Fortune Favours The Brave
A regular podcast for business leaders exploring how businesses can harness risks and use them to their advantage. In each episode Howden Insurance Brokers will discuss a topical challenge or issue and what business leaders can do to overcome it.
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Fortune Favours The Brave
Insurers: Navigating the Perils of Bad Faith (part 1)
Prepare to arm yourself with the knowledge to confront the lurking dangers of bad faith claims as Hilary Harmsworth, alongside experts Sam Vardy and Scott Seaman, unveil the intricacies of insurance law.
Our conversation explains how our innovative bad faith mapping tool will aid you in navigating the stormy waters of bad faith claims. Sam Vardy enlightens us on the inception and operation of this new resource, while Scott Seaman, armed with his legal acumen, dissects the ominous repercussions of bad faith on insurers, explaining the potential for staggering costs and damages, as well as imparting strategic wisdom to fortify against legal onslaughts.
For more information on Howden's bad faith mapping tool and the topics discussed today please contact Hilary at hilary.harmsworth@howdengroup.com
Welcome to Howden's podcast Fortune Favors the Brave. We all take risks in our everyday life, and business is no different. In this podcast, we're speaking to the experts about a topical challenge or issue and what business leaders can do to overcome it.
Speaker 2:Welcome to this series of Fortune Favors the Brave. My name's Hilary and I lead our insurance company practice here at Howden. This is the first of a three-part series on bad faith, and I'm joined today by Sam Vardy, who is in our legal, technical and claims team at Howden, and Scott Seaman at Hinshaws, chicago. In this first episode we're going to be introducing our new bad faith mapping tool and talking about what bad faith is and why insurers need to be concerned. So I guess we'll start with you know what is the purpose of the report and maybe, sam, you can talk to us about the concept and and why we've produced the report and and what it does.
Speaker 3:Yeah, I think it occurred to us that there isn't really anything out there that brings everything together On bad faith. You have a lot of experts in different areas in different states, you have insurers that are operating in different areas in different states and quite often when a bad faith claim materialises, there hasn't been the tracking or checking as to the risk in that particular area. So we thought it'd be useful to try and bring all of that together and we know that, of course, our insurer clients have a lot of material and data that they use internally themselves to assess bad faith risk. But we thought that there was something that we could do based on our experiences, the resources we have and people that we talk to in the industry, to try and work alongside them and produce something that we hope is of benefit and could be used as part of their own checking and monitoring of bad faith.
Speaker 2:And in terms of your sort of background and ability to talk to this and to talk to bad faith, can you just give us a little bit Sam on that?
Speaker 3:talk to this and to talk to bad faith.
Speaker 3:Can you just give us a little bit Sam on that?
Speaker 3:Yeah, so at Howden, as you say, I co-lead the legal, technical and claims team, and one of the areas that I work on heavily and work on with you, hilary, is the insurance company's book, and what that means primarily from a claims point of view is bad faith claims, because that's the most frequent claim that we see and they're also high value.
Speaker 3:So over the years that I've been working at the broker side, I've developed an understanding of what the triggers are where claims are likely to arise, both jurisdictionally, geographically, but also in terms of the circumstances and incidents. So that's been my background in bad faith, and it's always kind of interesting when you are dealing with a claim, because if you have someone that has a lot of knowledge around bad faith, they're not particularly surprised by what's happening. But if you have a new person perhaps a claims handler, an insurer who hasn't been dealing with bad faith much, or a UK-based legal person perhaps a claims handler at an insurer who hasn't been dealing with bad faith much, or you know a UK based legal person it's quite a surprise that you can have these small policy limits, but suddenly you're potentially on the hook for many millions more. So it's definitely this little industry that you need some information and knowledge about to be able to practice and advise clients properly.
Speaker 2:And Scott turning to you in terms of your background and expertise in the bad faith world. Maybe you can just touch on that a little bit for us.
