Maryland Lack-of-Good-Faith Statute in Operation

Bad faith claims have long been a source of concern for insurance companies. These claims potentially expose carriers to extracontractual damages, including attorneys' fees and punitive damages. This article focuses on how one state, Maryland, has chosen to address first-party bad faith claims arising out of property and casualty insurance policies. Maryland's experience handling these disputes teaches lessons to both carriers and insureds.

Maryland's First-Party Lack-of-Good-Faith Cause of Action

Since October 2007, insureds in Maryland have had a statutory cause of action against carriers that fail to act in good faith in settling a first-party claim under a property and casualty insurance policy. Maryland Code, Insurance Article ' 3-1701. It is now a violation of Maryland's Unfair Claims Settlement Practices Act for a carrier to fail to act in good faith in deciding first-party property and casualty claims. Maryland Code, Insurance Article ” 27-303(9) and 27-304(18).

The administrative procedure for prosecuting the claim requires the insured to file a complaint with the Maryland Insurance Administration (“MIA”) and produce all documents supporting its claim. Maryland Code, Insurance Article ' 27-1001. The carrier must answer and produce its entire claims file. The carrier may withhold privileged or otherwise protected documents, subject to an in camera review by the MIA. The MIA can: 1) order the carrier to produce the withheld documents and 2) consider the fact that they were withheld when determining the issue of good faith. The MIA will decide the case no later than 90 days after receiving the complaint. Either party may appeal the decision to an administrative law judge within the MIA or to the Circuit Court. The appeal is heard de novo.

The Floodgates Have Not Opened

Some in the insurance community feared that the law would increase litigation. The law's administrative procedure gives insureds free discovery and the opportunity to test legal theories before filing suit. The law also contains a fee-shifting provision as added incentive to the plaintiffs' bar.

By contrast, Maryland Gov. Martin O'Malley felt the law would reduce litigation. In encouraging the General Assembly to pass the law, Gov. O'Malley argued that the law “will encourage insurers to make fair offers, in good faith, and not force policyholders to pursue litigation to collect what is due to them.”

In operation, the law has not opened the litigation floodgates, and most decisions have favored the carriers. According to the MIA's annual reports for fiscal years 2008 through 2010, the MIA handed down 94 decisions. Since the end of fiscal year 2010, the MIA has published an additional 14 decisions. Sixty-six of these 108 decisions involved UM and/or PIP issues with the remainder involving property claims. The MIA decided in favor of the carrier 84 times and in favor of the insured in six cases. The lowest award was $11,234.10, and the highest was $246,250.

Lessons to Be Learned

Carriers

Make Your Claims File Sparkle. A solid claims file that supports a carrier's case value will likely carry the day. A claims file that demonstrates repeated attempts to reduce the claim's value, as recommended by the claim handler, is a recipe for disaster.

Don't Dismiss Evidence Supporting the Claim. Consider evidence in your claims file that supports the insured's claim. If the file contains a records review supporting the claim, at least in part, account for that in valuing the case.

Know the Law. One carrier ran into trouble when it consented to settle with the tortfeasor and then tried to raise tort defenses to the UM claim, which Maryland law does not permit. Another carrier was on notice of the tort case and chose not to intervene, thereby exposing itself, under Maryland law, to the jury's verdict in the tort case.

Follow the Procedures. One carrier responded to an insured's complaint with only a letter from a claims supervisor. The MIA replied, advising the carrier of its obligations. Rather than providing the entire claims file, the carrier supplanted with only the insured's medical records. The MIA relied on this in finding an absence of good faith.

Privilege Concerns. To date, no carrier has been compelled to produce protected material. In the decisions reviewed for this article, only once did the MIA consider a carrier's failure to comply with the production requirements when rendering its decision, and that case involved a carrier who outright failed to produce its claims file.

Insureds

Have Something More Than a Mere Disagreement over Value. The MIA will not side with insureds where the sole dispute is a disagreement over competing case values. Your claim looks weak when there is a large gap between the amount of medical bills and policy limits.

