(Editor's Note: Attorney Barry Zalmahas provided this installment of Claims Commandments in an effortto offer direction to all parties involved in claimshandling.)

Commandment I:Thou Shall Always Conduct A ThoroughInvestigation

Investigation is a search for truth. It isan art form where facts are established. It has been defined by thestate of California, for example, as follows:

“Investigation” means all activities of aninsurer or its claims agent related to the determination ofcoverage, liabilities, or nature and extent of loss or damage forwhich benefits are afforded by an insurance policy, obligations orduties under a bond, and other obligations or duties arising froman insurance policy or bond. [California Code of Regulations,10CFR2695.2(k)]

Notice provisions in insurance policiesserve the important function of allowing the insurer theopportunity to make a timely and thorough investigation of theinsured's claim. American States Insurance Co. v. NationalCycle, 260 Ill. App. 3d 299, 310-11, 631 N.E.2d 1292, 197 Ill.Dec. 833 (1994); Twin City Fire Insurance Co., 266 Ill.App. 3d at 7.

Courts will not subject an insurancecompany to a choice between liability under abad-faith-failure-to-investigate theory for publication of a denialof coverage without an adequate investigation, and liability for aconstructive denial imposed after it has conducted a more thoroughinvestigation that confirms an earlier determination of nocoverage, on the theory of delay coupled with a wrongful intent.Rather, courts required that an insurer complete a thoroughinvestigation before it makes a decision with regard to a claim fordefense or indemnity under an insurance policy. Initial conclusionsbased on a bare reading of a law suit or initial investigativeinterview are not enough.

Although an insurance company is entitledto make a thorough investigation to determine whether there iscoverage under its policy of insurance, the company acts at itsperil in refusing to defend its insured in that, if it issubsequently determined that the company erroneously deniedcoverage, the company will be liable for damages for breach of itsagreement under the policy. Therefore, insurers should conducttheir thorough investigation as soon as possible and if a defenseis required before the investigation can be completed provide adefense to the insured under a reservation of rights.

When an insurer denies or delays payment ofpolicy benefits due to the existence of a genuine dispute with itsinsured as to the existence of coverage liability, the insurancecompany will not be liable in bad faith even though it may beliable for breach of contract. One court gave the followinginstruction to a jury:

In determining whether or not an insurancecompany had a genuine dispute as to whether or not a loss wascovered, you may consider among the following: (1) Whether theinsurance company was guilty of misrepresenting the nature of theinvestigation; (2) Whether the insurance company adjusters andinvestigators lied during their depositions or to the insured; (3)Whether the insurance company dishonestly selected its experts; (4)Whether the insurance company experts were unreasonable; and, (5)Whether the insurance company failed to conduct a thoroughinvestigation.” [McCoy v. Progressive West Insurance, Co.,90 Cal.Rptr.3d 74, 171 Cal.App.4th 785 (Cal.App. Dist.202/04/2009)]

An insurer has a duty to conduct anappropriate and careful investigation prior to making a decision ona claim. However, if after conducting a thorough investigation ofthe facts and circumstances giving rise to a claim, the insurer canreasonably conclude that the claim is debatable or questionable, athere can be no bad faith even though it refused to pay the claimincorrectly.

How to Conduct a ThoroughInvestigation

The investigative interview is a structuredconversation between a trained and experienced interviewer and anperson who has no training in the interview. It is not aninterrogation. It is not the stuff of spy films, policeinvestigations, or prisoner of war camps. Interviews happeneverywhere. Interviewing is performed by almost everyone. Sinceinterviewing is an art the most effective interview is oneperformed by someone with knowledge of the art.

Investigation to gather information is anartistic endeavor. The art is supplemented with scientifictechnique obtained from criminal investigators and professionalpsychologists but is performed by individuals without thinkingabout what it is they are doing. The art of the investigation mustbe honed until it becomes second nature much as a skilled typistdoes not think where to put his or her fingers while typing.

The art of uncovering the truth by aprofessional draws heavily from the police sciences. The policescience of interrogation draws heavily upon human nature and theskills of the conversationalist. Because the interrogation isformal, in a confined space and conducted by a person in authoritylike a police officer or a lawyer examining a witness under oath incourt, the techniques used are more formal and controlled than aninsurance investigation.

Insurance investigators are compelled toget the information they need by intelligence, wit, skill andexperience. They put people at ease. The skill of the professionalcauses the person being investigated to want to give information tothe investigator. The most important skill of the professional isto cause the person being investigated to want to give informationto the professional that the professional needs. To conduct athorough investigation the claims investigator should, at aminimum, perform the following:

• Read the loss notice and policy of insurance.
• If a lawsuit has been filed read the lawsuit in conjunctionwith the policy wording.
• Interview the person insured — preferably in person.
• Obtain a recorded statement from the person insured concerningthe facts of the loss.
• Interview and obtain a recorded statement from everyindependent witness.
• Interview and obtain a recorded statement from the claimant ifsuit has not been filed.
• If suit has been filed interview the attorney for the claimantabout the factual basis for the suit.
• View the scene of the incident.
• Obtain all documents that have relevance to the claim,including: the insured's copy of the policy; a police orfire report, if any; medical records; financial records, theapplication for insurance; and contracts, if any, between theinsured and the claimant.
• Consult with necessary experts like investigativeengineers, coverage counsel, defense counsel, medicalprofessionals, architects and forensic accountants.
• If it appears that there is coverage for the claimed lossadvise the insured of the insurer's decision.
• If it appears that there is no coverage consult with managementto review the facts gathered by the thorough investigation before adecision is made.

