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Bad faith claim handling – how to avoid it without simply paying all insurance claims

“Bad faith” – just the sound of it can bring fear to even the most experienced claim adjuster. And for good reason. In many states, an allegation of bad faith in claim handling or a claim decision can bring with it the threat of punitive or exemplary damages.  The standard by which bad faith is judged varies, with some states imposing statutory liability, while in other states it is a judicial creation. Claim handlers could be forgiven for believing the only way to avoid a bad faith lawsuit is to simply pay all claims regardless of merit, but I submit there is another way. And having a good “bedside manner” is a start.

Having defended hundreds of bad faith lawsuits over the years, I have noted a common theme. I call it “bedside manner”, similar to what you expect from your doctor.  In the vast majority of bad faith lawsuits I have seen, there is almost always some communication failure between the claim handler and the insured, with the insured coming away feeling as if the adjustor is ignoring the insured, or worse, doesn’t care. Keeping the insured informed through every step of the process is a good practice to follow. While it is true that denying an insured’s claim is never good news for an insured, responsiveness, compassion and understanding by the adjuster toward the insured can go a long way to alleviating the ill will that sometimes leads to a bad faith claim.

Practicing good customer relations is not the only way to avoid bad faith. Another pointer is to be sure to know the applicable insurance policy inside and out. Lack of familiarity with the insuring agreement, conditions or exclusions tends to manifest itself in confusion and frustration on the part of the adjuster and the insured, sometimes leading the insured to lack confidence in any claim decision being explained.

While bad faith is most typically associated with claim denials, many states also recognize bad faith investigation. It goes without saying (but I’ll say it anyway), that the best way to avoid a claim of bad faith investigation is to …. you guessed it …. investigate. If the claim file does not contain the factual basis to support the claim decision, chances are an adequate investigation has not been conducted, or if conducted, has not been documented. But it is not enough to simply conduct an investigation into the claim – there should also be a review and evaluation of that investigation before a decision is made, and the claim file should reflect that review and evaluation.

Which brings us to another tip for avoiding bad faith – documenting the file.  There is an old mantra that says “if it isn’t noted in the claim logs, it didn’t happen.” That is a good mantra to keep in mind.  Claim activity should be noted in the file, to support the decision made and the basis for it. It is much easier to point to notes in the file showing what was done than to try and recall things that are not documented and try to explain years later that certain things were actually done during the investigation, but not noted in the file. Of course, when entering claim notes, assume that everything in the claim file will be revealed for courtroom scrutiny. Use detailed, accurate and courteous entries in the daily log and in all reports and avoid unnecessary editorial, careless or harsh comments.

Paying claims regardless of merit is not the solution. In the end, prompt, courteous and accurate communications with the insured are paramount. It may not be possible to always avoid a bad faith claim, but remembering a few of these pointers could go a long way in that direction.

 

Authored by A. David Fawal

David Fawal