J.D., CPCU, CLU

FAQ

Frequently Asked Questions

Learn more about the tort of bad faith

No. Although it is not my role as an insurance expert witness to provide an opinion concerning legal duty of an insurer, it is important for me to be aware of the legal duty insurance companies have when adjusting claims under a policy. This legal duty was established by the Supreme Court of each state. Knowledge of this legal duty is a foundation to my opinions regarding the standards of care of insurers when adjusting an insurance claim. Although it is the role of each state Supreme Court to establish the legal duty of an insurance company, it is the role of the jury to decide if the insurance company breached this legal duty and whether an insurer breached the applicable standards of care. Except under a limited number of federal statues, there is no federal insurance law. No federal judge may substitute her/his learned view of state insurance law.

WHY IS THERE A DUTY OF GOOD FAITH AND FAIR DEALING IMPOSED ON AN INSURER?

Implied in every contract is a duty for all parties to the contract to engage in good faith and fair dealing. Because of the enormous disparity of the bargaining power between insurance companies and insurance consumers as well as the very nature of the insurance transaction [reposing great trust and confidence in an insurance company to provide peace of mind through the transfer of risk of loss from an insured to an insurer], tort law has evolved to impose an expanded obligation of good faith and fair dealing on an insurance company, the breach of which will give rise to tort damages rather than only contract damages.

WHAT IS THE DIFFERENCE BETWEEN THE DUTY OF GOOD FAITH AND FAIR DEALING FOUND IN CONTRACT LAW AND SUCH DUTY UNDER TORT LAW?

Contract law and tort law are different. This difference can be easily highlighted by looking at the kind of damages that may be recovered. With contract damages, the injured party can recover the “benefit of the bargain” plus certain consequential damages. This is generally the difference between what was promised in a contract and what was actually received in the contractual undertaking. With tort damages in bad faith, however, the injured insured can recover not only the unpaid benefit of the insurance policy but also monetary loss or damage to credit reputation experienced and reasonably probable to be experienced in the future as well as money damages for emotional distress, humiliation, inconvenience and anxiety experienced, and reasonably probable to be experienced in the future as determined by a jury. [RAJI Bad Faith 7, Exhibit C] An insured may also seek damages for loss of economic opportunity. The Common Law developed the tort of insurer bad faith in the mid-20th Century, an insured would not be made whole if the law did not permit recovery of reasonable litigation expenses, including attorney fees against the insurer in the insured’s effort to obtain the benefit promised in the insurance policy. This was a departure from the “American Rule” that did not allow recovery of attorney fees in most litigation.

WHY IS AN INSURANCE POLICY A CONTRACT OF ADHESION?

The tort law of insurance bad faith recognizes the disparity of bargaining power between almost all insureds and an insurance company. Bad faith law is existent because of the very nature of the insurance contract being a contract of adhesion. This means that the insurance company dictates the terms of the policy and the insurance consumer simply “adheres” to those terms. In the real world, the insurance consumer takes the policy presented by the marketer and insurance company with all of its limitations, conditions for claim payment and exclusions as they are. Rarely does an insurance consumer have the power to dicker with the insurance company and negotiate changes in the policy form offered by the insurance company. Although an insurance consumer has the power to shop around for insurance policies offered by different insurance companies, once a purchasing decision occurs, the consumer is stuck with the policy language found in the purchased policy. This creates an imbalance of negotiating power.

CAN AN INSURER ASSERT A COMPARATIVE FAULT DEFENSE TO ITS INSURED’S ACTION SEEKING TORT DAMAGES FOR VIOLATING HE IMPLIED DUTY OF GOOD FAITH AND FAIR DEALING?

No. It has been my experience that only insurance consumers are allowed to recover bad faith damages in tort. There is no such thing as comparative fault when dealing with the tort of bad faith. The insureds’ obligation is to comply with the cooperation clause of the policy.

