Insurance, Bad Faith, Expert Witnesses

Expert Witnesses (Sometimes Lawyers) in 

Insurance Bad Faith [IBF]Cases[1]:

An Mostly Elementary Introduction to Some Fundamentals in Two Parts (Part II)

Author:

Michael Sean Quinn, Ph.D., J.D., C.P.C.U. &c

Law Office of Michael Sean Quinn

2630 Exposition Boulevard Suite 115

Austin Texas 78703

(o) 512-296-2594

(c) 512-656-0503

mquinn@msqlaw.com

(Resumes on Website:

www.michaelseanquinn.com)

This is Part II of an essay that contains a number of short “chapters.”  The first three are in Part I, so we begin with Chapter IV.

___________________________________________________________

IV.

          Typical Issues and Conduct of Insurers & Adjusters in Bad Faith Cases: The Expert Witness

                   A.      In virtually all bad faith cases, an expert (as well as the adjusters) will have to know the meanings of the operative words in insurance contracts, their accepted usage in the insurance “industry,” and how they might be ambiguous,[2] whether they are thought to be or are argued to be.[3]

          Of course, the adjuster has to—or should—know the things during the adjustment process itself before any testifying expert is involved.  It is not entirely uncommon for field adjusters not to recognize ambiguities in policies.  The same is often true of supervising desk examiners, and it can be true of more senior officers in adjustment departments.  Amazingly, teams of adjusters conduct “round table” discussions, and the claims file indicates a 50/50 disagreement as to what relevant language policy means.  Sometimes those in underwriting can be helpful, but they have a tendency to talk about what they intended, as if that is always clear.  Lawyers in the Adjustment Division of the general counsel’s office can be helpful, but they have a propensity to advocate the insurer’s “official” position and not examine the language of the policy with objective skepticism.

          B.      In virtually every case, the type of expert witness discussed herein will have to be able to relate that which is alleged to be a loss and the descriptive language in a policy.  Here, are a few examples of which there are many, many more:

                   1. What is “wind damage”?  (Notice how quickly this meaning links to other matters—How does it relate to other damages?  How does one look at its order and timing?)  Remember, there are subsidence exclusions in or added to many policies, e.g., liability policies, when construction projects are involved. What is “subsidence”?  Here is a typical passage, from a typical endorsement, sometimes attached to CGL policies:

a. Would any sinking or settling whatsoever of the ground under a parking lot, say, being built constitute subsidence? 

b. What is sinking anyway?  Obviously, it is different from subsidence.

c. Is “subsidence ambiguous?  Some dictionaries define it as a “deep” drop, at least as one alternative.  Others describe it as a drop at or close to a bottom.

d. What if it were 1/10^th of an inch? 

e. What if it were the contents of a bottomless sand box?  Bought yesterday?) 

f. What if a dozen different companies worked on the initial project and it is not clear who caused the problem.  What if the subsidence exclusion is applicable only if the policy holder caused the problem, and it cannot be told which company caused the sinking? All these are problems of meaning and interpretation.          

                             2. What is “ACV”? What is the real meaning of this term spelled out, “Actual Cash Value”?  How is this figured?  The phrase is usually-pretty-much-always taken to mean actual sale value minus depreciation.   What counts as evidence or what?  How is actual sale value of a partially damages complex building reliably computed?  Why can there be so much disagreement between policyholders and insurers?  And between the people hire to each?  Is it fair to treat building which is worth one thing before a real estate bubble bursts and less during the burst period, but which will rise again in the normal courts of things?  Should this be true when the policyholder paid premiums on an property evaluation double what it is during the burst-period?[4]   How is evidence gathered and calculations be done for current estimates of a building which has been entirely destroyed work?)

                   3. Can a building which has been completely destroyed be restored, as that undefined term is used in many property policies?  As it is used in ordinary language?

