The Perfect Payment

Rooted in its history is the insurance industry's search for the unattainable: "the perfect payment." Seemingly intelligent men and women strive to make a payment that represents "neither one penny more nor one penny less," than the amount of the policyholder's loss. This questionable adage sets what the insurance industry perceives to be the gold standard for its claim practices.

As a result, insurance companies once having determined the amount of the loss will not or only with great discomfort entertained a policyholder's legitimate claims for amounts in excess of “the perfect payment.” Insurance companies' rigid focus on "the perfect payment" ends the dialogue between the insurance company and the policyholder. It pits claim representative [hotlink] against the very policyholders they are there to help. Given the ubiquity of "the perfect payment" philosophy, it’s no wonder that policyholders considered themselves bullied by their insurer.

The Supreme Court's Remedy for the Perfect Payment

Insurance companies have always had the resources to impose their determination of the amount of loss over policyholders' objections. And from the policyholders' point of view, it appears the insurance company has infinite resources to make the policyholder accept just what it decides "the perfect payment" to be. What's more, policyholders are particularly disadvantage coming to their insurance companies having suffered a financial loss and in need of help. Before 1973, filing a lawsuit against an insurance company was not a viable option. The policyholder gained very little by litigation because, after the conclusion of the lawsuit, the insurer was only obligated to pay what it should have paid in the first place.

In 1973, the California Supreme Court in Gruenberg v. Aetna [hotlink] issued a decision many hoped would level the playing field and give the insurance industry cause to reconsider the way it investigated and paid policyholders' claims. The Court held that claims made by policyholders are made under a covenant of good faith and fair dealing and allowed the successful policyholder a possibility of recovering from the insurance company the costs of litigation and other losses because of the insurance company's unreasonable conduct. One would have assumed that "the perfect-payment” philosophy would have gone with the wind.

The Perfect Payment Inheres in the Relationship

Remarkably, "the perfect-payment" philosophy still persists more than thirty years after the Gruenberg Court's landmark decision. The "perfect payment" weathered many catastrophic financial disasters when trial courts and juries awarded policyholders damages for emotional distress, punitive damages and attorney fees. Although three decades of enhanced policyholders' rights has produced a somewhat more flexible insurance industry, "the perfect payment" ideal held on and has never lost its prevalence. That myth, so intoxicating to the insurance industry, arises out of its irrational desire for certainty in its relationship with the policyholder. Because certainty does not exist, this "the perfect payment" philosophy undermines the give-and-take needed to resolve most insurance claims. Unfortunately, this myth is not about to disappear so long as the insurance industry holds on to the belief that there is one preordained amount of loss and, once determined, the policyholder is a mere bystander. Despite the myriad of regulations, [hotlink]the insurance industry still disregards its lawful obligations because of this infantile philosophy.

The Corporate Claims Organization

As large as one imagines the corporate organization of giant insurance companies, as few as three individuals make the decisions that affect you. Astonishingly, the process of reviewing a claim is much more one-on-one than the policyholder would imagine. The line of authority is simple. First, the Claims Office reports to the Regional Office. In turn, the Regional Office reports to the Home Office. At each level, a designated individual makes the decision about a claim filed in his territory. If you made a claim in 2009, out of the 70,000 employees, then employed by one large insurance company that we dealt with, just three employees made the claims decisions for a large geographic area.

The simplicity of the claim structure makes the competency of the individuals you deal with enormously important. And because management has failed to actively supervise its claim representatives, a wide range of unlawful conduct has followed.

Although simple, the claims structure benefits the insurance industry by affording its Regional Offices and Home Offices a substantial degree of insulation from the wrongdoing of their claim representatives. Upper management, content to allow its frontline s to deal with the day-to-day claim problems, show their face only when confronted with the policyholder who insists on getting all of his/hers rights under the policy. Therefore, competent Claims Representatives, who are able to keep policyholders' complaints minimal, are moneymakers for the insurance industry. But even these moneymakers are often ignored and disappear to be replaced by cheap help. Most claim representatives are overworked and underpaid for the service they provide for their corporate employer. And as a result of stingy salaries, many senior claim representatives have left the insurance industry and are being replaced by new employees who are simply not capable adjusters.

Disputes About the Amount of Loss

Branch and Regional supervisors have the authority to deny monetary claims within their monetary authority and claims that relate to particular kinds of property that are excluded or for which special limits are in place. They are less likely to deny a claim on the grounds that the loss is caused by an excluded peril without management's approval. Generally, the insurance industry treats a policy limit as "set in stone" rather than considering that it may have resulted from its own failure to provide adequate coverage, an unfair and unreasonable claims practice.

Monetary Claim Authority

The claims organization has clearly defined levels of monetary authority. The claim representative at the Branch Office – the person that you, as the policyholder, will most likely be working with – has the lowest monetary authority. In most cases, the Regional Office only briefly reviews claims that are closed without complaint at the Branch Office. The attention of the Regional Office is limited to larger claims that require more thorough supervision. The Home Office concentrates on the largest losses. As a result, the potential for conflicting and contradictory decisions is ever present and claim decisions vary widely within the same insurance company depending on the training and knowledge of the individuals at the Branch and Regional levels.

