Michael Sean Quinn, Ph.D, J.D., C.P.C.U., Etc.
2630 Exposition Blvd #115
Austin, Texas 78703
(o) 512-296-2594
(c) 512-656-9759
I started working on first-party insurance
claims in the early 1980s. I have been collecting
data and literature on insurance adjusting, i.e., claims handling, ever
since. A fair amount of it is collected,
explicated, and criticized in a couple of my essays from the 1990s, e.g., The Ethical Habitat of Adjusters.[1] (I
used to teach ethics at various levels and business ethics of various sorts,
first when I taught in the Philosophy Department at Southern Methodist
University during the 1970s and 1980s, among others, later when I
taught in an M.B.A. program. I also taught "legal ethics a number of times when I taught in the Law School at the University of Texas and then in a multitude of C.L.E. programs.
There is no really new textbook literature;
most of what there was has been cited in The
Ethical Habitat, and there isn’t that much new and interesting material. (There
is some newer “how to” literature, but most of it is common sensical.[2]) Much of the literature of insurance adjusting
is like this, including much of the literature on ethics.
One
short treatise by a frequent writer on insurance is—if or when anything more
than poor—quite uneven, at least for use by lawyers. For example, the author, who was a claims
examiner for many years, tries to get to the idea of “good faith” in adjustment
by suggesting that the key idea here is faith. He then suggests that “there is a closer
relationship between insurance and religion than many twenty-first century
insurance practitioners suspect.”[3] In addition the faith involved in insurance
must be good faith. Therefore, it
cannot be “weak, blind, inactive, or bad.
To be good faith must be based
on correct theories, study, understanding, the building of relationships, and
positive actions.”[4]
Many
of the values, norm, rules, and principles which govern insurance adjusting and
which much be involved explicitly or implicitly in adjuster training are what
intelligent junior high school students would list if the activity were
described to them. They would include
·
fairness,
·
objectivity,
·
listening carefully,
·
truth valuing (telling, accepting, &c.),
·
falsity rejection,
·
empirical evidence gathering, organizing, and applying,
·
civility,
·
courtesy,
·
reasonable skepticism only,
·
honesty,
and so
forth. These are important values, of
course, and whoever presents, argues, and advocated them as “Principles of
Sound Adjustment” is right.
I
will herein be suggesting a more subtle principle, and one which is less likely
to be formulated by those unfamiliar with various aspects of insurance claims. I
submit that there is at least one fundamental principle which is not usually
appreciated or explicitly discussed. This
principle frightens at least some who are involved in insurance matters, even
if they acknowledge its truth. In fact, I think I got fired once, some years ago, as an expert witness by a well-known insurer
when I mentioned it in my report. I
don’t think my report was even ever turned over to opposing counsel or to the
court. Such is the influence of panic
and fear. Before I go further I say now that this principle is not outside all
tensions, and it is these tensions which makes it interesting. Figuring out how to apply this principle,
given that it has some tensions with others, is not always easy. This is particular true since opposing
principles have foundations which are easier to see than their limitations.
This
principle is not my invention. I got it
from one of the really great adjusters I have worked for, labored with, and
learned from. This principle applies to
any type of insurance when the issue is the relationship between the insurer
and the insured. It may be entailed by
whatever “special relationship” there
may be between an insurers and an insured; it may result in part from the counter-intuitive
complexity of at least some insurance;[5]
and it may result from the difficulty many people have in understanding various
parts of insurance, e.g., the contract language of at least some policies.
Starting
in the early 1980s, I worked with and for Al Mueller (“Mueller”), then a senior
boiler and machinery adjuster at Kemper.
That type of insurance had been around for a long time as separate types
of polices. It has been around virtually
since railroads began—in fact, it’s substance has been around even longer built
into ocean marine insurance. Ships began
to have machinery on board long before there were also railroads. Some ships similarly began to have boilers
long before there were very many miles of commercially-used tracks. (As such, boiler and machinery has not been
around as long as fire insurance, of course.)
Anyway,
Mueller taught me a principle (i.e., fundamental norm or rule) which is important,
if not crucial, for experienced adjusters, claims managers, and expert
witnesses in many insurance cases, especially those suits where the
policyholder alleges bad faith adjustment investigation or
decision-making. It has not played
a—word for word--explicit role in reported cases. The exact—and suggestive—words of the
principle are not legally explicit quotes in textbooks, although they are often
implied, as we shall see. Still, the
principle is central to the insurance litigation that pertains to adjustment, including
all sorts of bad-faith cases, so it should be explicitly explored. I often recommend to policyholder lawyers
that they ask about this principle using exactly my words, and no adjuster so
examine has ever denied the principle and all have agreed with it. If fact, I have never met an adjuster who
rejects it as a fundamental principle of sound adjustment.
Mueller
was highly experienced and gifted at his job.
He understood machines, boilers, insurance concepts, and
accounting. He was tall, beautifully
gray, heavily set, hard working and a very bright adjuster. Mueller was personable, humorous, and loved a
great dinner, no to mention a good wine.
He was also a smoker, as well as a chewer, of wonderful cigars, and a superb
horseshoe player. (Indeed, he retired to
do precisely and virtually only the latter two of these.) I have lost track of him, alas. I have, however, not lost my vivid memories
of him, his handling of claims, and what he taught me. He was an excellent, honorable, heavy-duty,
first-party commercial adjuster. I never
saw even the most confident policyholder accountant win-out over him, even when
they tried hard and hit truths. Not even
highly complex fallacious though clever reasoning swayed him. It didn’t matter
whether this reasoning was coming from engineers, impassioned client managers,
or forensic accountants. He believed in
truth, sound argument, and justice. He
dealt with insureds and their advocates who were trying to expand claims
illegitimately without anger and absent malice, but with logic, firmness, and
patient.
By the time I came into contact with
Mueller, I had a considerable amount of education, some of it quite advanced,
much of it about values, logic, reasoning, and ethics, not to mention the law. I did not then know much about what he did,
however, whether it was looking at and examining machine disasters, judging the
nature and size of physical losses, or thinking about a range of topics: reasonable costs (e.g., of repair or
replacement), reported costs, reviewing business interruption claims, data, and
accounting, allocating losses to various different causes and/or temporal
periods, and claims in general. Fortunately,
Mueller helped me learn lots and lots quickly.
Much of what he taught me was and is quite general across various
first-party coverages. I have been doing
some of what he taught me ever since, and I don’t think I have ever deviated
(at least—intellectually) from one of his major and fundamental principles of sound
(and reasonable) adjusting he taught me. By the way, I tell this story at such length
as a coaching device. Lawyers have much
to learn from certain types of highly experienced adjusters, and they can be
fun people.
Incidentally,
the Mueller Principle or Mueller Maxim extends well beyond first-party
coverage. There is no reason to think
that it does not apply or liability insurance.
I am inclined to think that the duty to defend is first-party coverage
anyway, and that which much be investigated, to wit: the live pleading, is simple enough to
investigate—at least as a general rule. I also don’t see any reason not to
apply this Principle to duty to indemnity.
The First Principle
of Adjustment
The
Mueller Maxim is this: Look for coverage! Perhaps this should be called “the Central
First Principle” (“CFP”) of sound insurance adjustment. My then mentor, Mueller, described it as the fundamental ethical principle
governing all first-party adjuster
conduct in processing claims. The
principle applies, he said quite rightly, no matter what kind of person or
entity the insured was. It didn’t
matter, according to Mueller, whether the insured was likable or even honest, although
honesty might have something to do with some features of adjustment, it was
irrelevant to a right to appropriate payment if there was a covered loss. Even the houses of gamblers, protitutes, swindlers,
and con-people can sustain covered hail (or similar) damage and/or non-arson
caused fires. Some commercial
buildings—say, whorehouses—may be a different matter, especially if the
business activity conducted there was not described with appropriate accuracy
in the application. This is not a
problem of adjustment exactly, although an adjuster may be the first to become
aware of the problem.) It does not
matter, said Mueller, what the truthfully preserved covered claim was for or
how well it was presented.
Fraudulent
claims are a wholly different matter, of course. If
Scott Peterson’s house burned from lightening, even he would have a right to
coverage. If he burned down the house in
order to kill his wife, thee probably is no coverage, since there is no
accident and there is a violation of the “Principle of Fortuity.”
Since 1985, or so, I have repeated
this exact principle to many adjusters to determine whether they agree with, or
subscribe to, it. Not one has ever rejected
it or expressly disagreed with it. Many
have stated that they learned the same principle in pretty much the same words from
whomever it was who taught them. Some of
them have observed that CFP is a widely embraced principle. None has ever rejected it.
One
of the other adjusters who mentored me, John Moyer (“Moyer”), also at Kemper for many years, but now an expert
witness in insurance matters, also subscribed to the Look for coverage! Principle for many years, taught it during that
lengthy interval , and still embraces it.[6] Moyer is much shorter and more trim than
Mueller. He is not gray and he, too, has
always been a heavy smoker.
Interestingly, Moyer was a boxer in his youth but had been an insurance
claims man for many years. For one of
these reasons, Moyer seemed to love, at least some, lawsuits. They often involve a kind of “sparring,”
alas. His experience as an adjuster was
much more diversified than Mueller’s, and he held more senior positions. Moyer seemed to enjoy squared-off debating more
than Mueller, but he was also fair, but he subscribed to CFP with conviction.
