In 1959, California enacted the Unfair Insurance Practices
Act (“UIPA”), set forth at Insurance Code sections 790, et seq. In 1972, the provisions set forth at
Insurance Code section 790.03(h), the Unfair Claims Settlement Practices Act (“UCPA”),
were enacted. The UCPA provisions
constitute factors for the jury to consider in determining whether the
insurance company acted in good faith or bad faith. See, CACI 2337; BAJI 12.94. The factors include: misrepresenting
pertinent facts or policy provisions to insureds (Ins. C. § 790.03(h)(1));
failing to acknowledge and act reasonably promptly on claims communications
(Ins. C. § 790.03(h)(2)); not attempting in good faith to effectuate prompt,
fair, and equitable settlements once claim liability has become reasonably
clear (Ins. C. § 790.03(h)(5)), etc.
While there
is no private right of action under section 790.03(h), in light of Moradi-Shalal
v. Fireman’s Fund Ins. Cos. (1988) 46 Cal.3d 287, 304, the statutory provisions
do set forth industry standards that insurance companies are to follow. As CACI’s use notes point out, these factors “assist
the jury in determining whether the insurer’s conduct was unreasonable or
without proper cause.” See, Jordan v.
Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1078.
On December
15, 1992, the Insurance Commissioner adopted the “Fair Claims Settlement
Practices Regulations.” See, 10
CCR §§ 2695.1 - 2695.13 (California Code of Regulations, Title 10, Chapter 5,
subchapter 7.5). The purpose of the
Regulations is to enforce the UCPA statutory provisions.
By their
own terms, the Insurance Commissioner promulgated the Regulations to accomplish
the following objectives:
“(1) To delineate certain minimum standards for
the settlement of claims which, when violated knowingly on a single occasion or
performed with such frequency as to indicate a general business practice shall
constitute an unfair claims settlement practice within the meaning of Insurance
Code Section 790.03(h);
(2) To promote the good faith, prompt,
efficient and equitable settlement of claims on a cost effective basis. . . .”
See, 10 CCR § 2695.1(a). The Regulations delineate “minimum standards”
- they are not “guidelines” or “suggestions” as insurance companies contend.
The
Regulations provide a very useful, tangible way to show a jury that the
insurance company acted unreasonably in the handling of a particular
claim. Juries appreciate clarity, and a
check list or road map against which they may consider or evaluate insurance
carrier conduct. In addition to
Insurance Code section 790.03(h), the Regulations provide that road map.
Classes Of Insurance To Which The Regulations Do Not
Apply
The
Regulations do not apply to:
● Workers’
compensation insurance (see, 2695.1(b)(1))
● Health
care providers’ professional malpractice insurance (see, 2695.1(b)(2))
● Certain
ERISA plans, and self-insured or self-funded employee plans (see, 2695.1(b)(3)
and (4))
● Surety
insurance, partially (see, 2695.1(c))
Otherwise, the Regulations do apply to other classes
of insurance, including auto, homeowner, commercial, and non-health care
providers’ professional malpractice insurance.
The Standards With Which Carriers Must Comply Under The
Regulations
There is no
substitute for actually reading the Regulations themselves. The following provides a brief summary,
however, of some of the more significant features and requirements of the
Regulations:
● Section
2695.1. Preamble.
The Regulations’
Preamble expressly states that the Regulations are the “minimum standards”
applicable to claims handling and resolution.
See, 2695.1(a)(1). A
carrier’s failure to meet the “minimum standards” evinces carrier misconduct
and possibly bad faith.
The Preamble clarifies that the
Regulations are not the “exclusive definition of all unfair claims settlement
practices.” Other unreasonable carrier
conduct may furnish evidence of breach and bad faith. See, 2695.1(b).