Policy Provisions Must be Applied Consistently

The concept of "the perfect payment" also affects the insurance industry's view of coverage because it believes it has a need to make payments that inflexibly reflect policy provisions as it understands them. Insurance companies are obsessively concerned that by giving any latitude to its interpretation of the policy provision they will create an exception that will become the rule. Its obsession arises because of the belief that any good-faith concession to resolve a claim jeopardizes its legal right to apply a different application to the same policy provision in similar circumstances arise in the future. This philosophy creates a stiff and inflexible process that frustrates policyholders' reasonable expectations and deprives them of their policy benefits.

Resolution by Litigation

By virtue of the number of insurance claims made, disputes inevitably arise. Sometimes, insurance companies just don't pay the benefits that the policyholder should recover under the policy, without consequence. However, if an insurer unreasonably denies or delays payment for a covered loss, such conduct, when reflecting corporate policy, is potentially tortious – in other words, unlawful in the eyes of the law. An insurer's unreasonable denial of coverage does not result in garden-variety harm. The consequence to the policyholder is often catastrophic; insufficient coverage after a fire may make it impossible for the policyholder to rebuild his home. The law expects the insurance companies to have policies in place that will provide their claim representatives with the guidance and training they need to prevent the unreasonable denial and delay a policy benefits.

Declaratory Action and Johansen Offer

Sometimes an insurance company, concerned about the potential financial consequences of denying a claim that is likely to cause great harm to the policyholder might file a Declaratory Relief Action, [hotlink]through which its decision is reviewed and approved by the court. In so doing, the insurance Company hopes to protect itself against claims for breach of the Covenant of Good Faith and Fair Dealing. [hotlink]However, filing any lawsuit against its policyholder is a draconian move. After submitting an insurance claim, any policyholder would be stunned to find himself a defendant in a lawsuit brought by his own insurance company. In addition, the policyholder has the right, if not the obligation, to cross-complaint for breach of the covenant of good faith and fair dealing, and may raise as evidence of bad faith the insurance company's audacity to file a lawsuit to escape its liability.

The Johansen Offer is a method an insurance company might use to soften the brutal affect of filing a declaratory relief against its policyholders. Although the Johansen offer is sanctioned by the appellate courts as a safe harbor, it is almost never used. One big reason being that the Johansen Offer requires the insurer to pay all the policy proceeds the policyholder claims due first, and then file an action to recover those same proceeds.

Reformation

Written policies that do not include all promises made by the Insurer or its Agents may be reformed to reflect all of the agreement of the parties, despite plain written language to the contrary. Where an Insurer induced a policyholder to buy insurance, leading the policyholder to believe the coverage was more comprehensive than the coverage that ended up in their written policy, the law will reform the policy to conform to the actual agreements even though they were oral. Similarly, if the Insurer knows the policyholder misconstrued a policy provision believing that he is getting more coverage in the coverage in the policy, the law will reform the policy to conform to the policyholder's mistaken beliefs. Once the court reforms the policy, the law will consider whether the Insurer’s conduct constitutes a breach of the covenant of good faith and fair dealing in light of the reformed contract, not the written policy that your insurance company sent to you.

Arson and Fraud

Creating even more needless and harmful rigidity along with "the perfect payment" and inflexibly applied policy provisions, the insurance industry is in an ongoing battle to prevent fraud. Arson for profit, staged burglaries and injuries, overstatement of the amount of loss, etc. are some of the tactics of deceit used to defraud the insurance industry. Unfortunately, on constant alert for fraud, many claim representatives become suspicious of everyone judging an honest error or simple mistake as evidence of a fraudulent claim. A policyholder's whose credibility is damaged will find the claim process thereafter extremely difficult.

Insurance companies have an arsenal of investigative techniques to determine their liability and the amount of damage. In a survey of law, the various methods of investigation available to the insurance company as set forth in Arson in California: Is California Buring [hot link]

An Insurance Policy is a Written Contract of Insurance

An insurance policy is a contract much like any other. The policy of insurance may be referred to as the contract of insurance. As do other contracts, the contract of insurance assigns the policyholder and the insurance company rights and obligations. Each party must fulfill the agreed to obligations set forth in the contract. California Insurance code section 2071 [hot link}sets forth the minimum coverage and insurance company can offer to a homeowner in California.

Adhesion Contract

Policyholders are not able to change any of the terms in a policy of insurance. The Insurer offers its standard form and the policyholder either accepts or rejects the entire policy. These policies are adhesion contracts [hotlink]and the interpretation of these policies does not follow the traditional rules of contract interpretation.

The benefit of the doubt must be given to the policyholder. If there are two reasonable interpretations of coverage, one affording coverage and the other not, the law requires the court to accept the interpretation that provides coverage.

Don't be put off by technical language. Read the provisions of the policy. The way you and your colleagues understand the language is exactly the way the courts will interpret it. The law requires the court to interpret the policy the way the insurance company should expect the ordinary policyholder to understand it.

