By John J. Pappas
This is one of a series of articles under the by line “Butler Pappas on Bad Faith” originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 17, #10, p. 21 (September 17, 2003). © Copyright Butler Pappas 2003.
Like most things, it began with a phone call.
“John?”
“Hello.”
“Hi, John. This is Ralph.”
“Hi, Ralph. How ya doin'?”
“Fine, thanks. Listen, John, I have good news and bad news. The good news – we actually read your Mealey's Commentaries.”
“Yeah, and?”
“Well, the bad news is our CEO wants to talk to you.”
“That ain't bad news. Sure, put him on.”
“No. You don't understand. He wants to see you. He wants to discuss this 'institutional bad-faith' stuff with you.”
“Great. No problem. Let me see what my calendar looks like.”
“No, John, you don't understand. He wants you to meet him in his office tomorrow morning at 10:00 a.m.”
“Oh. Would it be wrong for me to read between the lines that Mr. Kanter ain't happy?”
“John, this is all way above my level. All I know is Mr. Kanter has requested your presence, and I don't think you're playing golf.”
“Okay. Well, my calendar –”
“John, listen closely. Mr. Kanter has requested your presence in his office at 10:00 a.m. tomorrow, here in Home Office. I presume you want me to tell him you'll be there – right?”
“Okay. I'll get it done. Who else is going to be there?”
“As far as I know, it's just you and Mr. Kanter.”
“Anything else I need to know?”
“No. Well, just remember, Mr. Kanter is not a lawyer, and he ain't a claims person. He has an MBA and he ran banks for 15 years.”
“I got it. Thanks, Ralph.”
“Good luck, John.”
“Thanks.”
* * *
The early morning flight was uncomfortable. The taxi ride was worse. I arrived on time. Mr. Kanter called me in twenty minutes later.
“Good morning, Mr. Pappas,” he said as he walked toward me.
“Good morning, Mr. Kanter,” I replied firmly as he vigorously shook my hand.
“No, no, no,” he protested with a big smile. “Please call me Dean. May I call you John?”
“Of course.” I was already prepared to “buy” whatever “Dean” was about to “sell.”
“John, thank you for meeting with me on such short notice. Please sit down. I know you're a very busy man.” Got-it, I thought, a short meeting.
“No problem. I hope I can be of some assistance.”
“Well, I hope so too. Our Claims Department and our Legal Department think very highly of you. I have read some of your publications. They are most interesting.”
Given my extensive legal training, I knew he was “setting-the-hook,” but he was doing it with such effortless charm I couldn't help but bite. “Thank you,” I replied knowing I did not conceal my proud smile.
“However, I do not entirely agree with what I have been reading. In fact, it disturbs me more than a little because it sounds like we are not allowed to be profitable, or even try to be profitable. Surely you know I am responsible to many shareholders and a Board of Directors. My job, like any CEO, is to maximize profits. Perhaps you can explain yourself.”
“Well,” I replied hesitantly, “Some would say that you are not allowed to maximize profits.”
“But that's ridiculous. They are taking honest, good faith business practices and distorting them into something they are not. Their argument is absurd.”
“But that's what they will say. An insurance company is a regulated industry. And, there are special rules and laws pertaining to an insurance company's conduct, both contractual as well as extra-contractual – such as Unfair Claims Practices Acts. They also make the argument that an insurer, given its uniquely regulated relationship with its insureds, maybe even third-party claimants, has a heightened duty to them. Some argue that duty may even be the highest duty the law acknowledges – a fiduciary duty. A fiduciary duty is where one must actually look out after the interest of another above the interest of their own. Thus, these unique rules, if you will, pertain solely to insurance companies, which make it much more difficult for them to act like a typical corporation, which is not subject to these type of rules.”
“So, are you saying I cannot seek to increase our profits?”