The legal duty as established by the Supreme Court of Arizona is conveniently set forth in the Revised Arizona Jury Instructions Civil (5th) Bad Faith. The insureds may recover bad faith damages if they prove, by the greater of weight of evidence, that the insurer breached its implied duty of good faith and fair dealing in either one of two different ways: either (1) that the insurer intentionally failed to pay the claim or delayed payment of the claim without a reasonable basis for such action and knew that it acted without a reasonable basis, or (2) that the insurer intentionally failed to pay the claim or delayed payment of the claim without a reasonable basis and failed to perform an investigation or evaluation adequate to determine whether its action was supported by a reasonable basis. [RAJI Civil (5th) Bad Faith 1] In all aspects of investigating or evaluating a claim, the insurance company must give as much consideration to its insured’s interests as it gives its own interests. [RAJI Civil (5th) Bad Faith 2]

TO RECOVER TORT DAMAGES FOR BAD FAITH CLAIM HANDLING, DOES THE INSURED HAVE TO PROVE THAT THE INSURER INTENDED TO INJURE ITS INSURED?

No. To prove that the insurer acted intentionally on the bad faith claim, the insured must prove that the insurer intended its conduct, but the insured does not need to prove that the insurer intended to cause injury. The insurer’s conduct is not intentional if it is inadvertent or due to a good faith mistake such as loss of papers, misfiling of documents and like mischance. [RAJI Civil (5th) Bad Faith 3]

WHAT ARE THE DAMAGES AN INSURED MAY RECOVER WHEN AN INSURE BREACHES ITS DUTY OF GOOD FAITH AND FAIR DEALING?

If the jury finds that the insurer violated its duty of good faith and fair dealing, it must decide the full amount of money that will reasonably and fairly compensate the insured for the unpaid benefits of the policy, monitory loss or damage to credit reputation experienced and reasonably probable to be experienced in the future and emotional distress, humiliation, inconvenience, and anxiety experienced, and reasonably probable to be experienced in the future. [RAJI (5th) Bad Faith 7]

DOES DEFENDING BAD FAITH LAWSUIT OR FILING A DECLARATORY JUDGMENT LAWSUIT HALT AN INSURER’S DUTY OF GOOD FAITH AND FAIR DEALING?

No. filing a declaratory judgment lawsuit or defending a bad faith claim does not inoculate an insurance company from liability or damages caused by its bad faith claim handling practices. The duty of good faith and fair dealing is a continuing one and is not terminated or held in abeyance because the insurer hires a lawyer or files a declaratory judgment lawsuit.

IS IT BAD FAITH FOR A FIRST PARTY INSURER TO ST A “LOW BALL” VALUE OR MAKE A “LOW BALL OFFER”?

Yes. Placing a low ball value on an insurance claim is never ethically justified even when the claimant makes an unreasonable demand. Placing a low ball value on a claim and communicating it to the insured is always an act of bad faith claim handling.

IS IT FIRST PARTY BAD FAITH IF AN INSURER CONDITIONS PAYMENT OF AN UNDISPUTED BENEFIT ON ITS INSURED GIVING UP OTHER OR DISPUTED BENEFITS?

Yes. An insurance company cannot place “strings” on its liability to pay indemnity or other benefits of an insurance contract upon its insured agreeing to relinquish other contract benefits in the same or another insurance policy. The failure of an insurer to pay undisputed promised insurance benefits “without strings attached” is evidence that the insurer is acting with an evil intent to inflict harm on its insureds. An insurer has unconditional obligations to all of its insureds to conduct a reasonable investigation and a reasonable evaluation of the claims submitted while giving at least equal consideration to all of its insureds as it gives itself. An insurer may not attach unacceptable conditions when ostensibly offering to pay a claim.

IS IT PROPER FOR AN INSURANCE COMPANY TO INJECT IRRELEVANT OR NONADMISSIBLE EVIDENCE INTO THE CLAIM DECISION PROCESS?

No. It is, in my judgment, bad faith claim handling for an insurance company to inject irrelevant and non-admissible evidence into the claim evaluation. Insurance companies frequently use words and phrases that are susceptible to more than one meaning. In some cases, however, insurance companies provide special and very specific definitions for words to eliminate some or all of the ambiguity. In other cases, insurance companies purposely do not define ambiguous words and phrases. Since insurers have the power to include or eliminate ambiguity, fair consideration demands that any such ambiguity be construed in favor of the insured and against the insurer.

CAN AN INSURANCE COMPANY HIDE BEHIND ITS OUTSIDE VENDORS, INCLUDING ATTORNEYS, TO AVOID BAD FAITH LIABILITY?

