Notice provisions in insurance policies serve the important function of allowing the insurer the opportunity to make a timely and thorough investigation of the insured's claim. American States Insurance Co. v. National Cycle, 260 Ill. App. 3d 299, 310-11, 631 N.E.2d 1292, 197 Ill. Dec. 833 (1994); Twin City Fire Insurance Co., 266 Ill. App. 3d at 7.

Courts will not subject an insurance company to a choice between liability under a bad-faith-failure-to-investigate theory for publication of a denial of coverage without an adequate investigation, and liability for a constructive denial imposed after it has conducted a more thorough investigation that confirms an earlier determination of no coverage, on the theory of delay coupled with a wrongful intent. Rather, courts required that an insurer complete a thorough investigation before it makes a decision with regard to a claim for defense or indemnity under an insurance policy. Initial conclusions based on a bare reading of a law suit or initial investigative interview are not enough.

Although an insurance company is entitled to make a thorough investigation to determine whether there is coverage under its policy of insurance, the company acts at its peril in refusing to defend its insured in that, if it is subsequently determined that the company erroneously denied coverage, the company will be liable for damages for breach of its agreement under the policy. Therefore, insurers should conduct their thorough investigation as soon as possible and if a defense is required before the investigation can be completed provide a defense to the insured under a reservation of rights.

When an insurer denies or delays payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability, the insurance company will not be liable in bad faith even though it may be liable for breach of contract. One court gave the following instruction to a jury:

In determining whether or not an insurance company had a genuine dispute as to whether or not a loss was covered, you may consider among the following: (1) Whether the insurance company was guilty of misrepresenting the nature of the investigation; (2) Whether the insurance company adjusters and investigators lied during their depositions or to the insured; (3) Whether the insurance company dishonestly selected its experts; (4) Whether the insurance company experts were unreasonable; and, (5) Whether the insurance company failed to conduct a thorough investigation.” [McCoy v. Progressive West Insurance, Co., 90 Cal.Rptr.3d 74, 171 Cal.App.4th 785 (Cal.App. Dist.2 02/04/2009)]

An insurer has a duty to conduct an appropriate and careful investigation prior to making a decision on a claim. However, if after conducting a thorough investigation of the facts and circumstances giving rise to a claim, the insurer can reasonably conclude that the claim is debatable or questionable, a there can be no bad faith even though it refused to pay the claim incorrectly.

How to Conduct a Thorough Investigation

The investigative interview is a structured conversation between a trained and experienced interviewer and an person who has no training in the interview. It is not an interrogation. It is not the stuff of spy films, police investigations, or prisoner of war camps. Interviews happen everywhere. Interviewing is performed by almost everyone. Since interviewing is an art the most effective interview is one performed by someone with knowledge of the art.

Investigation to gather information is an artistic endeavor. The art is supplemented with scientific technique obtained from criminal investigators and professional psychologists but is performed by individuals without thinking about what it is they are doing. The art of the investigation must be honed until it becomes second nature much as a skilled typist does not think where to put his or her fingers while typing.

The art of uncovering the truth by a professional draws heavily from the police sciences. The police science of interrogation draws heavily upon human nature and the skills of the conversationalist. Because the interrogation is formal, in a confined space and conducted by a person in authority like a police officer or a lawyer examining a witness under oath in court, the techniques used are more formal and controlled than an insurance investigation.

Insurance investigators are compelled to get the information they need by intelligence, wit, skill and experience. They put people at ease. The skill of the professional causes the person being investigated to want to give information to the investigator. The most important skill of the professional is to cause the person being investigated to want to give information to the professional that the professional needs. To conduct a thorough investigation the claims investigator should, at a minimum, perform the following:

• Read the loss notice and policy of insurance.
• If a lawsuit has been filed read the lawsuit in conjunction with the policy wording.
• Interview the person insured — preferably in person.
• Obtain a recorded statement from the person insured concerning the facts of the loss.
• Interview and obtain a recorded statement from every independent witness.
• Interview and obtain a recorded statement from the claimant if suit has not been filed.
• If suit has been filed interview the attorney for the claimant about the factual basis for the suit.
• View the scene of the incident.
• Obtain all documents that have relevance to the claim, including: the insured's copy of the policy; a police or fire report, if any; medical records; financial records, the application for insurance; and contracts, if any, between the insured and the claimant.
• Consult with necessary experts like investigative engineers, coverage counsel, defense counsel, medical professionals, architects and forensic accountants.
• If it appears that there is coverage for the claimed loss advise the insured of the insurer's decision.
• If it appears that there is no coverage consult with management to review the facts gathered by the thorough investigation before a decision is made.