Moyer
regarded this proposition as thoroughly true, even though Moyer had skeptical
and even cynical streaks. Maybe boiler
and machinery claims are invariably more honest and less expansive than other
kinds of claims. Moyer knew that his
moderate skepticism was something he had to work with, solve, and overcome (at
least sometimes, when he obeyed CFP. He
also know that if his cynicism ran any deeper and it did—or where less easy to
set aside and/or defeat—embracing CFP as a practical matter would be very
difficult. One of the attitudes about
human-kind which makes being an adjuster extremely difficulty is a
universalistic, strong belief that most everybody trends toward dishonesty to a
considerable extent whenever it well may be to their advantage.[7]
According
to Moyer, CFP is a widespread fundamental directive across the entire insurance
industry, including at least the duty-to-defend component of third-party
coverage. After all, many responsible
adjusters read plaintiffs’ petitions (or, complaints) broadly to see if there
is a duty to defend. Moyer didn’t love
unjust lawsuits. He seemed to love exactly
three types of suits: (1) those which defended
attacks on policyholders; (2) attacks upon insurers that had behaved justly;
(3) defenses of insurers against immoral screw-jobs conducted by insureds. He did not love defending insurers that
denied complex claims based upon subtle, tricky distinctions. (Moyer used a confidential—indeed,
secret—early first principle: Insurance and sophistical subtlety in the
claims process do not mix well.
(Moyer would never tell me whether this principle covered both insurers
and insureds.[8] I have also wondered if the “Moyer Principle”
should apply to the interpretation of complex, specialized high-priced
commercial policies, especially credit insurance and intellectual property
insurance.)
Moyer
also told me that he systematically and repeatedly taught CFP in training
courses. He said, however, that the
principle was and is, to some degree, also unintentionally undermined in many training
sessions. According to him, this is because so much attention was, is, and must be
devoted to exclusions. Moyer thought
that the huge amount of time and attention spent upon exclusions tends to focus
the attitudes of new adjusters on getting out of coverage, rather than on
finding it. Intellectually, attention
and dominant attitude are not always trained together, he said. The amount of training-time for exclusions,
of course, has to do with the number of words involved in applicable exclusionary
lists, as opposed to the usually quite short positive policy sections setting
forth coverage. “Insuring Agreements” come first, but they
tend to be short and simple-looking. The
specificity versus generality of the two substantive sections is often
forgotten.
Furthermore,
complex definitions set forth in policies often play larger roles in
understanding and construing exclusions than they play in dealing with coverage
agreement sections. Some definitions are
simple and short. Often some of the most
important of these definitions appear first in the Insuring Agreements. Often definitions are long and more
complex. Some of these are to be found
in the Exclusions Section, as opposed to the general definition section. (Of course, such is not always true. In some third-party liability policies, for
example, there are relatively simple definitions in the insuring agreement,
e.g., “bodily injury” and “property damage” and the more complex definitions only
came up elsewhere, e.g., “products-completed operations hazard(s).”)
Curiously, some definitions are both simple in
wording and complex in meaning and function.
Consider “occurrence.” It is
simple so long as “accident” is the only definition that matters. It is complex if the temporality of the
accident matters.) In contrast, many
Directors and Officers have complex definitions incorporated into the Insuring
Agreement, e.g., “loss,” “wrongful act,” and “claim.”
As a lawyer, I have taken the
depositions of numerous adjusters over the years and I have prepared witnesses
for and/or defended more than a few such adjuster depositions, as well. (I am counting adjuster supervisors and
“Claims Department” executives as adjusters.
That is—after all—usually how and where they started.[9]) Both series of events have happened in a
variety of contexts, for example, bad faith cases, commercial subrogation cases,
lost policy suits and disputes involving various types of policyholders with a
diversity of coverage problems. (Of
course, adjusters are not usually witnesses in premium suits.) Not one of this adjuster-witness has ever
denied the significance or wide applicability of CFP, when I have asked about
it in a deposition, while preparing testimony, or at trial. Virtually all of them have said that they
subscribed to it, that their (previous) insurer-employers did so, and that the current
insurance company employing them did so as well. From time to time adjusters have said that
they don’t really fully understand CFP, but every one of them who subscribes to
and/or is familiar with CFP has acknowledged over the years that it has been a—if not the—fundamental
norm governing sound adjusting. Many have
said that the proposition or the idea was foundation for, integral to, or at
least, involved in their training. Significantly,
first principles are seldom fully understood, even by the profoundly learned or
wise.[10] Occasionally, adjusters have worded CFP
somewhat differently. One substituted, Search for Coverage; another said, Look around for what else might be there; a third wondered if Pay expansive and creative attention was
the same.
Sometimes, as I already indicated, I
suggest to other lawyers representing policyholders that they ask adjusters
appearing as witnesses about the maxim Look
for coverage! This often happens
when I am working as an expert witness for a policyholder – a less-and-less infrequent
occurrence as the years go by. Many have
followed my suggestion in depositions. None
of these lawyers has ever told me that an adjuster rejected CFP. Indeed, they consistently say quite the
opposite. I often ask these lawyers
about what the adjuster-witness says, and frequently I read their depositions. The answer adjusters give is always
the same: CFP—or its equivalent—is true,
helpful, endorsed, taught in training classes, fundamental and frequently
recognized. It is usually regarded as a fundamental principle of adjustment ethics or an important
moral principle of the profession. I
have never hear of an adjuster who rejected or denied it.
(By
the way, a frequently tell lawyers representing insurers to educate their
adjusters to this principle. This
knowledge helps avoid unnecessary rhetorical difficulties. In addition, if the claims process is thought
through from this point of view, and conceptualized in terms of it, problems
can be avoided.)
Obviously, it is important to keep
in mind that the principle Look
for coverage! does not entail, imply, or even suggest, the imperative, Find coverage! Looking for something and finding
it are not the same. If something does
not exist, it cannot be found, even if someone looks hard for it. Similarly, CFP does not entail or
imply, though some think it suggests, the principle Use all your efforts and energy to find coverage and do
absolutely nothing else! Furthermore,
CFP does not imply or suggest this principle:
Always conduct a totally full and absolutely
complete investigation. This
principle means that a full and complete investigation could be accomplished
only if everything was looked at, everything was examined, and no stone (whether
factual, linguistic, or legalistic) at all was left unturned. Nothing short of all these would constitute a
full or complete adjustment. If
the first inquiry of a CFP establishes without significant doubt, for example,
that there is no coverage of any kind, that no actionable act or event took
place, that no policy existed at any relevant time, or that no injury and/or
damages have been sustained, it is not necessary to look further or elsewhere, to
look more deeply, or to examine something else which might be claimed to be relevant. Many policyholder lawyers adopt the four
“principles” beyond CFP reviewed in this paragraph, at least for rhetorical
purposes. They sound good. Lawyers for insurers should carefully
consider demolishing these suggestions, however, through logic, law, and expert
witnesses. Pragmatism,
as well as logic, applies to the real world.
The fact that a sentence sounds
good does not make it true. Looking for
something—even a complex and/or abstract something—does not imply looking
forever, looking absolutely everywhere, or paying out all assets—whether
available or not—to finance the search. The principle Look for coverage! may be a nearly absolute imperative, but
it is not completely absolute,
universalistic (in the sense that there are no other significant principles), or infinite in terms of width, depth, or
diversity. At the same time, it is not
shallow, narrow, or simplistic. It is
tied to insurance policies and none of them have the last three
characteristics. The principle Look for coverage!, even with the
exclamation point, is not the same as the principle Find coverage! which is the “asserted axiom” of at least some
policyholder plaintiff’s coverage lawyers.
Thus,
CFP probably does, at least empirically, nearly entail the following complex
principle, however: Use reasonable and actually appropriate knowledge, intelligence,
imagination, and energy in dealing with a claimed loss—whether finding it or
analyzing it—and thereby find coverage within the terms of an existing and
applicable insurance contract. At
the least CFP suggests and supports this principle in a powerful way in the
practical context of the real world.
Genuinely, finding coverage entails that the terms of the policy
control. Finding coverage presupposes the existence of a contract. Finding
coverage, i.e., finding something actually covered by the contract, is not the
same as finding some loss or other.
Finding coverage does not require distorting the meaning of the
policy. Something has to exist to be
found. Inventing or imagining something
and finding something which already exists are not the same. That actually would distort coverage and
undermine the idea of insurance itself. Imagining
a unicorn does not create a unicorn, any more than imaging long-gone dinosaurs
bring any back to life. Remembering
Napoleon, Edmund Burke, or one’s long-gone grandparents, does not bring any of
them back to life or actualize them currently in any—except a subjective—way. The
function of imagination in insurance adjustment is the same as it is in science
and the law. It is not a foundation for
evidence or proof; it is a foundation for hypothesis, as it functioned in the
first—March 15, 2007--episode of the new TV detective show RAINES. Fundamentally, insurance adjustment is an
empirical discipline.
Alas,
this just formulated principle is too long, too wordy, and too complex to be
workable as a slogan, maxim, or stimulating ideal in teaching contexts or trials. Some expert witnesses will say they don’t
really understand it. Perhaps some
don’t. This observation is especially
the first time someone hears it, even if that someone is experienced and/or
knowledgeable. Some adjusters will say
the same thing. Simple wordings can be
important. It can guide; it can inspire;
and it can be grasped quickly. Of course, it can also be misleading.