                   4.  If only the equivalent of and/or accidents, i.e., “occurrences,” is within coverage, what makes something not an accident, and therefore not within coverage?

          a. Consider this in a FPC:  Suppose a homeowner had large quantities of a highly flammable, explosive substance in his garage, where he smokes!  What if the material is highly explosive and the homeowner not only smokes in the garage, but also fixes his motorcycles, two or three at a time, and keeps Widespread Panic, the focus of his broad and focused musical taste at a high volume?  What if he, alone with Verdi operas, is distracting and reduces his concentration? 

          b. Now consider a different problem in an LI policy.  Suppose

an adjuster believes that the word “occurrence” refers to “property damage” which has occurred and not the negligent act which occurred somewhat earlier—or a lot earlier—and which caused the “property damage..”  Can it get any worse?

5. What if a business which calls itself “The Fun House,” and has a well known business motto, “What happen in the Fun House, stays in the “Fun House,” burns a good bit, including all of the picturesque bedroom furniture, most of which came from the Romantic period, or its starts a bigger fire that spreads throughout the building and burns the whole ting down.  Suppose The Fun House is situated over a “strip joint,” which itself burns.  Is the insurer obligated to pay for the property damage?  What if the “House of Fun” is situated over a casino?  What if all the establishments in the building are used by the insurer’s in-house adjusters?  Its underwriters?  Its executives?          (How are these latter facts about “meaning” of the relevant policy, if at all?)    

6. What some insurance adjusters, all in the same insurer, keep confusing the word “’occurrence,’” a defined term in the policy which essentially involves the idea of an “accident,” and word “occurrence,” which is not a defined term and has only to do with something happening.  (Remember, in insurance policies defined terms are distinguished from others by some sort of special designation.  Here are some typical ways of doing this: italicize the defined term, underline it, or place it in quotes.  The case just described turns on this differentiation.[5])  Here is a three-pronged  example of what I’m describing: :

a. The “occurrence” must occur within the coverage period.

b. The “property damage” must occur within the policy period.

c. The “property damage” need not occur during the policy period, thought the “occurrence” must.

C. Not all IBF problems arise out of individual errors by “idiot,” “dozing,” “revengeful,” or mean-spirited adjusters. Sometimes IBF arises out of the insurer—often through senior “officials” in the adjustment department—establishing an adjustment rule.[6]  Here are the related rules I saw recently.

          1.  Supposedly the Carrier Insurance Company (“Carrier”) believes that its FPC property policy does not cover lifted (or uplifted) roof shingles resulting from a hurricane. Thus a roof shingle merely having been uplifted by even severe wind cannot have suffered physical damage.

          2. Carrier has also prescribed that an adjuster can and should determine whether a roof shingle is a lifted single simply be looking at it while standing over it.  Thus, an adjuster must go on the roof and walk around to perform a reasonable adjustment, but it need not crawl on the roof or made a close-to-the-eyeball inspection.

          3. Carrier was prescribed that in big storm loss situations, e.q. hurricanes, adjusters should work much its internal records set forth three reasons :

                   a. more insured submit phony (fraudulent) claims after a big storm when many are submitting claims;

                   b. this adjustment method speeds things up and saves carrier/money, and

                   c. this “method puts quickly calculated suits in the pockets of honest policyholders more quickly.”

          4.  Carrier believes that the mere ripping of the seal between a lifted shingle and the wood roof under neither it is not “physical damage” as defined in the policy.[7]  After all, a torn shingle which is not worn out will repair itself in a couple of years at most.

Each of the immediately forgoing involves an insurer creating a rule of establishing coverage and handling adjustment without a reasonable basis.  This is especially true if the insurer has not really thought about the problem, has not researched, performed, or relied upon relatively certain inquiry which is not subject to genuine controversy.[8]  Notice the insurers actions precede any actual adjustment process.

          D.      Of course, something else an expert on adjustment has to know about, is how reasonable adjustments are conducted.  I will return to this presently. 

E.  In the meantime, it must also be remembered that there are lots of other things expert witnesses need to know, and other terms they have to be attentive to. 

