ICAP
3rd Quarter 2014
ICC CLAIMS AGENCY PARTNERSHIP
The Agent’s Cameo in Claims Handling:
A Legal Study of Why Agents Should Never Play the Lead
INTRODUCTION
The partnership that we share with agents is paramount to our success at
Illinois Casualty Company. Partnerships are a joint venture that function best
when the individual partners have clearly defined roles and operate within
the bounds of their presumed expertise. The vitality of a partnership
depends on whether the partners exercise appropriate stewardship over their
respective functions. In essence, the better partners are at their particular
niche, the more successful the partnership.
Within the claims function, Illinois Casualty Company depends on agents to
partner with us by selling and delivering a strong book of business, timely
reporting claims, and providing necessary information about the insured that
will initially assist in underwriting and later assist in the investigation and
defense of claims. Your client, the policyholder, benefits most when we each
stick to doing what we do best. It is within the function of claims and
litigation handling that we occasionally see confusion about the agent’s role
in the process. The goal of this ICAP is to help more clearly define the role of
agents in the handling of claims and litigation so that you can partner with
Illinois Casualty Company to provide the policyholder the exceptional and
efficient service they desire and deserve.
The Law Drives Claims
Handling
In general, it is imperative that agents allow the Claims and Litigation
Departments to handle the investigation of claims for policyholders, as well as
to manage and direct the resolution of claims without interference. The main
reason for this is there are serious legal ramifications if these boundaries are
not respected, and the insured is ultimately the one who suffers. This article
will discuss specifically how the law necessarily drives claims handling and
resolution, as well as give the legal justifications for why it is crucial to
separate the agent from the claim handling process. Later, we will illustrate
through colorful anecdotes how these legal issues have played out when an
agents’ interference in claims handling has wreaked havoc not only for the
partnership, but more devastatingly for the insured.
We know that our insureds are passionate about what they do. Many would
say that in addition to money, they have their own blood, sweat, and tears
invested in their bars and restaurants. The reputation of their business goes
lock step with their overall financial success. Many insureds view a claim or
lawsuit as a threat not only to their business, but also to their livelihood.
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While we respect an agent’s desire to assist the policyholder in every possible
way, there are limits to what an agent can and should be doing with regard to
claims handling.
The Umbrella of
Privilege:
Confidentiality and
Attorney Client
Privilege
The attorney client privilege protects communications between an attorney
and the client. This privilege is the very foundation of the legal system in
America, and as such, is held in highest regard by attorneys because it is
essential to the integrity of the legal system. For the privilege to attach in the
context of a claim, the attorney must be acting in his or her capacity as the
insured’s attorney when the communication is made, and the communication
must be confidential (private). In the context of insurance, many jurisdictions
recognize a tripartite relationship between outside counsel, the insurer, and
the insured to protect the privilege. As such, the privilege does not extend to
the insured’s insurance agent. Although the privilege does belong to the
insured (as the client) alone and it is the insured’s to waive, it is critical that
we avoid intentional or inadvertent disclosures that could waive the attorney
client privilege of the insured.
As a result, communications with the insured’s insurance agent must be
limited to matters of public record. When an agent requests the status of a
claim, Illinois Casualty Company strives to give the most accurate and
appropriate information available. We typically share the stage of the claim
or litigation, if there are any upcoming mediations or trial dates, and if we
know whether the case is likely to settle or proceed to trial. If there are
updates in discovery that significantly increased or decreased the exposure
on the claim and warranted a reserve adjustment, we may be able to give a
brief explanation for the reserve change, such as recent receipt of medical
bills that are notably higher than what we previously received or testimony
that is damaging to our liability defense of the case.
The Umbrella of
Privilege:
Work Product
Doctrine
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The “work product doctrine” refers to the legal privilege that protects the
confidentiality of documents prepared in anticipation of litigation. Most
often, the privilege protects the attorney’s preparation materials, including
notes and writings. The mental impressions, evaluations, and strategies of
the attorney are usually considered absolutely privileged. In some
jurisdictions, the work product privilege is also extended to the work of
insurance adjusters. It is difficult for a Plaintiff suing one of our insureds to
convince a court that the privilege afforded by the work product doctrine
should be waived because the Plaintiff must demonstrate that an extreme
hardship would be suffered if the documents were not disclosed to the
Plaintiff. For example, imagine the only way the Plaintiff can prove a
necessary element of the case is through the documents that are solely in the
possession of the Defendant. These disputes can be the subject of lengthy
and costly discovery motions to compel and motions for protective orders. If
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the documents in question have been readily produced or disclosed on a prior
occasion (e.g., to an agent), it is unlikely a court will rule that the documents
are any longer protected.
