Insurers’ Failure to Research Applicable Law Is a Failure to Investigate
Insurers’ Failure to Research Applicable Law Is a Failure to Investigate
By David A. Gauntlett*
Introduction
Upon signing an insurance agreement, insurers take on a duty to investigate claims reported to them. In the case of first-party claims (i.e., claims in which the policyholder suffers injury), that duty requires the insurer to investigate the factual circumstances of the claim. For third-party claims (i.e., claims in which the policyholder caused another party to suffer injury), the duty extends to investigating the latest legal authorities to determine whether the insurer has a duty to defend or indemnify its insured. Many insurers, however, fail in this duty, relying on outdated or inapplicable case law to support to denials. This is especially true in the context of “advertising injury” policies, which turn many of the general rules for coverage law on their head.
Unique Complications of “Advertising Injury” Coverage
Unlike many other forms of insurance, “advertising injury” coverage does not depend on whether a particular type of injury has occurred.[1] Instead, coverage extends to any injury “arising out of” a list of “offenses.” Courts have recognized how this unique structure relying on nebulous “offenses” rather than clearly defined torts has led to confusion:
The definition of ‘advertising injury’ in standard business insurance policies has troubled and in some cases confounded courts for years. . . . With varying degrees of success, insured parties have sought coverage for the underlying actions of patent infringement, trademark or trade dress infringement, misappropriation of trade secrets or other confidential information, and actions alleging harm to consumers rather than competitors.[2]
Insurers’ Own Manuals Recognize Duty to Investigate
A typical manual distributed to Claims Representatives for insurers providing CGL policies includes language mandating compliance with the coverage laws and regulations of the state in which a claim is pending. Chief among those is the relevant fair claims practices act of the given state. Pennsylvania’s Unfair Insurance Practices Act is a representative example of such statutory schemes.
It forbids conduct such as “[r]efusing to pay claims without conducting a reasonable investigation based upon all available information,” “[c]ompelling persons to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts due and ultimately recovered in actions brought by such persons,” and “[f]ailing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.”[3] Logically, then, the only way an insurer can conduct a reasonable investigation, determine the amount legally due for a given claim, or reasonable explain a denial in relation to applicable law is to properly understand the nature of the coverage provided by the policy and be familiar with the latest cases interpreting such policies.
With an “advertising injury” claim, reasonable conduct requires the insurer’s coverage analyst to secure the assistance of coverage counsel to check out the analysis called for in analyzing “offense” based coverage where the Claims Representative assigned to conduct the review lacked experience with and knowledge of the unique character of that form of policy. As explained in Atlantic Mutual Insurance Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017 (2002) and progeny, “offense” based coverage requires a different analysis than occurrence based coverage.[4]
Expert Witness Testimony Is Appropriate for Interpreting “Advertising Injury” Coverage
Expert witnesses can serve many functions in the context of a coverage lawsuit.[5] In the case of Bermuda Form policies,[6] experts with knowledge of how such policies are drafted and the history behind them are commonly called in to testify to aid the court and jury in understanding the coverage provided.[7] Because “advertising injury” policies similarly require unique interpretations that are foreign to most courts, experts are equally appropriate.
While expert testimony cannot stray into legal conclusions regarding the ultimate issue of the given case, expert analysis of cases and legal theories that weigh on the ultimate issue is not forbidden.
