Use and Misuse of Insurance Experts: Surviving the Admissibility Challenge

If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise.

Thus, there are three elements of admissible expert testimony: 1) it must pertain to scientific, technical, or other specialized knowledge beyond the ken of the average juror; 2) it must assist the trier of fact; and 3) the expert must be appropriately qualified. But in the case of nonscientific testimony such as that relating to insurance, the test as a practical matter boils down to the fundamental question of whether the testimony will help the trier of fact sort through complex or specialized information, and whether the expert utilized some reasonable approach or methodology in reaching his or her conclusions. Given the broad latitude of trial courts to admit or reject nonscientific expert testimony as they see fit (the standard on appeal generally is an abuse of discretion), the most important task for the party sponsoring the insurance expert is to convince the court that the jury stands to benefit from hearing the testimony and that the testimony is more rigorous than the expert's ipse dixit.

In applying the Supreme Court's interpretation of Rule 702 in Daubert v. Merrel Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), to nontechnical expert testimony in a field of “specialized knowledge” like insurance, courts consider two questions: whether the testimony is (i) “relevant,” ie, an appropriate “fit” with the issues of the case, and (ii) “reliable.” See Grinnell Mut. Reins. Co. v. Heritage Ins. Co., 2001 WL 902777 at *6 (D. Minn. Aug. 10, 2001) (“The objective … is to ensure the reliability and relevancy of expert testimony.”). These twin requirements apply to the field of insurance in a somewhat particularized way.

Assisting the Jury: Relevance

To be “relevant” under Rule 702, insurance expert testimony, first and foremost, must address a subject matter that can be characterized, convincingly, as “specialized knowledge.” An examination of some of the subjects on which insurance expert testimony has been allowed is instructive.

Bad Faith. Many jurisdictions recognize that expert testimony is admissible in bad faith cases to provide factual evidence of industry custom, practice, and standards, which is probative of the standard of care owed by a reasonably prudent insurer. See Groce v. Fidelity Gen. Ins. Co., 448 P.2d 554, 560 (Or. 1968) (“It can hardly be said that the average juror was … well equipped … to judge the good or bad faith of an insurer.”) Indeed, expert testimony may be required in such cases to establish insurance industry standards. Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 788 N.E.2d 522, 536 (Mass. 2003) (“The standard of reasonable conduct for an insurer acting pursuant to its contractual obligation to defend any claim made against its insured is not a matter within the common knowledge of the ordinary lay person where that standard is not specifically set forth in the contract. Such a standard of care is analogous to the standard of care owed by other professionals to their clients and is elucidated by expert testimony.”) Courts often permit the expert to go one step further and opine that the insurer's conduct in the case at hand met or fell short of such industry standards. Rawlings v. Apodaca, 726 P.2d 565, 574 (Ariz. 1986) (finding no error in allowing expert to testify about insurance industry custom and that the insurer breached such custom because “failure to comply may be relevant to the question of an insurer's alleged bad faith”); cf. Fed. R. Evid. 704 (opinion on ultimate issue not per se objectionable).

There certainly may be instances where the particular insurance industry custom, practice, or standard in question is a matter of common sense and not specialized knowledge. The Massachusetts high court acknowledged this possibility in Herbert A. Sullivan, Inc. 788 N.E.2d at 536 (“Only where professional negligence is so gross or obvious that jurors can rely on their common knowledge to recognize or infer negligence may the case be made without expert testimony.”). For instance, a court may be reluctant to allow an expert to opine that an insurer violated industry standards by falsely reporting to its insured that it had opened an investigation into the claim. Lay jurors likely understand, based on common knowledge and experience, that insurers are not supposed to lie to their insureds, and expert testimony may not be necessary, e.g., Weiss v. United Fire & Casualty Co., 541 N.W.2d 753 (Wis. 1995) (rejecting the need for expert testimony where the bad faith claim alleged incomplete and sloppy investigation, a matter within the average juror's knowledge, though admission of such evidence is unlikely to be reversible error.) But short of plain and obvious violations of nonspecialized duties, in most cases expert testimony regarding the insurer's compliance with industry custom, practice, and standards, will assist the jury.