Support Your Claim. In one case, the insured failed to attach to the complaint copies of the materials it sent to the carrier to prove the loss. The MIA noted that it could dismiss the case for that reason alone, but dismissed the case on the merits anyway. Also, the MIA will not automatically award attorneys' fees of 33% of the damages award, so if you are going to ask for 33%, be able to support it.

Be Realistic. In one case, the insured relied on the carrier's failure to use the “customary multiplier” for Maryland claims of “five times special damages.” In two other cases, the insured included several claims that were not covered by the law. Overstating your case will cause the MIA to focus on your claim rather than the carrier's good faith.

The First Bite at the Apple. The production requirements are free discovery. The de novo appeal to the ALJ or Circuit Court means you can test your legal theories and tailor any subsequent complaint to address perceived weak points.

Carriers and Insureds

Listen to the MIA. The MIA frequently reminds the parties that it is merely deciding whether the carrier acted in good faith, and that future litigation is possible. In these comments, the MIA reflects how a neutral third party would value the case. In that way, MIA decisions could facilitate settlement.

On the Horizon

There is some indication that the MIA has begun to make findings of lack of good faith in settling first-party property and casualty claims outside of the administrative process for lack-of-good-faith complaints. In other words, where policyholders file complaints with the MIA, but outside of the lack-of-good-faith procedure, commissioners are looking for ways to find that carriers have acted in the absence of good faith and to impose the penalties that otherwise would have been available had the complaints been filed within the lack-of-good-faith procedure. This does not appear to be what the General Assembly intended in passing the lack-of-good-faith statute, but there have not yet been any court challenges to such rulings.

Conclusion

So far, it appears that Gov. O'Malley was correct in saying that this law would reduce litigation. However, he was wrong when he implied that carriers do not make offers in good faith. Suffice it to say, carriers that diligently and fairly evaluate first-party property and casualty claims in Maryland have little to fear from this administrative process.

William J. Carter, James P. Steele and Mariana D. Bravo are members with Carr Maloney P.C., a regional law firm serving the mid-Atlantic with offices in Washington, DC, Maryland and Virginia. The firm's attorneys have advised and represented clients in a variety of contexts, including coverage litigation, and strategic claim advice and analysis. For more information, visit www.carrmaloney.com.

Bad faith claims have long been a source of concern for insurance companies. These claims potentially expose carriers to extracontractual damages, including attorneys' fees and punitive damages. This article focuses on how one state, Maryland, has chosen to address first-party bad faith claims arising out of property and casualty insurance policies. Maryland's experience handling these disputes teaches lessons to both carriers and insureds.

Maryland's First-Party Lack-of-Good-Faith Cause of Action

Since October 2007, insureds in Maryland have had a statutory cause of action against carriers that fail to act in good faith in settling a first-party claim under a property and casualty insurance policy. Maryland Code, Insurance Article ' 3-1701. It is now a violation of Maryland's Unfair Claims Settlement Practices Act for a carrier to fail to act in good faith in deciding first-party property and casualty claims. Maryland Code, Insurance Article ” 27-303(9) and 27-304(18).

The administrative procedure for prosecuting the claim requires the insured to file a complaint with the Maryland Insurance Administration (“MIA”) and produce all documents supporting its claim. Maryland Code, Insurance Article ' 27-1001. The carrier must answer and produce its entire claims file. The carrier may withhold privileged or otherwise protected documents, subject to an in camera review by the MIA. The MIA can: 1) order the carrier to produce the withheld documents and 2) consider the fact that they were withheld when determining the issue of good faith. The MIA will decide the case no later than 90 days after receiving the complaint. Either party may appeal the decision to an administrative law judge within the MIA or to the Circuit Court. The appeal is heard de novo.

The Floodgates Have Not Opened

Some in the insurance community feared that the law would increase litigation. The law's administrative procedure gives insureds free discovery and the opportunity to test legal theories before filing suit. The law also contains a fee-shifting provision as added incentive to the plaintiffs' bar.

By contrast, Maryland Gov. Martin O'Malley felt the law would reduce litigation. In encouraging the General Assembly to pass the law, Gov. O'Malley argued that the law “will encourage insurers to make fair offers, in good faith, and not force policyholders to pursue litigation to collect what is due to them.”