Defendant next argues that it is inappropriate for Hoffman to testify as to his opinion on Westchester's violations of various insurance statutes, including Pennsylvania's Unfair Insurance Practice Act (“UIPA”) and the Unfair Claims Settlement Practices (“UCSP”) regulations promulgated thereunder, as support for his opinion that Westchester has acted in bad faith. . . . I disagree. As an initial matter, the mere fact that Hoffman's testimony may rely in part on his understanding of the UIPA or UCSP does not render that testimony inadmissible. None of these statutory provisions or regulations are directly at issue in this case, and Hoffman's references to the same are ancillary to the ultimate issue of bad faith. See Hangarter v. Provident Life & Accident Ins. Co., 373 F.3d 998, 1017 (9th Cir. 2004). Furthermore, whether or not Westchester complied with applicable insurance statutes or regulations may be relevant as to whether Westchester acted reasonably and/or deviated from industry standards.[8]
Insurer experts, however, often lack the necessary understanding of these unique policies and mislead courts as to proper interpretations. For example, insurer-friendly expert testimony will frequently note the absence of a specific tort or cause of action. Neither absence is germane to the issue of “advertising injury” coverage.[9]
Conclusion
While Claims Representatives are not required to be experts, there is a wide gap between expertise and the current state of affairs. At present, denials are commonly issued simply because specific torts are not alleged in the underlying action, despite courts repeatedly holding that no such requirement exists for “advertising injury.” Failure to correct these practices may leave insurers vulnerable to bad faith claims, which can only be avoided through “reasonable” handling of claims.
*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1032 (2002) (“Coverage for personal injury is not determined by the nature of the damages sought in the action against the insured, but by the nature of the claims made against the insured in that action. Under the personal injury policy provision, ‘[c]overage . . . is triggered by the offense, not the injury or damage which a plaintiff suffers.’”).
[2] Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 744, 746–47 (3d Cir. (Pa.) 1999); see also EKCO Grp., Inc. v. Travelers Indem. Co., 273 F.3d 409, 412 (1st Cir. (N.H.) 2001) (“Needless to say, the advertising injury provision is, at least in certain applications, unclear and has provoked a good deal of litigation.”)
[3] 40 Pa. Stat. Ann. § 1171.5(a)(10).
[4] J. Lamb, 100 Cal. App. 4th at 1032–33 (“Unlike coverage for bodily injury and property damage, which is ‘occurrence’ based, there is no requirement for personal injury coverage that there be an “accidental” occurrence. All that is required is that the injury arise out of the conduct of the insured’s business. Thus, even an intentional tort, such as those alleged in the Continental complaint, may be covered. The triggering event is the insured’s wrongful act, not the resulting injury to the third party claimant. Indeed, coverage will exist for a personal injury ‘offense,’ committed during the term of the policy, even if the injury occurs after the policy expires.”)
[5] See David A. Gauntlett, The Coverage Attorney’s Role as Expert Witness in Proving Damages Against an Insurer, https://www.gauntlettlaw.com/news/the-coverage-attorneys-role-as-expert-witness-in-proving-damages-against-an-insurer (July 7, 2022).
[6] Bermuda Form policies are a hybrid of traditional occurrence-based polices and claims-made policies, typically provided to large manufacturers and aimed at limiting liability for occurrences that span multiple years.
[7] See, e.g., Zurich Am. Ins. Co. v. Syngenta Crop Prot. LLC, No. N19C-05-108 MMJ CCLD, 2023 Del. Super. LEXIS 154, *13 (Super. Ct. Mar. 28, 2023) (experts called in to testify as to proper definition of “occurrence” in a Bermuda Form policy).
[8] Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., 410 F. Supp. 2d 417, 420–421 (W.D. Pa. 2006); see also Slupski v. Nationwide Mut. Ins. Co., 2021 U.S. Dist. LEXIS 130817, *11 (E.D. Pa. July 14, 2021) (“While a violation of the Unfair Insurance Practice Act (UIPA) does not constitute a per se violation of the bad faith statute, it does point to a material fact that could support a common law bad faith claim.”)
[9] Winklevoss Consultants, Inc. v. Fed. Ins. Co., 11 F. Supp. 2d 995, 1000 (N.D. Ill. 1998) (“[T]he policy offense of ‘disparagement’ is not synonymous with common law commercial disparagement. . . . The SASC still includes factual allegations that Winklevoss made false negative comparative statements about Lynchval's goods, causing Lynchval to lose sales. It does not matter that these allegations may not meet the technical requisites for stating a commercial disparagement claim.”); J. Lamb, 100 Cal. App. 4th at 1034 (“The scope of the duty does not depend on the labels given to the causes of action in the third party complaint; instead it rests on whether the alleged facts or known extrinsic facts reveal a possibility that the claim may be covered by the policy.”)