After the disastrous hurricane season of 2020 when Louisiana was pounded with several hurricanes, one of which set a few records, a law was passed in 2021 which amended Louisiana’s bad faith statute, adding a new appraisal clause that insurers could trigger to deflect allegations of bad faith.
Essentially, that was the message Matthew Monson, The Monson Law Firm, related to his audience during the Louisiana Department of Insurance’s LDI Conference 2022 held at the Higgins Hotel in New Orleans March 7-8.
During the seminar, titled Beating Bad Faith after Laura, Delta and Ida, Monson said that Act 345 was introduced as House Bill 591. The legislation was sponsored by Rep. Michael “Gabe” Firment, R-Pollock, who is a claims adjuster.
Before launching into the particulars of the appraisal clause, Monson said that bad faith is not defined specifically in Louisiana statutes. “Bad faith,” he said, is a generic term used to describe the conduct of an insurer that breaches its statutorily-imposed duty to act in good faith and engage in fair dealing in adjusting claims.
According to Monson, Black’s Law Dictionary says that bad faith is any frivolous or unfounded refusal to pay proceeds of an insurance policy. Bad faith conduct suggests a dishonest purpose for self-interest.
After mulling over a possible definition, someone came up with “bad faith is not in good faith,” Monson said.
If a claimant seeks to file for bad faith penalties in Louisiana resulting from a property damage claim, the bad faith allegation is governed by two statutes, R.S. 22:1892 and R.S. 22:1973, Monson explained.
The purpose of R.S. 22:1892 is to ensure that an insurance carrier, which is fully apprised of the facts and circumstances of the claim, “does not arbitrarily or capriciously deny a claim that is due.” Monson noted that most allegations of bad faith stem from first party claims, but it is possible to have third-party bad faith claims for property damage.
He reminded his audience that Louisiana has a two-year statute of limitations for first-party property claims.
There are some requirements and deadlines related to R.S. 22:1892. Loss adjustment is to be initiated 14 days after notification of loss. In the case of catastrophe losses, the carrier has 30 days to initiate adjustment. The carrier shall make a written offer of settlement within 30 days of receipt of satisfactory proof of loss. Payment to the insured of any claim is due within 30 days of receipt of satisfactory proof of loss.
Relative to initiation of loss adjustment, Monson pointed out that the insurer must take “substantive and affirmative steps” to accumulate facts. Merely opening a file is not initiating loss adjustment, he said. There is no requirement that the claim be fully investigated within 14 days.
Relative to satisfactory proof of loss, Monson said there are not formal requirements for a proof of loss. It is, he said, that which is sufficient to fully apprise the insurer of the insured’s claim. No formal/written proof of loss is necessary for total losses exceeding policy limits of which the insurer has actual knowledge, according to Monson.
Where unconditional tender of a reasonable amount is concerned, the Insurance Code (R.S. 22:1892) indicates that an insurer has an affirmative duty to tender amounts due and owing to an insured. An insurer can avoid penalties and attorneys’ fees by tendering the portion of the claim that is undisputed, Monson said. He made clear that payment in exchange for a complete release is not an unconditional tender and that unconditional does not mean final, conclusive, irrevocable or forever binding.
Monson defined arbitrary and capricious and said that “arbitrary, capricious or without probable cause” is synonymous with “vexatious” (Who uses that word in normal conversation? he queried), which is defined as “unjustified, without reasonable or probable cause or excuse and is not based on a good faith defense.” To show arbitrary, capricious or without probable cause behavior, the claimant must show:
-the insurer received satisfactory proof of loss;
-the insurer failed to pay the claim timely, and
-the insurer failed to timely tender a reasonable amount.
In addition to the amount of the loss, the penalty is 50 percent of the amount found to be due from the insurer or $1,000, whichever is greater, plus attorneys’ fees, according to Monson. If partial payment has been made, 50 percent of the difference between the amount paid and the amount due, plus attorneys’ fees.
An insurer’s error in interpreting its own contract, he said, is not an excuse. Also, penalties are not appropriate when the insurer has a reasonable basis to defend the claim.
The purpose of R.S. 22:1973, according to Monson, is to impose an affirmative duty on the insurer to adjust claims fairly and promptly and to make a reasonable effort to settle claims after receipt of satisfactory proof of loss. This statute sets forth five prohibited acts. They are:
-misrepresenting pertinent facts or policy provisions regarding coverage;
-failing to pay a settlement within 30 days after an agreement is reduced to writing;
-denying coverage or attempting to settle a claim on the basis of an application which the insurer knows was altered without the consent of the insured;
-misleading a claimant about the applicable prescriptive period, and
-failing to pay a claim due within 60 days after receipt of satisfactory proof of loss when such failure is arbitrary, capricious or without probable cause.
Under R.S. 22:1973, a penalty may be assessed against the insurer in an amount not to exceed two times the damages or $5,000, whichever is greater, in addition to general damages to which a claimant is entitled under the facts of the case, Monson reported. The insurer shall be liable for damages as a result of the breach and may be liable for penalties.
After reviewing the penalty statutes, Monson turned to Act 345 and pointed out the additions to R.S. 22:1892. In addition to the new appraisal clause, the penalty statute now requires:
-notice of withheld depreciation;
-explanation of how depreciation is applied;
-that insurers not require remediation or repair be performed by a specific vendor, and
-that overhead and profit be paid where a general contractor is reasonably foreseeable.
Act 345 requires that the appraisal clause be in every property policy. The Insurance Code lays out the process for appraisal and stipulates that each appraiser shall be paid by the party selecting that appraiser. Other expenses of the appraisal and the expenses of the umpire shall be divided and paid in equal shares by the parties. If there is an appraisal award, all applicable policy terms, limits, deductibles and conditions will still apply. Finally, any lawsuit filed prior to a demand for appraisal will be held in abatement until execution of an appraisal award.
On disputed claims, Monson affirmed, appraisal is the best way to beat bad faith. The reason: An insurer does not act arbitrarily or capriciously when it withholds a payment based on a genuine good faith dispute about the loss or the applicability of coverage. Also, compliance with a contracted and self-involved appraisal process fails to provide evidence or factual proof of vexatious, arbitrary or capricious conduct or conduct without probable cause.
If an insurer timely pays all undisputed amounts, it is not bad faith to resolve the disputed portions of the claim via appraisal, Monson said. Appraisal demand is timely if it is made within 60 days of receipt of the insured’s estimate.
R.S. 22: 1892 indicates appraisal demand can be made after litigation, Monson said. Ideally, demand appraisal in under 30 days after receipt of the competing estimate, Monson advised.
Once an award is determined, payment of the appraisal award must be within 30 days.
Failure to pay the claimant the amount of the appraisal award before the award was determined does not constitute evidence of bad faith, according to Monson.
Usually, appraisal awards come in significantly less than the amount of the insured’s demand, according to Monson, which proves the carrier’s good faith in disputing the demand.