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When COVID-19 Comes Home to Roost for the Insurance Industry

Through my membership with The CLM, a Member of the Institutes, from 2009 to 2020, I spent substantial time working with and educating claim professionals on claim handling best practices, avoiding bad faith, and encouraging aggressive good faith.

But the insurance industry threw everything I had been taught and, in turn, taught to others out of the window in collective haste to avoid liability for COVID-19 business interruption and income cases. Claim practices that would otherwise be considered unimaginable in any professional claim operation were suddenly the current fashion.

For example, a major North American property and casualty insurer decided -- at the highest levels of the company -- to deny every single COVID-19 business interruption and income case before the first claim was ever filed. Before a single notice of loss. Before nationwide lockdowns. The company generated five unique form letters across different policy lines and holstered them, waited for claims, and then fired as each were filed.

Policies containing the so-called virus exclusion were easy marks as they should have been. But policies without the exclusion and in which there was a genuine dispute over the terms physical damage, direct physical loss, and whether same required physical alteration of property were easy marks as well, shot down like mechanical ducks in a penny arcade.

I was taught by very smart and senior claim professionals that the first obligation of an insurance company to its policyholder is to look for coverage. To turn the claim upside down and inside out in an effort to find coverage, because the moral imperative of an insurance company is to pay legitimate claims.

One can argue that there was no moral imperative in respect to COVID-19 claims because there was no covered cause of loss and a virus is not capable of causing direct physical loss or damage to property. And the percentage of business interruption and income cases on which motions to dismiss have been granted would statistically bear that out (leaving the evisceration of Rule 12 by the Federal judiciary for another day).

But the deliberate denial of claims completely outside the bounds of what would otherwise be normal claim handling practices and procedures cannot be overlooked. The company that I reference made no effort to have legal counsel offer opinions on court decisions and precedent in any jurisdiction with regard to physical loss or damage and physical alteration before shooting each claim down.

Made no effort to take a proof of loss. Made no effort to look for coverage. Made no effort to handle the claims in a good faith manner.

I don't believe this company is alone. I know that it isn't. The industry may have saved itself hundreds of millions of dollars in closing COVID cases with no payment -- even as it shredded professional claim handling in the process -- but the stain is going to take much longer to wash out. And then the chicken will come home to roost.

Bad faith cases are not going away and neither are allegations of institutional bad faith. In broad terms, institutional bad faith, besides being systemic unethical conduct, is intentional or unreasonable conduct as a general business practice to drive down aggregate claim payments in order to lower costs and/or increase profits at the expense of policyholders and individual claimants.

As far as it being systemic unethical conduct, the work of adjusting insurance claims engages the public trust, and, accordingly claim adjusters are held to a high ethical standard. In every instance -- except COVID cases it seems -- the adjuster must put a duty of fair and honest treatment of a claimant above his or her own interest or the interest of the insurance company.

The chicken is pre-determined claim outcomes, and the roost is institutional bad faith. Claim handling procedures and best practices are at issue in every bad faith case, and lawyers use a comb with very fine teeth to look for deviations from or discrepancies with those practices and procedures in proving not only bad faith but the institutional variety as well.

And they will ask the questions that will root out the massive deviations and discrepancies in handling COVID cases and apply them to their own. After all, if you've done it before, there's nothing to say you haven't done it again. It's systemic conduct. It's pattern and practice. And it could be devastating.

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