In operation, the law has not opened the litigation floodgates, and most decisions have favored the carriers. According to the MIA's annual reports for fiscal years 2008 through 2010, the MIA handed down 94 decisions. Since the end of fiscal year 2010, the MIA has published an additional 14 decisions. Sixty-six of these 108 decisions involved UM and/or PIP issues with the remainder involving property claims. The MIA decided in favor of the carrier 84 times and in favor of the insured in six cases. The lowest award was $11,234.10, and the highest was $246,250.

Lessons to Be Learned

Carriers

Make Your Claims File Sparkle. A solid claims file that supports a carrier's case value will likely carry the day. A claims file that demonstrates repeated attempts to reduce the claim's value, as recommended by the claim handler, is a recipe for disaster.

Don't Dismiss Evidence Supporting the Claim. Consider evidence in your claims file that supports the insured's claim. If the file contains a records review supporting the claim, at least in part, account for that in valuing the case.

Know the Law. One carrier ran into trouble when it consented to settle with the tortfeasor and then tried to raise tort defenses to the UM claim, which Maryland law does not permit. Another carrier was on notice of the tort case and chose not to intervene, thereby exposing itself, under Maryland law, to the jury's verdict in the tort case.

Follow the Procedures. One carrier responded to an insured's complaint with only a letter from a claims supervisor. The MIA replied, advising the carrier of its obligations. Rather than providing the entire claims file, the carrier supplanted with only the insured's medical records. The MIA relied on this in finding an absence of good faith.

Privilege Concerns. To date, no carrier has been compelled to produce protected material. In the decisions reviewed for this article, only once did the MIA consider a carrier's failure to comply with the production requirements when rendering its decision, and that case involved a carrier who outright failed to produce its claims file.

Insureds

Have Something More Than a Mere Disagreement over Value. The MIA will not side with insureds where the sole dispute is a disagreement over competing case values. Your claim looks weak when there is a large gap between the amount of medical bills and policy limits.

Support Your Claim. In one case, the insured failed to attach to the complaint copies of the materials it sent to the carrier to prove the loss. The MIA noted that it could dismiss the case for that reason alone, but dismissed the case on the merits anyway. Also, the MIA will not automatically award attorneys' fees of 33% of the damages award, so if you are going to ask for 33%, be able to support it.

Be Realistic. In one case, the insured relied on the carrier's failure to use the “customary multiplier” for Maryland claims of “five times special damages.” In two other cases, the insured included several claims that were not covered by the law. Overstating your case will cause the MIA to focus on your claim rather than the carrier's good faith.

The First Bite at the Apple. The production requirements are free discovery. The de novo appeal to the ALJ or Circuit Court means you can test your legal theories and tailor any subsequent complaint to address perceived weak points.

Carriers and Insureds

Listen to the MIA. The MIA frequently reminds the parties that it is merely deciding whether the carrier acted in good faith, and that future litigation is possible. In these comments, the MIA reflects how a neutral third party would value the case. In that way, MIA decisions could facilitate settlement.

On the Horizon

There is some indication that the MIA has begun to make findings of lack of good faith in settling first-party property and casualty claims outside of the administrative process for lack-of-good-faith complaints. In other words, where policyholders file complaints with the MIA, but outside of the lack-of-good-faith procedure, commissioners are looking for ways to find that carriers have acted in the absence of good faith and to impose the penalties that otherwise would have been available had the complaints been filed within the lack-of-good-faith procedure. This does not appear to be what the General Assembly intended in passing the lack-of-good-faith statute, but there have not yet been any court challenges to such rulings.

Conclusion

So far, it appears that Gov. O'Malley was correct in saying that this law would reduce litigation. However, he was wrong when he implied that carriers do not make offers in good faith. Suffice it to say, carriers that diligently and fairly evaluate first-party property and casualty claims in Maryland have little to fear from this administrative process.

William J. Carter, James P. Steele and Mariana D. Bravo are members with Carr Maloney P.C., a regional law firm serving the mid-Atlantic with offices in Washington, DC, Maryland and Virginia. The firm's attorneys have advised and represented clients in a variety of contexts, including coverage litigation, and strategic claim advice and analysis. For more information, visit www.carrmaloney.com.