An insurer’s duty of good faith survives the filing of a lawsuit and may be wrongfully perpetrated by an insurer’s employee, vendor, agent or attorney. For example, if an attorney representing the interests of an insurer refuses to make proper disclosures or answer appropriate discovery requests, such would be a further act of bad faith claim handling for which the insurance company would be liable to pay damages proved by the evidence to have been thereby sustained by its insured.

It should be kept in mind that when an insurance company seeks to avoid liability under an insurance contract because of an exclusion, limitation or condition, the burden of proof falls on the insurance company to establish the applicability of such an exclusion, limitation or condition.

CAN AN INSURANCE COMPANY BE LIABLE FOR PUNITIVE DAMAGES FOR BAD FAITH CLAIM HANDLING PRACTICES?

Disregarding the fair interests of the insured in the investigation and evaluation process is not only probative evidence of bad faith claim handling, such supports the giving of a punitive damage jury instruction. Linthicum v. Nationwide Life Ins. Co., 150 Ariz.326, 723 P.2d 675 (1986); Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986) (insurer intentionally delayed disclosure to its insured of a cause of loss report favorable to its insured).


Learn more about claim handling standards

WHAT IS A BROAD STATEMENT OF THE INSURANCE INDUSTRY CLAIM HANDLING STANDARDS FOR AN INSURER WHEN INVESTIGATING OR EVALUATING A FIRST PARTY CLAIM?

There is, in my opinion, a national standard for any insurance company when adjusting a first party insurance claim. That is, the insurance company must investigate and evaluate all such claims promptly, thoroughly and fairly. In all aspects of investigating or evaluating a claim, an insurance company is also required to give as much consideration to the interests of its insured as it does to its own interests.

WHAT ARE THE MORE SPECIFIC STATEMENTS OF STANDARDS FOR AN INSURER WHEN INVESTIGATING OR EVALUATING A FIRST PARTY CLAIM?

The standards to reasonably adjust claims in a prompt, thorough and fair manner may be further explained by consideration of more specific standards that are universally understood and adhered to by ethical insurers:

a. The insurance company must treat its policyholder’s interests with equal regard as it does its own interests;

b. The insurance company should assist the policyholder with the presentation of the claim;

c. The insurance company should not mischaracterize the evidence to the benefit of the insurer;

d. An insurer should not select or use biased consultants or experts;

e. An insurer should be open and honest in all of its dealings with its insured;

f. The insurance company must disclose to its insured all benefits, coverages and time limits that may apply to the claim;

g. The insurance company should not consider factors in its evaluation for which there is no evidence admissible in the relevant judicial proceeding;

h. The insurance company must conduct a full, fair and prompt investigation of the claim at its own expense;

i. The insurance company should objectively evaluate all claims based on all admissible evidence and not just evidence which the insurance company believes supports its position;

j. The insurance company should examine and question reports from its consultants (including attorneys) to assure they contain all opinions necessary to evaluate the claim and are based on all relevant and admissible evidence;

k. The insurance company must fully, fairly and promptly investigate and evaluate the claim;

l. The insurance company must pay timely all amounts not in dispute and not require it’s insured to engage in arbitration, litigation or needless adversarial hoops to receive the benefit promised in the insurance policy;

m. If there is a full or partial claim denial, the insurance company must give a written explanation, pointing to the facts and policy provisions supporting the denial;

n. The insurance company may not misrepresent facts or policy provisions;

o. The insurance company must timely advise it’s insured of all policy limitations, conditions or exclusions which may apply to a claim;

p. An insurance company must not assert a coverage position which it knows is without merit;

q. An insurance company must look for coverage and not just ways to deny a claim;

r. The claim process should not be an adversarial process. I believe that an insurer’s claim handlers including its attorneys are trained or should be trained to try and not be adversarial and to give the insured’s interests at least as much consideration as they give to the insurer’s interests;

s. It is the job of an insurance company to find reasons to pay the insurance claim both as presented as well as how it should have been presented. If neither the insured nor her/his lawyers recognize that the insured is entitled to something that he may be entitled to in the insurance contract, it is the insurer’s obligation to point it out. Certainly, an insurer cannot deny or delay payment of a claim without first conducting a prompt, thorough and fair investigation and evaluation of the claim. The focus of this investigation and evaluation should not be how the insurer can hold on to the proper claim reserve; the focus should be on how to pay the claim;

