When a policyholder tenders a potentially disputed insurance claim, the ensuing information exchange and communication process will be central to whether the claim can be resolved quickly and amicably. Relevant information obviously includes the insurance policy and basic claim facts, but this is usually just the start, particularly when a claim is a “close call.” In a difficult claim situation, the parties’ communications sometimes devolve into a series of carefully worded, one-sided questions and answers, with each exchange less informative than the last. When the claim then erupts into coverage litigation and the relevant information is obtained through discovery, one or both parties often find themselves saying, “If I had only known that, we could have resolved this claim without a fight.”
No one would argue that either side affirmatively can deceive the other during insurance claims processing. Indeed, policyholders are subject to express written warnings that require them to be truthful and complete when submitting policy applications and claim forms.1 But it is far less clear to what extent parties involved in an insurance claim are required to “volunteer” information useful to the resolution of the claim without being asked. This is particularly so when it comes to insurers. For example, is an insurer required to inform the policyholder about coverages that may better fit the claim or afford a benefit more lucrative than the one that the policyholder has requested? Is an insurer obligated to remind the policyholder of conditions that, if not satisfied, will vitiate coverage under the insurance contract? Must an insurer reveal its internal views or opinions about policy language without being asked?
This article will focus on the extent to which the courts have wrestled with assertions that an insurer has a legal duty to volunteer information, examining the issue in the framework of the legal theories on which that duty arguably is premised, such as the common law duty of good faith and fair dealing, the tort of bad faith, and/or statutory and regulatory obligations imposed by various state legislatures. It is our hope that by addressing this issue, insurers and policyholders will gain a better understanding of how best to interact when a tough claim comes along.
Legal Theory No. 1: Common Law Duty of Good Faith and Fair Dealing
A covenant of good faith and fair dealing is implicit in every insurance contract.2 The duty to act in good faith can be central to the insurer-policyholder relationship, which often is viewed as “special,” with high expectations for diligence and trustworthiness on each side.
As noted above, the policyholder’s duty to be forthright and informative is embodied, in general, directly in policy language and/or associated forms. This language makes clear the policyholder’s obligation to provide all information that bears on a claim—whether favorable or not. By contrast, most insurance policies say nothing about whether an insurer must provide information during the claims process, including the insurer’s view of how the policy operates in any given claims situation. Cases often teach that when it comes to understanding an insurance policy, for example, the insurer and/or its agents have no duty to explain policy terms.3 Rather, the insured is bound by the policy terms even if they are not explained fully.4 And courts have found that there is no general duty on the insurer or its agents to ensure that an insurance policy provides coverage adequate for the policyholder’s needs.5 In the words of one Pennsylvania court, the insurer-policyholder relationship “is not so unique as to compel . . . an insurer to explain every permutation possible from an insured’s choice of coverage.”6
Unique circumstances. While there does not appear to be a general duty to explain an insurance policy at any point during the insurance relationship, some courts have found that unique circumstances contractually require an insurer to volunteer certain information.
For example, in Dercoli v. Pennsylvania National Mutual Insurance Co.,7 a married couple was involved in an automobile accident caused by the husband, who died in the accident. At the time of the incident, Pennsylvania law recognized interspousal immunity, which limited the injured wife’s ability to recover from her husband’s estate, including their liability insurance policy.8 Approximately one year after the accident, the Pennsylvania courts abolished interspousal immunity.9 The insurer was aware of this change in the law but waited several years to inform the wife of her ability to sue her husband’s estate and access their joint insurance.10 The delay prejudiced her claim, so the wife brought suit against the insurer for breach of the duty of good faith and fair dealing, as well as tortious bad faith.
Ruling for the wife, the Supreme Court of Pennsylvania found that once the law had changed, a conflict of interest arose.11 The court explained that,
[c]onsistent with the obligation of fair dealing and good faith[,] the [insurer] had a duty to inform the [wife] of their conflict of interest, and of her apparent right to damages against her deceased husband’s estate which ultimately would be payable under the liability provisions of the policies that insured the decedent.12
In essence, the insurer was held to have an affirmative, long-after-the-fact duty to volunteer to one of its insureds that coverage had been expanded by a change in the law.
