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. 15, #6, p. 43 (July 18, 2001). © Copyright Butler Pappas 2001.
I. Preface
When a first-party insurer denies a claim on insufficient investigation, that may constitute “bad-faith.” Is it, however, “bad-faith” for an insurer to refuse to investigate a reported loss before the insured submits a claim? Is it “bad-faith” if the insurer refuses to share with the insured information concerning the loss or claim? These are the issues we address.
II. A Scenario
An insured notifies its insurer of property damages as a result of windstorm. The insurer immediately sends a reservation of rights letter requesting that the insured submit an executed Sworn Statement in Proof of Loss form along with supporting documentation. Subsequently, the public adjuster requests the insurer participate in a joint-inspection of the insured premises, inclusive of more than 2,000 windows, 1,500 sliding glass door units, 4 tower roofs, and 30 condominium golf villa roofs of Spanish concrete tile. The insurer declines the request reiterating its demand for a Proof of Loss and back-up. Is the insurer committing “bad-faith?”
Eventually the insured cooperates with the insurer's investigation. Before the Examination Under Oath begins, the insured requests to see the insurer's expert reports and cost estimates. The insurer denies the request. Is the insurer committing “bad-faith?”
III. Why Not Investigate? Why Not Disclose?
A strong case can be made for swift and comprehensive on-site investigation of a reported loss by an insurer. Typically the reasons given would be maintaining “control-of-the-claim” and some public relations and customer service benefit. Yet, there are some claims that are most efficiently addressed in response to an insured's claim presentation. Many of these occur where the insured premises are vast and already have existing damages unrelated to the covered event. Without knowing the specific damages the insured contends are actually caused by the covered event, an insurer could spend considerable time, effort, and money investigating damages the insured never intended to claim.
As to why would an insurer not disclose information to its insured, one common reason is that the insurer may suspect the insured of intentionally submitting an inflated claim or knowingly making claim for damages not covered. To provide the insured with the insurer's own expert reports and cost estimates before the insurer has completed its investigation, may assist the insured in altering its presentation and future Examination Under Oath testimony enhancing its chances of successfully pursuing a fraudulent claim.
The issues addressed here, however, are not whether an insurer should investigate a loss before a claim is submitted or should disclose information to the insured during the investigation. The issues addressed here are if an insurer chooses not to investigate before a claim is presented, or chooses not to disclose information to the insured, is it committing “bad-faith?”
IV. The Source Of The “Duty”
A. The Insurance Contract
Almost all first-party insurance contracts do not obligate an insurer to investigate a loss or claim. Most property insurance contracts have three distinct sections, which are best described as:
1) Coverage: What is covered and what is not covered;
2) Duties In The Event Of Loss: The insured's post-loss obligations; and
3) Payment: How much must the insurer pay and when.
The typical first-party insurance contract does not obligate the insurer to investigate any loss or claim. In the case of Zurich Insurance Company v. Killer Music, Inc., 998 F.2d 674 (9th Cir. 1993), a federal appellate court in interpreting California law held that although “Zurich did not reasonably investigate the claim to determine coverage. . . without actual presentation of the claim by the insured in compliance with claims procedures contained in the policy, there is no duty imposed on the insurer to investigate the claim.”
There is also no contractual duty to disclose. In American Reliance Insurance Company v. Riggins, 604 So. 2d 535, 535-36 (Fla. 3rd DCA 1992), a Florida appellate court stated:
We agree entirely with the defendant insurer that the Plaintiff insureds were absolutely required under the contract of insurance herein (1) to provide the insurer upon its request with certain relevant records and documents, and (2) to submit upon request to examination under oath by the insurer, after a fire loss claim is made under the insurance contract. Accordingly, the trial court was clearly in error in requiring, as a prerequisite to the performance of the above acts, that the insurer provide the insureds with certain fire cause and origin reports; there is nothing in the contract of insurance which requires the insurer to produce such reports for the insureds.
(Emphasis supplied). In the absence of a contractual duty to investigate or disclose, where can such a duty emanate?
B. State Law
If there is a cornerstone for the construction of a duty to investigate or disclose, it may be found in state law. Many unfair claims practices acts have a provision identifying the “failure to adopt and implement standards for the proper investigation of claims.” There are also common administrative or regulatory codes suggesting, if not requiring, an insurer's adjuster “upon undertaking the handling of the claim, to act with dispatch and due diligence in achieving a proper disposition thereof.” When coupled with the statutory or common law obligation for an insurer to “in good faith settle claims when, under all the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for his interest,” such laws may provide a framework for an emerging “duty” to investigate before a claim has even been submitted. At least one state seems to recognize such a “bad-faith” cause of action for failing “to conduct any necessary investigation in a timely fashion,” apparently unrelated to the actual denial of the claim.
In the case of Coventry Associates v. American States Insurance Company, 961 P.2d 933, 937 (Wash. 1998), the Supreme Court of Washington held:
An insured may maintain an action against its insurer for bad faith investigation of the insured's claim in violation of the CPA [Consumer Protection Act] regardless of whether the insurer was ultimately correct in determining coverage did not exist. An insurer's duty of good faith is separate from its duty to indemnity if coverage exists. This result creates no insurmountable burden on the insurer. The insurer is only required to fulfill its contractual and statutory obligation to fully and fairly investigate the claim. The problem arises when the insurer fails to investigate, in bad faith, thereby placing the insured in the difficult position of having to perform the insurer's statutory and contractual obligations.
(Emphasis supplied). Nevertheless, Coventry fails to quote the “contractual obligation” being referenced. Moreover, the closest thing to law cited in support of such a “duty” is that of the Washington Administrative Code 284-30-330 that states, “refusing to pay without a reasonable investigation.” (Emphasis supplied). The court, however, did not stop here.
