By Lon A. Berk and Michael S. Levine
Chapter 48 provides a discussion of dispute resolution principles under first-party insurance contracts with a particular emphasis on the appraisal valuation process.
Section 48.01 discusses generally the first-party recovery process and provides an overview of the initial steps of claim handling and investigation, or adjustment, following notice of loss. The Section then illustrates how the adjustment process might proceed, and how it might break down, leading to a need for dispute resolution, the type of which will vary depending on when in the claim process the breakdown occurs. Only where the breakdown involves a dispute over the valuation of an agreed covered loss does appraisal provide a viable means of resolution. Other breakdowns will require judicial intervention.
Section 48.02 discusses the role of public adjusters in the claim adjustment process. The section notes the critical dichotomy in the interests of adjusters employed by insurers and those retained to assist policyholders, and illustrates why it behooves the prudent policyholder to use the services of a qualified, licensed public adjuster. The section also discusses the rationale behind licensure of public adjusters and the recourse policyholders should seek if subjected to bias from an insurer-retained adjuster.
Section 48.03 discusses the appraisal process as a means of resolving valuation disputes as an alternative or precursor to litigation. Property policies typically include appraisal provisions that outline the appraisal process. The provisions are not all-inclusive, leaving open the nature of the appraisal process, requiring only that the parties select their own appraiser, that the appraisers state the amount of the loss that they determine and that, if the party appraisers cannot agree on a value, then their differences are submitted to a neutral umpire.
Timing of the appraisal process is addressed in Section 48.03[b]. There is debate among the courts as to when a demand for appraisal must be made. This debate remains despite language in the typical appraisal provision calling for appraisal within 60 days (or some other fixed number of days) of the proof of loss. In addition to the language of the appraisal provision, factors such as whether the insurer has denied coverage for the loss will be relevant to determining whether a demand for appraisal is timely. As a general matter, courts will look at all of the circumstances as of the time the demand for appraisal was made.
The distinctions between appraisal and arbitration are discussed in Section 48.03. Most importantly, while arbitration of a dispute often resolves the entirety of the dispute, appraisal in the context of a first-party property claim typically resolves only issues of valuation, although other matters also may be resolved by special agreement among the parties. Appraisal, therefore, has been found by some courts to be exempt from legislation governing arbitrations. Likewise, the distinction between arbitration and appraisal is consistent with the regulation of insurance, where arbitration has not been approved by insurance regulators. Also, appraisals do not share the same judicial economies as arbitration, with the former being viewed narrowly and the latter, broadly, so as to capture as many of the issues in dispute as possible.
The role played by courts, as distinct from the role of the appraiser, is addressed in Section 48.03[a]. Courts have wrestled with whether they, or appraisers, should be the arbiters of policy interpretation, particularly where the provision in question bears on how a loss should be valued. Appellate courts have held that where the policy provision goes to the method of valuation, then it is within the jurisdiction of the loss appraiser, not the court. As illustrated in Section 48.03[b], where the issue goes to causation, on the other hand, the question remains one for the court.
Section 48.03 discusses litigation of claims under first-party property policies. The general principals applicable here are similar if not the same as those that pertain to third-party liability claims. As a general matter, disputes over first-party claims are often resolved by declaratory judgment. Litigation may also include claims for breach of contract and insurer bad faith. Confounding litigation of these claims in the first-party context are additional issues concerning timing of payments, appraisal, and constraints imposed by suit limitations clauses. These issues most frequently come to bear when suit is brought against an insurer before all necessary conditions under the policy have been satisfied. However, some courts have held that actual compliance with all conditions precedent is unnecessary, and that only substantial compliance need occur.
Section 48.05 discusses the doctrines of res judicata and merger of judgments as they pertain to disputes in the context of first-party insurance claims. Where a declaratory judgment is sought before a demand for appraisal is made, a subsequently demanded appraisal may operate to preclude further litigation of the declaratory judgment action. It may be necessary, therefore, that all pertinent coverage issues be resolved before a demand for appraisal is made, as any remaining issues that could have been raised potentially face preclusion or bar. This is particularly so in coverage matters, where relief sought typically includes more than a mere declaration, thus rendering the "declaratory judgment exception" to claim preclusion inapplicable.
Section 48.06 discusses statutory penalties and bad faith claims. In Section 48.06, there is a discussion of the differences between such claims in the context of first-party and third-party claims, setting out the contexts in which courts typically find that insurers have acted inappropriately in their claim handling.
Section 48.06[a] discusses when bad faith law applies. Here, the discussion illustrates the availability of remedies even where a claim under the express language of the insurance contract may not be available. Such claims are grounded in the premise that insurance companies promise more than just to pay claims under their policies. Rather insurance companies also promise to deal fairly with their policyholders. This promise transcends the scope of the insurance contract and pertains to all aspects of dealing before the insurer and its policyholder.
