Insurance claims cannot be validly denied unless the denial is based upon a reasonable investigation. To do that is at least a paradigm of insurer error, and if the mistake is bad enough it will constitute insurer bad faith.  These kinds of errors can lead to winnable lawsuits based upon the common law or upon a variety of statutes in every state. There can be not only actual damages but also punitive, or, exemplary, damages.  Many are the reported cases from courts discussing these matter—“legion” is an exaggeration.

So, how many ways can an investigation by an insurer, or by someone the insurer has hired, be unreasonable? Let me count the ways.

  1. Not done at all.
  2. Started late.
  3. Too long.
  4. Poor adjuster.
  5. Right questions not asked.
  6. Insufficient data collected. Important data not studied appropriately.
  7. Demanding an insured to provide the same information several times.
  8. Demanding an insured provide data when the insurer knows the insured cannot do it.
  9. Demanding an insured provide data when the insurer knows that the insured is unlikely to be able to do it.
  10. Demanding an insured provide data when the insurer does not really need it.
  11. Demanding data of a size or complexity when there is an easier way to obtain needed information. (If one mode of assigned-to-the-insured mode of investigation, A, is easier than another, B and equally reliable, then A is the more reasonable. Or A is reasonable while B is not.)
  12. Demanding an insured provide unnecessary data.     
  13. Demanding data from the insured when the insured could collect that data much more easily than the insured can.
  14. Demanding that the insured engage in burdensome collection of data, where a smaller amount or group or assortment would be sufficient.
  15. Threatening the insured with claim denial, whether explicitly or impliedly, in connection with unnecessary work.

Notice that there are whole variety of ways that an investigation can be unreasonable: None enough of this or too
much of that.  Interestingly, an investigation can be defective for several opposite reasons all at once.  Suppose a claim had two independent aspects. An insurer could not do enough on one, A, but the right amount on another, B.  Or, a right about on A but too much on B. Starts late on A, but on time with B, but it’s A-lateness temporally retards the whole show. And so on.

Does this sound like it involves a lot of balancing? Well, it does.  But balancing can require exactitude, or at least precision, under many circumstances. It must be remembered that built into all of this is the following proposition:

Except where there is a preconceived and intentional screw-job imposed on the insured, insurer negligence is a necessary condition for bad faith though not one that is sufficient.


Also, it must be kept in mind that the word “negligence” does not entail a separate cause of action in tort. The word “negligence” does not really denote one single thing.  In more common usage, the word “negligence” means careless, sloppy, stumbling around, forgetful, and/or inattentive.  It is important to remember that all these can occur at once, or only a few of them together.  It must also be remembered that some instance of negligence can amount to breach of contract.

Originally posted on 11/24/2014 @ 4:55 pm

Michael Sean Quinn, PhD, JD, CPCU, Etc

Michael Sean Quinn, PhD, JD, CPCU, Etc. (530)

One of Texas's leading insurance scholars, Michael Sean Quinn is a past chair of the Insurance Section of the State Bar of Texas and has a broad legal practice.

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