Failure to conduct a thorough investigation is a breach of the promises made by the policy of insurance to provide defense and/or indemnity to the person insured. Failure can also result in the insurer being sued for the tort of bad faith. Insurers must, to comply with current law conduct:

• A detailed investigation of the facts of the loss and policy acquisition.
• A determination of the expectations of the insured and the insurer at the time the policy was acquired.
• A determination of the purposes for which the policy was acquired.
• An examination of all communications between the insurer and the insured or their representatives.
• If the investigation is not conducted, the insurer faces suit for the tort of bad faith.

The thorough investigation requirement first enunciated by the California Supreme Court in Egan v. Mutual of Omaha Insurance Co., 24 Cal. 3d 809, 620 P.2d 141, 169 Cal. Rptr. 691 (Cal. 08/14/1979) is essential when attempting to interpret a disputed policy of insurance. In Egan, the Supreme Court concluded that “an insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.”

Commandment II: Thou Shall Communicate Often

Insurance claims is a service business. The claims person provides a service to the insured and the insurer. Communication is essential to providing the service promised by the insurance policy. In some states, like California, communications is required by regulation:

Every insurer shall disclose to a first party claimant or beneficiary, all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant. When additional benefits might reasonably be payable under an insured's policy upon receipt of additional proofs of claim, the insurer shall immediately communicate this fact to the insured and cooperate with and assist the insured in determining the extent of the insurer's additional liability. [10 CCR 2695.4 (a)]

This means that the initial written contact with an insured in a first party property claim should advise the insured of all benefits, coverage, time limits, or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by a first party insured.

When a claims professional receives any communication from an insured, third party claimant, or a representative of the insured or claimant regarding a claim that reasonably suggests that a response is expected, should immediately after receipt of that communication, furnish the claimant with a complete response based on the facts as then known by the claims person. Some regulations allow the claims person up to 20 days to respond. Good claims handling requires an immediate response. If the response is oral rather than written it should be noted in the claims person's file or log. Upon receiving notice of claim, every insurance claims person should immediately do the following:

• Acknowledge receipt of such notice to the claimant or insured.
• If the acknowledgment is not in writing, a notation of acknowledgment must be made in the insurer's claim file and dated.
• Provide to the claimant or insured necessary forms, instructions, and reasonable assistance, including but not limited to, specifying the information the claimant must provide for proof of claim;
• Begin any necessary investigation of the claim.

The investigation must be a “real,” meaning the claims person or investigator must actually contact the claimant, the witnesses and start collecting the documents needed to complete the claims investigation. Investigation and must be started immediately after receiving notice of claim. Merely reading a policy wording and notice of claim is not the beginning of an investigation or an investigation at all. Upon receiving proof of claim, every insurance claims person should immediately accept or deny the claim, in whole or in part.

The amounts accepted or denied shall be clearly documented in the claim file unless the claim has been denied in its entirety. Some states allow up to 40 calendar days to respond. If more time is required to determine whether a claim should be accepted and/or denied in whole or in part, then the claims adjuster should provide the claimant or insured written notice of the need for additional time. This written notice should specify any additional information the insurance claims person requires in order to make a determination.

The written notice should state any continuing reasons for the insurer's inability to make a determination. Thereafter, the written notice should be provided at least every thirty calendar days until a determination is made. If the determination cannot be made until some future event occurs, then the claims person should comply with this continuing notice requirement by advising the claimant and/or insured of the situation and providing an estimate as to when the determination can be made.

Effective diary systems are also essential to professional claims handling or the Regulations will be violated with regularity. Every claims person must conduct and diligently pursue a thorough, fair and objective investigation and should not persist in seeking information not reasonably required for or material to the resolution of a claim dispute. The claims person's obligation is not limited to communication with the insured or the claimant.

The claims person and the insurer have an obligation to communicate with the state, police agencies, or prosecutors. In California, and most states, such a communication is absolutely immune from suit. Pursuant to section California Civil Code Section 47(b), a privilege is stated that bars a civil action for damages for communications made “[i]n any (1) legislative proceeding, (2) judicial proceeding, (3) in any other official proceeding authorized by law, or (4) in the initiation or course of any other proceeding authorized by law and reviewable pursuant to [statutes governing writs of mandate],” with certain statutory exceptions.

The privilege established by this subdivision often is referred to as an “absolute” privilege, and it bars all tort causes of action except a claim for malicious prosecution. “The absolute privilege in section 47 represents a value judgment that facilitating the “utmost freedom of communication between citizens and public authorities whose responsibility is to investigate and remedy wrongdoing” is more important than the “'occasional harm that might befall a defamed individual.'” (See Imig v. Ferrar (1977) 70 Cal. App. 3d 48, 55-56 [138 Cal. Rptr. 540].)”

In summation, the claims professional must communicate promptly and often with the insured, the claimant and the insured (if a third party claim) and counsel for each. In doing so the claims person establishes a rapport with the insured and/or claimant and will make resolution of the claim easier. No claims person should ever misrepresent or conceal benefits, coverages, time limits or other provisions of the policy from the insured or the claimant.