to additional benefits for losses falling under the time element coverages and additional policy coverages. According to Penford, its covered losses will exceed $50 million. Penford requests that the Court “declare Penford's rights and Defendant Insurance Companies' obligations under the Policy,” and that it award compensatory damages for breach of contract….of particular significance to the instant motion, Penford asks that the Court award it additional damages for Defendants' alleged bad faith in denying Penford benefits which are due under the policy, and “unreasonably delaying undisputed payments under the Policy.”

The defendant insurers moved to bifurcate the contract and bad faith trials and stay discovery of the bad faith aspects of the case, arguing:

“…that recovery by Penford on its declaratory judgment and breach of contract claims is a “condition precedent” to its recovery on the bad faith claim. Defendants argue that the discovery required on the bad faith claim is “not relevant” to the discovery associated with the declaratory judgment and breach of contract claims. Therefore, according to Defendants' argument, bifurcating the trial and staying discovery on the bad faith claim will promote judicial economy.”

This is the same argument insurers use in many cases. In my experience, judicial economy is best served by denying the stay order and then deciding if matters should be bifurcated at trial. The gamesmanship and lack of good faith, if any, is explored early in the litigation and the matters resolve for all much quicker. This practical experience seems lost on some judges, which is why these motions are so common. When judges do not get sidetracked into granting the motions and instead order full discovery, judicial economy is swiftly served by eager settlement discussions by insurers that may have problems in their claims handling.

 The policyholder’s response was:

“…that much of the discovery “intermingles” between the contract and bad faith claims….a number of witnesses have knowledge regarding both the flood loss and the subsequent adjustment of the insurance claim, and staying discovery on the bad faith claim would necessitate deposing those witnesses twice. In addition, Penford argues that even if it does not prevail on the breach of contract claim, it nonetheless has a viable bad faith claim for Defendants' alleged failure to timely pay the benefits due under the policy. Finally, Penford argues that even if bifurcation of the trial is otherwise appropriate, the parties should be permitted to proceed with discovery on all claims.”

The Court ruled for the policyholder, and the ruling is much more significant than a mere finding about the bifurcation and discovery, because it correctly noted that delay of the previous payments could be an independent basis for the bad faith claim:

“…Defendants argue that it is unnecessary to address discovery and trial on the bad faith claim unless Penford first prevails on its contract claims. This argument fails, however, to address Penford's claim that Defendants acted in bad faith in delaying the payment of insurance benefits. Even if it is determined that Penford has been paid all of the benefits it is entitled to receive under the policy, a claim for bad faith may lie if Defendants knowingly acted unreasonably in delaying payments. Galbraith v. Allied Mut. Ins. Co., 698 N.W.2d 325, 328 (Iowa 2005) (a bad faith claim may lie if “the insurer lacked a reasonable basis for denying or for delaying payment of the claim”)… Accordingly, Penford is entitled to discovery regarding the adjustment of its loss, even if Defendants ultimately prevail on the contract claims.

…Bifurcating the trial and staying discovery on the bad faith claim until after the contract claims have been resolved would unnecessarily delay this action and, therefore, prejudice Penford…In Agrawal v. Paul Revere Life Ins. Co., 182 F.Supp.2d 788 (N.D.Iowa 2001), the court ordered bifurcation of trial on the coverage and bad faith claims...The court did not, however, stay discovery. The court envisioned that the bad faith claim would be tried immediately following coverage claim, if necessary…Discovery on both claims proceeded, notwithstanding the court's decision to bifurcate the trial.

…

The Court concludes that discovery on the bad faith claim should not be stayed… As set forth above, Penford may pursue a bad faith claim for defendants' alleged delay in the payment of benefits, even if it is not entitled to any additional recovery under the contract.”

This is a common scenario in insurance claims. Part of the claim is paid after a period of time that the policyholder thinks is not within the standards of good faith conduct, and the remaining portion of the claim is denied. Discovery generally moves along much quicker and with a greater chance of complete resolution of all matters if courts do not stay any portion of the discovery. While the Court in this case did not bifurcate the trial, my impression is that justice is best served by usually reserving that decision until right before trial because the evidence at that time may better clarify how the trial should proceed.

