A cause of action for breach of a duty of good faith and fair dealing is stated when it is alleged that there is no reasonable basis for a denial of a claim or delays in payment or a failure on the part of the insurer to determine whether there is any reasonable basis for the denial or delay.
The insurer is liable for bad faith if it knows or should know that it is reasonably clear a claim is covered, but nevertheless denies or delays payment of a claim. An insurer cannot be liable for extra-contractual claims based upon the denial of an insurance claim that is not covered. However, failing to attempt to act in good faith to effectuate a prompt, fair, and reasonable settlement of a claim with respect to which the insurer’s liability has become reasonably clear. Many states have specific deadlines defining “prompt”. Bad Faith can be supported by failing to promptly provide to a policyholder a reasonable explanation of the basis in the policy, in relationship to the facts or applicable law, for the insurer’s denial of a claim or offer of a compromise settlement of a claim.
Generally, all bad faith conduct points toward a common standard of reasonableness. The adjuster must take steps in their investigation that are considered reasonable to the claim itself. Maintaining the claim file is the best defense against bad faith. The claim file is the most critical source of evidence to an insurer establishing reasonable investigation and prompt, fair and reasonable settlement.
The diary and activity notes in a claim file impact the outcome because the plaintiff’s attorney may look for missing state mandated time lines, missing documents or no reference to important documents, signs of a lack or unnecessary excessive investigation targeted toward a denial.
Sometimes even the most seemingly harmless statement could cause a negative light on the case. Once the case goes to litigation it is too late to rescind the comments.
In outlining what a claim file should contain we list the following:
- Notice of Loss known also known as an Accord
- Basic Policy information to include coverage declarations pages
- Un biased fact finding investigation
- Interoffice and outward communications
- Assessment of liability
- Information relating to damages
- Reserve setting
- Settlement or denial documentation
The claim file should show that the investigation must be thorough, reasonable, impartial and prompt.
It is very important to document sending a written acknowledgement of the claim as well as documenting requests for information while investigating a claim. Documenting prompt payment is critical to the investigation once all requested documentation is received.
In the context of first party claims, one must provide a reasonable explanation of the basis in the policy in relation to the facts or applicable law for your denial of a claim, or the offer of a compromise of a settlement of a claim.
The adjuster must be persistent in asking the insured or their representative to provide supporting documentation by certain date deadlines.
Diary the file date and address that you still do not have the requested information by the deadline. Then send a follow-up requesting the documentation once again by a certain date. Stay on top of your requests for documentation and document the notes accordingly in the claim file.
Immediately document entries regarding conversations, documents, events as they occur so they are not forgotten is critical because if it is not in the claim file it did not happen.
If the caller gets angry, resist the desire and urge to respond but document the file. Treat the communications with the same courtesy and importance as all other written correspondence.
Avoid adjectives adverbs and labeling as well as racial, sexual, ethnic or religious characterizations. It is also important not to describe one’s financial condition or status, occupation or career unless it has a purpose in the claim. Other areas to avoid are describing a level of intelligence, mental status, nor physical appearance again unless it has a specific purpose in the claim investigation.
In a third party situation character comments of the opposing counsel, the judge, venue, jury pool, witnesses, or the plaintiff’s experts should also be avoided. Comments in a file can come back to haunt the defense in a bad faith litigation.
From failing to perform a prompt, fair, thorough, and reasonable investigation and ultimate settlement of a claim to its maintenance of the claim file can be the determining source of evidence against an insurer for a bad faith allegation.
Author: Partners of Claims Resources and Solutions LLC publishes this article as a public service. It is provided for general information and is not intended to replace legal advice for specific cases.