Third-party vs. first-party, common law vs. statutory, identifying all sources of recovery, assigning a bad faith claim, negotiation tips, and more.
By Joseph L. Vaccaro
Excerpted from Negotiating With Insurance Companies
An attorney handling personal injury, wrongful death, or other claims that involve insurance coverage must explore all potential sources of recovery. This means not only looking for other policies of insurance, but also bad faith, either in a first-party or a third-party context.
Although statutory and case law can vary from jurisdiction to jurisdiction, there are some common elements to insurance bad faith. A starting point to recognizing a potential bad faith case is to understand what duties are owed by an insurer to its insured. That is, it’s important to understand what “good faith” is in order to understand bad faith.
Many factors contribute to establishing a bad faith claim, but a short test to see whether an insurance company has acted improperly is to look at whether the insurance company has placed its own financial interests before its insured’s financial interests.
In my opinion that is what insurance bad faith is all about. Whether it is one single act or a series of actions, if the insurance company has placed its own interests before its insured, with a result that the insured is harmed, then there is likely to be bad faith on the part of the insurance carrier.
Listen to your gut instincts as an attorney. If something seems unfair then it probably is unfair and deserves further scrutiny. If you are not sure, find someone who is. Talk to someone who specializes in insurance bad faith law or is an expert in analyzing and testifying about insurance bad faith.
§15:30 Third-Party v. First-Party Bad Faith
Third-party bad faith occurs when an insurance company fails to defend or pay a claim asserted by a third party against a person insured by the company.
A third party was operating a motor vehicle and was stopped at a light and was rear-ended by your client. The value of the third party’s injury claim far exceeds the policy limits of your client’s insurance policy limits but your client’s insurance carrier fails to tender those limits in a timely manner. Litigation ensues and the third party obtains a judgment against your client in excess of the policy limits. At that point your client sues his or her own insurance company in order to collect the amount of the excess judgment, alleging breach of fiduciary duty, breach of contract, violation of an unfair claims practice act, bad faith, and any other theory that may be allowed in your jurisdiction. Once collected, the funds are then used to pay the third party to satisfy the judgment in the underlying case.
First-party bad faith occurs when an insurance company fails to pay its own injured insured under a form of first-party coverage.
Your client was operating a motor vehicle and was rear-ended by another party who has a policy that has inadequate coverage to satisfy your client’s claim. The other person’s insurance carrier tenders its full policy coverage in a timely fashion and there is no further likelihood of a recovery against the other person. Your client then has an uninsured motorist claim or an underinsured motorist claim (in many jurisdictions, the terms uninsured and underinsured are synonymous) on his or her own policy. You file this claim on behalf of your client but your client’s insurer fails to tender its policy limits, despite the fact that you’ve provided it with more than enough documentation to prove that the value of the claim is in excess of the limits. Your client may then sue his or her insurance company for bad faith for failing to honor the coverage under the uninsured and/or underinsured policy.
§15:31 Common Law v. Statutory Bad Faith
Depending upon your jurisdiction, and how the bad faith law developed in that jurisdiction, you may be dealing with either a common law or a statutory bad faith claim.
For example, in Florida first party bad faith is statutory [FS §624.155]. Florida’s first party statutory bad faith scheme requires the filing of a “Civil Remedy Notice” form with the Department of Insurance as a condition precedent to filing suit. After the Civil Remedy Notice is filed, the insurance carrier gets 60 days in which to cure the grievance. If it fails to do so, and litigation results in an excess judgment, the insurance carrier is required to pay the amount of the excess judgment.
§15:32 Identify All Sources of Recovery
Look for whether or not the insurance carrier has insurance that will pay for judgments in bad faith cases. If so, you need to discover the identity of the carriers, and the amount of the insurance, just as you would in any liability claim.
Likewise it’s important to identify the potential defendants because there may be more than just the insurance company that wrote the policy. For example, a third-party administrator that the insurer hired to investigate and adjust the claim may be a potential defendant. There are many third-party administrators who work for insurance companies such as Crawford and Company, the General Adjustment Bureau, and others. If an adjuster from one of these companies caused or was the catalyst in causing a bad faith claim, then that company should be named as a defendant. Typically these companies carry some form of errors-and-omissions coverage insuring their liability against any judgments in such circumstances.
An independent insurance agency that wrote the policy may also be a possible defendant. If some act on the part of an independent insurance agent caused the excess judgment on a potential defendant, its errors-and-omissions coverage may cover its liability.
Also do not overlook determining who employs the company adjuster who worked on the claim. For example, with an insurance group such as “The Hartford,” the name “The Hartford” is really a non-entity. The Hartford is a group of individual insurance companies under different corporate names. Thus, Hartford Accident and Indemnity Company may have been the insurance company that wrote a particular policy, but the adjusters might work for and be paid by Hartford Insurance Company, a different company in the Group. Hence Hartford Insurance Company is actually acting in concert with Hartford Accident and Indemnity Company and could be an additional defendant in the bad faith claim.
You may also be able to name the adjuster and other claims personnel as defendants, particularly if there is a breach of fiduciary duty to the insured.
