Insurers: Navigating the Perils of Bad Faith (part 3)
Jul 01, 2024
Howden Insurance Brokers Ltd
Exploring bad faith claims: human error, the COVID-19 aftermath, and mitigation strategies.
Join us with Hilary Harmsworth, alongside experts Sam Vardy and Scott Seaman, who explore these key themes for our final instalment of our series on bad faith.
This episode uncovers the latest trends, from the intricate balancing act of addressing both liability and damages, to the heightened risk faced by commercial auto policies and care homes. Alongside this, we assess the sweeping impact of social inflation and economic changes on insurance lines.
Beyond the trends, we dissect the implications of virtual communication on legal proceedings, revealing the subtle nuances lost in the transition from in-person to remote interactions. As bad faith claims become more frequent and severe, we also discuss effective management strategies to mitigate settlement costs.
Finally, our conversation pivots to the pressing need for reform in certain states, and the broader effect of regulatory constraints on the insurance market landscape.
For more information on Howden's bad faith mapping tool and the topics discussed today please contact Hilary at hilary.harmsworth@howdengroup.com
Exploring bad faith claims: human error, the COVID-19 aftermath, and mitigation strategies.
Join us with Hilary Harmsworth, alongside experts Sam Vardy and Scott Seaman, who explore these key themes for our final instalment of our series on bad faith.
This episode uncovers the latest trends, from the intricate balancing act of addressing both liability and damages, to the heightened risk faced by commercial auto policies and care homes. Alongside this, we assess the sweeping impact of social inflation and economic changes on insurance lines.
Beyond the trends, we dissect the implications of virtual communication on legal proceedings, revealing the subtle nuances lost in the transition from in-person to remote interactions. As bad faith claims become more frequent and severe, we also discuss effective management strategies to mitigate settlement costs.
Finally, our conversation pivots to the pressing need for reform in certain states, and the broader effect of regulatory constraints on the insurance market landscape.
For more information on Howden's bad faith mapping tool and the topics discussed today please contact Hilary at hilary.harmsworth@howdengroup.com
Speaker 1:
Welcome to Howden's podcast Fortune Favors the Brave. We all take risks in our everyday life, and business is no different. In this podcast, we're speaking to the experts about a topical challenge or issue and what business leaders can do to overcome it.
Speaker 2:
Welcome back to the third and final episode of our three-part series on bad faith. I'm joined again by our guests Sam and Scott. If you haven't already, we would recommend listening to episodes one and two first. In this part, we're going to look at the latest trends around bad faith. So, sam, are you seeing any particular trends in bad faith claims at the moment? I mean, we're certainly seeing more come through, but what can we take from?
Speaker 3:
that we're definitely seeing more. I think the trends it's difficult to say really the the settlement demands and not paying the settlement demands often seems to underpin a lot of the claims that we see. But it also, I think, if I was looking for another trend it really does just come down to human error and we spoke previously about that culture of excellence and internal communications and escalation and all of that side of things. And most cases that I pick up and by the time I pick them up, that means that there probably has been something that's gone pretty wrong. You look at it and retrospectively everyone can see where it's gone wrong and how it shouldn't have gone wrong. So I think it's that human error which really. I mean, is that a trend? That's just nature, right? Unless you're going to have senior people looking at things all the time, you're going to get those mistakes and the TPAs and the juniors who are learning their trade. So whether that's a trend or not, I don't know, but that's certainly underpinning a lot of the claims that I see.
Speaker 2:
I wonder whether it is a post-COVID or during COVID where things maybe weren't done as well as they could have been done. Do you think there is potential for there to have been more errors because of the working environment? Yeah, I don't know.
Speaker 3:
I mean, it's definitely something you know. We talk about a lot Generally having those juniors and being able to turn to the person next to you and say, oh, I've just got this in. I'm not sure about it. You know what do you think in that? Having that senior person sat next to you, and that's more difficult if you have to set up a team school. You're not in the office at the same time, so it's a theory. As to whether that's happened in practice, I'm not sure. I don't know really. But you know certainly something to look out for and to make sure, I guess, in terms of going back to how to avoid these, make sure that you are having regular catch-ups with your junior team so you know what's going on.
