June 1st marks the beginning of the Atlantichurricane season, but 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. At press time, members of the Oklahoma NationalGuard were sifting through rubble for survivors, stalled bythunderstorms and lightning. For adjusters, the scene is eerilyfamiliar. Roughly two years ago, a powerful EF5 twister rippedthrough 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 executives exploredbad-faith trends 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 claimsprofessionals' work and the efficacy of the organization as awhole. Below, we share some key points to ponder on the precipiceof another hurricane season.

What's the trap you see insurers fall into most often inthe realm of bad faith litigation?
One of the mostcommon things is that you have claims staff who are extremely busyand may not document everything or every conversation they mighthave had with an insured. They say, “I know I did this,” but it'snot documented in the files. So you've been set up, saying “This isin your procedure: You document every conversation you have withthe insured, the insureds lawyer?” “Yes.” “Well, you're saying youhad a conversation with the lawyers. Is that important todocument?” “Yes, absolutely.” “Where is it in your file?” “Well,it's not there, but I know I did it.” You're setting yourself upfor a classic trap. It doesn't mean you didn't do it, but you haveto agree that the golden rule is that if it was not documented itwasn't done. So then you're saying you violated the golden rule. Tosome extent it's the claim adjuster's file that goes ontrial. 

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 absolutely more common that you have first-party bad faith.Ordinarily, it's a property damage case where the issue is thetreatment of the insured, or the insured is unhappy with the resultor the offer that is being made (or the determination that there isno coverage). 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.”  Asa result, 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 respectiveorganizations?
First is training—both in-house andthrough organizations that provide seminars. This also applies tohaving your lawyers come in and do presentations to the claimsdepartment. Often claims departments are handling several states,or a dozen states, and you have to know the laws. What are yourobligations? What is the statute of limitations? Each state has alittle variation as to the requirements. [Discerning statutes]therefore becomes a difficult task for the individual claimshandler. You must be acutely aware and train them to: 1) be awareof the different regulations and laws in each state; and 2) besensitive enough to go to your in-house counsel and say, “Help meout here.” In addition, claims departments must be willing to spendthe money to ensure their staff 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 tosee with Hurricane Sandy, the tension with insureds who had floodcoverage, but had building coverage only and not contents. Or maybethey had building coverage but only to “X” amount. That becomes aquestion of who didn't explain what. As for the agent's role in allof this? Well, this highlights the importance of communication bothbefore and after the claim. This includes the agent thoroughlyexplaining what the policy covers so that insureds fully understandwhat the limits are.

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  insurersto overcome, regardless of where the case law is going.

Bad Faith Claims Across the Nation
While19 states have laws that specifically authorize consumers to makebad faith claims against P&C insurers, bad faith is a broad,flexible concept that plays out most often in court decisions andcase law. Stephen S. Ashley states in Bad Faith Actions:Liability and Damages, that almost 30 state courts recognizedarguments of bad faith by the mid-1990s. Here are some examples ofcourt decisions that have helped shaped the current arena.

• 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.