By Mike Abourezk and Marialee Neighbours


It is universally recognized that corporations adopt corporate philosophies and reward employees who follow those corporate philosophies. For instance, in a Newsweek article, Jack Welch, former CEO of General Electric, emphasized that corporations must show employees the corporate vision, then reward them with salary, bonus or significant recognition when they follow that vision. See Jack Welch and Suzie Welch, "How to be a Good Leader" p. 46, Newsweek April 4, 2005.

Like other businesses, insurance companies adopt corporate philosophies. These corporate philosophies influence the behavior of claims personnel who are expected to implement corporate philosophies in handling insurance claims. An insurance company's philosophies may be reflected in its newsletter, inter-company memorandum, videotapes, written training materials, codes of ethics, by-laws, statements of management's philosophy, speeches and presentations.


Discovery of an insurer's corporate philosophy is particularly relevant in a bad faith action because it may show that an insurer fostered an attitude that encouraged treating claimants unfairly. In Grange Mutual Ins. Co., 151 S.W.3d 803, 816 (Ken. 2004), the Kentucky Supreme Court held that an insurer's internal company newsletters related to claims handling were relevant. In explaining its holding, the court said that such evidence could show that the insurer encouraged or knew about bad faith claims handling by its adjusters:

On this point, we would simply note that internal company newsletters that relate to claims handling could contain evidence that shows that Grange encouraged or knew about bad faith claims handling by its adjusters, which makes those documents relevant and discoverable.


An illustration of what the Kentucky Supreme Court meant is State Farm's publication of an employee newsletter entitled "Obiter Dictum." In that newsletter, State Farm's President exhorted his claims handlers to "focus" their claim investigations "on the company's best line of defense." He told State Farm's claims handlers that they were the company's "big spenders" and admonished them "to spend State's Farm's money as if it were your own." These statements were made despite the fact that the law requires a fair investigation that gives "equal consideration" to the rights of the insured, not a one sided investigation that just looks for ways to deny a claim. See, e.g., Walz v. Firemans Fund Ins. Co., 556 N.W.2d 68, 70-71 (S.D. 1996).

In addition, the State Farm newsletter contained a story of an adjuster who had settled a case of disfigurement to a child for $10,000.00 when the company had actually reserved $50,000.00. According to the newsletter, the adjuster had saved the company money-- "sparing the child from a trial."

The newsletter contained countless other illustrations of the company's attitudes such as one article entitled "Honor Thy Father and Thy Mother, but Not the Subpoena." Again, in adopting this kind of corporate philosophy, State Farm advocated that employees break the rule of "equal consideration" that the company owed its insureds.

Most insurance companies develop videotapes to orient and train claims personnel. Some of these tapes are highly instructive. For instance, Farmers Insurance developed one videotape entitled "Bring Back a Billion," as part of a program in which Farmers exhorted its claims personnel to raise a Billion dollars by more frugally handling claims. Farmers even had claims personnel sign a pledge, promising to do anything possible to raise a billion dollars. Perhaps, just coincidentally, claims personnel became more tight-fisted than ever shortly after signing that pledge.

Another example of an insurer videotape that reflected corporate philosophy is a videotape of a speech made at a national meeting of State Farm's claims supervisors. At that meeting, the company's legal counsel bragged, "We can tie plaintiffs up in motions for weeks and months. It's the old 'mad dog defense tactic,' but it works." In another statement in that same video-taped speech, counsel told the claims handlers that "there is nothing more important than protecting the company's treasury." He told them how important it is to prepare witnesses, because "truth is illusory," and in preparing for trial "we create a memory for the person."

Proof Of Bad Faith And Punitive Damages

In a bad faith case, it is necessary to prove the insurer's lack of knowledge or reckless disregard of a reasonable basis for denying a claim. Discovery of a corporate philosophy that repeatedly extolls the virtues of denying or minimizing claims payments helps establish knowledge and wrongful intent. It negates the habitual insurer response that wrongful conduct was an isolated incident or a mistake.

In South Dakota, the existence of a corporate policy or practice is directly relevant to a punitive damages claim. See Roth v. Farner Bocken Co., 667 N.W.2d 651 (S.D. 2003)(punitive damage award reversed and remanded to trial court because there was no evidence that conduct reflected a company policy or practice). Discovery of an insurer's corporate philosophy reflects its institutional policies or practices. These institutional policies and practices help prove a plaintiff's entitlement to punitive damages by establishing wrongful intent or reprehensibility.

In addition, evidence of corporate philosophy is probative of whether the insurer conducted a fair and reasonable investigation. An insurer's corporate philosophy will affect the way claims personnel investigate claims. Claims personnel who have been conditioned by a corporate philosophy that emphasizes profitability by minimizing or denying claims cannot be expected to conduct a fair and reasonable investigation as required by law. See, e.g., Walz v. Firemans Fund Ins. Co., 556 N.W.2d 68, 70-71 (S.D. 1996).

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