Category: Bad Faith

How To Defend A Bad Faith Case When The Claims Rep Is A Bot, And Other Terrifying Questions…..

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I came across an extremely thought –  provoking article this morning on Artificial Intelligence (A.I.) and the law, by Dennis Anderson on Law360.com, which began with the following futuristic, bone-chilling scenario:

On the evening of Dec. 23, 2016, at seven seconds after 5:49 p.m., the holder of a renter’s policy issued by upstart insurance company Lemonade tapped “submit” on the company’s smartphone app. Just three seconds later, he received a notification that his claim for the value of a stolen parka had been approved, wire transfer instructions for the proper amount had been sent and the claim was closed. The insured was also informed that before approving the claim, Lemonade’s friendly claims-handling bot, “A.I. Jim,” cross-referenced it against the policy and ran 18 algorithms designed to detect fraud.

This piece goes on to ask a question which I have yet to stop thinking about:  how to defend an insurance company claims decision when the decision is made by an algorithm, not a human being?

Before attempting a reasonably good answer to this question, if there is  good answer to be had at all,  a quick review of history is in order:  this is not the insurance claims industry’s first foray into using artificial intelligence to process claims.   Countless bad faith claims in the past have in fact been premised on that very thing, i.e., the use of a computer program to put the value on a bodily injury claim, for example.  The very use of software to value a claim was the central theme of the bad faith complaint.  Many of those claims, however, were successfully defended by lawyers for  insurers who  argued that such computer-provided data was merely a starting point, and that claims representatives with blood pulsing through their veins then went to work to take that piece of information, along with countless other pieces of information, to value, negotiate,  and otherwise  process the claim in good faith –  the Human Element Defense, let’s call it.

Now, a stolen parka, I grant you,  is a far cry from  a soft tissue neck injury.  But it is not hard to see that in the future, algorithms can and will be developed to use A.I. to adjust property damage and homeowners’ claims, commercial coverage claims,  and , yes, let’s  be bold here, personal injury claims.

I have spent decades defending bad faith claims, and every defense begins and ends with the same thing:  what was the claims representatives thought process?  Can that process be traced, documented, demonstrated, and shown in the light of day to be a reasonable approach to a difficult problem?

Are we coming to a time now when claims logs and insurer communications will simply be replaced with massive strings of zeroes and ones?  How can you tell a story made out of zeroes and ones?

The immediate question, of course, becomes how to defend a claims algorithm in a bad faith case  to a jury of humans, or a human judge sitting in a bench trial.  There is, I’m afraid no immediate answer, except perhaps this one — it is best to continue to  include human beings, in some capacity,  in a claims process which may later have to be explained and legally justified to other human beings.

Stated another way, a purely mathematical,  algorithmic defense of a bad faith claim may not be fully successful until the time comes when judges and juries are also algorithms, and, so too, are the lawyers.

I hope I’m retired by then.

CJH

 

 

 

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Professional Liability Insurer Off The Hook For Settlement After Insured Fails To Obtain Consent To Settle, Ninth Circuit Rules

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PASADENA, Jan. 19 – The Ninth Circuit Court of Appeals has ruled that a professional liability insurer had no obligation to fund a settlement agreed to by the insured, which did not obtain the insurer’s consent to the deal, as required in the policy.

In One West Bank, FSB v. Houston Casualty Co.,  Houston Casualty wrote a professional liability policy requiring the insured to seek prior written consent before resolving any covered claim by way of settlement.

The insured, One West, was sued for failure to properly administer loans it was servicing.  One West reached an agreement to settle with the plaintiff in the underlying case, but it neither sought or obtained  Houston Casualty’s written consent to the terms prior to executing the term sheet.  Applying California law, the 9th Circuit Court ruled that One West breached  prior written consent provision of the policy, thereby relieving Houston Casualty of its obligation to fund or cover the settlement.

In the ruling, while the Court recognized that an insured could be relieved of the consent obligation for  economic necessity, insurer breach, or other extraordinary circumstances, it affirmed the district court’s finding that no such circumstances existed.

Also, while One West alleged that Houston Casualty breached the insuring agreement and its common law obligation of good faith, the Court affirmed dismissal of those claims, ruling that there was no evidence that Houston Casualty withheld any benefits due under the policy, in light of the consent provision.

One West Bank, FSB v. Houston Casualty Co., 676 Fed.Appx. 664, 2017 WL 218900 (9th Cir., filed January 19, 2017).