Importantly, the
Preamble states at sub-paragraph (f) that: “Policy provisions relating to the
investigation, processing and settlement of claims shall be consistent with or
more favorable to the insured than the provisions of these regulations.” Thus, for example, a policy provision that
states the insurance company need not alert an insured claimant as to a one
year suit provision is not enforceable. See,
2695.4(a).
● Section 2695.2. Definitions.
There are 25 terms
defined in the Regulations. Of
particular significance:
“Claimant”
includes not only a first or third party insured, but an insured’s attorney, or
the insured’s public adjuster, as well. See,
2695.2(c). Thus, Regulation
provisions stating that the insurance company must notify the “claimant” as to
certain policy provisions or limitations apply even if the insured is
represented.
“Notice of
claim” is any written or oral notification to an insurer that reasonably
apprises that the insured wishes to make a claim against a policy, and that
conditions giving rise to carrier obligations under the policy may have
arisen. See, 2695.2(n). The Regulations do not require a formal
written notice procedure, with identification of the coverage triggering facts,
to qualify as a claim. Yet, we have seen
insurance carriers make the argument that a formal notice of claim procedure is
required, even under standard auto or homeowner policies. Such a position violates the Regulations.
The terms “willful” and “willfully”
under the Regulations do not require an intent to violate the law, or injure
another, or gain an advantage over the insured.
These terms mean “simply a purpose or willingness to commit the act, or
make the omission referred to in the California Insurance Code or this
subchapter.” See, 2695.2(y). Thus, the insured does not have to show that
the carrier specifically intended to harm the insured in order to establish
willful violation of the UCPA or the Regulations.
● Section 2695.3. File and Record Documentation.
Insurance company claims
files are subject to examination by the Commissioner. Thus, the Regulations require that the claims
files “shall contain all documents, notes and work papers
(including copies of all correspondence) which reasonably pertain to each claim
in such detail that pertinent events and the dates of the events can be
reconstructed and the licensee’s [insurer’s] actions pertaining to the claim
can be determined. . . .” See,
2695.3(a).1
Importantly, this
Regulation goes on to specify that:
“All
insurers shall” maintain accessible, legible, and retrievable
claim data, available for all open and closed files for the current and
preceding four years;
“All
insurers shall” record in the claim file the date every material
and relevant document was received, processed, transmitted, or mailed. See,
2695.3(b)(1) and (2).
Thus, when you are first
contacted with respect to a potential bad faith case, you and/or the insured
may ask the insurance company to provide all claim related documents, prior to
filing suit. See, e.g., Ins. C. §
2071 (standard fire/homeowner policy); § 10082.3 (earthquake insurance).
Additionally, other
claims information pursuant to Colonial Life & Acc. Ins. Co. v. Superior
Court (1982) 31 Cal.3d 785 is important and relevant in most insurance bad
faith cases. Section 2695.3 is a
valuable tool in countering carrier burden Declarations positing that the other
claims information is not readily accessible or retrievable.
● Section 2695.4. Representation of Policy Provisions and
Benefits.
Every insurance carrier “shall
disclose to a first party claimant or beneficiary, all benefits, coverage, time
limits or other provisions of any insurance policy issued by that insurer that
may apply to the claim presented by the claimant.” See, 2695.4(a). Recently, the Second District Court of Appeal
in Superior Dispatch, Inc. v. Ins. Corp. of New York (2010) 181
Cal.App.4th 175, 181, held that carriers must comply with the 2695.4(a)
Regulation requirement with respect to notifying insureds of “contractual
limitations provisions and other policy provisions that may apply to the claim,
regardless of whether the insured is represented by counsel.”
Much too common is the carrier
practice of not revealing to insureds potentially applicable coverage under a
policy. This is a violation of the
Regulations.
This Regulation also provides that
when additional benefits might reasonably be payable under a policy, based on
additional proofs of claim, “the insurer shall immediately
communicate this fact to the insured and cooperate and assist the insured in
determining the extent of the insurer’s additional liability.” See, 2695.4(a). This is a very important Regulation
requirement. Many carriers do not assist
the insured, but handle claims in an adversarial fashion. That is a violation of the minimum standards
applicable to claims handling - and demonstrates bad faith.