Tough facts often make the resulting decision unsuitable in other contexts. And so it is with Dercoli, which the Supreme Court of Pennsylvania subsequently narrowed. In Miller v. Keystone Insurance Co.,13 the court explained Dercoli by noting that
the insurer’s knowing and purposeful misrepresentation was critical to this Court’s determination that the insurers were bound to disclose all of the benefits to which the claimant was entitled.14
The court made clear that it would be
incorrect [to hold] that Dercoli imposes an affirmative duty upon an insurer to advise and inform an insured of all potential claims when the insurer assumes the responsibility for processing the claim.15
The court found instead that Dercoli created an affirmative duty to provide an insured information, without being asked, only when three conditions are met:
(1) the insurer has assumed the responsibility for processing its insured’s claims; (2) the insurer knows that the insured is relying exclusively on its advice and counsel; and, (3) the insurer has knowledge regarding an additional claim for benefits to which the claimant is potentially entitled.16
Ambiguous terms. Policyholders also have argued that the duty of good faith and fair dealing requires an insurer to volunteer information during the claims process when the terms of the policy are so obscure or ambiguous that a failure to inform would amount to misrepresentation or concealment.
For example, in Nardelli v. Metropolitan Group Property & Casualty Insurance Co.,17 a policyholder brought suit against an automobile insurer for breach of the duty of good faith and fair dealing. The policyholder’s car had been stolen and severely damaged, but the insurer refused to recognize the damage as a total loss and thus paid a lesser amount.18 The policyholder later argued that the insurer had not mentioned two policy provisions that would have allowed him to obtain a payout greater than originally sought.19
After reviewing the policyholder’s complaint, the court held that sufficient evidence might exist for a jury to consider whether the insurer breached its duty to the policyholder.20 The court reasoned that
[w]hile . . . [a]n insurer is not required to explain every fact and provision without limitation, . . . the duty of good faith encompasses some obligation to inform the insured about the extent of coverage and his or her rights under the policy and to do so in a way that is not misleading.21
Insurers’ codes of conduct. In fact, sometimes insurers create a duty to volunteer through expressions of their own business practices, including so-called claims-related codes of conduct.
In Travelers Insurance Co. v. Buffalo Reinsurance Co.,22 for example, an insurer justified its claim for reinsurance benefits by arguing that it had an “ethical” duty to disclose available coverage to its policyholder even though the policyholder had expressed its belief during the claims-handling process that certain losses were excluded or subject to deductibles. The insurer explained that “it was bound by ethical claims-handling practices to apprise its insured . . . that indemnity coverage might exist” because once it “receives notice of claims that are potentially covered under its policies—even where the insured may not recognize that coverage is available”—its business practices give rise to “an ethical obligation to advise its insured.”23
Limits of special relationships. However, the duty to speak discussed in the cases above is, generally speaking, limited, as illustrated by Love v. Fire Insurance Exchange, a California appellate decision.24 There, homeowners, after discovering cracks in their home’s foundation, sought coverage from their homeowners insurance policy. The insurer denied the claim on the grounds that the damages resulted from an “act of god.”25 The homeowners did not continue to pursue the denied claim even though they had been told that the cracked foundation may have been the result of builder negligence. Years later, when the homeowners learned that other nearby homes had suffered the same problem, they resubmitted the claim, but the insurer again denied it. The homeowners sued for breach of the covenant of good faith and fair dealing and violation of certain statutory duties. The trial court concluded that the action was barred by limitations.
The appellate court affirmed, despite the homeowners’ assertion that the insurer should be estopped from raising limitations given its “fiduciary” status—a status that required the insurer to disclose voluntarily that an otherwise excluded loss would become a covered loss if third-party negligence was a cause of the injury.26 The appellate court refused to accept the homeowners’ premise, noting that insurers do not have the duties of fiduciaries, even if their relationship with an insured is a “special” one.27 The appellate court went on to reject the homeowners’ estoppel argument because the homeowners knew all of the operative claim facts, did not argue that they lacked knowledge of the relevant policy provisions, and were told that their claim was denied for lack of coverage. As a result, there was no misrepresentation or concealment.
A Washington appellate court also has discussed the degree to which a “special” relationship exists between an insurer (and its agent) and an insured during the policy-procurement process, and thus whether the insurer/agent has any duty to volunteer information.28 The court explained that a special duty to inform can arise if
(1) the agent holds himself out as an insurance specialist and receives additional compensation for consulting and advice, or (2) there is a long-standing relationship, some type of interaction on the question of coverage, and the insured relied on the agent’s expertise to the insured’s detriment.29
However, “where the insured never consulted with the agent about the adequacy of coverage and the agent never gave any advice, courts have held that no special relationship exists.”30
Legal Theory No. 2: Bad Faith
Insurance “bad faith” claims have grown into a major source of litigation.31 Previously limited to contractual claims for breach of the implied duty of good faith and fair dealing—claims that did not permit punitive or exemplary damages32—insureds gained additional rights after Comunale v. Traders & General Insurance Co.,33 where the Supreme Court of California ruled that insurance bad faith claims arise in tort.34 A number of other states have followed California’s lead and now recognize insurance bad faith as a separate and distinct tort claim.