The laws regarding privilege are subject to judicial interpretation, and
therefore, can vary from jurisdiction to jurisdiction. Federal and state courts
are not always consistent in deciding what information or materials fall under
the umbrella of privilege. Therefore, nowadays it is even more important for
insurance companies to be vigilant in protecting the privilege and limiting
unnecessary disclosures to anyone who is not essential to the defense of the
insured.
Cautionary Tale 1:
No Matter the Storm,
the Umbrella of
Privilege Cannot Be
Shared
Owner’s bar was sued in a dram shop case in which Owner and his employees
have no recollection of the AIP being served at the bar on the date of loss.
Agent calls Illinois Casualty Company to tell the Litigation Counsel managing
the case that the claim is a sham, and questions why she cannot just “make
this suit go away.” Litigation Counsel explains to the Agent that based on the
allegations in the complaint, we must defend Owner in the dram shop lawsuit
until evidence is obtained that will exonerate the bar and allow for the filing
of dispositive motions.
Agent is not satisfied with this information. Agent calls and requests an inperson meeting with Attorney, who Illinois Casualty Company retained to
defend Owner in the case. At the meeting, Agent tells Attorney that Owner
does not want to settle the case because there is no liability, and Owner and
Agent will both be very upset if Attorney suggests any settlement. Agent also
tells Attorney that Owner has trusted Agent with the oversight of the lawsuit,
and would like Agent to be copied on all correspondence and reporting to
Illinois Casualty Company so Agent can monitor the lawsuit on behalf of the
Owner. Attorney informs Agent that such an action would essentially waive
the attorney-client privilege for Owner, so Attorney would need to speak to
Owner first about the Agent’s request. However, when Attorney speaks to
Owner, Owner advises he does not actually want Agent to be involved in the
handling of the lawsuit, and certainly not in place of Owner. Owner feared
that the Agent was going to use this information as a justification for
increasing his insurance rates overall, and thought it was improper for the
Agent to be doing so.
At what point did the Agent go too far? First, despite the frivolous
appearance of some lawsuits, very rarely is it possible to simply “make them
go away.” Illinois Casualty Company has a duty to investigate, defend, and if
appropriate, indemnify under the policy. We take this obligation seriously,
and fulfill these duties as required. Next, let us consider the Agent’s decision
to contact Attorney and request to be involved in the day-to-day handling of
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the lawsuit. This was entirely inappropriate for Agent to do. From a legal
perspective, it puts Owner at risk of waiving confidentiality and privileges in
the case. It also creates ethical dilemmas for Attorney and Illinois Casualty
Company. From a business perspective, it appears unprofessional to Owner,
who may decide to take his business to another agent in the future. As a
result, the partnership (both Illinois Casualty Company and Agent) suffers.
A Primer on
Discovery:
Rule 26 Disclosures
In civil litigation, there are set rules of procedure that govern the litigation
process. Once a claim goes into suit, these rules of procedure trigger various
duties for the parties in the lawsuit, including the duty to disclose
discoverable, non-privileged information. Civil Procedure Rule 26 sets out the
required disclosures of the parties and defines the scope of discovery. The
parties must disclose the name and contact information of each individual
likely to have discoverable information, along with a description of that
information. The parties must also provide copies of all documents,
electronically stored information, and tangible items that parties have that
may be used to support or defend the claims in suit.
The scope of discovery under Rule 26 is rather broad, encompassing any
nonprivileged matter that is relevant to any party’s claim or defense—
including the existence, description, nature, custody, condition, and location
of any documents or other tangible items, and the identity and location of
persons who know of any discoverable matter. For good cause, a court may
order discovery of any matter relevant to the subject matter involved in the
action. Note that “relevant” information need not be admissible at trial in
order to be discoverable by an opponent; if the information or
documentation sought appears even reasonably calculated to lead to the
discovery of admissible evidence, it must be shared.
Typically, we are required to turn over to the other party anything that is not
protected by attorney-client privilege or the work product doctrine. It is
always better to err on the side of caution when dealing with discoverable
materials because the laws can vary depending on the type of materials being
sought for disclosure. Furthermore, the laws can vary from state to state
regarding what investigative materials are subject to Rule 26 disclosure. In
some states, the recorded statements obtained by our claims representatives
must be disclosed to the Plaintiff, regardless of whether they damage our
defense of the insured. For this reason, it is essential that we protect and
maintain the confidentiality of our insureds and any privilege that is available.
