Friday, March 28, 2014

Fair Claims Settlement Practices Regulations: What They Are And How To Use Them In An Insurance Bad Faith Case

The business of insurance historically has been subject to state regulation, not federal.  Hence, states were free to enact laws regulating insurance companies.  In the early 1900’s, California promulgated the Cartwright Act which provides that “every trust is unlawful.”  See, Bus. & Prof. C. §§ 16700, et seq.  The statute defines a “trust” as “a combination of capital, skill or acts by two or more persons for any of the following purposes:. . .  (a)  To create or carry out  restrictions in trade or commerce.  (b)  To limit or reduce the production, or increase the price of merchandise or of any commodity. . . .”  The Cartwright Act is designed to protect against, for example, insurance companies acting in concert regarding premium rates to the harm of consumers.


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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