F. Now we come to some really BIG stuff including core principles and tests.  (This was just hinted at a couple of subsections ago.)  Obviously, findings of common law and/or statutory insurer bad faith can essentially turn on these kinds of principles or results.  These prescriptive considerations need to be conceived of in several ways as setting forth, as customary conceived in terms of common sense and then measuring against  industry standards:[9]

1.       The more thorough the insurer’s investigation, the more carefully it is reviewed, discussed, objectively and rationally debated within the company (or the office of the high prestige independent adjuster)[10]

2.       The more logical the adjuster’s reasoning in the context of investigation, reporting, and decision-making the more thoughtful and reasoned the insurer’s final decision(s) will be (or will plausibly appear), and so on, the less likely the insurer will likely be found to be in bad faith. 

a. The more reasonable the insurer’s conduct is the more it matches the opposite of bad faith. 

b. They may all be called Epistemological-Logical Principles                    

3. An insurance adjustment expert should be able to articulate and highlight the logic-and-reasonableness reasonableness, or lack thereof, of the claims handling actor and decision makers. 

4.       It is also crucial that the insurer have the right attitude.  The expert witness (as with claims handlers in general) must articulate the principle “Look for coverage!”[11]                                       a. An insurance adjustment expert must also be able to formulate and describe how the insurer did or did not fulfill this standard.

b. The vast majority of adjusters will do so as well, say, in deposition when this happens the expert’s function is to trace out the consequences of applying this noble axiom.

c. A “right attitude” in this context should not be confused with a mental state.  Corporations do not have mental states; they have activities which will not happen without a section with an attitudinal consensus, at least among section leadership.

5.       An insurer under performance assessment should never deviate from any genuinely fundamental adjustment principle.       This includes the “look for” Principle and all of the Epistemological-Logic Principles mentioned above.                               

6.       An insurance adjustment expert witness must, in most cases, know and be able to set forth how to do this.[12]

7.       The same points apply to cause and origin.

8.       All the same just stated points must be true for the entire adjustment team—or at least—that part of the team involved in a given case, up to and including the senior decision makers.

9.       Insurance Adjustment experts should be able to recognize and explain insurer misrepresentations, no matter how they occur.

V.

Other Uses for Insurance Expert Witnesses

          A.      Insurance expert witness can also be used in an insurance case for the following:

1.       Explain the policy, if that is permitted by a court;

2.      Discuss the policy in order to explicate the idea of “distance” between insurer adjustment an the policy, assuming that is the real problem (or part of it);          

3.       Explain structures and processes leading up to policy insurance

          a. marketing;

          b. retail agents, wholesale agents and/or MGAs;

c. the surplus lines carrier and its relation to state agencies; and

          d. underwriting.

4.   Explain a variety of other assorted matters, such as:

          a.       the issuance of Certificates of Insurance

                   (i) nature;

                    (ii) purpose;

                   (iii) text;

                   (iv) who—may and/or does issue;

                    (v) to whom;,

                    (vi) why;

                   (vii) meaning of language; and/or

                   (viii) problems.

b. ACORD forms for the adjustment process—who is and who should not be involved and what should involvement look like? 

5. Can erroneous information utilized by an insurer constitute the insurer’s commitment to that false “information’? 

a. One would think so, although obviously it would not be waiver, if unintentional.

b.What would count as an actionable misrepresentation?

6.  Describe and explain the structure of the insurance industry, e.g., sales, intermediary group structure regulation, relations with other types of institutions and “players” (e.g., governmental commissions, banks, &c.)                 

7. Explain facts about differences in adjustment processes, e.g., CGL versus commercial property insurance, business interruptions versus non-payment of loan insurance, maritime v. commercial airplane insurance

a.     most significantly: how are different types of  adjustment done, e.g., at what pace

b.     how different types of adjusters usually behave

c.      how different adjustment departments—those working on different types of cases--conduct communications with policyholders and others:

(i)    oral

(ii) written: such as

·        denial letters,      

·         reservation of rights communiqués,

·        “You can count of us letters”

Of course, experts will not just be describing how all these things work.  They will also often be describing whether various functions have been correctly or reasonably performed.  This need not be in a bad faith case, of course.  It is often necessary in complex contract cases, and occasionally in super-twisted-in-all-directions securities cases, and the like.      

