Make a List, Check It Twice
By Ray Bourhis

Analyzing insurance coverage and maximizing recoveries in bad faith cases
by Ray Bourhis.

It's late Friday afternoon. As usual, it has been a long week. The last thing you want to do is read a nine-page denial of a $3.6 million insurance claim. The denial letter drones on and on:

"... We do not insure for such loss regardless of: a) the cause of the excluded event; or b) other causes of the loss; or c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss:

a. Ordinance or law meaning enforcement of any ordinance or law regulating the construction, repair or demolition of a building or other structure.

b. Earth movement meaning any loss caused by resulting from contributing to or aggravated by earthquake; landslide; mud flow; sinkhole; erosion; the sinking, rising, shifting, expanding or contracting of the earth. Earth movement also means eruption, explosion or effusion, except as provided in Additional Coverage.

We do insure for direct loss by fire, explosion other than of a volcano, theft or breakage of glass or safety glazing materials resulting from earth movement."

The denial letter cites six other paragraphs of the policy, each more creatively written than the one previous. The insurer's Mad Hatter department did an award-winning drafting job.

You begin your quest to determine whether or not the insurance company's denial of coverage (a) is wrongful; and (b) constitutes bad faith. The insurer will hope that you restrict your inquiry to the four corners of their denial letter, but there is a lot more to it than that.

It is no accident that policies are confusing and filled with loopholes; that documentation requests are never-ending; that it seems to take forever to get responses to basic inquiries; and that settlement offers often border on the absurd. In analyzing an insurance problem, it is unfortunately necessary to consider that there may be sneaky things the insurance company will do, or things it won't tell you, that can leave your client high and dry.

To avoid such an unpleasant outcome, you should use a check list that includes at least the following questions:

1. When was the coverage originally sold? How many times was the policy renewed? Were any changes made from one policy year to the next?

Coverage included under earlier policies sometimes is reduced without adequate notice to the insured. If this happened, it may be possible to compel the carrier to apply the broader original coverage. Also, different types of policies (homeowners, business, errors and omissions, disability, umbrella, etc.) can overlap or expand upon each other. It is crucial to have all policies available and to understand their interrelationships.

2. Were any promotional materials used to sell the policy that contained representations contrary to the policy that was actually issued?

This is a common practice that is often a violation of the Insurance Code, and may also constitute fraud in the inducement. Although it is true that an insured cannot intentionally remain ignorant of the terms of the policy, he or she might well have read the policy and, like many, misunderstood it.

This practice is particularly widespread with regard to umbrella policies. In the words of an advertisement circulated by one very well known carrier, its umbrella policy will protect the insured from suits for:

"false arrest, false imprisonment, wrongful eviction, wrongful detention, malicious prosecution or humiliation; libel, slander, defamation of character or invasion of rights of privacy; and assault and battery."

However, if a claim is actually filed for one of these, the insurance company may assert that Insurance Code §533 -- which states that an insurer is not liable for the willful act of the insured -- precludes coverage for intentional torts. Such conduct approaches actionable bait-and-switch sales tactics. The consequences of misrepresenting policy coverage in promotional material range from fraud-based punitive damages to bad faith liability.

3. Do any notes or correspondence exist from meetings between the insurance agent and the insured?

Were others present? What do they remember? Such evidence can prove very useful in claims alleging fraud or misrepresentation as an act of bad faith.

4. Does the policy contain any relevant ambiguities or uncertainties?

If so, by law these must be interpreted in favor of the policyholder. Also remember that if any clause in the insurance contract was unconscionable at the time it was drafted, the court may refuse to enforce the contract, the unconscionable clause, or may simply limit the application of any unconscionable clause to avoid an unconscionable result.

5. What were the objectively reasonable expectations of the insured at the time the policy was entered into?

The insurer is responsible for meeting the objectively reasonable expectations of the insured, and coverage must be provided accordingly. Virtually every bad faith case reported over the past 20 years discusses the "peace of mind" motivation in purchasing insurance. The facts behind such motivations are often key in both individual and business client situations.

6. If the carrier is attempting to enforce an exclusion, is that exclusion clear and conspicuous?

If an exclusion is not clear and conspicuous, it is of no effect. The insurer bears the burden of proving that a particular risk is excluded.

7. Does the problem involve a breach of the duty to defend?

The duty to defend is much broader than the duty to indemnify. An insurer must defend if the suit potentially seeks damages within the scope of coverage. This means that if the complaint does not allege covered facts and/or damages, but is reasonably capable of being amended to include a covered cause of action, the insurer must provide a defense. In addition, the insurer's duty to defend can be triggered not only by facts alleged in the complaint, but also by extrinsic facts that the insurer learns from any source.

Most underlying complaints allege numerous causes of action. If the insurer is required to defend at least one cause of action, it must then defend the entire complaint. If the insurer agrees to defend but reserves the right to contest coverage at a later date, the policyholder may be entitled to retain counsel of his or her choice -- called Cumis counsel -- in addition to the counsel hired by the insurance company. Failure to appoint Cumis counsel is evidence of bad faith and would subject the carrier to all proximately caused damages. This issue has grown somewhat complex in recent years and should be thoroughly researched in light of the specific facts of your case.

8. Has the statute of limitations run out?

In general, the statute of limitations for bad faith is two years. However, the policy may have a contractual limitation that requires an action to be filed within one year or less of the date of the occurrence. Generally, these contractual limits are tolled during the period that a claim is being processed, and are also tolled when a denial is equivocal or left open for further discussion or information.

9. Does the case create punitive damage exposure for the insurer?

It is rarely possible, prior to discovery, to evaluate whether clear and convincing evidence justifying punitives -- malice, fraud or oppression -- exists. This evidence is usually uncovered through the claims files, depositions and/or trial testimony of key witnesses. Suffice it to say that it is rarely a good idea to settle any insurance case without reviewing the original of the claims file -- including the home office file.

On the other hand, if the objective is merely to recover the policy benefits, plus consequential damages and attorneys fees (including contingency fees that would otherwise be paid by the client), then early settlement may be worth considering without an examination of punitive damage exposure.

10. If you are involved in discussions with the insurance company, can you serve as an attorney in the insurance coverage or bad faith case?

Negotiations often take place between the underlying case attorney and representatives of the insurance company. Whether such discussions are confirmed in writing or not, the attorney could be called as a witness in subsequent litigation. If this is a possibility, you should either obtain a conflicts waiver from your client or should refer the bad faith case to another attorney.

In general, it is not a good idea to represent a client in the bad faith action if you also handled the underlying case. The insurance company will almost certainly take your deposition and attempt to disqualify you by making you a witness in the bad faith case.

Look Under Every Rock

This is not an exhaustive checklist. Most insurance policies are deliberately lengthy, confusing and formatted in such a way as to make coverage determination difficult. It is telling that insurance companies often retain outside law firms to tell them what their own policies mean.

Although the law requires an insurance company to consider the interests of the insured at least as much as its own, if there is any excuse for an insurance company to deny or limit coverage of a large claim, it probably will try to do so. As a result, more and more bad faith cases are being brought by commercial and governmental entities. Corporate clients who would not previously have elected to proceed on a contingency fee or to seek punitive damages are now doing so enthusiastically.

Insurance companies are masters of claims negotiation. You need more than just a working knowledge of policy analysis to achieve a just result for your client -- you need to be thorough and methodical.

Make a list.

If you are a victim of bad faith or fraudulant insurance practices, or have a question regarding your insurance claim denial, please click here to submit a question through our online form.

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