Current Trends and Issues
Insurer's Duty at the Outset of a Personal Lines Claim
Tim Ryles | September 1, 2008
Footnotes
1
Sources:
National Association of Insurance Commissioners, "Unfair Property/Casualty Claims Settlement Practices Model Regulation," in National Association of Insurance Commissioners, Model Laws, Regulations, and Guidelines, Vol. V, 902-1 through 902-10 (Kansas City, Mo.: 2006)
Widiss, Alan I. "Obligating Insurers to Inform Insureds about the Existence of Rights and Duties Regarding Coverage for Losses," Connecticut Insurance Law Journal 67, (Spring 1995).
The insurance industry has produced a significant body of literature on claims and has established several "designations" designed to improve the knowledge and skills of claims personnel. These sources discuss rules for good-faith claims handling, strategies for good negotiations and communications, unfair claims practices, and how to process particular types of claims (e.g., automobile, commercial property, business interruption, homeowners). The material leans heavily in favor of property and casualty fields.
The generally unexamined subject in standard sources, however, is the extent to which an insurance company bears a responsibility to sit down at the outset of a claim and inform a first-party insured of her rights under the policy, what coverage provisions apply to the claim, and what must be done to gain maximum benefits. Indeed, my experience in reviewing hundreds of claims is that some companies tend to adhere to a "Don't ask, don't tell" policy, meaning if the insured does not inquire about specific policy provisions, an adjuster remains silent about them. Further, too often when an insured affirmatively asks questions, the adjuster is unable to provide the correct answer. This approach is what I characterize as the "Gotcha!" claims adjustment method. "Gotcha!" is 180 degrees removed from proper claims administration because failure to inform insureds of coverage matters is an egregious act of omission for several reasons.
This article 1 offers commentary as to why an insurer has an obligation to engage the insured at the beginning of a claim and assist her in securing all relevant benefits of the insurance contract. The basis for the "sit down conference" during which an adjuster educates the insured about the claim and policy rights at the initial stages of a claim arises from (1) the distinguishing features of the insurance contract, (2) common law principles, and (3) regulatory standards.
The Insurance Contract as a Basis for the Duty To Inform Insureds
In Zilisch v. State Farm, 995 P.2d 276, 279, Arizona's Supreme Court affirmed, "An insurance contract is not an ordinary commercial bargain." Unlike many consumer protection measures fashioned to dull the sharp edges of caveat emptor ("let the buyer beware") in consumer-business relations, insurance law's philosophical foundation is relatively free of caveat emptor. Caveat emptor rewards the qualities of cunning and guile in commercial relations. Rules governing insurance relationships, on the other hand, stem from a background of utmost good faith, a tradition of a more kind and gentle nature of openness and trust. As one widely used college insurance textbook opines:
Outside academic circles, a text adopted in many states for agent prelicensing courses has this to say:
An authority on ethics for life insurers adds:
In contrast to caveat emptor, this author proposes that the principle of cognosceat emptor, Latin for "Let the buyer know," is the more appropriate modern standard.
A reasonable inference from this "utmost good faith" standard, therefore, is that in the insurance context, there is a heightened duty governing the parties' relationship. Insureds buy insurance for purposes other than pursuit of commercial advantage; rather, what an insured seeks is peace of mind, "good hands" security from a surrogate "good neighbor" that is "on your side" when "occurrences" bring harm and loss.
These benefits are purchased from an insurance company that develops contracts of adhesion, holds the money, and has years of experience dealing with novice claimants who are ill informed about the product they bought to protect against life's misfortunes. Yet, despite a status as the weaker party, the insured possesses the details about the risk assumed by the stronger party (the insurer)—details that should be revealed if material. Utmost good faith—honesty, openness, mutual assistance—benefit both parties in the long run. An open discussion of policy benefits is consistent with this principle.
The Insurance Contract Is More Than a Private Agreement between Two Parties
The U.S. Supreme Court determined almost a century ago in German Am. Ins. Co. v. Lewis, 233 U.S. 389 (1914):
Georgia's Supreme Court, quoting favorably from the Lewis decision in 1939, affirmed an identical view at the state level, in Cooper Co. of Gainesville v. State , 187 Ga. 497, 500 (1939). More recently, the Supreme Court of Texas stated:
State insurance codes statutorily incorporate the public interest element of an insurance contract as well. For example, a Washington statute states:
Idaho's statute affirms the same provision, but modifies it:
Preserving the integrity of insurance as a public policy objective is obstructed, not advanced, in an atmosphere of secrecy, deception, and exploitation of the other party's inexperience or ignorance. To overcome this "Gotcha!" threat, from a public policy perspective, the public interest element implies that an altruistic motive lies behind the insurance mechanism. Consistent with this notion, some observers see a fiduciary relationship in the public interest quality of the insurance mechanism, while others describe it as at least quasi-fiduciary. Either is supportive of an insured's "right to know" the benefits of the bargain.
Common Law Supports Disclosure of Policy Benefits
In Barry Ducola v. Pennsylvania Nat'l Mut. Ins. Co., 554 A.2d 906 (Penn. 1989), the court opined:
Professor Alan Widiss, who served as an expert in Weber v. State Farm Mut. Auto. Ins. Co., 873 F. Supp. 201 (S.D. Iowa 1994), also contends that, inter alia, the insurer's duty to inform insureds about coverages arises from the covenant of good faith and fair dealing that is implied in all insurance policies.
In Rawlings v. Apodaca, 726 P 2d 565 (Ariz. 1986), the Arizona Supreme Court also developed this notion, explaining that insurance policies consist of essentially two covenants: the formally expressed commitments of the parties in the written text of the insurance policy and the implied covenant of good faith and fair dealing. The latter, said the court, dictates "that each of the parties was bound to refrain from any action which would impair the benefits which the other had the right to expect from the contract." (At p. 155) The court's emphasis is on the right to expect from the policy, not upon the policyholder's knowledge of what to demand.
The stronger party's failure to explain all applicable coverages is among the actions that would impair an insured's benefits.
Regulatory Standards Specifically Mandate Disclosure
The National Association of Insurance Commissioners' Model Unfair Property/Casualty Claims Settlement Practices Regulation Section 5 (a) stipulates:
While this article has emphasized an affirmative duty to advise, Section 5(b) suggests that inaction adversely affecting an insured's rights under a policy is not a means of circumventing the regulation's dictates. Section 5(b) says:
Section 6(d) states:
The regulatory language is quite broad as to what an insurer must do and refrain from doing to fulfill its side of the bargain. It does not place on the insured the responsibility of having to first inquire about coverages, nor does it provide that the duty is waived if an insured is represented by either an attorney or a public adjuster, as some insurers have been known to argue. The duty to advise and inform the insured is a continuous, unqualified duty of the insurer.
Summary
Unlike other "financial services" products, insurance consists of public interest elements, utmost good faith principles, a heritage distinct from caveat emptor, and specific statutory and regulatory requirements setting it apart from normal rules of commercial relations. These qualities strongly support the view that insurers have an affirmative duty to continuously advise first-party insureds of their rights and obligations under an insurance contract. Lethargic inaction is no excuse for noncompliance with regulatory standards.
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