Wisconsin bad credit auto loan

BAD FAITH

Avoiding or winning a bad faith claim is tricky business

This column will examine three loss situations that involved bad faith claims against an agent or insurance company. (The names of the people and companies involved have been changed.) These examples do not demonstrate all of the possible ways that an insurance agent can become involved in a bad faith situation.

Agents should not presume that their errors and omissions or umbrella contract will cover a bad faith claim. If neither of these contracts provides an agent with bad faith coverage, the agency may wish to endorse it. Usually, a bad faith action is tied to a covered loss, for example, claiming that an insurer did not properly handle a given loss.

Business income loss

Clear Blue, Ltd., located in an upper Midwest city, incurred a fire loss in the late 1990s. The business was a very large account for the agent, who had been writing its insurance for more than 20 years. he first wrote the account when the business was operating out of an old Main Street brick building. At the time of the loss, the insured business was located in a large, automatically sprinkled building. Its owners were also in the midst of securing financing to build another structure.

There was almost enough insurance on the structure and business personal property. Time element or business income insurance was the problem. Less than 10% of the business income exposure was insured. The insured had furnished to the agent a copy of its year-end financial statements. Many of us are familiar with the business income worksheet CP 15 15, developed and furnished by the Insurance Services Office. Determining the proper amount of business interruption is usually a tedious process. A common problem is that clients' accountants use different words to label the required information.

In this case, there was no need to complete a business income worksheet to determine the amount of loss of income exposure. Clear Blue's accounting had already determined the proper limit. Page 2 of the business's financial statements listed the annual business income exposure. In fact, it also showed the prior year's loss of income exposure. Using those two numbers, an insurance agent could easily make a projection of the loss of income exposure for the coverage period.

Instead of using Clear Blue's financial records to determine the proper amount of coverage, the agent chose a business income limit by just "picking a figure out of the sky." The agent said he chose the income limit because he wanted to save money. This was not documented anywhere in the agent's file. In fact, there was nothing in the agent's file to indicate that the business income limit had been discussed.

Clear Blue experienced an uninsured loss of several million dollars. The owners stated that they did not remember talking to the agent regarding the business income limit.

Bad faith was one of the allegations contained in the lawsuit against the agent and the insurer regarding this loss.

Insurer complicates a simple loss

A Wisconsin-based antique dealer, owner of Bruce's Oldies But Goodies, LLC, visited relatives in Arizona. The relative's neighbor, Wally's Stuff, Inc., was selling a motor home. Wally's Stuff had bought it as part of a loan foreclosure proceeding by John Deere Credit, Inc. Wally's Stuff had paid $10,000 for the vehicle, which Bruce then bought for $20,000, paying the entire amount in cash. The retail value of the home was $25,000. As part of the price negotiation for the motor home, Bruce had Wally put all new tires on the vehicle.

Bruce drove the motor home to his 80-acre farm in South Dakota. After winterizing the place, he headed for North Dakota to visit some relatives. he had been traveling on a state highway for about an hour when, around 4:00 a.m., the motor home caught on fire and was totally destroyed.

Typical loss settlement for a motor vehicle is the value of a similar unit in the insured's trading area. Because Bruce lived in central Wisconsin, the value would be that of a similar unit being sold by a dealer somewhere between Green Bay and Minneapolis. A similar rig was selling for $25,000.

Chincy Insurer, Inc., offered Bruce $15,000. After a month of haggling over the value of the loss, Chincy called its arson/fraud investigator. (A good arson investigator will do its work within 24 hours of a loss. Weather and/or time can eliminate signs of arson.)

The remains of the motor home had been removed from the highway and stored behind a garage located five miles from the scene of the fire-the nearest auto repair facility. State arson investigators looked at the burned-out motor home prior to releasing it so that the garage could move it. Bruce had nothing to say regarding moving the damaged vehicle and where it was stored. The police decided that it was to be moved, who would move it and where the remains of the motor home would be stored. The arson investigators stated that there was no evidence of arson.

Chincy Insurer tried to build a fraud case against Bruce, saying that Bruce burned the home to profit from the insurance proceeds. A typical fraud case involving a motor home usually is a situation where the owner of the motor home has a large loan on the vehicle and cannot keep up with the payments. The owner torches it to get the insurance money to pay off the loan. However, in this case, Bruce had a clear title. he owned the motor home outright. While it had a value of $25,000, Bruce had underinsured it at $20,000. Bruce had nothing to gain from a loss. But the insurer refused to budge from its position that he had created a deliberate loss in order to profit from it.

In the eyes of the courts, there are many "definitions" of bad faith. Here are several that could have been used in the above case:

1. Examination of the facts indicates that there is no reasonable basis for denying the claim.

2. Was there a proper investigation of the claim and were the results of the investigation given a reasonable evaluation and review?

3. In denying the claim, the insurer either knew or recklessly failed to ascertain that the claim should have been paid.

In many bad faith cases, both the insurance agent and insurer will be named in the bad faith action. Also, an errors and omissions action may be brought against an insurance agent for the same situation out of which the bad faith action stems. There are times when it is difficult to tell the difference between an errors and omissions action and a bad faith action. From a practical standpoint, we need to know how to avoid a problem with either one.

Conflicting forms

In a loss involving Juliss Prince and Suddenly Sober, Suddenly was at fault in an auto accident-having hit Juliss. Nameless Coverage, Ltd., Suddenly's insurer, paid the policy limits to Juliss. Unfortunately, the cost of Juliss's injuries far exceeded the amount of insurance that Suddenly had on his car. Juliss presented an underinsured motorist claim against her insurer, Friendly Insurer, Inc. Friendly said it would honor juliss's claim. However, the amount it would pay would be reduced by the amount of money she had received from Nameless Coverage. At the time of this personal auto loss, few insurers were using an offset clause.

Juliss made a second claim against Friendly Insurer. In this claim, she stated that she deserved coverage because neither Friendly Insurer nor its agent had told her about the offset clause, nor given her the option to buy it back.

Among other allegations, juliss included the words "bad faith." Her request for legal action included naming both Friendly Insurer and its agent.

Bad faith allegations can result from a wide range of situations. Agents should check to be sure their umbrella or errors and omissions policies provide coverage for bad faith actions.

By LeRoy H. Utschig, CPCU, ARM

The author

LeRoy H. Utschig, CPCU, ARM, is a Wisconsin-based insurance educator, consultant and expert witness.