The
principle Look for coverage! is of
enormous social and economic significance in the context of a capitalistic
economy. One of the fundamental
principles for all businesses in anything resembling a capitalist order
is: Maximize
legal profits! Any insurance
company which follows this principle will have a pervasive and powerful temptation
to minimize (or, at least, reduce) claim-based payments. Insurance companies have money. They received it mostly from
policyholders. Insurers cannot boldly,
timely, and simply maximize profits, at least from an absolute point of view,
if they pay money out on claims. For
this reason, one temptation that every insurance company faces is to find as
little coverage as possible (or, as little as they can get away with).[11] On the other hand, the temptation to maximize
profits, while apparently or superficially dictated by economic principles, is:
(i) inconsistent with the fundamental purpose of insurance; (ii) inconsistent
(therefore) with the social purpose of genuine and justified insurance companies;
(iii) will lead to the long-term death of insuring companies; (iv) will trigger
negative governmental regulatory reactions; (v) will breed lawsuits; and
historically one of the probably foundations of both common law and statutory
bad faith law.
Of
course, lawsuits cost enormous sums of money.
Legal services in business controversies are especially expensive, not that
they are cheap anywhere. Further,
lawsuits can be lost. When lost for
good, e.g., after big-time discovery, negotiations, trial, and appeal, they can even more expensive for insurers than
ordinary laws suits. This is especially
true, of course, because of the spectre of
statutory and/or common law bad faith, in addition to coverage and
perhaps two expensive sets of legal fees.
Thee is also, of course, negative publicity, and even now there are class-actions. They both raise the overall price of coverage based
litigation even further.
Any insurance company following the
principle, Avoid admitting coverage and
paying claims in their correct amount whenever possible in order to maximize profits!
is profoundly immoral, as well as sometimes illegal, since its conduct is anti-contractual,
conceptually inconsistent with the very idea of insurance, deeply unethical, and
so forth. Consequently, insurance
companies need to train those in charge of examining and adjusting claims to
play a role which is fundamentally inconsistent with what is, at least, a
strong business-based temptation.
Economic
theory embraces the legitimacy of self-interest. Of course, given that insurers should receive
only reasonable premiums and pay all legitimate claims fairly, they should—given
these two limits and within their context—appropriately maximize profits. There is no inconsistency between the purpose
of an insurance company and the correct payment of genuine claims. However, there is an inconsistency between a
company successfully taking all of its income and maximizing profits upon the
receipt of those funds and the paying claims at the lowest possible level it
can get away with. Hence, if for no
other reason, CFP needs to be a central part of the dominant mental processes
of every adjuster, and it is one of the very foundations of adjustment morality
and ethics. It is not the only one, even
if it is fundamental in practical contexts, given its actual meaning, i.e.,
given the actual and literal meaning of its words.
Does CFP Create Fiduciary Duties?
The
significance in centrality of the principle Look for
coverage! does not entail or imply that an insurer is the fiduciary
of its claim-making insureds. An
insurer’s obligation to look hard at relevant facts, and even its obligation to
look expansively at both language and facts to determine whether there is
coverage, does not create fiduciary duties.
The proposition that Insurers are not (usually) the fiduciaries of their
insureds is not entirely undisputed.
Nevertheless, it is probably true.
Truth or falsity here again (probably) does not matter from the point of
view of sound adjustment, although it matters from the point of view of
litigation rhetoric. It is certainly
true in many jurisdictions for ordinary claims.
One
characteristic of fiduciary duties is that the fiduciary must treat as superior
to its own the interests of the person or entity for which it is a
fiduciary. There is nothing about CFP
which entails any such tilting differentiation in favor of an insured. Sometimes, however, insurers are said to have
special relationships with their
insureds. Usually, this means that the insurer
must treat the interest of the insured as equal to its own, though sometimes
courts erroneously assimilate the special
relationship to the fiduciary relationship.
When viewed correctly, special
relationship balancing is different from simple third-party relationships
between business and customers, and it is not the same as a fiduciary
duty.
In
addition to the foregoing, fiduciaries are frequently said to have the
following duties, beside the one already mentioned. Probably, non-fiduciaries have at least
roughly the same level of high-duties.
Attorneys, for example, are said to owe their clients the highest fiduciary duties. Obviously, if there were not different
levels, attorneys could not have fiduciary duties higher than those of some
others. In any case, here are some of
the fiduciary duties: good faith,
trustworthiness, careful observation of the relationship, scrupulous in
administering the relationship, complete and total honesty, very substantial
openness, very substantial candor, no deception, no concealment, full and fair
disclosure of facts, complete and total maintenance of client confidences (a
fiduciary duty, at least attorneys have, but also which some others have), and
so forth. It seems quite clear that if
an entity lacks any of these duties at any level, then it cannot—in any
complete sense—really be a fiduciary.
At
the same time, it is quite clear that insurers do not always, and under all
circumstances, owe insureds candor and openness. Thus, for example, if the policyholder-claimant
is lying to an insurer, the insurer might wish to keep its skepticism, its
contrary evidence, what other witnesses have said, and so forth, to itself
until its review of the claim is elaborated.
Thus, a full and complete disclosure is not at all times required. At the same time, it is perfectly true that
most insurers, most of the time, owe first-party policyholder-claimants some
good faith, although—perhaps not—uberima
fides, absolutely the highest good
faith lawyers owe clients. (Obviously, there is much more to be said, but the
fundamentals of the case are against fiduciary status is established.
Interestingly,
in a book I have already criticized, Ken Brownlee, who frequently writes on
adjustment, correctly observes that insureds must trust their insurance
companies.[12] Here is what he writes: “The insured must place considerable trust in
the insurer to be there when a covered loss occurs. In exchange for nothing more than a promise
and a stack of printed paper from an insurer, the policyholder may pay hundreds
or thousands of dollars. That is an
expression of faith on the part of the policyholder.” Indeed, if Brownlee is right about the
necessary role of faith, in a capitalist economy, where each business is
expected to maximize its profits, this trust based on the money and history may
be thin. Perhaps that’s why there is so
much public skepticism about insurers in ordinary, routine discourse. Then again, Brownlee’s faith may be a complex
notion involving faith in several different institutions, including the justice
system.
Some Implications of CFP
CFP has at least three major
implications. Each of them apply under
all circumstances. The first two of
these implications are extensions of CFP, or are very much like
extensions. The third one is a
qualification and may constitute a kind of limitation. Looking for truth and accuracy sometimes
requires moving over the same grounds more than once, though not with mere
repetition.
Looking
Beyond. First, when an adjuster
looks for coverage, the adjuster is looking beyond the language of the proof of
loss or other report of the claim. If,
for example, the owner of a commercial building reports that it has sustained
storm damage to its roof as the result of a huge rainstorm—perhaps a storm with
hail, lightning, wind, and so forth—the adjuster needs to look beyond the
roof. This much has already been
discussed. The point grows larger,
however. The CFP-bound adjuster needs to
go into the building and see what happened below the roof. If the roof is damaged, some of the rest of
the building may have also experienced some damage from the storm as well. If the roof of the building is covered for
storm damage, it’s probably covered for damage inside the building as well. External walls may also need
examination. Similarly, there may be
damage under the building or there may be two or more covered structures on the
insured property. CFP may include them
all. Then again, maybe not! As we shall see, this implication has
limits.
Adjusters should not restrict their
looking to the policyholder’s chosen language in either the proof of loss or
the earlier report(s). Most
policyholders are not insurance professionals.
Most policyholders are trying to get their claim to the insurer quickly so
that they can obtain a coverage decision, and then begin repairs or
replacements. Thus, the principle Look for coverage! is designed to help
insurers and their adjusters be helpful
to the insureds. Insurance is to protect
insureds. The “precise” wording of the
claim, and the common understanding of contract language, it does not require
that any of these be ignored, forgotten, disproved, or contradicted. Acts of looking
beyond obvious facts are always appropriate and usually required. CFP is the key foundation to this idea.
One
also wonders whether an insurer has a duty to inform an insured about the
presence of extensions of the reported loss or of different losses which have
not (yet) been reported. Does an insurer
have a duty to say to an insured, “You have made one claim, but now that I look
at your building, it seems to me that you may have a second claim. It may be even more important that the one
you have reported. Look up there. Feel this.
Sniff that.” If there is a duty,
what sort of duty is it? Is it a legal
duty or simply a moral duty? Would it
make any difference if the insurer were a fiduciary of the insured for some
reason in the contexts of adjustment?
Actually
Look. Second, as long as an adjuster
is at a building looking to see whether there is coverage and if so how much
money needs to be paid to cover damages, the adjuster needs to look beneath his
own memory of what the policy says.
Often, adjusters actually need to take an actual look at actual policy
language. (There is much to be said for actuality.) Often, the adjuster does not need to read
deeply into the language of the policy.
Often, the language is clear on its face. Sometimes, however, comprehensive,
thoughtful, and even deep-readings are necessary. Indeed, looking for coverage in complex cases
often requires that policies be studied. If there is a pattern of omission in
adjustment processes, this is it.
