To Arms! More bad faith cases are coming

Author Subject: To Arms! More bad faith cases are coming
Advocate Posted At 08:21:18 12/28/99



To Arms!
More Bad Faith Cases Are Coming

By Barry Zalma

California invented the tort of insurance bad faith. Since that invention, it has morphed into different categories. It started with first-party bad faith by third-party liability insurers, and graduated to first-party bad faith by first-party disability, life and property insurers. With the Royal Globe desicion, people injured by insured persons were allowed to sue the insurer for the tort of bad faith claims handling. Years later, after multiple abuses of the system by the plaintiffs' bar, the California Supreme Court decided, in Moradi-Shalal v. Fireman's Fund, to do away with the tort of third-party bad faith. With the arrival of Jan. 1, 2000, there will be a new, statutory tort of bad faith claims handling, and the law will again allow accident victims to sue twice for their injuries. The tort of bad faith is growing. Their trial lawyers will prod states outside California (most of which have acknowledged and adopted the tort of bad faith) to follow California's lead again.

Insurers, basking in the false peace provided by Moradi-Shalal have decimated their claims staff. Having seemingly concluded that they no longer needed a professional claims staff, they laid off experienced personnel and replaced them with young, untrained and unprepared people. Virtual clerks replaced the old professional claims handlers. Because there was no exposure to third-party bad faith damages, insurers still made money. Neither claimants nor insureds were treated well. Insurers treated some badly. No one seemed to care. The bottom line remained positive.

The California Supreme Court created the tort of third-party bad faith (TPBF) to cure a perceived abuse of the public by third-party liability insurers. The Royal Globe decision allowed claimants who had no contractual relationship with an insurer to sue for TPBF, violating the California Fair Claims Practices Act (California Insurance Code 790.03 (h)).

The decision in Royal Globe caused approximately 15 years of abuse of insurers by the plaintiffs' bar. Plaintiffs held the hammer of a second lawsuit over the heads of the insurers who were defending their insureds faced with minor tort claims. Insurance rates rose logarithmically until the California Supreme Court reversed itself in Moradi-Shalal.

Understandably, insurers changed their claims handling practices. Plaintiffs could not settle marginal cases, and claimed that the insurers were abusing claimants as they had before Royal Globe. In the year 2000, the California legislature, at the urging of the California Consumer Attorneys Association, will have, in effect, a TPBF law authorizing third-party claimants to sue the insurers of the tortfeasor for bad faith claims handling.

The enactment of a statute in California to allow third-party bad faith suits may be copied across the country. First-party bad faith suits are still available in most states. Insurers should remove their heads from the sand, look around and protect themselves against multiple lawsuits. An effective, cost-effective defense to bad faith claims is a claims staff filled with insurance claims professionals dedicated to excellence in claims handling. Insurers have found that insurance claims professionals resolve more claims for less money without the involvement of counsel for the insured. A happy insured or claimant satisfied with the results of his or her claim will never sue the insurer. Incompetent or inadequate claims personnel force insureds and claimants to lawyers.

Every study performed on claims establishes that claims with an insured or claimant represented by counsel cost more than those in which counsel is not involved. Prompt, efficient, professional claims handling saves money and fulfills the promises made when the insurer sold the policy.

After the law becomes effective, insurers who believe that they can handle third-party claims as they did before will be faced with the screams of angry stockholders. Profits, thin as they are, will move rapidly into negative territory. Punitive damages will deplete reserves. Insurers will quickly question why they are writing insurance in California. Some will escape. Those who remain will either adopt a program requiring excellence in claims handling from every member of their claims staff, or fail.

Insurance is a business. It must change if it is to survive. It must rethink the firing of experienced claims staff and reductions in training to save expense.

Excellence in claims handling

Excellence in claims handling is a new program that can help insurers avoid charges of bad faith in both first - and third - party claims. An insurer must understand that, without excellence in claims handling, it cannot adequately fulfill the promises it makes to its insureds and the Fair Claims Practices Act when dealing with claimants. The insurer must work intelligently and with vigor to create a professional claims department.