Summary Judgment For Insurer In Super Storm Sandy Claim; Deposited Claim Check Constitutes Accord and Satisfaction

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PHILADELPHIA, Nov. 17 – The U.S. Third Circuit Court of Appeals has ruled that a day care center which submitted a Super Storm Sandy  claim for nearly a million dollars has accepted less than $30,000.00 from Philadelphia Indemnity Insurance Company in full satisfaction of the claim.

In Cranmer v. Harleysville Insurance Company et al,  2017 U.S. App. LEXIS 23187 *; 2017 WL 5513204, the owners of Tiny Tots day care center submitted a claim for storm damages to PIIC for $956,455.09 for income loss, business interruption, and other related claims.  PIIC valued the claims at $28,542.84.  Ultimately, counsel for PIIC sent counsel for the insureds a letter which stated:

Accordingly, should I not hear from you within ten (10) days of your receipt of this correspondence, I will instruct [PIIC] to tender settlement in an amount of $28,542.84 payable to Tiny Tots Daycare Preschool, LLC and [RLF], its attorney. We will deem the acceptance of this payment as full and final settlement of this claim as well as a release by your client of any further demand for recovery as against Philadelphia Insurance Companies.

The insured endorsed and deposited the check, which was marked “FINAL,” and the comment line stated: “Business Income, windstorm damage, loss of income from the date of loss through the period of restoration.”  PIIC’s counsel also sent a general release to the insureds, however, which was never signed and returned.

The Plaintiffs sued PIIC for breach of contract and bad faith, and PIIC moved for summary judgment, which was granted by the U.S. District Court for the Eastern District of Pa.  In affirming summary judgment in favor of the insurer, Judge Patty Schwartz held that the elements of an accord and satisfaction were met:

Under New Jersey law, the affirmative defense of accord and satisfaction requires the defendant to prove: “(a) a bona fide dispute as to the   amount owed; (b) a clear manifestation of intent by the debtor to the creditor that payment is in satisfaction of the disputed amount; and (c) acceptance of satisfaction by the creditor. . . The undisputed record shows that the first accord and satisfaction requirement of a bona fide dispute was satisfied because PIIC and Plaintiffs disagreed about the amount to which Plaintiffs were entitled under the insurance policy. Plaintiffs submitted Sandy-related claims to PIIC for $956,455.09 while PIIC valued Plaintiffs’ loss at $28,542.84. . .

There is also no genuine dispute that PIIC intended its $28,542.84 payment to satisfy all of Plaintiffs’ Sandy-related claims against PIIC, thus satisfying the second element of accord and satisfaction. The August 15, 2013 letter states that PIIC will “tender settlement in an amount of $28,542.84 payable to Tiny Tots Daycare Preschool, LLC and [RLF], its attorney” and “deem the acceptance of this payment as full and final settlement of this claim as well as a release by [Plaintiffs] of any further demand   for recovery as against [PIIC].” App. 341. One month later, PIIC’s counsel sent RLF a check for $28,542.84, with an accompanying letter that incorporated by reference PIIC’s August 15, 2013 letter and stated that the $28,542.84 payment was tendered “in good faith for the purposes of settlement.” App. 345-46. In  addition, the check contained a claim number matching the Sandy claim that Plaintiffs submitted to PIIC, was marked “FINAL” in the payment line, and the comment line stated “Business Income, windstorm damage, loss of income from the date of loss through the period of restoration.” . . . The combination of the letters and the check demonstrate that PIIC intended to make a payment in full satisfaction of the claim, and Plaintiffs have identified no evidence to the contrary.

The Court also ruled that the Plaintiffs failed to demonstrate any bona fide evidence of bad faith on the part of PIIC, and affirmed summary judgment in favor of PIIC on the bad faith claims as well.

Cranmer v. Harleysville Insurance Company et al,  2017 U.S. App. LEXIS 23187 *; 2017 WL 5513204

Electronic Signature On Limited Tort Form and Medical Peer Review Both Valid; Court Dismisses Bad Faith Claims Against Progressive

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PHILDADELPHIA, Dec. 11 – A Pennsylvania Federal judge has granted summary judgment in favor of Progressive Insurance in a bad faith case, finding in part that an electronic signature on a limited tort form was valid, and that use of a PRO medical review was also appropriate

In Jallad v. Progressive Advanced Ins. Co., 2017 U.S. Dist. LEXIS 202999, Plaintiff Sahar Jallad (“Jallad”) filed suit against a motorist defendant and her own insurer, Progressive Advanced Insurance Company (“Progressive”) in the Court of Common Pleas of Philadelphia County, alleging negligence against the motorist,  Madera causing personal injuries,  and claims of breach of contract and bad faith against Progressive related to its handling of Jallad’s underinsured motorist (“UIM”) claim.