● Section 2695.5. Duties Upon Receipt of Communications.
This Regulation sets
forth a requirement that often goes unheeded by the carrier:
“Upon
receiving any communication from a claimant, regarding a claim, that reasonably
suggests that a response is expected, every licensee shall immediately,
but in no event more than fifteen (15) calendar days after receipt of that
communication, furnish the claimant with a complete response based on the facts
as then known by the licensee. . . .” See,
2695.5(b).
Clearly, the purpose of this
Regulation is to promote prompt claim handling and resolution. All too often, claims files include letters
from insureds where the insurance company’s response is greatly delayed. Every late response is a separate Regulation
violation.
Upon receiving notice of
a claim, the insurance company “shall immediately, but in no
event more than fifteen (15) calendar days later:”
Acknowledge
receipt of the notice of loss;
Provide
necessary forms, instructions, and reasonable assistance to the insured; and
Begin
necessary claim investigation. See, 2695.5(e)(1),
(2), and (3).
The Regulations state
more than once that the insurance company must assist the insured in
claims handling - not harass or impede.
● Section 2695.6. Training and Certification.
Insurance companies “shall
adopt and communicate” to its claims handling personnel written standards for
the prompt investigation and processing of claims. See, 695.6(a).
Insurance companies “shall
provide thorough and adequate training regarding the regulations” to all claims
handling personnel. See, 2695.6(b).
Carriers “shall
demonstrate compliance” with these requirements by executing an annual written
certification under penalty of perjury stating that the carrier’s claims manual
contains a copy of the Regulations, and that clear written instructions
regarding procedures to be followed were provided to claims handling
personnel. See, 2695.6(b)(2)(A)
and (B).
Noteworthy is that this
Regulation mandates that carriers have a claims manual. Many carriers take the position that they are
not required to maintain claims manuals.
Failure to maintain and provide claims manuals to claims handling
personnel is a violation of this Regulation.
In discovery, request
production of the carrier’s claims manuals, and also the annual written
certification, signed “under penalty of perjury, by a principal of the entity.
. . .” If the carrier has such signed
certifications - and, concomitantly, no claims manual - there is an argument
that the carrier engaged in fraud or misconduct.
● Section
2695.7. Standards for Prompt, Fair and
Equitable Settlements.
This Regulation section
is most important relative to fair claims settlement practices. The very first subparagraph (a) provides:
“No
insurer shall discriminate in its claims settlement practices based
upon the claimant’s age, race, gender, income, religion, language, sexual
orientation, ancestry, national origin, or physical disability, or upon the
territory of the property or person insured.”
This
is not optional - yet, carriers argue the Regulations are merely “suggestions.”
Subparagraph (b) of this
provision requires that upon receiving claim notice, carriers “shall
immediately, but in no event more than forty (40) calendar days later, accept
or deny the claim, in whole or in part.
The amounts accepted or denied shall be clearly documented in the claim
file unless the claim has been denied in its entirety.” If the claim is suspected to be false or
fraudulent - “where there is a reasonable basis, supported by specific
information available for review by the California Department of Insurance” -
the forty day requirement does not apply.
See, 2695.7(k).
Most insureds are not
aware of the forty (40) day accept or deny mandate.
If a carrier requires
more time than forty (40) days to conduct the claim investigation, the carrier
must provide written notice specifying additional information the carrier
requires, and state any continuing reasons for the insurer’s inability to make
a final claim determination. If the
claim continues, the carrier “shall” provide this written notice
every thirty (30) calendar days until a determination is made, or notice of
legal action by the insured is served. See,
2695.7(c)(1).
Insurers often argue
that this thirty (30) written notice requirement is optional, superfluous,
onerous, and constitutes “form over substance.”