Failure to conduct a thorough investigation is a breach of thepromises made by the policy of insurance to provide defense and/orindemnity to the person insured. Failure can also result in theinsurer being sued for the tort of bad faith. Insurers must, tocomply with current law conduct:

• A detailed investigation of the facts of the loss and policyacquisition.
• A determination of the expectations of the insured and theinsurer at the time the policy was acquired.
• A determination of the purposes for which the policy wasacquired.
• An examination of all communications between the insurer andthe insured or their representatives.
• If the investigation is not conducted, the insurer faces suitfor the tort of bad faith.

The thorough investigation requirement first enunciated by theCalifornia Supreme Court in Egan v. Mutual of Omaha InsuranceCo., 24 Cal. 3d 809, 620 P.2d 141, 169 Cal. Rptr. 691 (Cal.08/14/1979) is essential when attempting to interpret a disputedpolicy of insurance. In Egan, the Supreme Courtconcluded that “an insurer cannot reasonably and in good faith denypayments to its insured without thoroughly investigating thefoundation for its denial.”

Commandment II: Thou ShallCommunicate Often

Insurance claims is a service business. The claims personprovides a service to the insured and the insurer. Communication isessential to providing the service promised by the insurancepolicy. In some states, like California, communications isrequired by regulation:

Every insurer shall disclose to a first party claimant orbeneficiary, all benefits, coverage, time limits or otherprovisions of any insurance policy issued by that insurer that mayapply to the claim presented by the claimant. When additionalbenefits might reasonably be payable under an insured's policy uponreceipt of additional proofs of claim, the insurer shallimmediately communicate this fact to the insured and cooperate withand assist the insured in determining the extent of the insurer'sadditional liability. [10 CCR 2695.4 (a)]

This means that the initial written contact with an insured in afirst party property claim should advise the insured of allbenefits, coverage, time limits, or other provisions of anyinsurance policy issued by that insurer that may apply to the claimpresented by a first party insured.

When a claims professional receives any communication from aninsured, third party claimant, or a representative of the insuredor claimant regarding a claim that reasonably suggests that aresponse is expected, should immediately after receipt of thatcommunication, furnish the claimant with a complete response basedon the facts as then known by the claims person. Some regulationsallow the claims person up to 20 days to respond. Good claimshandling requires an immediate response. If the response is oralrather than written it should be noted in the claims person's fileor log. Upon receiving notice of claim, every insurance claimsperson should immediately do the following:

• Acknowledge receipt of such notice to the claimant orinsured.
• If the acknowledgment is not in writing, a notation ofacknowledgment must be made in the insurer's claim file anddated.
• Provide to the claimant or insured necessary forms,instructions, and reasonable assistance, including but not limitedto, specifying the information the claimant must provide for proofof claim;
• Begin any necessary investigation of the claim.

The investigation must be a “real,” meaning the claims person orinvestigator must actually contact the claimant, the witnesses andstart collecting the documents needed to complete the claimsinvestigation. Investigation and must be started immediately afterreceiving notice of claim. Merely reading a policy wording andnotice of claim is not the beginning of an investigation or aninvestigation at all. Upon receiving proof of claim, everyinsurance claims person should immediately accept or deny theclaim, in whole or in part.

The amounts accepted or denied shall be clearly documented inthe claim file unless the claim has been denied in its entirety.Some states allow up to 40 calendar days to respond. If moretime is required to determine whether a claim should be acceptedand/or denied in whole or in part, then the claims adjuster shouldprovide the claimant or insured written notice of the need foradditional time. This written notice should specify anyadditional information the insurance claims person requires inorder to make a determination.

The written notice should state any continuing reasons for theinsurer's inability to make a determination. Thereafter, thewritten notice should be provided at least every thirty calendardays until a determination is made. If the determinationcannot be made until some future event occurs, then the claimsperson should comply with this continuing notice requirement byadvising the claimant and/or insured of the situation and providingan estimate as to when the determination can be made.

Effective diary systems are also essential to professionalclaims handling or the Regulations will be violated withregularity. Every claims person must conduct and diligentlypursue a thorough, fair and objective investigation and should notpersist in seeking information not reasonably required for ormaterial to the resolution of a claim dispute. The claimsperson's obligation is not limited to communication with theinsured or the claimant.

The claims person and the insurer have an obligation tocommunicate with the state, police agencies, or prosecutors. InCalifornia, and most states, such a communication is absolutelyimmune from suit. Pursuant to section California Civil Code Section47(b), a privilege is stated that bars a civil action for damagesfor communications made “[i]n any (1) legislative proceeding, (2)judicial proceeding, (3) in any other official proceedingauthorized by law, or (4) in the initiation or course of any otherproceeding authorized by law and reviewable pursuant to [statutesgoverning writs of mandate],” with certain statutoryexceptions.

The privilege established by this subdivision often is referredto as an “absolute” privilege, and it bars all tort causes ofaction except a claim for malicious prosecution. “The absoluteprivilege in section 47 represents a value judgment thatfacilitating the “utmost freedom of communication between citizensand public authorities whose responsibility is to investigate andremedy wrongdoing” is more important than the “'occasional harmthat might befall a defamed individual.'” (See Imig v.Ferrar (1977) 70 Cal. App. 3d 48, 55-56 [138 Cal. Rptr.540].)”

In summation, the claims professional must communicatepromptly and often with the insured, the claimant and the insured(if a third party claim) and counsel for each. In doing so theclaims person establishes a rapport with the insured and/orclaimant and will make resolution of the claim easier. No claimsperson should ever misrepresent or conceal benefits, coverages,time limits or other provisions of the policy from the insured orthe claimant.