          7.  Of course, some experts will be good at one area and        incompetent at another. 

a. Some adjusters and/or experts can testify about the way intermediaries related to each other, to different types of intermediaries (e.g., retail agents and MGAs), and/or to insurers. But  not at all types of experts to how long it takes to adjust this or that type of specialized  or esoteric claim, the order in which reasonable adjustment should be performed in a given case, whether engineers are needed, what type is needed, how an engineer would fit in, what is sound engineering, the same for sophisticated accounting,  how liability insurers and their adjusters should observe, track, and direct defense counsel, and so on and on.

b. Why and how insurers or their lawyers should not expect what might be called “thorough horizontal knowledge.”

VI.

          Qualifying and Preparing Experts[13] & Other        Recommendations

          A.      Challenges as to Qualifications:  Often it is argued that a proposed expert is not really qualified to testify.  Experts are challenged by way of a “Motion to Disqualify.” They are numerous, but with some witnesses, they get less routine, as time goes along.

          1. The usual ground urged for disqualifying a proposed expert is that s/he doesn’t know enough.

2. Often opponents of the witness argue that the proposed witness does not have enough experience of the relevant sort.  (E.g., the witness primarily has done worker’s comp claims so s/he should not be permitted to testify in an adjustment case involving Financial Institution Bonds.)

          3.       Sometimes the claim is not just that the proposed witness doesn’t know enough, but that s/he does not have sufficiently scientific training or knowledge and/or that there has been no experiments, and/or there has been no peer review of the proposed experts polished work.  There is a U.S. Supreme Court case, which some lawyers use as the foundation for this.[14]  It’s the wrong case for challenging insurance experts.  Nobody adjusting claims is a “scientist” and there is no science or technology involved.  It’s like complaining that a historian is not a scientist.

          4.       In any case, sometimes experts are qualified—in fact, in the area of insurance adjustment, usually, if proposed experts are any good at all they are permitted to testify; but sometimes they are not.  Difficulties arising in conjunction with disqualification get more pronounced as the complexity and/or value of the case go(es) up.

          5.       The fact that a proposed expert witness of some experience has been disqualified completely once—or a few times—is not a certainty as to what will happen in a particular case.  Judges decide these issues and have wide discretion in their rulings.

B.      Other Recommendations.  Expert witnesses must be prepared for testifying, whether in depositions or for trial. 

          1.       They must prepare themselves.  This happens by study, by writing a report (if required), and by rehearsal-speech.  Experts should think about the questions they will be asked and construct the right sorts of answers and the right sorts of arguments.  They should avoid humor and witty sarcasm most of the time and incivility all the time, even when pointing out the outrageous incivility of examining counsel.  (This must be done even though it makes the testimony less interesting and more boring.  Well, maybe a little bit here and there.  It better be less than too much, and it better be good.  Usually don’t tell jokes.)

          2.  Advocating lawyers in the case at hand should prepare expert witnesses.  Except in monetarily smallish cases, this should be done carefully.  It takes time.  Sample questions should be used.  The expert’s degree of knowledge and preparedness should be quizzed.  Videotaping is particularly helpful.[15]  Previous deposition and reports should be reviewed.  These can be found on WestLaw, and—more significantly—on association, society, or common-interest—organizations, amongst lawyers, for example.

          3.       Restraint.  All expert testimony should be presented with restraint.  This is true both with respect the lawyer offering the witness and the witness himself. An expert witness is not an advocate.  S/he is an objective authority.  Expert witnesses are supposed to be characterized by objectivity, a sense of seriousness, perhaps a semi-academic-like quality, affability, and so forth. Remember the teaching at all times.

