BAD FAITH

Rough Notes, Jul 2004 by Utschig, LeRoy H

Avoiding or winning a bad faith claim is tricky business

This column will examine three loss situations that involved bad faith claims against an agent or insurance company. (The names of the people and companies involved have been changed.) These examples do not demonstrate all of the possible ways that an insurance agent can become involved in a bad faith situation.

Agents should not presume that their errors and omissions or umbrella contract will cover a bad faith claim. If neither of these contracts provides an agent with bad faith coverage, the agency may wish to endorse it. Usually, a bad faith action is tied to a covered loss, for example, claiming that an insurer did not properly handle a given loss.

Business income loss

Clear Blue, Ltd., located in an upper Midwest city, incurred a fire loss in the late 1990s. The business was a very large account for the agent, who had been writing its insurance for more than 20 years. he first wrote the account when the business was operating out of an old Main Street brick building. At the time of the loss, the insured business was located in a large, automatically sprinkled building. Its owners were also in the midst of securing financing to build another structure.

There was almost enough insurance on the structure and business personal property. Time element or business income insurance was the problem. Less than 10% of the business income exposure was insured. The insured had furnished to the agent a copy of its year-end financial statements. Many of us are familiar with the business income worksheet CP 15 15, developed and furnished by the Insurance Services Office. Determining the proper amount of business interruption is usually a tedious process. A common problem is that clients' accountants use different words to label the required information.

In this case, there was no need to complete a business income worksheet to determine the amount of loss of income exposure. Clear Blue's accounting had already determined the proper limit. Page 2 of the business's financial statements listed the annual business income exposure. In fact, it also showed the prior year's loss of income exposure. Using those two numbers, an insurance agent could easily make a projection of the loss of income exposure for the coverage period.

Instead of using Clear Blue's financial records to determine the proper amount of coverage, the agent chose a business income limit by just "picking a figure out of the sky." The agent said he chose the income limit because he wanted to save money. This was not documented anywhere in the agent's file. In fact, there was nothing in the agent's file to indicate that the business income limit had been discussed.

Clear Blue experienced an uninsured loss of several million dollars. The owners stated that they did not remember talking to the agent regarding the business income limit.

Bad faith was one of the allegations contained in the lawsuit against the agent and the insurer regarding this loss.

Insurer complicates a simple loss

A Wisconsin-based antique dealer, owner of Bruce's Oldies But Goodies, LLC, visited relatives in Arizona. The relative's neighbor, Wally's Stuff, Inc., was selling a motor home. Wally's Stuff had bought it as part of a loan foreclosure proceeding by John Deere Credit, Inc. Wally's Stuff had paid $10,000 for the vehicle, which Bruce then bought for $20,000, paying the entire amount in cash. The retail value of the home was $25,000. As part of the price negotiation for the motor home, Bruce had Wally put all new tires on the vehicle.

Bruce drove the motor home to his 80-acre farm in South Dakota. After winterizing the place, he headed for North Dakota to visit some relatives. he had been traveling on a state highway for about an hour when, around 4:00 a.m., the motor home caught on fire and was totally destroyed.

Typical loss settlement for a motor vehicle is the value of a similar unit in the insured's trading area. Because Bruce lived in central Wisconsin, the value would be that of a similar unit being sold by a dealer somewhere between Green Bay and Minneapolis. A similar rig was selling for $25,000.

Chincy Insurer, Inc., offered Bruce $15,000. After a month of haggling over the value of the loss, Chincy called its arson/fraud investigator. (A good arson investigator will do its work within 24 hours of a loss. Weather and/or time can eliminate signs of arson.)

The remains of the motor home had been removed from the highway and stored behind a garage located five miles from the scene of the fire-the nearest auto repair facility. State arson investigators looked at the burned-out motor home prior to releasing it so that the garage could move it. Bruce had nothing to say regarding moving the damaged vehicle and where it was stored. The police decided that it was to be moved, who would move it and where the remains of the motor home would be stored. The arson investigators stated that there was no evidence of arson.

Chincy Insurer tried to build a fraud case against Bruce, saying that Bruce burned the home to profit from the insurance proceeds. A typical fraud case involving a motor home usually is a situation where the owner of the motor home has a large loan on the vehicle and cannot keep up with the payments. The owner torches it to get the insurance money to pay off the loan. However, in this case, Bruce had a clear title. he owned the motor home outright. While it had a value of $25,000, Bruce had underinsured it at $20,000. Bruce had nothing to gain from a loss. But the insurer refused to budge from its position that he had created a deliberate loss in order to profit from it.