Perhaps this is why so many insurers are hiring frustrated, tired, or
disgusted lawyers to come in-house – either as adjusters themselves, or as
easily reachable, quick thinking, highly knowledgeable coverage counsel, or
both. I once saw a whole series of
lawsuits arise involving plumbing losses in houses because a very good and very
experienced adjuster thought he knew what a standardized policy said, but was
wrong. This particular adjuster was so
experienced, so honest, and was (or appeared to be) saving the insurer so much
money (at least from temporary appearance), that the supervising examiner never
really checked the adjuster’s work.
Unfortunately, the adjuster had misread (or, misremembered) the
policy. Looking for coverage requires
that the policy be grasped, and often this imperative requires that the policy actually
be looked at in an adjustment process.
As already indicated, although the
actual language of an insurance contract ultimately controls insurer liability,
the same is not true for insurance claims.
Policyholders do not always understand what they have said. They do not always understand what could or
should be said under various circumstances.
Adjusters should not even regard themselves as governed by recorded
statements. Those doing claims need to
look beyond the language actually
used by the policyholder. They need to
look deeply into language used in the
claim, the needs of coverage, the needs of the insured resulting from injury,
and the spirit of the claim, as opposed to its literal formulation. In following CFP, adjusters need to encourage
the policyholder to say more; the need to inquire about what else could
reasonably be said; the need to try and get the whole story, even if the whole
favors the policyholder when a mere part (already given) does not.
Moreover, the language of policies
is not always clear, even though this linguistic fact may not be known in
advance. When policy language is less
than clear, the adjuster needs to look deeply into the language of the policy
and think about what it might reasonably be taken to mean under the actual
circumstances of the claim. This is
proof of required looking. Adjusters
should not simply automatically accept the way the language has been
interpreted in the past by insurers, even standardly. Linguistic habits of the past do not always
determine actual meaning, especially in new circumstances. This is especially true with words like,
“occurrence” and “accident,” which are extremely important in liability
policies. They have already been discussed
briefly. The word “pollution” may also
have the same problems.
Look
For. Third, should an adjuster
looking for coverage look around damaged premises, for example, to see whether
there are covered injuries and damages which haven’t been claimed? Parts of this have already been discussed. Part of the answer depends on the type of
damages involved, as well as the types of claims. If there are multiple damages, then, even if
they have not been formulated and even if the explicit claim which has been
made is illegitimate and not covered, arguably, the adjuster should, at least, consider
carefully informing the policyholder of existing claims and should probably do
so. Such is what taking care (or caretaking) expansively is all about. Insurance is
an industry—it is a business—the purpose of which (at least among others) is to
protect some people, i.e., policyholders, from certain types of losses.
Insurers are designed to reduce a certain ranges of risks—risks of loss--facing
policyholders. Insurance companies are
designed to provide care to policyholders under some circumstances.
CFP has several dimensions: looking at already relevant facts, looking at
and through claim and contract language, looking for at least some other
possibly relevant facts, looking for policies or evidence thereof, and possibly
looking for other, perhaps, covered injuries and damages. In this context, adjusters need to be mindful
of what may constitute a claim. It
should therefore be remembered that even the term “claim” is ambiguous. In the context of adjustment, the insurance
generally, the term has several meanings.
(1)
Insureds make claims for first-party
insurance coverage and payment. These
are not claims against the insurance
company. They are part of the
contract. Insurance policies provide
coverage for losses. Letting insurers
know about the existence, nature, and size of a loss, makes a claim. Claims are, at least in the abstract,
contemplated as a genuine part of the insurer-insured relationship from the
beginning. (Completely fraudulent or
fraudulently expanded claims are claims against
the insurer, since they are not genuine.
This is certainly how the insurer will feel about them.[13])
(2) In
the context of liability insurance, claims may be made against insureds. The
insured may turn them over to the insurance company. As claims against insureds develop,
sometimes, those claims are made against insureds. It also happens before suits are filed. Auto liability claims are often like
this. It sometimes happens in filing
suits and in amendments thereto. This
sometimes happens in the context of litigation, for example, when an insurer is
defending under a reservation of rights, the underlying claim against the
insured is settled, and then there is an assignment from the insured to the
tort plaintiff. All over the country,
courts seem to be getting more flexible about tort plaintiffs suing both
insured defendants and liability insurers in the same lawsuit.
(3)
Claims are sometimes made by insureds against
insurers. This happens when insureds
believe that insurers are not adjusting claims properly, or that they ever
refused coverage when they should have admitted. In other words, sometimes, this means that
the insured is pressing for a type of coverage or an amount of coverage which
the insurer has tried to deny on the basis of good reasoning. In the alternative, the claim can be against
the insurance company because the insured is accusing the insurer of being
irrational, dishonest, or outside the purview of good faith. A claim against an insured can become a claim
against a liability insurer in various ways.
Sometimes in the liability context, a claim against the insurer will
come from the person or entity making the original claim against the
insured. Sometimes it will come from the
insurer himself. CFP is relevant to claims in all three senses of the word
“claim” in various and different ways.
CFP entails that adjusters should be
trying to find some coverage
following a claim. The entailment exits
in liability insurance contexts. As
already indicated, CFP does not imply
that they should actually find, as it were, coverage, if it does not
exist. This is not finding coverage; it is inventing
coverage. It is not the case that good
adjusters shall find some coverage in
or close to it in every claim. CFP
implies that insurers and their adjusters should be discerning in observational
powers expansive in thinking and interpretation, but it does not imply that the
adjusters should set out to undermine the language of the insurance contract or
the insurer. Looking for coverage does not imply creating
it by (even sympathetic and/or empathetic) fictionalization. Adjusters are seldom novelists or writers of
other kinds of fiction. Instead, CFP
implies (although it is not implied by) the propositions that (1) adjusters
should be appropriately knowledgeable; (2)
adjusters should be objective; (3) adjusters should not be biased; (4)
adjusters should be fair; and (5) adjusters should be impartial. Adjusters should not restrict themselves to
what the insured says or has said. In
the end, they should restrict themselves and the insured to the actual facts
found, after an effort is made to observe all relevant and potentially relevant
and observable facts. Cupboards need to
be opened. Refrigerators need to be
pulled away from the way. Attics and
basements need to be inspected.
Sometimes applying
CFP has to do with policy language.
Sometimes it has to do with facts.
Analyses of facts are not always driven by CFP. Sometimes, they are driven by what cannot be
found. This parallel has already been
discussed. Here is an excellent example
of one relationship between looking for coverage and facts, which have not been
discussed yet. A man owned two houses. One of them he lived in most of the time in a
large city. The other one was a vacation
cottage 150 miles away. The vacation
cottage was next to the lake. It was
used for fishing on the weekends. It was used in the summer. It was a log cabin (sort of), obviously, made
mostly out of wood. The country cottage
was an old building. It had been painted
many times.
Both buildings
were insured. The insured was in severe
financial trouble and needed a cash infusion.
For a month or so, he announced to everyone he knew that he was going to
take a week off from work and “fix-up” the country cottage. The first thing he was going to do, he said,
was clear the layers of paint off the floor, sand it down, and restore the
beauty.
One weekend, the
insured went to his cottage, and moved all of the furniture in the cottage out
into the yard. He then poured chemicals
on the floor, ostensibly so that he could begin clearing out the many layers of
paint. The insured was a smoker. After pouring gallon upon gallon of the paint
thinner on the floor, he went outside to smoke a cigarette. He stood with his back to the house. He had brought a box of fireplace matches
outside with him. He struck one to light
his cigarette, and tossed it over his shoulder.
The match landed on the outside porch, which was itself wood, heavily
painted, and thoroughly covered with paint thinner. The cottage burned to the ground almost
immediately.
In the context of
his claim, the insured told the story as recounted. He made no secret of the fact that he was in
financial trouble and needed money.
Naturally, it occurred to the insurance adjuster that the insured may
have burned down his own cottage. The
adjuster asked the insured bluntly if that was what he had done. The insured hesitated; smiled slightly, and
there was a dance of achievement in his eyes.
Very quickly, however, the insured unequivocally denied that he had
deliberately set fire to his house.
For years, the
adjuster was absolutely convinced that was precisely what the insured had
done. At the same time, the claim was
promptly paid. There is no way in the
world arson could be proved. There was
no way in the world that a claim should be denied and taken to court.
(Things
could have been at least somewhat, different if the insured had used the box of
matches to light the cigarette of a genuine smoker, other than himself, and
then flipped the match over his shoulder.
Things might have been different if the insured had become a smoker for
the first time only recently and, therefore, did not have at least a long on-off
smoking history. It would make some difference
if the insured had a history of having destroyed things he owned or burned them
and so forth. The insurer’s
investigation, however, indicated none of these as possibilities.)
Some Other Basic Principles of
Adjustment
There are at least three other important
fundamental principles of adjustment.
One such fundamental principle is this:
Insurers are not either legally or
morally obligated to pay claims which are definitely not covered in applicable
insurance contracts. Perhaps this
should be called the “Second First Principle” (“SFP”) of insurance adjustment Thus, insurers are not obligated to pay claims
which are demonstrably, provably, or establishably fraudulent, claims which are
based upon provably false propositions, 100% of claims which are overstated for
whatever reason, claims which are actually outside coverage, and so forth. (Of course a provably false proposition and a probably false one are quite different. A proposition which is probably false
may—eventually—be “proved” to be true. The weight of evidence can support a
proposition which turns out to be false, but is never known to be false. Thus, a jury may come to a false conclusion,
because a proposition was “proved” to it to be true, even though it isn’t and
never was.)
