Insurance Claims Settlements: The Role of the Agent

October 15, 2012

Almost every agent has been confronted with a third-party claim. An agent has written a commercial policy for a contractor; an incident occurs where the contractor allegedly injures a third party; and the third party then contacts the insured’s agent for purposes of filing a “claim” against the insured’s carrier. In some instances, the third-party makes contact with the contractor’s agent before the contractor does. In this circumstance, the question that arises is: What should the agent do when receiving such a third-party contact? Some observers believe the agent must immediately notify the applicable carrier and file a claim. I, however, am not necessarily convinced that is the first obligation. Rather, I think the agent should get the information from the third-party claimant, and the first step thereafter would be to contact the insured, i.e., the contractor in the foregoing example. I say this for a number of reasons. First, it simply makes sense to contact one’s customer before filing any type of claim under the policy. This will allow the agent to obtain additional facts (i.e., the other side of the story), which undoubtedly is important for purposes of adjusting the ultimate claim. Second, it puts the customer on notice of the claim (assuming it did not have any knowledge prior to that time), and indicates a willingness of the carrier and its agent to work with the insured in handling the matter. To simply file a claim without first discussing it with the insurer has every potential of creating a bad customer relationship.

Recently, I encountered a situation before the Wisconsin Office of the Commissioner of Insurance (“OCI”) involving an insurance agent’s role with respect to a third-party claim. The third party called the agent and demanded the agent file a claim with its insured’s carrier. The agent ultimately did so after first contacting its risk. OCI became involved, and its representative seemed to suggest that the failure of the agent to immediately file a claim would constitute a violation of an insurance administrative rule.

Wisconsin Admin. Code § INS 6.11(3) governs unfair insurance claim settlement practices. It sets forth a list of acts that “if committed by any person without just cause and performed with such frequency as to indicate general business practice, … constitute unfair methods and practices in the business of insurance[.]” Wis. Admin. Code § INS 6.11(3)(a).  Note the phrase “any person.” It is not limited to just carriers. It includes agents. The list of proscribed activities includes “failure to initiate and conclude a claims investigation with all reasonable dispatch.”  Wis. Admin. Code § INS 6.11(3)(a)2.

As is evident from the face of the regulation, “[i]n order for an insurer’s conduct to be classified as an unfair method or practice within the meaning of this rule, the conduct must have two characteristics: it must be done without just cause, and it must be done with such frequency as to be a general business practice.” Kranzush v. Badger State Mut. Ins. Co., 103 Wis. 2d 56, 80-81, 307 N.W.2d 256 (1981).

The particular conduct relates to the failure to “initiate and conclude a claims investigation” after being advised of the claim. The administrative rule does not describe what constitutes an “investigation,” or the steps that an agent or carrier must take before it can “conclude a claims investigation.” However, under the standards for civil liability for bad faith, an insurance carrier must make a “diligent effort to ascertain the facts necessary for an intelligent and good faith judgment about a claim” and the “investigation must be neutral and detailed.” Lewis v. Paul Revere Life Insurance Co., 80 F.2d 978, 990 (E.D. Wis. 2000). Under this standard, an insurer is not liable for conducting a flawed investigation. Rather, the plaintiff must prove there was no objectively reasonable basis to deny coverage.

It is clear that an agent who receives a third-party claim directly should conduct an investigation. I do not believe simply filing the claim is the requisite “investigation” as contemplated in the rule. Rather, I think that term means the agent must call the insured, advise as to the nature of the claim, get the insured’s side of the story, and then assist in providing all relevant information to the carrier.

As noted above, the rule is applicable only in instances where there is no just cause and a one-time event does not necessarily create the frequency as mandated by the rule. Accordingly, it is my view that when agents are contacted directly by third-party claimants with a request or demand that a claim be filed, an agent should not simply file a claim with the carrier. Rather, I think the agent should, either as a matter of law or as a matter of best practice, make an investigation. To me, that means calling the insured, advising of the claim, and getting the insured’s side of the story. Only when the agent has a better understanding of what has transpired, can the agent provide meaningful advice to the risk and assist in the filing of the claim. To do anything else is going to create problems, particularly in the customer relations area.

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