Lost Policies. It is generally the insured's burden to establish the terms of lost or missing policies. In some cases, there is strong secondary evidence of what the policy terms were, such as binders or lists of form numbers. Piecing together the evidence into a coherent mosaic, which is what insurance archaeologists and policy reconstructionists do, has been recognized to be relevant testimony concerning a field of specialized knowledge that will assist the jury. See Century Indem. Co. v. Aero-Motive Co., 254 F. Supp. 2d 670, 679 (W.D. Mich. 2003), (permitting testimony of policy reconstruction expert, though Daubert factors did not strictly apply, because that field of knowledge has gained general acceptance).

Policy Construction. Because insurance policies are standard-form contracts with specialized terms, there typically is an industry understanding or range of understandings as to the meaning of policy terms. Playtex FP, Inc. v. Columbia Cas. Co., 622 A.2d 1074, 1076-77 (Del. Super. Ct. 1992). Many courts find that expert testimony explaining the industry's understanding of a policy term will assist the jury to determine whether the construction advocated by one side or the other is reasonable, which may bear on an insurer's bad faith, among other issues. E.g., North River Ins. Co. v. Employers Reins. Corp., 197 F. Supp. 2d 972, 983 (S.D. Ohio 2002) (permitting expert to construe certificate of reinsurance to the extent it “constitutes a statement of fact concerning industry custom and practice”). Cf. Iacobelli Constr., Inc. v. County of Monroe, 32 F.3d 19, 25 (2d Cir. 1994) (finding expert affidavit to be competent summary judgment evidence where it “explained the approach by which reasonably prudent contractors would interpret the contract documents and enumerated the conclusions such reasonably prudent contractors would reach”).

Expert testimony regarding policy construction often is attacked as irrelevant in that it amounts to the expert's opinion on a “legal conclusion” or merely tells the jury how to find. (Another common formulation of this attack is that the expert testimony “invades the province of the jury.”) But this argument ignores the fact-bound nature of whether a policy construction is reasonable, which must be assessed in the context of surrounding circumstances such as an industry-wide understanding of the meaning of a term and its application in context. Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 682 P.2d 388, 398 (Ariz. 1984). So long as the testimony assists the jury by providing insight into a field of specialized knowledge beyond the jury's ken, the cry of “legal conclusion” alone no longer provides a proper basis for disallowing expert testimony, as Rule 704 especially confirms. E.g., U.S.F.&G. v. Williams, 676 F. Supp. 123, 126 (E.D. La. 1987) (“[T]he Court was seeking the testimony solely to determine what general understanding, if any, the insurance industry has as to the meaning of certain provisions in USF&G's policy. While resolution of this factual question affects the legal issues involved, the factual issue of industry custom is distinct from the legal issue of construction.”). Cf. North Am. Specialty Ins. Co. v. Myers, 111 F.3d 1273 (6th Cir. 1997) (disallowing expert to construe policy terms that did not involve specialized or technical concepts beyond the jury's common experience).

Similarly, opponents of expert testimony may contend that any references to insurance statutes, standards, or other “legal obligations” impermissibly instruct the jury as to the law. But an expert's reference to a state's insurance code easily can be defended as providing the expert's basis for his or her opinions under Federal Rule of Evidence 703, which provides that the facts or data on which the expert relies need not be independently admissible so long as they are “of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject.” Certainly, state insurance codes bear on proper insurance-industry practices, so an expert commits no transgression by relying on the law in explaining practice. Peiffer v. State Farm Mut. Auto. Ins. Co., 940 P.2d 967, 970-71 (Colo. Ct. App. 1997) (admitting expert testimony that an insurer violated the Unfair Claims Settlement Practices Act as relevant to a bad faith claim).

Assisting the Jury: Reliability

The second element that determines whether expert testimony will help the jury is the reliability of the opinion. For nonscientific expert testimony, this question turns largely on whether (i) the expert is properly qualified, and (ii) whether the opinion is nonspeculative.