t. When conducting a claim investigation or evaluation, an insurance company is not privileged to focus on facts that would support a claim denial. Insureds are promised that they will be given claim service and the law requires insurers to give insureds equal consideration. All insurers are obligated to go out and look for facts and law that support coverage and to give those facts and law an objective and fair evaluation. This is what claim handlers should be trained to do. Because insurance is vested with the public interest, it is highly regulated by the several states. Adjusters are often called on to interpret statutes and regulations. Such is part of an adjuster’s job. When interpreting such a law, the adjuster must do so promptly, thoroughly and fairly giving equal consideration to the interests of its insureds as it gives to itself. Adjusters must consider the entire statute or rule and not just that part that may favor non-payment of all or part of an insured’s claim;

u. Claim handlers should not base their claim evaluation on suspicion, hunches or speculation. If claim handlers including their lawyers have had experience with claim exaggeration or claim fraud, it is not appropriate to be biased in favor of claim delay or denial because some claims in their experience have included an element of fraud or exaggeration. Insurers have an unfair prejudice against UM/UIM coverage. This is why states have adopted statutes like A.R.S. §20-259.01 that mandate personal auto insurers to make UM/UIM insurance available to insureds. This unfair prejudice arises out of the unproved belief that UM/UIM claims pose an uninsurable moral risk attributable to insurance fraud;

v. It is the job of all insurers to conduct a prompt, thorough and fair investigation and evaluation. There is no corresponding duty on the part of the insured. The insured’s obligation is to comply with the cooperation clause of the insurance contract which contains an integration of all duties the insured owes to the insurance company;

w. If the insurer wants or needs something for its claim investigation or claim evaluation, it should get it. Each insurer knows what it needs and it is the insurer’s obligation to affirmatively go out and get what it needs. It also has an obligation to disclose to its insured information it gathers in its investigation and what it does in its evaluation of the claim. This standard holds true whether the information supports the insurer’s interests or the insured’s interests. Withholding information from an insured that supports claim payment can even support a jury instruction for punitive damages arising out of the insurer’s claim handling.

x. The insurer should promptly disclose to its insured any information it learns that is favorable to the payment of a claim. An insurer may not wait for the insured or the insured’s lawyers to “ask the right question.” First party claim litigation is unlike any other form of civil litigation. This is the substantive law of Arizona. An insurer’s obligation in this regard is much broader than any discovery or disclosure requirement in civil litigation. The insurer’s obligation to disclose exists before, during and after the commencement of arbitration or litigation;

y. An insurer has the duty to assist its insured with a first party claim. If there is a benefit in the insurance contract that the insured may not know about or if there is something that needs to be done to strengthen the insured’s entitlement to insurance contract benefits, the insurer has an obligation to assist its insured in obtaining that benefit. This standard of care is existent even where the insured is assisted by a lawyer, advocate or public adjuster; and,

z. Of course, an insurance company cannot misrepresent facts or insurance policy provisions to its insureds. An insurance company cannot lie. All insurers have an obligation to interpret the insurance contract fairly and to handle the claim in relation to the actual insurance policy and not in relation to extraneous things.

WHAT ARE THE STANDARDS OF CARE INSURERS MUST FOLLOW WHEN CALLED ON TO INTERPRET OR CONSTRUE AN INSURANCE POLICY?

An insurance company must interpret its policies reasonably, pursuant to the well recognized insurance industry rules for insurance policy construction, which include the following:

a.) the insuring clause is to be interpreted broadly;

b.) any exclusions, limitations or conditions are to be interpreted narrowly;

c.) the insurance company must resolve doubts concerning coverage in favor of the policyholder;

d.) policy language should be given plain, ordinary and popular meaning;

d.) ambiguous policy provisions should be interpreted against the insurer and in favor of coverage, and

e.) the insurance company has the burden of proving the application of an exclusion, limitation or condition that takes away coverage promised in the insuring clause.

DOES THE INSURANCE INDUSTRY RECOGNIZE THAT INSURERS HAVE GREAT POWER OVER ITS INSURED?

