THOUGHTS ON DEFENDING THE INSTITUTIONAL
CLAIM HANDLING CASE

The prospect of defending the institutional claim handling case at trial is daunting. Insurance company claim operations are large undertakings. Despite claim manuals or standard operating procedures, individual discretion dominates the handling of every claim. Human error abounds. Because each claim necessarily develops over time, the flow of information and the assessment of it by a claim department often can result in investigations that have false starts, dead ends, or erroneous conclusions. The pressure to resolve claims in a timely manner may lead to premature decisions that, even when corrected, continue to taint the file.

Insurance company claim obligations arise from the concept of the covenant of good faith and fair dealing, not "perfect" dealing. Notwithstanding an insurer’s defense that perfection is not required, the showing that the claims handling was not "fair" or "good" can have support when any file is examined microscopically. In an institutional claim handling case, the defense may be forced to explain the handling of dozens, hundreds or even thousands of separate claims. In each file, there could be questionable or debatable decisions. It is hard enough to defend one file, let alone many others.

In an institutional claims handling case, the plaintiff’s burden to prove improper handling is relaxed because, depending on court rulings, the breadth of the claim inquiry can go beyond the plaintiff’s specific claim. The handling of other claims can be used to establish a pattern or suggest a method of claim operation that goes beyond the defense of simply "shoddy, witless and inept" claim handling and is sufficient to document a pervasive, improper claims handling practice by the insurer that justifies punitive damages. Compare Patrick v. Maryland Casualty Co. (1990) 217 Cal.App.3d 1566 with Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910.

There is little doubt that when any insurer in an institutional claim handling case produces 25 other claim files, even if all the claims were paid, there may be indicia of arguably improper claims handling, e.g., delayed payments, in more than a few of them. Thus, when faced with an institutional claim handling case, it is important for the defense to focus the trial on key issues that can diminish the emphasis on the institutional conduct. Below are some thoughts as to how the defense can accomplish these goals at trial.

1. Empower The Jury.
In most cases, the contract dispute will remain a trial issue. The defense must empower the jury in voir dire, opening statement, and, finally, closing argument, to decide the primary issue of the entire trial, to wit: whether the plaintiff is entitled to contract benefits. The goal of this empowerment is to neutralize the plaintiff from the start, so that the jury appreciates that the contract issue remains a question of fact, not an issue of whether the insurance company’s handling of the claim was proper (that is important, but it must be a secondary issue to the contract determination). In California, the standard form BAJI Instruction 1.00 reads as follows: Ladies and Gentlemen of the Jury:

It is now my duty to instruct you in the law that applies to this case. It is your duty to follow the law. As jurors it is your duty to determine the effect and value of the evidence and to decide all questions of fact.

You must not be influenced by sympathy, prejudice or passion. This instruction should be given as a pre-instruction charge; if it is not, it will be the first instruction at the conclusion of the trial. The defense should weave it into voir dire, opening and closing. The theme is that the first duty of the jury is to "decide all questions of fact" which necessarily must include the claims decision.

Thus, the claim controversy is played on a level field. The claim controversy is not one where the plaintiff, with the attending physicians or experts supporting the plaintiff’s claim, starts from the position that the claim is payable unless the insurer can establish bases to show that it is not payable.

Similarly, the jury should be instructed that the determination of whether the claim is payable is one that is based upon a review of the contract. An instruction in this regard can be drawn from inter alia Fields v. Blue Shield of Calif. (1985) 163 Cal.App.3d 570, and might read as follows:

A claim for insurance benefits will be determined, first of all, by the provisions of the policy itself. Plaintiff has a duty to read the policy and is presumed to have read it and know its contents, and will be bound by its provisions, whether read or not. This type of instruction, along with specific instructions drawn from the insurance contract itself, helps the defense justify claims handling based upon contract interpretation, factual decisions which the jury has been empowered to determine.