SFP is and should be deployed and
utilized in defending bad-faith litigation.
Usually, if an insurer does not have coverage, it will not owe for bad
faith, even if it reasoned badly, so long as sound reasoning trains have not
been waived, or something of the sort. Alas,
SFP, too, involves complexity. These
include ambiguity, the relationship between insuring agreements and exclusions;
the nature of conditions; and so forth.
The
insurance contract is important and determinate, at least with respect to its
clear statements and fairly establishable facts. So are facts which are eventually proven to
be true. From a legal point of view,
facts which are felt to be true, guessed to be true, or merely intuited to be true, are nothing more
than something like wishful thinking
or hopes for proof. In any case, at the
end, i.e., at the point of deciding coverage, feelings, guesses, invitations,
wishes, and hopes are irrelevant and immaterial to correct coverage
decisions. (Sometimes, of course, wishful
thinking, along the way to a decision, and others of these key ideas, can play
a useful role, particularly where it takes time to locate, surface, and/or
scrape-off the muck concealing the surfaces of previously hidden facts.)
CFP
and SFP are perfectly consistent. Given
the nature of contracts, insurers do not have obligations to pay claims that
are correctly determined to be outside coverage, even if they have an
obligation to try to look for coverage, once the claim is made. Nevertheless, while consistent, CFP and SFP function
differently. CFP tells adjusters how to
receive claims, how to investigate, what epistemic spirit to have, how to think
about claims, and how to treat them.
More than anything else, CFP is practical normative principle. Inherent in CFP are certain other ideas:
objectivity, appropriate thoroughness, energy and willfulness when it comes to
investigation and thought, and a willingness to look beyond the actually stated
themes and details of a claim, as well as the actual wording of a claim. Not all insureds think clearly or write
well. The same is true of public
adjusters and others—e.g., lawyers—representing or assisting insureds in making
claims. Some of these ideas will be
discussed again later. SFP is a legalistic
and linguistic principle. It even has an
empirical component. It is not a norm;
however, directing what ought to be done in the process of adjustment. CFP is.
SFP is instead about how the social world actually is. It is not a commandment. Some might call SFP a meta-principle. In other words, SFP is about the nature of other
principles, such as CFP, how they actually work, perhaps how they should work,
how they fit together, and so forth.
The situation is different; of
course, if facts relevant to the claim are obscure or the insurance contract is
ambiguous. If policy language is, by
itself, ambiguous, at least on the surface, and it is not clarifiable by genuine
and provable reference to technical standard uses, e.g., engineering, medical,
trade usages, &c., or it is not disambiguate-able by references to
significant facts, e.g.., the actual intentions of the parties at the time of
contract formation, under the law, the meaning of the language will (or should)
be resolved in favor of coverage or to the benefit of the policyholder if
coverage is already established. The
amount of lawyerly and academic prose on this rule is, at least, enormous, and
perhaps immense. (Assuming those words
express different ideas.)
What
counts as ambiguity is not well
established. Here is a pragmatic
list: vagueness (consider the word “nearby”), the sandy
(or, fuzzy) edges of some general terms (consider “maxim”), internal complexity
(“corporate structure”), obscurity (“accident”), imprecise terms (“accepted,”
as in “accepted principles”), oddity (“personal injury”), queer dictionary
entries (“sudden”), huge and changing ranges of reference (“pollutant”), ill-understood
terms (“willful”) and/or terms defined one way on one page and used differently
on another, all may, in some circumstances—though not all—count as ambiguous
terms. Then again, not every general term with
“fuzzy” edges should be counted as ambiguous.
Consider, for example, “balding,” “tall,” “short,” “heavy, (even) “fat,”
“owned,” “finished,” “work,” and many
others may not be so adjudged, even if they are not words of perfect precision.[14]
Paradigmatic,
common usage ambiguity is quite different.
The term “ambiguity” of law means that the term has quite different
meanings. Consider, “bank,” “bank” and
“bank.” Obviously, some banks are financial
institutions; some banks are slopes next to rivers; and some banks are angles
at which airplanes turn. Also, consider the word “appearance.” In a deposition, the following question and
answer occurred:
Q.
Is your appearance here today determined by the
subpoena served upon you?
A.
No. I’m dressed
the way I always dress on weekdays.
Obviously, the
word “appearance” is ambiguous.
The
applicability of general terms, even many with fuzzy edges should mostly be
determined by reference to material empirical facts, not by reference to
meaning. Interestingly, the term “ambiguous” is itself
ambiguous. General terms with clear centers and fuzzy
edges are not usually counted as ambiguous, even if they are counted as vague,
to one degree or another. In many
contexts, a word is ambiguous only if
it has quite different linguistic meanings.
This fact is often ignored in lawyer arguments about contract
construction.
Some
of the instances are central to insurance disputes. Consider, for example, the use of the word
“regular” in some standard auto insurance policies. In some policies, certain autos which are
“regularly used” by an insured, fall into an exclusion Here is an example of such an exclusion. Consider
the following exclusion found in Form 8430 and frequently denoted B.2.
We
[the insurer] do not provide Liability Coverage for the ownership, maintenance
or use of any vehicle, other than your
covered auto, which is
(a)
owned by you, or
(b)
furnished or available for your regular use.
Empirically
speaking, what constitutes regular use
may not always be empirically clear.
Once a month? Twice a month? Once a week? And so on. At the same time, the word “regular” in the
exclusion is probably not ambiguous. A
great many central cases are easily determined from obvious facts. At the edges of the term, there is some
vagueness.[15] It
should not be taken to imply ambiguity.
Similarly,
if it is unclear what happened to cause an accident, a fire, or some other
property damage, an insurer may be tempted to deny a claim. In the context of liability policies of a
variety of sorts, the word “occurrence” is crucial. Even though it is defined in terms of the accidental, the concept of occurrence is sometimes not easy to
understand. There has been substantial
controversy, for example, as to whether the two airplanes which hit the two World Trade
Center
Often
when the adjustment results are cloudy, access to adjudication should be an
insurer’s right: “We – the company – can’t figure these facts out, so we will
do whatever the court tells us to do. We’ll
conceptualize them as the court tells us.”
Sometimes these attitudes are aggressive and/or unreasonable. Sometimes they even cause stupid decisions. Sometimes not. Sometimes the decisions to seek adjudication
are appropriate and reasonable. Then again, sometimes the decision of an
insured to seek adjudication is improper.
Suppose an insurer is pretty well convinced that there would be coverage
if the claim were honest, but the insurer is convinced that the claim is not
honest, although it knows it cannot prove to be true—its belief. Suppose an insurer seeks adjudication in
order to wear down and perhaps wear out the claimant whom it believes to be
dishonest. Is that an appropriate
seeking of adjudication? Probably
not.
Within
certain limits, some extensions through CFP are obvious enough. If the insured says that the north half of
the building is damaged and it is obvious from damage to the roof that more of
the building may be damaged, the insurer should look around a whole lot more. This has already been discussed some. In such cases, the insured should be told,
even encouraged to expand the claim, explicitly, if the bureaucrats at the
insurer need it. At the same time, it is
not clear that the insurer should be looking for entirely different types of
losses, when it investigates a given loss claim. Thus, an insurer need not look for theft
losses when examining storm loss. The
maxim, “Look for coverage! does not prescribe that while
investigating one type of claim, an insurer needs to imagine all types of
claims which might be brought under a regular type of policy and search for each
of them. This would drive up the price
of insurance absurdly. He is not
consistent with the spirit of the contract, which requires insureds to report
losses before the insurer has an obligation to look for losses. Besides, an insured might not want an insurer
to look for a loss. Indeed, it might not
wish to discuss it.
At the same time, if an unreported
loss is obvious, and the insured is in need of help, an adjuster for an insurer
should probably point out to the insured that he has a different kind of loss
and that he might want to file a claim for it.
Indeed, if the loss is quite an old one, pointing it out in Year Ten
might be a good idea from a variety of points of view, including some interests
of the insurer, some interests of the insured, and perhaps those of various
other companies.
Thus, there is a certain clarity in
and certainty about CFP. Although an
insurer is obligated to look for coverage, and it is clear that the insurer is
obligated to look at empirical matters which present themselves, given the
claim, it is not clear how far the insurer must, in following and obeying CFP,
go beyond the actual wording of the claim.
Some distance is obvious enough, especially when the insured is a bit of
an amateur. Rigid, restrictive
interpretation of the items of the claim is inconsistent with the spirit of
insurance. Nevertheless, spending
valuable, expensive time searching for all sorts of possible claims is a (at
least equally) silly idea. Thus, CFP has its limits.
Another
fundamental adjustment principle is this:
Sound adjusting is governed by empirical
facts, not by subjective impressions.
Let’s call this one the “Third Fundamental Principle” (“TFP”). Its logic and status resembles SFP more than
it does CFP. Observers of the empirical
world can be wrong about what has happened and/or about what caused what. Thus, a policyholder who claims that his
building exploded and burned as the result of being attacked by Iraqi
terrorists may not have “seen” the facts correctly when he observed events
surrounding his building in rural Wyoming . (It was a building that housed harvested
sugar beets.) The policyholder could be
perfectly honest, through and through, but he could also be wrong about the
facts. Perhaps he mis-saw what was
projected at his building. Perhaps he
mis-saw who did it. Maybe he was drunk. Possibly he was stoned.
