Good Faith Claims Handling–Not As Hard You Think

By John Armstrong

“Good faith” is terrible as a legal standard because it is inherently subjective. It means different things to lawyers, judges, regulators, legislators, and claims professionals, except in the more extreme circumstances.

The most workable definition I’ve seen is in California’s official jury instructions, which define it as “unreasonable insurer conduct.” This of course doesn’t tell us what qualifies as “unreasonable,” but what is reasonable is dependent on the circumstances, that is, what information was both known and available at the time the claim was denied.

Where mistakes get made and where litigation often occurs is when an incomplete analysis of the claim was made when the claim was denied.

Business today literally moves at light speed. We are all expected to do more in less time. Time management tells us to delegate tasks that can be delegated to promote efficiency. The problem with delegation however is your results are only as good as the information you’ve passed on.

For example, a new claim comes in, and you’ve delegated the task of whether there is coverage to coverage counsel as you suspect the claim isn’t covered under the company’s standard policy. You send the claim to coverage counsel along with a copy of the standard policy issued the insured. Coverage ghost writes a letter for you denying coverage just as you thought. Routine, right? “Good faith,” right? WRONG! Why?

Well, the insured did have the standard policy but also bought extended coverages, including coverage for the specific claim at issue. “Bad faith”? 9 times out of 10, yes. Why? Because the underwriting file was available and would have showed coverage existed. It’s unreasonable not to look at what coverages the insured bought before denying a claim. The advice of counsel defense won’t work because coverage counsel was not given a complete copy of the policy. To a jury, it will like this was intentionally withheld. And, if your compensation is tied in any way to the number of claims denied, your company may even be exposed to punitive damages by providing an economic incentive to deny claims. It won’t matter that you made a simple, common mistake because deny coverage for the very risk the insured purchased is the heart of insurance bad faith.

The point? No matter how busy, no matter how overloaded, you must make sure you have a COMPLETE copy of the policy before denying the claim, and it’s always a good idea to run the claim and all applicable policies by coverage counsel to make sure you have the added protection on the good faith reliance on coverage counsel. Getting a second opinion will itself often be considered as evidence of your good faith conduct in denying a claim that is not covered.