Among the many contract provisions that might be applicable for purposes of a jury instruction, some include: the contract in its entirety must be read; no changes to the contract can be made absent written approval by the company; notice and proof of loss requirements rest with the insured; and, time limits applicable to certain claims. These can be supplemented by specific provisions of the contract applicable to the particular claim.

2. Stress Core Jury Instructions.
* Many standard form jury instructions are critical in insurance litigation. The following should be considered: * The burden of proof instruction will be drafted specifically in each case, but in almost every instance the burden of proof will remain on the plaintiff to establish the bases for claim payment. This is a critical instruction because at the time of closing argument the defense can argue alternatively that the claim is not payable and/or that plaintiff has failed to meet the burden of proof in establishing that it is.

The California bad faith instruction contained at BAJI 12.92. It reads:
An insurance company which fails to deal fairly and in good faith with its insured by refusing unreasonably to pay the insured for a valid claim covered by the policy is liable for all damages from such conduct. Key language in this instruction will be the terms "refusing unreasonably" and "a valid claim." These two phrases allow leeway for the defense to argue either the claim is not payable or the decision not to pay is reasonable.

A supplement to BAJI 12.92 should be an instruction that educates the jury that a breach of contract is not, in and of itself, a basis to determine that the insurer has acted in bad faith. An instruction drawn from the decision in California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, could read as follows:An erroneous denial of a claim for benefits due under an insurance contract does not by itself justify an extra-contractual liability. Without more, an erroneous denial is simply a breach of contract. To support any extra-contractual damages, a denial must breach the insurer’s implied obligation of good faith and fair dealing. In other words, it must have been in "bad faith."

Many times jurors do not understand the difference between a breach of contract and a breach of the implied covenant of good faith and fair dealing. Too often the attorneys, for both sides, fail to recognize that the distinction between the contract and tort theories (elemental to them through years of practice) is often lost when the jury is presented with such concepts for the first time. This also can be true for the trial judge, for whom a trial brief is a necessity. Thus, it is essential for the defense, more so than the plaintiff, to draw this important distinction in the jury instructions so that the jury does not conclude that a breach of contract necessarily means a breach of the implied covenant of good faith and fair dealing.

* This same distinction must be drawn with respect to punitive damages. In California, the punitive damage instruction, BAJI 14.71, requires that the jury must find malice, oppression or fraud by "clear and convincing evidence." This is important because it changes the juror’s weighing of the evidence from the preponderance of evidence standard applicable to the contract and bad faith/tort theories, to the greater quantum required under the clear and convincing standard
* Many times in insurance litigation the testimony of third-parties regarding the plaintiff’s claim, including testimony supporting emotional or financial distress damage claims, may be presented through an exception to the hearsay rule. It is important that the defense insist at trial that the court advise the jury of the limited admissibility of the testimony when it is received and also ensure that a limited evidence instruction is read to the jury with the other instructions. Such an instruction based on BAJI 2.05 is as follows:Some evidence was admitted for a limited purpose only. When I instructed you that an item of evidence has been admitted for a limited purpose, you must consider it only for that limited purpose and for no other.

This instruction is especially important if, for example, there is extensive testimony from a physician regarding the self-report of the plaintiff regarding physical ailments, etc.

California BAJI Instruction 2.43 informs the jury, albeit in a conceptual manner difficult even for some attorneys to grasp, that such statements are not evidence of the truth of the facts stated, but are merely to be considered evidence of the plaintiff’s statements about then-existing state-of-mind, emotion or physical sensation. In argument, the defense should stress that a doctor or third-party testifying about the plaintiff’s state-of-mind, emotion or physical sensation, is merely operating as a "telephone line," communicating only what the plaintiff said. The jury can disregard such evidence if they do not find the plaintiff persuasive or credible. It is imperative that the jury understand this because these third-parties, with credibility, persona and credentials usually far superior to the plaintiff, must be seen only as conduits of information, not as fountains of truth.