Yes. Insurance companies during the claim process possess great powers over the insurance consumer who presents a claim. These great powers have been identified generally in insurance industry claim treatises as (1) the power of money, (2) the power of time, (3) the power of superior knowledge over low-information consumers and (4) the power of litigation tolerance. [1] In other words, insurance companies have large financial resources and perpetual existence that give them a significant advantage over the insurance consumer. Insurance companies also have a far superior knowledge of the insurance contracts they sell, insurance industry standards of care for good faith and fair dealing as well as the claim process. Insurance consumers, in the other hand, rely on their insurance company to treat them fairly and in good faith as well as the expertise of the insurance marketers selected by the insurance company to represent the insurance company with the insurance consumer. The fact is that consumers hardly ever read their policies and when they do, they hardly ever understand the interplay between the insuring clause, exclusions, limitations, conditions and specially defined words and phrases scattered throughout the policy and various amendments or “riders.” All this renders insurance policies almost unintelligible to virtually all consumers. Consumers increasingly rely on branding defined by advertising as insurers portray the insurance contract as a commodity.

[1] Markham, The Claims Environment (Insurance Institute of America, 1993) at 12-23, 192-195, 228-229.

MAY AN INSURER ESCAPE BAD FAITH LIABILITY IF IT USES OUTSIDE OR NON-EMPLOYEE VENDORS, CONTRACTORS, AGENTS OR ATTORNEYS?

No. An insurance company may not use its claim department and, by extension, it’s outside vendors including its litigation attorneys as a profit center. It may not misuse its great powers of (1) money, (2) perpetual existence, (3) superior knowledge of insurance and its litigation strategy or (4) its tolerance for litigation to the disadvantage of its insureds. The fact that an insurer may be losing money administering a book of insurance business should not have any impact at all on its administration of any claim. Sometimes when an insurance product is designed, it is profitable and sometimes it is not. If an insurance product is not profitable, the insurer must, nevertheless, pay claims. An insurance company should not use its claim adjusters or outside lawyers to put pressure on the insured to accept less than what was promised in the insurance contract.


Learn more about insurance company power

DOES THE INSURANCE INDUSTRY RECOGNIZE THAT INSURERS HAVE GREAT POWER OVER ITS INSURED?

Yes. Insurance companies during the claim process possess great powers over the insurance consumer who presents a claim. These great powers have been identified generally in insurance industry claim treatises as (1) the power of money, (2) the power of time, (3) the power of superior knowledge over low-information consumers and (4) the power of litigation tolerance. [1] In other words, insurance companies have large financial resources and perpetual existence that give them a significant advantage over the insurance consumer. Insurance companies also have a far superior knowledge of the insurance contracts they sell, insurance industry standards of care for good faith and fair dealing as well as the claim process. Insurance consumers, in the other hand, rely on their insurance company to treat them fairly and in good faith as well as the expertise of the insurance marketers selected by the insurance company to represent the insurance company with the insurance consumer. The fact is that consumers hardly ever read their policies and when they do, they hardly ever understand the interplay between the insuring clause, exclusions, limitations, conditions and specially defined words and phrases scattered throughout the policy and various amendments or “riders.” All this renders insurance policies almost unintelligible to virtually all consumers. Consumers increasingly rely on branding defined by advertising as insurers portray the insurance contract as a commodity.

[1] Markham, The Claims Environment (Insurance Institute of America, 1993) at 12-23, 192-195, 228-229.

MAY AN INSURER INSTRUCT OR TRAIN EMPLOYEES OR CONTRACTORS WHO INFLUENCE AN INVESTIGATION OR EVALUATION OF A CLAIM TO MEET FINANCIAL GOALS?

No. It is improper to train claim adjusters and outside venders or to teach them techniques or methods that would assist the insurer to meet its financial objectives. Financial objectives have nothing to do with fair claim handling. The claim department and its attorney are required to look at the insurance policy at issue, interpret the policy fairly and reasonably and give everything the policy promises without regard to the costs to the company or if the payment of the claim will result in a drain on the insurer’s surplus. The claim department including its outside attorneys is not supposed to try to figure out ways to not pay everything that is due to the insured.

CAN AN INSURER DEFEND A BAD FAITH CLAIM BY CLAIMING IT TREATS ALL OF ITS INSUREDS IN THE SAME FASHION OR THAT IT KNOWS OF OTHER INSURANCE COMPANIES WHO HAVE THE SAME CLAIM PRACTICE?

