2014 CLM Insurance Bad Faith/Coverage/Fraud Mini-Conference
February 28, 2014 – Atlanta, Georgia
Post-Suit Claims: The Cart Before the Horse and Something In Between
I.
Evolution of Claim Submission
Assume the following scenario: The first-party property insurer thoroughly
investigates the policyholder’s claim as submitted. As the insurer requests, the
policyholder confirms that it has provided all information, documentation and
Examination Under Oath testimony it intends to provide to support its claim. The
policyholder also requests at that time a written decision regarding its claim. After
receipt of such confirmation and completion of its investigation; the insurer denies the
claim. The policyholder then sues for breach of contract.
As the breach of contract litigation proceeds, it is apparent that the insured
policyholder is litigating a different claim than the one initially presented, and on which
the insurer based its decision. Is the policyholder entitled to present a different claim
than the one presented prior to bringing suit? Should the policyholder be precluded
from submitting any evidence in support of its claim for breach of contract on a claim
that was not previously submitted? Should the policyholder be allowed to present new
theories for its claim? What about new facts? Shouldn’t the breach of contract claim
concern only whether there is coverage for the claim that was actually presented by the
policyholder, and then denied by the insurer? These questions lead us to consider
strategies designed to avoid the potential for being forced to defend an action for breach
of contract on an insurance claim that was never presented to the insurer to investigate.
A. Notice of Claim
1. What is the claim for which notice has been given?
From the outset upon receipt of a notice of loss, the insurer should identify
precisely the loss for which notice has been given, i.e., the cause of loss and damages
for which notice has been given. It is important from the outset that the insurer is
investigating the actual loss and claim for which notice was given. If the loss was
identified differently from the loss the insured is pursuing in litigation, it will be helpful, as
a litigation strategy, to demonstrate at what point the insured policyholder’s loss and
claim has “shifted” or “changed.”
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2. What is the claim being submitted?
The insurer must also remember to identify precisely what claim is being
submitted by the policyholder. At times, the loss that was originally reported is not the
same as the claim that is being submitted. It is important that, if there is a distinction
between the loss that is reported and the claim that is being submitted, the insurer
identify that distinction, and properly investigate both the loss as reported, and the claim
as submitted by the policyholder. Again, if either or both the loss and claim presented
pre-suit were identified differently from the loss and/or claim the insured is pursuing in
litigation, it will be helpful to demonstrate, as matter of strategy, at what point the
insured policyholder’s claim has “shifted” or “changed.”)
B. Submission of Proof of Loss
The insurer must determine what constitutes a sufficient Sworn Statement in
Proof of Loss. An appropriate proof of loss form should be used. Further, the insurer
should not complete the proof of loss form for the policyholder, but rather should require
that all aspects of the proof of loss form be completed by the insured policyholder. For
example, the policyholder should on its own identify all additional insureds, loss payees,
and others with any potential insurable interest in the damaged property. The insurer
should also consider whether a single page versus multiple page proof of loss form (one
which requires a calculation relating to coinsurance, or alternatively requires a
statement of the actual cash value and loss damage. The insurer should also ensure
that the proof of loss form is signed by the proper parties, i.e., by the insured
policyholder(s). The Sworn Statement in Proof of Loss will be a critical piece of
evidence during litigation to demonstrate that the loss and claim presented at litigation
was never presented to the insurer to investigate.
C. Addressing New Submissions Before Litigation
The insurer must be able to identify a “shift “in the policyholder’s presentation of
the claim. It must determine whether the policyholder is presenting a supplemental
claim, a new element of the claim already presented, or new theories and facts for its
claim (such as identifying a new peril or cause of loss), which are intended to
circumvent an anticipated denial of the claim. Being attuned to whether the policyholder
is presenting a supplemental claim, a new element of the claim already presented, or
new theories and facts for its claim will allow the insurer to consider what further
investigation it must conduct, and what additional compliance, if any with policy
conditions, it must request of the policyholder.
Again, any “shift” or “change” in the
claim as presented pre-suit will be important to identify so that the insurer may properly
investigate it, and make an appropriate decision consistent with the insurance policy, as
well as avoid any surprises at trial.