          4.       Most of the time expert witnesses should regard themselves as “teachers.”

          5.       Arguably, expert testimony should have that which might be called a “Christian” quality.  Of course this has nothing to do with religious or internal belief.  Perhaps, under most circumstances, an expert witness should not wear a cross or any other religious symbol on his lapel or around her neck.  The point here is that there should be a degree of friendliness, love of neighbor (including strident and even insulting lawyers), and sometimes even a tenor of forgiveness.  (Some might believe that this is nothing but secular cynicism in disguise. The expert and the presenting lawyer must be cautious and careful.)

VI.

Lawyers as Expert Witness:

In Insurance IBF Cases

          A.      Sometimes lawyers are perfect witnesses.  What if the problem arises out of the insurer’s General Counsel Office, or the adjustment division?  What if the real problem arises out of the insurer failing to supervise defense counsel in an appropriate and reasonable way?  Surely, an insurance lawyer may be very helpful in testifying about an insurer’s internal guidelines, behavior rules, and so forth.

          B.  Often lawyers, no matter how experienced or knowledgeable they are, get challenged because they have never been a salaried employee of an insurer. 

1. This happens to me even though I have given over 100 insurance-related depositions, testified in over 35, or so, trials or arbitrations, many more mediations, and have published scores of times, not to mention spoken, on insurance topics. 

a. It does not seem to matter that I have licenses in both adjustment and in being an intermediary.

b. It never seemed to stop, except for litigants for whom I have been retained before.  It seems to true much more with insurers than it is with policyholders.  Some years ago, the last point was not the case.

2. All this happens to virtual all lawyers who are retained to testify as expert witnesses.  It is even true of lawyers who once worked for insurers, if that took place years before.

3.  Both of the two preceding points apply to testify as to intermediaries.

4.  Of course, all this happens to all expert-witness candidates, but more so with lawyers.  Perhaps an exception is a fulltime law professor who has worked on insurance law for many years.

          B.      Then again, experienced insurance lawyers with enough of the right sort of experience and/or training are probably as well qualified as many or most actual adjusters. 

1.  This point is true, if for no other reason, than because lawyers have a good sense of what counts as a convincing argument, even when empirical facts are central to the decision.

2. It is not being suggested that lawyer-witness should give these types of arguments.  Rather, they are prepared to recognized them (and their opposites) when used by the claims or adjustment departments of insurers.

          C.      There is usually an attempt to disqualify experienced insurance lawyers on the grounds that they have not been employees of insurance companies, usually in adjustment departments.   This is an illogical argument, even if it sometimes works.  If a very experienced insurance lawyer is presented as an expert and that lawyer has worked for insurance companies over and over again on may sorts of problem, the chances are that such a lawyer will be at least as qualified to testify to the issues at hand as employees of insurance companies, e.g., adjusters. 

          D.      Earlier the matter of “distance” was discussed.  In bad faith cases, the conclusion may depend upon the “distance” between how a policy is or should be understood and how the insurer actually understood it.  Lawyers are often very good at this, so long as they do not come off as advocates.

          E One last thing, lawyers as expert witness have little danger of exposure to malpractice liability—of that founded upon fiduciary-ness—either.  First, such an expert I not functioning as a lawyer.  Second, the duties and danger of lawyers do not apply here.  Third most states have refused to recognize such cause of action.  Alas, that established may be subject to a new trend.  It is still a minority, however.[16]  Nevertheless, have expert witnessing explicitly included in your malpractice insurance.

VII.  

Conclusion

One of the most important things to remember about expert witnessing is this:  The testimonial function of an expert witness is teaching.  When testifying an expert witness should regard her/himself as a teacher.  In preparing to be an expert witness, that person should keep in mind past teachers who were the most instructive, the most likable, the most authoritative, and the least irritating.  Then, try to generalize their attributes; in this regard, think about not just you, but your spouse, your kids, your Xs, your Ys, and your Zs.  Call up you “brothers” and “sisters” from college.  Now, try to put it all together.  You will be amazed how often the stories and evaluations match up.  The expert witness should be like that.   However, s/he should avoid advanced physics teachers, actual chemistry teachers, usually accounting teachers, and certainly those who taught differential equations.  These people are too hard to understand; they go too fast; and they are usually boring.  Above all, though for different reasons, AVOID THE USUAL LAW SCHOOL PROFESSOR TYPES !  Actual law professors are OK, so long as they don’t act or talk like it.  As already been stated, restrained semi-academic knowledgeableness is fine, but ostensible learnedness is usually not.[17]  Alas, this means you have to avoid the entire faculty at, Chicago or Yale—and their “family relations”--and a good number of their mentally-high-powered graduates—namely those who exude it.  (Elitism is a good thing in some contexts, but this is not one of them.)