No. Sometimes an insurer defends a bad faith lawsuit by arguing that it was just doing to its insured what other insurers do to their insureds. The argument continues that such claim handling practices, therefore, conform to insurance industry “customs,” “standards” and/or “practices” and, therefore, the insurer cannot be found to be in bad faith. If these “customs,” “standards” and/or “practices” are contrary to either (1) the language found in the insurance policy, (2) the legal duty for good faith claim handling [articulated in the jury instructions], (3) the standards of care insurers must use for good faith claim handling or, in some cases, (4) the insured’s reasonable expectation when the insurance policy was purchased, such acts or omissions nevertheless support a bad faith claim.

WHAT IS THE LAW OF LARGE NUMBERS?

Insurance companies have great power in the litigation process. Litigation is very expensive, time consuming and emotional. Insurance companies, of course, know that they posses this litigation power and some unethical insurance companies abuse this power as they utilize the Law of Large Numbers [2]. Insurance companies know that out of the universe of claims only a few will actually go to trial. Very few insurance claimants have the ability to locate a competent lawyer to represent them through trial. Insurance companies know that most claims can be compromised for far less money than the insurance company is obligated to pay and they are fully aware of the fact that many claimants will simply give up a claim either out of disgust, fear or the inability to locate competent counsel to represent their interests. The net effect of the unethical misuse of the litigation power is that insurance companies know with certainty that few of the claimants that are denied benefits will actually withstand the gauntlet of litigation. Few claimants actually obtain a day in court where their case can be presented to a fair minded jury and judge.

[2] Hoopes, The Claim Environment, Insurance Institute of America (2nd ed. 2000) at 1.1-1.2 (“The law of large numbers is a mathematical principal that states that when the number of similar, independent exposure units increases, the relative accuracy of predictions about future outcomes based on those exposure units increases.”); Markham, The Claim Environment, Insurance Institute of America (1st ed. 1991) at 2; https://www.irmi.com/online/insurance-glossary/terms/l/law-of-large-numbers.aspx. The Law of Large Numbers as used in the business of insurance has been discussed in reported cases over many years. See, i.e., German Alliance Ins. Co. v. Lewis, 233 U.S. 389 (1914); Sears, Roebuck and Co. v. C.I.R.. 972 F.2d 858 (7th Cir. 1992); Cont. Ins. Co. v. Illinois Dept. of Transp., 709 F.2d 471 (7th Cir. 1983); Conn. Gen. Life Ins. Co. v. Shelton, 611 S.W.2d 928 (Tex. Ct. App. 1981).

WHAT IF THE INSURANCE POLICY IS AMBIGUOUS?

Insurance companies frequently use words and phrases that are susceptible to more than one meaning. In some cases, however, insurance companies provide special and very specific definitions for words to eliminate some or all of the ambiguity. In other cases, insurance companies purposely do not define ambiguous words and phrases. Since insurers have the power to include or eliminate ambiguity, fair consideration demands that any such ambiguity be construed in favor of the insured and against the insurer.

DOES THE BURDEN OF PROOF SHIFT TO THE INSURANCE COMPANY IF IT ASSERTS THAT THE INSURANCE APPLICANT MADE A MATERIAL MISREPRESENTATION?

Yes. If the insurer attempts to use any statement in the application that was made by its insured as a justification for a claim denial, the burden shifts to the insurance company to prove that the statement was fraudulent, material and that the insurer would not have issued the insurance policy at any price. A.R.S. §20-1109.

DOES THE BURDEN OF PROOF SHIFT TO THE INSURANCE COMPANY IF IT RELIES UPON AN EXCLUSION, LIMITAITON OR CONDITION TO DENY OR LIMIT RECOVERY ?

Yes. It should be kept in mind that when an insurance company seeks to avoid liability under an insurance contract because of an exclusion, limitation or condition, the burden of proof falls on the insurance company to establish the applicability of such an exclusion, limitation or condition.


Learn more about insurance marketing malpractice

In Arizona, a marketer of insurance to consumers (including a licensed insurance producer) owes “a duty of ‘reasonable care, skill and diligence’ in dealing with clients.” Webb vs. Gittlen, 217 Ariz. 363, 369, 174 P.3d 275, 279, ¶20 (2008) (quoting Darner Motor Sales, Inc., vs. Universal Underwriters Insurance Company, 140 Ariz. 383, 397, 682 P.2d 388, 402 (1984). Accord, Wilks v. Manobianco, 237 Ariz. 443, 445, 352 P.3d 912, 914 ¶6 (2015), see also, Restatement (Third) of Agency § 8.08 (“If an agent claims to possess special skills or knowledge, the agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents with such skills or knowledge.”). The words, “marketer,” “agent,” and “producer” are used interchangeably.