The Coventry court went out of its way to affirm the existence of a “stand-alone” cause of action for failure to investigate and disclose when it distinguished the case of Fireman's Fund Insurance Company v. Alaskan Pride Partnership, 106 F.3d 1465, 1470 (9th Cir. 1997), by stating that the “insurer's reliance on [that] case holding that failure to conduct a reasonable investigation could not alone support a finding of bad faith is 'misplaced' because 'that is not true of Washington law'.” In classic ipse dixit, the Washington Supreme Court declared:
The implied covenant and good faith and faith dealing in the policy should necessarily require the insurer to conduct any necessary investigation in a timely fashion and to conduct reasonable investigation before denying coverage. In the event the insurer fails in either regard, it will have breached the covenant and therefore, the policy.
(Emphasis supplied). Id. at 938. Thus it would appear that Coventry stands for the proposition that it is “bad-faith” for an insurer to fail to conduct an “investigation in a timely fashion” independent and separate from the actual decision-making on the claim. Coventry is either an aberration or the seminal case of a new “bad-faith” cause of action -- the failure to investigate and disclose. Coventry itself seems to be standing alone -- at least for the moment.
In the case of Aetna Casualty & Surety Company v. Superior Court, 778 P.2d 1333 (Ariz. App. 1989), an Arizona appellate court held that an insurer's subjective bad faith may be inferred from a flawed investigation, yet an improper investigation, standing alone, is not a sufficient cause for recovery if the insurer in fact had an objectively reasonable basis to deny the claim. The court found that because the plaintiff did not identify what additional pertinent facts would have been determined by any further investigation, the insured failed to establish the insurance company's pre-denial investigation could amount to “bad-faith.”
In the case of Brown v. General Motors, 662 So. 2d 531, 536 (La. App. 5th Cir. 1995), the Louisiana appellate court stated:
Plaintiff contends Allstate's contractual right to inspect damaged property for which it may be liable under its policy is accompanied by a duty to conduct a thorough examination. In effect, plaintiff would impose on the insurer the duty to be an expert mechanic, or carpenter, or electrician, etc., when inspecting damage claims of its insureds. We find no such duty imposed by the insurance contract. . . . The policy language cannot reasonably be construed to warrant that Allstate will discover hidden damage that the insured has not discovered. The rights and obligations of the parties herein concerned are predicated upon certain terms and conditions of a contract. The courts may not make a contract for the parties. Their functions and duties consist simply in interpreting and enforcing the agreement as actually made. It is self-evident that a failure to restrict the rights of an injured person to the terms and conditions of the insurance contract would expose the insurer to liability far beyond the scope of the contract.
In Timberlake Construction Company v. U.S. Fidelity & Guaranty Company, 71 F.3d 335 (10th Cir. 1995), the Federal court in attempting to predict Oklahoma law stated:
In the casualty insurance situation, the relationship between insurer and insured is for many purposes at arms length. The insurer has no clearly defined duty of investigation and may require the insured to present adequate proof of loss before paying the claim. The two parties are on opposite sides of the issue rather than being partners on the same side as in the liability insurance situation.
(Emphasis supplied) Id. at fn. 15. Notwithstanding the Coventry proclamation, it appears that all other courts addressing the issue have held that there is no “stand-alone” cause of action in “bad-faith” for refusal to investigate and disclose.
C. “Promises”
This “emerging” duty to investigate and disclose may actually find its greatest support neither in contract nor in law, but rather in the insurance industry's own marketing and advertising programs. In fact, Coventry, in citing the Arizona Supreme Court case of Rawlings v. Apodaca, 726 P.2d 565 (1986), stated that the insurance industry itself lends credence to the fact that the insureds seek more than a bare promise to pay certain claims. These two state high courts recognized that “advertising programs portraying customers as being 'in good hands' or dealing with a 'good neighbor' emphasize a special type of relationship between the insured and the insurer -- one of which trust, confidence, and peace of mind have some part.” In Powers v. USAA, 962 P.2d 596 (Nev. 1998), reh'g denied, 979 P.2d 1286 (Nev. 1999), the Nevada Supreme Court “legislated” that the duty owed by an insurance company to its insured is fiduciary in nature and in order to recover the insured may establish by a preponderance of evidence that a fiduciary relationship existed between plaintiff and defendant and that defendant breached “the duty to disclose known facts” to the insured.
In none of these cases were promissory estoppel, breach of oral contract, or fraud in the inducement pleaded. Could an insured plead a cause of action averring detrimental reliance and expectation that its insurer would immediately investigate the reported loss and share its knowledge with the insured before the insured submits a claim? Apparently in at least some states, such a legal duty imposed upon a first-party insurer is more than a possibility.
D. Conclusion
A first-party insurer has a contractual right to demand that its insured submit a claim before the insurer investigates. Notwithstanding Coventry, an insurer who refuses to investigate before a claim has been presented or refuses to share information with its insured during the claim investigation is not guilty of “bad-faith.”
However, if such conduct is ultimately tied to other inculpating facts, such as the insurer did not investigate because it believed the insured did not have the financial resources to present its own legitimate claim, or the insurer did not disclose its own reports during the investigation of the claim because they supported the insured's position, then the failure to investigate or disclose may have significant “bad-faith” consequences.
Whether the “duty” to investigate or disclose is or ever becomes a viable stand-alone basis for “bad-faith,” an insurer who refuses to investigate or disclose better have a cogent justification. Otherwise, such an insurer may unwittingly help to expand this emerging doctrine of “bad-faith.”