Speaker 2:
Scott, what's your view on trends and what you're seeing and what may be causing them?
Speaker 4:
Well, just quickly to begin with on COVID, we saw a lot of deadlines to responding to claims missed early on as companies were shifting from working in the office to working at home during the pandemic and that's produced some bad faith claims. But a lot of that sort of got evened out by the fact that most courts were closed during that period of time. One trend we see is there's absolutely no embarrassment on the part of policyholder lawyers in containing their greed. The settlement demands have become more and more outlandish and it's been changed in the tort system generally and a lot of times defense lawyers and coverage lawyers are hesitant to talk about damages because they thought that was somehow an admission of liability. And these days of nuclear verdicts, you cannot leave the issue of damages to chance. It is not inconsistent to argue against liability but then also take the plaintiffs on their damages. Claims and damages should be something that's addressed and facts developed through discovery and that should be argued to the jury. You have to do both liability and damages.
Speaker 4:
The other thing that is a concern is one of the greatest assets of insurers historically and why they've been able to insurers historically and why they've been able to survive and thrive through all sorts of economic and societal changes is the greatness of their personnel, the people there and counsel.
Speaker 4:
And, as with many industries, but more than some industries, insurance companies are having a hard time competing for employees, and that's something that is reflected in things not being done, not being done the way they used to be done or the way of it underwriting claims guidelines require them to be done, so that's an aspect I think insurers have to focus on. Same thing with counsel, which I'll talk about in a little bit. In terms of lines of coverage, any line is subject to bad faith claims, but some more so than others. Liability coverages are more susceptible to bad faith claims, and always have been, because you have the duty to defend, because you're dealing with third party claims and because you're dealing with slightly large liabilities. Commercial auto policies, truck accidents, have been really an area of a lot of big damage awards and have been subject in one or two states to actually some tort reform dealing specifically with them.
Speaker 3:
Yeah, I think that's definitely something we've seen as well, scott. Where there is a catastrophic injury, then a bad faith claim often follows because the damages are so large, potentially.
Speaker 2:
And Scott. The other area that we've sort of seen quite a bit of activity is care homes and that. Is that still the case? Is it still? I mean, it falls within that liability bracket, I guess, but is that still an area where you are seeing a number of bad faith claims?
Speaker 4:
Yes, you know, there seems to be really no let up there, yeah.
Speaker 2:
And on the so on, the sort of social inflation point. Is that impacting any particular business line more than another, or is that you know? So on the property side of things, are we seeing more because the underlying limits aren't worth as much and it's costing more? What's the sort of view there?
Speaker 4:
Yeah, it's impacting almost every line you can think of, especially now that in the US we've had social inflation coupled with economic inflation. That know that so long ago was at a 40-year high of 9%, even now at 3, 3.3%. The cost of everything is escalating. Limits aren't what they used to be. The cost of replacement is enormous, particularly in the construction industry, and so you have those escalating costs and you have some carriers now responding by offering limits that are tight to increases for inflation. But you also have time delays because of material shortages and it's not across the board. It varies from time to time.
Speaker 4:
For a while it was hard to get two by fours. So these are challenges that really permeate throughout the economy and they do influence the price of claims. I think also the notion once jurors accept the notion that we have inflation, economic inflation, it becomes built into their awards and the Keynesian economists will tell us that wages and prices and those sorts of things are sticky downwards. So they become built in even as we see a lessening of inflation. But social inflation really cuts deep because it does impact the way. What is the main control that we have on the jury system and that's jury instructions. We rely on jurors to listen to the law that courts give them, to base their decisions on evidence in the courtroom, not things they see on social media. And the mindset of jurors, particularly younger jurors, is to be like the Adams family do what they want to do, walk how they want to walk.
Speaker 2:
And you know that presents challenges in trying jury cases and you know Beth presents challenges in trying jury cases and we've talked about the nuclear verdicts and you know, once you get to that trial situation it's quite often bad news, it seems. I think we've seen certainly a reduction in the number of claims going to trial and people are obviously much more incentivized to settle before they get there. What's your view on that, scott Well?