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D. Addressing New Submissions After Litigation
The insurer must also be able to identify a “shift” or “change” in the policyholder’s
presentation of the claim if litigation has already been commenced. Just as in the presuit context, it must determine whether the policyholder is presenting a supplemental
claim, a new element of the claim already presented, or new theories and facts for its
claim (such as identifying a new peril or cause of loss), which are typically asserted in
an effort to circumvent an adverse ruling on the breach of contract claim. Being attuned
to the nuances of the differences in the claim submission will also allow the insurer to
consider whether it should conduct further investigation of the claim, and whether it
should require additional compliance whether it will require by the policyholder with
policy conditions, even though litigation is underway. Being attuned to whether the
policyholder is presenting a supplemental claim, a new element of the claim already
presented, or new theories and facts for its claim will also allow the insurer to consider
what, if any, new affirmative defenses it may need to assert in the litigation, including
with respect to the misrepresentation/concealment/fraud provision of the policy.
Further, the insurer may need to consider asserting a claim for declaratory relief, and
may additionally need to consider reformation or rescission of the policy.
To be effective, strategy decisions made during litigation must be consistent.
Thus, if the insurer determines to undertake a proper investigation of the new claim, it
must be sure to issue a separate decision on that claim), as well as continue to defend
the breach of contract suit on the basis that it cannot be in breach of contract of a claim
that was never presented. If no new investigation is warranted, or is decided against for
other strategy reasons, litigation strategies should be employed to ensure that the
insurer is not defending the claim that was not submitted.
II.
Purpose of Sworn Statement in Proof of Loss
For purposes of litigating breach of contract claims, the importance of the Sworn
Statement in Proof of Loss cannot be understated. Thus, it is important to keep in mind
its purpose each time a proof of loss is requested, whether for an advance, interim, or
final payment.
The insurer should examine carefully the notice of loss received, and compare
this notice to the subsequent description of the loss and claim by the Insured as stated
in the Sworn Statement in Proof of Loss. The date and time of the occurrence of loss
as well as the cause of loss should also be examined for consistency. Ultimately, since
the Proof of Loss is a sworn document, it is important that the insurer investigates the
claim reflected by the Sworn Statement in Proof of Loss, that it determine whether the
claim as reflected is different from the loss as reported (and if so, why), and that the
Sworn Statement in Proof of Loss is consistent with its findings during its investigations.
The Sworn Statement in Proof of Loss is also the key document to determining how
much is being claimed by the insured policyholder for its loss. Especially if an
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Examination Under Oath is unavailable, it is the only verifiable means to determine what
amount of money the insured is actually claiming for its loss. The value of obtaining a
notarized and “under oath” Sworn Statement in Proof of Loss cannot be understated,
and is especially important if it turns out that the insured policyholders submits an
“evolved,” “shifted,” or “changed” claim, or that the claim is in any way fraudulent, or
there has been a misrepresentation or omission of material fact with respect to the loss.
III.
Investigation of Claim as a Process
Oftentimes, a claim investigation is approached as a sequence of events,
beginning with an initial inspection of the loss, the request for documents, and the
submission of the Sworn Statement in Proof of Loss, to be followed by final payment
and the closing of the claim file. With respect to more difficult claims, however, the
investigation must be considered a process, with a ”stop and consider” approach after
each step of the investigation. Undertaking a ”stop and consider” approach at each
step of the investigation will ensure that any “shift” or “change” in the claim is
recognized. The more thorough the investigation pre-suit, the easier it will be to
address any post-litigation “shift” or “change” in the claim.
A.
Sworn Statement in Proof of Loss
As referenced above, an appropriate proof of loss form should be used. Further,
the insurer should take care not to complete the proof of loss form for the policyholder.
The policyholder should be the source of all the information contained in the form.
Thus, even if the insurer’s adjuster assists the policyholder in completing the form, the
information such as the time of the loss, the cause and origin of the loss, and the title
and interest in the property should be completed based on information provided by the
policyholder. Frequently, the insurer’s adjuster completes proof of loss forms in order to
secure an advance for the policyholder. Great care should be taken to ensure that only
the policyholder is the source of the information recorded on the form. Moreover, the
insurer must take steps to ensure that all aspects of the proof of loss form are
completed. The policyholder should on its own identify all additional insureds, loss
payees, and others with any potential insurable interest in the damaged property. The
insurer can assist the policyholder in reviewing the policy and identifying those
additional insureds, loss payees, and others with any potential insurable interest in the
damaged property as reflected by the policy. The insurer can also assist the
policyholder to prepare the necessary documents should additional insureds, loss
payees, and others with any potential insurable interest in the damaged property wish to
waive their right to be listed as a payee on disbursements for the claim. The
policyholder should on its own, however, confirm all the interests.
The insurer should also consider whether a single page versus multiple page
proof of loss form (one which requires a calculation relating to coinsurance, or
alternatively requires a statement of the actual cash value and loss damage, or
apportionment among policies). This determination is dependent on the type of loss.
