Hurricane Report: Acting in Good Faith

Another recommended good faith claim-handling practice is born of the nearly universal limitation of time on paying or alternatively affirming or denying coverage of claims for insurance policy proceeds, such as after a hurricane or after an earthquake — or any other potentially covered occurrence, accident, or damage from a covered peril.

Local laws in many jurisdictions require that the insurer either issue payment or at minimum affirm or deny coverage within a reasonable period of time. Every adjuster should therefore be cognizant of the time periods imposed by local law when evaluating claim files and act accordingly, especially when dealing with payment of partially covered claims. This may entail requesting necessary (meaning not obstructionist or arbitrary) proofs to process potentially covered claims, all of which should be paid or reasonably requested within the time limit imposed.

Discerning Real Value

In a recent Kentucky case, an appellate court ruled that the universally enacted unfair claim-handling act had been violated. The insured's homeowner's policy provided for replacement value of certain items that were either taken or destroyed during a burglary and vandalism incident. The homeowner's insurance representative instead provided the insured with claim forms to recover the lower actual cash value of the lost items. In addition, the representative failed to advise the insured that his policy provided replacement cost coverage instead of coverage for actual cash value. Parenthetically, within a day, the insured completed and returned the proof-of-loss forms that he received from his homeowner's insurance company.

At least one lesson from this experience in the Kentucky case is clear. When offering an insured any proof-of-loss statements, be reasonably certain of the appropriate level of reimbursement that the policy provides. Furthermore, convey to the insured in each case that proof of loss does not need to be completed on the particular insurance company's chosen form, as long as the proof or the evidence submitted by the insured is sufficient to show the loss and peril for which they are claiming policy proceeds.

In Florida, the language of this model statute has been changed somewhat to reflect this. Failing to affirm or deny full or partial coverage or failing to provide a written statement that the claim is under evaluation is an unfair claim practice if the insurance company persists in that failure upon written request by the insured within 30 days after proof-of-loss statements have been completed.

The clear lesson from these recently enacted and revised state laws is this: Good faith claim handling — particularly of claims for policy benefits and proceeds in the aftermath of a hurricane or another catastrophe — requires prompt payment for any part of a claim that is reasonably covered.

What constitutes "prompt" payment? It may vary from place to place, depending upon the local law, but the same concept still holds true. A claim should be paid within either a reasonable amount of time or within a specific time period dictated by local laws — usually 30 days — of that portion of any claim that is reasonably proven as covered by the proof-of-loss statements.

Practice Transparency

A court will likely say that a proof-of-loss statement should not take the form of an overly technical definition. If related rulings across the U.S. provide any indication, then most courts will apply a rule of reason rather than a technical definition as to what should be regarded as an acceptable proof of loss.

One example is a North Carolina court case in which homeowners accused their insurance carrier of unfair and deceptive claim practices. The policyholders were allowed to sue after filing a claim for additional living expense benefits after an employee of a phone company ruptured an underground sewer pipeline on their property. The rupture resulted in wastewater flowing into their residence. Not only did their house suffer property damage, but they also "suffered … adverse physical reactions such as accelerated heart rates, shortness of breath, skin rashes, and headaches." As a result, the insureds vacated the residence.

The policyholders alleged that their homeowner's carrier had failed to promptly affirm or deny coverage for their additional living expenses. They further alleged that the carrier had specific knowledge that the policyholders were incurring large expenses because they could not live in their home. The accusations did not end there. The carrier also was accused of failing to promptly inform them as to whether and when additional living expenses would be covered. All the while, the carrier allegedly knew that the insureds believed that the additional living expenses they were forced to incur were in fact covered under their homeowner's policy.

To reiterate, the circumstances of the insured's proof of loss can be vital to the people who later determine what the insurance company's adjusters knew and when they knew it.

We've already discussed that if the insured's proof of loss is reasonably likely to establish that part of a claim is covered, then the insurer should either inform the insured or other claimant, or it should pay the portion of the claim that is eligible for coverage — ideally both, within any time limit imposed by local law. On the other hand, if the proof of loss is not likely to establish that any part of a claim is covered — because the proof of loss submitted to the insurance company is either incomplete or insufficient — it is therefore recommended that the policyholder and, where required by local law, the claimant (a non-policyholder) similarly be informed of that situation. The adjuster should request that both the policyholder and the claimant submit the missing proof of the loss and the peril involved in the specific claim that would potentially be covered under the policy in question.

In closing, it would be reasonable to presume that steps have been taken to reform the law extant in some of the jurisdictions that have suffered the effects of recent hurricane and other catastrophes and claims. That is certainly the case in Louisiana, for example, where statutes have been enacted and revised to deal with claims related to future catastrophes. In Louisiana, a single statute regulates the payment of claims owed to any insured, and it also regulates the amount of any third-party property damage claim, falling into one of three basic groups. First, with certain exceptions, all insurers shall pay the amount of any claim owed to any insured within 30 days after insurers have received satisfactory proofs of loss, whether the proofs of loss are submitted by the insured or by "any party in interest."

Second, again with certain exceptions, all insurers shall pay the amount of any third-party property damage claim, in pertinent part, within 30 days after a written settlement agreement of the claim "from any third-party claimant."

Finally, under laws enacted since Hurricanes Katrina and Rita, all insurers are required to make a written offer to settle any property damage claim, "including a third-party claim" (reminiscent of the Wisconsin statute that applies to all insurers as well), within 30 days after the insurers receive satisfactory proof of loss.

It is recommended that the good faith claim-handling practices adopted in response to developments in local law incorporate newly enacted and revised requirements for the handling and payment of future claims resulting from future hurricanes.

Dennis J. Wall is an attorney and consultant about insurance coverage and insurer bad faith. He may be reached at djw@dennisjwall.com.