One evening a couple of months ago, our niece called with a claim problem. It seems that her sister was involved in a collision on a bridge over Tampa Bay. She had stopped for a traffic jam and was rear-ended by a limousine transporting two passengers to the airport. About two seconds later she felt a second impact, and a moment after that a third.
Any of us who have been in the business very long know the routine: the innocent first vehicle owner collects 100 percent, the second vehicle collects 100 percent of the damage to the rear of his vehicle and one-third to half of the front end damage, the third car gets about the same, and the fourth vehicle pays 100 percent of the damage to the rear of the third car, and somewhere around a third to a half of the remaining damage. At least, that is the theory of how it is supposed to work, if everyone is honest.
Unfortunately, it seems that integrity and honesty are things we left in the 20th century. The highway patrol showed up at this wreck, got two police reports explaining the accident as described above, as two separate rear-end collisions, not just one big one. So it would seem that our niece's sister, we'll call her Sis, would have no problem. Wanna bet?
The limo driver sent his two passengers off in a passing taxi to the airport as fast as he could. Ergo, no independent witnesses. Then he told his employer, and the limo's liability insurer, that he had not hit Sis first, that he was struck and pushed into her. They liked that idea, and denied Sis' claim. The insurer of the third and fourth vehicles, reviewing the police reports, admitted liability, but refused to pay for more than one third of Sis's damage.
Here is the really nasty part: Sis was driving Mom's car. It was insured for collision, with a fairly high deductible, with one of those national "We're cheaper and better as long as you don't make claims" insurers, who also insure Mom's home. If you know anything about insurance in Florida, you know that it is almost impossible to get homeowners' insurance due to the costs of Hurricane Andrew (at least, that's the excuse). Mom has had a couple of previous claims, minor things, and her agent warned her that, if there were another, the company would not renew her coverages. So, Mom was not about to make a collision claim.
It was not that our niece does not know all about claims; she is a licensed Florida adjuster, and her husband is an attorney. He is busy handling EEOC cases, however, and the limo company's insurer probably is not easily intimidated. Everybody has provided statements, truthful or otherwise, and that insurer's position is, "So sue us already." With only a few thousand dollars' worth of material damage, however, even the firm of Sleezebag Shyster & Shrewd would not touch it.
Few Good Options
If a policyholder lies about his liability and an insurer elects to deny and defend, even in the face of an adverse police report or whatever other investigation it may have made, the innocent victim begins to see the reason that our industry is so hated by the American public. The simple answer is to make the collision claim, and allow the carrier to subrogate and take the case to Intercompany Arbitration, where, hopefully, justice will prevail and Mom will get her deductible back. As we have noted, however, that was not an option here.
Another thought would be small claims court, but the limo driver probably is protecting his job and, if he lied to the insurer, he probably would lie to the court. Even if Sis and Mom won, how are they going to collect the judgment?
Or they could hire a good plaintiff lawyer and sue all the rascals. (Yes, Virginia, there are good plaintiff lawyers and, sometimes, they are a victim's last resort.) For a third of the amount of property damage to Mom's car, reduced by the amounts paid by insurers for cars three and four, no lawyer, good or bad, is going to waste time on this case. We all are entitled to our day in court, but principle is very expensive.
Our niece wanted to know if the Great Iconoclast had any ideas. Duhh, gosh. Let's look in the book. (I just write them; I do not necessarily remember what's in them.) I dug out my chapter on "Good Faith Duties and Role of the State" in Excess Liability – Rights and Duties of Commercial Risk Insureds and Insurers, 4th Ed., and, under ?2:45 subtitled, "Third party claims for unfair claim practices," found footnote 1 for Florida:
State Farm v. Zebrowski, 706 So.2d 275 [Fla., 1997]; third party actions permitted if actual damage due to violation of the Unfair Claims Practice Act is provable. Case is in conflict with Cardenas v. Miami-Dade Yellow Cab Co., 538 So.2d 491 [Fla. App. 3rd Dist., 1989.]
Actually, the Zebrowski case is not really all that clear, for the Florida Supreme Court ruled that application of good faith handling under ?624.155(1) (b), the Florida Unfair Claim Practice Act, runs solely to the insured and, therefore, any rights of a third party depend on the insurer's violation of its duty to its own insured.
So, Sis and Mom were in a pickle, and complaining to the Florida Insurance Department about that mean old insurance company probably was going to be a waste of energy. After all, that insurer's duty of good faith runs to its own insured, the limo company, not Sis, and their insured has just as much right to be believed in this who-hit-whom-first dispute as does Sis. Mom ends up between a rock and a very hard place.
Third Party Bad Faith
Very few states recognize third party rights of action under their Unfair Claim Settlement Practice legislation, whether it follows the NAIC Model Act or is homegrown. California was the first but, after a wild decade of expanding and defining litigation, the California Supreme Court, in effect, reversed itself in the 1988 Moradi-Shalal case, and we do not hear much about such litigation out there any more.