In order to be qualified, the insurance expert must have relevant training and experience. Insurance experts typically are members of the insurance industry, be they claims adjusters, underwriters, brokers, or state regulators. But the expert's experience must be tailored more narrowly than simply having general industry experience ' courts will reject experts whose experience is too far afield. In California Shoppers, Inc. v. Royal Globe Insurance Co., 221 Cal. Rptr. 171 (Cal. Ct. App. 1985), for instance, the court refused to find that a well-respected coverage lawyer was qualified to give expert testimony concerning insurance industry standards because he had never worked in the industry. Moreover, an expert who has spent her entire career with one insurance company may be vulnerable to the charge that her knowledge is limited to the particular procedures utilized by that company and not to industry-wide standards. See, e.g., Sparks v. Republic Nat'l Life Ins. Co., 647 P.2d 1127, 1136-37 (Ariz. 1982) (“What other insurance companies would have done regarding payment of benefits under the circumstances of the present case would be irrelevant in view of the likelihood that each insurance company follows varying practices regarding the payment of doubtful claims.”) However, this contention ignores the expert's ability to put the practices of her employer and the conduct of the insurer under scrutiny into the broader context of what constitutes good industry practice; that is, the expert is not limited to merely testifying that “this is what we did at Company X,” but can state with authority that “we did it this way at Company X because that procedure represents a good insurance practice, for the following reasons …”

The reliability requirement that expert opinions be nonspeculative is paid too little heed and, in fact, often is the real dynamic at work in cases where expert testimony is excluded as “invading the province of the jury” or “providing mere legal conclusions.” For example, in Alvarado v. Old Republic Insurance Co., 951 S.W.2d 254 (Tex. Ct. App. 1997), the court rejected the insured's expert testimony that an insurer committed bad faith, not because it stated a legal conclusion, but because the legal conclusion was unsupported. The court held that, “In the absence of facts, legal conclusions are inadequate to raise an issue of fact in response to a motion for summary judgment despite the affiant's qualifications.”) Id. at 263 (emphasis added). Further underscoring the point, the court then accepted the insurer's expert testimony on the same subject, including the reasonableness of the policy interpretation, “because the factual basis of his expert opinion is clear.” Id.

Similarly, in Tapatio Springs Builders, Inc. v. Maryland Casualty Insurance Co., 82 F. Supp. 2d 633 (W.D. Tex. 1999), the court rejected the insurer's charge that the insured's expert testimony “set [ ] forth improper legal conclusions” and was “conclusory” where the expert based his testimony on (i) “twenty years of experience in the insurance industry” and (ii) “[the insurer's] own documents and his interpretation of them.” Id. at 648-49. Also instructive is North Star Mutual Insurance Co. v. Zurich Insurance Co., No. CIV.01-837 RLE, 2003 WL 21524543 (D. Minn. Apr. 22, 2003), in which the court rejected the testimony of an expert who failed to tie his opinions to any independent source of authority, such as industry codes or treatises. The court found unreliable testimony that merely amounts to “how one person who, admittedly, has been in the insurance industry for many years, views a series of communications between an insurance agent, and an insurance broker.” Id. at *6.

In short, courts are far more amenable to expert testimony that touches upon an ultimate issue (Rule 704) if the testimony is well supported by a strong factual and experiential foundation.

As evidentiary challenges to expert insurance testimony become a routine part of coverage litigation, insurers and insureds are well advised to understand how the fundamental principles underpinning Federal Rules of Evidence 702 through 705, as elucidated by Daubert, apply to nonscientific, nontechnical, fields of specialized knowledge like insurance, and to be guided by such principles in retaining insurance experts and crafting their testimony.

The use of expert testimony has dramatically increased over the past two decades, and insurance litigation has not been an exception. Experts have long been used in insurance cases to help the jury determine the facts surrounding the loss, such as in arson cases. But use of experts specializing in the field of insurance itself is becoming commonplace, as are challenges to the admissibility of their testimony.

