In a previous commentary, "Insurer's
Duty at the Outset of a Personal Lines Claim," I wrote about an insurer's
duty to advise first party insureds/claimants of their rights and benefits under
an insurance policy as an essential part of claims adjustment, a process I generally
view as "adjusting" the terms and conditions of an insurance policy to facts
of the situation. An implicit premise of my thoughts on that subject is that
an insurer possesses superior knowledge of the contract, and this information
should be shared with policyholders to benefit—not shortchange—them.
"Information is power" is a contemporary cliché, but worthy of note because
it confers specific advantages in the claims environment wherein most policyholders
rarely, if ever, read their insurance policies. (The question remains, of course,
as to whether they would gain any greater understanding if they did fulfill
what courts often term "a duty to read.")
Typically, in the property/casualty context, first party claims involve only
the company and the policyholder, the policyholder's loss of property in some
form, and a demand that the insurer pay the loss. In third-party claims, however,
a non-party to the insurance policy alleges a loss (property damage or bodily
injury, for example) and demands that the insured assume liability for it. Assuming
coverage exists, the insurance company has a contractual duty to defend and
indemnify the insured. A company's failure to act in the best interest of its
insured can bring serious problems, including the two dreaded words, "bad faith."
In third-party claims, one of the most vital types of information is the
amount of money available to compensate the victim(s). The amount of money potentially
available is so important to some liability insurers that they guard this "policy
limits" information as if its disclosure endangers national security. Nondisclosure,
though, may lay a foundation for bad faith, the subject of this commentary on
disclosure.
Why Insurers Need To Be Careful Responding to Policy Limits Requests
A demand for policy limits information often occurs shortly after an accident
or "occurrence" in which someone suffers harm, blames another, and seeks compensation.
Usually, an attorney or public adjuster contacts the insurance company asking
for policy limits. Persons experienced at the process ask for all policies,
including umbrella and excess. By failing to disclose the information, or if
it is only partly disclosed, an insurance company enjoys a tactical advantage
of forcing the third-party claimant to negotiate in the dark and make a demand
without benefit of knowing what is potentially available.
To disclose or not to disclose, therefore, is the point where an insurance
company's interests and the policyholder's may diverge. Whereas, nondisclosure
favors the insurer's economic interests, disclosure may serve the policyholder's
best interest because it:
- aids purposeful settlement discussions;
- is an essential component of evaluating a case;
- may discourage a seriously injured victim from demanding more than the
policy limits; and
- may prevent litigation.
Policy Limits Demands and Settlement Demands
A demand for policy limits is not a settlement demand; rather, it is what
the plaintiff asserts she must have to settle a case. If the settlement demand
is within policy limits, the insurer rejects the demand, litigates the case,
experiences a judgment in excess of policy limits but refuses to indemnify its
own insured for the full judgment, the insurer invites a lawsuit for bad faith
refusal to settle. Most likely, this is where insurers are most sensitive to
potential bad faith claims.
But, can failure to provide policy limits information in the absence of litigation
establish a case for bad faith? Two cases addressing this question are the foundation
of this article: Powell v. Prudential P&C Ins. Co.,
584 So. 2d 12 (Fla. 1991), and Boicourt v. Amex Assur.
Co., 78 Cal. App. 4th 1390 (Cal. 2000), a bicoastal duo of cases that
must signal caution to insurers.
Powell v. Prudential
First, in Powell, an auto insured by Prudential
and driven by Powell's daughter struck two pedestrians, one of whom was seriously
injured. Shortly after the accident, the victim's attorney sent a letter to
Prudential asking for policy limits. Getting no response, he sent a second letter,
certified this time, and informing Prudential:
… the inducement for my client to settle within policy limits is with a
view toward prompt and immediate resolution….
Prudential did not respond, so the attorney sent a third letter. Prudential
neither responded nor advised its own insured Powell of the correspondence.
Five weeks later, Prudential's adjuster tendered the policy limits. The victim's
attorney rejected the offer and filed suit.
