The $32M Question: How Should Insurers Approach First-Party Claims?

Finding that Farmers engaged in deceptive acts, acted unconscionably, committed fraud, and did so knowingly, a Texas jury gave Linda Ballard $6 million for the house, $12 million in punitive damages, $5 million for emotional distress, and $9 million in attorneys fees.

On Dec. 19, 2002, the Texas Court of Appeals, in Allison v. Fire Insurance Exchange, found the evidence in the trial record was both legally and factually insufficient to support the jurys findings of unconscionability or fraud on the part of the insurer. The court further concluded that there was no evidence to support the jurys finding that the insurer "knowingly" breached its duty of good faith and fair dealing toward Ballard.

Because a finding of a knowing violation is required to uphold punitive and mental anguish damages, the court reversed the jurys awards for these damages and rendered judgment that Ballard take nothing for punitive and mental anguish damages. The court did, however, affirm the actual damages award in part, in the amount of $4,006,320.72, in addition to pre-judgment and post-judgment interest and attorneys fees.

The Ballard case has received national attention. And despite the recent decision by the Texas Court of Appeals, insurers providing coverage to residential and commercial properties need to take the message sent by the Texas jury very seriously.

In doing so, the inevitable question becomes, what steps can an insurer take to prevent the adjustment of a mold claim from evolving into bad faith litigation?

First, here are some mold basics, most of which we have all come to know given the recent proliferation of media attention to the potential harmful effects that mold poses to humans.

For instance, we know that mold is a fungus, and it is virtually everywhere. We also know that mold needs three things to thrive: moisture, a nutrient source and an optimum temperature.

In turn, most mold problems in the residential setting occur when there is a loss leading to water damage. Whether caused from a broken pipe, leaky roof or other water intrusion, mold can spread very quickly, causing extensive property damage and potentially affecting individuals exposed to harmful mycotoxins produced by the mold.

We know the basics, but what are the guidelines for the investigation and removal of mold in buildings?

Unfortunately, there are still none. The New York City Department of Health, however, recommends that an environmental assessment be conducted as soon as possible. Such an assessment should include a visual inspection and surface sampling as well as air sampling if there is evidence of physical injury or a question as to whether the ventilation system is contaminated. If mold is discovered, the contaminated areas must be removed or cleaned while due consideration is given to the health of the workers given such a task.

Although there are no uniform standards for investigating and remediating mold claims, insurers are not relieved of their duties to properly investigate and adjust the claim.

Lets turn then to the issue of bad faith.

Bad faith has been defined a variety of different ways in courts around the country. Many states have also codified the concept of "bad faith," outlining the types of prohibited conduct and the standards that will be utilized to judge an insurers actions in adjusting claims.

As it relates to mold cases, an insurers bad faith exposure arises in a number of different settings. The bad faith claim can arise from incorrect policy interpretation, improper investigation of the claim, inadequate remediation of contaminated areas, or delays in adjusting once notice is given to the insurer.

Because an insurers investigation into a mold claim is the most fertile ground for bad faith, the initial steps taken by an insurer are critical to the proper handling of mold claims. The following are some tips for insurers responding to mold claims that will help protect the insurer from bad faith litigation.

Respond as soon as possible.

Without a doubt, the most important aspect of responding to a mold claim is to investigate quickly. A delay of over 72 hours from the onset of water damage could result in additional property damage totaling in the thousands. Upon notice from the insured, an adjuster should set up an immediate site inspection.

Ask about health problems.

Even though permanent bodily injuries resulting from mold exposure are rare, an adjuster should nonetheless ask the insured about any noticeable health problems among those exposed to the mold.

Some people (children, those with compromised immune systems, etc.) appear to be at a higher risk for potential bodily injury as a result of exposure to certain molds. An insurer will certainly not be absolved of liability because an adjuster failed to ask questions pertinent to this issue.

Ask about problems with the property.

A thorough, comprehensive history of the covered property can prevent many future headaches.

An insured will likely be more open, honest and straightforward during the initial conversation than once the discussions turn toward coverage and payments.

Also, an adjuster should inquire as to whether there have been any recent repairs or maintenance to the property. If these repairs or maintenance caused the water damage, the adjusters questioning will uncover a responsible party early in the investigation.

Decide whether to initially provide a coverage position letter.

An adjuster should always consider sending the insured a reservation of rights letter upon notice of the claim. This is especially true when there has been a long delay (several months) between the onset of water damage and notice of the claim.

(A reservation of rights letter is basically an insurer's initial written notice to a policyholder that it is "reserving" its right to deny coverage of a claim when it appears that there might be a coverage question based on the terms of the policy.)

Preserving all of the insurers available defenses is critical, and a reservation of rights letter also allows the insured to stay informed of the issues that may need to be addressed as part of the insurers investigation.

Take the opportunity to conduct a proper visual inspection

Responding quickly to a claim is important, but totally meaningless if the inspection is not thorough.

The responding adjuster should be trained to identify mold. Potential bad faith litigation will focus on the degree of training, instruction and protocols that the adjuster has been provided.

A deposition of the adjuster will go more smoothly if the adjuster can competently answer questions concerning these topics.

After completion of the inspection, the adjuster should quickly obtain an estimate from a repair contractor (assuming the policy in question provides coverage). Likewise, if a consulting expert is needed, this too should be set up as quickly as possibleremember, receiving test results can take many weeks. The longer a delay in action, the more open an insurer becomes to a bad faith claim.

Rely on experience

When appropriate, an adjuster should consult with trained and certified consultants to conduct further investigations and repair affected areas. Saving a few dollars on unknown and unreliable "consultants" could actually turn into an enormous cost if the claim is not adjusted properly.

Likewise, the hired consultants opinions should not be ignored, even if the opinions do not conform to the adjusters initial assessment. Problems result when adjusters forget that their jobs are to adjust insurance claims and not investigate and interpret issues requiring specialized knowledge.

Retain an Attorney

A seasoned attorney should be involved as soon as litigation looks likely, or even if there are unresolved problems with the insured and the mold claim.

When faced with difficult issues or decisions that may have potential legal consequences (for example, the troubling issue of whether there is a duty to warn neighboring residents of mold contamination), an adjuster should retain an experienced attorney. The advice of counsel may prove to be an effective tool in combating a bad faith claim.

In conclusion, while insurance companies routinely adjust mold claims with little problem, they need to be acutely aware that mold claims need to be handled promptly and correctly in order to avoid the prospect of a bad faith finding.

By responding quickly, following a defined protocol, and relying upon those with specialized knowledge, insurers can significantly reduce their potential bad faith exposure when presented with mold claims.

Andrew S. Boris is a partner in the Chicago office of the law firm of Tressler, Soderstrom, Maloney & Priess. His practice focuses on litigation of complex insurance coverage and reinsurance

Reproduced from National Underwriter Edition, February 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.