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The Role of Outside Counsel in Claim Investigations

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 and Slander

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 may be.

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 Act Requests

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 insurer.

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 of insurance.

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 denial.

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 be disastrous.

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.

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