In fact, the thirty (30) day notice requirement has multiple
benefits: The insured is kept apprised
of the claims handling, and the claims adjusters are reminded to pursue necessary
further investigation on a claim that has not yet been resolved. Carriers that comply with this thirty (30)
day written notice requirement tend to avoid claims languishing for months or
years. We have seen that insurance
companies that do not compel their adjusters to follow this provision have greater
claims handling delays.
Where a first party
claim is denied in whole or in part:
The carrier
must do so in writing;
All bases
for denial, including factual and legal, must be specified;
Denial based
on a statute, law, or policy provision must refer to the same, and fully
explain the carrier’s reasoning. See,
2695.7(b)(1).
Where a third party
claim is denied in whole or in part, the denial must be in writing. See, 2695.7(b)(1).
When a claim is denied
in whole or in part, the carrier “shall”advise the insured or
third party claimant that the matter may be reviewed by the Department of
Insurance, with provision of the applicable Department unit address and
telephone number. See, 2695.7(b)(3). Carriers with a principal place of business
outside of the State of California often omit this Department of Insurance
information. This is yet again another
Regulation violation.
Subsection (d) mandates
that “[e]very insurer shall conduct and diligently pursue a
thorough, fair and objective investigation and shall not persist in seeking
information not reasonably required for or material to the resolution of a
claim dispute.” Where a claim is beset
by carrier misconduct and bad faith, this Regulation is often repeatedly
violated by various, and separate instances of, claims personnel acts and
omissions. Delay violates this
Regulation.2 Refusal to
consider all facts the insured presents, including matters demonstrating
coverage, violates this Regulation.3
Conducting a biased investigation violates this Regulation.4 Repeatedly requesting information not
reasonably necessary for claims evaluation, and requesting information the
insureds advise they do not possess, violate this Regulation.5
Section 2695.7(g)
additionally proscribes a carrier from “making a settlement offer that is
unreasonably low.” The Regulations
outline seven (7) factors that illuminate whether a carrier is making an
unreasonably low settlement offer:
(1) The extent to which the insurance company
considered the insured’s evidence regarding claim value.
(2) The extent to which the carrier
considered legal authority or evidence made available.
(3) The extent to which the carrier
considered the claims adjuster’s advice regarding amount of damages.
(4) The extent to which the carrier
considered its attorneys’ advice regarding potential excess policy limits
recovery.
(5) Procedures used by the carrier in
determining the dollar amount of property damage (this prong is particularly
important in auto and homeowner cases).
(6) The extent to which the carrier
considered the insured’s probable liability and likely jury verdict (or other
final determination).
(7) Other credible evidence specifically
pertaining to first and third party claims.
Section 2695.7 goes on
to discuss other aspects pertaining to the prompt, fair, and equitable
resolution of first and third party claims.
● Section
2695.8. These provisions specifically
set forth minimal standards that apply to automobile insurance. Section 2695.85 sets forth the Auto Body
Repair Consumer Bill of Rights.
● Section
2695.9. Additional Standards Applicable
to First Party Residential and Commercial Property Insurance Policies. This is a must read for any practitioner
handling a first party homeowner insurance claim/bad faith case.
You can
download the Regulations from, inter alia, the Department of Insurance
web site. Print them, read them, and
keep them handy.
Practical Application: Pleading/Dispositive Motions
You may
include a discussion of Regulations violations committed by the insurance
carrier in your bad faith Complaint.
This helps to defeat a general demurrer based on failure to state facts
sufficient to constitute a cause of action.
On the other hand, we have also seen many motions to strike the
Regulations language from the Complaint as there is no private right of action
for Regulations violations. The language
is not properly stricken if it supports a breach or bad faith cause of action,
and where it merely constitutes evidence of carrier misconduct rather than a
request for relief based on the Regulations violations themselves.