Speaker 4:Sure. I'm the co-chair of Hinshaw's Global Insurance Services Practice Group, and over the past 36 years, I've represented insurers and reinsurers in coverage matters, bad faith matters and extra contractual disputes, and occasionally I represent policy holders in defense of commercial professional liability, general liability or D&O cases all across the United States and beyond, and so we're engaged in bad faith litigation across the country in particular, and we also counsel companies on minimizing their bad faith exposure in terms of their claims and underwriting practices. We defend companies in bad faith cases and we work with insurers to avoid bad faith in connection with negotiating and responding to claims, and I've tried cases before judges and juries and handled appeals involving bad faith issues.
Speaker 2:And so I guess you know people listening to this will have different, varying levels of knowledge around bad faith. But I think it would be useful to start with you know what bad faith is and why do insurers need to be concerned about it. So maybe, scott, I could hand over to you for that question.
Speaker 4:Sure, in actuality, hilary, there's really no such thing as bad faith, so we're talking about something that doesn't exist. Bad faith is a shorthand reference for the breach of the duty of good faith and fair dealing that is implied in insurance contracts. And there's various types of bad faith and fair dealing that is implied in insurance contracts. And there's various types of bad faith First party bad faith, which is failure or delay in settling claims with the policyholder. A third party, which is the original form of bad faith, which involves failing to settle a claim brought by a third party against the policyholder, brought by a third party against the policyholder. There is institutional bad faith that takes on insurance company pattern and practices and, under a broader universe of extra contractual liability, there can be claims for fraud, conspiracy, market conduct, a breach of fiduciary duty. And also there are various consumer fraud and protection statutes in the various states and claims handling regulations promulgated by the departments of insurance, some of which give rise to private causes of action, others do not.
Speaker 4:So this basket of bad faith claims presents numerous concerns to insurers.
Speaker 4:Broadly speaking, it exposes them, as Sam was saying, to greater damage awards.
Speaker 4:They are exposed to tort damages, consequential damages, as opposed to just breach of contract damages, there may be exposure for attorney's fees, and if the conduct is sufficiently egregious, there could be bad faith exposure as well.
Speaker 4:Efficiently egregious, there could be bad faith exposure as well. So, apart from making cases, altering the value potentially of cases and the risk of high awards, bad faith also broadens the scope of discovery a lot of times beyond what is generally permitted in the coverage action involving just a declaratory judgment or breach of contract claims. And, as you know, pretrial discovery in America is already quite broad, time-consuming, it's burdensome, very expensive compared to discovery in the UK, and bad faith claim it just adds to that, and there's also a potential in some states that policyholders could get discovery of documents that otherwise may be considered privileged, and the concern insurers have is that one bad faith could give birth to others. So inclusion of bad faith claims really raises the stakes for both the defense cost and indemnity cost point of view. And one thing I would say, though, is at the very beginning you have to separate bad faith claims that are just tossed out there and don't have an actual basis from those that present some concerns.
Speaker 3:Yeah, I think that's right, Scott. I mean, that's certainly our experience in terms of the matters that we see that 90% of the time, perhaps more, where bad faith is alleged in some form, it really doesn't have any merit and what the plaintiff is really saying is you've rejected my claim and I'm not very happy about it. So I'm going to use this as a bit of a make way to try and get you to the table, ensure us to settle. But there are those claims that do have legs, and that's really what the tool is about is identifying the issues and areas that come up and when you do need to be concerned that this could be a multimillion loss.
Speaker 4:Yeah, and I don't know, hilary and Sam, if you want me to talk just a little bit more about this insurance law tool that we're making available to our respective clients. The mechanics of it are all a mystery to me. The talented people at Howden just managed to make this a very user-friendly tool. But basically we take a look at nine of the most common bad faith issues whether a state allows first-party bad faith claims. Whether they allow third-party bad faith claims. Whether an excess insurer may assert a claim against the primary insurer for a judgment in excess of primary limits. Whether bad faith claims may be assigned. Whether bad faith claims may be dismissed or stayed by the insurer pending determination of coverage and that's a major strategy for insurers. And then whether four types of damages are recoverable consequential damages, emotional distress damages, attorney's fees and punitive damages.
