The Role of Outside Counsel in
by Guy E. Burnette, Jr., Esquire
The use of an outside attorney in claim investigations
is a means of utilizing specialized expertise. A qualified defense attorney
has training and experience in the legal issues unique to claim investigations.
The attorney is an important member of a team together with the file handler,
claims supervisor and the special investigations unit. A team approach to
detecting and resisting fraudulent claims has been proven to be the most
effective response in combating schemes to defraud insurers.
The Role of Outside Counsel
The attorney involved in claim investigations serves
several functions critical to the success of the investigation. First and
foremost, the attorney is a legal advisor. He or she will ensure compliance
with the legal requirements of a claim investigation. This runs the gamut
from compliance with claims administration statutes to the avoidance of
unfair claims practices. The attorney will guide the investigation past
legal pitfalls such as violation of an insured's privacy rights, "bad
faith" claims handling, defamation, libel, slander, credit privacy
laws and a host of other problem areas which arise in almost every investigation.
The attorney will identify and respond to issues
of innocent co-insureds, waiver of policy rights and conditions, equitable
claimants, mortgagees and loss payees under the policy, inquiries from criminal
investigative agencies and pro-rata coverage issues.
The attorney will examine and establish legal and
policy defenses such as fraud, arson, application fraud, vacancy and unoccupancy,
insurable interest and non-compliance with duties under the policy.
The attorney also serves as liaison between the
company and claimants' counsel, third-parties asserting legal interest in
the claim proceeds, department of insurance representatives, prosecuting
authorities, law enforcement agencies, bankruptcy trustees and any other
persons or entities involved in the claim.
The attorney can provide information and investigative
resources through contacts and past dealings with the insured, his or her
attorney, law enforcement investigators, other defense attorneys, professional
organizations, private investigators, fire investigators, forensic analysts,
engineers and consultants.
The attorney is directly involved in various phases
of the investigation, including scheduling and conducting the examination
under oath, preparing and obtaining an assignment of mortgage, settling
the claims of other parties, drafting the denial letter to the insured and,
of course, litigating the claim when suit is filed.
Avoiding Legal Pitfalls
Company representatives face a number of legal
pitfalls in the investigation of a claim. An investigation can be undermined
or even ruined when a mistake is made. When a mistake gives rise to a claim
of bad faith, the consequences can be catastrophic. Company representatives
must be aware of these pitfalls in order to avoid them. While an attorney
can protect against these pitfalls, it is too late to do anything once a
mistake has been made. The company representative must be aware of the pitfalls
before it is too late. These are some of the more common problem areas which
can arise in the investigation of a claim.
Documenting the File
A claim file under investigation must be properly documented. The file should
record all of the facts developed in the investigation, but only the facts.
There is no place for opinions and judgments in a claim file. Moreover,
the claim file must document everything which has been uncovered in the
investigation of the claim and all of the steps taken in the investigation.
The greatest danger comes from what is not done, rather than what is done.
When an insured alleges a violation of the unfair claims practices act,
the most common allegation is a failure to properly investigate the claim.
The claim file must demonstrate a comprehensive and objective investigation
of the claim in order to refute such allegations. Everything recorded in
the claim file should be recorded in such a way that it will prove a proper
investigation. It should be assumed the claim file will be read by a jury
at trial. For this reason, the file handler must take care to make sure
there is nothing in the file which could raise questions about the objectivity
of the investigation.
Avoiding Defamation, Libel
In line with the comments above, the claim file
should never contain expressions of opinion or judgments on the part of
the file handler. The opinions and judgments of others may be recorded in
the file when necessary, but they must be attributed to the source. The
information developed in the claim investigation may well implicate the
insured in fraud. However, the conclusion of fraud should not be recorded
in the file. The discovery of a forged or altered receipt, for example,
should simply be recorded in the file without mention of the conclusion
of fraud on the part of the insured, no matter how obvious the conclusion
Communications with witnesses and other parties should always keep this
in mind. Contacts with witnesses and other parties should always be objective
and fact-finding. Concerns about the suspicious nature of a claim should
never be communicated to outside parties. In an arson case, there should
never be reference to the investigation of arson. It should only be referred
to as the investigation of a fire claim. Witnesses and outside parties should
never be asked to express an opinion about fraud on the part of the insured.