The legal duty of an insurance marketer as announced in Darner and as affirmed in Webb v. Gittlen and Wilks v. Manobianco has been established by the Supreme Court of Arizona. This legal duty should be distinguished from the standard of care of an insurance producer. The distinction between (1) legal duty and (2) standard of care, “long has been a source of confusion.” Southwest Auto Painting & Body Repair, Inc. vs. Binsfield, 183 Ariz. 44, 46-47, 904 P.2d 1268, 1270-71 (App. 1995). In Arizona, Darner is the seminal controlling authority concerning insurance marketing malpractice. In that case, Justice Feldman stated that, “When an insurance agent performs his services negligently, to the insured’s injury, he should be held liable for that negligence just as would an attorney, architect, engineer, physician or any other professional who negligently performs personal services. [citations omitted] The principle involved here is simply that a person who holds himself out to the public as possessing special knowledge, skill or expertise must perform his activities according to the standard of his profession. If he does not, he may be held liable under ordinary tort principles of negligence for the damage he causes by his failure to adhere to the standard. [citation omitted] Proof of the standard in this type of case may require expert testimony at trial.” [1] Darner, 140 Ariz. at 397-8, 682 P.2d at 402-3.

[1] Footnote 14 provided in Darner at this point in the opinion is illuminating. (“We take note that Doxsee was not an independent agent, but was employed by Universal. We do not imply, by this opinion, that the standard of care is the same. It may be that “company agents” are held to a somewhat lower standard than “independent agents”; this, of course, is a matter of evidence.”)

WHAT IS THE STANDARD OF CARE FOR AN INSURANCE MARKETER?

As an insurance expert witness, I testify that the standard of care for a producer or marketer of insurance is for the insurance producer or marketer to ascertain and understand the needs of his/her/its client (the insurance consumer) and provide that advice which, under similar circumstances, the marketer would provide to him/her/itself. This standard of care requires the marketer to communicate such advice in a manner that is known to actually gain the attention and understanding of the client.

My opinion concerning this statement of the standard of care for insurance professionals is derived from my education, training and experience in insurance, insurance standards, insurance law, and how virtually all insurance producers view themselves as insurance professionals having specialized knowledge, education and training concerning insurance and the business of insurance and their role as advising insurance consumers who almost always present themselves with significant lower information on the subjects than the insurance professional. I also developed this opinion with knowledge of insurance commitments that almost all insurance companies and insurance marketing organizations adopt as their code of ethics or commitment to constituents. In addition, there are a number of professional designations awarded by independent organizations serving the insurance industry (including insurance marketers) who require designees to subscribe to a professional commitment. The designation may also require the taking courses and passing examinations. Before being allowed to matriculate to take any such examination, the authority awarding the designation will almost always require the person to pledge to conduct her/his professional affairs in conformity with a commitment.

For Chartered Property and Casualty Underwriters (CPCU) awarded by The American Institute for Property and Casualty Underwriters [closely affiliated with The Insurance Institute of America, Inc. whose interlocking boards of directors are made up of CEOs from all the major insurers and national producers (known collectively as “The Institutes”)] the commitment is:

“As a Chartered Property Casualty Underwriter: I shall strive at all times to live by the highest standards of professional conduct; I shall strive to ascertain and understand the needs of other and place their interests above my own; and I shall strive to maintain and uphold a standard of honor and integrity that will reflect credit on my profession and on the CPCU designation.” [Emphasis added].

Significantly, The Institutes own the CPCU Society. Effective January 1, 2017 The Institutes reference the CPCU Society as “The Institutes CPCU Society.” Because of The Institutes’ broad influence in the entire U.S. property and liability insurance industry, I believe the insurance industry is accepting an expanded standard of care for marketers/producers/agents toward clients from an equal consideration standard to a fiduciary standard. This is consistent with the fiduciary standard that has been advanced by the U.S. Department of for insurance advisors to Employee Benefit Plans.

