12/19/2014

Trust But Verify

Lessons in Handling Bad Faith Litigation

By Dennis J. Wall

The following lessons in bad faith have been learned over the course of 36 years of opinions and advice on bad faith issues, while also taking bad faith lawsuits to trial and settlement. While I have not handled bad faith claims as an adjuster, I have worked with enough claims representative, supervisors, and managers to understand best practices.

First things first for adjusters: defer to outside counsel if you must, but never abdicate. A bad faith claim is made against your company, not against the attorney’s law firm. Many adjusters defer to attorneys in handling bad faith claims, which, in my judgment, is the leading mistake for them to make. More is required of an adjuster than paying an attorney bill, particularly in a bad faith case.

When lawyers are involved in presuit bad faith claims, they can provide potentially invaluable legal insights. These insights include the likelihood of success if the bad faith claim were to go to verdict; the size of damage awards in jury verdicts for similar bad faith cases; and the likely treatment by judges and juries of bad faith litigation in a particular locale. As the claim proceeds, attorneys can provide comments on the likely demeanor and appearance of key witnesses in the case.

The key to evaluating lawyer insights into these and similar issues is deference, not abdication. The ultimate choice of evaluation remains with the adjuster and the insurance company.

A key lesson for adjusters handling bad faith claims, whether the claims are presuit or in litigation, is to test the lawyer’s assertions and to check out the lawyer’s evaluations. This does not involve disagreeing with the lawyer for the sake of showing independence. Instead, it involves bringing the insurance company’s own experience to bear on the same issues after the adjuster has received the attorney’s input.

For example, most lawyers have no more experience in reading an accident report than many seasoned adjusters. Good faith does not require a perfect investigation in the abstract. Good faith requires a reasonable investigation in reality, more often than not.

When a bad faith claim passes from the presuit stage into litigation, there is a tendency for some adjusters to defer to their companies’ defense lawyers in just about everything involved in the case. The single memorable exception may involve costly discovery, in which case adjusters often decline to pay for it regardless of the significance of it to a defense lawyer.

As the bad faith litigation proceeds, it will become obvious even to adjusters handling their first bad faith case defense that these cases are costly, and the stakes are high. The money involved is, as they say, “the company’s money.”  (They say this even though there may be reinsurance for all or some of any indemnity paid in the case.)

It bears repeating that when bad faith cases are litigated, they cost a lot of money. This is equally true for the plaintiff as it is for the defense. That fact alone is important for an adjuster handling a bad faith case to keep in mind.

Bad faith claims are best defended by people who have some experience in defending them. This need not be a catch-22; namely, that you need experience in defending a bad faith claim to defend your first bad faith claim. To the contrary, defense lawyers have connections with other lawyers. They have ways to associate lawyers who know what they are doing in defending bad faith cases if only because those other lawyers have done so before.

Likewise, adjusters have connections with other lawyers in addition to the defense lawyers chosen to defend a particular bad faith case. Adjusters, too, have ways to consult lawyers who know their way around best practices in the defense of bad faith cases.

Still another way is for an adjuster to retain experienced counsel for the single purpose of advising the insurance company on how the bad faith case is best defended, in their opinion, based on their review of the claims file and even of the defense lawyer’s file if the case has progressed to the point where it is useful to review the defense lawyer’s file. (In order to decide if the bad faith case has progressed to this point, the adjuster should ask the special counsel whether he wants or needs to review it, in order to properly advise the adjuster on the issues for which the adjuster is retaining the special counsel: the defense of the bad faith case.) In an appropriate case, but not necessarily in all cases, the special counsel retained to review the files could end up being listed as a consulting or testifying expert witness in the bad faith case. I have not found a bad faith case in which a judge or jury ruled against an insurance company where the insurance company’s good faith handling of a claim was supported by the testimony of a lawyer specially retained to counsel the company on how the claim was handled. If the special reviewing counsel is not listed as an expert in the case, then at most he will be a consulting expert in the eyes of the law in the local jurisdiction. In that event, his opinions will be immunized from discovery accordingly.