Cautionary Tale 2:
Insurance Agents Are
Not Secret Agents
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Agent is a prudent business person. Agent believes that the better he knows
his clients, the better he can serve them. For this reason, Agent likes to keep
detailed records of his policyholders, including records of their claims. When a
claim comes in, the Agent does his own investigation and creates a file with
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detailed notes. He even investigates potential witnesses, and sometimes
contacts them to discuss the loss. In doing so, he makes sure to inform the
witnesses that an insurance claim has been filed, and someone from Illinois
Casualty Company may be contacting them in the future to discuss the claim.
Has Agent done anything wrong? We would argue that he has put himself
(and his policyholder) in a precarious situation for a number of reasons.
Keeping a detailed file of his clients is one thing, but investigating claims is
outside the scope of Agent’s duties to his policyholders. Foremost, when
Agent is engaging in these investigations, he is not under the umbrella of
confidentiality and privilege. Agent’s investigations and discoveries are not at
all protected against discovery. What the Agent has done is essentially make
himself a witness to the claim. Further, Agent has created an investigation
file of his own that is likely to be subpoenaed by the Plaintiff’s attorney when
the claim goes into suit. Agent will be ordered under Rule 26 to produce the
records of his office. This will likely mean that the Plaintiff’s attorney will also
depose the Agent to have him testify in the case. As such, Agent’s testimony
may be held against Illinois Casualty Company and his own client, the
policyholder. This could then trigger an errors and omissions claim from the
policyholder against Agent. In the end, Agent could be fighting several legal
battles, and he is likely to lose a client in the process. Without a doubt, these
are the unintended consequences of Agent’s misinformed, but well intended,
actions of investigating his policyholder’s claims.
Good Faith Claims
Handling
Illinois Casualty Company has a contractual duty to the insured under the
insurance policy to act in good faith and fair dealing when handling a claim.
There are also statutory and common law duties that define additional ethical
and legal duties that we owe not only to the insured, but also to third parties.
Generally, we have the right and duty to defend the insured against any claim
or lawsuit seeking covered damages under the policy. Illinois Casualty
Company reserves its right under its insurance policies to negotiate and
resolve claims by way of settlement. To act in good faith towards the insured,
we must investigate, defend and/or indemnify the insured for covered claims
or lawsuits.
Cautionary Tale 3:
Anxious to Please Is
Just A Tease
A successful restaurant Owner writes all of his business with Agent and is one
of Agent’s biggest clients. Agent placed all eight of Owner’s restaurants with
Illinois Casualty Company, and Owner has been pleased with the
arrangement. Recently, Plaintiff filed suit alleging that he tripped and fell at
one of Owner’s restaurants. Owner called Agent to give notice of the lawsuit,
and to tell Agent that he does not want Illinois Casualty Company to “pay a
dime” on this case because the Plaintiff is a less than reputable individual
looking to hit the jackpot with his frivolous lawsuit. Owner tells the Agent
that if Illinois Casualty Company settles this case, then Owner will pull all of
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his business from Agent. Owner does not want an insurance carrier that will
pay settlements and encourage others to file lawsuits against his businesses.
Fearing that he will lose all of Owner’s business, Agent tells Owner that he will
instruct Illinois Casualty Company not to pay a dime to settle the case—it will
go to trial.
The problem with the Agent’s conduct in this scenario is obvious—he has
made representations to Owner that are not truthful and promises to Owner
that he cannot honor. It is Illinois Casualty Company that has the ability and
right under the policy to negotiate and resolve claims by way of settlement or
trial—not Agent. When an agent makes promises to the insured that he or
she cannot keep, no good can come of that situation. As the insured’s
insurance agent, the insured places their faith and trust in you. If you
represent to the insured that you have the ability to control the outcome of
the claim, the insured will believe you. This makes for uncomfortable and
awkward discussions with the insured after a decision is made by Illinois
Casualty Company to settle a claim that an agent represented would not be
paid. The insured will likely lose faith in both the agent and Illinois Casualty
Company, and take his business elsewhere.