The practice tip for the policyholder attorneys is to seek independent actions and remedies for the payments that were delayed. Specific pleadings indicating that the bad faith action is based on the delay of payments for coverage that was acknowledged will help judges recognize that the entire case is not just about the unsettled coverage controversy.

The practice tip for insurers is to act in good faith and not just focus on what might not be paid. Having a sufficient number of properly motivated adjusters with authority to promptly investigate a loss in an honest manner so that all the benefits owed following a loss are determined and paid promptly is the good faith service commercial policyholders purchased long before the loss ever occurred. Claims managers should make certain their adjusters perform to this standard.

This is the California Law she referred to:

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

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

...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In our Motion For Leave Of Court to file the brief, we wrote:

“1. The financial security that insurance policies provide is critical to business and property owners and to the fabric of our economy and our society. United Policyholders ("UP") is a unique non-profit charitable organization founded in 1991 that is helping preserve the integrity of the insurance system by serving as an information resource and a voice for policyholders' interests. Donations, grants and volunteer labor support the organization's work.

2. United Policyholders monitors the national insurance marketplace with a particular focus on regions impacted by large-scale natural disasters. The organization hosts and participates in public forums, disseminates information about the claim process, works with individuals and elected officials to solve insurance problems, and files amicus briefs in cases involving coverage and claim disputes. UP serves as a clearinghouse for information on coverage and claim issues related to commercial and personal lines insurance products.

3. United Policyholders has focused its efforts since the 2005 hurricane season on providing education and support to businesses and homeowners in the Gulf Coast states and working to help solve insurance problems. The organization hosts a free on-line "Road Map to Recovery" for Florida, Louisiana and Mississippi, and created and is maintaining a Hurricane Claim Help Library for residents of the impacted states. For more information, visit www.unitedpolicyholders.org.

4. United Policyholders seeks to fulfill the "classic role of amicus curiae in a case of general public interest, supplementing the efforts of counsel, and drawing the court's attention to law that escaped consideration." Miller-Wohl Co. v. Commissioner of Labor & Indus., 694 F.2d 203,204 (9th Cir. 1982). This is an appropriate role for amicus curiae. As commentators have often stressed, an amicus is often in a superior position to "focus the court's attention on the broad implications of various possible rulings." Robert L. Stem, et al., Supreme Court Practice 570-71 (1986), quoting Ennis, Effective Amicus Briefs, 33 Cath. U. L. Rev. 603, 608 (1984).

5. United Policyholders has filed over two hundred and thirty-five amicus briefs, since it was founded, in state and federal appellate courts throughout the United States. United Policyholders' amicus brief was cited in the U.S. Supreme Court's opinion in Humana Inc. v. Forsyth, 525 U.S. 229 (1999). UP was the only national consumer organization to submit an amicus brie/in the landmark case of State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003). The organization has participated by court invitation in briefing and oral argument, and many of the arguments from United Policyholders' amicus curiae briefs have been cited with approval by reviewing courts.

6. The issue involved in this case, concerning whether or not Florida law recognizes a claim for breach of the implied warranty of good faith and fair dealing by an insured against its insurer based on the insurer's failure to investigate and assess the insured's claim within a reasonable period of time, has significant ramifications for insurance policyholders seeking to hold their insurance companies responsible for their insurers' actions. This is an area of law in which United Policyholders and the undersigned attorneys submit it would be useful to the Court to allow the insurance policyholders' perspective to be heard.

7. The undersigned counsel for United Policyholders have significant experience in first-party property insurance litigation against major insurance companies, such as QBE Insurance Corporation, and honestly believe that they will be able to provide assistance to jurists analyzing the insurance issues of this case and their public policy implications in a way that compliments and dovetails with the arguments raised by counsel for the parties to this appeal. Counsel for United Policyholders is retained pro bono, and will accept no money for their legal work in this case.”

Obviously, this matter is extremely important to Florida policyholders. Florida has never recognized a common law cause of action for the breach of the duty of good faith arising from a first party property insurance claim. In the summary of our argument, we noted:

“Nowhere is the contractual concept of an "implied warranty of good faith and fair dealing" more important than in the insurance setting, due to the unique nature of the product and the disparate circumstances of the parties to the contract. Although Florida courts have previously and explicitly recognized a common law claim arising from the nature of an insurer's obligation to its insured in the third party setting, Florida should join the majority of states that recognize a common law remedy for damages caused by first party insurers breaching their recognized obligations of good faith and fair dealing.