Speaker 4:
in the US, less 5% of the civil cases go to trial Plus. If trial is too high, the risk of too high, particularly with bad faith claims. But with litigation financing, plaintiffs have the ability to take cases deeper, to invest in experts. The plaintiff's bar has been highlighted to spending more than $1.5 billion a year in advertising, not only to recruit plaintiffs but to influence future jurors. So far, my anecdotal evidence is about the same. Number of cases are bad faith. Cases are being tried, but insurers and defendants are paying more to settle bad faith and high risk cases. Insurers used to enjoy a leverage advantage in terms of settlement but they have given this up, sometimes because of a myopic focus on their defense spend.
Speaker 4:
While the plaintiff's bar is investing in experts in science usually junk science in messaging, the defense bar seems to be more static, devoting more time to legal audits and budgets. The defense bar is at risk of losing talent to the plaintiff's bar, to commercial litigation and other areas. Gen X lawyers are just not hip to billing guidelines, billing time in general, responding to audits. In long term, the defense bar is at risk in competing for legal talent. I would say by and large, insurers are the victims of nuclear verdicts and social inflation, but in this one way at least, defendants and insurers may be contributing to social inflation, nuclear verdicts and larger settlements.
Speaker 4:
We have to regain our focus, I think, as a defense group, on defending cases engaging in jury research projects, on defending cases engaging in jury research projects, in messaging through associations that all of these large verdicts are making everybody pay more for things and making less products available. We're losing the messaging battle and the plaintiffs, on the other hand, are really dialed into the disposition of today's jurors. They're dialed in in their messaging. That's how reptilian tactics came to be and I think insurers and their lawyers and the defense bar in general needs to raise their game and need to invest more buyer in general needs to raise their game and need to invest more.
Speaker 3:
Scott the dynamics of settlement in this post-COVID world, with meetings taking place on teams and now mediations and negotiations over settlements also possible remotely, are you seeing any shift in dynamics? There was previously, I think, a bit of a thought process that if you got everyone in the room then they'd made the effort to get there and there was an incentive to get a deal done on the day. Are you seeing fewer mediations in person and, if you are, are you seeing that it's easier for people to walk away from those because they haven't invested the time in traveling?
Speaker 4:
Yes, you know we are seeing more and more mediations and settlement discussions taking place on Zoom or Teams as opposed to in person. The good side of it is it saves travel costs, it makes it easier to schedule meetings and do quick follow-up meetings. But you're right, what you miss out on is you're just looking at the screen. And the advantage of a Zoom meeting from my perspective is everybody in the world who sees me on Zoom thinks I'm six foot two, so that part I like. But the disadvantage is that you can't go out and talk to somebody in a corner or by the water fountain or, you know, read them outside of. You know what's stated on a Zoom session that everybody's in and you know doing breakouts on Zoom is not the same thing as being able to, you know, sit somebody down on the side, grab a cup of coffee and resolve an issue and also to get a read on the issue. Because, as you guys know, it's not always the things that people say or the arguments that they make that influence or serve as a pressure point to resolve a case. It's sometimes things people aren't saying. It's sometimes things that could be completely external to a particular case or claim that can dry on its resolution and you miss out on a lot of that.
Speaker 4:
By Zoom, however, we see clients allowing more travel, but insurers still prefer to save the cost associated with travel when they can do Zooms for hearings or settlement conferences, and also it helps them, I think, with their green targets in terms of carbon credits and so forth. So you do have these things that never were considerations before that sometimes drive the conduct of parties. It's also you guys did a podcast a while back with a woman who was talking about customer service and how to treat customers and pointing out that the impact of an email is different than a phone call. And you know you can't see emphasis, you can't see. And a little bit of the same is true by a Zoom. You just can't get the same read of people or convey messages the same way in a Zoom as you can in person.
Speaker 2:
Great Thanks, and one question I did want to ask you, scott, was really you know we've certainly seen a little bit of an increase in claims as a result of bad law firm advice and TPA's bad handling of a claim. So have you got any suggestions of how to avoid and manage relationship?
Speaker 4:
Yeah, I mean choosing your vendors is critically important. I saw a survey where many claims adjusters felt that the quality of lawyering didn't matter, which I hope I disagree with because that would undo the justification for what I do. But when you're dealing with TPGAs and MGAs, but when you're dealing with TPAs and MGAs, sometimes there's a sense that a company's exposure is increased for bad faith liability. Sometimes it is, sometimes it isn't. It depends on the quality of the TPA or the MGA, their capabilities, especially as compared to an issuing company. As compared to an issuing company, and sometimes the issuing company has client staff. You know mighty better and certainly know their company and portfolio interests better, but a company that doesn't have a staff could be well served by using a TPA it does.