Regulations
violations also help to defeat a motion for summary judgment/adjudication. Such evidence underscores carrier breach and
bad faith. Make a list of the
Regulations violations, and cite to the evidentiary proof. You may work with your bad faith expert in
deriving such a list. We had one case
where there were 174 separate Regulations violations, which were set forth on
an appendix with citations to the evidence.
There was abundant evidence of carrier breach and bad faith to defeat
the motion.
Furthermore,
at least one treatise suggests that the Regulations violations shift the burden
of proof in a bad faith case. The
Regulations were promulgated to enforce the UIPA. The theory is that such carrier violations create
a rebuttable presumption of bad faith, which shifts to the insurance company
the burden of proving excuse or justification for its misconduct. See, Crosky, et al. California
Practice Guide: Insurance Litigation (The Rutter Group 2009) ¶ 14:131.
Practical Application: Discovery
Requests
for Production may include requests for claims manuals, and writings that
constitute the carrier’s compliance with section 2695.6(a) (written standards
for the prompt investigation and processing of claims). Ask for production of the carrier’s annual
written certifications, which are to be signed under penalty of perjury by a
principal of the company. We obtained
such signed certifications - in a case where the carrier did not even have a
claims manual!
Practical Application: Trial
Jurors do
not like an insurance company (or any defendant) that refuses to follow the
rules. The Regulations provide a compact
set of the rules carriers must follow.
In the case we had involving 174 Regulations violations, during closing
argument, we had one huge blow up with nothing but the number 174. We also enlarged the relevant Regulations
language. The insureds’ bad faith expert
discussed the Regulations violations, and jointly prepared the Regulations
violations memorandum with our office.
Through the expert, we were able to get the fact of 174 Regulations
violations into evidence.
The jurors
got it. The trial was long - one
month. The case involved a first party
homeowner case, with an accidental loss due to a fire caused by the insureds’
son. The insurance company paid for
Dwelling restoration and personal property losses; but, the payments were
unreasonably low. The carrier’s theme
was “we paid, and paid, and paid.”
Nevertheless, the jurors never lost sight of, and were very unhappy
with, the insurance company that repeatedly flouted the rules. There were many juror comments during the
post-verdict court hallway discussions to the effect that “we would never buy
insurance from that carrier,” “that carrier didn’t want to follow the rules it
was supposed to follow,” and “we didn’t like that the insurance company
insisted on doing things it was not supposed to do under the Regulations.” The jury found breach and bad faith.
Incredibly,
the insurance company’s only comment about the Regulations was that they were
merely “guidelines.” Otherwise, the
carrier never refuted the 174 Regulations violations.
Conclusion
As Abraham
Lincoln said, “no law is stronger than is the public sentiment where it is to
be enforced.” (December 1859.) Public sentiment will always be against the
habitual or willful rule breaker - particularly where the rules exist to
protect the vulnerable. Even “conservative”
jurors do not like corporate disobedience.
Use the Regulations throughout litigation and at trial to expose and
reinforce the insurance company’s “rule breaking” misconduct and bad faith.
1 The “shall,” where quoted from the Regulations, is
emphasized to underscore the mandatory nature of the Regulations. Carrier exhortations to the contrary, these
are not “guidelines.”
2 Such conduct also violates Insurance Code sections
790.03(h)(2), (3), (4), (5) and decisional law: Fleming v. Safeco Ins. Co.
of America, Inc. (1984) 160 Cal.App.3d 31, 37.
3 See
also, Insurance Code section 790.03(h)(5) and decisional law:
Egan v. Mutual of Omaha Ins.
Co. (1979) 24 Cal.3d 809, 819; Jordan v. Allstate Ins. Co. (2007)
148 Cal.App.4th 1062, 1072.
4 See also,
Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal.App.4th 1617,
1624.
5 See, e.g., Bernstein v. The Travelers Ins. Co.
(N.D. Cal. 2006) 447 F.Supp.2d 1100.
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