Insurance claims professionals are people who can read and understand the insurance policies issued by the insurer; people who understand the promises made by the policy and their obligation, as an insurer's claims staff, to fulfill the promises made. They are all competent investigators. They have empathy, and recognize the difference between empathy and sympathy. They understand medicine relating to traumatic injuries and are sufficiently versed in tort law to deal with lawyers as equals.

An insurer whose claims staff is made up of people who are less than insurance claims pofessionals, will be destroyed by the new tort of third-party bad faith.

Promoting claims professionals

To avoid claims of bad faith, to avoid punitive damages, to avoid losses and to make a profit, insurers must maintain claims staff who are dedicated to excellence in claims handling. That means they will make sure every promise made in every policy is satisfied.

How?

Insurers must only hire insurance claims professionals.
Insurers must train their claims staff to be insurance claims professionals.
Insurers must require that the claims staff treat every insured with good faith and fair dealing.
Insurers must demand excellence in claims handling from their claims staff.
For the last 15 years, the insurance industry has decimated the number of insurance claims professionals available for hire. If any experienced claims professionals exist in the insurer's staff, the insurer must cherish and nurture them.

If none are available, the insurer has no option but to train its people. Those who treat all insureds and claimants with good faith and fair dealing and provide excellence in claims handling should be honored with increases in earnings and perquisites. The insurer must immediately eliminate those who do not provide excellence in claims handling from the claims staff.

Claims adjusters can never be insurance claims professionals unless they are familiar with all of the following:

All insurance policy contracts used by the insurer.
The rules applied by the courts for the interpretation of insurance contracts.
The Fair Claims Practices Act of the jurisdictions in which they work.
The regulations promulgated by the Department of Insurance to enforce the Fair Claims Practices Act.
The law of contracts.
The law of torts.
The law of fraud, and the obligations of an insurer to anti-fraud activities of the states in which they work.
The red flags of fraudulent claims.
Treatment of traumatic injuries.
Cost of reasonable medical treatment for traumatic injuries.
Sufficient medical terminology to understand the diagnoses of physicians.
The ability to obtain information through detailed and effective oral interviews, often called the recorded statement.
How to determine the extent of damage to structures or vehicles and the cost of repair or replacement.
How to establish the fair market value of items of personal property, including vehicles.
The skills necessary to negotiate fair, reasonable and acceptable settlements.
Once the claims person has all of the tools needed to analyze, investigate, adjust and settle insurance claims, the insurer must demand that the claims person provide excellence in claims service. To provide such service, the claims person who wants to become an insurance claims professional must apply all of the skills daily and in each contact with the insured or claimant.

Pursuing claims excellence

An insurer dedicated to claims excellence should expect its claims professionals to investigate each claim thoroughly with a view to paying the indemnity the insurer promised. For example, an insurance claims professional faced with a third-party liability claim, such as an automobile accident, should be required to do no less than the following:

Contact the insured immediately, and no later than 24 hours from the time of notice, to schedule an appointment to commence the investigation of the reported loss.
Before meeting with the insured, read the wording of the policy issued to the insured and any special endorsements or modifications to the policy. Obtain a copy of the application submitted by the insured
Meet with the insured immediately, and no later than 48 hours after the notice of loss. At the first meeting determine:

The facts of the loss.

Answers to the "who," "what," "why," "where," "when" and "how" of the loss.
The damage, if any, to the vehicle owned by the insured.
The identity of each witness and claimant.
A determination of the truth of statements made by the insured in the application.
After the first meeting, the adjuster shoud:

Advise the insured of any duties and obligations with regard to the policy.
Obtain a detailed recorded statement, with the insured's evaluation of liability.
Examine, immediately, but in no event later than 24 hours after the report of the loss, the scene of the accident, documenting the scene with photographs, measurements and any other physical evidence available.
Contact and interview immediately, but in no event later than 36 hours from the date of notice, each claimant and witness.
If a determination is made, from the interview with the insured, witnesses and claimants, that the insured is exposed to liability to the claimants immediately:

Gain control of the claimants by offering a no-strings advance payment.
Show empathy to the claimants and offer help.
Advise the claimants that they have the right to attorney representation at any time before the running of the statute of limitations but, if a lawyer is hired immediately, the claims professional probably cannot make advance payments.
Ascertain that the claimants know when the statute of limitations will run and confirm that fact in writing.
Evaluate treatment to claimants and, if appropriate, pay the medical bills and out-of-pocket expenses of the claimants immediately.
Keep in close contact with the claimants no more than once every 30 days to determine whether their injuries are resolving.