For people who have the Chartered Life Underwriter (CLU) designation awarded by The American College, the required pledge is: “In all my professional relationships, I pledge myself to the following rule of ethical conduct: I shall, in light of all conditions surrounding those I serve, which I shall make every conscious effort to ascertain and understand, render that service which in the same circumstances, I would apply to myself.” [Emphasis added].

An insurance industry designation Fellow of the Life Management Institute (FLMI) that is prestigious in the life and disability industry is awarded by the Life Management Institute. I could not find any professional commitment requirement for a Fellow of the Life Management Institute but I believe the non-public web presence of LMI discloses the professional standard to which Fellows are required to adhere.

Those people who have the Certified Financial Planner (CFP) designation are required to subject themselves to the jurisdiction of the CFP Board and must agree to a Code of Ethics which include general statements expressing the concept that CFP’s “owe to the client the duty of care of a fiduciary as defined by the CFP Board: one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client”. [Emphasis added].

I note that the concept of “utmost good faith” or uberrima fides is well known in the British Brokerage System of insurance marketing and sets a fiduciary standard for insurance marketers.

I am also mindful of the trend toward moving the standard of care for insurance professionals from providing the same good advice the professional would give to him/her/itself to placing the interests of the client-consumer above the interests of the insurance professional. Placing the interests of others above the interests of the professional has always has been the professional commitment of the CPCU Society. Moreover, Department of Labor Regulation changed the definition of the word “fiduciary” and require persons who serve as advisors to employee benefit plans to put the interests of others ahead of the interests of the advisor. 29 CFR 2510.3-21(c) [announced in U.S. Department of Labor reference RIN: 1210-AB32] under the authority of 29 USC § 1002, ERISA § 3(21); 29 USC § 1135 and ERISA § 505]. These Department of Labor regulations were put in force effective June 9, 2017. 81 Fed. Reg. No. 68 (Regarding 29 CFR Parts 2509, 2510, and 2550).

The standard of care for insurance marketers also requires that they deal with the insurance client honestly and in good faith. Producers should not misrepresent the terms of any insurance contract or present information about the contract that is deceptive or misleading. Mont. Code Anno. §§33-18-201 to 204; Ariz. Rev. Stat. §§20-442 to 444 and 461. Moreover, the standard of care for producers requires them to be knowledgeable about the insurance contract that is being presented to the client as well as generally being knowledge about the types of insurance that are available in the market place (even from competing insurance marketers or companies). Producers should also honestly, thoroughly and accurately answer questions from the insurance client. If the producer does not have the knowledge to provide an accurate and complete answer, the producer should so state an offer to do the research necessary to accurately, thoroughly and fairly respond to the inquiry or state that the research will not be done. If the client’s needs require that they purchase insurance coverage that the producer cannot sell (because of marketing restrictions or because the coverage is not commercially available), the producer should truthfully explain the situation to the client. Producers are high information professionals giving insurance advice to almost always low information clients regarding complex financial service transactions. Producers are not mere order takers. Clients look to producers to get insurance advice – not just expecting the producer to correctly take down and dispatch the client’s order for a particular insurance policy and deliver the correct order to the client. Almost always the client only knows in a general way what kind of insurance they want (i.e.: auto insurance, business insurance, homeowners insurance, health insurance).

The standards of care must be met not only when insurance is placed but also when the same insurance is renewed or once a year whichever is a shorter period of time. Insurance marketers should conduct at least an annual review of all insurance sold to a client. This is usually done at or near the anniversary date of the policies. It is an opportunity for the producers to learn of changes in the clients’ insurable risks. This review should be reasonably comprehensive and include inquiry by the marketers regarding both liability exposures as well as property exposures. Most certainly, coverage gaps must be brought to the attention and understanding of the client on such occasions – even when redundant with the advice given on many prior occasions.

“Producers may not market, distribute or sell insurance in a given state without a license from that state. States have an application process that typically requires providing personal information, completing required education and training, satisfying a background check, and passing a licensing examination. Regulating producers is an important activity for states. Producers often are the principal insurance point of contact for consumers and, therefore, regulating producers’ qualifications directly bears on consumer protection. Producer licensing also generates revenue for the states and state insurance departments.” Federal Insurance Office, U.S. Department of the Treasury, Completed pursuant to Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act [2010], (December 2013) at 46.