What Are the Good Faith Claims Handling Rules Insurance Companies Must Follow? Adjusters Must Do These or Be Guilty of Bad Faith

Good faith claims obligations are not learned in bad faith insurance cases written by judges. That would be like doctors learning how to practice medicine by reading what judges write in medical malpractice cases.

Most insurance company adjusters have access to and learn how to practice adjusting through insurance industry courses about insurance adjusting. Most of these courses have high ethical and practical requirements for proper adjustment practices. I was reading an expert report by insurance claims expert Robert Dietz where he noted some of these: 1

Aggressive Good Faith and Successful Claims Handling, (1st Edition 1987), author Willis Park Rokes, Insurance Institute of America; How Insurance Works, (2nd Ed. 2002), authors Eric Wining, Barry Smith, Insurance Institute of America; Liability Claim Practices, (1st Ed. 2001), author James Jones, American Institute for Chartered Property Casualty Underwriters/Insurance Institute of America; The Dark Side of Goal Setting: The Role of Goals In Motivating Unethical Decision Making, authors Maurice Schweitzer, Lisa Ordonez, and Bambi Douma, Academy of Management Proceedings 2002 MOC:BI; Goals Gone Wild: The Side Effects of Over-Prescribing Goal Setting, Harvard Business School, Working Paper 09-083 Copyright2009 by Lisa Ordonez, Maurice Schweitzer, Adam Galinski, Max Bazerman; The Good Faith Claims File, Council on Litigation Management (CLM) June 8, 2011 presentation; A Primer on Good Faith and Bad Faith Issues for Colorado Claims Association annual claims seminar October 2010 by Franklin Patterson and Craig Nuss; Handling UM/UIM Claims in Colorado, by L. Kathleen Chaney, JD, CPCU, GCA (presented to AMFAM employees). Bad Faith: Revisiting an Insurer’s Affirmative Duty to Settle, by Charles Miller, September 2016 Issue of Advocate; Bad Faith and Excess Liability-Insurer Conduct on Trial, by Robert Prahl, CPCU, Director of Education American Association of Insurance Services, Wheaton, Ill.; and Slouching to Gomorrah: Adjuster Pay Plans and Bad Faith, By Kevin Quinley, Claims magazine October 2004.”

In the report, Dietz noted the following rules of good faith claims handling:

• Must treat its insured’s interests with equal regard as it does its own interests. This is not an adversarial or competitive process. Insurers should not use their superior financial advantage to the detriment of an insured. A reasonable insurer will give equal consideration or regard to the financial harm of an insured as it does to its own financial risk when making claims decisions. The insured expects and deserves honest, fair treatment throughout the claim process.

• Should assist the insured with the claim. The insurer, through its claims department is expected to be experienced and knowledgeable in the business of claims. When insureds face unexpected loss, they are typically vulnerable-financially, physically, and emotionally. They are not at their best, and should be able to rely on and trust the insurer to assist in the claims process. It would be wrong for an insurer to take advantage of an insured, especially when they are in particular need of help and assistance.8 In the absence of assisting and enabling the insured to use the policy to obtain benefits, the insured faces unreasonable barriers in the claims process.

• Must acknowledge and act reasonably promptly to communications with respect to claims of its insured. Prompt and adequate communication is a foundational component of claims handling. Effective communication enables the claims process to move forward in a positive direction. If communication is not reasonably prompt and adequate it can cause unreasonable delay. Unreasonable delay has the effect of diluting the claims benefits.

• Must adopt and implement reasonable standards for the prompt investigation of claims. When insurers do no adopt and implement reasonable standards, claims handling may not be consistent. Without standards, claims handling decisions can be wrongful and harmful to an insured. Learning by way of on-the-job training without standards in place means that the insurer learns by its wrongdoing, and this is usually to the detriment of an insured. When an insurer conducts its claims business without standards that are in place and followed, its consequential behavior is not considered a simple mistake or accident. Rather, the consequential behavior is predictable.

• Must fully, promptly, and fairly investigate and evaluate the claim, and must not refuse to pay a claim without conducting a reasonable investigation. A reasonable investigation will vary depending on the claim. An insurer will cause harm to an insured if it denies a claim, or withholds benefits without a basis that is reasonable. A fair investigation is one that is honest and even handed, and that considers facts that support the claim equally to facts that do not. Because delay dilutes the benefits of insurance, investigations must be reasonably prompt, generally within thirty days. If an investigation remains open, an insurer should effectively communicate with its insured, specifically as to why the investigation remains open, what is needed to be completed, and timeframe for doing so. The insurer cannot put the burden of investigation on its insured.

• Must attempt to pay those claims when liability is reasonably clear and amounts are known to be owed. For insurance to function as it is intended, claims benefits need to be both prompt and fair-not one or the other. Withholding benefits that are known to be owed dilutes the benefits by way of delay. The delay can also weaken the resistance of an insured, who is already vulnerable, and may force the insured to take less than is owed.

• Must pay all amounts not in dispute promptly, usually within thirty days. Amounts of benefits owed to an insured should be paid as reasonably promptly as possible. Withholding and delaying benefits to an insured can only cause harm to an insured. When an insurer calculates benefits that are owed, prompt payment is warranted.