Once the injuries have resolved, sit down with the claimants and negotiate a fair and reasonable settlement of all injuries received. Explain in detail, confirmed by a written explanation, the effect of a release of all claims so that there is no question that once signed, no further money will flow to the claimants.

Confirm that the claimants understand how the offer of settlement is calculated. Make clear to the claimants that they get to keep 100 percent of any settlement reached.

Explain to the claimants that the claims professional is patient and the offer of settlement will remain open for a reasonable time so the claimants can obtain the advice and counsel of an attorney.

In the case of a small fire loss, for an additional example, a complete and professional investigation would require that an insurance claims professional:

Contact the insured immediately, no later than 24 hours after the date of notice, to schedule an initial meeting and inspection of the damaged property.
Before meeting with the insured, read the wording of the policy issued to the insured and any special endorsements or modifications to the policy. Obtain a copy of the application submitted by the insured.
Meet with the insured and inspect the damage immediately, no later than 48 hours after the report of loss.
Thoroughly inspect and photograph the scene of the fire and obtain the agreement of the insured concerning the scope of the loss. The insured and the claims professional should agree, in general terms, what is damaged and what needs to be removed and replaced.
After the inspection and agreement to the scope of loss, obtain a recorded statement of the insured and a recorded statement of any independent witnesses concerning the facts of the loss, the acquisition of the policy and any other information necessary to a determination of coverage, including a verification of the accuracy of all statements in the application for insurance.
Advise the insured of the terms, conditions and limitations of the policy in general terms understandable to the insured, including the obligation to submit a sworn proof of loss. Give the insured a blank form of proof of loss.
Write a claims professional's estimate of the cost to repair the damage and provide a copy (without the extensions) to the insured and to a licensed general contractor, with instructions that any repair estimate prepared should follow the same order as the estimate prepared by the claims professional.
Advise the insured when to expect to hear from the claims professional next. If delays result, keep in constant contact with the insured to explain why.
When the estimates are received, compare them to establish that they all are estimating the same work.
Meet with the insured, explain the comparison of the various estimates and negotiate a settlement.
Once an agreement is reached, execute a proof of loss and agreement to the settlement and a subrogation agreement (if subrogation potential exists), and cause payment to be delivered to the insured immediately, but in no event more than 30 days from the day the agreement is reached.
What training tools are available?

Insurance training is available across the country by correspondence, in local colleges and universities and from law firms that will provide the training as a marketing tool. While none of these sources are directed to producing insurance claims professionals, they do provide the basic background information necessary to begin the process.

An excellence in claims handling program includes a series of lectures supported by text materials. It should be supplemented by meetings between supervisors and claims staff on a regular basis to reinforce the information learned in the lectures. The insurer also must institute a regular program of auditing claims files to establish compliance with the subjects studied.

There is no quick and easy solution. The training takes time. Learning takes longer. The insurer's management must support and reinforce the training regularly.

The excellence in claims handling program requires a minimum of the following:

The insurance policy - how to read and understand the contract that is the basis of every adjustment.
The formation of the insurance policy.
Tort law including negligence, strict liability in tort and intentional torts.
Contract law including insurance contracts, lease agreements, bills of lading, non-waiver agreements, proofs of loss, releases and other claims related contracts.
The duties and obligations of the insured and insurer in a personal injury claim.
The duties and obligations of the insured and insurer in a first-party property claim.
The Fair Claims Practices Act and the regulations to enforce it.
Basic investigation of auto accident, construction defect, non-auto neglegence, strict liability and first-party property claims.
The recorded statement of a first-party property claimant.
The recorded statement or interview of a third-party claimant.
The recorded statement of a insured.
The red flags of fraud.
The special investigations unit and the obligation of the claims representative when fraud is suspected.
Claims report writing.
The evaluation and settlement of the personal injury claim.
How to retain coverage counsel to aid when a coverage issue is detected.
How to control coverage counsel.
Dealing with a plaintiffs' lawyer.
Dealing with personal injury defense counsel.
The evaluation and settlement of the property damage claim.
Arbitration and mediation and the claims representative.
Insurers can avoid training their staff. Insurers can continue as they have in the past. Those who do not, however, adopt a program of excellence in claims handling will find themselves involved in multiple third- and first-party bad faith suits. Defense of those suits will be enormously expensive. In some of those cases, judgments will be entered for punitive damages equal to a small percentage of all of the assets of the insurer. The cost of implementing a training program to create a claims staff dedicated to excellence in claims handling will be less than 1 to 5 percent of the amount the insurer can expect to pay in a single bad faith judgment.