Insurance companies are expected to know this well-established rule of interpretation and should insist that their employees follow this rule of interpretation. However, there are many claim representatives who have become used to applying their own interpretation, and if they are held to have deprived the policyholder of the benefits of the contract, the insurance company may be held responsible for compensatory and punitive damages.

Start with the Exceptions

Fire insurance companies write all risk [hotlink] and specified perils hotlink]policies for homeowners and commercial ventures. All risk is a misnomer, as these policies are subject to the exclusions set forth in the policy. In addition to the much broader coverage provided by the all risk coverage, with an all risk policy, all loss or damage to Insured property is covered unless the Insurer can prove the exclusion is applicable. In all risk, the Insurer has the burden of proving the cause of loss is excluded. On the other hand, with specified perils the policyholder has the burden of proving the loss was caused by one of the specified perils. A specified perils policy sets forth the list of causes of loss that are covered.

There are other conditions and obligations in the sections appropriately called conditions. The conditions are in the back of the property section, the liability and at the very end the policy. But once the claim is filed, the insurance company is obligated to provide notice of any condition it intends to rely upon in writing. Failure to provide notice coupled with the policyholder's reliance and fulfillment of the conditions set forth in writing may be construed as a waiver releasing the policyholder from the unstated conditions.

Manuscript (Policy Written Especially for you)

Large corporate entities – with the assistance of large insurance brokers -- can negotiate the coverage the Insurer will provide. This is an exception to the general rule that a policyholder either takes an insurance policy as it is offered or rejects it. They are called manuscript policies [hotlink]because the provisions are the product of negotiations. The law interprets manuscript policies in the same way as any other contract, the reasonable meaning that most closely reflects the intent of the parties must be determined.

Primary Obligation

The policyholder's primary obligation is to pay premiums. The insurance company's right to premiums is well protected by law. Although, the insurance company must notify the policyholder in writing of cancellation for non-payment of premium the notice does not have to actually reach the policyholder for the cancellation to be effective. The insurance company's right to cancel the policy for failure of pay a premium is effective when the notice is mailed to the address on the policy, even if the policyholder does not receive notice.

The policyholder having an all-risk policy is obligated to prove that a physical loss caused damage to insured property and the amount of loss. Nothing more is required. An insurance company must consider this rule in the context of the Convent of Good Faith and Fair Dealing. Insurance companies must assist the Insured in proving his loss and damage. Insurance companies failure to do so could cause the policyholder to fail to obtain the bargained for coverage in the breach of the covenant of good faith and fair dealing.

Policyholder's Obligations After Loss

The policyholder must provide immediate notice of the loss to the insurance company when loss occurs. Prompt notice allows the insurance company to investigate the loss site before changes are made. The policyholder should ordinarily allow conditions to remain unchanged until the insurance company has an opportunity to investigate. If immediate repairs are necessary to prevent further damage, photographs of the scene can be used to help explain the cause and extent of the loss. Under any circumstance, the insurance company must be give prompt notice to allow it to perform a prompt investigation.

The policyholder must also provide the insurance company with an accurate account of the loss. The insurance company may request that the policyholder give an examination under oath to help determine the facts needed for a coverage determination. Unlike a misrepresentation to an agent when procuring insurance, an intentional misrepresentation or concealment after a loss is a felony, punishable with a prison sentence. A policyholder's contentions and arguments may be freely made, but the facts must be accurately disclosed. The scope of the insurance company's investigation is limited to matters that bare on the issue under investigation, and the policyholder’s right to privacy does not evaporate because a loss occurred.

The Insurance Company's Obligations After Loss

When a peril damages insured property and triggers coverage, the rights of the parties are fixed. The insurance company must promptly provide written acknowledgment of the claim and begin its investigation within ten days. Once the amount of loss is determined and liability is established, most policies provide that loss is payable within 60 days. Insurance companies must comply with a plethora of regulations during the claims investigation. Most insurance companies know time is the policyholders' enemy. The longer the policyholder's insurance company delays making critical coverage decisions and fails to make payment to the policyholder, the greater the likelihood the policy holder will accept and in adequate and undesired payment.

Property Insurance Review

For most individuals, your home and its contents represent your largest financial investment in real and personal property. The loss of all or even a part of these assets could not only present a major disruption in your life and business but also precipitate financial disaster. Like any investment, they must be protected from loss. While you cannot prevent an accidental or unexpected loss to your property, you can insure your financial interest at stake.

The insurance needed to protect your investments in these valuable assets is found under a variety of names, some readily recognizable, others utterly dumfounding: first-party insurance, homeowners, inland marine, property, fire, and business interruption. And, although this insurance is commonplace, few lawyers regularly practice this specialty. As an exception, Mr. Doherty has devoted over 35 years to this specialty, advising clients about their insurance needs and representing them in civil litigation after a loss occurred.

-- Francis Doherty

Mr. Doherty has represented both insurance companies and their policyholders since 1972. Mr. Doherty has the knowledge and experience to provide you with an important, bona fide assessment of the coverage, limits, exclusions and conditions that you need to protect these important assets.