2010 Professional Risk 2010 Professional Risk Symposium: EPL, E&OSymposium: EPL, E&O

and Fiduciaryand Fiduciary

PLI Claims Trends: PLI Claims Trends: Fresh PerspectivesFresh Perspectives

PLI Claims Trends: PLI Claims Trends: Fresh PerspectivesFresh Perspectives

Moderator:

Meryl R. Lieberman, Esq., Founding Partner, Traub Lieberman Straus &

Shrewsberry LLP

Panelists:

Judge Marina Corodemus (Ret.), Esq., Director ADR Practice Area,

Corodemus and Corodemus, LLC

Charles K. Graber, Esq., Shareholder and President, Charles K. Graber, Esq., P.C.

Jeffrey R. Lerman, Esq., Partner, Montgomery, McCracken, Walker & Rhoads, LLP

Jeanette Bourey McDonough, Esq., CPCU, Claims Counsel, Markel

PLI Claims Trends: PLI Claims Trends: Fresh PerspectivesFresh Perspectives

• At the core of every bad faith cause of action is the recognition under the law that insurance companies owe a duty of good faith and fair dealing to the persons they insure.

HAT TRICKSHAT TRICKS

• Comparative examples from three popular states:

1. New Jersey

2. Florida

3. California

New JerseyNew Jersey

1. New Jersey Supreme Court Defines Bad Faith in Pickett v. Lloyds, 131 N.J. 457, 621 A.2s 445 (N.J. 1993)

2. New Jersey recognizes an action of bad faith claim for denial of insurance benefits where:

• No reasonable basis exists for denying benefits • Coverage obligation is clear and not “fairly debatable”

3. The “fairly debatable” standard is based on the idea that when an insurer denies coverage with a reasonable basis to believe that no coverage exists, it is not guilty of bad faiths even if the insurer is later held to have been wrong. Polizzi Meats, Inc. v. Aetna Life & Cas. Co., 931 F.Supp. 328, 334 (D.N.J. 1996).

New JerseyNew Jersey

4. Insurance regulations in New Jersey impose on insurers the duty to act “in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.” N.J.A.C. 11:3-10.5

FloridaFlorida

• The Supreme Court of Florida, in State Farm Mut. Ins. Co. v. LaForet, 658 So. 2d 55 (Fla. 1995), expressly rejected the “fairly debatable” standard.

• Under the “fairly debatable” standard, a claim for “bad-faith” can succeed only if the plaintiff can show the absence of a reasonable basis for denying the claim.  

• Under Florida law, the standard of care that the insurer must exercise when handling claims against the insured "the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business."

• The Florida Statute, states that an insured has a cause of action for bad faith, when the insurer did not attempt "in good faith to settle claims when, under all circumstances, it could and should have done so, had it acted fairly and honestly towards its insured and with due regard for her or his interests." § 624.155(b)(1), Fla. Stat. (2002).

CaliforniaCalifornia

• The key to a bad faith claim in CA is whether the insurer's denial of coverage was reasonable. “When an insurer unreasonably or without proper cause, withholds a payment or denies a payment that is due under the policy, the insurer has not only breached the contract, but is subject to the tort of bad faith.

• The ultimate test is whether the insurance company acted unreasonably. A bad faith claim can be dismissed on summary judgment if the defendant can show that there was a genuine dispute as to coverage.

• Third party coverage also contains a duty to settle a reasonably clear claim against the policyholder within policy limits. This avoids the risk of a policyholder being hit with a judgment in excess of the policy limits. If the insurer breaches its duties to defend, indemnify, & settle, it may be liable for the entire amount of any judgment against the policyholder, even if the amount is in excess of policy limits.

Examples of Bad FaithExamples of Bad Faith

Unreasonable denial in Coverage

Unreasonable delay in payment of a claim

Duty to Investigate

Duty to Disclose Coverage

Wrongful Refusal to Defend Third Party Claim

Duty to Settle

Unreasonably Low Settlement Offers

Other Bad ActsOther Bad Acts

• Threatening to rescind the policy where there are no grounds for such.

• Unsupported allegations that the insured is guilty of fraud may constitute evidence of bad faith

• False promises to provide coverage

• Hostile or sarcastic attitude of Insurance adjuster may constitute evidence of bad faith

Other ExamplesOther Examples

• Failure to promptly and thoroughly investigate a claim

• Unreasonable interpretations in translating policy language

• Refusing to settle or inadequate offers to settle• Unreasonable denial of benefits to a claim or

termination of a claim that should have been paid• Unreasonable delay in making payments to a policy

holder• Unreasonable attempts to under-settle a claim.

State FarmState Farm

• State Farm Mutual Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003).

• Campbell sued State Farm for damages arising from its decision to try a third-party automobile accident case in which Mr. Campbell was the defendant, rather than accepting offers to settle for Campbell's insurance policy limits. The jury found in Campbell’s favor, awarding $911.25 in out-of-pocket costs, $2.6 M in compensatory damages, and $145 M in punitive damages.