Bad Faith Claims
Bad faith claims can arise in a variety of contexts. For the purposes of this
article, we will focus on third-party bad faith claims. Specifically, a Plaintiff
who alleges that the insurance carrier engaged in fraudulent and deceitful
practices that interfered with the Plaintiff’s ability to pursue a claim.
(corrected this incomplete sentence) As stated previously, the insurance
carrier does owe a duty of good faith and fair dealing with the third parties,
albeit a much less stringent duty because it is not governed by contract law.
Bad faith claims of this nature typically arise when an insurance carrier or
Insured has tampered with a witness or withheld key evidence that should
have been disclosed under Rule 26.
Punitive Damages
Claims for bad faith typically result in a punitive damages claim against the
insured. This poses complications for claims handling because punitive
damages are not covered under Illinois Casualty Company insurance policies.
It is against public policy in most states to insure against punitive damages, so
essentially they are not insurable as a matter of law. Therefore, a punitive
damages claim creates extra contractual exposure for the insured. Most
recently, we have witnessed some situations where the actions of an agent,
unbeknownst to Illinois Casualty Company, have created the appearance of
bad faith claims handling, and thus a punitive damages claim against the
insured. Consider the following “mixed bag” of bizarre agent slip-ups that
resulted in a punitive damages claim against the insured. In doing so, try to
identify all the ways in which the agent operated outside the boundaries of
his responsibilities.
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Cautionary Tale 4:
The Perfect Storm
Agent is reading the newspaper on Sunday morning and the front page
headline reveals “Fight at Local Bar Results in Fatal Shooting.” Agent
recognizes from the front page picture that the bar in the picture belongs to
one of his Insureds, but the police in the photo appear to be securing an area
across the street from the Insured’s bar. The Agent believes this shooting may
have occurred off the Insured’s premises, and wants to help his client avoid a
costly claim. The Agent thinks that if he can do a bit of his own investigation
on the front end, he can head off any potential claims or lawsuits for the
Insured. He contacts the independent security firm that provides security for
the Insured and requests to interview the security employees that were
working on the night of the shooting. Agent decides to record the interviews
of the security employees just to be safe. The security employees also gave
Agent the name of an eyewitness who was standing outside when the
shooting occurred. Agent called this witness, and she told him that the fight
that lead to the shooting started in the Insured’s parking lot. She was not
certain exactly where the shooting occurred. Based on the interviews with the
security employees, the Agent believes he has confirmed that the shooting
occurred off the premises. Agent decides not report the claim to Illinois
Casualty Company.
A month later, the Agent receives notice from Insured of a lawsuit that was
filed by Victim, who was injured in the shooting. The lawsuit is filed against
Insured and the independent security firm. Before providing notice to Illinois
Casualty Company, the Agent calls Victim’s attorney and shares the results of
Agent’s personal investigation. Agent tells Victim’s attorney that he spoke to
several witnesses, including the independent security employees, and there is
no liability in this case because the shooting happened across the street from
the Insured’s premises. Victim’s attorney concedes that his case is not very
strong if the shooting did not occur on the Insured’s premises. Agent is
pleased that his efforts so far appear to be paying off.
Agent then reports the lawsuit to Illinois Casualty Company. In doing so,
Agent instructs the claims adjuster that Agent should be the point of contact
for the Insured during claims handling. The Insured does not like to be
bothered with these matters, and the Insured is uncooperative by nature
because he is inherently suspicious of everyone. The Insured only trusts
Agent, so the claims adjuster is instructed to contact Agent regarding any
claims handling matters.
As the lawsuit proceeds, Victim’s attorney learns of the eyewitness to the
shooting whose testimony will confirm that the incident, at the very least,
began in the Insured’s parking lot. The eyewitness tells Victim’s attorney that
she previously spoke to an attorney for the Insured, who instructed her not to
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contact or speak with Victim’s attorney. She has not spoken to anyone about
the shooting since then because she was afraid. Victim’s attorney then files
an amended Complaint to add a claim for bad faith and punitive damages.
Victim’s attorney believes that either the Insured’s personal attorney or an
attorney at Illinois Casualty Company talked to the witness shortly after the
shooting, and instructed her to have no further contact with Victim or his
attorney. In reality, the eyewitness is confused. She has mistaken Agent for
an attorney involved in the representation of Insured.
