Bad Faith Sanctions: How Insurance Companies May Be Held Accountable for Reckless Investigations
Updated: Aug 19, 2020
Amid the COVID-19 pandemic, policyholders submitting claims need to be on the lookout for missteps by their insurance companies. An Eleventh Circuit Court of Appeals case from 2016 is instructive. In Atlantic Specialty Insurance Company v. Mr. Charlie Adventures, LLC et al., the Eleventh Circuit overturned an insurance company’s victory because there was evidence the insurance company conducted a reckless investigation of the policyholder’s claim.
The policyholder's yacht was engulfed by a fire that began in the engine room. The yacht and its contents were completely destroyed. After the event, the policyholder notified the yacht's insurer of the claim and requested the insurance company pay out the policy limits.
The insurance policy at issue covered damage to the yacht and its contents up to the policy limits but excluded coverage for "[a]ny loss, damage or expense caused by or resulting from...marine life [or] [the policyholder's] failure to maintain the covered yacht in good condition and repair."
Over seven months after receiving notice of the claim, the insurance company denied the policyholder's claim stating the loss was not covered because the fire was "caused by or resulted from growth of marine life on or in the vessel, which restricted the intake or flow of water to cool the engine and exhaust system," and there were "maintenance problems related to the loss." The insurance company based its denial on the reports of two purported experts that it hired to investigate the claim.
However, the policyholder presented evidence that the purported experts formed the conclusion that the loss was not covered before actually investigating the loss. When presented with evidence contrary to their initial conclusion, the experts attempted to find support for their conclusion rather than reinvestigating to find the actual cause. The policyholder also presented evidence that the insurance company had sufficient information to know that the experts' reports were unreliable.
The Eleventh Circuit held the evidence presented by the policyholder was enough to send the case against the insurance company to trial.
Although most businesses are currently facing the effects of COVID-19 and not damage to a yacht, the same principle applies: an insurance company must conduct their investigation in a good faith attempt to determine coverage and, if they do not, policyholders can hold them accountable.
The case discussed above is Atlantic Specialty Insurance Company v. Mr. Charlie Adventures, LLC et al., 644 Fed. Appx. 922 (11th Cir. February 29, 2016).
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Disclaimer: This post is for general information purposes only and is not intended to be and should not be taken as legal advice.