Specific Expertise as to Bad Faith and Unfair Claims Practices.
Bad Faith Generally. It should be recognized that bad faith in law arises in a number of areas of commerce, not just insurance. For example, bad faith is a term commonly used in the law of contracts and other commercial dealings, such as commercial paper and secured transactions.
Insurance Bad Faith. When I use the term “bad faith” here, I mean bad faith in connection with insurance transactions. Insurance bad faith is a term that describes a claim that an insured person may allege against an insurance company for its bad acts. Bad faith is generally defined in statute or in case law, depending on the state.
Bill Hager Speaks about Bad Faith
In carrying out its claims settlement actions, an insurer in most states must comply with, among other things, that state’s Unfair Claims Practices Act (by whatever name). The Act deals with timeliness of claim actions, investigative obligations and the like. Failure to comply can attract allegations of breach of these obligations. Separate and apart from these obligations, an insurer’s actions may be so egregious toward its insured, that allegations of bad faith arise.
Elements of Bad Faith. Given the controversy surrounding this area of law and the fact that it continues to develop, it is often a difficult task to pinpoint with certainty the elements of bad faith in a particular jurisdiction. This is especially true when courts within a jurisdiction disagree as to the conduct required to show bad faith and its related burden of proof.
And importantly, jurisdictions vary as to the elements required to prove a bad faith. Analysis of bad faith is further complicated by the fact that jurisdictions may differ as to the tort, contract, or statutory relief available to a claimant.
Examples of the Elements of Bad Faith by Jurisdiction. Set out below are two of 50 examples of state provisions relating to bad faith. I set them out here simply as information to illustrate the state by state nature of bad faith and to underscore that fact that to determine the applicable law of bad faith, one must analyze that state’s law. There is no attempt to do so here.
Texas is a jurisdiction that recognizes bad faith. In order to establish bad faith in Texas, it is said that the following elements must be shown: (1) the absence of a reasonable basis for denying payment of the claim and (2) that the insurer knew or should have known that there was no reasonable basis for denying the claim the claim. Having said so, as long as the insurer has a reasonable basis to deny payment of the claim, even if that basis is eventually determined by the fact-finder to be erroneous, the insurer is not liable for the tort of bad faith.
Alabama. As another example, I review here Alabama. It is said that the following are the elements of a bad faith claim: (1) an insurance contract between the parties and a breach by the insurer; (2) an intentional refusal to pay the insured’s claim; (3) the absence of any reasonable or arguably legitimate reason for that refusal; (4) the insurer’s actual knowledge of the absence of any legitimate or arguable reason; and (5) if the intentional failure to determine the existence of a lawful basis is relied upon, the plaintiff must prove the insurer’s intentional failure to determine whether there is a legitimate or arguable reason to refuse to pay the claim.
Some states do not recognize the existence of a separate tort cause of action for bad faith. For example, in Illinois there is no common law bad faith tort.
Expertise as to Bad Faith. In any event, my background provides the basis for my expertise as to both matters of unfair claims practices and bad faith. That expertise is grounded in the following: knowledge of (i) insurance policy forms and (ii) the claim settlement obligations of insurers. Knowledge as to bad faith begins with knowledge of an insurer’s claim settlement obligations in the first place as there can be no bad faith if an insurer has met its related obligations.
1. Bad Faith: Expertise as to Insurance Policies.
A. Insurance Policy Expertise as an Insurance Regulator. An understanding of insurer claim settlement obligations and bad faith begins with an understanding of related policies, which set forth contractual obligations of the insurer (and the insured for that matter). I have had extensive and substantive experience relating directly to most all insurance policies including interpreting policy language and determining the insurer’s obligations under such policies. As a regulator for eight years in three positions ((i) Assistant Attorney General assigned to the Department of Insurance (Iowa); (ii) First Deputy Commissioner of Insurance; and (iii) Commissioner of Insurance), along with my staff, I approved (or disapproved) of the language of most all insurance policies used by each of the 1,500 insurance companies doing business in the state. This regulatory action also included the approval of policy application forms. In addition, I regularly served as an Administrative Law Judge (then known as a “Hearing Officer”) in matters relating directly to insurance policies.
