The NAIC model regulations and act were designed to ensure thatthe claim process was transparent, moved promptly, and reached anequitable result. All of the adopting states imposed upon carriersrequirements to report to first- and, in some instances,third-party claimants as to the progress of the insurer'sinvestigation and the date by which a resolution of the claim maybe expected fulfill these goals.

Adjusters face a significant problem when they encounter a claimwhere there exists a suspicion that the insured either contributedto the loss or has intentionally exaggerated the estimate ofdamages. How does one handle the claim consistent with the policiesembodied in the regulations and statutes?

A total of 19 states provide some form of guidance andprotection for the claim adjuster. Those states are listedbelow:

The protections fall generally within two classifications:extensions or waivers of the time limit by which the investigationmust be completed, the claim accepted or denied, and what theinsured must be told regarding the evidence of potentialwrongdoing.

One common requirement is that the evidence supporting suchsuspicions must be documented in the claim file. In other words, a“gut hunch” is not sufficient. Additionally, some states — forexample, Alabama, New York, New Jersey, Minnesota, Maryland,Pennsylvania, and West Virginia — specifically require that theevidence be available for inspection by state authorities. In allother states, the states' ability to review the file isimplicit.

Case In Point

Examples of protection are as follows: Alaska and Marylandrequire that insurers advise as to the status every 45 days andstate the reasons why more time is needed while the investigationis in process. [3 AAC 26.070; MD ADC 31.15.07.04(B) and MD ADC31.15.07.04(E)] However, “if there is a reasonable basis supportedby specific information for suspecting that a first-party claimanthas fraudulently caused or wrongfully contributed to the loss, andthe basis is documented in the claim file, then this reason neednot be included in the written request for additional time tocomplete the investigation or the written denial.”

In three states, a reasonable basis, supported by specificinformation that the insured has fraudulently caused or contributedto the loss, converts the time for completion of the investigationfrom a specific deadline to a “reasonable” time frame. No mentionis made of what the insured must be told as the basis for theextension of time. These states are Alabama in 482-1-125-.07(1);Kentucky in 806 KAR 12:095 ? 6; and Nebraska in 210 NAC ? 60-008.03. Oklahoma also extends the time limit for acceptance orrejection of a first-party claim. [36 Okl.St. Ann. ? 1250.7(C); OKADC 365:15-3-7(c)] Absent such evidence of fraud, the maximum is120 days from the notice of claim.

Four states relieve the carrier of the time limits and therequirement to advise the first-party claimant of the reasons forthe extension where there is specific information that the insuredhas fraudulently caused or contributed to the loss by arson. Thesestates are:

• Arizona [AZ ADC R20-6-801(G)(1)(c)]
• Arkansas [AR ADC INS 43 9(b)]
• Kansas [KS ADC 40-1-34 ; N.A.I.C. 902-1 (January 1981 ed.); KSST 40-2404(9)(e)]
• Texas [V.T.C.A., Insurance Code 542.056(b)]

The limitation as to arson appears to leave open the question ofwhat an adjuster should do where there is no specific evidence ofincendiary origin but the lost property descriptions or valuationsare very questionable.

Four states extend both the time limit for acceptance orrejection of the first-party claim and the requirement to informthe insured of the reasons for the extension if there is a“reasonable basis” to assert fraud or causation by the insured.These states are:

• West Virginia [W. Va. C.S.R. 114-14-6.7]
• Iowa [IA ADC 191-15.41(3)]
• New Jersey [N.J.A.C. 11:2-17.7(g)]
• Pennsylvania [31 PA ADC 146.7]

In all four states, the carrier must advise the insured as toacceptance or rejection in a reasonable amount of time.

New York is similar to West Virginia, Iowa, New Jersey, andPennsylvania with the added requirement in 11 NYCRR 216.5(b) thatthe insurer must submit a specific report to the Insurance FraudBureau when fraud or causation by the insured is suspected.

California extends the waivers to both first- and third-partyclaims; statute 10 CA ADC 2695.7(b)(1) extends the 40-day timeframe for accepting or rejecting the claim to 80 days or, givenundefined circumstances, indefinitely if the carrier has a“reasonable basis supported by specific information for belief thatclaim is false or fraudulent.” Under the 10 CA ADC 2695.7(b) (2)statute, the insurer is “not required to disclose information thatcould be reasonably expected to alert the claimant that the subjectclaim is being investigated as a suspected fraudulent claim.”

Additionally, Rhode Island extends the waiver of the time tocomplete the investigation to both first and third-party claims.[RI ADC 02 030 073]

Minnesota also extends the protection to both first- andthird-party claimants and appears to allow for a more liberalinterpretation of the quality of the evidence by stating “whereevidence of suspected fraud is present, the reasons for failure tocomplete the investigation within the time period need not bespecific.” The drafters did not require that the evidence be“specific.” [M.S.A. ? 72A.201 Subd. 4(3) (i) - (4)]

New Hampshire simply requires that when the reason for delay incompletion of the investigation is suspected fraud a “delay lettershall be deemed sufficient if it indicates that the reason for thedelay is that further investigation is needed to determine thevalidity of the claim.” [NH ADC INS 1002.05]

In the next article, we'll further examine the handling ofsuspicious claims in these jurisdictions and in the states that donot provide for waivers of regulatory requirements.

Tim Lynch and Anne Bandle are insurance defense attorneyswith Lynch and Associates in Anchorage, Alaska. They also aremembers of the Council on Litigation Management. They can bereached at 907-276-3222, [email protected], [email protected],www.northlaw.com.