- Introduction
In the not too distant past, claims and claims handling were generally predictable. There was an incident causing damage, then a demand, and a dispute largely about the amount that would be paid. More recently, many clever plaintiff’s attorneys have developed strategies to cause an otherwise routine claim to expand into something more in an effort to drive up the claim’s value and to increase the likelihood of settlement. For example, claims for bad faith, vendor liability, agent errors or omissions, and consumer protection are frequently added to routine claims as a means to increase the scope of available damages.
Now, it is incumbent upon risk managers to recognize when a claim has the potential to mushroom into something more than a routine claim or into something that could be damaging to the companies involved. These materials provide an overview of frequently occurring claims strategies that can cause your case to “mushroom” and how to recognize them.
- Types of Claims
- Extra-Contractual Liability/Bad Faith
In recent years, many states have expanded their common law and statutory law governing insurance claims to include some available remedy to an insured for extra-contractual liability or claim for bad faith.
While the legal definition changes from state-to-state, a claim for extra-contractual liability or bad faith typically involves a claim that an insurer improperly denied an insurance claim without a good faith basis. In many states, a plaintiff may bring a claim for bad faith when they believe their insurer has denied their claim for no viable reason or reason at all. Generally, in order to bring a first-party claim for bad faith, a plaintiff must prove: (1) that the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis.[1] The precise language and standards vary from state-to-state.
Most states also recognize a common law tort cause of action for first-party (a policyholder suing his or her own insurer) bad faith claims. Other states recognize a statutory claim for bad faith/ lack of good faith.[2] Some states fail to recognize first-party bad faith as a tort altogether, and rather require that the policyholder bring a claim for breach of contract.[3]
Claimants often resort to extra-contractual liability or bad faith as a mechanism for seeking attorney’s fees or statutory damages. For example, Maryland permits the recovery of actual damages, expenses/attorney’s fees, and interest where the denial of a claim was not in good faith.[4]
When analyzing a claim, risk managers should always consider the adjustment history of the matter to consider whether extra-contractual liability or bad faith claims could be asserted.
- Vendor Liability
Many insurers offer information to insureds concerning approved vendors that can help an insured remediate damage. Often there may be agreements between the vendor and the insurer as to the amounts that can be charged to the insurance company or insured, and as to indemnification. When a vendor allegedly damages the property they were hired to repair, policyholders will often bring claims against the insurance company for negligence due to the close relationship with the vendor. Claimants will assert that an agency or employment relationship exists between the insurer and the vendor, such that the insurer can be held liable for the vendor’s actions. Vendor claims are often raised in connection with a breach of contract action against the insurer.
In a recent New York case, Bennett v. State Farm,[5] a policyholder’s property was damaged by an oil spill. The insurer provided coverage for the damage and hired an engineering firm to perform an oil remediation on the property. When that firm allegedly caused damage far beyond the original claim, the policyholder brought suit against its insurer for negligently hiring and supervising the work. The court ultimately upheld the Plaintiff’s right to bring a viable cause of action in this instance because the insurer affirmatively undertook to supervise, direct, and perform repairs on the property and failed to take reasonable care in doing so.
Insurers have to carefully consider the language of any vendor agreement to avoid arguments that the vendor is an agent, rather than an independent contractor as they are typically designated.
- Agent Errors and Omissions
Additional claims can arise from argued errors or omissions by an insurance producer, agent or broker. After a claim is denied for lack of coverage, an insured may indicate that statements or actions of a producer made them believe a particular risk was covered or that the producer should have taken actions to protect the insured.
Often, these claims are lodged to create artificial pressure against the denying insurer. Also, producer claims may provide for tort causes of action and tort-damages that would be unavailable in a breach of contract case against the insurer. The producer is likely to have an errors and omissions policy through another carrier that serves as another source of funds for the claimant to recover against.
By way of example, in Lexington Ins. Co. v. Buckingham Gate,[6] the policyholder purchased an insurance policy from two brokers who assured them all damage to the property would be covered. In reality, the policy did not cover dock damage. When Buckingham Gate filed a notice of loss for...
