In virtually all jurisdictions, insurance carriers must act in good faith when evaluating, settling or otherwise responding to claims submitted by third parties and policyholders. Although states like Maryland do not recognize a separate cause of action for bad faith toward policyholders, most states impose substantial penalties for punitive damages when insurers act in bad faith toward third party claimants and many impose similar penalties in "first party" claims submitted by policyholders themselves. For this reason, it is extremely important that insurers avoid misconduct which may prompt legal action that could jeopardize the welfare of the company.
While most discussions of bad faith liability focus on broad pronouncements of law requiring insurance companies to act with good faith toward policyholders and third parties, the following examples of misconduct are real-life illustrations of situations subjecting insurers to substantial liability. In short, here's how to "botch" a claim:
- 1. Tell Plaintiff's Counsel That Your Policy Limits Are Only $20,000/$40,000 Despite The Fact That Your Insured Has A $100,000/$300,000 Policy [or, better yet, send an edited-version of your declarations sheet designed to convince your opponent to settle for far less than your actual exposure --- a great way to save big bucks!]
When dealing with claimants and others, an insurance carrier has a special obligation to be honest in all communications and must refrain from any misrepresentations. Although an insurer may conceal its "bottom line" in settlement negotiations, it must be careful not to misstate the facts. This is particularly true in connection with inquiries regarding the terms of the applicable insurance policy. Indeed, if a carrier is concerned about disclosing the terms of coverage to third parties prior to litigation, it would be well advised to respectfully decline to provide any information regarding coverage than to misstate the terms of coverage. The latter practice may render carriers liable for far more than the policy limits -- a devastating punitive damage award.
- 2. Ignore Letters From Plaintiff's Counsel Regarding Settlement or Other Matters Relating to the Claim
An insurer must respond promptly to all communications regarding a claim. Letting letters gather dust without a response is easy when confronted with a seemingly insurmountable flood of paperwork and claims. But such inactivity could cause far more significant paperwork in the form of a lawsuit for bad faith. Thus, even if additional work is required before evaluating the claim, insurers should, at the very least, acknowledge all correspondence.
- 3. Reject Plaintiff's Contentions Without Investigating the Claim
An insurer may not simply deny a claim on a whim. Insurers have a duty to thoroughly investigate all claims. Not only is this important in determining liability and damages and in protecting the insured, it is essential in avoiding bad faith claims in which disgruntled claimants charge that the insurer has discriminated against them or otherwise rejected their claims without a legitimate basis for doing so.
- 4. Reject Claims Without Offering Any Explanation For Doing So
In denying claims, it is essential that the insurer explain the basis for the denial in writing to the claimant. While carrier should consult with competent coverage counsel regarding the appropriate language to employ in specific cases, insurers should take care to outline all bases for denial for two reasons: First, insurers who neglect important defenses to liability may be held to have waived these defenses in later litigations. Second, insurers who develop new bases for denial after litigation arises invite claims that they are acting in bad faith to concoct illegitimate reasons for denying claims.
- 5. Don't Go Overboard in Investigating Claims! Play Golf Instead!
This may prove to be a very expensive trip to the golf course. As every experienced claims person knows, courts scrutinize the practices of insurance carriers with a microscope that detects and punishes all miscalculations and errors. Where insurers are charged with bad faith, all doubts are resolved against the carrier, rendering companies liable for virtually all gaps in claims investigation and analysis. Therefore, it is essential that insurers approach the investigation of claims seriously, diligently, and thoroughly.
- 6. Don't Ever Initiate Settlement Discussions with Plaintiff's Counsel! [if they can't make the first move, why should you look anxious to settle?]
In most states, an insurer's duty to act in good faith requires the extension of reasonable settlement offers regardless of whether a claimant's attorney has "made the first move." Don't let the actions of Plaintiff's counsel dictate your handling of a particular claim. While traditional negotiation strategies suggest otherwise, the law of bad faith mandates that insurers make reasonable settlement offers within a reasonable time after evaluating liability and damages.
- 7. Never Settle a Claim Right Away!!! If you hold out for unreasonably long periods of time, most money-grubbing plaintiffs will wear down and accept less in settlement.
Not only is this philosophy dangerous when considering bad faith liability, it is often poor negotiation strategy as well. Claims have a tendency to grow in size the longer they hang around. What may start as a small whiplash injury case may grow to a case of serious permanent injury when a claimant's attorney refers the claimant to a doctor who later recommends surgery. To minimize liability, evaluate claims thoroughly, promptly and -- where appropriate -- attempt settlement quickly.
- 8. Take Careful Notes on Your Desire to Save Money, your Suspicions of a Lying, Fraudulent and Greedy Plaintiff, and Your Utter Disdain for the Plaintiff's Attorney [its a great way to relieve those everyday frustrations with these pesky little ambulance chasers and their cheating, money-grubbing clients!]
Progress notes and other correspondence in the claims file may become "Exhibit A" in a bad faith claim against the insurance carrier. Be very careful to document what is important in evaluating a claim, but avoid "extracurricular comments" which may lead to bad faith claims. Remember, anything you write may be used against you in a court of law.
- 9. Don't Tell Your Insured About Potential Excess Exposure [what an insured doesn't know, can't hurt her!]
Wrong again. If claims are submitted which exceed an insured's coverage, the insurer has an absolute obligation to inform the insured and advise her of the possibility of personal liability. In most states, the insurer must also advise the insured of her right to obtain counsel at her own expense to protect against such exposure. Failure to do so may subject the carrier to that excess exposure in the form of a bad faith claim. Indeed, what an insured doesn't know, can hurt her and can hurt her carrier as well!
- 10. See If You Can Get the Insured to Contribute Toward a Settlement within Policy Limits
Carriers who have tried to "save on the policy" by tapping into their own insured's pockets have committed serious violations which have been severely punished by the courts. Do NOT ask your insured to contribute to a settlement within policy limits. If a settlement within policy limits is advisable, the insurer must do everything within reason to protect the insured from excess liability.
- 11. Do Everything Possible to Save Your Company Money [after all, the most you can lose are the policy limits of your insured!]
Critics of insurance companies claim that insurers don't care about their insureds, they only care about saving money on the policy. While insurers may dispute this criticism, some claims representatives forget that an insurer's first obligation is to protect the interests of its insured against excess exposure. It is also obligated to act in good faith toward third parties who submit claims. While it is important to keep the company's exposure to a minimum, those who neglect their duty of good faith and fair dealing may unwittingly increase this exposure in the form of substantial liability for punitive damages. In these cases, a carrier may lose far more than the policy limits of its insured.