Insurer bad faith 'common in US'

Three quarters of US claim litigation involves allegations of insurer bad faith, Victoria Roberts, VP and counsel at Meadowbrook Insurance Group, told the AILA conference.

She said the focus was on the insurer's conduct, requiring an examination of the claim department's mindset in handling the investigation and resolution of an insured's claim.

"It often involves a subjective determination of the carrier’s mindset when handling the claim."

The US had four types of bad faith: statutory, first party, third party, and bad faith without coverage.

Statutory varied across the states but was modelled on the National Association of Insurance Commissioners’ Unfair Insurance Practices Act. It empowered commissioners to stop carriers operating, but that "extreme sanction" had not been used.

The statutes were not generally construed to provide the basis for awarding benefits to policyholders. But Ms Roberts said a small number of states had "improved" on the model act and added provisions that appear toed make it possible for commissioners to order payment of policy benefits if they found they were wrongly withheld by virtue of an unfair claims practice.

Some of those states authorised relief only on a determination an insurer committed violations with such frequency as to indicate a general business practice to engage in that type of conduct.

In Florida, claimants could issue civil remedy notices and insurers had 60 days to respond. "It’s a little scary and keeps you on your toes," Ms Roberts said.

First party bad faith included insurers not paying within reasonable time limits or "not paying as much as the insured thinks they should". Some states had punitive damages for insurer bad faith.

"Unlike coverage for injuries caused to third parties, first party bad faith involves claims by insureds for policy benefits for their own damages. Third party bad faith is almost 100 years old, but first party bad faith first arose more recently," Ms Roberts said.

"States which have refused to adopt a cause of action for first party bad faith do so on the basis an adequate alternative remedy already exists to drastic insurance company's improper behaviour. These centre around the broad range of compensatory damages available in a contract action [and] various other statutory remedies, including interest on the judgement and attorneys’ fees."

Ms Roberts said although it was referred to as third party bad faith, the insurer's duty of good faith and fair dealing extended only to its insured, not the third party.

"However, it arises in the context of third party liability claims. Unlike the first party context, a fiduciary relationship is seen to exist between the carrier and its insured in third party situations because the insured is completely dependent on the carrier to make sure its interests are being protected. The carrier controls the defence and eventual resolution of its claim, usually with no right of input from the insured."

She said most states determined a carrier’s duty to defend based on a review of the contract terms against the allegations of the complaint, regardless of the merit of the allegations. If there were any potential for coverage, there was a duty to defend.

A minority of states allow carriers to also use extrinsic evidence to determine that duty – such as police reports or insureds’ recorded statements. However, most states that allowed use of extrinsic evidence, allow it only to implicate coverage in favour of an insured, not to deny coverage.

"Even if a carrier defends its insured, but does so under a reservation of rights, some states allow the insured to reject that defence, retain its own lawyer at the carrier’s expense and attempt to settle the case. However, in those instances, the carrier retains the option to withdraw its coverage position, regaining control of the claim, or later challenging coverage through a declaratory judgment action."

Ms Roberts said if a carrier failed to settle claim when there was an opportunity to do so within policy limits, and the settlement demand was reasonable in light of all the circumstances, the insurer was viewed as subjecting the insured to the risk of a judgement in excess of policy limits, for which the insured would be liable but the insurer would not.

"Doing so can create the appearance the insurer is putting its own interests ahead of those of its insured."

Bad faith without coverage existed in "only a few states", but judges could award damages for emotional distress and legal fees even without policy coverage.

Ms Roberts said insurers could minimise the risk of bad faith actions by having broadly drafted claims handling guidelines; and training staff to conduct thorough investigations and note all evidence. "If it’s not in the claims file, it didn’t happen," she said.

Her advice was to pay claims immediately if there was no dispute. Defences to bad faith allegations included taking reasonable action in the circumstances.