Section 48.06[b] discusses bad faith in the particular context of property insurance. In this context, bad faith law serves to ensure fair and consistent treatment of policyholders. Where a property insurer takes an arbitrary position or tailors its actions to favor itself, to the detriment of the policyholder, then that insurer may be in violation of its duty of good faith and fair dealing. The typical imbalance of experience between policyholders and insurers creates a special need for extra-contractual remedies. By utilizing its expertise, an insurer might adjust a claim in a manner that emphasizes minimizing coverage rather than fairly compensating the policyholder. By forbidding the insurer's preference of its own interests above those of its policyholders, the bad faith remedy helps ensure that policyholders receive the benefit of their bargain.
Section 48.06[c] discusses examples of specific acts that constitute insurer bad faith in the context of adjusting first-party insurance claims. Bad faith can occur in the manner in which the insurer processes the policyholder's claim; from a failure to thoroughly investigate and document a claimed loss; from a failure to timely pay an otherwise covered claim; from the lack of any reasonable justification for denying a particular claim. However, regardless of the specific acts that give rise to the breach of duty, the consequences remain the same.
For example, where an insurer fails to investigate a reported claim because it believes, based only on its own assumptions, that the claim is not covered, the insurer may be acting in bad faith. Similarly, where an insurer undertakes an overly aggressive investigation aimed at identifying information that would support a denial of the claim, the insurer's conduct may amount to bad faith. Conversely, even where an insurer's conduct and investigation is negligent and deficient, bad faith may not exist unless it can be shown that the insurer's conduct also was outrageous. Whether the insurer's actions are deemed to be in bad faith will often turn on whether the insurer acted reasonably under the circumstances. An insurer acts unreasonably when it refuses to pay a claim or delays payment of a claim without proper cause.
More often than not, an insurer's improper reliance on an unmeritorious defense begins with the insurer's failure to adequately investigate the insured's claim. However, the mere existence of a triable issue will not preclude liability for bad faith refusal to pay an insurance claim if the insurer's actions were vexatious and recalcitrant. And, a refusal to pay, based only on a suspicion without substantial facts to support that suspicion, is typically considered to be vexatious. Therefore, in many jurisdictions, an insurer may be found to have acted unreasonably in refusing to pay an insured's claim if it failed to investigate the claim thoroughly or to subject the results of the investigation to a reasonable evaluation and review.
To guard against bad faith and to ensure that the interests of the policyholder are protected, it is essential that the insurer fully inquire into any possible grounds of support for the claim. A failure to do so is a breach of the insurer's implied-in-law duty of good faith and fair dealing. This is most clearly evident in those jurisdictions where it is possible for an insurer to have acted in bad faith by failing to conduct a thorough claim investigation even though the claim is not covered under the policy. Such a potential for liability arises from the insurer's good faith duty to investigate the claim and make a determination based on that investigation that the claim is, or is not, covered. A failure to do so, which necessarily thrusts the burden of investigation back onto the insured, may constitute bad faith.
Nevertheless, the law does not compel an insurer to comprehensively investigate every claimed loss. Rather, many jurisdictions require that an insurer only investigate what is reasonable under the circumstances. Such an investigation necessarily requires an initial determination of whether the claim at issue is covered. The duty does not, however, continue ad infinitum; it ends if and when it is reasonably determined that the claim is or is not covered.
Furthermore, even where the claim is covered, the insurer is under no duty to investigate the claim for purposes of building a case against the party responsible for the loss. Rather, the duty to investigate a covered claim extends only to determining whether the claim is covered and, if so, determining the quantum of covered loss. Moreover, any alleged breach of the insurer's duties is to be determined based on the circumstances as they existed at the time of the alleged breach.
Finally, Section 48.06[d] discusses the relationship between insurer bad faith and jurisdictional insurance regulations and statutes. Indeed, while it remains the case in some jurisdictions that an insurer's bad faith liability is to be judged and sanctioned entirely in accord with the common law, other jurisdictions have enacted legislative constraints to guide the actions of insurers. Missouri, Virginia and New York are among those that have taken this additional action to ensure that policyholders are treated fairly and with the utmost care.
Lon A. Berk is an attorney with Hunton & Williams LLP, where he is a member of the firm's Insurance Litigation and Counseling practice group. Mr. Berk's practice focuses on commercial, insurance and reinsurance disputes. He has also assisted clients in connection with liabilities arising out of emerging technologies, including issues relating to internet security and electronic discovery. Mr. Berk has particular expertise with claims involving business interruption, construction defects, e-commerce issues, and professional liability issues, and he frequently writes and speaks on mainstream and emerging insurance coverage and general litigation issues. Mr. Berk is based in Virginia and New York but handles cases nationwide. He is admitted to practice in New York, Massachusetts, Virginia and the District of Columbia.
Michael S. Levine is an attorney with Hunton & Williams LLP, where he is a member of the firm's Insurance Litigation and Counseling practice group. Mr. Levine's practice focuses on commercial contract litigation and the litigation and counseling of insurance coverage and recovery disputes. He has particular expertise with claims involving business interruption, construction defects, e-commerce issues, and professional liability issues, and he frequently writes and speaks on mainstream and emerging insurance coverage and general litigation issues. Mr. Levine is based in Virginia and New York but handles cases nationwide. He is admitted to practice in New York, Massachusetts, Virginia and the District of Columbia.
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