CLAIMS FILES: PRIMARY SOURCE OF INFORMATION IN FIRST-PARTY BAD FAITH CASES
By Mike Abourezk and Marialee Neighbours
Insurance claim files are highly relevant in a bad faith case. A plaintiff needs access to his or her entire claim file in order to prove elements of bad faith and to prove entitlement to punitive damages. The opinions and mental impressions of the insurer, its employees, and agents in handling a claim are directly at issue. Obviously, the best way to unearth evidence of the day-to-day activities of claims personnel who handled a claim is to look at an insured's claims files. Usually, the claim file will contain crucial evidence on key issues such as an insurer's knowledge or state of mind and its unreasonable conduct in handling a claim.
However, claims files are not only important to show the activities of individual claims adjusters, they are also an important source of information about the daily activities of claims supervisors. Supervisor instructions will appear in the daily activity logs or diaries of the supervisors. Among these daily entries, evidence can be found about how supervisors instructed claims personnel to behave. This type of information can provide evidence that an insurance company is engaging in systematic efforts to improve the financial results of the company to the detriment of insurance claimants.
In pre-trial discovery, courts hearing South Dakota bad faith cases have overruled insurer objections and ordered claim files produced. For instance, Judge Andrew Bogue ordered the production of the insurer claim file in Torres v . Travelers Insurance Co., Civ. No.01-5056 (D. S.D. April 4, 2002).
Other jurisdictions have recognized the relevance of claim files and have ordered their production. In ordering production of an insurer claim file, a Montana district court recognized that the claim file is the primary source of information in a first-party bad faith case:
Under ordinary circumstances, a first-party bad faith claim can be proved only by showing the manner in which the claim was processed, and the claims file contains the sole source of much of the needed information.
Silva v. Fire Ins. Exchange, 112 F.R.D. 699 (D.Mont.1986), citing Brown v. Superior Court In and For Maricopa County, 137 Ariz. 327, 670 P.2d 725, 734 (Ariz.1983) (emphasis added).
In Brown v. Superior Court In and For Maricopa County, the Arizona Supreme Court held that portions of an insurance claim file that explained how the insurer processed and considered plaintiff's claims and why the insurer rejected the claims were relevant to the issues. 670 P.2d 725 (Ariz.1983). The Court reasoned that:
Further, bad-faith actions against an insurer, like actions by client against attorney, patient against doctor, can only be proved by showing exactly how the company processed the claim, how thoroughly it was considered and why the company took the action it did.
Id. at 734, citing APL Corporation v. AETNA Casualty & Surety Co., 91 F.R.D.10, 13-14, 29 Fed.R.Serv.2d 1067 (D. Md. 1980).
The court recognized that an insured had an "overwhelming" need for claim file:
....The claims file is a unique, contemporaneously prepared history of the company's handling of the claim; in an action such as this [bad faith] the need for the information in the file is not only substantial, but overwhelming....The "substantial equivalent" of this material cannot be obtained through other means of discovery. The claims file "diary" is not only likely to lead to evidence, but to be very important evidence on the issue of whether Continental acted reasonably.
Id., citing APL Corporation v. Aetna Casualty & Surety Co., 91 F.R.D. 10, 13-14 (D.Md. 1980)(internal citations omitted)(emphasis added). See also, Reavis v. Metro. Prop and Liab. Ins. Co., 117 F.R.D. 160, 164, 9 Fed.R.Serv.3d 258 (S.D. Cal. 1987) (insured entitled to discover documents reflecting the mental impressions, opinions, conclusions or legal theories of insurer's representatives contained in claims files relating to underlying case).
Moreover, a plaintiff in a bad faith case does not have ready access to his or her claim file. Claim file documents are in the exclusive possession, custody, and control of the insurer. Thus, it is impossible to obtain the "substantial equivalent" of the claim file by any other means.
CLAIMS MANUALS AND PROCEDURE GUIDES: DISCOVERY OF TRAINING AND POLICY INTERPRETATION MATERIALS
By Mike Abourezk and Marialee Neighbours
Claims manuals and procedure guides demonstrate the procedures used by an insurance company's claim handlers. This category of discovery may include supervisor/manager manuals that describe their duties in supervising claims personnel; employee handbooks used by employees to guide their actions; documents and manuals relating to quality control audits; indexes of forms; and other manual or educational materials used in addressing claims. In addition, this category includes policy interpretation documents which describe the standards, criteria or procedures that employees use to determine the scope of insurance policy terms.