TFP
works well in bad-faith litigation, so long as the idea of subjectivity is
maximized. The idea refers to that which
is mental only and not obviously connected by truth and/or evidence to the
outside world. The purely subjective is
very much like guess-work by an adjuster.
Sometimes it works for insurers and sometimes the opposite. If the insurer paid absolute heed to
empirical facts, and the policyholder is suing on the basis of subjectivity,
the insurer will win the bad faith case, even if it loses the coverage
case. If the insurer is depending on the
subjectivity of the adjuster and a
mistake is made about coverage or about amounts owed, the insurer will lose the
contract case and may well lose the bad faith case. Rationality and empirical
evidence is the key to winning a bad faith case.
Sound
adjusting can have something to do with subjective
impressions, and even intuitions, of course, as already indicated, to the
extent that these are stimuli of rational reasoning and the search for
empirical evidence. The adjuster must
always include reference in her reports to an examination of what propositions
relevant people believe (and/or appear to believe), and what they believe they
have empirically observed, as well as what is actually establishable. Subjective impressions are fine when they are
no more than hypotheses. Memory is
important, of course, though it, too, is subjective. Clear memory is even more important. Reliable memory even more so: it is the most
important form of acceptable memory.
Reliability is necessarily tied to empirical findings over time. This fact is particularly true when causal
processes are leading to possibly covered losses with sudden, mysterious, not
actually physically observed, and so forth.
Subjective contents of minds may be important, but they are frequently
not decisive. This is true even when a
given person’s memory is often reliable.
This is particularly true when a witness’s memory is inconsistent with
establishable facts. Looking for
coverage does not require that the subjective triumph over the objective.
Usually, it does not even permit it.
Now is it the literal truth of the
normative spirit of CFP to require that an insurer or the insurer’s adjuster
absurdly assumed that a claimant is an insured?
Determining whether there is coverage requires determining whether a
claimant is a party to or otherwise included as an insured within an insurance
contract. With respect to whether
someone is a named insured, the insurer has to look at the contract, look at
the names, and look at the facts. It is
not required to be particularly expansive, however. This proposition is true even if the language
of the contract has to be reformed. A
misspelled name, for example, does not create coverage for anyone other than
the intended named insured. The
situation is somewhat different, probably, when there are additional insureds
included by categories within a policy, and one of the terms creating
additional insureds is ambiguous. It is
probably not radically different, however.
The doctrine regarding ambiguities and interpretation is not usually
applied to proper names.
A fourth fundamental, “first”
principle (“FFP”) of adjusting is this: An insurer should probably treat an unresolvable
empirical doubt in favor of coverage. If
it is unclear what happened, or it is unclear what the policy says, the insurer
should pay the just amount of the loss, given the character of the coverage. The insurer should not reduce the size of its covered
costs as a result of the monetary amount of the legitimate but mild doubts. Lawsuits often work this way, however, so
these equations are very tempting in the adjustment process. At the same time, if a claim is genuinely and substantially doubtful, it can be tried and thereby determined in a
court of law, and under certain circumstances it should be. It is a well-established law, of course, that
genuine contractual doubts about the meaning of language in a policy should be
resolved in favor of coverage. Indeed,
they should not only be resolved in favor of coverage, they should be resolved
in favor of amounts of loss, where coverage is undisputed. What applies to contract interpretation
should be taken to apply to factual evaluations. Of course, there is no legally established
dividing line between mild doubts and those doubts which are genuine and substantial.
FFP
explicitly extends this fundamental principle from construing policy language only
also to construing ambiguous and unclear facts.
This extension is particularly true when the probabilities of opposing
factual scenarios are indeterminable and must be treated as though they are
approximately the same. In contrast, if
one probabilistic account of the nature of a loss, and what caused it, is quite
high and the probability of its alternative is quite low, an insurer may
rationally embrace the more likely account of what happened. If, on the other hand, the probabilities for
alternative accounts are indeterminable and not
strikingly—dramatically—different, then the insurer should choose to be
governed by the empirical or historical account that favors the insured. Such is the essence of FFP.
CFP does not imply the existence of
a fiduciary duty running from an insurer to an insured. At most, it implies a special relationship, if it implies any sort of relationship. Similarly, FFP is not derived from the nature
of the insurer-insured relationship. It
is true because it stands in strong analogy with the legal principle governing
the proper interpretation of contracts (including insurance contracts) which
turn out to have used ambiguous language.
(Of course, the principle of a contract interpretation pertaining to
ambiguous language is extremely important when it comes to adjusting claims. Nevertheless, it is not—after the manner of
CFP—a practical, morally based, normative principle of adjustment. It is a well-established principle of law and
therefore, affects adjustment principles. Consequently, it need not be discussed as part
of a group at which CFP is at the center.)
FFP is not usually quickly embraced
by adjusters when they recognize the difference between it and CFP. Nevertheless, the same moral, justice, and
public policy arguments support both.
Policyholders consider trying to talk adjusters into adopting this
principle.
How does the principle Look for coverage! fit in with these
other principles? CFP is supposed to be suggestive. It is supposed to be generative. Any principle which is both of these must be very
strong and a bit obscure at the same time.
Like many suggestive principles, CFP is fundamentally and significantly
ambiguous. This linguistic fact is not a
bad thing. The core idea expressed in
CFP is not ambiguous, and the ambiguity of the central term encourages those
who embrace it to interpret it broadly. Its
fundamental power lies in its core, its attractiveness, and its potential
influence. The term can be powerful
without being completely precise. Words
like, “freedom,” “liberty,” “justice,” and “benevolence” are all like this.
CFP is ambiguous in another way also. The word “look” is not absolutely clear on
the surface of the language, precisely because it is broad and suggestive. Indeed, the word “look” involves multiple
meanings, and the concept of looking is
itself multi-dimensional. Perhaps,
therefore, at least arguably, CFP should be, itself construed in favor of the
insured, although this fact—if that’s what it is—should not include importing
undenoted, unimplied, or unsuggested ideas into the concepts which are central
to the principle; i.e., really looking and actually finding coverage.
Of
course, whatever else is true, a crucially important purpose of CFP is to motivate the rational adjuster. It orients the attentions and the actions of
the rational and properly committed adjuster and insurer. It is not perfect, however. Imperfections relate to problems. There is tension between CFP and TFP. Look
for coverage! implies work; it
implies effort; it implies concentration; it implies sympathy; it may even
imply staring, a bit. This means pushing
beyond the empirically obvious. At the
same time, looking for coverage does not imply inventing coverage. It does not require saying you see something
when you don’t. There is no inconsistency between CFP and TFP,
even if there is tension.
CFP and Fairness
In
order to consider Look for coverage!
thoroughly, it is necessary to ask how it is justified. It is necessary to ask why it is so completely
true and central. Obviously, CFP is
attached to and implied by certain very important values. Some of the most important fundamental values
are knowledgeable-ness, impartiality, objectivity, and there is another one which
is also extremely important, namely, fairness.
All four of these have already been mentioned and will be again.
The
last of these four implies another fundamental principle of adjustment—a fifth fundamental
principle: Treat every claimant fairly! (5FP) Notice that 5FP refers to claimants not policyholders, while the
remainder of the chapter refers to policyholders. Of course, most claimants are
policyholders. Sometimes, one makes a
claim when they are not a policyholder.
This happened not long ago in my office.
One of the lawyers had a tree fall on her house. She called her agent to see who her insurance
company was. Her agent said it was the
ABC Insurance Company. The agent was
wrong. It turned out to be the XYZ
Insurance Company. Thus, so far as ABC
was concerned, the claimant was not a policyholder, though she was a
claimant. Once the claim was made to
XYZ, my colleague became both claimant and a policyholder. The general point of 5 FP is that insurers
should treat all claimants alike and should treat them as if they were
policyholders. Naturally, one of the
first questions which comes up in applying CFP is this one: Is the claimant a policyholder? If the answer is clearly not, the insurance
company need do nothing further. It has
already done everything it needs to do to look for coverage. (Perhaps, there are exceptions. If the ABC Insurance Company is part of a
group, the adjuster at ABC might check unified computer records if they exist,
to see if the claimant is insured by another member of the group and then give
appropriate notice.) Fair
treatment is a complex idea. In the
context of insurance adjustment, the idea of fairness moves in two
directions. First, if every policyholder
should be treated fairly, then no policyholder should be treated better than
any other. Wealthy policyholders should
not be treated better than poor ones.
