As a part of its effort to insure enactment of uniform insurance laws, the National Association of Insurance Commissioners (NAIC) drafted the Unfair Claims Settlement Practices Act which required specific insurance adjuster conduct and claims handling. The Model Act, which has been adopted in most states authorizes a state’s insurance commissioner to enforce its provisions through investigation and sanctions if warranted. The Act also outlines the activities which constitute unfair claims practices. These practices can be broken down into four basic categories: (1) misrepresentation of insurance policy provisions, (2) failing to adopt and implement reasonable standards for the prompt investigation of claims, (3) failing to acknowledge or to act reasonably promptly when claims are presented, and (4) refusing to pay claims without an investigation.
There is a split among the state legislatures and courts as to whether a particular state’s unfair claims settlement practices act gives rise to a private cause of action as opposed to simply an administrative penalty.
The Model Act, which has been adopted in most states, identifies 14 prohibited “unfair” claims practices. The Act delineated five prohibited practices involving communications with insureds and claimants:
- knowingly misrepresenting to claimants and insureds relevant facts or policy provisions relating to coverages at issue;
- failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies;
- failing to affirm or deny coverage of claims within a reasonable time after having completed its investigation relating to such claim or claims;
- failing in the case of claims denials or offers of compromise settlement to promptly provide a reasonable and accurate explanation of the basis for such action;
- failing to provide forms necessary to present claims within 15 calendar days of a request with reasonable explanations regarding their use.
The Model Act delineates seven specific claim activities/practices which are prohibited:
- not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear;
- compelling insureds or beneficiaries to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them;
- refusing to pay claims without conducting a reasonable investigation;
- attempting to settle or settling claims for less than the amount that a reasonable person would believe the insured or beneficiary was entitled by reference to written or printed advertising material accompanying or made part of an application;
- attempting to settle or settling claims on the basis of an application that was materially altered without notice to, or knowledge or consent of, the insured;
- making claims payments to an insured or beneficiary without indicating the coverage under which each payment is being made;
- unreasonably delaying the investigation or payment of claims by requiring both a formal proof of loss form and subsequent verification that would result in duplication of information and verification appearing in the formal proof of loss form.
A majority of states have also enacted two additions to the Model Act’s prohibited conduct. Thirty-two states prohibit insurance companies from “making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration.” Thirty states prohibit insurance companies from delaying claims settlement “where liability has become reasonably clear under one portion of the insurance policy coverage in order to influence settlement under other portions of the insurance policy coverage.”
Administrative penalties can be imposed if the state insurance commissioner finds that there has been an unfair claims practice. A two-tier penalty structure was adopted by the NAIC. The first tier is applicable to those situations where the Act has been violated without aggravating circumstances. First tier monetary penalties under the Model Act have a per-violation cap of $1,000 and an aggregate cap for all violations of $100,000. Second tier penalties are applicable where the violation was committed “flagrantly and in conscious disregard of [the] Act.” Only a few states have adopted the “flagrantly and in conscious disregard” standard. Many jurisdictions trigger second tier penalties when the insurance company knows or should have known that its conduct violated the Act. Second tier penalties are capped at $25,000 for each violation with an aggregate cap of $250,000. Most states have adopted the two-tier penalty structure of the Model Act but have provided lower penalty amounts.
EXCEPTIONAL CLAIMS HANDLING
A standard business day for claims professionals is populated by interruptions, time crunches, large case loads, inundation of correspondence and an incessantly ringing telephone. The effective claims professional must be a professional juggler in this circus who performs in the arena with many eyes watching. It is impossible to guarantee that every communication from an attorney or insured is going to be timely and appropriately responded to. Nevertheless, the diligent claims adjuster diaries his claim log and manages the onslaught of daily activities which represent the claim environment. It has been this author’s experience that most claims professionals manage to accurately represent relevant facts and policy provisions, timely affirm or deny coverage of claims once the claim investigation has been completed, and provide necessary forms in first party cases to present claims. The problematic areas remain timely acknowledgement of pertinent communications with insureds and attorneys and the providing of inadequate explanations for claim denials and offers of compromised settlements.
With respect to acknowledgment of communications, there is no substitute for the maintenance of a complete claim diary. The claim diary should take into consideration the possibility that in any given day responsive communications which have come up on diary may go unanswered. Therefore, the adjuster should set up a follow up folder to capture those missed diary communications so that they can be appropriately responded to the following day. This can be as simple as a notepad with the title heading of Missed Diaries which are then annotated and crossed off by date when completed.
An effective way to make sure that the adjuster has appropriately communicated the reasons for a compromise settlement offer is to have a direct verbal communication with claimant’s attorneys which is then memorialized in the claim notes. Typically, the compromise offer is memorialized in correspondence which does not include a delineation of the discussion with claimant’s attorney where, as an example, gaps in treatment, preexisting conditions, and liability questions are discussed as reasons for the settlement offer. Best practice would be to include those delineations within the correspondence sent to claimant’s counsel. However, the unfair claims acts typically do not require those explanations to be made in writing provided that the substance of the explanations have been communicated either verbally, in writing, or both.