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 2)
Navigate the legal labyrinth of insurance bad faith claims as Hilary Harmsworth, alongside experts Sam Vardy and Scott Seaman, dissect this complex topic, in part two of our mini-series.
In this episode we analyse certain states and jurisdictions, as outlined in our bad faith mapping tool. We also discuss different strategies for dealing with bad faith claims, and how to avoid them as much as you can.
For more information on Howden's bad faith mapping tool and the topics discussed today please contact Hilary at hilary.harmsworth@howdengroup.com
You can listen to the first episode in our mini-series on bad faith via our podcast platform.
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 back to the second episode of our three-part series on bad faith. I'm joined again by our guests Sam and Scott. If you haven't already, we would recommend listening to episode one first. In this part, we're going to look at strategies for dealing with bad faith claims and how to avoid them as much as you can. So, scott, what states make you particularly nervous?
Speaker 3:As someone who does this, has done this for a long time, no state really makes me nervous. You know the challenges you're confronting. You know how to resolve cases, how to obtain leverage along the way and the best ways to navigate defend these claims. Car dealers say you have to know when to hold them and know when to fold them and no one to solve them. And if you're dealt a bad hand in the form of a particular case, generally you want to position your clients as best you can to settle the case and settle it early, because these types of cases tend to get worse In problem jurisdictions and all over.
Speaker 3:In these times of social inflation, you have to promptly and accurately evaluate the claims. Clients are really well served by counsel and claims evaluating the case up front, promptly updating these evaluations and your strategy as warranted by developments. Clients may not always appreciate getting a high evaluation for a claim, but what they really hate is being led down the golden path, paying their lawyers a lot of money during the life of the case, while hearing them say that a case is defensible, only to be told on the eve of trial to cave and pay a lot of money. So I think and I mentioned this earlier. You have to keep in mind you're litigating a particular case in a particular county or federal district and there are cases with good facts and dangerous facts. There are conservative or good jury pools in one county or federal district of a state and potential runaway juries and others, and there's no tool that we could create that can substitute for analysis and experience. But sometimes I ask myself why on earth would an insurance company want to do business in the state of Washington?
Speaker 4:Yeah, I think there's definitely looking from the insurer's point of view. There are states where, if a claim is coming in in that state, you're going to be concerned about it from a bad faith perspective, and that's exactly what the tool's designed to do. So Florida, Texas, California, Missouri states that come up a lot. So I'm sure, Scott, you're very happy to get your teeth into those cases and I'm sure that's very professionally satisfying for you. But from an insurer's perspective, that's where they need to be flagging them quickly and I'm sure you'll be able to help them and give that advice to get them out of it as cheaply, efficiently as you can.
Speaker 3:Yes, and we'll talk about, you know, some protections that are built into even some of the problematic jurisdictions.
Speaker 2:So maybe before we do that, Scott, could you just touch on where bad faith arises. So you know, we hear a lot around sort of duty to friend, duty to settle and duty to investigate, but it would be quite good to get your feel of whether there's any trends in that area, whether you see that you see more problems in one of those particular sort of issues, or not Sure.
Speaker 3:That's an excellent question and, as Sam alluded to a couple moments ago, it's really important to appreciate that the law of bad faith varies considerably from state to state and the sources of bad faith law can be statutory, could be case law, could be both Insurers have different duties. Sometimes bad faith can arise from an improper refusal to defend a potentially covered claim and, of course remember in the US the duty to defend is generally broader than the duty to indemnify. Bad faith can arise from a failure or delay in settling a case or failing to give proper consideration to a policyholder's interest in settling a case within policy limits. Bad faith can arise from failing to adequately investigate a claim, failing to communicate to the policyholder either some things that may be required to be disclosed by claims handling regulations or the policyholder's rights along the way. A breach of contract, in other words, a mere breach of the duty to defend or indemnity or indemnify. It's not automatic bad faith. There usually must be more. There's got to be some tortious conduct or some unreasonableness involved. An insurer may be wrong in its coverage determination, but that is not tantamount to bad faith. So, to put it differently, most states provide a cushion between breach of contract and bad faith that cushion may be a genuine dispute.
Speaker 3:Doctrine that an insurer may be wrong but if it's dispute with the policyholder was a sincere, be wrong. But if it's dispute with the policy holder was a sincere, reasonable dispute, there may be no bad faith. Some places it's called the fairly debatable doctrine that the issue of the insurer's position again may turn out to be wrong, but it was fairly debatable and they just be spoken in terms of reasonableness. The insurer may have taken the wrong position but its conduct or its position was reasonable. And then there may be statutory safe harbors we mentioned Florida a moment ago and Florida which has some bad faith problems and vulnerabilities but there an insurer must be provided with a civil remedy notice by the policyholder that alerts the insurer to an alleged violation and the insurer is given 60 days to cure it.
