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Personal Lines Claims

Avoiding Bad Faith Allegations in Excess Loss Situations

Elise Farnham | January 1, 2009

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Personal lines claims are particularly challenging when the loss or damages are extensive. Few insureds carry personal umbrella coverage and are bare above the limits of the primary liability policy. This places them at risk in large dollar losses or when lawsuits go bad.

Claim professionals are particularly vulnerable in these situations. An insured facing a multi-million dollar judgment will look aggressively for an opportunity to recover damages. Several options are available to the insured and counsel, including allegations of bad faith and collusive agreements with the plaintiff (e.g., Mary Carter agreements). There are four generally recognized bases for bad faith:

  • Claim denial
  • Excess liability
  • Statutory bad faith
  • Violations of unfair claims settlement practices acts

In this commentary, we will be discussing steps the claim professional can take to avoid bad faith situations, or at the very least, be prepared when a claim is made so that defense is not only possible, but winnable.

Filing an Excess Liability Claim

Excess liability claims are filed only after a judgment has been entered in the case or a final settlement agreed upon in excess of the policy limits. The courts have found that it is not necessary for the insured to have actually paid the excess amount to the plaintiff prior to bringing a suit for excess liability against the insurer/claim professional. The insured may allege one or more of the following:

  • The insurer had an opportunity to settle the claim within policy limits and failed to do so.
  • The insurer refused to provide a defense resulting in an excess judgment and wrongful denial.
  • The insurer refused to settle the claim.

Optimism is no defense, and decisions must be based on objective evaluations of coverage, negligence, and damages substantiated by evidence and documented in the file.

If an insurer has an opportunity to settle a large loss within policy limits and refuses to do so, the claim representative must carefully document the reasons for this refusal. Careful analysis of the liability situation and the extent of damages is paramount. Has the adjuster fully investigated the accident? Has that investigation been supported by expert advice from a loss/cause analysis or accident reconstruction? Are damages substantiated by appraisal, medical testimony, life care planning, vocational and rehabilitation specialists? What about pain and suffering, or in some states, stress and mental anguish of the plaintiff or close family members? These are more problematic but require careful analysis and cannot be ignored.

Defending Bad-Faith Allegations

In cases where the claim representative can document that the claim has been appropriately evaluated with respect to liability and damages, that a fair offer has been made to the plaintiff, and that the insured has been kept informed of the claim activity, bad faith allegations can be defended. Remember, bad faith is not blind faith, and insurers are required to adequately investigate claims. Just because the insured has limits of $300,000 doesn't mean that all plaintiffs' demands within that limit must be met. An appropriately evaluated $50,000 claim is still worth only $50,000 even though a jury may award $450,000 resulting in an excess of $150,000 over the $300,000 limit.

On the other hand, if the adjuster ignored evidence, was slipshod in evaluating damages, or treated the insured inappropriately, a bad faith allegation is possible and may prove successful.

Insurers and claim representatives are particularly vulnerable when coverage is denied. Doing so requires the insured to hire defense counsel and work in an arena where the insured most likely has no prior experience or knowledge. Suppose the insured hires incompetent counsel, and a large judgment is entered. The larger the judgment, the more aggressive the insured will be in seeking coverage or in attempting to recover based on wrongful denial. This explains why insurers are extremely cautious before issuing a denial of coverage.

Reservation of Rights

An insurer can provide an initial defense even when a coverage issue arises. A reservation of rights letter or non-waiver agreement is utilized to advise the insured of the potential for no coverage and to allow the insurer to continue investigating and possibly defending the lawsuit without jeopardizing its right to deny coverage at a later time. The reservation of rights letter must be specific with respect to potential coverage denial and state which portions of the policy are at issue.

There must be confirmation that the letter was received by the insured, and it must have been sent within a reasonable amount of time after the discovery by the insurer of the coverage problem. Reservation of rights letters clearly state that the rights of both parties are reserved, including the insured's right to obtain counsel for representation on the coverage issue.

The easiest way to avoid allegations of wrongful denial is to make sure that coverage is applied appropriately. This may involve discussion with the agent or underwriter to determine the intent of coverage, and certainly an intimate knowledge of the policy wording and caselaw/court interpretation of the terms and provisions at issue.

Once again, documentation plays a key role in defending lawsuits—communication with the insured, analysis of the policy wording, discussions with the agent and underwriter—are all important pieces of evidence for the defense. Caution is needed regarding documentation since adjuster notes are easily obtained during discovery. Conversations and discussions need to be recorded factually.

Tips for Avoiding Bad Faith Claims

To avoid bad faith allegations in excess liability claims, here are a few tips to remember:

  • Fully investigate and document liability and damages.
  • Use experts to substantiate your findings.
  • Seek the advice of counsel regarding similar cases and your evaluation of the subject claim.
  • Objectively evaluate each claim and make a fair offer if settlement is justified.
  • Keep your emotions at bay, they can cloud your judgment and cause you to make bad decisions.

Beware: despite the best efforts of the claims representative, the insured may still bring forth allegations against the adjuster, the agent, and/or insurer. In my experience, these unfounded bad faith allegations occurred because one or more of the following were present.

  • The claim professional's response was not quick enough.
  • The insured felt there was damage done to his reputation.
  • The insured felt that the adjuster was not accurate enough in the representations made.
  • The insured had issue with the tone and manner of adjuster—the adjuster was not polite enough.
  • There was overreaching by the adjuster.
  • The adjuster "could do nothing right."
  • The adjuster was perceived as being anti-consumer.
  • Or simply, the insured was "mad at the world."


As claims representatives know, there seems to be no shortage of creative attorneys. Keeping the bad faith exposure in mind when handling large-dollar personal lines claims will give the claim representative confidence that the actions taken were necessary and appropriate—that any bad faith allegation can be successfully defended.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.