Last month we explored exposures that adjusters must risk manage. Once exposures are determined, identify potential perils along with any hazards that could trigger a peril. Many threats are physical in nature: fires, thefts, cyberattacks, injuries or deaths, and injuries to third parties, but they can also be moral or morale hazards, which are more difficult to define. Consider every hazard and avoid them if possible. Some must be accepted, however, most can be modified.
In claims, the greatest peril is litigation. Whether allegations are true or false, lawsuits are expensive. If a “bad faith” lawsuit seeks punitive damages, a single suit could bankrupt a person or firm. In most states a “bad faith” claim can only be brought by an insured; the policyholder to whom a good faith and fair dealing duty is owed. A third party, however, can often receive an assignment of that insured’s interest in a bad faith claim.
What is “bad faith” and how does it arise? Third-party claims used to be handled in a “fiduciary” manner — the insurer acting on behalf of the insured, requiring “utmost good faith.” Today, only a few states still consider a third-party claim fiduciary in nature. Adjusters should keep that standard in mind when representing insureds in third-party claims.
Adjusting a liability claim begins with the investigation, evaluation and negotiation of coverage. If there is no coverage, liability and damages no longer matter. However, where there is even a hint that some aspect of the third-party claim may have coverage; there is a duty to respond. The standard rule is that “the duty to defend is greater than the duty to pay.”
Every claim must be evaluated from a coverage perspective; if coverage is not clear, proceed only under a “reservation of rights,” reserving the right to seek the court’s ruling as to whether coverage applies via a declaratory relief decision. Anticipate that if the trial court grants the insurer a “summary judgment” that coverage does not apply, the insured will appeal, and the appellate court may reverse that decision. Therefore, it is necessary to continue investigating.
If there is even a hint of coverage, then the supplementary payments of a liability policy require the insurer to defend. This leads to the “tripartite” relationship situation where the insurer selects the defense counsel who will defend the insured. That attorney represents the insured, not the insurance company. At the same time, it is the insurance company’s duty to decide whether to settle or defend.
Bad faith arises when the insurer elects to defend where liability and damages indicate some settlement within the policy limits was feasible, but the adjuster or insurer continued the defense to the point of a trial. If the judge or jury award a verdict in excess of the insured’s policy limits, then “bad faith” will be alleged in a subsequent trial by the insured against the insurer who could become liable for any excess policy amounts plus costs and any punitive damages assessed against that insurer.
Coverage disputes are common sources of litigation, but damage issues are frequently resolved by an arbitration process called “appraisal.” Other sources of first-party litigation may involve issues of subrogation or demands for contribution from third parties, or failure to protect the interests of an insured party. Next month we will continue this discussion on adjusting perils.
Ken Brownlee, CPCU, (kenbrownlee@msn.com) is a former adjuster and risk manager based in Atlanta, Ga. He now authors and edits claims-adjusting textbooks. Opinions expressed are the author’s own.
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