Speaker 4:And basically you could go up there, choose from a menu one state, many states, or all 50 of them, if you like, pick the states that you're interested in and then magically, magically, the answer to those nine questions will appear.
Speaker 4:There is also we have color-coded the states to sort of assign their risk level. So states that are generally low risk for bad faith are color-coded green, the median risk jurisdiction's yellow and if you see red that's a high risk jurisdiction. We're going to talk later on about judicial hell holes, but basically it's a quick way of looking and visualizing to see overall what you risk are in a state. Of course, a particular case and a particular county or judicial district may be different than a state overall. And then there's sections that provide an overview of bad faith, some tips for managing bad faith exposure and, of course, since lawyers were involved, there's some caveats in there. But I think the exciting thing is the tool gives Hinshaw and Howden the ability to update and add issues over time. So we're certainly looking forward to people's feedback when they're using the tool and other issues they'd like to see addressed down the road.
Speaker 3:I think there are different ways that you can use it, depending on your own background and how steep you are in bad faith law, because there's the very technical legal aspects that Scott has outlined, but there's also the explanation of what those issues mean. What does that mean in practice? Why is that a bad thing for a particular issue to go one way or the other? And then, ultimately, there is the colour coding thing as well, where, if you're just looking for, do I need to be concerned about a state? Then you can pull that out as well.
Speaker 2:You mentioned, scott, judicial hellholes. Could you just maybe talk us through a little bit what that means and where you'd say the hot areas are in terms of hellholes at the moment, and maybe also touch on the term we're hearing a lot is nuclear verdicts and what that means from a bad faith perspective.
Speaker 4:You know, as I said, we, for purposes of this tool, did code things, focusing on bad faith exposure. The American Tort Reform Foundation looks at what they call judicial hellholes and there are several things that we look to when identifying what I'll just broadly call problem jurisdictions. List several factors, but, hillary, if you made me list only one, I would say bad judges. But some of the others include jurisdictions that target defendants based on deep pockets rather than culpability. Extraordinary verdicts get upheld in those jurisdictions even when the evidence doesn't support it and even when the verdict viol't support it, and even when the verdict violates constitutional standards. Cases are allowed to go forward against defendants even if they don't have a real connection to the jurisdiction. In other words, a lot of forum shopping.
Speaker 4:In these jurisdictions, it's easy for plaintiffs to sue insurers and companies and it's difficult for them to get out. Judges who allow suits that are not supported by existing law to go forward and admit junk science and questionable experts, discovery abuses on both sides. Judges subjecting insurers and defendants to expensive unlimited discovery sometimes and other times denying defendants their right to learn key facts about the plaintiff's case. You see a lot of consolidation and joinder of claims that don't have common facts and circumstances and proper certification of cases as class actions. Unfair scheduling, you know, requiring the defendant to be multiple places in a short period of time. Uneven application of evidentiary rules and a lot of times even improper or slanted jury instructions, which are the charges the jury has in terms of the law that they're supposed to apply to the facts that they, as jurors, determine.
Speaker 4:And these are jurisdictions that tend to have expanded damage theories.
Speaker 4:They tend to allow lawsuits under loosely worded consumer protection statutes to go forward, and public nuisance claims are a problem in some of the states and generally you can go to hell holes to find that going on.
Speaker 4:And in judicial hell holes you may see a government overreach, such as alliances between states' attorneys general and plaintiffs' personal injury lawyers, a lot of cozy relationships between the judges and the parties. But the main thing about judicial hellholes is they are the home to nuclear verdicts, and nuclear verdicts are verdicts of $10 million or more. Thermonuclear verdicts are verdicts over $100 million and it's not exactly the same thing as saying that the verdict is excessive, because much lower amounts than $10 million in a particular case may be exorbitant and sometimes a $10 million verdict can be warranted by the facts and circumstances and actual damages. But these proxies, nuclear verdicts, thermonuclear verdicts, are substitutes for really saying verdicts out of control. And in the US we've just seen a major increase of the number, the amount of nuclear verdicts for several decades, but a real spike, believe it or not, post the court closures that happened during the pandemic. In other words, nuclear verdicts have come back on steroids.