VerdictsVerdicts

• Riehs v. Rutgers Casualty Insurance Company,

• In New Jersey, if a plaintiff is willing to settle his or her claim for the defendant’s policy limits, and the defendants’ insurance company, in bad faith, refuses to tender the policy limits, then any excess verdict will not be the responsibility of the defendant, but rather will be the responsibility of the insurance company. Rova Farms Resort Inc. v. Investors Insurance Co., 323 A.2d 495 (N.J. 1974). In January, 2010 New Jersey case, a verdict of approximately $186,000 was awarded by a jury after trial against Rutgers Casualty Insurance Company’s insured, The plaintiff had advised defense counsel of his willingness to settle the case for the insured’s $100,000 policy the full amount of the verdict was deemed payable by the insurance company.

The RainmakerThe Rainmaker

• Mrs. Black (Mary Kay Place) reads a letter from her insurance company, denying her son's claim. "You must be stupid, stupid, stupid," says the letter.

Insufficient LimitsInsufficient Limits

• When the damages exceed the limits

• When the insured can’t accept a potential excess exposure

• When the co-defendants are uninsured and there is joint and several liability

• Where XS policy does not match primary

• When the aggregate limit has been eroded by unrelated claims or defense costs

Multiple ClaimsMultiple Claims

• When more than one claim has been made against the policy

- need to analyze each claim separately

• In some jurisdictions there is a duty to try to settle all claims, even if not in same proceeding

- global mediations are helpful

• Work closely w/Insured and its personal counsel in reviewing exposures and various resolution scenarios

Multiple InsuredsMultiple Insureds

• When a settlement demand is made against one but not both defendants

- can’t leave second defendant w/o a defense by settling out least culpable defendant for remaining limits

- need to include both defendants in discussions of how to reach resolution

- if interests are adverse, each defendant should have separate defense counsel

Bad Faith ClaimsBad Faith Claims

• Where a claim is not settled and an Insured is found liable in excess of policy limits, or where the duty to defend or indemnify was denied, the Insured can allege that its Insurer breached its duty of good faith under either a statute or common law and seek to recover its consequential damages.

• This first party type of bad faith claim is generally assignable to the underlying plaintiff or judgment holder against the Insured.

Bad Faith PitfallsBad Faith Pitfalls

• Failure to promptly issue a reservation of rights when coverage issues are identified

• Failure to urge Insured to retain independent counsel at its own expense whenever there is potential excess exposure

• Failure to recognize Insured’s right to independent counsel paid under the policy when required

• Failure to advise Insured and/or its personal counsel of need for consent as soon as it becomes clear that case should be settled

More Bad Faith PitfallMore Bad Faith Pitfallss

• Failure to initiate early settlement discussions where limits are potentially inadequate or policy is cost inclusive

• Failure to consult with Insured on response to settlement demand that exceeds limits

• Failure to make reasonable settlement offer when liability is clear & damages are known or ascertainable

• Failure to accept limits demand when liability is clear, damages could exceed limits, and consent is given or unnecessary

WHAT IS BAD FAITH?WHAT IS BAD FAITH?

• Most courts define bad faith as acting (or not acting) without a reasonable basis with knowledge of the lack of a reasonable basis or with reckless disregard of the absence of a reasonable basis

• But: Does this definition really help the insurance professional in the real world?

A GOOD LAWYER ASKS:A GOOD LAWYER ASKS:

• Is the conduct in question representative of good faith? Bad faith is the opposite of good faith.

• Is the conduct arbitrary?

• Was the insured harmed?

• Can we win?

A GREAT LAWYER ASKSA GREAT LAWYER ASKS::

• Does the case have PIZAZZ?

• Is a jury going to be ANGRY?

• Is it SEXY?

• Do I go WOW?

WOW FACTORS:WOW FACTORS:

“They must be crazy. They’re not offering a dime. They won’t give me authority to offer

any money in this case, you know I can’t believe it.”

Birth Center v. St. Paul Cos., Inc.,787 A.2d 376,380-81 (Pa. 2001)

(quoting N.T. 5/3/96 at 69).

WOW FACTORS:WOW FACTORS:

“[We try] all of these bad baby cases,

and we’re going to trial.”

Birth Center v. St. Paul Cos., Inc.,

787 A.2d 376,380 (Pa. 2001)

(quoting N.T. 5/6/96 at 16).

More Wow More Wow (but only after digging)(but only after digging)

“She/he who has control of the dollarsis in a position of power!

If you are in a position of power,use it!

If you are in a position of no power,delay.”

Negotiating Skills for the Claim Professional, introduced as an exhibit in

State Farm v. Campbell

More Wow More Wow (but only after digging)(but only after digging)

Premise:“Show me a company’s compensation plans, and

I’ll show you how its people behave.”

Jack Welch, How to Be a Good Leader, Newsweek, (Apr. 4, 2005) (quoting Charles

Ames, former chairman and CEO of Reliance Electric Co.).