Insurers must recognize that the system has changed. The world will be different in the year 2000. Get ready for the next century or file bankruptcy.

Barry Zalma is an attorney in Culver City, Calif., who limits his practice to the representation of insurers and those in the business of insurance. He is also president of ClaimSchool and the publisher of "Heads I Win, Tails You Lose," a collection of his insurance fraud columns.



Michael Speer Re: To Arms! More bad faith cases are coming (Currently 0 replies)
Posted At 04:55:38 03/10/2000

Barry,
Having read your article and having experienced first hand the reality of claims handling from the opposite end from where you sit suggests to me that you need to come walk in my shoes. It would be a wonderful world indeed if the law were applied equitably and if everyone had to comply with said law but that is NOT the case.
To date I have listed some 84 laws, codes,canons, statutes, rules, and regulations that have been violated by the attorneys, judges, the insurers, the Ins. commissioner, the DA's office, and of course, the employer that range from misdemeanors to felonys. Constitutional guarantees are worth about as much as the paper that they are written on with violations 'under the color of authority' as common as rain.
The State Bar and the various other 'ethics' outfits are facades put up to quell the publics outrage of what is going on in every state in this country. Let's face reality about the insurers........in Worker's Comp. they have managed to legally extort every employer in every state , by law, to pay for insurance. The Insurer collects off of the employees end by not honoring the 'no fault system' that they sold to the legislators. Of course the Insurers contribute to all these various legislators political aspirations, legally.... A check of the law will expose that the insurers have pretty much immunized themselves against the law...... and one can find that the Insurers have had their legislators manage to get the Insurers into the law enforcement area by allowing them to 'police'
all of us.
My case has revealed all of this and much more..... Corrupt doesn't begin to accurately describe what is going on.

Sadly, it is misguided fools like you that are 'glazing over'the reality of what is going on. You left some important information out of your article. That information is about the dark side of the insurer and
lengths that they will go to for the win.In my eyes and in many peoples eyes , the insurers are little more than parasites, living off of the blood of others or carpet baggers who should be tarred & feathered and ran out of town.
Regards,Mike Speer
Marty Politicians are owned by insurance companies!! (Currently 0 replies)
Posted At 13:42:38 04/07/2000

Very well said Michael. I congratulate you for saying well what many of us know to be the truth and present reality of the workers comp system everywhere.
Fred Johnson Re: To Arms! More bad faith cases are coming (Currently 0 replies)
Posted At 11:29:29 04/18/2000

I second the motion, it's is difficult to come off as being saine. When talking or writing about the workman's comp. system, there is no way to imagine what they will do until you are put in the middle.

Starvation litiagation!!!!!!!!!!!!!!
Chantel the Collection Agent in Memphis SUCKS! Collection Agency Law Bill Collectors Debt (Currently 0 replies)
Posted At 19:56:47 04/03/2001

Your Lying Games DO NOT WORK Bill Collector Scum!

Chantel (or Shantel or whatever) in Memphis needs to know that Bill Collectors who LIE are only cheating themselves. When I told her I only had $20, that's exactly what I meant! You cannot make me come up with $60 when all I have is $20.

Hey, I'm sorry that I owe the money. But I'm not lying to you, Chantel, so, don't you LIE TO ME. Don't tell me you'll SEE WHAT YOU CAN DO about payment arrangements. You'll be doing yourself and others a big favor.

Stop Lying, you bill collecting, collection agent scum!

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