The Touchstone of Admissibility: Will It Assist the Trier of Fact?

The rules of evidence in most jurisdictions, modeled after the federal rules, establish a fairly precise set of standards governing the scope and nature of allowable expert opinion testimony. Most states' versions of Rule 702, which establishes the fundamental standard for admissible expert testimony, provide something like the following:

If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise.

Thus, there are three elements of admissible expert testimony: 1) it must pertain to scientific, technical, or other specialized knowledge beyond the ken of the average juror; 2) it must assist the trier of fact; and 3) the expert must be appropriately qualified. But in the case of nonscientific testimony such as that relating to insurance, the test as a practical matter boils down to the fundamental question of whether the testimony will help the trier of fact sort through complex or specialized information, and whether the expert utilized some reasonable approach or methodology in reaching his or her conclusions. Given the broad latitude of trial courts to admit or reject nonscientific expert testimony as they see fit (the standard on appeal generally is an abuse of discretion), the most important task for the party sponsoring the insurance expert is to convince the court that the jury stands to benefit from hearing the testimony and that the testimony is more rigorous than the expert's ipse dixit.

In applying the Supreme Court's interpretation of Rule 702 in Daubert v. Merrel Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), to nontechnical expert testimony in a field of “specialized knowledge” like insurance, courts consider two questions: whether the testimony is (i) “relevant,” ie, an appropriate “fit” with the issues of the case, and (ii) “reliable.” See Grinnell Mut. Reins. Co. v. Heritage Ins. Co., 2001 WL 902777 at *6 (D. Minn. Aug. 10, 2001) (“The objective … is to ensure the reliability and relevancy of expert testimony.”). These twin requirements apply to the field of insurance in a somewhat particularized way.

Assisting the Jury: Relevance

To be “relevant” under Rule 702, insurance expert testimony, first and foremost, must address a subject matter that can be characterized, convincingly, as “specialized knowledge.” An examination of some of the subjects on which insurance expert testimony has been allowed is instructive.

Bad Faith. Many jurisdictions recognize that expert testimony is admissible in bad faith cases to provide factual evidence of industry custom, practice, and standards, which is probative of the standard of care owed by a reasonably prudent insurer. See Groce v. Fidelity Gen. Ins. Co., 448 P.2d 554, 560 (Or. 1968) (“It can hardly be said that the average juror was … well equipped … to judge the good or bad faith of an insurer.”) Indeed, expert testimony may be required in such cases to establish insurance industry standards. Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 788 N.E.2d 522, 536 (Mass. 2003) (“The standard of reasonable conduct for an insurer acting pursuant to its contractual obligation to defend any claim made against its insured is not a matter within the common knowledge of the ordinary lay person where that standard is not specifically set forth in the contract. Such a standard of care is analogous to the standard of care owed by other professionals to their clients and is elucidated by expert testimony.”) Courts often permit the expert to go one step further and opine that the insurer's conduct in the case at hand met or fell short of such industry standards. Rawlings v. Apodaca , 726 P.2d 565, 574 (Ariz. 1986) (finding no error in allowing expert to testify about insurance industry custom and that the insurer breached such custom because “failure to comply may be relevant to the question of an insurer's alleged bad faith”); cf. Fed. R. Evid. 704 (opinion on ultimate issue not per se objectionable).

There certainly may be instances where the particular insurance industry custom, practice, or standard in question is a matter of common sense and not specialized knowledge. The Massachusetts high court acknowledged this possibility in Herbert A. Sullivan, Inc. 788 N.E.2d at 536 (“Only where professional negligence is so gross or obvious that jurors can rely on their common knowledge to recognize or infer negligence may the case be made without expert testimony.”). For instance, a court may be reluctant to allow an expert to opine that an insurer violated industry standards by falsely reporting to its insured that it had opened an investigation into the claim. Lay jurors likely understand, based on common knowledge and experience, that insurers are not supposed to lie to their insureds, and expert testimony may not be necessary, e.g., Weiss v. United Fire & Casualty Co., 541 N.W.2d 753 (Wis. 1995) (rejecting the need for expert testimony where the bad faith claim alleged incomplete and sloppy investigation, a matter within the average juror's knowledge, though admission of such evidence is unlikely to be reversible error.) But short of plain and obvious violations of nonspecialized duties, in most cases expert testimony regarding the insurer's compliance with industry custom, practice, and standards, will assist the jury.