Many reasons exist for the defense to discuss damages, not the least of which is that the contract amount will be in controversy. It is essential that the jury be aware, hopefully from the outset in pre-instruction but certainly through voir dire and opening statement, that the amount of damages claimed by the plaintiff in pleadings or through argument is not to be considered as evidence. For example, California BAJI Instructions 14.60 and 14.62 advise the jury not to award speculative damages and not to consider the argument of counsel as evidence of reasonable compensation.

These instructions again serve to empower the jury to make independent assessments on damages. The defense also can argue that the jury properly discounts the self-serving statements by the plaintiff and/or plaintiff’s attorney regarding the existence of or amount of damages based on these instructions.

Finally, to the extent that the jurisdiction may allow for an attorney fee recovery, as California does, it is imperative that the jury make that determination as well. In California, the authority for an attorney fee recovery where there is a breach of the implied covenant of good faith and fair dealing is set forth in Brandt v. Superior Court (1985) 37 Cal.3d 813. That decision suggests that the attorney fee issue can be handled by the court via post-trial motion, subject to the stipulation of the parties. Generally it is not a good idea for the defense to stipulate. It is better to have the issue of attorney fees heard by the jury, for whatever possible benefit may flow from the (somewhat unseemly) presentation of evidence by the plaintiff’s attorney regarding fees.
The Brandt decision supplies the model instruction: If you find (1) that plaintiff is entitled to recover on his cause of action for breach of the implied covenant of good faith and fair dealing, and (2) that because of such breach, it was reasonably necessary for the plaintiff to employ the services of his attorney to collect the benefits due under the policy, then and only then is the plaintiff entitled to an award of reasonable attorney’s fees incurred to obtain the past and current policy benefits. This award must not include attorney’s fees incurred to recover any other portion of the verdict. This instruction is a helpful conduit for the defense again to empower the jury to make decisions on contract issues. In conjunction with the damage instructions above, it allows the defense to argue that even the testimony of the plaintiff/plaintiff’s attorney on fees need not be accepted by the jury, as they are empowered to award "reasonable attorneys’ fees in their own judgment."

These are only a few of the core jury instructions that should be utilized by the defense in handling an insurance claim dispute at trial.

3. Isolate the Claim File.

No matter how numerous the institutional claim issues, the defense has to focus the dispute on the plaintiff’s (debatable/questionable) right to receive the benefits under the contract. The defense must utilize every available tactic to focus and re-focus the jury on the claim file. Some of these tactics include: providing the individual jurors with a copy of the claim file; preparing a visual aid, such as a timeline to explain the claim file handling; concentrating aspects of the cross-examination of the plaintiff and/or plaintiff’s expert on an extended analysis of the claim file handling.

These tactics serve to reinforce the impression on the jury that there is but one claim in dispute, namely the plaintiff’s claim, and that the institutional claim handling arguments raised by the plaintiff are merely a smoke screen to obscure the weaknesses in plaintiff’s contract case.

4. Address the Regulation of the Insurance Company and Its On-Going
Public Disclosures to Reduce the Taint Of Institutional Wrongdoing.

If the plaintiff is allowed to "go big" on institutional claims handling, it is important that the insurer explain the nature of its business in the key area of regulation.

For example, if the insurer is licensed to do business in all 50 states, it is important for the jury to understand that this means the insurer is regulated and supervised by 50 different Departments of Insurance. The extent to which these 50 Departments may conduct market conduct examinations of the claims department or otherwise subject the insurer to regulatory intervention should be stressed, so as to counter the argument that the insurer is a monolith that can be controlled only by a jury verdict.

In addition, many insurance companies are stock companies. They file reports on a regular basis with the Securities & Exchange Commission, supplemented by quarterly and annual reports to the shareholders. This is in addition to filings with the State Insurance Departments. Many times these filings/reports contain specific information about claim operations which the plaintiff is arguing is the root of the bad institutional conduct. If it can be shown that the insurer is disclosing to regulators and the public the very claim operations that the plaintiff argues is untoward, this may convince the jury that there is nothing improper about the claim operations.