Following removal of the case to the U.S. District Court for the Eastern District of Pennsylvania, U.S. District Judge Robert F. Kelly granted Progressive’s motion for summary judgment on the bad faith claims.

Judge Kelly confirmed a long standing principle that the mere disagreement over the value of the insured’s injuries in the setting of a UIM claim was not a sufficient basis for a prima facie bad faith case against an insurer.

Judge Kelly went on to rule that none of four other arguments made by Jallad created a genuine issue of material fact as to the bad faith claims.  First, Kelly ruled that regardless of whether or not the tortfeasor’s insurer paid a $15,000.00 liability limit insuring Madera,  Progressive was entitled to a credit of that available limit toward the valuation of Jallad’s UIM claim.

Kelly further dismissed Jallad’s argument that her signature on a limited tort election was invalid:

“Jallad provides no citation to any case law or statute that prohibits insurance companies from obtaining electronic signatures for tort waiver forms. Further, Progressive responds that electronic signatures are permissible under both federal and Pennsylvania state law. See 15 U.S.C. § 7001; 73 P.S. § 2260.305. Accordingly, Jallad’s argument is without merit.”

Next, Judge Kelly ruled that Proressive’s use of a PRO reviews of Jallad’s medical records did not, as a matter of law, constitute bad faith:

“Pennsylvania law provides that “[i]nsurers shall contract jointly or separately with any peer review organization established for the purpose of evaluating treatment, health care services, products or accommodations provided to any injured person” and “[s]uch evaluation shall be for the purpose of confirming that such treatment, products, services or accommodations conform to the professional standards of performance and are medically necessary.” 75 Pa. Cons. Stat. § 1797(b)(1). Under the circumstances presented here, we fail to see how sending medical documentation to a PRO to determine whether medical treatment conforms to the professional standards of performance or is medically necessary amounts to bad faith.”

The Court finally ruled that Progressive’s request for documents concerning Jallad’s wage information was appropriate, and  dismissed Jallad’s bad faith claims with prejudice.

Jallad v. Progressive Advanced Ins. Co., 2017 U.S. Dist. LEXIS 202999

Bad Faith Cannot Be Presumed In UIM Claim, Federal Judge Rules

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PHILADELPHIA, Nov. 17 – A federal judge in Pennsylvania has dismissed a bad faith claim against State Farm Insurance arising out of the handling of a UIM claim, ruling that neither the passage of time or the non-payment of the claim in themselves can establish a prima facie case of insurer bad faith under the Pennsylvania Bad Faith Statute.

In Sherman v. State Farm Ins. Co., 2017 U.S. Dist. LEXIS 190363, Judge Mark A. Kearney ruled that the Plaintiffs had not plausibly set forth a bad faith claim against State Farm arising out of a January 2013 auto accident involving Edward Sherman.  After settling with the tortfeasor following the accident,  the Shermans notified State Farm of their intent to pursue a UIM claim u nder their own auto policy in February 2015. 

The complaint alleged that State Farm investigated the claim between Febryary and July of 2015 but that State Farm failed to make any offer of payment.  After the Shermans sued State Farm in 2017, State Farm moved to dismiss statutory and common law bad faith claims  from the complaint.  In granting the motion to dismiss, Judge Kearney wrote:

“After July 1, 2015, we have no idea what happened. As of July 1, 2015, the parties were working together to address the Shermans’ UIM claim. Over two years later on September 27, 2017, the Shermans sued State Farm claiming it never provided the Shermans with UIM benefits…

Our court of appeals has consistently dismissed Section 8371 claims when the complaint lacks factual allegations of bad faith conduct, and only states conclusory allegations…

[The] Shermans allege communications evidencing responsive insurer conduct and then conclude, simply because they have not been paid since, State Farm is liable for bad faith. We have a gap of over two years with no allegation as to what happened. Bad faith is not presumed simply from a conclusory allegation  of no payment. In conclusory fashion, the Shermans allege State Farm failed to make an informed decision regarding their claims, failed to pursue a diligent investigation, and failed to act in good faith.  They also allege State Farm failed to make a settlement offer, and these actions were intentional, taken in bad faith, and aimed solely at reducing State Farm’s expenditures. These are the types of conclusory allegations which do not suffice. Failing to plead explanations or descriptions of what an insurer actually did, or why they did it, is fatal to a bad faith claim.  We cannot measure the reasonableness of the insurer’s conduct absent facts. Legal conclusions are insufficient.”

