Failure to Have Specific Written Claims Standards is Bad Faith

An insurance claims blog, The Claims Spot, sponsored by an insurer claims consulting firm, Lanzko Consulting, made a point that the failure to have specific written claims standards could lead to a claim of bad faith. This is the same finding I suggested in Should Insurance Companies Have Claims Manuals Explaining Procedures and Standards for Adjustment?:

From a policyholder’s advocate viewpoint, I think an insurer would be crazy not to have a claims manual or claims procedure guidelines. Most state unfair claims trade practice laws generally require insurers to adopt and implement those standards and procedures.

Lanzko, who is an insurer’s advocate, comes to a similar conclusion, regardless of whether the lack of standards apply to reinsurance claims or other claims in Absence of procedures to notify reinsurance is a basis for bad faith:

There is an ongoing debate in the insurance industry about maintaining claim policy manuals as a potential risk in a bad faith action. The view is that if you have specific written procedures, and your claims staff does not follow them, then that could be used against them in a bad faith action. Here a court specifically states that failing to have procedures could be considered bad faith in the reinsurance notice situation….

…failing to have procedures or follow them can have a costly outcome. Claim handlers need some kind of guidelines to understand expectations, and to establish a baseline to measure performance. When handlers are trained on good practices, and are measured on those practices for compliance through and internal review or audit program, risks are diminished.

Since insurers have the obligation to have written claims standards and procedures when reporting to their reinsurers, why shouldn’t they have the same obligations to their customers?

Citing the following language from Unigard Sec. Ins. Co., Inc v. North River Ins. Co., 4 F3d 1049 (2d Cir. 1993), Lanzko suggests that by not having controls and standards, an insurer will be hard pressed to argue that a failure to act was a mere mistake:

However, if a ceding insurer has implemented routine practices and controls to ensure notification to reinsurers but inadvertence causes a lapse, the insurer has not acted in bad faith. But if a ceding insurer does not implement such practices and controls, then it has willfully disregarded the risk to reinsurers and is guilty of gross negligence. A reinsurer, dependent on its ceding insurer for information, should be able to expect at least this level of protection, and, if a ceding insurer fails to provide it, the reinsurer’s late loss notice defense should succeed.

The Claims Spot provides some very interesting articles and references to other insurance management concerns and issues. I will follow up with how policyholder counsel can use insurance industry information to better understand and win cases for their clients in Monday morning’s post.