Claims Commandment II

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This is the second in a series of fifteen claims commandments that I believe must be followed by every insurance claims professional.
INVESTIGATION

Investigation is a search for truth. It is an art form where facts are established. It has been defined by the state of California, for example, as follows:

    “Investigation” means all activities of an insurer, or its claims agent related to the determination of coverage, liabilities, or nature and extent of loss or damage for which benefits are afforded by an insurance policy, obligations or duties under a bond, and other obligations or duties arising from an insurance policy or bond. [California Code of Regulations, 10CFR2695.2(k)]

Courts will not subject an insurance company to a choice between liability under a bad-faith-failure-to-investigate theory for publication of a denial of coverage without an adequate investigation. Liability can be imposed for a constructive denial imposed after the insurer has conducted a more thorough investigation that confirms an earlier determination of no coverage, on the theory of delay coupled with a wrongful intent.

Courts, state statutes and regulations require that an insurer complete a thorough investigation before it decides the resolution of a claim for property damage, bodily injury, personal injury, or for defense and/or indemnity under a liability insurance policy. Initial conclusions based on a bare reading of a lawsuit or initial investigative interview are not enough. Rather, the insurer is required to perform a thorough investigation before deciding on a claim.

Even though an insurance company is entitled to make a thorough investigation to determine whether there is coverage under its policy of insurance, the company acts at its peril in refusing to defend its insured. If it is subsequently determined that the company erroneously denied coverage, the company will be liable for damages for breach of its agreement under the policy, but if done in good faith it will not be required to pay exemplary damages.

Insurers should conduct their thorough investigation as soon as possible. If a defense is required before the investigation can be completed, the prudent insurer will provide a defense to the insured under a reservation of rights, including a reservation to withdraw the defense and seek reimbursement for moneys expended in providing the defense under reservation.

When an insurer denies or delays payment of policy benefits due to the existence of a genuine dispute with its insured or where coverage is fairly debatable, as to the existence of coverage, the insurance company will usually find to not be liable in bad faith although it may be liable for breach of contract. One court gave the following instruction to a jury:

    In determining whether or not an insurance company had a genuine dispute as to whether or not a loss was covered, you may consider among the following: (1) Whether the insurance company was guilty of misrepresenting the nature of the investigation; (2) Whether the insurance company adjusters and investigators lied during their depositions or to the insured; (3) Whether the insurance company dishonestly selected its experts; (4) Whether the insurance company experts were unreasonable; and, (5) Whether the insurance company failed to conduct a thorough investigation.” [McCoy v. Progressive West Insurance, Co., 90 Cal.Rptr.3d 74, 171 Cal.App.4th 785 (Cal.App. Dist.2 02/04/2009)]

An insurer has a duty to conduct an appropriate and careful investigation prior to making a decision on a claim. However, if after conducting a thorough investigation of the facts and circumstances giving rise to a claim, the insurer can reasonably conclude that the claim is fairly debatable or questionable, there can be no bad faith even if it incorrectly, but in good faith, refused to pay the claim.

The same requirement of a thorough investigation applies to first party property claims like fire, lightning, windstorm and hail damage to property that is the subject of the insurance.
How to Conduct a Thorough Investigation

The investigative interview is a structured conversation between a trained and experienced interviewer and a person who has no training in the interview. It is not an interrogation. It is not the stuff of spy films, police investigations, or prisoner of war camps. Interviews happen everywhere. Interviewing is performed by almost everyone. Since interviewing is an art as well as a science, the most effective interview is one performed by someone with knowledge of the art and science of interviewing.

Investigation to gather information is partially an artistic endeavor. The art is supplemented with scientific technique obtained from criminal investigators and professional psychologists but is performed by individuals without thinking about what it is they are doing. The art of the investigation must be honed until it becomes second nature much as a skilled typist does not think where to put his or her fingers while typing.

The police science of interrogation draws heavily upon human nature and the skills of the conversationalist. The art of uncovering the truth by a claims person draws heavily from the police sciences. Because the interrogation is formal, in a confined space and conducted by a person in authority like a police officer or a lawyer examining a witness under oath in court, the techniques used are more formal and controlled than an interview as part of an insurance investigation.

Insurance investigators do not have the power of state investigators. They are compelled to get the information they need by intelligence, wit, skill and experience. They listen carefully. They put people at ease. The skill of the professional causes the person being investigated to want to give information to the investigator. The most important skill of the claims professional is to cause the person being investigated to want to give information to the claims professional that the claims professional needs. The insured who believes honest and thorough responses to the claims professional will then receive the benefits the insurance policy promised.

To conduct a thorough investigation the claims investigator should, at a minimum, the following:

    Read the loss notice and policy of insurance.
    If a lawsuit has been filed read the lawsuit in conjunction with the policy wording.
    Interview the person insured — preferably in person.
    Obtain a recorded statement from the person insured concerning the facts of the loss.
    Interview and obtain a recorded statement from every independent witness.
    Interview and obtain a recorded statement from the claimant if suit has not been filed.
    If suit has been filed interview the attorney for the claimant about the factual basis for the suit.
    View the scene of the incident.
    Obtain all documents that have relevance to the claim, like:
        The insured’s copy of the policy
        The police or fire report, if any.
        Medical records.
        Financial records.
        The application for insurance.
        Contract(s), if any, between the insured and the claimant.
        All other records that might be relevant to the claim and policy.
        Consult with necessary experts like:
            Investigative engineers.
            Coverage counsel.
            Defense counsel.
            Medical professionals.
            Forensic accountants.
            All other experts that might be relevant to the claim and policy.

If it appears that there is coverage for the claimed loss the claims person must advise the insured of the insurer’s decision immediately. If it appears that there is no coverage the claims professional must consult with management to review the facts gathered by the thorough investigation before a decision is made.
Conclusion

Failure to conduct a thorough investigation is a breach of the promises made by the policy of insurance to provide defense and/or indemnity to the person insured. Failure can also result in the insurer being sued for breach of contract and the tort of bad faith.

Insurers must, to comply with current law conduct:

    A detailed investigation of the facts of the loss and policy acquisition.
    A determination of the expectations of the insured and the insurer at the time the policy was acquired.
    A determination of the purposes for which the policy was acquired.
    An examination of all communications between the insurer and the insured or their representatives.
    If the investigation is not conducted, the insurer will invariably face suit for the tort of bad faith.

The thorough investigation requirement first enunciated by the California Supreme Court in Egan v. Mutual of Omaha Insurance Co., 24 Cal. 3d 809, 620 P.2d 141, 169 Cal. Rptr. 691 (Cal. 08/14/1979) is essential when attempting to interpret a disputed policy of insurance or a disputed factual situation.

In Egan, the Supreme Court concluded that “an insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.”

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected] and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.
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