Legislation passed in Florida recognizes the obligation of insurers to act in the utmost of good faith and fair dealing to their insureds. § 624.155, Fla. Stat., and § 626.9541, Fla. Stat. These obligations are further evidenced by pertinent portions of the Florida Administrative Code, requiring claims adjusters to provide ethical and good faith treatment to policyholders. The insurance industry recognizes its obligation to act in the utmost of good faith and fair dealing as evidenced in the training and reference textbooks for claims handlers and in internal claims handling documents prepared by individual insurance companies. Since Florida public policy, demonstrated in legislation and regulation, recognize a duty of good faith, and even the insurance industry recognizes such a duty, it would be a strange quirk in Florida common law for it to not to recognize what everybody else is requiring insurers to do-act in accordance of a duty of good faith and fair dealing to its own customers.

Florida should align itself with that majority of states, and allow this important alternative remedy to stand.”

I suggest those interested in this topic to read our entire brief—it may also be better than a sleeping pill for those in need of a good night’s rest. The last paragraph of the argument sums up my feelings on this issue:

“Making an insurer accountable for causing additional damages that naturally flow from the breach of its mandated obligation of utmost good faith is good public policy and logically required if accountability is important to the law. Without accountability for breaches of these insurance good faith duties that most recognize as involving the public trust, the law would minimize these concepts and the importance of personal responsibility for insurers to do what they are obligated to do.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

...

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

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

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

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

Eric,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 DISPUTED CLAIMS/APPRAISAL – POLICY FORM CHANGES

MAY 11, 2009

 EXECUTIVE SUMMARY

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

Background

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

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

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

Recommendations

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

• Eliminate the provision for appraisal of disputed property claims. 

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

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

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

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

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

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

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

RECOMMENDATION

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

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

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

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

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

In the Defense Research Institute presentation, she wrote:

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

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

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

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

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

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

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

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

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

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

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

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

Insurance companies do not want to be held accountable for wrongful conduct. "Cheat and get away with it"-- is the mantra of many insurers. This is wrong and it has to stop.

Honest insurers should push for consumer protection laws that hold dishonest insurers accountable. Do they? Not that I have seen. Only crooks and cheats oppose laws that punish cheating--where is the property and casualty insurance industry?

I know most independent adjusters would support these laws. Company adjusters publicly would as well if they were not subject to termination. The property and casualty industry needs to clean itself up. Honest insurers and adjusters should support penalties when others break rules. As Alex Sink suggested yesterday, there needs to be accountability for those that do not honor insuring promises. Who is against that? I suggest that the answer is only those that break those rules.

Yesterday, I tried to teach public adjusters how to prevent otherwise innocent policyholders from wrongfully inflating claims because they believe the insurer will always try to reduce what is rightfully owed. Two wrongs never equal a right. However, many policyholders lack faith in insurance company claims practices and believe they can’t be straight forward and get paid a fair amount. This must stop. Nobody benefits.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In the 30-second video, Dietz states:

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

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

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

You can view the video by clicking below:

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

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

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

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

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

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

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

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

The Texas appellate Court made the following observation of law:

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

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

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

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

*

Perdue and State Farm did not rule out other possibilities.

*

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

*

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

*

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

*

Perdue and State Farm's conclusion of no liability is not supported by facts.

*

Perdue and State Farm's conclusion that the house being four inches out of level is acceptable.

*

Perdue and State Farm fail to identify stress signs.

*

The face of the report had problems with the honesty of the report."

Hamilton, 265 S.W.3d at 735.

These issues were prevalent in Hurricane Katrina litigation. There, many expert reports originally favoring coverage were changed to findings limiting or denying the claim. This issue will undoubtedly be raised during Hurricane Ike litigation; this problem is rampant throughout the property adjustment community. So long as the insurance adjustment community is looking for “conservative” (which is different from the social or political context) experts to provide “favorable” (which means paying less or not at all) conclusions, policyholders should know to get their own experts and consultants.