Judge Kearney also dismissed the Plaintiff’s Breach of Implied Covenant of Good Faith and Fair Dealing claims, and further  ruled that the Plaintiffs could not plead or recover attorneys’ fees on the remaining Breach of Contract claim.

Sherman v. State Farm Ins. Co., 2017 U.S. Dist. LEXIS 190363 (E.D. Pa. Nov. 17, 2017)(Kearney, J.)

Liberty Mutual Wins Bad Faith Claim In Flood Loss Dispute

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PHILADELPHIA, Nov. 15 – A Pennsylvania federal judge on Nov. 15 dismissed a bad faith claim against Liberty Mutual, finding that a dispute over the amount Liberty Mutual should pay over a flood loss was not sufficient to create a legitimate bad faith cause of action.

In Steven Barnwell, et al. v. Liberty Mutual Insurance Co, No. 16-4739, E.D. Pa.,  2017 U.S. Dist. LEXIS 188427 (Beetlestone, J.), the Barnwells sued Liberty Mutual after a dispute arose over payment for an August 3, 2015 flood loss under the Barnewells’ homeowners policy with the insurer.  The home was under renovation at the time of the loss.

While the insurer made partial payment of the claim, the insureds sought further reimbursement and ultimately filed suit against Liberty Mutual in the U.S. District Court for the Eastern District of Pa.  In the proceeding, Liberty Mutual sought partial summary judgment on the bad faith claims.

U.S. District Judge Wendy Beetlestone granted Liberty Mutual’s motion, observing that a mere dispute over the nature and extent of damage did not constitute bad faith on the part of the insurer:

“Plaintiffs’ do not point to any competent record evidence to subvert the restoration company’s determination that only one marble tile needed to be reinstalled. Plaintiff Barnwell himself testified at the arbitration hearing that only four to six of the tiles were ruined. Even so, neither Plaintiff contacted Liberty to tell it that there was more damage to the floor tiles than the restoration company had identified and that the cost of repair would, accordingly, be higher. Instead, they replaced the entire floor and asked Liberty to pay for it. Under the circumstances, it was not unreasonable for Liberty to deny benefits under the policy.”

Judge Beetlestone also held as a matter of law that Liberty’s positions on food loss and living expense reimbursement of the insureds were not so unreasonable as to create a genuine issue of fact regarding bad faith.

Finally, the Court ruled that Liberty’s withholding of depreciation allowance did not constitute bad faith either:

“By the terms of the policy, Liberty is not obligated to pay depreciation until repair or replacement is complete. Plaintiff has not pointed to record evidence that the repairs are complete or that it has notified Liberty that the repairs are complete. Absent such evidence, it was not unreasonable for Liberty to withhold payment to Plaintiffs for any deductions for depreciation.”

Steven Barnwell, et al. v. Liberty Mutual Insurance Co, No. 16-4739, E.D. Pa.,  2017 U.S. Dist. LEXIS 188427

 

New Jersey Hot Potato: Insurer Who Merely Serviced Policy Can Be Liable for Bad Faith

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NEW JERSEY, Oct. 20 – A U.S. District Judge in New Jersey has ruled that an insurer who does not issue, but merely services, a policy of insurance, may be held liable for bad faith conduct.

In Fischer v. National Surety Corp., Civ. No. 16-8220 (KM), 2017 U.S. Dist. LEXIS 174267 (D.N.J. Oct. 20, 2017) (McNulty, J.), the insured plaintiffs had a home insurance policy “issued by Fireman’s Fund, underwritten by National Surety, and serviced by ACE American.” The insureds  complained that after promptly reporting a claim they were subject to nearly two years of dealings with various insurance company representatives, but did not receive full payment for the original loss.