This colorful anecdote provided an example of almost every potential mistake
or mishap that could occur when an agent is involved in the investigation of a
claim. It is really the perfect storm of worst-case scenarios. The result here is
that the mere appearance of bad faith on the part of the Insured or Illinois
Casualty Company is enough to create extra-contractual and personal
exposure for the Insured due to the bad faith and punitive damages claim. As
previously discussed, punitive damages claims also create coverage issues
that lead to inherent conflicts that can complicate the defense of these
claims. The unfortunate part about this scenario is the culpability of the
Agent himself, whose mistakes have now compounded tenfold on the insured
and Illinois Casualty Company.
The Agent was clearly mistaken about a number of things. First, it is not his
responsibility to investigate and hedge off claims for the Insured. The Agent’s
sole duty is to provide notice of the claim to Illinois Casualty Company,
including the relevant contact information for the insured. Agent’s failure to
timely report the claim to Illinois Casualty Company may have prejudiced our
ability to adequately investigate and defend the claim.
Agent is also mistaken about who the point of contact is for the handling of
the claim. Illinois Casualty Company will deal directly with the Insured when
handling the claim, and the Insured is contractually obligated under the policy
to cooperate and assist in the defense of the claim. It is not acceptable, legal
or ethical to have Agent pose as the go-between. Agent can and should put
Illinois Casualty Company in contact with the Insured when needed, but
Agent should not be involved in the investigation of the claim or
communication between Illinois Casualty Company and the Insured. Agent is
creating an ethical dilemma for Illinois Casualty Company, and putting the
Insured at risk of waiving all confidentiality and privilege in the case.
A moment of pause?
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Agent has also done a great disservice to himself by his aggressive approach
to investigating this claim. By contacting Victim’s attorney himself, he alerted
the attorney to the fact that Agent was conducting an independent
investigation of the claim. This was likely a red flag to Victim’s attorney, and
probably ruined all chances for Illinois Casualty Company to easily dispose of
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the claim. Agent also created an investigation file that was not privileged
and will be prejudicial to the Insured’s defense. Agent will become a witness
to the case, his records will be subpoenaed, and he will be called to testify by
Victim’s attorney. Agent’s testimony is unlikely to paint the Insured or Illinois
Casualty Company in a positive light to a jury.
Finally, Agent may very well face an errors and omissions claim from the
Insured that will result in a loss of business from the Insured. Agent’s existing
partnership with Illinois Casualty Company could also be jeopardized as a
result of his actions.
SUMMARY
As a disclaimer, we are certainly not in any position to render legal advice to
you, nor have we read your professional liability insurance policy. However,
we do care about your business and are invested in your success as your
business partner. For that reason, we feel it is necessary to caution that
becoming overly involved in the handling of a claim could result in an errors
and omissions claim against you, or worse yet, personal liability exposure.
Professional liability policies are usually tailored to include policy language
that is specific to the profession (insurance agent), and conduct that falls
outside of the context of professional services that would typically be
rendered by industry standards are not covered. Additionally, most policies
only cover errors and omissions claims that arise out of negligent acts. The
policies do not typically cover intentional errors and omissions. Therefore,
there is the potential that an insurance agent would not have coverage for
intentional wrongdoing. Typically, coverage for these claims would hinge on
whether the insurance agent acted in a knowingly wrongful or dishonest
manner by representing himself as something other than an insurance agent.
In the examples above, the agents may have been unaware of the
consequences of their actions, but ignorance is no defense in these situations.
The agents made conscious and deliberate decisions to be involved in the
investigation of the claims, and therefore acted intentionally and knowingly
when they did so. An agent is not a claims investigator. An agent is also not
an attorney. An agent that is operating outside of the role of an insurance
agent may not be covered under his professional liability policy for
inadvertent, albeit well-intended mistakes. The agent may then be forced to
personally defend a costly errors and omissions claim.
In closing, we hope that this article has given you greater insight into the way
that the law drives the obligations and responsibilities of the parties involved
in the handling of claims and litigation. It is also our goal to explain why it is
essential to separate and insulate our agents from that process. We know
our agents desire to give exceptional service to their clients; it is evident in
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the commitment our agents have to the partnership with us. Illinois Casualty
Company’s mission is to deliver expertly crafted insurance products and
services to the food and beverage industry. It is what we do, and it is who we
are. We believe we do it better than anyone else in our niche, but we cannot
do it without the cooperation of our agents. Please continue to partner with
us in this mission, and give our insureds the exceptional products and services
they deserve.
CONTACT US
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If you have any comments, suggestions, or wish to discuss this ICAP, please
contact us at [email protected].