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The insurer should also ensure that the proof of loss form is completed and
signed by the proper parties. If the insured’s public adjuster completes the form, it is
critical that the insured sign the form. Similarly, an insurer should not accept a proof of
loss formed signed by the insured’s attorney or public adjuster.
It is also important that the insurer seek to confirm that the claim as presented by
the Sworn Statement in Proof of Loss is the loss as initially submitted and therefore is
the claim being investigated. If there is any discrepancy, it must be determined if there
is more than one loss being reported (even if a separate claim number is not assigned),
and therefore more than one claim being submitted.
B.
Request for Documents
The insurer should also initially request documents regarding the loss, and
supporting the claim as submitted. As the investigation progresses, the insurer should
confirm that the requested documents have been provided, and follow up if necessary
to renew its request for relevant documents. The insurer should also consider the need
for a supplemental request for additional documents as its investigation progresses. All
requests should be made formally and in writing.
C.
Examination Under Oath
With respect to larger losses, or losses that raise concerns for the insurer, the
insurer should retain an attorney to conduct an Examination Under Oath. The
Examination Under Oath should be conducted after receipt of the policyholder’s Sworn
Statement in Proof of Loss for the full amount claimed, and all requested documents.
During the Examination Under Oath, the attorney will seek to confirm the facts
supporting the Sworn Statement in Proof of Loss, confirm the amount claimed, confirm
the policyholder’s calculation of the claim, and confirm the basis (theory) for the claim.
Obtaining direct and consistent answers from the policyholder to these critical questions
will provide additional support to the insurer’s argument in litigation that the claim being
presented in the breach of contract action was never presented to the insurer to
investigate.
D.
Inspections
The insurer should, of course, always initially inspect the loss, and ensure that
there are photographs of both the damaged property, as well as undamaged property.
The insurer should also consider, as its investigation progresses, whether additional
(multiple) inspections are necessary. An insurer’s representatives’ failure to conduct an
inspection of undamaged property at the same time it is inspecting damaged property
could be argued to constitute an insufficient inspection. Further, in the event of any
additional inspections, the insurer should ensure that there are photographs of both the
damaged property, as well as undamaged property.
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The insurer should also consider in appropriate circumstances, the need for an
inventory of damaged property, which is an obligation imposed on the policyholder, if
requested by the insurer, as set forth in many policy forms. Similarly, the insured
should consider the need to demand that the insured retain damaged property
The insurer should always consider whether it needs an expert as part of its
investigative team. Whether for a particular aspect of damage, or relating to an aspect
of a business loss, an expert is always a valuable addition to the investigation, and
reduces the opportunity for any argument that the investigation was inadequate, and
therefore the insurer’s decision was incorrect. Similarly, the insurer should consider the
need for counsel, even if counsel is providing advice behind the scenes. Even in
situations where no coverage opinion is required, counsel’s advice, including general
guidance, the preparation of requests for documents, the preparation of requests for the
Sworn Statement in Proof of Loss, ghost writing of correspondence exchanged with a
public adjuster who is obviously attempting to set up a bad faith claim, could all prove to
be valuable.
E.
Confirmation from insured that its claim presentation is completed
before decision is issued
Especially for the more complex losses, and certainly in any situation in which an
Examination Under Oath was conducted, it is critical that the insurer obtains
confirmation from the insured, in writing, that the Insured has provided all testimony,
documents and other information it intends to submit to support its claim. This step will
provide additional support to the insurer’s argument in litigation that the claim being
presented in the breach of contract action was never presented to the insurer to
investigate.
IV.
Discussions of hypothetical situations
Three hypothetical examples of an “evolving” claim will facilitate group discussion
during the presentation of strategies to consider during litigation.
1. Consider the claim in which the insured policyholder changes its theory
of damages (for example in the context of a business interruption
claim).
2. Consider the claim in which the insured policyholder changes the peril
for which it is making claim (for example from fire to smoke where it
could not prove a fire, and therefore sought to establish “smoke”
damage)
3. Consider where during litigation, it is uncovered that the insured
policyholder’s attorney has changed the conclusion of its expert’s
report, with the obvious intention of circumventing a policy exclusion.
Does the Insurer amend its affirmative defenses to assert fraud? Does
the Insurer seek to assert a declaratory judgment counter-claim?
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V.
Strategic Concerns Once Claim Changed
A.