His questions and the article reminded me of the first prize paper in the 2008 Student Writing Competition of the Tort Trial and Insurance Practice Section of the American Bar Association: Whitney Mauldin’s Good Business/Bad Faith: Why the Insurance Industry Should Adopt a Good Faith Model, 43 Tort & Ins. Prac. J. 151 (Summer 2008). It is an excellent paper which should be studied by all in this field. Claims managers and adjusters should reflect upon the author's findings.

The paper noted "most insurance companies...are for-profit corporations, and their desire to increase profits frequently results in the implementation of business practices that are adverse to the insured." It went on to note four modern claims trends which were made to increase profits but have "gone awry" to the detriment of the insurance industry's customers. Those listed are:

1. Computers in Claims Handling.
2. Compartmentalization of Claims Handling.
3. The Use of Outcome Oriented Experts.
4. Use of Corporate Consultants that do not Appreciate the Ethics of Good Faith Claims Handling.

The author's conclusion is worthy of quoting:

CONCLUSION: A CALL FOR A GOOD FAITH MODEL

Part of the problem documented here is the result of a fundamental change in the insurance industry. Insurance companies used to be, at least primarily, mutual companies, meaning that they were owned by policyholders, for the benefit of the policyholders. However, since the 1970’s there has been a shift toward a for-profit corporate structure, with insurance companies being owned by shareholders. This puts the company in the position of deciding whose interests to serve, that of the shareholders or those of the policyholders. It has a fiduciary duty to both.

The laws of the fifty states regarding bad faith are inconsistent. Therefore, if insurance companies want to avoid costly litigation and want to fulfill the role they were created to fulfill, then the industry should adopt a good faith model. Clear, common sense guidelines designed to build solid business practices would eliminate the uncertainty of claims handling and protect the insureds as well as the insurer. It could be argued that the current profit driven model not only leads to a breach of the fiduciary duty of good faith to the insured but also to the company’s duty to its shareholders. To the extent that these expensive and highly publicized bad faith law suites cause damage to not only the profitability but the reputation of the insurer management may have caused long term damage to the share holders by lowing the overall value the corporation.

There are some basic concepts that will form a foundation for a good faith claims handling model. First, avoid the use of any mechanism that will standardize claims. Claims are unique and efforts to rubber stamp them, will likely lead to a breach of the duty of good faith. Second, maintain communication with the insured through the claims handling process. Ensure that the adjuster can access the insured personally and that one person is in charge of all correspondence with the insured. The adjuster should have an integral role and therefore a holistic understanding of the investigation as it proceeds so that they can communicate progress to the insured. Third, use experts appropriately. Do not use them to create a one-size-fits-all investigation and do not ignore them when they provide evidence of a valid claim. Finally, make the policyholder more important that the shareholders. The duty is owed to policyholder.

Companies should establish protocols that alert the company when they are making increased sums of money and are not paying claims. Efforts to increase profits are a part of business but those efforts should be directed towards planning the business carefully, changing marketing strategies, selling more policies, and carefully selecting reinsurance. These strategies should leave the good faith claims handling model alone. This model is necessary, because the courts have repeatedly shown that in the war between shareholders and policyholders, the policyholders will win every time, whether it is initially by a fair settlement of the claim or later with loss of customers or punitive damages.

For an insurance company, ignorance can be bliss. For example, last week our law firm spent two hours in a in-house seminar regarding how winds can damage the glazing, fastening, and frames of glass windows and doors. The gentlemen teaching us spend their entire time inspecting glass windows and doors for all kinds of reasons.

I wonder how many insurance company adjusters have received any training regarding the effects of wind on glass doors and windows? I suspect that many Houston policyholders are going to be left with glass windows and doors that will deteriorate quicker, leak more often, and not work as well as a result of Hurricane Ike. Ignorant claims adjusters can wrongly save an insurer a lot of money at the policyholder's expense.

Most catastrophe adjusters receive little technical training regarding how a hurricane affects a structure. I took a deposition of a State Farm catastrophe adjuster that had no construction or adjustment experience before Hurricane Katrina. He was previously a minor league hockey player. Want to take a bet on how often his estimates for damage were accurate?