While they may well volunteer such an opinion, it should never be elicited
from them by the file handler. Post-denial communications should never reveal
the basis of the denial of the claim. The file handler should make no mention
of the reasons for the denial, only that the claim has been denied.
Communicating with the Insured
Communications with the insured present a formidable
challenge in the investigation of a claim. In the context of the investigation
of a suspicious claim, they must be carefully approached. An insured whose
claim is under investigation will be on the defensive. The mere fact of
an investigation will be considered an accusation of fraud against the insured.
The insured must be informed in no uncertain terms that while the claim
is under investigation, this does not mean the insured has been accused
of fraud. The insured must be told that the purpose of the investigation
is not to implicate the insured, but to uncover the truth and (hopefully)
exculpate the insured.
When the insured learns the claim is under investigation, the file handler
will be asked why this has happened. In the context of a theft claim, the
insured should be told that the investigation is intended to verify the
claim and loss which has been presented. In the context of an arson case,
the insured should be told that the fire has been determined to be incendiary
in origin and the company must investigate the loss to determine who is
responsible for the fire.
The most common mistake in communicating with the
insured is the failure to communicate or to communicate timely. It is a
direct violation of the unfair claims practices act to fail to promptly
respond to any communication from the insured concerning a claim. Every
communication with the insured should be confirmed in writing. Every time
the file handler speaks with the insured, a letter should be immediately
sent out to the insured confirming the content of the conversation. Even
when the insured has not initiated contact with the file handler, the insured
must be kept informed of what is going on in the investigation. As a matter
of good faith claims handling, this must be ensured.
Avoiding Privacy Rights Violation
Many states now have a constitutional amendment protecting the privacy rights
of all citizens. This extends to the context of a claim investigation. At
the same time, the policy of insurance specifically provides for the right
of an insurer to fully investigate a claim. The file handler must balance
the insured's privacy rights against the company's right to fully investigate
the claim. At the early stages of the investigation, the insured should
be informed of the company's intention to conduct an investigation. Despite
the fact the company has the right to investigate the claim, certain areas
of investigation will require authorization from the insured. The insured
is required to provide such authorization under the terms of the policy.
Financial records, medical records, employment records and other such matters
will necessitate a written authorization from the insured before the records
can be obtained. Obtaining the records without an authorization could constitute
a violation of the insured's constitutional privacy rights.
Avoiding Credit Privacy Violations
Federal law provides for the right of privacy of
an insured's credit history and information. It is a common practice to
obtain a credit report or credit history on an insured in order to evaluate
the insured's financial condition. However, obtaining a credit report or
credit history without a proper authorization may be a violation of federal
law for which criminal penalties may be imposed. It will almost certainly
give rise to a claim of bad faith or unfair claims practices. A financial
authorization release signed by the insured should expressly provide for
the release of credit reports and credit histories. It is not necessary
to have a separate authorization form signed by the insured for the release
of credit reports and credit histories.
Responding to Department
of Insurance Inquiries
In many states, the consumer affairs division of
the department of insurance responds to requests for assistance from insureds
who feel their claim is not being properly handled. Almost inevitably, an
insured whose claim is under investigation will feel his or her claim is
being improperly handled. When a complaint is filed with the department
of insurance, the company will receive a written inquiry requesting information
on the status of the claim and concerns which have been raised by the insured.
The file handler must promptly respond to such inquiries in writing. The
failure to do so may subject the company to administrative action by the
department of insurance and an allegation of unfair claims practices on
the part of the company. The response to an inquiry from the department
of insurance should be reviewed by the attorney involved in the investigation
prior to sending it out to the department of insurance.
