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In the not too distant past, claims and claims handling were generally predictable. There was an incident causing damage, then a demand, and a dispute largely about the amount that would be paid. More recently, many clever plaintiff’s attorneys have developed strategies to cause an otherwise routine claim to expand into something more in an effort to drive up the claim’s value and to increase the likelihood of settlement. For example, claims for bad faith, vendor liability, agent errors or omissions, and consumer protection are frequently added to routine claims as a means to increase the scope of available damages.
Now, it is incumbent upon risk managers to recognize when a claim has the potential to mushroom into something more than a routine claim or into something that could be damaging to the companies involved. These materials provide an overview of frequently occurring claims strategies that can cause your case to “mushroom” and how to recognize them.
Types of Claims
Extra-Contractual Liability/Bad Faith
In recent years, many states have expanded their common law and statutory law governing insurance claims to include some available remedy to an insured for extra-contractual liability or claim for bad faith.
While the legal definition changes from state-to-state, a claim for extra-contractual liability or bad faith typically involves a claim that an insurer improperly denied an insurance claim without a good faith basis. In many states, a plaintiff may bring a claim for bad faith when they believe their insurer has denied their claim for no viable reason or reason at all. Generally, in order to bring a first-party claim for bad faith, a plaintiff must prove: (1) that the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis. The precise language and standards vary from state-to-state.
Most states also recognize a common law tort cause of action for first-party (a policyholder suing his or her own insurer) bad faith claims. Other states recognize a statutory claim for bad faith/ lack of good faith. Some states fail to recognize first-party bad faith as a tort altogether, and rather require that the policyholder bring a claim for breach of contract.
Claimants often resort to extra-contractual liability or bad faith as a mechanism for seeking attorney’s fees or statutory damages. For example, Maryland permits the recovery of actual damages, expenses/attorney’s fees, and interest where the denial of a claim was not in good faith.
When analyzing a claim, risk managers should always consider the adjustment history of the matter to consider whether extra-contractual liability or bad faith claims could be asserted.
Many insurers offer information to insureds concerning approved vendors that can help an insured remediate damage. Often there may be agreements between the vendor and the insurer as to the amounts that can be charged to the insurance company or insured, and as to indemnification. When a vendor allegedly damages the property they were hired to repair, policyholders will often bring claims against the insurance company for negligence due to the close relationship with the vendor. Claimants will assert that an agency or employment relationship exists between the insurer and the vendor, such that the insurer can be held liable for the vendor’s actions. Vendor claims are often raised in connection with a breach of contract action against the insurer.
In a recent New York case, Bennett v. State Farm, a policyholder’s property was damaged by an oil spill. The insurer provided coverage for the damage and hired an engineering firm to perform an oil remediation on the property. When that firm allegedly caused damage far beyond the original claim, the policyholder brought suit against its insurer for negligently hiring and supervising the work. The court ultimately upheld the Plaintiff’s right to bring a viable cause of action in this instance because the insurer affirmatively undertook to supervise, direct, and perform repairs on the property and failed to take reasonable care in doing so.
Insurers have to carefully consider the language of any vendor agreement to avoid arguments that the vendor is an agent, rather than an independent contractor as they are typically designated.
Agent Errors and Omissions
Additional claims can arise from argued errors or omissions by an insurance producer, agent or broker. After a claim is denied for lack of coverage, an insured may indicate that statements or actions of a producer made them believe a particular risk was covered or that the producer should have taken actions to protect the insured.
Often, these claims are lodged to create artificial pressure against the denying insurer. Also, producer claims may provide for tort causes of action and tort-damages that would be unavailable in a breach of contract case against the insurer. The producer is likely to have an errors and omissions policy through another carrier that serves as another source of funds for the claimant to recover against.
By way of example, in Lexington Ins. Co. v. Buckingham Gate, the policyholder purchased an insurance policy from two brokers who assured them all damage to the property would be covered. In reality, the policy did not cover dock damage. When Buckingham Gate filed a notice of loss for damage to the dock, the insurer informed them that the damage was not covered. Buckingham filed suit against the insurer and the brokers for misrepresenting the terms of the policy. The court ultimately held that although the insurance company can only act through agents, the brokers were not purporting to act with authority from the insurance company when they told Buckingham what would be covered. Because it was apparent to the policyholder that the brokers were not employees of the insurance company, the insurer was not held to be liable for their misrepresentations.
The undersigned authors have written a portion of a treatise on insurance producer malpractice that addresses the many issues that can arise in producer cases.
Consumer Protection Claims
Some policyholders are adding consumer protection claims under state law to their claims for breach of contract. Most states have a consumer protection statute that allows consumers to bring claims when they believe they have been a victim of deceptive trade practices. An insured may argue that they were misled in some aspect of the insurance procurement process or in the adjustment of the claim that gives rise to a consumer protection claim.