After filing suit against the insurers, ACE filed a motion to dismiss bad faith and breach of contract claims, pointing out that National Surety was the insurer, and it was not, and therefore it could have not bad faith exposure to a non-insured.

U.S. District Judge Kevin McNulty denied the motion to dismiss, observing that at this state of the proceedings the precise servicing arrangements between the defendants was unclear.  Judge McNulty also dismissed ACE’s argument that without an insuring agreement, there could be no bad faith claim as s matter of law.

Citing the leading bad faith case of Pickett v. Lloyds. The court ruled:

“Pickett itself … seems to contemplate a bad faith cause of action against a party other than the primary insurance company. Indeed, it reasoned that because an agent owes a duty to the insured, the insurer must ‘owe[] an equal duty ..[a]gents of an insurance company are obligated to exercise good faith and reasonable skill in advising insureds…“[e]ven if the [insureds] fail to establish the existence of a contract with ACE American, their bad faith cause of action may still be viable.”

Fischer v. National Surety Corp., Civ. No. 16-8220 (KM), 2017 U.S. Dist. LEXIS 174267 (D.N.J. Oct. 20, 2017) (McNulty, J.)

Editor’s Note:  As insuring agreements, and servicing arrangements get more complex, new theories of non-contractual bad faith liability on the part of insurers and claims entities are likely to arise, and be based on the tort concept of the responsibility to act reasonably when a duty toward an insured  is undertaken.

October Bad Faith Case Roundup

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Discovery

Claims Files / Reserve History

Parisi vs. State Farm, 2017 US Dist. LEX, 162161 (Western District of PA, Oct. 2, 2017) (Gibson, J.) – Court ordered in camera inspection of State Farm’s claims file including portion of the file designated “free-form attorney” to make determination of whether or not information contained is protected by the attorney-client privilege or attorney work-product doctrine.   Court also held reserve history of claim is discoverable.

Pleadings

Adequately Pleading Bad Faith/Handling UIM Claim

Thomas vs. Protective Insurance Company, 2017 US Dist. LEX 166955 (M.D. Pa. Oct. 10, 2017) (Caputo, J.) – The Court denied Protective’s Motion to Dismiss Plaintiff’s Amended Complaint pursuant to F.R.Civ. P. 12(b)(6) finding that Plaintiff sufficiently stated bad faith cause of action when making specific averments concerning insurer’s conduct of handling UIM claim.  Plaintiff specifically alleged Protective’s failure to investigate, failure to communicate, failure to evaluate, and misrepresentation to the insured as well as violation of Pennsylvania Insurance Department regulations.

Irving vs. State Farm, 2017 US Dist. LEXIS 164390 (E.D. Pa. Oct. 4, 2017) (Slomsky, J.) – Court granted State Farm’s Motion to Dismiss Plaintiff’s bad faith claims pursuant to F.R.Civ.P 12(b)(6).   Disagreement over the value of the UIM claim, without more, does not constitute bad faith.   Plaintiff granted leave to attempt to amend Complaint to state bad faith cause of action.

 

Summary Judgment

Defense and Indemnity Provided To Insured

State Auto Property vs. Stucky, 2017 W.V. LEXIS 759 (Oct. 10, 2017) (Ketchum, J.) West Virginia Supreme Court held that Plaintiff failed to state a bad faith claim as a matter of law where it was provided defense and indemnity in an underlying trespass suit.   Court observed that State Auto provided the insured, CMD, with a defense and settled the underlying tort suit for $325,000, well within the insured’s $1 million dollar policy limit.
Delays Processing UIM Claim,  Collection of Records,  Investigation

Radolfi vs. State Farm, 2017 U.S. Dist. LEXIS, 165013 (M.D. Pa., Oct. 5, 2017) (Carlson, J.) – Court grants summary judgment in favor of State Farm in UIM claim,  holding no inference from which a finding of bad faith could be made.   The Court observed that while there were delays in processing the claim, including the collection and review of medical records, the delays were not attributable to State Farm.  The Court found that State Farm’s request to the Plaintiff’s attorney for medical records were not complied with, including requests for updated medical records.  The Court held that Plaintiff also failed to provide employment records despite making a claim for wage loss.  The Court also held that a new contractual bad faith cause of action was barred by the law of the case, in that it had previously dismissed a statutory bad faith claim, and that State Farm’s initial error in stating coverage limits to the insured did not constitute bad faith.