Similarly, impoverished policyholders should not be treated better than
rich policyholders. Asian policyholders
should not be treated better than Native American policyholders. Policyholders from Mexico (or of Latino ancestry) should
not be treated better than policyholders who are African-American, African,
Iraqi, Afghanistanian, and so forth. Policyholders attempting to defraud the
company should not be abused or treated worse than honest policyholders,
although, it is perfectly appropriate to try to catch people committing fraud.[16]
Second,
the insurer itself should not be treated more differently than any
policyholder. Its second sense of
fairness is one hard to grasp. Fairness
usually has to do with treating like cases alike. An insurer and an insured qualify as like
cases. At the same time, favoring an
insured over the policyholder is, in some sense, unfair, given the function of
insurance. Thus, the idea of fairness has at least two
separate and independent dimensions. Thus,
the general idea of fairness implies that adjusters should treat the interests
of the policyholder as at least equal in importance to those of the insurer. Many
people say that the insured should treat the interest of the policy as more
important than its own. This is one of
the reasons why some are tempted to call insurers the fiduciaries of their
insureds.[17] The ideas of equality of interests, and the
idea of balanced interests, both travel with the idea of fairness.
This
second dimension of fairness raises an extreme problem for adjusters. Adjusters are, to some extent, advocates, as
well as experts on property damage, other kinds of damage, and negotiators. Claims
representatives are not lawyer, or pseudo-lawyer, advocates on behalf of
insurers, as opposed to insureds. They
are not exactly advocates for insureds either.
Rather, they are advocates on behalf of actual as opposed to fictitious
coverage. (This is true both as to
whether injuries and damages are covered and with respect to what amounts
should be paid pursuant to coverage.) Adjusters are advocates on behalf of truth, as
opposed to profitability (to whomever the profits might flow) and they are
advocates on behalf of impartiality and fairness.
It is sometimes difficult for
insurers to understand or fully embrace these principles. Sound adjusters generally do, at least intuitively,
however. One of the responsibilities of
senior and supervising adjusters is to teach others in insurance companies the
truth and importance of these fundamental principles. That’s not always easy.
Justifying Principles
It might be useful, in something close
to a conclusion, to look at how CFP might be justified. In this context, it might be useful to take a
look at some theories of business ethics and so forth. Several have already been mentioned and
explored to some degree. Those already
mentioned can be formulated:
- Insurers should be appropriately knowledgeable when it comes to adjustment.
- Insurers should be fair to claimants when it comes to adjustment.[18]
- Insurers should be impartial when it comes to adjustment.
- Insurers should be objective when it comes to adjustment.[19]
- Insurers should treat claimants rationally so far as their claims are concerned in the process of adjustment.[20]
- Insurers should treat claimants reasonably in the process of adjustment.
Each of these
principles is true, of course, and each of them implies that the adjusters
either employed by, or working for the insurer should be the same. Here are two more:
- Insurers should treat claimants in morally appropriate ways during the processes of adjustment.
- Insurers should observe the Golden Rule in dealing with claimants in the adjustment process.
It is a virtual
certainty that CFP is justified by some even more fundamental principle. While CFP is a principle of insurance business
ethics, it is not an obvious principle that leaps out at one. This fact suggests the need for
justification. Although it is a
fundamental principle of adjustment,
it is not a fundamental principle of general business, business custom,[21]
or morality in general.
Oddly enough, none of these (probably)
true even more basic principles, by itself entails CFP. A more interesting question, of course, is
whether two or more of them in combination entail CFP. In short, however, not every combination of
two or more principles can be reviewed here.
Hence, this nearly concluding section will examine each of them by
itself as a possible foundation for CFP.
Does
the requirement of knowledgeability entail CFP?
If the idea of being knowledgeable
means being knowledgeable about an insured’s business, about what the insured
does, about how his machines work, about how his house fits together, and so
forth, the requirement of knowledgeability does not entail CFP. An adjuster should be appropriately
knowledgeable, of course.
Does
the requirement of fairness to claimants entail CFP? The answer is Probably not., if the idea of fairness focuses on how different
claimants should be treated—if the idea of fairness in claimants is understood
as the idea that all claimants should be treated alike. If this were true, then an insurer might
treat claimants fairly, but not very well.
Does
the requirement of impartiality entail CFP?
The answer is, again, Probably not. The reason is that if an insurer were
required to treat insureds impartially but was permitted to construe all claims
narrowly, then the requirement of impartiality would be met, but the requirement
of CFP would not. Exactly the same point
applies to the requirement of objectivity.
The
requirements of rationality and reasonable treatment are too vague to
constitute the foundation for CFP. This
is true, even though CFP is probably always reasonable, at least within some
limits, and probably always rational.
There are limits, as has been observed above. At the level of common sense, there are
interesting questions. If an insured has
a $10,000.00 claim, it would cost $150,000.00 to investigate the claim, what
does CFP require? What does rationality
require? What does reasonable treatment
require? There is a sense in which
rationality does not require the expenditure of $150,000.00. At the same time, CFP may require that the
money be spent or—more likely—that the claim simply be paid because it is too
expensive to look for coverage and claims which are indeterminate should be
paid if looking is a bad idea.
(Obviously, this last observation, while quite common, is puzzling in
some sense.)
Does
the Golden Rule establish CFP?
Obviously, to the extent that the Golden Rule is a moral principle, it
comes close. Most insurers would agree
that when their insurance claim is at stake, they want it examined very
carefully and expansively. Consequently,
the Golden Rule entails that this is how insurers should treat their own
insureds. Nevertheless, it is not
completely clear that the Golden Rule is a universal principle. It is not even clear that it is as universal
as CFP, granting that the latter is, in some sense, narrow, since it applies to
insurance adjustment and not to all human relations.
Here
are the problems with the Golden Rule.
For one thing, this Rule may work for people but not corporate
entities. Insurance companies need rules
they can embrace not only for employees, but themselves as well. Only this attitude will make training really
work. For another, this rule presupposes
that all people wish to be treated in roughly the same way. That thesis is probably false. To be sure,
most people don’t like to be irrationally criticized and verbally
attacked. Others, however, do like it
and subtly encourage it, because they like debate, they enjoy abusing others
verbally, and so forth. Not all people
wish to be treated in the same way, then the Golden Rule is problematic as a
universalistic principle of morality. In
addition, some people may wonder whether the principle applies well to
corporate entities, as opposed to people.
Finally,
we look to the idea that all appropriateness—or, universalistic principles of
moral appropriateness—entail CFP. One
recent influential thinker on the operation of businesses has a negative
suggestion. John C. Maxwell, the author of
a number of books on leadership and corporate organization, has suggested that
there is no such thing as “business” ethics.[22] The reason to refer to Maxwell’s view is
that the idea of principles of moral appropriateness contains the
bullet-pointed list and certainly supposes that there are not only such things
as perfectly general moral principles, but also principles applicable to much
narrower ranges of business. This
suggests that Maxwell is wrong and that there are principles which function as
business ethics. Such restricted
principles may be derived from more general principles, but they are not
identical to more general moral principles.
CFP may be like this.
The
problem now arises. In order to work out
the answer to the foregoing question, it is necessary to think through what
constitutes objectively establishable, general moral principles. That enterprise cannot be conducted in this
short paper. However, a reasonable
hypothesis is the following. The
Eighteenth Century famous, Enlightment German philosopher, Immanuel Kant
(1724-1804), had it right. The
fundamental moral principle is Treat each
person as an end, and never merely as a means.[23] If the insurer follows this principle in
adjusting claims, it will be going in the right direction and will embrace
CFP. The paradoxical problem is that
Kant’s Principle may not be completely consistent with capitalism. There is a danger in capitalism and profit
maximization. As Herbert Hoover once
remarked, “The trouble with capitalism is capitalists. They’re too greedy.”[24]
Testifying
Obviously, it is
appropriate that expert witnesses testify in insurance cases when some of the
insurer’s exposure to damages hinges on whether its adjusters did a reasonable
job. Often this an issue when the plaintiff—who is usually the policy holder of
his assignee—is suing the insurer for common law bad faith, for statutory
violations (i.e., statutory bad faith), or for a Stowers violation. I shall focus on first-party coverage.
Fairly obviously,
industry standards, procedures, and
customs regarding claims adjustment are relevant. Experts are often called to testify on these.[25] Sometimes they are adjusters, claims
executives, or retired folks who used to do such things; sometimes they are
experienced insurance lawyers; sometimes
they are professors of something. The
proper scope of adjuster or claims
investigations is crucial.[26] Indeed, this is one of the most important
areas of expert testimony and hence thought—this and the attitude in which
investigation are conducted and utilized. Interesting, it leads back to Look for coverage!
Conclusion
This
paper started with a hypothesis that Look
for coverage! is one of—if not, the—fundamental
principles of really good adjustment practice.
The surface themes of this paper are to explore CFP and related to some
other principles. The underlying theme
of the paper is that CFP has enormous implications for the way to conduct
insurance litigation, especially when an insurer is accused of bad faith. The policyholder lawyer ought to try to
establish, at least, these two propositions:
the first is that there is coverage, while the second is that the
insurer did not follow CFP. The strategy
of the insurer should be to try to show that there is no coverage, but that if
there is, it followed CFP. The more
detailed that the CFP-related part of the case can be articulated, developed
and concluded, the more likely it is who will win the case.
There is a final question of
interest to lawyers. To what extent
should CFP be involved in defending insurer who have been sued? This is an ambiguous question. Here is Version One: Should the defense of the bad faith case be
organized around defeating any suggestion that CFP was violated? Now Version Two: Should adjuster-witnesses be advised to try
and keep CFP in mind? Version
Three: If so, how and to what
extent?
