The Ramifications of a Less-Than-Thorough Investigation

10/25/2017 Articles

An insurance carrier has declined to defend a claim asserted against its insured, arguably without meeting its obligation to investigate the claim. For whatever reason— a change in personnel, loss of a file, or some other motivation—the carrier has done little, if anything, to investigate the claim tendered to it: no Google search, no phone calls, and very little factual investigation other than the information tendered by the insured. The carrier has, however, relied on the plain language of the policy, and the few facts of which it was aware supported its denial.

But when a court later finds that the carrier’s coverage position was wrong— the facts in existence created a potential for coverage and hence triggered the carri­er’s duty to defend—the insured may argue that its carrier’s failure to investigate sup­ports a finding that it breached the implied warranty of good faith and fair dealing; that is, the insurer acted in bad faith. This leads to two questions:

  • In defending itself against its insured’s bad-faith claim, can the carrier rely on facts that it would have discovered—had it conducted a more complete investi­gation—that tend to show the coverage question was a close one and thus the denial was reasonable?
  • Could the existence of a genuine dispute over the potential for coverage insu­late the carrier from bad-faith liability, even if the carrier had failed to investi­gate thoroughly, particularly when the dispute involves a third-party insur­ance policy?

In this article, we review possible an­swers to these questions from the per­spective of both insurance carriers and policyholders in both first- and third-party contexts. Not surprisingly, with the law un­settled, carriers and their policyholders may reach different conclusions. As the depar­ture point for our analysis, we briefly re­view what the covenant of good faith and fair dealing that is implied in every insur­ance policy requires.

Link to PDF of full article. Published in For the Defense, October 2017. Reprinted with permission.