Avoiding Bad Faith in Water Loss Claims by Practicing Due Diligence

One way to ensure a bad faith claim against your company is by ignoring expert advice, according to two presenters at the Combined Claims Conference held in Orange County, Calif., earlier this month.

According to Tony Falco, CR and CEO of Accurate Leak Locators and attorney John Edson of McKenna Long & Aldridge, whether an adjuster or an insurer listens to hired experts has a major impact on the resolution of a water loss claim.

During the presentation, Edson said that bad faith is the “unreasonable withholding of policy benefits.”

Edson cited the 2004 case of Jordan v. Allstate Insurance Company, and indicated that the insurer’s duty to investigate is not limited to what the insured tells an adjuster the problem is. In addition, if an adjuster or an insurer chooses to ignore expert recommendations, it is at the insurer’s peril.

According to Falco, a seasoned California-based contractor, a thorough plumbing contractor working with an insurer on a claim will conduct the following tests on a sealed plumbing system to determine the source of a leak.

1) Sound test on every fixture.

2) Pressure drop test. Test requires an operational shut off value.

3) Running drain test.

4) Video inspection.

5) Static pressure test.

6) Visual inspection.

7) Pool test, if applicable.

8) Irrigation test, if applicable.

9) Compaction probe test.

Falco also recommended that photos be taken whenever possible, in case a claim must be reexamined later.

Edson said that if a claim is found to have a second source for a water leak, not acting on it “is almost per se bad faith, per the Jordan decision.”

If an adjuster or insurer decides to ignore an expert’s recommendations, the claim file should be documented as to the reason(s) for doing so.

“What you know at the time of the claim is the test for bad faith,” said Edson.

If an adjuster encounters a contractor who refuses to warranty work, the panelists recommended the adjuster obtain a second opinion.

Both speakers recommended that adjusters be proactive in working these types of claims and in locating experts that could stand behind their findings.

Watch Caryn Siebert discuss the importance of continuing claims education.