Keeping the Faith in Suspicious First Party Claims
by: Anna Lisa Awiszus
Law Office of Patrica Tweedy

We’ve all heard the buzzwords of “good faith” and “fair dealing”, but where do they come from and how do they apply to investigations of suspicious first party claims? The duty of good faith and fair dealing is implicit in every insurance contract. In the context of insurance contracts, the insurer is obligated to act fairly and in good faith in meeting its contractual obligations.

     These duties have their roots in general contract law. General contract law usually limits damages of the injured party to actual contract damages. However, California has carved out an exception when an insurer violates its contractual duties. Citing a variety of public policy reasons, courts have held that insurers can be held liable in tort, as well as contract. Gruenberg v. Aetna Insurance Company (1973) 9 Cal. 3d 566, 575. Thus, a “bad faith” claim encompasses breach of contract issues, as well as tort remedies for breaches of the implied duties.

     What constitutes “bad faith”? You may be surprised to learn that it is not defined as malicious or immoral misconduct. It simply means that an insurer acted “deliberately”. Neal v. Farmers Insurance Exchange (1978) 21 Cal. 3d 910, 921. Clear as mud, right? Isn’t every action we take, whether misguided or not, deliberate in some way? The courts have tried to clear this up with case law: The insured, in a bad faith claim, must show that the insurer failed or refused to live up to contract responsibilities, consciously and deliberately, unfairly frustrated the purpose of the contract, failed to meet the reasonable expectations of the insured, and deprived him or her of the benefits of the contract. Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal. App. 3d, 1371, 1395. A cause of action may arise from an unreasonable delay in the payment of benefits.

     Ok, so much for the law. What does this really mean in terms of claims handling of a suspicious loss? Does the spectre of bad faith prevent an insurer from conducting a thorough investigation? Simply put, no. Let’s start at the beginning, when the insurer is first notified of the loss. This is a critical stage in the claim, for the initial contact between the insured and insurer will set the tone for the entire investigative process. An insured will expect prompt attention to his or her loss, directly from the insurer. Outside adjusting services can be very responsive and are invaluable for attending to insureds located away from the adjuster. However, it is important that the insurer also promptly contact the insured, introducing the adjuster on the claim and answering questions the insured may have about the investigation or policy benefits.

     An insured should not be given the impression he or she is being given the runaround, or avoided by the insurer. The key to resolving a suspicious claim is a prompt and thorough investigation. A prompt and thorough investigation will minimize benefits paid out on a fraudulent claim and protect an insured who has a legitimate claim. Remember, it is important to investigate exonerating information just as zealously as suspicious leads. The insurer should immediately provide the insured with a sworn statement in proof of loss form and contents/personal property inventory forms. The insured should also be provided with pertinent excerpts from the policy, setting forth the insured’s duties to complete the forms and submit them to the insurer within the requisite time, usually sixty days. The insured should be cautioned that misrepresentations can be grounds for denial of policy benefits. A reservation of rights letter should be sent to the insured if there are unresolved coverage issues, such as a suspicious loss or a loss potentially not covered under the policy.

     As soon as possible, recorded statements should be obtained from the insureds. Coverage issues requiring counsel should be forwarded to counsel when they arise, not after they have reached a critical mass stage. If the insured requests information about his or her policy, it should be forwarded without delay, with the applicable declarations page, policy addendum’s and schedules. The insurer should also review not only the policy, but all schedules, addendum’s and changes that may have been made to the policy since inception.

     The insurer’s investigation of the claim should begin promptly, and move along without delay, regardless of whether the loss is suspicious or not. It is not appropriate to wait for local authorities to complete their investigations. This could result in liability for failing to resolve the claim in a reasonable time frame, even if benefits are ultimately paid.

     In property losses involving theft, vandalism or fire, photographs should be taken of the loss premises, with particular attention to closets, storage spaces or other relevant areas. Have the loss property inspected as soon as possible to determine what remnants of furnishings, clothing and electronic equipment are present. Hire a specialist as to determine the cause and origin if the claim involves fire loss. Instruct the insured to submit receipts or other documents to support a claim for additional living expenses, if applicable.

     A great deal of information will be provided by the insured, but what happens when the insured does not cooperate as quickly or zealously as you would like? Can you cease working on the claim until the insured provides you with what you asked for? It is critical for the insurer to understand that the insured’s failure to timely respond to the insurer’s requests for information or documents does not alleviate the insurer’s responsibilities to investigate and resolve the claim in a reasonable time frame. Generally, the burden is on the insurer to establish that the insured’s failure to comply resulted in real prejudice to the insurer, even if the insured has technically violated a policy term. Simply put, an insurer cannot cease its investigation or deny benefits if an insured’s conduct did not prejudice the insurer. There are exceptions to this rule, including an insured’s repeated an unreasonable failure to comply with a policy term, like submitting to an examination under oath.

     The insurer should not underestimate the wealth of information that an insured’s supporting documentation contains. Insurers have uncovered fraudulent claims by carefully reviewing receipts, warranties and other documents provided by the insured. Dates and places of purchase or service can be just as important as a receipt. For example, one insurer recently resolved a suspicious theft claim based, in part, on a computer repair invoice its insured submitted to show the make and model of his computer, allegedly stolen from his home. The invoice revealed that the “stolen” computer was taken in for repairs after the date of loss! At the subsequent examination under oath, the insured continued to assert the loss, until the invoice date was pointed out to him. He admitted, on the record, that he had lied. The claim was denied on material misrepresentations made in the pursuit of insurance benefits.

     The investigative process should also include a review of the insurance history of the insured. For example, an insurer investigated the loss history of an insured who claimed that several pieces of jewelry were stolen from her home. The insured had previously purchased additional insurance to cover the jewelry. A review of her loss history obtained from former insurers revealed that she had claimed virtually every item as stolen before her current loss date. Additionally, she had informed the insurance company that she canceled her previous policy because she was unhappy with the rates and customer service. However, the investigating insurer learned that her previous insurer had canceled her policy two months prior, due to multiple claims. The claim was, of course, ultimately denied.

     Places of purchase can also provide valuable clues as to the whereabouts of an insured during key points in time. For example, if an insured claims he or she was out of town on certain days, yet submits receipts for local purchases, further investigation is warranted. Also, vendors should be contacted if any receipt appears suspicious. One insurance company resolved a suspicious claim by contacting retailers whose name appeared on receipts submitted by its insured. Printed invoices attributed to a local furniture shop were found to be falsified by the insured. The claim was denied for these material misrepresentations. The duty of good faith and fair dealing requires the insurer to conduct a prompt investigation of first party losses and to pay policy benefits, if appropriate, in a reasonable time frame. The duty of good faith is met, not violated, by a prompt and thorough investigation. To avoid bad faith litigation, act promptly and fairly to the appropriate resolution of each claim.

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