Next came Montana, with its Klaudt v. Flink case in 1983, which triggered such chaos that many insurers threatened to pull out of the state. Today, the only two states that definitely permit third party bad faith claims under their Unfair Claim Practice Acts are Kentucky (State Farm v. Reeder, 763 S.W.2d 116 [1988]) and West Virginia (Hayseeds Inc. v. State Farm, 177 W.Va 323, 352 S.E.2d 73 [1986]).
Courts have created confusing or conflicting situations in several states. In Massachusetts, for example, third party claims can be brought under unfair trade practice legislation, Chapter 93-A, and similar rights were extended in Louisiana legislation, but overruled as applicable to third parties by the state's Second Appellate Circuit in 1996. Very few states permit even first party claims under their Unfair Claim Settlement Practice Acts.
Most courts hold that the duty of good faith derives from the contractual relationship between the insured and the insurer. With the possible exception of an uninsured motorist claimant, who, technically, is an "insured" under the coverage, a third party claimant is not a party to that contractual relationship. The only duty an insurer has to a third party is the same duty that its insured has to that party. When it comes to a swearing match as to who hit whom first, as in Sis' case, the insurer that decides its own insured is a liar may be acting in bad faith unless it has very good evidence to the contrary. Consider that the highway patrol officer who created separate reports and recorded Sis's allegations was not an eye witness; in many cases a police report is useless. It is not a policeman's job to determine tort liability.
An insurer that relies solely on police reports for its liability determination is not investigating the claim, it is simply decorating a file. The NAIC Model Act, Paragraph C, states that unfair acts include "failing to adopt and implement reasonable standards for the prompt investigation and settlement of claims arising under its policies." This does not state, although perhaps it ought, that it is an unfair act to not promptly investigate a claim. What Paragraph C says is that an insurer has to create, and then use, "reasonable standards" for the investigation. It is Paragraph F that makes "refusing to pay claims without a reasonable investigation" an unfair act.
Offshore Claim Handling
Although some old fogies like myself are frustrated with our modern instant global communication world, the realities are that it will continue and life will move even faster. We do not know who "investigated" Sis' accident. For all we know, it might have been someone in Omaha, Neb., or New Delhi, India. As computer imaging is common and fast, police reports may be transmitted electronically anywhere in the world instantly, and money transferred between banks just as quickly. A person with an Indian accent can ask the same questions over the phone from thousands of miles away as can a person with or without some other accent in the same town. If the standards are "reasonable" (whatever that means) and the investigation "reasonable," the requirements of the code have been met.
For many of us, regional or intercontinental claim handling is a threat to our livelihoods. For our insurer or self-insured employers, however, it is a cost-saving benefit (although the benefit has side effects, one of which is the increased potential for fraud).
When Ramah Singh in Bombay can handle the claim as efficiently as Suzie Smith in the next town, the court probably would find this to be "reasonable." That Suzie may now be unemployed because the insurer does not have to pay Ramah as much is beside the point.
What seems reasonable today, however, may be unreasonable tomorrow. When all the Suzies and Sams and Rauls who now work in local insurer or independent adjusting firm offices are replaced by cheaper off-shore claim adjusting services, with any damage verification or investigation farmed out to local contractors who could not possibly care less about issues such as coverage, good faith, or fairness, what will happen when a complicated loss occurs? If there are fewer professionally trained and experienced claim adjusters in the pipeline, by 2010, insurers and self-insurers will have to hire attorneys to handle complicated coverage or liability issues. Imagine what that will do to premium costs.
The problem is political. If adjusters and adjusting firms want to preserve their profession, they need to act by being certain that state insurance licensing laws are both maintained and strengthened. If the law requires that every claim in a state be handled by an adjuster not only licensed but located within that state, hundreds of career claim adjusters would have a bit more job security. The public would benefit by having local people investigate claims, and most likely loss due to fraud would decrease, offsetting salaries.
On the other hand, insurers and self-insurers probably would oppose such strong legislation. National or regional insurers or companies can maintain better control over standards by having fewer, not more, reporting sources. The way claims are handled may be different in some states from claim-handling practices in other states. Standards can be more uniform in a more centralized system and, after all, aren't "reasonable standards" what the model act requires?
I do not know the answer to this issue. Maybe it is not even an issue. I hope that some of you, the readers, will respond with your own thoughts about the future of our claim industry. Is the professional local adjuster still needed, or can he be replaced by someone handling the claim remotely from a regional or international location, using only local "eyeballs?" Is claim adjusting to become simply an eyeball industry, a kind of independent verification system, or should our industry reclaim the full responsibility for coverage, liability and damage investigation, evaluation and negotiation that it had in the years prior to the 1990s?
Do you have a comment on this month's topic? The Iconoclast would like to hear from you. Contact us at Claims, 5081 Olympic Blvd., Erlanger, KY 41018 e-mail: editor@claimsmag.com
Ken Brownlee, CPCU, is a former adjuster and risk manager, based in Atlanta. He now authors and edits claim adjusting textbooks.
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