BMS’ Vice President of Claims, Urban Friesz discusses bad faith claims handling for natural disasters. He will be establishing a regular client services and claims themed blog.
In light of the immense storm activity we experienced in the South and Midwest last week, I thought it might be timely to revisit an article titled 3 Steps Insurers Can Take To Avoid Class Action Litigation Stemming From Natural Disasters, which was published in October 2011 on Property Casualty 360°, a National Underwriter Website.
As a reinsurance claims specialist, the part of the article that drew my attention dealt with claims for bad-faith. Most treaty reinsurance agreements include coverage for the insurer’s liability for loss or damage arising because of certain failures of a company in handling a claim. Two of the three recommendations included in the article involve claims handling. As a general rule, claims handling methodology should satisfy fair claims handling practices as required by each state as well as meet the prescribed duty of care required of the relationship between policyholder and insurer. A handy 50 State guide for claims handling practices assembled by Lynch & Associates can be found at Claim-Handling Guidelines.
Insurance companies typically have claims handling manuals which set forth acceptable claims handling practices and procedures in the acknowledgement, investigation and settlement of claims. In addition to these standard elements of the claims process, these manuals often prescribe additional steps to be taken in the event of a full or partial denial of coverage or other claim dispute. So, as long as you have a sound claims handling manual and your claims staff adhere to these practices, you should be good right?
Well….what about the scores of independent adjusters and appraisers that get involved when disaster strikes? Because of the difficulty in planning and deploying claims resources for sudden catastrophic events, most insurance companies rely heavily on local or national independent adjusting firms to help adjust catastrophe claims. What happens when these adjusters don’t adhere to a company’s claims procedures or fail to operate within the scope of the service agreement between the insurance company and the adjusting firm? What happens if the “failure” in claims handling mentioned above is attributed to actions of an independent adjuster?
The Vermont Supreme Court stated in Hamill v. Pawtucket Mutual. Ins. Co., No. 2005-025, 2005 WL 3556694 (Vt. Dec. 30, 2005) that, because the conduct of an adjuster acting within the scope of his or her authority as agent for the insurer is imputed to the insurer, the insurer is subject to liability for the adjuster’s mishandling of claims in actions alleging breach of contract or bad faith. An action for breach of contract or bad faith stems from the terms of the insurance policy itself or the implied covenant of good faith and fair dealing which commonly exists in the contract between an insured and his insurer. Absent privity of contract with the insured, the independent adjuster does not owe an independent duty to the insured unless the insured is suing for an intentional tort such as fraud or deceit (Dumas v. ACCC Insur. Co., Eleventh Circuit Court of Appeals, Case No. 09-13027). As a result, the insurer is often on the hook for activities of an independent adjuster when they lead to bad faith allegations.
It’s hard to think about bad faith claims handling in light of the devastation and tragedy experienced across parts of the country last week. Insurance companies are diligently deploying resources and capital to help individuals and communities in need as a result of these storms. Nonetheless, taking a few moments to review your service agreements with independent adjuster firms and formalizing expectations may save you time and money later.
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