Claims manuals and procedure guides are highly relevant in a bad faith action because they often show that insurers deliberately train personnel to minimize claims and elevate the insurer's financial interests above the interests of insureds. This kind of conduct violates the "equal consideration" rule that applies to bad faith actions. Kunkel v. United Security Ins. Co., 84 S.D. 116, 168 N.W.2d 723 at 726 (S.D. Jun 11, 1969)
Insurer Misuse of Claims Manuals and Other Training Materials
Insurer mis-use of claims and other training materials is best understood by looking at specific examples. The following list outlines some of the training manuals and materials that have been used by one major property and casualty insurer, State Farm Mutual Automobile Insurance Company.
1. In one training seminar entitled "Negotiating Skills for the Claims Professional," State Farm instructs its adjustors that "s(he) who has control of the dollars is in a position of Power! If you are in a position of power, use it! If you are in a position of no power, delay."
2. Personnel manuals showed that State Farm creates goals for adjustors in the payment of claims. Adjustors that achieve the goals are rewarded with salary increases and bonuses.
3. State Farm sponsored contests among claims adjustors, awarding cash prizes and trophies to those who paid the least in claims.
4. One State Farm operations guide instructed that: "The claim superintendent should not overlook the opportunity to strengthen his file by creating self-serving correspondence."
5. State Farm internal directives repeatedly instructed employees to destroy anything that could be used as evidence against State Farm in bad faith lawsuits.
6. State Farm's "Auto Claim School" training manual instructs claims adjustors to "Take good notes-take pride in your workbook-keep it for six months, then destroy it."
7. One State Farm operations manual, instructed claims personnel to ask embarrassing personal questions of claimants:
Most of us consider our income, our debts, our domestic problems, how we spend our money, whether we are keeping another women, and things of this nature to be very personal. We don't like other people asking us questions about these things, and, under normal circumstances, we don't go around asking other people those questions, however, when we're faced with what we think is a fraudulent claim or where a punitive damage count is in a lawsuit, these matters become extremely important to the successful defense of a claim. If the insured is paying the expenses of keeping some woman in an apartment, that may be extremely personal business, especially if he is married, but if he submits a claim to us, or charges that we are guilty of conduct for which we should be punished, it is also our business.
Recognizing the relevancy of claims manuals and procedure guides, courts routinely overrule insurer objections and order them produced. For instance, in Grange Mut. Ins. Co. v.Trude, the Kentucky Supreme Court ruled that the insurer's training and policy manuals were relevant in a bad faith case. 151 S.W.3d 803, 813. In that case, the court said:
The question is whether Grange's own policies, as described in the manuals, embody or encourage bad faith practices. And use of such manuals is not without precedent in our courts....Grange's training and policy manuals are relevant to Wilder's bad faith claim, and absent some sort of privilege or other showing of irreparable harm, they are discoverable.
In Champion Intern Corp. v. Liberty Mut. Ins Co., 129 F.R.D. 63 (S.D.N.Y. 1989), a federal court held that the insured was entitled to discovery of an insurer's instructions to sales personnel and claims manuals. In that case, the court reasoned:
" [W]hen dealing with a complicated organization, such as a large insurance company, knowing what the internal understanding was might inferentially have some bearing on what the external manifestation was likely to have been . . . and from a discovery point of view that, it seems to me, is sufficient justification for including these documents."
Id. at 67 (citation omitted). See also Miel v. State Farm Mutual Automobile Insurance Co., 185 Ariz. 104, 912 P.2d 1333 (Ariz. App. Div.1 1995) (claims manuals and discussions of claims handling in automobile liability insurer's in-house newsletter found relevant in bad faith action-addressed insurer's approved policies and procedures for handling claims); State Farm Mutual Automobile Insurance Co. v. Engelke, 824 S.W.2d. 747 (Tex.App.1992) (no abuse of discretion to require an insurer to provide all documents, manuals and training materials used in training insurer's claims handling personnel); Vining on Behalf of Vining v. Enterprise Financial Group. Inc., 148 F.3d 1206, 49 Fed. R. Evid. Serv. 1026 (10th Cir. 1998) (evidence of insurer's training manual was admissible); Bonenberger v. Nationwide Mutual Ins. Co., 791 A.2d 378, 2002 Pa. Super 14 (Pa. Super. 2002)( trial court properly admitted evidence of insurance claims manual where manual was in existence since 1993 and used by insurer's employees as primary guide in evaluating, valuing and negotiating claims); Glenfed Development Corp. v. Superior Court, 53 Cal. App. 4th 1113, 62 Cal. Rptr. 2d 195 (Cal. App. 2 Dist. 1997) (insurer's claims manual discoverable).
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