The Fine Art Of Deciding Not To Settle Within Policy Limits: Part Two

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In Part One of this post, we examined a hypothetical time-limit settlement demand against an insured for policy limits,  and contemplated the decision not to pay the demand.  In Part Two, we examine the specifics behind an insurer’s decision not to pay a time limits demand.

In the first half of this post we saw that the decision not to pay must be an informed and deliberate one.  Here are some of the nuts and bolts to that decision-making process:

 Err On The Side Of Paying

This may strike you as an awfully odd first element of the decision not to pay a policy limits demand — actually leaning toward paying it —  but stay with me for a second.  If you follow this rule first and foremost, all of your decisions not to pay a policy limits demands are going to look much, much better.

Perhaps it’s best to explain this one through the use of some numbers, looking back at the hypothetical policy limits demand of $300,000.00 we set up in Part One of this post.  If the case is not worth more than $150,000.00 after research and analysis, that is one thing, and a refusal of the demand of $300,000.00 is most likely supportable.  But if your considered judgment is that the case is worth  $285,000.00,  for example, be wise:  protect your insured and pay the $300,000.00.  If your reasoning leads you to believe that there is a 70-80% chance of a verdict of $350,000.00 or more, pay the $300,000.00 and get your insured’s name on a release.

Never flirt with disaster on the close ones.  It is not worth the downside.  Enough said.

Have A Thorough, Reliable, Claims Valuation/Vetting Process

This will mean everything to you if you pass on a policy limits demand and are later faced with a verdict in excess of policy limits.  If you are going to successfully defend a bad faith claim based on the excess verdict, a thorough, valid, reliable case valuation process will oftentimes save you from a follow-on bad faith verdict.  Without one,  you are likely facing and uphill and most likely unwinnable battle.

What comprises a thorough, reliable, claims process?  Investigation.  Analysis.  More Investigation.  More Analysis.  The basic blocking and tackling  is what we are talking about here – recorded interviews, medical records, police reports, wage and employment records, medical exams, depositions, discovery, etc.  The more information considered, the better.

Legal research into the liability aspects of the case, jury verdict research from the applicable venue, and similar case-valuation research is also extremely helpful.  If the venue you are in routinely shows verdicts in the high six-figure amounts for multiple fracture automobile accident cases, refusing to pay the demand of $300,000.00 is, obviously going to be much harder to justify.

Do the homework.  And make the decision to pay or not to pay the limits demand depending on what your homework shows.

Thoughtful deliberation by more than just a single claims professional is crucial as well– collective wisdom and decision-making is a great help to successful bad faith defense.   For an extra layer of protection, especially in high value cases, it never hurts to ask independent, outside counsel for a complete evaluation of liability, damages, and a case valuation.  It is time and money well spent.

Document Your Thorough, Reliable, Claims Valuation/Vetting Process

The best and most intricate case workup and evaluation will be of no use to you in a bad faith case if you cannot reconstruct the thought processes of your claims professionals leading up to the decision not to pay a policy limits demand.   All of the major aspects of the process should be reflected in either the claims file and/or the claims notes, for use at a later time in the event of an excess verdict.

The settlement negotiations themselves should likewise be documented, including notes following telephone calls and correspondence from your counsel to the Plaintiff’s counsel declining the demand, and more importantly, explaining the rationale for declining the demand, whether it be because liability is questionable, or the value of the injuries to not justify, based on your research, the amount of the settlement demand.

If you feel the demand is premature because, for example, depositions have not yet been taken in the case, spell that out in your negotiations and, if appropriate, ask for additional time, or to hold negotiations open.  If there is missing information you need from the Plaintiff or his lawyer, document making requests for that information, as well as any failures on the part of your counterparts to provide that information, and how that impacts your ability to evaluate the demand.

In other words, leave a very good trail of breadcrumbs.

Conclusion:  Is It Better To Be Right or Reasonable?

There is likely no tougher decision in the insurance claims business than the decision of whether or not to pay a policy limits settlement demand on behalf of an insured.   A great deal rides on making the right call.   So the process used in arriving at that decision is of utmost importance.

Whether it is better to be right or reasonable is a trick question, of course — it is always best to be both.  When it comes to the decision not to pay a policy limits settlement demand, however,  you cannot always be right.  But you can always be reasonable, by sticking with the right process, and that will keep you out of the worst  kinds of trouble.