• Must disclose to the insured all benefits, coverages, coverage issues, and time limits that might apply to the claim. Insureds need help from the insurer during the claims process. They should be able to rely on the insurer promptly disclosing all benefits and coverages that may apply to a loss. Any coverage issue or even potential coverage issue should be disclosed to the insured as soon as it is known to the insurer. Insurers know they may be estopped or waive coverage defenses if such are not promptly communicated. Indeed, insurers will typically issue a reservation of rights to an insured upon first knowledge of a coverage issue.

• May not deny a claim, or any part of a claim, based on insufficient information, speculation, or biased information. Claims decisions are to be made based on facts. Claims decisions are too important to be without reasonable foundation. Unfounded or speculative decisions in the claims process and especially in a claim denial or compromise offer will undoubtedly cause harm to an insured. A claims professional understands claims decisions involving suspicion and conjecture are unfair and reckless. Such decisions also show a lack of regard to the interests of the insured.

• May not misrepresent facts or policy provisions. Insurance policies are known as contracts of adhesion. Insureds do not bargain for the insuring agreement, conditions, definitions, or exclusions. The contracts are interpreted as written, with any ambiguities decided in favor of the insured. Insurers cannot impose conditions or provisions into the contract if they do not exist. If that were the case, insurers could post write policies such that the benefits are not collectible, simply by changing conditions, insuring agreements, definitions, or exclusions. Insureds should be able to expect honesty in all matters of the claim process.

• Must provide a reasonable explanation for a denial or compromise offer of benefits. Without such an important and adequate communication, an insured will be at a loss to understand how an insurer determined the amount of benefits, what else may be needed to support the loss, or if the insurer made an honest mistake in arriving at the amount of benefit-or indeed in a denial. Claims decisions are too important to be whimsical or unsupported. Insureds should be able to have a reasonable basis to understand a compromise offer or denial, so they can have equal footing if the need to challenge arises. Insureds expect transparency and honesty in the claims process.

• Must document its file sufficiently to record all pertinent activities and events so a reasonable understanding of file activity can be recreated. In the business of insurance claims handling, it is said that ‘if it is not in the file, it didn’t happen’. Recording pertinent activities as they happen serves to allow understanding and transparency to anyone who has a need to look at the file handling-such as claims supervision or another adjuster assigned with file handling. It also allows an insured, internal auditors, or regulators to review the claims handling activities when such handling is brought under question.

• May not make unreasonably low offers of benefits. Insureds are expected to be treated honestly, fairly and evenhandedly. Insurers know they cannot overreach their insured. This includes offers of benefits that are known to be low or should reasonably be known to be low and unrepresentative. Doing so can wrongly force litigation to get benefits that are known to be owed. Litigation is financially and emotionally costly, and the process causes delay in benefit payment. These factors dilute the value of the benefit.

Dietz noted that “these standards are commonly referred to as the ‘rules of the road’ for claims handlers.” If a claims adjuster or claims manager is to act reasonably, they must follow these rules.

Regarding claims managers, I noted the following in What Is Good Faith Insurance Claims Handling:

A good faith duty of claims management is:

“To provide a sufficient number of properly trained and motivated claims adjusters with sufficient resources and authority to promptly and fully investigate coverage and evaluate damage so that the policyholder promptly receives all benefits contemplated under the insurance product.

One problem today is that many insurance companies and independent insurance adjustment firms lack “properly trained and motivated claims adjusters with sufficient resources and authority to promptly and fully investigate coverage and evaluate damage.” The general adjuster with immediate authority to adjust the claim in the manner they used to do when I was first in this business forty years ago is no longer in existence. Instead, everybody reports and obtains permission from a desk adjuster, who often reports and obtains permission from another supervisor.

Desk adjusters now have management parameters for how claims are to be processed regardless of the field adjuster’s ethical training. Except for the national flood program, these claims guidelines are not made available to policyholders, insurance regulators, or market conduct examiners. These allegedly secret claims parameters are usually made by senior claims managers who supervise the desk adjusters. They are often the smoking gun of a scheme to underpay the full benefits owed to policyholders.

So why are there more delayed and denied insurance claims than ever before, as noted in yesterday’s post, The Bad Faith Claim Practice Scheme of Attrition—Delay and Make Them Sue to Get Full Payment? Part of the reason is the financial pressures being placed upon these claims managers who will not hire, train, evaluate, or promote claims adjusters on the above-cited rules of good faith claims handling. Instead, the financial goal setters are running the claims departments of most insurance companies. That is why these unethical and “top secret” claims initiatives are being adopted.

Thought For The Day

Markets are not self-correcting. Left to their own devices, markets can exploit workers, harm consumers, and wreak havoc on the environment.
—Joseph Stiglitz, Nobel Laureate in Economics

1 Potter v. American Family Ins. Co., No. 3:16-cv-05406, 2017 WL 3012281 [Report or Affidavit of Robert B. Dietz, B.S.] (W.D. Wash.).