For example, in Sparks v. Allstate, a policyholder filed a claim with her insurance company when a fire destroyed her home. When the claim was denied, she sued for violation of the Tennessee consumer protection statute, alleging that her insurance company had deceived her into believing this damage would be covered. The insurer argued that the statute only applied to the initial issuing of the policy and therefore because the allegedly deceitful statement did not induce her to purchase the policy, it did not apply. However, the court disagreed and held that the process of the insurance company paying out claims for its policyholders was an ongoing “distribution of services” to its customers and therefore the consumer protection statute would apply.
Claimants resort to consumer protection claims as the statutory framework often calls for attorney’s fees, punitive damages or damage multipliers.
In recent years, claims of civil conspiracy or collusion have been lodged by policyholders when there is some coordination between the insurer and third-party appraisers/adjusters. Again, this tactic may permit tort damages that might not otherwise exist.
By way of example, some policyholders are making their conspiracy claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) for a pattern of deceptive or colluding practices. Most notably, in the wake of Hurricane Sandy, a class-action of policyholders filed claims against a Florida-based insurance company alleging that the company profited by denying claims to the National Flood Insurance Program (managed by FEMA). The insurer allegedly profited by increasing claims handling expenses, and in turn received money from FEMA for administering the program. Although the insurer ultimately prevailed, the case displayed the mindset of “expansive” plaintiff’s theories.
Some claimants may file administrative or regulatory complaints in addition to any contractual claims. Administrative and regulatory complaints can trigger scrutiny from governmental officials that goes well beyond the claims at issue. This can put insurers and other businesses at significant risk of market-wide action that will be in the control of administrative/regulatory agencies, without regard to the resolution of the underlying claims.
Today’s digital era places businesses at risk of claims spilling into social media. Plaintiff’s counsel, in conjunction with the press, have sought sensational headlines and stories to attack businesses. Now, a disgruntled claimant does not even need cooperative press, but can inexpensively use social media to air grievances (justified or not).
Bad press coverage—for even a minor claim—can impact a business’s stock price and have repercussions on a company’s market share and image.
For example, in 2012, comedian Matt Fisher posted a blog entitled “My Sister Paid Progressive Insurance to Defend Her Killer in Court” prompting over 12,000 comments and numerous news articles. In 2012, Katie Fisher was killed in a car accident in Baltimore when she was hit by an underinsured driver who ran a red light. While the at-fault driver paid Katie’s estate immediately, Katie’s own insurer initially refused to pay out the difference. The comedian alleged that the insurance company went to shocking lengths to avoid paying out a policy on his late sister—including providing lawyers to the defend that driver that killed her. The claim was quickly resolved after this publicity.
In November of 2017, another sensational insurance headline hit the internet when WSBTV, an Atlanta new station, published an article entitled “Woman battles insurance company for weeks to bury dead son.” The article indicates that Donte Miller was shot nearly a month prior, and his mother’s insurance company would not pay out on her $10,000 policy until they conducted a medical review. After the article and subsequent investigation by the news station, the Texas-based insurance company agreed to pay out on the policy, but refused to answer any questions from journalists.
Special Claimants and Special Lawyers
What do you do when a celebrity, politician, or judge is the claimant in your case? Celebrities are involved in high-profile accidents and disputes involving insurance companies all the time and can provide new challenges outside typical legal strategies.
In 2015, comedian Tracy Morgan filed suit against a major retailer when he got into a car accident with one of the store’s tractor trailers on the New Jersey Turnpike. He sued the retailer for $90 million, after the relatively public accident left himself seriously injured and another dead. Although the terms of the settlement are confidential, the retailer’s insurer initially denied the retailer’s claim. However, it is reported that the insurance company later agreed to strike a deal and avoid a high publicity legal battle.
Numerous other celebrity car accidents and lawsuits also involved insurance companies and have the potential to similarly become public spectacles. In June of 2017, Venus Williams was involved in a fatal car accident that no doubt involved multiple insurance companies. The press has latched on to the story and is reporting on ongoing proceedings.
The same issue with celebrities can apply to prominent local politicians and lawyers. Such local politicians and lawyers can garner special sympathy from the public and may have more availability to the press.
The first step in attacking a mushrooming claim is to recognize when a claim is beginning to mushroom. The second step is to make sure that there is a cohesive and agreed upon strategy that will take you through the course of the claim. This second step should include a detailed consideration of the possible risks and costs. This analysis should be undertaken with qualified attorneys, who know both the practical and legal landscape. In connection with this second step, claims management and not simply the claims adjuster should be involved in setting the strategy. Finally, where a claim starts to mushroom, the team handling it should be prepared to react quickly so as to deal with both problems and opportunities.
Patricia McHugh Lambert has over 35 years of experience in handling complex commercial litigation and insurance matters. Ms. Lambert has worked on national class actions, significant litigation and regulatory matters for Fortune 500 companies. She has also assisted small and mid-sized companies and business executives with contract, real estate and commercial disputes that needed to be resolved quickly and efficiently. Ms. Lambert is best known as an attorney who knows the field of insurance. She has represented insurers, policyholders, and insurance producers in disputes both in court and before the Maryland Insurance Administration. Ms. Lambert can be contacted at 410-339-6759 and firstname.lastname@example.org.