I was thinking about the ongoing Hurricane Ike insurance claims during a deposition this week. The insurance company attorney at the deposition didn't appear to get it--but his adjuster client understood exactly what I was asking. Yesterday's post, Rules of Good Faith Claims Handling, listed the rules of claims adjustment. The adjuster agreed that his good faith training recognized every one of those claims rules about which I inquired.

Many catastrophe insurance adjusting firms pay lip service to the rules of good faith claims handling. There is little training and even less emphasis placed on getting the estimate right in the sense that the policyholder is getting the service promised and owed. The emphasis of most catastrophe adjustment services is to simply get the estimate done.

As a result, claims problems are commonplace following a catastrophe.

Hurricane Ike claimants are in the same boat Floridians were in following the 2004 hurricanes and other Gulf Coast residents were in following Katrina. As a result, it should come as no surprise that people hire attorneys like us--the insurance industry has invited Hurricane Ike policyholders to do so by failing to provide the service our clients bought.

Sometimes when I talk at conferences on this topic, an insurance adjuster or insurance attorney will challenge me. He or she will say that I never see the hundreds of examples of satisfied policyholders. In response, I ask if he would be willing to let me re-inspect and reopen ten claims files to see if I can prove that nine out of ten claimants did not receive entitled benefits. They get quiet pretty darn fast.

And the sad part is that insurance companies should have  programs doing exactly what I proposed. After all, shouldn't the insurance company be trying hard to pay every penny it is supposed to pay? That is how Hurricane Ike claims are supposed to be handled.
 

Like virtually every other adjuster, I anticipate that he will agree that the duties of good faith include:

• Company must treat its policyholder’s interests with equal regard as it does its own interests. This is not an adversarial process;
• Company should assist the policyholder with the claim;
• Company must disclose to its insured all benefits, coverages and time limits that may apply to the claim;
• Company must conduct a full, fair and prompt investigation of the claim at its own expense;
• Company must fully, fairly and promptly evaluate and adjust the claim;
• Company may not deny a claim or any part of a claim based upon insufficient information, speculation or biased information;
• If full or partial denial, Company must give written explanation, pointing to the facts and policy provisions;
• Company must not misrepresent facts or policy provisions;
• Company may not make unreasonably low settlement offers;
• An insurer must adopt and implement reasonable standards for the prompt evaluation of claims;
• In evaluating a claim under a replacement cost policy it is not proper for an insurer to deduct deprecation from the value of the claim;
• Failure to fairly and reasonably investigate a claim does not permit the company to deny the claim due to lack of information or one-sided information;
• An insurance company may not ignore evidence which supports coverage.
• If denial, must promptly give policyholder a reasonable explanation of the basis in the insurance policy in relation to the facts, policy provisions or applicable law upon which it relies for denial of claim;
• If offer is a compromise amount, must provide a reasonable explanation of the basis of that amount in the insurance policy in relation to the facts and law;
• Cannot discriminate in the claim settlement practices based on the claimant’s race, gender, income, religion, sexual orientation, national origin, or physical disability or the territory of the property or person insured;
• Cannot attempt to settle a claim for an unreasonably low amount;
• An insurer must communicate with its insured to keep it appraised of the status of its claim;
• It is improper for an insurer to tie in any manner claim personnelcompensation to claim decisions or payments to its insureds;
• An insurer has a duty to disclose all significant facts to its insured;
• An insurance company must not misrepresent facts or policy provisions relating to coverage of an insurance policy;
• An insurance company must not fail to acknowledge and act promptly upon communications regarding a claim arising under an insurance policy;
• An insurance company must adopt and implement reasonable standards for prompt investigation of claims;
• An insurance company must not refuse to pay a claim without a reasonable investigation of all of the available information and an explanation of the basis for denial;
• When insureds don’t recognize they are entitled to benefits in a policy, an insurance company’s obligation is to point out those policy benefits to them;
• An insurance company cannot deny a claim or refuse partial payment on a claim without first conducting a full, a fair, a thorough investigation of the facts and circumstances;
• An insurance company may not use the claims department as a profit center; and
• The insurance company must keep a total claims file that reflects all activity on a file.

These listed good faith duties are taught and explained in the insurance industry. In most cases when we are forced to get involved, we find that these rules of adjustment have been broken and are the cause of our client's problems. Good insurance companies strive to make certain these rules are never broken.