The trial court awarded $250,000 to the plaintiff, an amount 25 times greater
than policy limits, so Powell sued for bad faith. On appeal, the issue of whether
failure to reveal policy limits at the pre-litigation stage can serve as a basis
for bad faith was answered affirmatively by the court.
The lack of a formal offer to settle does not preclude a finding of bad faith.
Although an offer of settlement was once considered a necessary element of a
duty to settle, an offer to settle is not a prerequisite to the imposition of
liability for an insurer's bad faith refusal to settle, but is merely one factor
to be considered. Moreover, liability may be predicated on a refusal to disclose
policy limits. The refusal to inform a claimant of the policy limits deprives
the claimant of a basis for evaluating the case, thus hindering settlement.
Boicourt v. Amex
In Boicourt, decided 9 years later, following
an accident, an injured passenger in a vehicle sought policy limits information
from the insurer, Amex. Despite a California law requiring an insurer to contact
the insured and get permission to disclose policy limits when demanded by a
claimant, Amex never consulted its insured during three attempts over a 5-month
period by the injured party's attorney to determine policy limits. In fact,
the adjuster informed the attorney that the company policy prohibited disclosure.
Five months after litigation began, Amex offered to settle for $100,000.
The offer was rejected, but the plaintiff made no settlement demands after filing
the lawsuit. Subsequently, trial resulted in a stipulated judgment of $2.985
million against the driver (the owner's son) and $15,000 against the father-owner.
The son assigned his rights to Boicourt in return for a contract not to execute.
On appeal, the California court followed the Powell precedent closely but
concentrated more directly on the conflict of interest between insurer and insured,
concluding, "A conflict of interest can indeed develop without a formal settlement
offer being made by the claimant," to wit:
First, there is a conflict between the insured's peace of mind and the elephantine
lethargy endemic to many large organizations, certainly including many insurance
companies….
Second, there is the negotiating advantage an insurer gains for itself (but
not for the insured) when it forces a claimant to make any settlement offer
either (a) without benefit of knowledge of policy limits or (b) only after incurring
the expense of filing litigation and sending out some initial discovery.
The court noted that Amex's blanket rule against disclosing policy limits
also saves administrative costs. Of course, one might reasonably infer that
adhering to a policy of nondisclosure, with or without a formal rule, has the
same effect of protecting the company's economic interests at the expense of
its policyholders. As the court describes the advantage sought by the insurer:
It is the same sort of tactical one-upmanship that baseball managers try
to obtain when they put in a right-handed pitcher to face a right-handed
hitter, when chess players elect the white pieces, or when football captains
elect to receive the ball after winning the toss. It doesn't always win
the game, but it gives the player a slight edge in the competition. In negotiation,
unlike chess, there is a slight advantage to the party who receives an offer
over the party who first makes one, because the latter operates in a universe
with less information: namely, what the other party thinks about the value
of the transaction.
Lessons Learned
Insurers deal with policy demands and other aspects of claim administration
daily. This day-to-day experience teaches that many claimants cannot afford
attorneys to litigate on their behalf to force disclosure of the information;
consequently, their claims may settle for substantially less than their true
value, thereby benefiting the insurer. On the other hand, some claimants who
can afford it may decide that litigation is the most viable option when the
insurer fails to provide policy limits.
What this means for the policyholder is that because the insurer failed to
make a key disclosure, she must set aside significant blocks of time for discovery,
court appearances, stressful agony, and a prospect of an excess judgment. Further,
once litigation commences, a policyholder establishes as a matter of public
record that she has been a defendant in a lawsuit involving what is often very
damning details of the underlying occurrence.
Conclusion
An insurer's failure to reveal policy limits at the pre-litigation stage
can serve as a basis for bad faith actions. Moreover, while insurers may generally
anticipate such actions from third parties, and since failure to disclose policy
limits may be construed as resolving a conflict of interest favoring the insurance
company's economic interests over those of its policyholders, an insurer also
is vulnerable to bad faith allegations from its own insureds. Silence, then,
does not gain the insurer any fair advantage.