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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The Montana Supreme Court Just Made It Much Harder For Insurers To Litigate The Value of UM/UIM Claims

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HELENA, Oct. 24 – While disclaiming it was creating a new concept of insurer bad faith in the state, the Supreme Court of Montana just announced a bright line rule in first party UM/UIM litigation that discourages insurers from contesting in good faith the value of an insured’s injury, and rolls back the American Rule which requires that each litigant bear his or her own attorneys fees.

In Mlekush v. Farmers Ins. Exchange, 2017 MT 256, a unanimous Montana Supreme Court held that an insurer contesting an insured’s claim for UM/UIM dollars must reimburse the insured for attorneys fees if the insured goes to trial and recovers an amount in excess of the insurer’s last offer.  Justice Michael A. Wheat wrote for a unanimous court:

“[w]e hold that, when a first-party insured is compelled to pursue litigation and a jury returns a verdict in excess of the insurer’s last offer to settle an underinsured motorist claim, the insurer must pay the first-party insured’s attorney fees in an amount subsequently determined by the district court to be reasonable.   To be clear, if a first-party insured goes to trial and obtains a verdict in excess of the insurer’s last offer, this constitutes prima facie proof that the insured was forced to assume the burden of legal action to obtain the full benefit of the policy, thus obviating the need for an inquiry as to whether or not the insurance exception applies. However, in cases in which the policy limits are tendered prior to a verdict being returned, the district court may consider the entirety of the litigation to determine ‘whether, and to what extent, [the] insured was forced to assume the burden of legal action in order to recover the full benefits of the insurance contract.'”

Mlekush v. Farmers Ins. Exch., 2017 MT 256 (Oct. 24, 2017)(Wheat, J.)

Editor’s Note:   While the Court took steps to walk back from any suggestion it was creating new bad faith law, the opinion essentially creates  a rule of strict bad faith liability for any insurer who takes a UIM claim to trial and the jury awards more than the insurer’s offer.  The opinion is wholly  silent, of course on whether an insurer is entitled to recoup attorneys fees from the insured if the jury awards an amount less than the insurer’s last offer, and despite the symmetry of it,  it is probably not reasonable to assume such a corollary would ever be endorsed by the Court.  

 

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.

 

Pa. Supreme Court Holds No Fiduciary Duty Created By Purchase of Insurance From Ameriprise Financial

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PITTSBURGH, June 20 – The Pennsylvania Supreme Court has ruled that Ameriprise Financial owed no fiduciary duties to two insureds who consulted with an Ameriprise financial adviser following a cold call  and purchased life insurance and annuity products from the insurer.

In Yenchi v. Ameriprise Financial, Inc., Mr. and Mrs. Yenchi sued Ameriprise, American Express Financial Services Corporation, American Express Financial Advisors Corporation, IDS Life Insurance Company, and an agent, Holland, after having their purchases independently reviewed.  The Yenchis’ complaint, filed in November 2003, asserted claims of negligence/willful disregard, fraudulent misrepresentation, violation of the Uniform Trade Practices and Consumer Protection Law (“UTPCPL”),  bad faith, negligent supervision, and  breach of fiduciary duty.

The trial court granted the defendants’ summary judgment motion which argued that no fiduciary duty existed.  The Superior Court reversed, however, and the Defendants appealed to the Pa. Supreme Court which granted allocator on the issue of whether a fiduciary duty existed between  the Yenchis and the Defendants.

In finding no fiduciary relationship existed, Justice Christine Donahue wrote that not all insurance transactions impose fiduciary obligations upon the insurer:

The record here establishes that the Yenchis made the decision to purchase Appellants’ advice and financial products. Reliance on another’s specialized skill or knowledge in making the purchase, without more, does not create a fiduciary relationship. We acknowledge that the Yenchis may have become comfortable with the Appellants’ expertise before deciding to purchase the 1996 whole life insurance policy, which is to be expected when making a financial decision. It is part of the development of any business relationship — consumer or otherwise. It   does not, however, establish a fiduciary relationship. There is no evidence to establish that the Yenchis were overpowered, dominated or unduly influenced in their judgment by Holland.

The Yenchis never ceded any decision-making authority to [the advising agent]Holland. Over the course of the relationship, they followed some of his recommendations and rejected others. Prior to the proposal for the whole life policy at issue, Appellants proposed a different whole life product that the Yenchis did not purchase. As to advice accepted, the Yenchis purchased the 1996 whole life insurance policy and the 1997 deferred variable annuity. They began saving money in an investment certificate and opened an IRA account. On the other hand, they rejected other recommendations, including, in particular, Holland’s advice in 1998 to increase their life insurance to the $300,000 level, deciding for themselves that the 1996 whole life policy was a sufficient amount of life insurance for their needs. The evidence does not establish that the Yenchis were subject to any overmastering influence by Holland. They maintained and exercised decision-making control over their financial matters. No confidential relationship was ever created.

Yenchi v. Ameriprise Fin., Inc., No. 8 WAP 2016, 2017 Pa. LEXIS 1405, at *23-25 (June 20, 2017)

New York Rolls Out New Cybersecurity Requirements for Banks, Insurers

 

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Harrisburg, Feb. 22 –  According to the New York Department of Financial Services, new cybersecurity rules aimed at safeguarding consumer data go into effect on March 1, 2017.  The regulations  will require banks, insurers, and money services to strengthen their cybersecurity protocols by, in part, putting data security programs in place, and accepting greater responsibility for monitoring the vendors with whom they do business.  The rules also require reporting breaches within 72 hours.

The new rules impose obligations which could create liability from regulatory actions or consumer litigation. According to attorneys quoted in a recent article appearing on Law360.com,  the new guidelines will give enterprising  plaintiffs’ lawyers new claims against financial services firms, as well as firm directors and officers. Under the new DFS scheme, Company executives must certify compliance with the NY DFS regulations on an annual basis. Should those certifications prove incorrect, they could provide the basis for the DFS or consumers to make claims against banks, insurers and other financial services firms for breach of such certification.  Because of that, companies should devote considerable  attention and resources to two areas: 1.) implementation of cybersecurity programs and systems in compliance with DFS requirements; and 2.) making sure company executives have liability insurance coverage for cyber-related missteps, including coverage for both regulatory and consumer  claims.

With respect to adequately insuring cyber exposures, companies should undertake review of D&O policies to make sure any cyber-related liability is not excluded, and also that the insurance will cover the costs of defending against regulatory actions and any resulting penalties.  With respect to DFS requirements for the supervision of third-party vendors, the rules call for vendors to encrypt  nonpublic information and to set up robust protection systems.  Companies should require and review both vendor cybersecurity policies and related liability insurance products to make sure the vendors have technology errors and omissions coverage.  Companies may wish to secure additional insured protection in such policies as well.

A copy of the regulations may be found here:  nydfs-cybersecutiry-regs-03012017