1. Michael Sean Quinn, The Ethical Habitat of Adjusters: Principles, Problems, and Practicalities. This essay was published in two parts in Volume 10 of the ENVIRONMENTAL CLAIMS JOURNAL. Part I appeared in the Winter 1998 at p. 91, while Part II appeared in the Spring edition at p. 77.
2 See Kevin M. Quinley, ADJUSTING ADVERSITY: HOW CLAIMS PROS CONQUER WORST
CASE SCENARIOS (2003). Mr. Quinley has written a lot, over time, and some of it
can be quite helpful. He is given to
orderly and complete-looking lists so they can be helpful in thinking about how
to take adjuster depositions. Mr.
Quinley, C.P.C.U., A.I.C., also wrote WELL ADJUSTER; 185 SUCCESS TIPS FOR THE
ADJUSTER’S CAREER (2001). His book
contains 10 fundamental principles and a large variety of practical tips, such
as: #151: “Watch the fuel gauge,” which—I think—is “Don’t fun out of gas.” Quinley’s TIME MANAGEMENT FOR CLAIMS
PROFESSIONALS 2000) is also helpful, s is his THE QUALITY PLAN; PRACTICAL
ADVICE TO KEEP CLAIMS CLIENT COMING BACK (1992). This last aging book is about independent
adjusting, and it was published by Claims Books in Seattle , Washington
[3] I
am probably among the many. Obviously,
it is illegitimate to ask an adjuster in a deposition whether he believes in
the existence of one perfect God, His presence in the work, the damnation of
the dishonest and overly self-interest,. whether he believes that Jesus Christ
is his savior, or whey s/he goes to church.
Still, one wonders, Would a devote
Christian be a better adjuster than an atheist? Of course, not even this
question can be asked in discovery or at trial.
[4]
Ken Brownlee, WINNING BY THE RULES: ETHICS AND SUCCESS IN THE INSURANCE
PROFESSION 70 (2001). Obviously, this is
not exactly the idea of faith to be found in religion—not even close. (Note the
title. Brownlee argues that insurance
adjustment is a profession. This can be
an interesting—if abstract area—to explore in some depositions, since
professions are often regarded as having higher ethical standards than mere
vocations. Mr. Brownlee is also the
co-author of a helpful book for adjusting and helping lawyers prepare to depose
or examine adjusters. Pat Magarick and
Ken Brownlee, CASUALTY, FIRE & MARINE INVESTIGATION CHECKLISTS (5th
Ed. 2004). Curiously, the book WINNING
BY THE RULES is inexplicitly oriented toward liability adjustment.
[5] Here is
an example. Liability carriers are often
obligated to defend their insured. The
insurer therefore has the right to command the lawyer, who is a fiduciary of
the insured who is at least one of the lawyers clients. Does the insurer have a fiduciary to run the
defense in this or that way? Are there
not fundamental conflicts of interest?
The insurer must look after its insured, since it has contracted to do
so, but it may have obligations, e.g., to its stockholders, to look after its
own profits.
[6] He is
another of the truly first class adjusters, as well as a willing teacher. Moyer is also a very knowledgeable and
effective expert witness.
[7]
See Steven D. Levitt and Stephen J. Dubner, FREAKONOMICS; A ROGUE ECONOMIST
EXPLORES THE HIDDEN SIDE OF EVERYTHING (2005). Their second chapter argues that cheating is a fairly universal
phenomenon, and he develops an argument as to why this is true.
[8]
Here is a version which would cover insurers only: Sophisticated
subtlety is not easy to defend when it is employed by insurers to justify
denying claims. This is almost certainly true in personal claims, such as
auto and homeowner claims. It works
pretty well in workers compensation and commercial building claims. It may not work quite so well in business
interruption claims, especially where the lost profits derive from very complex
activities and pricing systems, e.g., big time utilities.
[9]
See Ray Bourhis, INSULT TO INJURY: INSURANCE, FRAUD, AND THE BIG BUSINESS OF BAD
FAITH (2005). The author provides a
history of a claims department—or, set of them—in this exciting litigation book
about adjustment in disability insurance.
The errors of the insurance company in this book illustrate the
intuitive importance of Look for
coverage! in insurance trial work.
[10] What does it mean, after all, to say that
“all men are created equal” or to assert that “it is self-evident that every
person has a right to pursue happiness.”
[11]
Consider the following passage in a biography of Maurice (“Hank”)
Greenberg, formerly the head of AIG and now the leader of the Starr Group of
insurers and intermediaries. “”While one part of the Greenberg profit formula
was to charge high premiums, another was to pay as few claims as possible. To that end, AIG has always had a notoriously
tough claims department that is famous for finding reasons to set policyholders
away empty-handed. The company was so
tough, in fact, that some portfolio managers joked that they loved to buy AIG
stock, but they would never consider buying an AIG policy. There is nothing wrong with that approach, of
course, provided that it isn’t carried to such lengths that it drives business
away. Management’s first and foremost
obligation is to make as much money for its shareholders as it can. Its only real obligation to policy holders is
to honor the contract.” Ron Shelp with
Al Ehrbar, FALLEN GIANT: THE AMAZING
STORY OF HANK GREENBERG AND THE HISTORY OF AIG 7 (2006). Many observers believe
that AIG has changed over time in this regard.
A Quinnian Question: Can an insurer both (i) affirmatively,
actively, and as a matter of business policy
try to avoid paying as many claims as possible (and/or pay as little as
possible on each claim paid) and (ii) systematically and as a matter of
business policy be trying to honor its insurance contracts?
[12]
Brownlee, supra, n. 4 at 71
.
.
[13]
Adjusters need to be very careful about this feeling. If a claim comes in much higher than anticipated,
there is going to be a tendency to suspect that the claim has been fraudulently
expanded. If this suspicion determines a
given adjustment process through and through, and the suspicion turns out not
to be true, there is a substantial risk that the insurer will mistreat the
insured. In some sense, fraudulent
claims are against insurers in a way
legitimate claims are not. Claims against will almost always be treated
differently than claims for.
[14]
Is this one interesting? “[A]lthough a
concept of individual authorship might have existed in the Middle Ages, tht
concept was very different from the proprietary notion of authorship we have
today or the one that existence in Rome during the Classical Age. As Ernst Goldschmidt pointed out, ‘[t]o the
medieval scholar the question: Who wrote this book? Would not necessarily or
even primarily mean: Who composed this book? It might convey that the inquire
was for the identity of the scribe not the author.’ The question meant liberally who wrote the
book.” Peter K. Yu, Of Monks, Medieval
scribes, and Middlemen, 1 MICH. ST. L.
REV. 1 (2006). Yu’s quote is from E. Ph.
Goldschmidt, MIDIEVAL TEXTS AND THEIR FIRST APPEARANCE IN PRINT 102
(1943). Now, forget about history. Could the same problem arise today. Consider these questions about handwritten
manuscripts: Who wrote this diary? Who wrote this contract? Who wrote this will?
Who write this draft of the novel? Now
suppose the insured is whoever “wrote” something.
[15] See Timothy Williamson, Vagueness (1994). See also Rosanna Keefen Petersmith, Eds., Vagueness:
A Reader (1999).
[16] Several Authors, Fraud Showdown At The PC Corral!,
Crackdown! (June 2005)
(“A Special Supplement to Claims in National Underwriter Magazines.”) Of course, policyholder fraud on insurance is
nothing new. For an account of a whole
series of such frauds involving missing ships during the last third of the 19th
Century, see Ann Larabee, The Dynamite
Fiend: The Chilling Tale of a
Confederate Spy, Con Artis, and Mass Murderer 141 (2005).
[17] See William T. Barker, & Others, Is An Insurer A Fiduciary To Its Insureds?, 25 Torts
& Ins. L.J. 1 (Fall 1989).
[20]
See Robert Fogelin, Walking The Tightrope
of Reason: The Precarious Life of a rational annimal (2003).
[22] John C. Maxwell, Ethics 101: What Every
Leader Needs to Know, Preface (2003).
This book was originally published as There’s
No Such Thing As “Business” Ethics.
As indicated, Maxwell is a leading thinker and teacher when it comes to
issues of business leadership. See John
C. Maxwell, Developing The Leader Within
you (1993), and many other works.
[23] Interestingly, founding fathers of the United States , Adams, Hamilton ,
Jefferson, Madison ,
and so forth, read many Eighteenth Century European thinkers: Burice, Voltaire, Diderot, and so forth. They did not read Kant, apparently. One can understand why. The prose is difficult. See, for example, Ron Chernow, Alexander Hamilton (2004).
[24] Quoted in John Steele Gordon, An Empire of Wealth: The Epic History Of American Economic Power 283
(2004).
[25] See Hangarter v. Provident Life & Acc. Co., 373
F3d 998 (9th Cir. 2004). This
is the care which is part of the focus
of the book INSULT TO INJURY, referenced
in a footnote early in this paper. See also Douglas G. Houser and Dennis J.
Wall, Expert Witnesses on Insurance Issues: Locating Them, Retaining
Them and Presenting Their Testimony, ___
FDCC QUARTERLY 33 (Fall 2005).
See Charles Platto and William T. Barker, A
Practical Guide to the Use of Experts in Insurance Claim Adjustment, 23
INS. LITIG. RPTR 133 (2001). See also
William T. Barker, Charles Plato and Polly Estes, A Legal Theory of the Use of Experts in Insurance Claim Adjustment, Id. at 140.
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