B. Insurance Policy Expertise: NAIC. While Commissioner, I also served as a member of the National Association of Insurance Commissioners (“NAIC”), (including membership on its Executive Committee), the nationwide organization of all state insurance commissioners. That organization has responsibilities for establishing model insurance administrative regulations and model statutes for consideration by all of the states. While with the NAIC, I served as, among other things, a:
- Commercial Lines. Member of the Commercial Lines Committee (all commercial lines policy forms and issues);
- Personal Lines: Executive Committee Member overseeing the so-called “D” or Property Committee, including all property lines including policy forms and issues;
- Life Insurance: Chair of the Life Insurance Committee. The charge of this Committee was oversight over all issues relating to life insurance products as well as life insurers, including practices such as applications and policy issuance;
- Chair of the Universal Life Insurance Task Force. The charge of this Committee was oversight of universal life and similar products; and
- Chair of the Life Insurance Product Development Task Force. While Chairman of this Task Force, I led the development of model disclosure statements for universal and indeterminate premium life products designed to assist consumers in their comparison of different types of life insurance products.
C. Insurance Policy Expertise: American Academy of Actuaries. Along these same lines, I served as general counsel and chief lobbyist to the American Academy of Actuaries, Washington D.C. The Academy is the national professional association for actuaries. These professionals establish premium levels for most all insurance policies. In addition, because policy language dictates premium levels, actuaries are also active in determining policy language.
D. Insurance Policy Expertise: CEO of A Major US Property Casualty Insurance Entity. After serving as a regulator, I served as President and Chief Executive Officer for the National Council on Compensation Insurance (“NCCI”), New York City, a nationwide industry owned organization with about 1,500 employees with annual revenues of about $150 million that did (and does) business in about 40 states. NCCI was domiciled in Florida and did business throughout most of the United States.
This means that while I was CEO, NCCI was subject to the full authority of each of the State Departments of Insurance (“DOIs”) and subject as well to the various State Insurance Code as well as the jurisdiction of all state and federal courts.
Among my responsibilities at NCCI was (together with my staff) to formulate all workers compensation insurance policy forms as used in our 40 states of operation. This work included drafting all policy language (tailored to the specific state’s insurance code) as well as drafting all endorsements and all other policy forms. In addition, my responsibilities included gaining state insurance department approval of all such policy forms as a condition precedent to their use as submitted by some 600 insurance companies. Finally, I note that among others, the life insurance benefit under workers compensation is an important coverage. I am very familiar with the meaning and relevance of specific state approval of policy forms, endorsements and applications and related documents and matters.
E. Insurance Policy Expertise: Reinsurance Arbitrator. I am also one of about 400+ certified reinsurance arbitrators (by ARIAS-US) and have sat as an arbitrator on insurance issues in disputes about policy language between reinsurers and their insurers.
2. Expertise as to Claim Settlement Obligations of Insurance Companies.
A. Expertise as to Claim Settlement Obligations of Insurance Companies As Commissioner of Insurance. I have also had significant experience and responsibility in connection with determining and passing judgment on insurers’ claim settlement responsibilities. In particular, in my three regulatory positions previously described, I had daily responsibility to assure and to hold accountable all of the state’s 1,500 insurers for their related obligations. I did so through a series of action steps and tools. The action steps and tools included the following:
1. Insurer Claim Settlement Obligations: NAIC Market Regulation Handbook. As Commissioner, I had as an available tool, the NAIC Market Regulation Handbook (“Examiners Handbook” or “Handbook”). Among other things, this Handbook sets forth standards to assess insurer behavior relating to (i) policy application, (ii) policy issuance and (iii) claim settlement obligations. The Handbook also sets forth insurer underwriting obligations and pricing obligations, which on some occasions, can attract allegations of bad faith. The Handbook is used by every department of insurance in the United States. The standards have been universally promulgated by all of the nation’s Commissioners of Insurance and adopted formally by them through the NAIC. The standards of the Handbook are universally recognized as appropriate standards against which to judge life insurer behavior.
2. Insurer Claim Settlement Obligations: Market Conduct Examinations. On a regular basis, my regulatory agency conducted Market Conduct Examinations of insurers utilizing the Examiners Handbook to determine whether in fact the target insurer was meeting all of their obligations to their insureds and others in connection with claim settlement actions. This action entailed physically going into the insurers’ application and policy issuance files and claim files to determine any errant action or inappropriate policy behavior. As further discussed below, errant insurers were warned, disciplined and prosecuted as required.
3. Insurer Claim Settlement Obligations: NAIC Financial Examiners Handbook. As Commissioner, I had available another tool, namely the NAIC Financial Examiners Handbook (“Financial Examiners Handbook”). Among other things, the Financial Examiners Handbook sets forth standards to assess life insurer solvency on a triennial basis. Among other documents reviewed by examiners in reaching financial conclusions are policyholder claim matters. As with the Market Conduct Examiners Handbook, the Financial Examiners Handbook is used by every department of insurance in the United States. Similarly, these standards have been universally agreed to by all of the nation’s Commissioners of Insurance as adopted formally by them through the NAIC. The standards of the Financial Examiners Handbook are universally recognized as appropriate standards against which to judge insurer behavior.
