Insurance Company Pricing

During the past several years I have become more and more involved in providing advice to attorneys, typically after a lawsuit has been filed. I have been involved on both sides of the table, plaintiff and defense, and can attest that both sides usually have a supportive argument. But know this: in most situations, insurance lawsuits come about due to a failure to communicate in some fashion.

Several of my cases that pertain to insurance defense work involve insurance agent negligence. I am hired by insurance companies that provide Insurance Agent Errors and Omissions insurance coverage to the insurance agency and to the specific insurance agent accused of some type of negligent action or inaction.

While insurance agent responsibilities vary from state to state, several states hold that it is the responsibility of insurance buyers to tell their insurance agents what coverages and what limits of insurance are desired. In essence, the insurance agent is charged with “taking the order” of their customer. Of course, this relationship is situation-dependent and can be altered depending on things such as the length of time the insurance customer and insurance agent relationship has been in effect, whether the insurance agent gives proactive advice and holds himself or herself out as an expert, whether fees in addition to commissions are charged, and so forth.

However, if a typical customer/agent relationship is said to exist, the insurance agent’s primary responsibility is simply to order the insurance coverage that their customer tells them to order and to providea cursory

review of insurance policies after the insurance policies have been issued so that the insurance agent can determine whether or not what was ordered was delivered.

Cases that involve supporting the plaintiffs usually occur after there has been a series of discussions between the insurance policyholder and the insurance company claims adjuster. Many times, the insurance company determines at the onset of a claim that coverage under the insurance policy (contract) may not apply. In these situations, a reservation of rights letter is sent to the insured policyholder before any other action is taken by the insurance company. In these situations, insurance company defense may or may not be provided to the insured.

I have seen some situations where an insurance company’s actions are absolutely appropriate, in my opinion. On the other hand, I have also seen insurance carriers make poor decisions (i.e., wrong coverage determinations) and then dig in their heels when there is little, if any, support for their position. In these situations, insurance companies have a built-in advantage in the legal system. They can deny coverage and as long as they have a “reasonable” explanation for their decision, they can hold onto the money that they would have paid for a claim until such time that a court determines that the claim must be paid.

Bad Faith

The term bad faith resulted from courts holding that there is an implied covenant of good faith and fair dealing in all contracts of insurance. This is because insurance contracts have special characteristics—including the fact that they are unilateral (drafted by only one party—the insurance company) and aleatory (the contract is based upon the insurance company’s promise to pay for a future unknown event).

The burden of proof is on the plaintiff to prove that bad faith should apply, and generally a negligence standard is applied. In other words, if a plaintiff can show that another insurer would not have reasonably denied or delayed payment of the claim under the same facts as the defendant insurer did, then the defendant insurer may be guilty of acting in bad faith.

States may recognize both First Party Insurance Bad Faith claims and Third Party Insurance Bad Faith Claims for Excess Verdicts. The term “First Party” refers to the insured protected by the insurance policy. The term

“Third Party” refers to third party claimants who allege wrongdoing on the part of an insured—i.e., the occupant of a car who is injured when struck by an insured driver.

First Party Insurance Bad Faith claims involve an unreasonable delay or the unreasonable denial of payment of a claim. The word “reasonable” may ultimately be determined in a court of law (where oftentimes a jury is involved) based upon specific facts of the case at hand. Should an insurance company’s actions be deemed unreasonable or inappropriate based on the facts of the case, a bad faith claim may be initiated by the insurance policyholder’s (plaintiff) attorney.

If an insurance company has committed bad faith, then the policyholder may be entitled to one or more of the following:

Breach of Contract Damages Emotional Distress

Future Installments Attorney’s Fees

Punitive Damages (if allowed)

Note: Punitive damages are a means to punish and deter an insurance company from future similar bad acts. Some states allow punitive damages and some states do not allow punitive damages.

Depending on the state where the alleged wrongdoing took place and the specific situation involved, the application of bad faith to the cause of action may change the legal action from one based on contract to one based on tort. This change comes about because the insurance company’s performance is no longer based upon the insurance contract itself, but rather the basis now becomes the breach of the implied covenant of good faith and fair dealing.

Once a bad faith tort action is initiated, the damages sought may no longer be limited to the damages that would have been owed by the insurance company under its insurance policy.