---

[1]  This is a revised version of a speech-paper distributed at a Continuing Legal Education program held in the at South Texas School of Law. 

[2] It is advisable for an insurance expert to keep in mind the simple fact that a term is vague or difficult to understand does not make it ambiguous.  Vagueness and complexity are separate issues.  (Consider this: the more complex the policy and/or that which is insured by it, the more likely that some of the terms will be difficult to understand.  Sometimes engineers or physicians, or physicists, not to mention chemists, have to be brought in to explain the terms and both its meaning and its common usage.  Obviously, adjusters cannot usually do this.)  QUESTION: Is accounting the same sort of thing?

[3] Notice again a good deal of this has to do with knowing whether an insurer is interpreting its contract in an acceptable “insurance industry” way.   As a general rule, insurers and insureds need to be quite literalistic in interpreting insurance contracts.  This was centrally involved in the application of the Ambiguity Rule in insurance contracts, although it applies to all contracts.

[4] There is also, of course, another question entirely.  If the phrase is “actual case value,” why should depreciation figure in at all.  That is a deduction from ACV, nor part of it.

[5] This problem can rise to the absurd.  I have been asked in a deposition for legal authority about the idea that a defined term, such as “occurrence,” indicated in the policy to be defined, must be treated differently than the same term when not in quotes, italics or underlined. Of course, no competent insurance adjuster or coverage lawyer could make this mistake.  Still “idiot” adjusters are not the only people who can make this kind of mistake. “Idiot” lawyers made too, as happened in my deposition.

[6] Of course some of these people can be bigger “idiots than a bumblers and relatively ignorant field adjuster.  Here is an example.  No long ago in a deposition, a senior adjustment official, who was also a lawyer, was asked to formulate and set forth at least some of the rules of adjustment his company formulated and used in any adjustment process.   Here is roughly what he said:  “A rule is how a company does things.” (In other words, it is not a prescription.”  Perhaps the fellow simply confused “rule” with “as a rule.”

[7] Property insurance policies—whether residential  or commercial—usually define “property damage” to contain the following words, or something equivalent to them.  “Physical damages” has occurred if there has been “physical damage to tangible property.”

[9] In this regard, proving bad faith and defending against it, resemble proof of and refutations of allegations of negligence.

[10] ?

[11] There is universal agreement (or close to it) about this principle in the insurance industry. Of course, like any foundational principle, based upon values, which is not in the self-interest of the person or entity, there is not always universal “follow-ance” of this principle:  sometime by accident, sometimes by inexperience, sometimes by sloppiness, sometimes by “idiocy,” sometimes by negligence, and sometimes by design.  The worse it gets on this “spectrum,” the more it is or indicative of insurer bad faith.  All adjusters should be fit and ready to testify to this evaluation and stating it, or it’s opposite(s).

[12] Some cases are unusual, vastly unfamiliar, or hugely complex.  In this sort of case, and adjuster cannot be expected actually to do the calculation.

[13] Of course, merely proposed experts may need this sort of thing too.

[14] Daubert [MSQ]

[15] Of course there are document discovery problems right here.  Expert witnesses should not get or retain videotapes of training or practice sessions.  Lawyers should not save them either, if at all possible.

[17] Of course, an accounting professor in a business interruption case, an engineer in a property damage case, a wind scientist (what few there are) in a hurricane case are all exceptions to this general point, though my point as to self-presentation remains true, but to a more limited extent.