Lost Policies. It is generally the insured's burden to establish the terms of lost or missing policies. In some cases, there is strong secondary evidence of what the policy terms were, such as binders or lists of form numbers. Piecing together the evidence into a coherent mosaic, which is what insurance archaeologists and policy reconstructionists do, has been recognized to be relevant testimony concerning a field of specialized knowledge that will assist the jury. See Century Indem. Co. v. Aero-Motive Co., 254 F. Supp. 2d 670, 679 (W.D. Mich. 2003), (permitting testimony of policy reconstruction expert, though Daubert factors did not strictly apply, because that field of knowledge has gained general acceptance).

Policy Construction. Because insurance policies are standard-form contracts with specialized terms, there typically is an industry understanding or range of understandings as to the meaning of policy terms. Playtex FP, Inc. v. Columbia Cas. Co., 622 A.2d 1074, 1076-77 (Del. Super. Ct. 1992). Many courts find that expert testimony explaining the industry's understanding of a policy term will assist the jury to determine whether the construction advocated by one side or the other is reasonable, which may bear on an insurer's bad faith, among other issues. E.g., North River Ins. Co. v. Employers Reins. Corp., 197 F. Supp. 2d 972, 983 (S.D. Ohio 2002) (permitting expert to construe certificate of reinsurance to the extent it “constitutes a statement of fact concerning industry custom and practice”). Cf. Iacobelli Constr., Inc. v. County of Monroe, 32 F.3d 19, 25 (2d Cir. 1994) (finding expert affidavit to be competent summary judgment evidence where it “explained the approach by which reasonably prudent contractors would interpret the contract documents and enumerated the conclusions such reasonably prudent contractors would reach”).

Expert testimony regarding policy construction often is attacked as irrelevant in that it amounts to the expert's opinion on a “legal conclusion” or merely tells the jury how to find. (Another common formulation of this attack is that the expert testimony “invades the province of the jury.”) But this argument ignores the fact-bound nature of whether a policy construction is reasonable, which must be assessed in the context of surrounding circumstances such as an industry-wide understanding of the meaning of a term and its application in context. Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 682 P.2d 388, 398 (Ariz. 1984). So long as the testimony assists the jury by providing insight into a field of specialized knowledge beyond the jury's ken, the cry of “legal conclusion” alone no longer provides a proper basis for disallowing expert testimony, as Rule 704 especially confirms. E.g., U.S.F.&G. v. Williams, 676 F. Supp. 123, 126 (E.D. La. 1987) (“[T]he Court was seeking the testimony solely to determine what general understanding, if any, the insurance industry has as to the meaning of certain provisions in USF&G's policy. While resolution of this factual question affects the legal issues involved, the factual issue of industry custom is distinct from the legal issue of construction.”). Cf. North Am. Specialty Ins. Co. v. Myers , 111 F.3d 1273 (6th Cir. 1997) (disallowing expert to construe policy terms that did not involve specialized or technical concepts beyond the jury's common experience).

Similarly, opponents of expert testimony may contend that any references to insurance statutes, standards, or other “legal obligations” impermissibly instruct the jury as to the law. But an expert's reference to a state's insurance code easily can be defended as providing the expert's basis for his or her opinions under Federal Rule of Evidence 703, which provides that the facts or data on which the expert relies need not be independently admissible so long as they are “of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject.” Certainly, state insurance codes bear on proper insurance-industry practices, so an expert commits no transgression by relying on the law in explaining practice. Peiffer v. State Farm Mut. Auto. Ins. Co., 940 P.2d 967, 970-71 (Colo. Ct. App. 1997) (admitting expert testimony that an insurer violated the Unfair Claims Settlement Practices Act as relevant to a bad faith claim).