Another way for the adjuster to determine a defense lawyer’s capacity for defending bad faith cases is to ask him who will be involved in defending the case.

As the defense progresses, in particular, the expenses may not resemble the defense of other kinds of claims. The defense of a bad faith case almost always involves a defense of the insurance company and its business practices. Many more types of documentary and witness information may be necessary to defend bad faith cases than many lawyers and adjusters may be used to.

For example, discovery from insurance companies in one bad faith case often will be shared with lawyers and their clients who are not directly involved in the bad faith case at hand. These are not considerations that ordinarily are associated with discovery in many other kinds of cases.

One constant in all kinds of large litigation, including bad faith cases, is that the handling adjuster should expect to spend a lot of time on the case. Besides the importance of paying hands-on attention to a bad faith case, a particular example concerns defense counsel’s reports that summarize deposition testimony.

The proper way to handle the defense of bad faith cases is for the handling adjuster to arrange to receive the transcripts of all significant witnesses in the case. (As a rule of thumb, if the transcript is 100 pages or longer, have the defense lawyer send a copy for review.) Whatever prearranged protocol there is for sending transcripts along with counsel’s summaries of depositions, adjusters should remember what most already know: Defense counsel will not necessarily know which of the transcripts that adjusters, supervisors, or managers are reading along with counsel’s deposition summaries. It tends to keep them honest, even if it is not absolutely necessary because, of course, most people are honest anyway. The same considerations motivate obtaining hearing transcripts at least one in a while and at least obtaining transcripts of the more important hearings in the bad faith case.

Deposition transcripts are useful for their substance. From time to time, the substance of particular witness testimony may not make it into the lawyer’s deposition summary, but the substance of the testimony is always in the transcript. Transcripts in important cases—and as we know most bad faith cases against insurance companies are treated as important cases—can be very revealing. Further, in addition to substantive testimony, deposition transcripts give the flavor of how the attorneys interact, who usually prevails in exchanges between them, and how a given attorney asks questions. These facts are important because they can change the outcome. They often are indicators of who among the attorneys makes a good impression on the judge, who will make a good impression on the jury, and how best to prepare persons employed by the insurance company who are likely to be deposed in the case.

The claims file should be the defendant’s number one exhibit. An important bad faith lesson is that it is not a good sign to anyone—certainly not to the judge or opposing counsel—when the insurance company pays the defense attorney lots of money to contest production of a claims file.

The realities of defending a bad faith case mean that the adjuster handling the bad faith case really has only two decisions to make concerning discovery: settle now before making the discovery or settle after contesting discovery. If the discovery request is contested, the bad faith case is likely to be settled whether or not the information is disclosed.

If the adjuster decides that it is worthwhile for the insurance company to expend the fees and costs necessary to contest the discovery, then the same adjuster also should keep in mind that the insurance company’s adversary is incurring fees and costs as a result. That cuts several ways. One thing that always should be taken into account is to what degree the adverse party will want to settle after the discovery contest ends, whether the court directs the discovery to be made available or whether the court immunizes the discovery.

In theory, there is a third choice, which is to litigate the bad faith case to a verdict. In truth, that does not happen often. It is no secret that the vast majority of bad faith cases are settled rather than tried to verdict.

In conclusion, the key lessons in bad faith cases for adjusters, counsel on both sides, and expert witnesses can be summarized as such:

  • Adjusters: Defer to attorneys if you must, but never abdicate.
  • The effect of an adjuster’s decision on settlement is the most important result of each such decision in handling a bad faith claim.
  • When you rely on summaries, you are relying on what you are fed. Get the deposition transcripts and sometimes get the hearing transcripts. That is where you, the judge, and the jury will learn about your case—not in someone’s summaries.


Dennis J. Wall is an expert witness, attorney, author, and consultant on the subjects of insurance coverage and insurer bad faith. He has been a CLM Member since 2009 and can be reached at (407) 699-1060 or DJW@dennisjwall.com.

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