Speaker 4:
You have to be careful who you give the pen to, whether it's the underwriting pen or the claims handling pen. Most times insurers retain that liability and so you have to really understand the capabilities of who you do in business with, particularly TPAs and MGAs, and all the things that we spoke about in terms of an insurer having a culture of excellence apply and you need to ensure that the TPA or the MGA has a culture of excellence and you have to ensure that they understand and are protecting the portfolio interest of the insurer, and one way to do this is to make sure you've got adequate protection and the agreement giving yourself the rights to review and to control what you need to review and control requiring these folks to have the assets in place to handle claims properly. Make sure there's adequate extra contractual liability coverage. It's part of the mix, and so those are some of the things you know.
Speaker 3:
There's no substitute for dealing with quality professionals bad faith and, you know, settlement by an insurer that they look at the services that they've received and whether there has been any breakdown in those and they might have a right to make a recovery and get some or all of the money back.
Speaker 4:
Yes, which is part of the reason you want to you know, know their financial liability.
Speaker 2:
So we've talked a lot about, obviously lots of changes around states, about business lines, around areas where clearly the figures involved in these bad faith matters are increasing. Sam, are we seeing that come through in terms of the claims that we're seeing from clients on the bad faith side? Are we seeing the quantums bigger? We're certainly seeing frequency increase. Are the quantums also increasing?
Speaker 3:
Yeah, I mean certainly the asks they do. It's stratospheric some of them and it seems like if you get a demand one week and you don't respond to it promptly, then within another couple of weeks it's gone up even further and there's often not any rhyme or reason around that. So getting on top of that is important. So the demands are going up. Are the actual settlement amounts. I think if it's managed properly, you get on top of it and you can put forward a proper justification for the amount that you're offering, based on actual damage, then you can get that figure quite a lot lower. So certainly in some senses going up, but so long as you can avoid the trial, I think so far the cases I've seen we've managed to avoid that nuclear-style verdict.
Speaker 2:
Scott, what's your feel on that side of things?
Speaker 4:
I agree with Sam. I think I might add that some locations tort reform is required. One place where there has been a lot of tort reform has been Florida and there have been some improvements made. Especially, we're seeing less rough claims, less abuses with rough claims, less abuses in general associated with the assignment of benefit claims that we had seen for many, many years as a result of tort reform. The first major impact of tort reform, however, was the filing of 300,000 cases to beat the effect they take. Time will tell how effective that reform is and I suspect more reform is going to be required.
Speaker 4:
You know we're seeing pockets like Florida, louisiana, california with capacity issues because insurers are becoming insolvent or refusing or limiting their writing to homeowners or other coverages due to weather related losses. So that's something else that we're seeing in the marketplace and you know so we're seeing in the marketplace and you know consumers always complain about prices and one of the main problems in California has been one of the propositions there that limited the ability of insurers to raise rates, and that's for another reason. Several significant carriers have pulled a scaled back from the market and I think the department's taking a look at that because obviously the alternative to not having insurers who can price their product fairly? Is you know things like citizens or insurers of last resort that one way or another, get funded by taxpayers?
Speaker 2:
Fortunately, that brings us to the end of this podcast and the end of this particular series on bad faith. Thank you very much, Scott, for joining us. I think very, very insightful, brilliant thoughts and ideas and thanks, Sam, for sharing all your insight and thought as well with us.
Speaker 4:
Hilary, thank you and Sam, for letting me join you on this very informative podcast. Thank you.
Speaker 2:
Thanks very much again. We will put our details in the contacts for the podcast, so, please, if you are interested in finding out more about the tool that we talked about in episode one, or anything else around bad faith, then we are here and we love to talk about it. Thanks again for listening and goodbye.
Speaker 1:
Thank you for listening to this episode of Fortune Favors the Brave from Howden. To hear more episodes and subscribe to our channel, search Fortune Favors the Brave on your favourite podcast app.