Speaker 3:Sometimes that means paying the claim or change its position or conduct, but so there is sort of a grace period there. So the other thing I would say is generally not always, but generally there must be a determination of coverage before there can be bad faith. In other words, if there's no coverage, generally there's no bad faith. But that's not always the case and, for example, in some states, failure to investigate can constitute bad faith, even if the claim is not covered. I call that a bad faith process, brian.
Speaker 2:I mean, it's just a minefield, isn't it? The more and more we talk about it and the more you know the things that insurers need to think about in each state and the differences between the states. And now you've got, you know, litigation funders out there. You know pushing to set insurers up. I wonder you know, maybe, if you can talk a bit about the bad faith set up and what's happening there and you know, and how the litigation funders also fit into that. Sure.
Speaker 3:As you mentioned, it's one of the you know it can arise in different scenarios, but a common scenario is when an insurer has a duty to defend. When you have a duty to defend as an insurer, you also have a concomitant right to control the defense, including settlement decisions. Sometimes you know family and professional liability policies the policyholder's consent is required for a settlement, but the insurer is controlling the purse. But an insurer that is not defending let's say, denied coverage or denied a defense it's at risk for being subject to the policyholder settling with the claimant, and the claimant and policyholder may reach a settlement in which they agree to a stipulated judgment or a judgment by confession and the claimant may agree not to execute or enforce the judgment against the policyholder. So, in other words, they're playing with insurer money and the amount of the settlement often tracks the amount of the applicable policy limits. They will then seek to enforce the judgment against the insurer, sometimes with the ordinance assignment, depending on the state. So by refusing to defend, the insurer may not have the right to assert coverage defenses and its ability to challenge the amount of the settlement may be limited. And there are a lot of ways that insurers can prevent this from happening so that they're not set up, including some cases by defending.
Speaker 3:The law and the doctrines vary a depending upon the states and the facts, but again, there are a lot of warning signs for these setups.
Speaker 3:There's things that you can do to protect yourself as an insurer, and it's important to get coverage counsel involved, because defense counsel is not necessarily equipped to deal with these issues.
Speaker 3:Plus, it has duties to the policyholder which may conflict with an insurer's interest in this context. So it's important to get coverage counsel involved because they can help avoid being set up. And sometimes it's not just a matter of being set up, it's defending against what's going to turn out to be a failure to settle all within policy limits case. And there are things you can do, things you can't do. A lot of times there are time limited demands that the settlement demand gives you a limited period of time to respond, and so there are ways and tried and true methods in various states to deal with this, and it's helpful to have coverage counsel involved, while you can make some decisions and take some steps to protect yourself from a fait accompli that are specialist plaintiff lawyers whose business model is creating these bad faith situations so they can exploit them, they can burst through the policy limits and then have these multi-million dollar settlement or trial opportunities.
Speaker 4:So it's an industry. There are people that know what they're doing, they know how to do it and that's why I think it is important to flag these internally, to have a system of flagging them internally where it there's a risk, and also have that support from coverage lawyers on the insurer side, as you say.
Speaker 3:You're exactly right, and you know there are firms that specialize in this, but more and more the play to inspire is a lot more organized. The policyholders a lot of them come from pretty sophisticated firms are very good at that. And again there are some warning signs, including when you're dealing with a policyholder that has limited assets and where the insurance is the only asset. They want to maximize that and you get into all sorts of situations bad faith. But you can have competing demands for limited policy limits and you want to make sure that as an insurer you're not paying more than your limits because you didn't do what you had to do or you didn't pay claims in the order that you should pay them.
Speaker 2:Scott, you mentioned warning signs, so you know how can bad faith be avoided. What advice have we got for our listeners around that?
Speaker 3:Well, I'll give you the few-minute version. Sometimes we spend, you know, a day going through all of this, but what I would say, generally speaking, is insurers are well-served by having a culture or a commitment to excellence that permeates throughout the company. A culture of excellence includes hiring, retaining talent and claims and underwriting professionals and supervisors, proper education and training and updating of them, proper supervision and quality control, having a practice of fairly and thoroughly investigating the claims and the facts, keeping abreast of applicable law. Even if the claims examiner is not a lawyer, many courts will hold them to knowing and applying the correct law as part of their business. Making sound coverage determinations is important, prompt and effective communications with policyholders and providing excellent service. But insurers are also well served by adopting a solid claims handling procedures that ensure that the claims handlers adhere to them and recognize that these may be discoverable.
Speaker 3:Insurers should make sure they comply with any regulation requirements that apply, whether it's timing and content and responding to a claim. They should have all the appropriate limitations and caveats in their procedures. They may apply only to certain types of claims. You have to supplement them from time to time and really these procedures have to be subject to the demands of a particular claim. All claims are not the same. If they were, and if you could just handle them routinely, insurers could hire trained SEALs to handle claims. Insurers are focused on their billing and their litigation management requirements, but they should keep in mind that these are guidelines. They are not the law, and sometimes they can be applied in ways that infringe upon the duties defense counsel may owe to the policy order, for example. So you have to review your procedures, update them regularly, be aware of any claims handling regulations that apply. Insurance regulations generally don't give rise to private positives of action. However, in some jurisdictions and instances, the failure to comply with some regulatory requirements could be used as evidence of bad faith.