Pre-Litigation
The Insurer should always be on guard to ensure that all consistencies are
analyzed. If, during the investigation of the claim it becomes evident that the
policyholder’s claim has “evolved” or “shifted” or “changed” in any manner, the insurer
should determine if an entirely new claim is presented, versus a “change” to an existing
claim. If it is a “change” to an existing claim, the insurer should determine if it is a
supplemental claim, a new element of claim, or if the claim now contains new
theory/facts of claim (e.g., peril or cause of loss) to circumvent the application of an
exclusion or an anticipated denial of all or a portion of the claim. Whichever it is, the
insurer must investigate thoroughly, using all tools in the insurer’s toolbox, properly
employing each of these tools as necessary. The insurer should consider its obligation
to make additional payment(s), and well as its obligation to Issue a decision as
necessary to reflect the insurer’s position on the new “submission” as a supplemental
claim, a new element of an existing claim, or a new theory or new facts of an existing
claim. Again, if the policyholder pursues litigation after the insurer’s denial of all or any
portion of its claim, ensuring that the investigation of all aspects of the claim was
thorough will provide additional support to the insurer’s argument in litigation that the
claim being presented in the breach of contract action was never presented to the
insurer to investigate.
B.
Post-Litigation
In the post-litigation context, the insurer should undertake precisely the same
analysis as above, but must also determine how, if at all, the claim as “evolved” or
“shifted” or “changed,” should impact its litigation strategy. If necessary, the Insurer
should conduct a parallel investigation of a supplemental claim, or new element of a
claim, while the litigation is on-going. This investigation should be conducted in the
ordinary course, thoroughly, and using all tools in the insurer’s tool box (including
retaining experts, conducting inspections, requesting documents, requiring a Sworn
Statement in Proof of Loss and conducting an Examination Under Oath) and as
permitted by the terms and conditions of the policy) as if no litigation was on-going,
including rendering a decision on the “supplemental” or “new” aspect of the claim. The
Insurer should consider its obligation to make additional payment(s) as necessary, as
well as whether the Insured is committing fraud in the presentation of its “evolving,”
“shifted,” and/or “changed” claim. The consideration of whether the policyholder is
committing fraud is significant, because it will most definitely impact the litigation
strategy, as the Insurer will likely need to amend its affirmatives defenses to add a
defense based on breach of the misrepresentation/concealment/fraud provision of
insurance contract, and potentially seek to add a counter-claim for declaratory relief
relying on this provision as well.
If the Insurer determines not to accept the “evolved,” “shifted,” or “changed” claim
as one that should be investigated, its litigation strategy should focus on highlighting
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continuously the “evolution” or “shifting” or “changing” of the claim, and direct discovery
to establish, that the claim as presented in litigation is not the one on which a claim
decision was rendered, and therefore the insurer cannot be in breach. Any notice of
loss, and all Sworn Statements in Proof of Loss are the starting point, but not the ending
point, to document the evolution of a claim. All written communications exchanged with
the Insured policyholder, including its representatives such as public adjusters and
attorneys, should be examined. If the claim “shifts” or “changes” as the litigation is ongoing, it will be important as well to review all deposition testimony and court filings to
establish the evolution of the claim. From the point that it is determined that the claim
on which the breach of contract action is based is not the claim on which the insurer’s
decision is based, it will be important to frame pleadings, discovery, and motions, as
well as all arguments to the Court, to highlight this issue as a theme in the litigation.
Whether the Insurer determines to treat the “evolution” or “shifting” or “changing”
of the claim as one that prompts a parallel investigation will be based on factors such as
the amount of the claim, the damages sought in litigation by the insured policyholder,
the delay in presenting the “new” submission, the cost of the defense of the litigation,
the thoroughness of the investigation pre-suit, whether the insurer denied the claim as
initially presented in its entirety, the degree of “evolution” or “shifting” or “changing” of
the claim, the confidence of the Insurer in its decision on the claim, the ability of the
insurer’s representatives to defend its position during litigation (whether during
depositions or at trial), and the confidence with which the Insurer is litigating the claim
(especially as discovery has potentially uncovered additional facts of which the Insurer
was not previously aware), and the insurer’s exposure to a potential bad faith claim.
There is no formula to be used to identify a strategy. Rather, the insurer must consider
and weigh the specific facts of each circumstance, in deciding whether to treat the
submission as a “new” claim, assert fraud as a defense, etc.
VI.
Summary of Key Points
A.
Analyze the Claim
The Insurer should be on alert at all times to inconsistencies in the claim, from
the point that the loss was initially reported, throughout the investigation through to a
decision on the claim, and then during litigation.
B.
Ensure that the Claim, as Presented, is Investigated
The Insurer should be on alert at all times to ensure that the claim, as presented
from the time the loss was initially reported, is the claim being investigated, is the claim
on which a decision is rendered, and is the claim being litigated.
© 2013 Janice C. Buchman, Michael Bowler, and Mike Gates
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