Utah HOA Law Blog

By Curtis G. Kimble.

In Utah, an insurance company has an obligation to act in good faith in all aspects of claim handling.  “The implied obligation of good faith performance contemplates, at the very least, that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim.  …  The overriding requirement imposed by the implied covenant is that insurers act reasonably, as an objective matter, in dealing with their insureds.” (Billings v. Union Bankers Ins. Co., 918 P.2d 461 (Utah 1996)).

The consequences to an insurer breaching these obligations can be significant.  As the court in the Billings case said, an “insurer who breaches the implied covenant by unreasonably denying the insured the benefits bargained for may be held liable for broad consequential damages foreseeably caused by the breach, damages which might include those for mental anguish” and may include attorney fees incurred as a result of the breach.

On the other hand, when an insured’s claim is fairly disputed by the insurer and it is truly debatable as to whether the claim is covered under the policy, the insurer is entitled to debate it (deny the claim) and cannot be held to have breached the covenant of good faith if it chooses to do so (even if the claim is denied and then later found by a court to be a properly covered claim).  An insurer who has a legitimate dispute with an insured over a claim must act reasonably and in good faith, but they are entitled to have the dispute resolved before having to pay the claim.

The problem arises when the insurers don’t act reasonably, promptly, fairly or in good faith.  A problem that some would say has increased dramatically since the mid-90’s.

As this article explains, “a new system to boost the bottom line” took over the insurance industry in the mid-90’s, where, rather than adjusting claims the traditional way, which gave claims managers wide latitude to serve customers reasonably and fairly, “insurers embraced a computer-driven method that produced purposefully low offers to claimants.”

Those who took the low-ball offers received prompt service, while those who didn’t had their claims purposefully delayed with the strategy of making such claims so expensive and time-consuming that people would just give up.

This strategy “put profits above all,” and has apparently worked in that regard. Allstate made $4.6 billion in profits in 2007, double its earnings in the 1990s, an increase which came through “driving down loss values to an average of 30 percent below the actual market cost.” In other words, the strategy has been to pay dramatically less on claims. A strategy that, in practice, is in direct opposition to the legal obligation of insurers to diligently investigate the facts to enable it to determine whether a claim is valid, to fairly evaluate the claim, and to act reasonably in rejecting or settling the claim.

Again, the article can be found here:  Insurance Claim Delays Deliver Massive Profits To Industry By Shorting Customers.

All consumers who buy insurance, HOAs and homeowners included, should take note of these issues and be prepared to push back when an insurer breaches its obligation to diligently investigate, fairly evaluate, and act reasonably and in good faith in any aspect of claim handling.