July 31, 2010 by
The law requires parties to an insurance contract to act with utmost good faith. When a loss adjuster or insurer is sued for bad faith dealing, plaintiff’s counsel may try to portray the insurer as having victimized or betrayed a vulnerable insured. In this article, we look at how a claim file should be documented to show that the insurer acted in the utmost good faith.
Documenting the deeds
To guard against a potential bad faith claim, the claim file must be documented to show how the loss adjuster handled the claim. A claim file should clearly reflect what the insurer’s concerns were and what was done in relation to the investigation to allow the insurer to make a decision on coverage or on the amount of the claim. The claim documentation should be approached with care, especially in a large loss when it looks like the claim will not qualify for coverage. Here are eight tips to keep in mind.
1. Remember that the file is producible
All correspondence, including any emails with reinsurers, may be considered part of the claim file. Any notes the loss adjuster has used or developed in evaluating the claim are also part of the file and might have to be produced in court. Loss adjusters may be called upon to discuss any part of a claim file with the insured.
2. Note the substance of all conversations
A loss adjuster should not rely on memory alone. The claim file must include a log of all telephone calls and other activities, documenting the substance of any conversation and the parties to it. This should include conversations about negotiation attempts. The insured’s failure to act on requests must be documented, as must follow-up requests by the loss adjuster.
3. Document coverage issue analysis
Insurers must effectively investigate each claim and must be allowed to contest suspect claims or claims that are not covered. Denial of a claim does not automatically indicate bad faith dealing, but the insurer must have credible evidence that supports its position.
When a question of coverage arises, the loss adjuster should be clear on the issues. Any difficulty the adjuster experiences in applying the policy language might be construed as an indication that the language was ambiguous or that the adjuster did not understand it. The adjuster must explain clearly how coverage was decided and how any areas of concern that would affect coverage were dealt with.
If a loss adjuster interprets a policy as meaning that a loss was not covered, but the insured disagrees and presents an argument in favour of coverage, the adjuster may choose to refer the file to legal counsel for a higher-level review of the language. The decision to refer a case to counsel for an opinion on coverage should be worded carefully to ensure that the loss adjuster has approached it in an appropriate way.
Any outstanding questions that the insured has been unable to answer should be documented, especially if they are crucial to the issue of coverage.
4. Don’t rely on the financial situation of the insured
Information on the insured’s financial situation should not form the basis for a decision to lower a settlement offer. If an adjuster recognizes that an insured is in dire financial straits and offers the insured less than the full value of the claim for this reason, the adjuster would probably be guilty of bad faith dealing. The insured’s financial position might be of legitimate interest as proof of a motive to commit insurance fraud, but unsubstantiated rumours should not be documented in a claim file unless there is good reason to do so.
5. Deal with internal criticisms separately
A supervisor’s notes criticizing the loss adjuster’s handling of a claim should not form any part of a claim file. If an insured sues the insurer and is successful in having the claim file produced, such notes appearing in the file might suggest the adjuster acted incompetently. And if the supervisor did not take appropriate action to correct any improper handling, this inaction would compound the alleged mishandling of the file.
6. Leave humour out of the file
Humour is not appropriate for a claim file, especially when the humour might demean the insured. Any humour recorded in a claim file is likely to be misconstrued. A loss adjuster who is thorough in a claims investigation, shows that he or she is sympathetic to the insured’s interests, and shows respect for the insured’s rights will not likely be sued for bad faith.
7. Avoid cover-ups
Any attempt to cover up evidence of bad faith dealing is likely to be punished by the courts. If it were shown that evidence was concealed, it might increase any punitive damages or at least justify an award. If a temporary lapse of good conduct has been identified, the best approach is to make amends and continue in good faith.
8. Ensure procedural manuals are in order
In a lawsuit, the insurer may be asked by the insured’s counsel to produce its claims manual. Any remote suggestion of questionable claims practices can come under intense scrutiny, and any hint of a conspiracy not to pay claims would fuel a lawsuit.
Privilege and proof
If the insurer is sued, the insurer’s counsel will usually seek to avoid producing the claim file. Lawyer-client privilege and work-product privilege provide some protection to the insurer. On the other hand, an insurer that believes the file documentation shows that it was operating in good faith may wish to waive any privilege. Once documents have been shared with the insured or an outsider, they are no longer considered privileged and have to be produced.
Punitive damages can be assessed against an insurer or an insured when either is found to have acted in bad faith. In Canada, courts have been conservative in awarding punitive damages against insurers. Only in exceptional cases, where proof of very bad behaviour on the part of the insurer is confirmed, have punitive damages been awarded. For a finding of bad faith dealing, the insurer’s conduct in investigating, assessing, or responding to the claim must be very poor. Documenting the appropriate progress of a claim can help to prevent such a finding.
This article is based on excerpts from the study material in the Claims Professional Series of applied courses -a core of the CIP Program that helps adjusters learn the functional knowledge and skills required of their profession.