Policy changes in renewal language. Bad faith claims based on an insurer’s failure to volunteer information sometimes arise as a result of what happened during the underwriting process.
In Thomas v. Northwestern National Insurance Co.,35 an insurer was found liable for insurance bad faith when it failed to inform the policyholder of changes to its policy during the renewal process, prior to a claim being filed. The insured, a plumbing and heating contractor, purchased a commercial general liability policy through a local independent insurance agency in 1989.36 The contractor renewed the policy with the same insurer via the same agency on an annual basis through 1993.37 The original policy excluded liability for certain types of pollution incidents. During one of the renewal periods, however, the insurer changed the exclusion’s language, converting it to a “total” pollution exclusion.38 The substantially reduced pollution coverage ultimately resulted in the contractor not being covered for an oil spill.
When the contractor sued its insurer for bad faith, discovery demonstrated that the renewed policy expressly warned the contractor that the new total pollution exclusion endorsement “CHANGES THE POLICY. PLEASE READ IT CAREFULLY.” But the Montana Supreme Court found that this was not enough to avoid an insurance bad faith claim.39 The court reasoned that
a renewal policy is a contract. As with any contract, the parties must necessarily agree on the terms of the renewal coverage. Certainly the insured has a reasonable expectation that his insurance policy will not be renewed on less favorable terms unless the insurer affirmatively notifies him of the changes.40
While acknowledging that the contractor had a duty to read its policy, the court found that the insured’s duty to read renewal language “may be less than the insured’s duty to read the original policy,” and thus in this instance the insurer was required to affirmatively notify the insured of any significant changes.41
As the Thomas case suggests, bad faith claims tend to be very fact specific. The question at the core of each bad faith suit is the degree to which the insurer acted “unreasonably” in the context of the specific facts at issue.42 The policyholder must show more than a breach of the insurance contract. It generally must show that the insurer acted intentionally or recklessly when addressing the claim.43 This can include, arguably, a showing that the insurer intentionally or recklessly failed to provide the policyholder with pertinent information. Stated another way, the courts will consider whether no reasonable insurer would have failed to provide the necessary information during the claims process.
Settlement offers. The bad faith failure to volunteer information during the claims process often occurs in the context of an offer to settle. For example, in Berges v. Infinity Insurance Co.,44 an insured brought a bad faith action against his automobile liability insurer for failing to settle an accident claim involving the death of the other driver and severe injuries to a min or passenger. The insurer not only refused to settle the claim for policy limits,45 it failed to advise the insured of the policy limits settlement demand prior to the acceptance deadline. The subsequent judgment far exceeded the policy limits.46 When the insurer was sued for bad faith, the trial court granted the insurer summary judgment, but the Supreme Court of Florida reversed, holding that
[w]here the insured reasonably relies on the insurer to conduct settlement negotiations, and the insurer fails to disclose settlement overtures to the insured, the jury may find bad faith.47
Similarly, in Wallace Mosley v. Progressive American Insurance Co.,48 a court recently denied an insurer’s summary judgment motion in a bad faith case because the insurer did not communicate sufficiently to its policyholder that if he failed to provide an affidavit attesting to his poor personal financial condition, the claimant would refuse to accept a policy limits offer, thereby exposing the policyholder to a judgment. The policyholder apparently resisted submitting the affidavit because of certain religious and moral beliefs. The court acknowledged that the insurer had informed the policyholder that the financial affidavit was needed but found that fact issues existed because the insurer did not explain voluntarily “in any discernable detail the gravity of the situation,” including the likelihood of a huge excess verdict.49
Other courts reject the breadth of the duty to disclose suggested by the cases discussed above. In Wedzeb Enterprises, Inc. v. Aetna Life & Casualty Co.,50 for example, the court ruled that there is not a good faith duty to determine that an insured is aware of all policy terms and conditions before the insured settles its claims and signs a release. When a fire destroyed the insured’s warehouse, the products stored there released toxins into the environment. The insurer disputed coverage for the necessary remediation, and the policyholder sued for coverage. The court found for the insured, after which the insurer paid $474,326 in exchange for a release from the insured. When the state later sued the insured for failing to remove the fire debris, the policyholder again sought coverage, this time under the debris removal portion of the policy. Citing the release, the insurer declined coverage. The policyholder brought suit again, but this time the court found for the insurer, despite the policyholder’s claim that the insurer had concealed in bad faith “potential coverage rights” under the policy.51 The court found that the insurer had no duty to advise the policyholder about all potential coverage under the policy, given that the insured was represented by counsel and had been engaged in litigation with the insurer.52