Speaker 2:And what's doing that Scott? What do you think? Is there any thought around what's causing it? Post-covid particularly.
Speaker 4:Yeah, I mean, first of all, we could have a separate podcast on social inflation. We've got a white paper on that but it's all the same sort of things that we see with. Some of them are societal changes, the attitudes of juries, their resistance to following jury instructions, their willingness to base verdicts on their own judgments and feelings rather than the evidence. Some of it is attributable to the dynamics and jurors having access to phones and computers and looking things up that may not be evidence in a case. Then you have. You know, a lot of people have been impacted by COVID. Either they've been injured or somebody that they love has been injured and killed as a result of the pandemic, and they carry those thoughts and feelings with them into the jury room. Corporations and insurance have always been the bad guys and there's always been bias, but not to the level we see these days. And of course, we've got some new things. At least in the US. There are no litigation funding, and that changes the dynamics a great deal.
Speaker 3:I think with bad faith and judicial hell holes, it's worth saying that as an English lawyer, you look at litigation risk and you know that if you take a case to court, even if you've got a reasonably strong case, there is a risk that things don't go well on the day the witnesses don't come up to proof.
Speaker 3:You get a decision that you don't go well on the day the witnesses don't come up to proof. You get a decision that you don't think is the right one. But with bad faith and judicial hell holes you can throw the whole legal textbook out the window sometimes and the results that come back just look like they don't bear any relation to the facts or the law or the advice that you've got. They don't bear any relation to the facts or the law or the advice that you've got, which makes it very difficult to manage, because if you're in a state that is a red state for bad faith, there's a judicial hellhole on that metric as well. It's really difficult to know what to do because you might have advice that says well, legally, this case we don't think the plaintiff has a strong case. We've got a very robust defence. Plaintiff has a strong case, we've got a very robust defense, but you know that if you put that in front of the wrong judge, the wrong jury, you could end up with a multi-million nuclear verdict.
Speaker 4:So managing that is very, very difficult, as is predicting it, because even in judicial hellholes, not every case results in a runaway verdict. There are certain triggers, either in the facts or the nature of the claim. It could be what leads to a nuclear verdict and it places a premium really on evaluating claims upfront, taking into account the jurisdiction where you're at. But also, we're not in the business of playing Santa Claus and we can't let fear result in us settling cases at way more than they're worth because of the fear of a runaway burden.
Speaker 2:Does it always follow that those territories that are judicial hell holes are also red flags for bad faith?
Speaker 4:There is a strong correlation. But you're right, it doesn't necessarily mean because you're in a problematic jurisdiction that bad faith is a major issue. Like, for example, there are spots in Illinois Cook County and Madison County which are judicial households. But the Illinois law on bad faith, section 155 of the insurance code, really has a limit to vexatious delay and there's a cap there on damages. So from that standpoint it may not be as problematic as another jurisdiction.
Speaker 4:So you're right, you can't just say something, look at any color code or look at any way you characterize a jurisdiction and say that that's going to apply across the board. It's something you take into account. But you look at the particular issues, the case that you have in front of you, and in some cases you may be worried about a case in a bad jurisdiction. In other cases you may not be particularly worried about it and I guess we'll talk about this later. But it's not uniform across the state. You try cases in particular counties or judicial districts and there's a variance there. Some of the things pertain to state law and those may factor in in all counties, but a lot of the factors and things we identified in judicial households differ within the counties or districts of a state. It was a great idea, wasn't it? Creating 50 states.
Speaker 2:So that brings us to the end of that episode. We've given you an overview of our new bad faith mapping tool and how it can be used. Thanks to Scott and Sam for joining me today. If there's anything you want to know about that we've discussed today, then our contact details are in the show notes and please don't hesitate to contact us. Thanks again for listening and goodbye.
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