Speaker 4:I think the escalation process is key because you practically, when you look at some of these claims because they're on policies where they have limited policy limits, they might be dealt with by junior claims handlers initially, or TPAs what we see is that there are mistakes made at that junior level and that's because they're juniors, and the ramifications of that are then the access to these large verdicts. So, having that process in place for saying, look, we can't have a senior person second chairing every single small claim, but you need to have a way of identifying and escalating those where bad faith could become a problem because you need to deal with it quickly. These cases can go wrong very, very rapidly and if you make those mistakes in the early stages of a settlement demand or whatever it is, then the damage is done.
Speaker 3:Yeah, that's an excellent point. The other thing I would say is that the content of the claims file is often very important. You should have a claims file that adequately documents the claims, investigation, the actions, any coverage determinations, and the file itself should demonstrate that the claim was handled reasonably properly without undue delay, that there's a good diary system in place. You want to demonstrate the diligence of the investigation and document the coverage determinations, and a lot of times you know claims handlers have a large number of files, but it is important to make sure the documentation you need and the evidence you need is in the file itself. If you want to demonstrate frequent and proper communication with the policyholder on coverage determination, progress of a claims investigation and processing significant developments regarding the case and settlement the policyholder's rights along the way, the file should be complete. Oftentimes the best practice is to maintain separate claims and defense files and to maintain separate litigation files.
Speaker 3:I would say the other thing claims professionals should consider is the effect on a judge or a jury of the documents in the claim file. What you document, what you say and how you say it may very well be evidence. Unlike me, you have to avoid using humor. You certainly want to avoid anything that evinces prejudice, bias or animus towards a policyholder or lack of concern of the policyholder's interest. You would be surprised how many comments that are made in a claim file that are just maybe casual comments, how they could blow up a trial. So you have to be very careful about the content of a client file. We have a separate white paper on social inflation and many of the recommendations for containing social inflation and minimizing bad faith exposure really overlap.
Speaker 2:So it's that combination of training, knowledge, best practice around processes and admin and files, alongside, I guess, making sure that you do have that escalation in place too, in the event that some of that doesn't work quite as it should do, but also recognising that not everyone in your claims team is going to be an expert in this field straight away. So very helpful. So, in terms of how our insurers should deal with bad faith if it is alleged, could you give us some thoughts on best practice in that area?
Speaker 3:Yes, I could speak to you on that until you're sleeping, but I'll give you the convinced version, which is you got to evaluate the claims and issues promptly and flag those claims that are problematic. You have to separate the speeches or poor phone rule bad faith claims from claims that present a danger. Maybe I'm tooting my own horn, but there are several others. Use quality experience coverage counsel. Generally, insurers are going to want to seek to dismiss or stay in the bad faith claims until the coverage claims are decided, which is one of the topics in the insurance law tool. But I think I have an old saying which is try no bad faith claim before it's time, and it's time may never come. So sometimes delaying or bifurcating claims will result in not having ever litigated a bad faith claim if there's no coverage determination or the suit gets resolved that it avoids having bad faith evidence. Influence the trier effect when you're talking about coverage. Influence the trier effect when you're talking about coverage. The other thing and this is picking up on something that Sam alluded to is take corrective action when it's warranted. I mention this because insurers should not be intimidated by bad faith claims, but they should not foreclose their option to change course when warranted. You may be stuck with some of the historical facts and decisions, but often there are things you could do during the course of the claim and the litigation to limit your bad faith exposure. You can reverse your decision and provide a defense. You can settle the claims against the policyholder and take it out of harm's way the claims against the policyholder and take it out of harm's way. You could revise your coverage position.
Speaker 3:These are just some examples, but sometimes the prudent course is to make some adjustments. One level of social inflation deals with the underlying liability and there the insurers and the policyholders are united. Typically their interests align. But the second level of social inflation, which is the coverage and bad faith level, divides policyholders and insurers, and that social inflation level is directed directly at insurers by policyholders. But what I am seeing is that both levels insurers often get beat on the messaging and are a little bit behind the times, and in the US they were caught unaware for a good amount of time with dealing with reptilian tactics by the plaintiff's bar, and these are things that must be combated. So you really have to learn and take the lessons from the past and apply them. But you also have to realize that the claims of today and tomorrow are not necessarily the claims of yesteryear. The jury's composition and predilections may not be the same, so we really need to be current in defending cases.
Speaker 2:That brings us to the end of the episode. I hope that's given you some strategies for dealing with bad faith claims and how to avoid them as much as possible. Thanks so much to Scott and Sam again for their time. If you're interested in talking further about any of the areas we've discussed today, our contact details are in the show notes, so please feel free to contact us. Thanks again for listening and goodbye.
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