The Fine Art Of Deciding Not To Settle Within Policy Limits: Part One

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The Problem

You are defending your insured in a motor vehicle case with a $300,000.00 policy limit.  The Plaintiff’s injuries are fairly severe (several fractures and a hospital stay) and there is some work loss and other consequential damages.   The case is venued in a middle-of-the-road jurisdiction, and liability for the accident is questionable — a jury may well apportion some fault to both parties.

Until now, the Plaintiff’s only settlement demand has been $650,000.00.  But in today’s mail you receive a 30 day time limit settlement demand for the $300,000.00 policy limit, after which, the letter continues, the Plaintiff’s lawyer is going to take the case to verdict and seek an assignment of bad faith rights from your insured against you in the event of an excess verdict.

You have almost all of the relevant medical and work loss records, but no depositions have been taken.  What to do?

If those of you in the claims and claims management business had a nickel for every time this scenario  (or one similar to it) crossed your desk, you would no longer need to be in the claims or claims management business and, consequently, would not have to worry about it.   But until that kind of hazardous duty pay somehow materializes, you are stuck on the horns of a dilemma.

An excess verdict, in this example is possible, you believe, but it is equally possible that the case could come in at $200,000,00, maybe less.  Heck, if the jury finds the plaintiff more than 51% at fault (using Pennsylvania law as an example), the Plaintiff is going to take $0.  So the decision is taken:  despite the urgings, and veiled threats, of both the Plaintiff’s lawyer, and your insured’s personal lawyer (policy limit demands indeed make strange bedfellows), you are going to decline to pay the demand, and move forward for now with the litigation.

* * *

In this two-part post, we are going to examine the decision not to settle your insured’s tort case within policy limits.  How it should be done, when it should be done, whether it should be done, and why it should be done or not done, not necessarily in that order.  In Part One,  we will take a broad, 50,000 – foot look at the issue, and then in Part Two,  we will drill down into some of the particulars.

The Big Picture And  Rules of the Road

Obviously, the decision not to protect an insured and settle a tort case against him or her is a major one with major consequences:  It potentially exposes the insured to excess, and potentially personal liability, which defeats the purpose, your insured believes, of paying for insurance in the first place.  Not settling prevents financial and emotional closure of a rather unpleasant experience for one of your customers.  And perhaps most importantly, if declining a policy limits demand  is not done properly, with reasonable basis, it exposes the insurer to extracontractual damages via a bad faith claims in the event the underlying tort verdict exceeds the policy limits.

Doing business in this territory can be a risky place to go.

While all of these things are true, there are other less thought of elements which also operate in the background:

  • Despite what every Plaintiff’s lawyer would like you to believe, an excess verdict is not a res ipsa loquitur  or per se establishment of insurance bad faith.   An excess verdict is nothing more than an entre’ for an insured or his assignee to attempt to make out a bad faith case, which is a far cry from a final finding.  Do not let a Plaintiff’s bad faith  lawyer standing at home plate holding an excess verdict convince you he or she has already hit a home run.  He or she has not.
  • Reasonable offers of settlement less than policy limits are often  made, and rejected, followed by a verdict in excess of the policy limits.  It happens, and it often times happens even in the absence of insurer bad faith.    If the amount of the offer and the amount of the verdict are reasonably close (I use this vague term intentionally), and there is a reasonable, documented rationale for either making a sub-limit settlement offer and/or declining to pay a limits demand, a finding of bad faith against the insurer is not a foregone conclusion.

So how should the decision to pay or not to pay a limits demand be made?

 

The Art and Science of the Decision Not To Settle Within Limits

There is a reason this post was not titled, “The Fine Art of Not Settling Within Policy Limits.”  The title contains an extremely important verb:  “Deciding.”   An insurer’s decision to reject a policy limits demand against its insured must be just that:  a decision.  The decisional aspect of not settling within limits implies a whole host of items comprising a decision – making process, which encompasses legal and factual information-gathering, deliberation, analytics, examination of comparable injuries and cases, and consideration of other relevant factors.

The decision not to settle within limits must be an informed one — it cannot be one which is knee-jerk, emotional, or irrational.  It cannot be one made simply on the basis that the insurer would rather not pay.  Stated simply, the decision, if made, must be made properly.  The decision – making process must not only  be a thorough one;  it must be one where the reasoning behind it is documented so that it is re-traceable at a later time .  We will examine the specifics of this decision making process in Part Two of this post.

 

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