Good Faith Claim Handling in Fraud Investigations

Insurance fraud is rampant. It is considered to be the second costliest white-collar crime in America after tax evasion, costing consumers an estimated $308.6 billion each year.

It may involve outright fraud—such as a staged accident, arson, identity theft, contractor fraud or medical fraud—or it may involve soft fraud, such as a padded property claim or an exaggerated injury claim. In either case, fraud is pervasive, and combatting fraud is a challenge for all involved.

To avoid bad faith and potential extra-contractual penalties in the current litigious environment, insurance claim professionals must conduct their claim investigations while considering regulatory requirements, case law and industry standards, along with the potential legal ramifications for failing to adequately investigate suspicious claims.

Most states have an Unfair Claims Settlement Practices Act or similar statutes penalizing insurers who unreasonably fail to settle covered claims, such as Georgia statutes O.C.G.A. §§ 33-4-6, 33-4-7. With strong lobbying from the plaintiffs’ bar, some states are broadening these regulations to the point where some courts have interpreted these new measures to authorize personal liability against individual adjusters for bad-faith claims handling.

A case to note is Keodalah v. Allstate Ins. Co., 194 Wash. 2d 31 (2018), finding that the state’s Insurance Fair Conduct Act “imposes a duty of good faith on corporate and individual insurance adjusters alike.” Thankfully, that case was overturned, but only by a narrow 5-4 margin (Keodalah v. Allstate, 194 Wash. 2d 339, (2019)).

It should come as no surprise that incidents of fraud spike after states enact such measures.

So, what are adjusters and insurance carriers to do?

It is important to stay up to date on your state’s laws, both statutory and common law, to ensure you are complying with the processes and time limits set forth by the governing body of your state. Keep in mind that most states require an insurance carrier to satisfy not only the procedural requirements of a state’s bad-faith statute but also the substantive requirements of the statute.

For example, under Georgia law, there can be no finding of bad faith under O.C.G.A. § 33-4-6 if “it can be said as a matter of law that there was a reasonable defense which vindicates the good faith of the insurer” and that “the insurer had reasonable and probable cause for making a defense to the claim.” (Colonial Life & Accident Ins. Co. v. McClain, 243 Ga. 263, 265 (1979)).

Additionally, with no statutory definition of “bad faith,” Georgia courts have defined bad faith as a “frivolous and unfounded refusal in law or in fact” to provide coverage according to the terms of the policy. (Interstate Life & Accident Ins. Co. v. Williamson, 220 Ga. 323 (1964)). Furthermore, whether the insurer’s denial was “frivolous or unfounded” is determined based on the evidence presented at trial, not at the time the claim decision was made. (Hudson v. State Farm Mut. Auto. Ins. Co., 201 Ga App. 351 (1991)).

Continuing your thorough investigation with an examination under oath is critical because an EUO, unlike a recorded statement, can be useful as impeachment evidence should the matter go to trial. An EUO also provides insurance carriers with broader access to information than a deposition.

One example of the benefits of an EUO is that an insured may not invoke legal privileges, even the Fifth Amendment right against self-incrimination. Harary v. Allstate Ins. Co., 988 F. Supp. 93, 103 (E.D.N.Y. 1997), aff’d, 162 F.3d 1147 (2d Cir. 1998) found an insured may not use her Fifth Amendment privilege as a sword against her fire insurer; Pervis v. State Farm Fire and Cas. Co., 901 F.2d 944 (11th Cir. 1998) held that the Fifth Amendment privilege against self-incrimination did not excuse the insured from fulfilling his contractual obligation to answer questions that were material to the insurer’s investigation during examination under oath.

Pretrial discovery also plays a critical role in uncovering fraud since the determination of whether an insurance carrier’s decision was made in bad faith depends upon the sufficiency of its evidence in court. Your legal counsel should be seeking legally credible and reliable copies of all documents relied upon for a fraud defense to ensure the records will be admissible in litigation. This includes documents such as phone records and bank statements in first-party claims and all pre- and post-accident medical and pharmacy records in injury claims. As such, it is important to document the claim file thoroughly with as much information as possible but also to understand that certain information may require a subpoena to be obtained from other sources if the claim progresses into litigation.

Finally, insurance carriers also must consider the potential exposure for failing to investigate claims, whether failing to investigate based upon a cost-benefit analysis or some urgency in processing claims such as in a catastrophe setting. Insurance fraud is a crime in every state.

Many states have insurance fraud bureaus or departments that investigate illegal insurance activities. Several states require insurers to have mandatory fraud plans and to report insurance fraud when discovered. Several states also have immunity laws designed to enable insurance companies to report their fraud without limited risk of criminal or civil prosecution. Investigating fraud is, in many states, an insurer’s obligation.

Fraud is everywhere. Diligent claim handling is more than “dotting the I’s and crossing the T’s.” It is using all resources the policy and applicable law provide you while allowing your inherent curiosity to lead you to the proper legal and ethical conclusion.

Segel is a partner in Swift Currie’s Atlanta office. She represents insurance carriers and businesses in commercial litigation and insurance coverage matters with an emphasis on defending against bad faith and fraudulent claims.