Most states impose a duty on the insurance company to exercise ordinary care (due diligence) in all aspects of handling claims. Third Party Insurance Bad Faith Claims For Excess Verdicts occur when the insured’s insurance company makes payment for a claim without keeping their policyholder updatedon the claim status, and when the insurance company

fails to obtain input from their own insured about the claim at hand.

Many times, these situations involve “policy limits” payments, which is the limit of insurance that you paid for when you bought your insurance policy. If it appears that the total amount of payment for the claim may exceed your policy limit, then the insurance company is obligated to notify their insured (you) of this possibility because you may then become personally liable for monetary judgments above the policy’s dollar limit.

Some of the duties that insurance companies must adhere to while handling claims in order to avoid Third Party Insurance Bad Faith claims include the following:

Conducting a reasonable investigation into the facts surrounding the incident and the extent of injuries of the person making the claim against the insurance company. Based upon this investigation, the insurance company should then make a reasonable assessment as to how much money it may eventually have to pay if the case were to go to a trial.

Advising the insured when it is probable the person seeking payment will be awarded more money than the available insurance coverage dollar limit. This allows the insured to hire their own attorney if they so choose.

Timely and appropriately inform the insured of all settlement demands, offers and negotiations.

If the insurance company is found to have committed bad faith in this area, then the insured may be entitled to collect the following:

1.      The Amount of the Judgment in Excess of the Policy Limits

2.      Attorney’s Fees and Costs

3.      Expert Witness Fees

4.      Punitive Damages (if allowed)

Note: In case you have missed my repetitive point, please understand that the area of bad faith can differ dramatically from state to state and that these types of lawsuits are always dependent upon the specific facts of the case at hand.

Bad faith claims are generally difficult to prove, and insurance companies

are typically absolved of wrongdoing if they have a reasonable basis for their position. It is important to understand that all of my comments related to the area of bad faith are intended to be a general introduction to this topic. Should you desire additional information in this area, please consult with an attorney who is well-versed in this specialized area of the law.

Sample Engagements

I mentioned at the start of this chapter that I have been involved in many insurance-related court cases. So that you might gain a better understanding of the types of things that are litigated in the insurance arena, below are examples of some cases that I have been involved in during the past several years.

Defense Cases

Failure of Insurance Agent to Recommend Specific Trucker’s Insurance Coverage

Failure of Insurance Agent to Provide Product Recall Insurance

Architects’ and Engineers’ Professional Liability Insurance Wrongful Placement Based Upon Application Information Provided By the Business Customer

Insurance Agent Responsibilities in the Areas of Application Completion and Issued Policy Review

Specific Standards of Care Required of an Insurance Agent During the Insurance Application Process

Application of Intra-Family Exclusion on a Specific Recreational Vehicle Coverage Endorsement

Insurance Agent Responsibilities to the Insurance Carrier During the Insurance Application Process

Insurance Agent Duties Related to Home Replacement Cost Determination

Failure of Insurance Agent and Insurance Company to Properly Write Builder’s Risk Loss of Income Coverage

Failure of Insurance Consultant to Recommend Uninsured Coverage For Personal Vehicle Driven in Florida

Lack of Property Insurable Interest and the Resulting Impact Upon Property Insurance Coverage

Failure of An Insurance Agent to Submit a Customer’s Directors and Officers (D&O) Claim to the Insurer

Failure of An Insurance Agent to Submit a Customer’s Employment Practices Liability (EPL) Claim to the Insurer

Insurance Company’s Claims-Handling of Their Insured’s Fire Damage Claim

Plaintiff’s Cases

Bad Faith Claim Handling Involving Insurance Company Duty to Defend

Denial of Water Damage Claim Within a Commercial Apartment Building and Resulting Mold Damage

Claim Denial Due to Property Vacancy and Improper Insurance Company Interpretation of the Vacancy Condition

Insurance Agent Failure to Offer Employment Practices Liability Insurance

Improper Cancellation of Farm Insurance Policy

Insurance Company Denial of a Claim for Mold Damage Within a House

Insurance Company’s Improper Denial of Their Insured’s Fire Damage Claim

Insurance Agent’s Negligence In Obtaining A Business Income Insurance Policy That Lacked Requested Coverages

Insurance Company’s Failure to Offer An Appropriate Business Income Loss Settlement Amount to Their Insured