Finally, there may be instances where the defense attorney committed malpractice. If so, this attorney may need to be named. However, keep in mind that the defense attorney may also be one of your best witnesses against the insurance carrier.
§15:33 Negate the “You Set Us Up” Defense
A favorite insurance company argument in defending a bad faith claim is that the plaintiff’s attorney “set up” the insurer in the underlying claim. However, in my opinion, it is not possible to set up insurance companies for bad faith. They do it to themselves.
If you give the insurer sufficient information to evaluate the claim, along with a reasonable deadline to tender its policy limits, an insurer will not be able to successfully blame you for its failure to settle the claim. An insurer that has been given sufficient information to evaluate the claim, along with a reasonable deadline, cannot be set up for bad faith because the insurer has total control over its own decision to protect the insured or not.
Insurers also have total control over their internal programs. Thus, when an insurer has a program designed to chisel money from legitimate claims [see §15:21], it does so voluntarily and with design and with no warning to the person buying the insurance. Similarly, when an insurer has a program of providing incentives to adjusters to pay less than fair value [see §15:22] it does so voluntarily.
§15:34 Provide Full and Complete Information
Ultimately, it is up to the insurer to do a proper investigation in a timely fashion to develop the information it needs to pay the claim. Even when the plaintiff’s attorney is completely uncooperative it is still incumbent upon the insurance carrier to protect its insured.
Furthermore, what more information does the insurance company need when its insured reports that he or she rear-ended another vehicle and the occupant in the other vehicle died and there is only $100,000 worth of insurance under the policy? The insurer’s duty at that point is to immediately write a check for the $100,000 payable to the estate of the deceased. Nevertheless, insurance carriers go through many machinations to delay payment of such a claim, including requiring a death certificate, proof that an estate has been set up, photographs of the vehicle damage, and copies of funeral bills. All such information is superfluous. Its insured told it that the other person was killed, and a carrier can verify that by simply getting a copy of the police report.
Even when you believe the insurance carrier’s request is unreasonable, do what is possible to cooperate with the insurance carrier’s requests for information. Consider whether a jury hearing a bad faith case will believe that the request was reasonably necessary for the insurer to evaluate your client’s claim. It is generally prudent to err on the side of providing the information if you have it.
Sometimes, if you are dealing with a serious injury clearly in excess of the insurance company’s policy limits, it may be that the only information you can readily obtain is a copy of the emergency room report and a copy of an X-ray reading demonstrating that your client suffered multiple displaced fractures in both of his or her legs. If the insurance limit is only $100,000, the value of this claim is clearly going to exceed that. However, even though you may have immediately provided copies of these documents to the insurance carrier, the carrier might ask for copies of the medical bills or additional hospital information or other medical records.
Typically, insurance carriers send out a form letter that requests anything and everything. Your best course of action might be to send the carrier a medical authorization that it can use to get whatever information it wants. When you provide that kind of access the carrier cannot claim that you “set it up” by not providing all the information it needed to evaluate the claim. Often in such situations insurance carriers will not even bother to get the additional information because they don’t want to spend the money since they know that they will have to pay their policy limits anyway.
You can either ask the insurance carrier for one of its medical authorization forms that your client can sign, or you can provide your own.
Also, even though you have no obligation to do so, consider the wisdom of making your client available to the insurance carrier for an interview. This may be especially useful in a serious injury case where your client is going to be in the hospital for a lengthy period of time and there will not be access to medical records for a while. By offering to produce your client for an interview, the insurance carrier cannot claim that it did not have an opportunity to assess your client’s injuries or the facts under which the accident occurred.
To make such an offer, you could add a statement such as the following to a settlement proposal [for a sample settlement proposal, see Chapter 5, Presenting a Settlement Proposal]:
In an effort to assist you in your investigation, I will agree to make my client available to you for an informal interview in my presence. You will be allowed to question my client informally on any relevant aspect of his claim.
Forms & Samples: See the following at the end of this chapter and on the CD:
- 15-1 Authorization to Disclose Medical Information
§15:35 Document Your File
Document every material conversation you have with the insurance company adjuster or other insurance representatives.
When you write to an adjuster enclosing documentation, list exactly what you’re sending in your letter and send that letter certified mail return receipt requested, or overnight mail, or by fax. This way you have proof that the insurance carrier received what you sent. You would be surprised at how many times documents “disappear” from insurance companies’ claims files, or conversations with the plaintiff’s attorney go undocumented in the claims file.
Your file should reflect as clearly as possible your reasonable attempts to settle your client’s claim for policy limits and the insurance carrier’s failure to settle the case. Keep in mind that your file may be discoverable in a subsequent bad faith case.
Forms & Samples: See the following at the end of this chapter and on the CD:
- 15-2 Sample Letter Enclosing Documentation or Documenting a Conversation
§15:36 How Much Time to Give the Insurance Company
The answer to the question of how much time to give an insurance company for its investigation varies from case to case.
For example, how much time does the insurance carrier need where there is only $100,000 in coverage if it has a report from its insured about the facts of the accident and the claimant is dead? In that situation the amount of time it needs is however long it takes to write the check to the estate of the deceased.