“No. What I am saying is that an insurance company's quest for profit will be examined, if not attacked, in our judicial system, under a different set of rules than most corporations. Typically they only have to answer to their shareholders, who indeed, want them to maximize profits. You not only have to answer to your shareholders, who want to maximize profits, but you must answer to those who regulate you as well as to those who you insure. These regulators and insureds are not necessarily interested in you maximizing profits, especially if they perceive you are doing so at their expense.”
“But we don't do that.”
“Their argument is that some, if not most, insurance companies do. Their argument is that any particular claim handler wants to do the right thing, but that the corporation, that is the management, through its communications, directives, policies, programs, performance evaluations, incentives, and compensation plans encourage the claim handler to underpay claims.”
“But that's not true.”
“Well, I think it is a matter of both perspective and semantics. Your perspective is that in order to maximize profits and ensure that claims are handled properly, that is, that claims are not overpaid, intelligent and competent corporate management requires programs, policies, and rules to ensure that such does not occur. To the extent that is intended to drive down payment of claims, from your perspective, from the perspective of your shareholders, as well as your employees and their families, that is a good thing. The other side, however, whether they actually believe it or not, argue that such corporate practices encourage claims personnel to not only not overpay claims, but actually go farther, resulting in underpayment of claims.”
“Well, John, that is a ridiculous argument. If we were out there systematically underpaying insurance claims, our customer satisfaction statistics will not be what they are and our policy renewals would not be what they are. I have never been made aware of a single adjuster who has ever said that they intentionally underpaid a claim because of any perceived corporate pressures.”
“I know. I'm just telling you what the other side is arguing. Please don't shoot the messenger.” Dean did not look happy and he was looking right at me.
“Well, how do they, I presume you mean plaintiffs' attorneys, suggest an insurance company's CEO fulfills his obligations to the Board of Directors and to his shareholders, and not create this so-called corporate climate of 'bad-faith?'”
“Well, Dean,” I thought if I called him by his first name it may help the blood drain from his head, “they don't. They don't run corporations and they don't answer to a Board of Directors and to shareholders. The only profits they aim on maximizing are their own – ironically. And the way they maximize those profits are to argue to judges and juries that a particular claim was indeed underpaid and, in order to maximize their profits, by obtaining extra-contractual damages, typically punitive damages, is for them to argue that such underpayment occurred because the big, bad, and evil corporate management wanted the claim to be underpaid. And, in fact, its corporate practices are designed and intended for such underpayment to occur. This is their argument. And, if it were true, they would be right – it would be 'bad-faith.'”
“Well, John, I know of no insurance company that does not try to maximize profits. I know of no insurance company that does not create corporate practices to control against overpayment of claims and other expenditures. This is basic Business Administration 101. A corporation cannot exist if it's not profitable. A corporation cannot exist if it does not have practices and programs to control its expenses. These are fundamental requirements for any business to survive.”
“I understand. But the fact that I understand and you understand is not sufficient. We must make the Courts and the juries understand. It is your position that you and your management team and your corporate practices do not and are not intended to encourage underpayment of claims. It is your position and sincere belief that your corporate culture and corporate practices actually disfavor such conduct –”
“Now you're talking! That is exactly correct –”
“Then, you and your company need to get prepared to get this message to the opposing parties, the judges, and the juries. The message must be supported by the facts and the documents and those communicating the message must be knowledgeable and articulate.”
Dean took a deep breath as he stared through me. “I agree,” he said, as only a CEO can.
“Of course,” I continued, “at least at the beginning, this may increase your litigation costs. That is, until we convince those that need convincing, that your corporate practices are not a source of profit for them.”
“Well, now I understand. I don't think we have a choice. Either we cease being a well-managed business or we encourage meritless lawsuits by making them profitable by way of settlement.”
“I agree.”
“John, thanks for visiting with me on such short notice. You have been very helpful. I know you are a busy man so I won't keep you any longer.” Got-it. Meeting over.
“Thank you, sir.”
Suddenly I sensed light peering through my eyelids. I felt groggy. I opened one eye, confirming my suspicion. It was time to wake up and go to work.