Providing copy of policy. Similarly, in Schoonover v. American Family Insurance Co.,53 an Illinois court held that an insurer’s duty of good faith does not require an insurer to provide a copy of a policy absent a specific request. After Schoonover purchased his homeowners policy, his house was destroyed by fire. He filed an insurance claim, which the insurer denied because the claim was not submitted within one year of the fire, a condition to coverage. Schoonover hired an attorney and later sued for bad faith. The trial court refused to grant the insurer’s motion for summary judgment because Schoonover said he did not have a copy of the policy. The decision was reversed on appeal because the appellate court ruled that the insurer was not obligated to provide a copy of the policy unless asked. The appellate court noted that
[t]he insured cannot blame the insurance company for his failure to read the policy to discover the requirements for bringing suit. It is not the duty of the insurer to inform the insured of his duties.54
The court also observed that
numerous courts have determined that representation by an attorney precludes an insured from alleging that he was misled by the terms of a policy or was ignorant of certain provisions in the policy.55
Legal Theory No. 3: Unfair Claims Settlement Practices Acts
Most states have an insurance code section that prescribes to some extent the manner in which insurers must handle claims. These statutes are usually referred to as “unfair claims settlement practices acts.” They are generally fashioned after a model law drafted by the National Association of Insurance Commissioners (NAIC). The NAIC model law defines unfair claims practices to include, inter alia, failing to adopt or implement reasonable standards for prompt investigation and settlement, not attempting in good faith to effectuate a fair and equitable settlement, and refusing to pay claims without a reasonable investigation.56 Some states, though, have added statutory language stronger than the model law in an effort to provide policyholders with greater protections.
Implied misrepresentations. Certain state legislatures have added a provision that makes it a statutory violation to “misrepresent to claimants pertinent facts or policy provisions relating to any coverages at issue.”57 California courts have interpreted this provision to prohibit any “implied misrepresentations,” arguably including where an insurer fails to inform a policyholder of its rights under the insurance contract.
For example, in Davis v. Blue Cross of Northern California,58 a group of policyholders brought suit against an insurer for denying coverage. The insurer attempted to compel arbitration under the terms of the insurance agreements at issue, but the policyholders argued that the insurer had waived its right to arbitration and/or misrepresented the arbitration provision under California’s unfair claims settlement practices act.59 They asserted that the insurer had situated the arbitration clause within an obscure portion of the contract and had used vague wording for the purpose of concealing that part of the policy.60 The trial court agreed, and its ruling was affirmed by the California Supreme Court, which found that the insurers had engaged in an “implied misrepresentation.”61 The court found went so far as to find that the insurers had placed the arbitration clause “for the purpose of inducing subscribers to give up their rights” under the contract.62 It held that the insurers not only had engaged in misrepresentation in violation of the unfair claims settlement practices act but also had violated the contractual duty of good faith and fair dealing, thereby waiving any right to compel arbitration under the agreement.63
Raising the bar even higher. Several states have gone even further than California by requiring insurers to volunteer or explain information during the claims process.
For example, Arizona’s unfair claims settlement practices act prohibits insurers from failing “to fully disclose to first party claimants all pertinent benefits, coverages or other provisions of an insurance policy or insurance contract under which a claim is presented.”64
The Louisiana courts have gone even further. In Kelly v. State Farm Fire & Casualty Co.,65 a federal court asked the Louisiana Supreme Court whether the state’s unfair claims settlement practices statute created a duty to disclose facts beyond those strictly related to the insurance policy’s coverage. The pertinent statutory language prohibited “[m]isrepresenting pertinent facts or insurance policy provisions relating to any coverages at issue.” Relying on the use of the word or, the state court found that an insurer can be liable for failing to reveal “pertinent facts,” whether or not those facts “relat[ed] to any coverages at issue.”66 The insurer had communicated to its policyholder that he might face personal liability and, therefore, that he should consider seeking independent counsel, but the insurer had failed to volunteer that the medical bills at issue exceeded the policy limits, nor did it volunteer that it had made a settlement offer that had been rejected by the injured third party. The court found that the insurer was obligated to disclose these facts because they were necessary for the policyholder to determine what was “in his best interest.”67
While contract, tort, and statutory law create certain duties on insurers to comport themselves within certain norms during the claims process, whether and when those norms require an insurer affirmatively to volunteer information without being asked is a tricky question. The courts tend to find that the duty to volunteer exists when a failure to do so would have the effect of affirmatively misrepresenting or concealing information so as to unreasonably deny the policyholder allegedly “hidden” benefits. The courts also are more likely to find the existence of this duty when the policyholder is not sophisticated and/or is not represented by counsel. Insurers should be wary of these situations and be cognizant of the relevant standards so as to avoid any potential liability for failing to volunteer information.