On the other hand, if you are dealing with a $1 million or higher policy it is going to take more time to document your client’s claim.
Likewise when liability is unclear, more time may be needed. However, even in such situations, it is incumbent upon the insurance carrier to evaluate the exposure to its insured. If the exposure is in excess of the policy limits, the insurance carrier needs to tender its policy limits.
Assume an intersectional automobile collision where there are no controls at the intersection and there are no eyewitnesses to determine who was at the intersection first. In this situation, it is reasonable to assess 50 percent responsibility on both drivers. Therefore, if an insurance carrier is only carrying $100,000 in policy limits, and the pure value of the claim (with no deduction for comparative negligence) is $500,000, the insurance carrier should tender its $100,000 policy limits quickly and timely because the value of the claim will still end up being over the $100,000 policy limits (i.e. $500,000 divided by 2 equals $250,000).
In some jurisdictions, in first-party claims (e.g., an uninsured motorist claim) the time limit for an insurance carrier to reasonably tender their policy limits may be set by statute:
- Florida. In Florida the “civil remedy” statute [FS §624.155] requires a civil remedy form to be filed with the State Department of Insurance that outlines your client’s grievances. The statute then allows for a 60-day time period for the insurance carrier to remedy the situation. Should the carrier fail to remedy the situation within that 60-day time period, then it is possible to pursue a claim for bad faith.
A court may consider insurance carrier’s arguments that a “civil remedy notice” does not provide sufficient information to the insurance carrier for it to resolve the grievance by its insured. It is therefore important to provide detailed information in the filing of such a form that will overcome such a potential defense.
§15:37 Assigning a Bad Faith Claim
If you have obtained an excess judgment against an underinsured defendant whose carrier failed to timely tender policy limits, consider asking the defendant to assign his or her rights to the bad faith claim to your client. However, be cautious because this is not always advisable.
Usually, in the majority of cases, it is better to have the insured defendant who has been aggrieved by the insurance company stand in front of the jury with his attorney explaining how his client has been financially ruined because the insurance company failed to do its job and fulfill its fiduciary duty.
On the other hand, you may want to get an assignment if the defendant insured makes an absolutely terrible witness and his or her mere presence in the courtroom would turn any jury against the claim regardless of what the insurance company did to them.
You might also consider assignment in cases where a defendant is having a coverage dispute with his carrier. In those situations, explore whether or not your jurisdiction would allow a Coblentz agreement. [For an explanation of Coblentz agreements, including a sample Coblentz agreement, see Chapter 2, Coverage Issues.] If a defendant’s insurance carrier denies coverage and a defense then the defendant may be willing to confess to a judgment to the real value of the claim which may be in excess of the policy limits. After doing this, the defendant then enters into a Coblentz agreement that assigns his or her coverage claim to your client so that you step into the shoes of the defendant in pursuing the coverage claim against his or her insurance carrier.
Be reasonably certain that you are going to win the coverage dispute before entering into a Coblentz agreement.
§15:38 Negotiating a Bad Faith Claim
Insurance carriers are difficult to negotiate with in bad faith claims because they have not collected a premium for the money that they have to pay that’s in excess of their policy limits. That excess money comes out of the insurance company’s profits and does not fit in with their actuarial analysis and business model.
Try to convince the insurance carrier that it is best to settle sooner than later. The insurance carrier needs to understand that its exposure is more than just the excess judgment. There are all the extra-contractual damages that your client may suffer, including attorney fees, the interest accruing on the judgment, the damage to his or her credit rating, and the loss of an opportunity (e.g., to purchase a home or go into a business). There is also the possibility of punitive damages.
Furthermore, there are the expenses that the insurance carrier has to pay to their defense attorneys and the costs for the filing of a supersedes bond.
Therefore, when you are negotiating a bad faith claim, consider preparing an economic chart that demonstrates what the carrier’s ultimate exposure will be if it tries the case to conclusion as opposed to settling the claim early and avoiding the risk of further exposure.
Joseph L. Vaccaro has 40+ years of insurance claims handling experience.
He served 11 years in the claims department of one of the nation’s largest insurance companies, handling claims and supervising adjusters in casualty claims in all lines of both personal and commercial insurance.
During the 28 years following, he worked for two prominent plaintiff’s law firms as head of their pre-litigation departments.
In September of 2008, he started his own consulting firm. Mr. Vaccaro counsels attorneys in the areas of insurance coverage analysis, insurance bad faith analysis, and mediation/negotiation strategies. He also provides expert witness services on behalf of policyholders.
Mr. Vaccaro carries these professional designations recognized by the insurance industry: Casualty Claim Law Associate (CCLA); Commercial Lines Coverage Specialist (CLCS); and Personal Lines Coverage Specialist (PLCS). He still maintains a current adjuster’s license. Mr. Vaccaro is a prolific writer on insurance-related topics and is frequently invited to speak at continuing education and other seminars for attorneys and paralegals.
To learn more about Mr. Vaccaro, visit www.jlvaccaroconsulting.com.