Assisting the Jury: Reliability

The second element that determines whether expert testimony will help the jury is the reliability of the opinion. For nonscientific expert testimony, this question turns largely on whether (i) the expert is properly qualified, and (ii) whether the opinion is nonspeculative.

In order to be qualified, the insurance expert must have relevant training and experience. Insurance experts typically are members of the insurance industry, be they claims adjusters, underwriters, brokers, or state regulators. But the expert's experience must be tailored more narrowly than simply having general industry experience ' courts will reject experts whose experience is too far afield. In California Shoppers, Inc. v. Royal Globe Insurance Co., 221 Cal. Rptr. 171 (Cal. Ct. App. 1985), for instance, the court refused to find that a well-respected coverage lawyer was qualified to give expert testimony concerning insurance industry standards because he had never worked in the industry. Moreover, an expert who has spent her entire career with one insurance company may be vulnerable to the charge that her knowledge is limited to the particular procedures utilized by that company and not to industry-wide standards. See, e.g., Sparks v. Republic Nat'l Life Ins. Co., 647 P.2d 1127, 1136-37 (Ariz. 1982) (“What other insurance companies would have done regarding payment of benefits under the circumstances of the present case would be irrelevant in view of the likelihood that each insurance company follows varying practices regarding the payment of doubtful claims.”) However, this contention ignores the expert's ability to put the practices of her employer and the conduct of the insurer under scrutiny into the broader context of what constitutes good industry practice; that is, the expert is not limited to merely testifying that “this is what we did at Company X,” but can state with authority that “we did it this way at Company X because that procedure represents a good insurance practice, for the following reasons …”

The reliability requirement that expert opinions be nonspeculative is paid too little heed and, in fact, often is the real dynamic at work in cases where expert testimony is excluded as “invading the province of the jury” or “providing mere legal conclusions.” For example, in Alvarado v. Old Republic Insurance Co., 951 S.W.2d 254 (Tex. Ct. App. 1997), the court rejected the insured's expert testimony that an insurer committed bad faith, not because it stated a legal conclusion, but because the legal conclusion was unsupported. The court held that, “In the absence of facts, legal conclusions are inadequate to raise an issue of fact in response to a motion for summary judgment despite the affiant's qualifications.”) Id. at 263 (emphasis added). Further underscoring the point, the court then accepted the insurer's expert testimony on the same subject, including the reasonableness of the policy interpretation, “because the factual basis of his expert opinion is clear.” Id.

Similarly, in Tapatio Springs Builders, Inc. v. Maryland Casualty Insurance Co. , 82 F. Supp. 2d 633 (W.D. Tex. 1999), the court rejected the insurer's charge that the insured's expert testimony “set [ ] forth improper legal conclusions” and was “conclusory” where the expert based his testimony on (i) “twenty years of experience in the insurance industry” and (ii) “[the insurer's] own documents and his interpretation of them.” Id. at 648-49. Also instructive is North Star Mutual Insurance Co. v. Zurich Insurance Co., No. CIV.01-837 RLE, 2003 WL 21524543 (D. Minn. Apr. 22, 2003), in which the court rejected the testimony of an expert who failed to tie his opinions to any independent source of authority, such as industry codes or treatises. The court found unreliable testimony that merely amounts to “how one person who, admittedly, has been in the insurance industry for many years, views a series of communications between an insurance agent, and an insurance broker.” Id. at *6.

In short, courts are far more amenable to expert testimony that touches upon an ultimate issue (Rule 704) if the testimony is well supported by a strong factual and experiential foundation.

As evidentiary challenges to expert insurance testimony become a routine part of coverage litigation, insurers and insureds are well advised to understand how the fundamental principles underpinning Federal Rules of Evidence 702 through 705, as elucidated by Daubert, apply to nonscientific, nontechnical, fields of specialized knowledge like insurance, and to be guided by such principles in retaining insurance experts and crafting their testimony.