Although the Atlantic hurricane season doesn't officially beginuntil June 1, disaster season is well underway, producingstorms of terrifying magnitude. The two-mile-wide tornado that torethrough Moore outside of Oklahoma City on May 20, 2013 claimed atleast 24 lives. For adjusters, the scene is eerily familiar. Roughly two years ago, a powerful EF5 twisterripped through Joplin, Missouri, killing 161 people.

Amid the debris and wreckage, claims adjusters must help policyholderspiece their lives back together, which can be an emotionallyjarring and complicated process. Without handling claims stemming from catastrophes skillfully, insurerscan find themselves bombarded with accusations, not to mentionplenty of bad press. That's why it is imperative to continuallyrefine practices while cultivating a culture of “good faith” atyour claims organization.

At the recent “Bad Faith Litigation” conference in Philadelphia,expert litigators and high-level insurance execs explored bad-faithtrends while reaffirming claims best practices integral to mitigating such accusations.Present at the conference was Jay Barry Harris, a litigator atFineman Krekstein & Harris with more than 30 years ofexperience. Representing both insurers and insureds across thespectrum of coverage and liability disputes over the years, heknows exactly how good intentions can sometimes lead to allegationsof bad faith.

Harris' session titled, “Claims Management: Properly TrainingClaims Handlers, and Implementing Best Practices to MinimizeInstitutional Bad Faith Claims” is a great starting point inaddressing practical ways to ensure the integrity of claims' workand the efficacy of the organization as a whole. Below, we sharesome key points to ponder on the precipice of trouble brewing inthe Atlantic.

What is the trap you see insurers fall into most oftenin the realm of bad faith litigation?

One of the most common things is that you have claims staff whoare extremely busy and may not document everything or everyconversation they might have had with an insured. They say, “I knowI did this,” but it's not documented in the files. So you've beenset up, saying “This is in your procedure: You document everyconversation you have with the insured, the insureds lawyer?”“Yes.” “Well, you're saying you had a conversation with thelawyers. Is that important to document?” “Yes, absolutely.” “Whereis it in your file?” “Well, it's not there, but I know I did it.”You're setting yourself up for a classic trap. It doesn't mean youdidn't do it, but you have to agree that the golden rule is that ifit was not documented it wasn't done. So then you're saying youviolated the golden rule. To some extent it's the claim adjuster'sfile that goes on trial.

Are bad faith allegations more common in certainsituations? How do the issues differ depending ontype?

You have third-party and first-party bad faith. It is absolutelymore common that you have first-party bad faith. Ordinarily, it's aproperty damage case where the issue is the treatment of theinsured, or the insured is unhappy with the result or the offerthat is being made (or the determination that there is nocoverage). Then there is the bad faith allegation along with thebreach of contract allegation.

The more difficult cases, however, are the third-party, whereyou're defending the insured. The most difficult ones are where youhave a large exposure with a very good liability defense but alimited policy. In those cases, you realize if you don't win yourinsured is exposed to liability beyond the limits of the policy.That's where it becomes the insurer saying, “Settle with them; givethem the money.” Meanwhile, you say, “Well, no, my evaluation isthat we have a very good chance of winning this case.” As aresult, you get the tension between the insurer, who is usuallyaligned with defense counsel. That tension can create friction, aswell as an environment where bad faith rears its head.

How can claims managers create a culture of adherence tobest practices at their respective organizations?

First is training—both in-house and through organizations thatprovide seminars. This also applies to having your lawyers come inand do presentations to the claims department. Often claimsdepartments are handling several states, or a dozen states, and youhave to know the laws. What are your obligations? What is thestatute of limitations? Each state has a little variation as to therequirements. [Discerning statutes] therefore becomes a difficulttask for the individual claims handler. You must be acutely awareand train them to: 1) be aware of the different regulations andlaws in each state; and 2) be sensitive enough to go to yourin-house counsel and say, “Help me out here.” In addition, claimsdepartments must be willing to spend the money to ensure theirstaff is properly trained.

Second, in this age of technology, we have to be careful that wedon't overburden our claims handlers. That often leads todifficulty, and it has nothing to do with the intentions or eventhe structure that you have. Every now and then something slipsthrough the cracks because we're human beings. You want to makesure (to the best of your ability) there are controls in place tomake sure your claims people are following some standardprocedures. And you have to make sure claims handlers have the timeto do that. A lot of claims departments are doing their ownin-house investigations, and they're not relying on outsideadjusters for the routine investigations. That adds another levelof activity for claims handlers. It might save the company money,but it means you're giving more responsibility to your individualclaims handlers.

The paramount issue, regardless of where you are, whether in thefirst- or third-party arena, is making certain you considered theinsured's interests. In the first-party arena, one of the bestanswers I've had is a claims rep during a deposition, in responseto the question, “What's your job?” was “My job is to findcoverage.” Rather than “My job is to determine if there iscoverage.” This shows you are looking to help the insured.That could become the overriding philosophical approach that gets[insurers] out from under the bias against the industry.

What recent events and court decisions are influencingthe realm of bad faith litigation?

I'm starting to see with Hurricane Sandy, the tension withinsureds who had flood coverage, but had building coverage only andnot contents. Or maybe they had building coverage but only to “X”amount.

It becomes a question of who didn't explainwhat. As for the agent's role in all of this? Well, thishighlights the importance of communication both before and afterthe claim. This includes the agent thoroughly explaining what thepolicy covers so that insureds fully understand what the limitsare.

As I said before, the laws and court decisions arestate-specific. But the good practices, regardless of what's goingon it each individual state, is what will allow insurers toovercome, regardless of where the case law is going.

Bad Faith Claims Across the Nation

While 19 states have laws that specifically authorize consumersto make bad faith claims against P&C insurers, bad faith is abroad, flexible concept that plays out most often in courtdecisions and case law. Stephen S. Ashley states in Bad FaithActions: Liability and Damages, that almost 30 state courtsrecognized arguments of bad faith by the mid-1990s. Here are someexamples of court decisions that have helped shaped the currentarena.

• In 1958, the California Supreme Court's decision inComunale v. Traders & General Ins. Co. establishedthat insureds can establish tort claims in instances of bad faithon the part of insurance companies. This case specifically dealtwith third-party liability insurance; however, in 1973 Californiaextended the same rule to first-party fire insurance inGruenberg v. Aetna Ins. Co. Other states have sincefollowed California's lead.
• In 2003, a court overturned $145 million in punitive damagesagainst State Farm in State Farm Mutual Auto. Ins. Co. v.Campbell. This decision affirms that due process typicallycaps punitive damages to ten times the amount of compensatorydamages. This type of judgment is based on the degree of theplaintiff's reprehensibility and the disparity between thepotential harm and the punitive damages assigned.
• Bad faith claims are particularly rampant in cases of toxicmold. For example in 2001, a Texas jury awarded Melinda Ballard(Ballard, et al. v. Fire Insurance Exchange) $32 million.Ballard had contacted her insurance company about a plumbing leakand subsequent damage to flooring. The company attributed thedamage to factors not covered by the policy. The lack of repairspurred the growth of black mold, which caused illness in theBallard family. The jury found the insurance company was unfair,and that the insurer did not appoint a competent appraiser. In2002, the Texas Court of Appeals upheld the finding of a breach ofgood faith; however the court overturned the jury's conclusion thatthe insurer acted fraudulently and failed to appoint a competentappraiser. As a result, the punitive and mental anguish damagesagainst the insurer were reversed.