Responding to Immunity
By law, certain investigative agencies such as the state fire marshal (and
other agencies investigating a fire loss) or state division of insurance
fraud are entitled to all information developed by the company in the investigation
of a claim upon request. Whenever a request for information is received,
the company must respond under penalty of law. Anything and everything in
the file must be turned over to the requesting agency. When the request
is verbally made, the file handler should ask for a formal written request
in order to document the file. With or without a written request, the materials
should be turned over with a cover letter confirming the information is
being turned over pursuant to the applicable immunity act. The duty to release
information to the requesting agency is a continuing duty. Any additional
information developed in the investigation must be provided to the requesting
agency in a supplemental response.
Apart from the statutory duty to respond to a request for information under
the immunity act, these laws impose an affirmative duty upon the company
to notify the appropriate agency whenever a potential fraud claim is uncovered.
In arson cases, the duty arises even though there may be no evidence implicating
the insured. Every incendiary fire loss must be reported to the designated
agency. The failure to do so constitutes a violation of law for which criminal
penalties may be imposed. Moreover, in at least one case in virginia a court
has held that the failure to report an incendiary fire loss to the state
fire marshal can be considered evidence of bad faith on the part of the
Avoiding Gruenberg Issues
The landmark case of Aetna v. Gruenberg established the tort of bad
faith in claims handling. This case arose out of a fire loss investigated
by aetna and the actions of the file handler in dealing with the law enforcement
and prosecuting authorities. In that case, aetna was found to have actively
encouraged and promoted the prosecution of its insured in order to avoid
liability for the claim. The insured recovered punitive damages against
aetna in that case as a result of its actions which were found to be a violation
of the "covenant of good faith and fair dealing" under a policy
The various immunity acts which now exist came
about largely as the result of Gruenberg. The acts provide immunity
from civil liability for an insurer responding to requests for information
from law enforcement agencies. However, the immunity is not absolute. The
file handler must take care to ensure the investigation of the claim is
conducted independent of the investigation by law enforcement authorities.
Any attempt to influence the outcome of the criminal investigation or encourage
the arrest and prosecution of the insured will be actionable conduct for
which the company can be held liable.
Avoiding Waiver and Estoppel
The actions of an insurer in investigating a claim may create waiver and
estoppel issues. The rights provided under the terms of the policy of insurance
can be waived by the actions of the company. The company may be estopped
from enforcing its rights under the policy or raising defenses to the claim
by its actions. The file handler must take great care to avoid the potential
for waiver and estoppel problems.
The failure to promptly request compliance with
the policy terms and conditions can be considered a waiver. The right to
require documentation of the claim, submission of a proof of loss and appearance
for examination under oath can be lost by mere inaction. For this reason,
the file handler must request compliance with all duties under the policy
in written correspondence to the insured at the early stages of the investigation.
The file handler must follow up with the insured in writing throughout the
investigation of the claim in order to preserve the company's rights. The
insured should never be told "that is all we need from you" or
"there is nothing more you have to do" while the investigation
is continuing. The insured should be told in advance that additional information
and assistance will be needed, including the insured's appearance for examination
under oath. When an initial statement is taken from the insured about the
loss, the file handler should inform the insured the statement will not
be accepted in place of an examination under oath later on and this should
be confirmed with the insured. Otherwise, the right to an examination under
oath can be lost under principles of waiver.
Estoppel problems can arise when the insured is told the loss is covered
and will be paid. An insured who replaces or repairs the stolen or damaged
property with the belief the claim is going to be paid may estop the company
from later denying the claim. At the early stages of the investigation,
the insured must be told the claim is under investigation and no determination
of coverage, in whole or in part, has been made. The use of a reservation
of rights letter will serve this purpose.
Working with the Attorney
Throughout the investigation of the claim, the
file handler should be working closely with the attorney. For all of the
reasons stated above, this is essential. At several key points, the file
handler will be working directly with the attorney.