Robert Campbell has close to 20 years of experience as a general litigator. He has an active litigation practice primarily in complex commercial and general litigation matters in Maryland state and federal courts as well as other jurisdictions in which he is admitted pro hac vice. He has extensive appellate, arbitration and trial experience and notably has a long and successful motions track record including successful motions for summary judgment and dismissal for his clients. As part of his practice, Mr. Campbell is assigned to represent insureds by national insurance carriers in premises liability, tort defense, automobile and trucking cases, and government liability matters. He has participated in the prosecution and defense of claims against Maryland insurance producers. Mr. Campbell can be reached at 410-769-6140 and email@example.com.
 These are commonly the elements for both common law and statutory claims. See e.g., Noble v. National American Life Insurance Company, 624 P.2d 866, 868 (Ariz. 1981); see also Goodson v. Am. Standard Ins. Co., 89 P.3d 409 (Colo. 2004); see also Minn. Stat. Ann. § 604.18 et seq.
 See Fla. Stat. § 624.155; Ga. Code § 33-4-6; 215 Ill. Comp. Stat. Ann. 5/155; Kan. Stat. § 40-256; Me. Rev. Stat. Tit. 24-A §2436-A; Md. Code Ann., Cts. & Jud. Proc. § 3-1701(e); Minn. Stat. Ann. § 604.18 et seq; Mo. Rev. Stat. § 375.420; Mont. Code Ann. §§ 33-18-244; 42 P.S. § 8371; Tenn. Code Ann. § 56-7-105(a).
 See Choharis v. State Farm Fire & Cas. Co., 961 A.2d 1080 (D.C. 2008) (affirming the trial court’s decision not to recognize the tort of first-party bad faith); see also Lawton v. Great Sw. Fire Ins. Co., 392 A.2d 576, 581(N.H. 1978) (“We hold that allegations of an insurer’s wrongful refusal or delay to settle a first-party claim do not state a cause of action in tort.”); see also Roberts v. Auto-Owners Ins. Co., 374 N.W.2d 905 (Mich. 1985) (“we declined to recognize a separate cause of action for bad-faith breach of an insurance contract”); see also Acquista v. N.Y. Life Ins. Co., 730 N.Y.S.2d 272 (App. Div. 2001) (“We are unwilling to adopt the widely accepted tort cause of action for “bad faith” in the context of a first-party claim”); see also Beck v. Farmers Ins. Exch., 701 P.2d 795 (Utah 1985) (“We therefore hold that…a first-party relationship between an insurer and its insured…can give rise only to a cause of action in contract, not one in tort”); see also A & E Supply Co. v. Nationwide Mut. Fire Ins. Co., 798 F.2d 669 (4th Cir. 1986) (“Virginia law would not recognize… the tort of bad faith refusal to honor a first-party insurance obligation”).
 See Md. Code Ann., Cts. & Jud. Proc. § 3-1701(e) (Repl. Vol. 2013).
 Bennett v. State Farm Fire and Cas. Co., 137 A.D.3d 727 (App. Div. 2016).
 Lexington Ins. Co. v. Buckingham Gate, Ltd., 993 S.W.2d 185 (Tex. App. 1999).
 P. Lambert/R. Campbell, Insurance Producer Liability, Insurance Law Institute, Maryland Institute for Continuing Professional Education of Lawyers (2004).
 Sparks v. Allstate Ins. Co., 98 F. Supp. 2d 933 (W.D. Tenn. 2000).
 18 U.S.C. §1962(c).
 Melanson v. United States Forensic, LLC, 183 F. Supp. 3d 376 (E.D.N.Y 2016).
 Matt Fisher My Sister Paid Progressive Insurance to Defend Her Killer In Court, Premium Fisher (Aug 13, 2012) http://mattfisher.tumblr.com/post/29338478278/my-sister-paid-progressive-insurance-to-defend-her
 Nefertiti Jaquez, Woman battles insurance company for weeks to bury dead son, WSB-TV 2 Atlanta (Nov 9, 2017) http://www.wsbtv.com/news/local/south-fulton-county/woman-battles-insurance-company-for-weeks-to-bury-dead-son/644780282
 Dareh Gregorian, Tracy Morgan, Walmart Settle lawsuit over turnpike crash, NY Daily News (May 27 2015) http://www.nydailynews.com/news/national/tracy-morgan-walmart-settle-lawsuit-turnpike-crash-article-1.2237668
 Nicole Bitette, Walmart Reimbursed in lawsuit with comedian Tracy Morgan, NY Daily News (Nov 23, 2016) http://www.nydailynews.com/entertainment/gossip/walmart-reimbursed-lawsuit-comedian-tracy-morgan-article-1.2884871
 Mike Vulpo, Venus Williams Claims Third Driver’s Negligence Contributed to Deadly Car Crash, E! Online (Oct 13, 2017) http://www.eonline.com/news/886983/venus-williams-claims-third-driver-s-negligence-contributed-to-deadly-car-crash