4. Insurer Claim Settlement Obligations: Financial Examinations. On a regular basis, my Department conducted financial examinations of insurers utilizing the Financial Examiners Handbook to determine whether in fact the insurer was, and would likely remain, solvent; included in this analysis was whether the insurer was meeting its ongoing claim settlement obligations. As with market conduct exams, financial examinations entailed physically going into the insurers’ operations and studying files and other items to assure compliance with policyholder claim settlement obligations. As further discussed below, errant insurers were warned, disciplined and prosecuted as required.
5. Insurer Claim Settlement Obligations: Complaints From the Public. On a daily basis, my Department received incoming consumer complaints as to insurance company practices relating to claim settlements. This Consumer Protection Division was staffed by Department lawyers who resolved the individual complaint and also, equally importantly, those lawyers also determined whether an insurer evidenced unacceptable practices — that is to say, whether the incoming consumer complaints in fact constituted a red flag as to the insurance company’s potential behavior across the board as to claim matters.
6. Unfair Claims Settlement Practices Act. As discussed above, as Commissioner of Insurance, on a daily basis I enforced this Act which sets forth required and prohibited claims practices of insurers. As stated, this law has been enacted in most every state in a substantially similar form and is recognized throughout the U.S. by regulators as criteria against which to assess insurer claim practices.
7. Insurer Claim Settlement Obligations: Prosecution. To the extent insurer behavior required formal action (whether as a result of complaints from the public or as a result of Department investigation through a Market Conduct Examination or the Financial Examination), my Department prosecuted such insurers under the state’s civil Administrative Procedures Act.
In connection with such prosecutions, I served in various capacities during my eight years as a regulator, including serving as: (i) prosecutor (as Assistant Attorney General); (ii) as the decision maker as to whether to initiate prosecution in the first instance (while First Deputy and Commissioner of Insurance); and (iii) as the Administrative Law Judge (“ALJ”) who presided over the prosecution and entered findings of fact and conclusions of law as to insurer coverage determinations and claim settlement practices. I have served as an ALJ in scores of such cases where the insurer’s overall claim settlement conduct was the primary issue and I entered final decisions and orders in such matters.
B. Insurer Claim Settlement Obligations: Expertise As to Duties of Insurance Companies as an Insurance Industry Executive: CEO of a Major US Insurance Organization. I discuss my executive experience at NCCI under this section because in addition to expertise as to policy and claim matters (discussed above), my experience at NCCI also resulted in expertise as to insurer responsibilities as to these very issues.
While I was President and CEO, NCCI was subject to the full range of authority of the State DOIs as discussed above. I am very familiar with the obligations of insurers admitted to do business in the various states and to their obligations and responsibilities and the regulatory scheme in place in the states as to claim matters.
While President and CEO of NCCI, I visited and physically toured and reviewed in excess of 400 insurance companies and gained direct exposure to the procedures and processes and standard industry claim settlement practices of the U.S. insurance community in that any number of those insurers had multi-line insurance operations.
C. Insurer Claim Settlement Obligations: Expertise as to Duties of Insurance Companies: General Counsel to the American Academy of Actuaries. As stated above, I served as General Counsel and Director of Government Relations for the American Academy of Actuaries. I mention it again here in connection with claim settlement obligations because Academy members included affiliation with virtually every insurance company in America. Among other things, such actuaries had duties relating to policy language and policy pricing. The Academy’s Board of Directors was likewise made up of leading insurance company executives from throughout the U.S.
D. Insurer Claim Settlement Obligations: Expertise as to Duties of Insurance Companies: Attorney in Private Practice Iowa. As an attorney in private practice, I represented a number of insurer interests and became familiar with applicable industry standards of practice, including insurer responsibilities toward their insureds. Those interests also included intimate involvement with insurance forms such as those at issue here, as counsel to the (i) Professional Insurance Agents of Iowa (property casualty products), (ii) the Iowa Association of Life Underwriters (life, health and annuity products) and (iii) the Property Casualty Insurers Association of America (stock property casualty insurers).
E. Insurer Claim Settlement Obligations: Expertise as to Duties of Insurance Companies: Elected Member of the Florida House of Representatives: Member of the Insurance Committee. I am also an elected Member of the Florida House and serve on the Insurance Committee, which has jurisdiction over insurer claim settlement actions inclusive of bad faith.
3. Conclusion: Bad Faith Expertise
In all of this, I believe my background and experiences show expertise as to insurer claim settlement obligations and responsibilities and matters of bad faith as well.