Examination Under Oath
The right of examination under oath is probably the most important right
provided to an insurer investigating a claim. It is the opportunity to question
the insured under oath about every aspect of the loss and the claim. Additionally,
background information and related information from the insured can be obtained.
This includes the insured's employment history, litigation history, insurance
claims history, financial condition and a host of other areas. The insured
is required to produce records and documents relating to these areas of
inquiry. The examination under oath is probably the single most important
phase of the investigation. It brings together all of the information necessary
to make a decision on the claim. It provides the opportunity to assess the
insured as a witness. It provides a written record to establish a misrepresentation
defense should the insured lie about matters material to the investigation
of the claim. At trial, the examination under oath is powerful evidence
in establishing a claim as fraudulent.
The file handler should always be a part of the
examination under oath. The file handler should be there to assess the insured
and hear his or her story. When questions arise about the actions of the
company, the file handler can provide information to the attorney in order
to respond to such allegations. After the examination under oath is completed,
the file handler and attorney will determine the need for additional investigation
in order to bring the matter to a close. Since the examination under oath
typically takes place late in the investigation, any follow up investigation
will need to be quickly done.
Drafting the Denial Letter
When the decision is made to deny a claim, especially on grounds of fraud
or arson, the denial letter must be carefully written. It is a violation
of the unfair claims practices act to fail to deny a claim in writing with
specificity. When accusing an insured of fraud or arson, it is difficult
to put it into words. However, the company must do just that.
The denial letter should be prepared by the attorney
in order to make sure all of the defenses to the claim are raised. There
is the potential for waiver when a claim defense is not raised in the denial
letter. Moreover, the attorney can ensure the basis of denial is properly
stated under the law. The denial letter must cite the basis under the policy
or law which supports the denial of the claim. It must specifically state
the basis for denial, including the particular matters which may have been
misrepresented or concealed by the insured during the investigation. The
letter will be sent to the insured or the insured's attorney by certified
mail, return receipt requested. The letter will be marked "personal
& confidential" both on the letter and the outside of the envelope.
The failure to do so could open the company to a claim of libel or defamation
should the denial letter be read inadvertently by some other person.
In addition to making sure all available defenses
are raised in the denial letter, the attorney will make sure that those
defenses raised have an adequate legal and factual basis in support of the
Litigation of the Claim
When a claim is denied and suit is filed, the attorney
is primarily responsible for the handling of the file. At the same time,
the file handler remains actively involved. The development of a discovery
plan should be established in coordination with the file handler and attorney.
Key depositions should be attended by the file handler. In almost every
case, the file handler or company representative will be noticed for deposition.
This is a critical step in the litigation of the claim.
The file handler must be properly prepared for
his or her deposition. This requires a conference with the attorney to review
the scope of the deposition and to prepare the file handler for how it will
be conducted. A file handler should never have his or her deposition taken
without thorough preparation by the attorney. Otherwise, the results can
At trial, the file handler will likely sit at counsel
table as the company representative. In a case of fraud or arson, the file
handler will almost certainly be called to testify during the trial. Once
again, thorough preparation is essential. In the presence of the jury, the
file handler as company representative must make an effective presentation.
While it is the company on trial, the file handler as company representative
will be seen by the jury as the company. A favorable impression on the jury
will likely lead to favorable results. An unfavorable impression will just
as likely lead to unfavorable results. The file handler as company representative
is an important part of the trial process. His or her participation in the
trial definitely plays a part in the outcome.
The use of outside counsel in claim investigations
can facilitate the investigation while making sure it is properly done.
The attorney is a key part of the investigative process and the company
team investigating the loss. While the attorney plays an important part,
it is the file handler's claim from beginning to end. The success of the
investigation depends upon proper training of the file handler and an awareness
of the investigative process. With this approach, fraudulent claims can
be detected and resisted successfully.
Reprinted with permission from the author.