Courts Agree on Courts Agree on the Wowthe Wow

• Evidence of a philosophy to reduce average claim payment to level first consistent with, then lower than, major competitors supported bad faith verdict.

• Evidence regarding Provident’s practice of claims adjudication in light of “termination ratios” in respect to claims arising under disability policies supported bad faith verdict

• Evidence suggested State Farm set arbitrary claim payment goals for its claims personnel to reach goal of having the most profitable claims service in the industry; promotions & salary increases for claims personnel were based upon reaching these goals.

Courts Agree Courts Agree on the Wowon the Wow

• Evidence of corporate policy of taking tough stance towards insureds implemented through periodic evaluations of claim handlers and supervisors admissible as evidence of bad faith.

• Evidence that claim personnel had a financial incentive to deny claim.

• Evidence that State Farm had a comprehensive nationwide policy of handling certain claims in a like manner.

Rewarding Claims Rewarding Claims Personnel Personnel

for Not Paying:for Not Paying:

• An insurer cannot encourage its claim personnel to meet certain arbitrary average or median claim payment amounts before the facts and circumstances of the claims to be evaluated and valued are known. It is, by definition, arbitrary.

• Don’t you agree?

MantraMantra

• Bad Faith is an arena where few gladiators should be. It’s tough combat. Blood is spilled, and it’s not for the faint of heart.

• To be successful, the Plaintiff lawyer must wake up with two questions, each and every day:

What did the company do last night?What are they hiding today?

WHAT IS WHAT IS GOODGOOD FAITH? FAITH?

• Treat the insured fairly

• Give at least equal consideration to the insured’s position as the company’s position

• Search for basis to find coverage, not grounds for denial

• LOOKING GOOD – THE ROLE OF HONESTY AND SINCERITY

COMMON NEGATIVE COMMON NEGATIVE VIEWS OF INSURERS:VIEWS OF INSURERS:

• They deny claims whenever possible

• They delay claims as long as possible

• When they do pay they nickel and dime as much as possible

• THE PREVALENCE OF THE “RAINMAKER” ATTACK

A FAIR AND MORE A FAIR AND MORE REALISTIC WAY TO REALISTIC WAY TO

THINK OF INSURERSTHINK OF INSURERS

• Who is the insurer/personalize• The Insurer is the people you see in court who

like other working people have a job to do• Nobody’s perfect• Not all claims are legitimate or honestly or

reasonably computed and presented• The interests of the insurer do not have to be

abdicated by its employees. • Just like banks, an insurer’s employees do not

always have to agree with the customer

THE TRUTH OF THE TRUTH OF MODERN INSURERSMODERN INSURERS

• Delay is expensive

• Procedural safeguards are almost universally in place to prevent unreasonable denials

• Customer satisfaction means repeat business for insurers too

• Auto insurers now have repairs done in days; homeowner claims get investigated & approved almost immediately through high tech systems

NEGOTIATING IS FAIR GAME;

TAKING UNFAIR ADVANTAGE IS NOT

WE ARE NOT AN HMO OR A HEALTHCARE INSURER

CREATIVE SELECTION CREATIVE SELECTION OF THE SPOKESPERSONOF THE SPOKESPERSON

• Claims handler• Supervisor• Expert• Bottom line:

WHO CAN WEAR THE WHITE HAT COMFORTABLY AND APPEARS ABOVE REPROACH

PROTECTING THE INSURED AS “JOB ONE”, REASONABLY AND CONSISTENT WITH THE POLICY

TERMS AND CONDITIONS

IS IT ENOUGH TO OFFER THE COMPANY’S FAIR SHARE?

EMBRACING OR EMBRACING OR CREATINGCREATING DISTANCE DISTANCE

FROM THE FILEFROM THE FILE

• Profanity

• Favoring the insurer

• Disregarding the interests of the insured

• Individual or group disparagement

• Having a closed mind

• Discourtesy

REAL “THE FILE IS ON REAL “THE FILE IS ON TRIAL” PROBLEMSTRIAL” PROBLEMS

• Let’s roll the dice on this one

• No way am I going to tender

• Try your best to save something off the policy

• Let’s wait until they’re desperate

• In fact, the kid comes from parents that are a step above retarded. What do they expect

• Unfortunately, I cannot find basis to deny coverage

IF YOU DO NOT BELIEVE INSURERS IF YOU DO NOT BELIEVE INSURERS CAN BE SET UP THERE IS CAN BE SET UP THERE IS

A BRIDGE IN BROOKLYN I WOULD A BRIDGE IN BROOKLYN I WOULD LIKE YOU TO SEELIKE YOU TO SEE

• Demand letters

• Bad faith letters

• The “set up” as an art form

SOMETIMES YOU HAVE TO SOMETIMES YOU HAVE TO PUT THE INSURED AND ITS PUT THE INSURED AND ITS

ATTORNEY ON TRIALATTORNEY ON TRIAL

• Reverse bad faith

• The conduct of the insured/claimant as part of “what happened”