For their part, policyholders should be aware of the limits of an insurer’s duty to volunteer information. Policyholders should be aware that insurers are not their fiduciaries and, depending on the facts, may not be obligated to volunteer information during the claims process. As a result, they should not wait to be told what is in their best interest; instead, they should ask all questions necessary to obtain a favorable claim outcome.
1. The “Conditions” section of many policies states, for example, that coverage is precluded if an insured (1) intentionally conceals or misrepresents any material fact or circumstance, (2) engages in fraudulent conduct, or (3) makes any false statements.
2. Roemer v. Allstate Indem. Ins. Co., 163 A.D.3d 1324, 1325 (N.Y. App. Div. 2018).
3. Frith v. Guardian Life Ins. Co. of Am., 9 F. Supp. 2d 744, 745 (S.D. Tex. 1998).
5. Martinonis v. Utica Nat. Ins. Grp., 65 Mass. App. 418, 420–21 (2006).
6. Kilmore v. Erie Ins. Co., 407 Pa. Super. 245, 252 (1991).
7. 520 Pa. 471, 473 (1989).
8. Id. at 474.
11. Id. at 478.
13. 535 Pa. 531 (1994).
14. Id. at 536.
16. Id. at 535.
17. 230 Ariz. App. 592 (2012).
18. Id. at 596–97.
20. Id. at 601–02.
21. Id. at 603.
22. 86 C.V. 3369 (JMC) (Sept. 26, 1988).
24. 221 Cal. App. 3d 1136 (Ct. App. 4th Dist., Div. 1, 1990).
25. Id. at 1141.
26. Id. at 1144.
27. Id. at 1147.
28. Junfang He v. Norris, 415 P.3d 1219, 1220–21 (Wash. Ct. App. 2018).
29. Id. at 1221.
31. Victor E. Schwartz & Christopher E. Appel, Common-Sense Construction of Unfair Claims Settlement Statutes: Restoring the Good Faith in Bad Faith, 58 AMULR 1477 (2009).
32. Id. at 1480.
33. 50 Cal. 2d 654 (Cal. 1958). The California Supreme Court reaffirmed its view in Gruenberg v. Aetna Insurance Co., 9 Cal. 3d 566 (Cal. 1973).
34. Schwartz & Appel, supra note 31, at 1483–85.
35. 292 Mont. 357, 359 (1998).
39. Id. at 364.
40. Id. at 363.
42. See Lasma Corp. v. Monarch Ins. Co. of Ohio, 159 Ariz. 59, 63 (1988).
43. Id. at 63.
44. 896 So. 2d 665 (Fla. 2004).
45. Id. at 669–72.
46. Id. at 671.
47. Id. at 680.
48. 2018 U.S. Dist. LEXIS 199078 (S.D. Fla. Nov. 25, 2018).
50. 570 N.E.2d 60 (Ind. Ct. App. 1991).
51. Id. at 62.
52. Id. at 63.
53. 572 N.E.2d 1258 (Ill. App. Ct. 1991), overruled sub silentio on other grounds by Faier v. Ambrose & Cushing, P.C., 609 N.E.2d 315 (Ill. 1993).
54. Id. at 1264.
55. Id. at 1266.
56. Nat’l Ass’n of Ins. Comm’rs, Model Unfair Property/Casualty Claims Settlement Practices Regulation §§ 5(a), 5(b), 6(d).
57. Cal. Ins. Code § 790.03(h)(1); Md. Code Ann. Ins. § 27-303(1).
58. 25 Cal. 3d 418, 420 (Cal. 1979).
60. Id. at 422.
61. Id. at 426–27.
63. Id.; see also Ramirez v. USAA Cas. Ins. Co., 234 Cal. App. 3d 391 (1991) (insurer obligated to reveal potential uninsured motorist benefits).
64. Ariz. Admin. Code § R20-6-801(D)(1).
65. 169 So. 3d 328 (La. 2015).
66. Id. at 342.
This article was prepared collaboratively by the authors for the American Bar Association Tort Trial and Insurance Practice Section’s Insurance Coverage Litigation Committee midyear meeting, where the authors presented on the following topic: “Outside the Lines: Practical and Strategic Considerations in Avoiding, Prosecuting and Defending Against the Bad Faith Claim.”