Finally, any insurer with a large claims operation will have institutional memoranda, focusing on policies and practices designed to counter fraudulent claims. Many times such memoranda are written in a fashion that allows the plaintiff to argue there is a pervasive mind set in the claim department to find bases to deny even valid and legitimate claims. To counter that, the insurer has to justify such memoranda by reference to the various state mandates for antifraud units and procedures to control fraudulent claims. For example, California has Special Investigative Unit Regulations, which are contained at Title 10, Subchapter 9, Article 2 of the California Code of Regulations. A cross-examination of plaintiff’s expert regarding the obligations mandated by such regulations deflates any argument that procedures are designed to deny legitimate claims when, instead, they are the outgrowth of regulatory requirements necessary to combat fraud.

Fraudulent claims is a trial topic that the plaintiff wants to avoid. Even if the plaintiff’s claim is legitimate, albeit not payable, the specter of fraudulent claims is always present in the jurors’ collective mind. The extent to which the defense can discuss fraudulent claims may well be dependent on the extent to which the plaintiff opens the door to it with institutional allegations. But if the door is opened, an extended discussion of Special Investigative Units and mandatory antifraud activity is a helpful counter-balance.
5. Claim Handling Decisions Need To Be Justified, Even If An
Apology Is Necessary.

As stated above, there is no requirement that claim handling be "perfect." Many times, human error will lead to erroneous claim activity. If the claim error is not a part of institutional claims handling, but rather the result of human error, the impact is probably negligible. When that occurs, it is important that the defense recognize it, explain it, and, as necessary, apologize for it.

A key jury instruction to accompany such a potential problem is one which advises the jury that insurance company conduct should not be considered in hindsight. For example, a jury instruction drawn from Austero v. National Casaulty Company (1978) 84 Cal.App.3d 1, might read:

The reasonableness of the denial of plaintiff’s claim must be determined on the basis of information known by the insurer or reasonably available to it at the time of the denial.

This is more problematic if the error is the result of institutional claim handling as opposed to discretionary claims handling. When the challenge is to institutional claim handling, it is hard to apologize because the claim handling is not the result of an error or human mistake, but the result of an institutional practice. Of course, if the practice has been changed, that can be explained. If the practice remains in place, it will need to be justified. Even then, however, an Austero-type instruction allows for some justification of the insurer’s claim handling.

CONCLUSION
In a perfect world (or, at least, the perfect world as seen by the defense) institutional claim handling cases would be exceedingly rare. A single dispute regarding the interpretation of the plaintiff’s contract would not give rise to an onslaught against the insurer’s overall conduct. It is a credit to the advocacy and intelligence of the plaintiff’s bar that many seemingly mundane claim disputes can mushroom into an institutional trial.

When that occurs, the burden on the defense is terrific. To counter the plaintiff’s arguments, the defense must focus on key jury themes set forth above. In so doing, the defense can argue that an institutional case is nothing more than an argument designed to deflect the jury from deciding the key contract issues. The focus should:
* Limit the nature and/or purpose of admissible evidence; * Remind to the jury that inter alia the burden of proof rests with the plaintiff; * Evidence must be established beyond simply the argument of the attorney; and * Human beings at the insurance company were simply trying to perform their job in conformance with the contract provisions.

In a recent institutional trial, the plaintiff’s attorney continually argued an anti-insurer inference to all the evidence. In closing, the defense attorney commented upon the plaintiff attorney’s jaundiced view of the evidence and how it was so out of sync with reality.

The defense attorney told the story of the parents of the screw-up son who, in an effort to find some discipline in his life, joins the Army. At the end of basic training, the parents go to see the son parade by in his uniform, along with the 200 other soldiers in his company. As the company marches by, the parents observe the son and the other soldiers. One parent remarks to the other, how wonderful it is that their son has finally found discipline and direction in his life. The other agrees, but sadly laments how unfortunate it is that everyone else in the company is marching out of step from their son.

In institutional claim litigation, it is important for the defense to show that notwithstanding the bluster and argument, it is the plaintiff that is "out of step" in the analysis of claims handling.