Avoiding or winning a bad faith claim is tricky business

This column will examine three loss situations that involved bad faith claims against an agent or insurance company. (The names of the people and companies involved have been changed.) These examples do not demonstrate all of the possible ways that an insurance agent can become involved in a bad faith situation.

Agents should not presume that their errors and omissions or umbrella contract will cover a bad faith claim. If neither of these contracts provides an agent with bad faith coverage, the agency may wish to endorse it. Usually, a bad faith action is tied to a covered loss, for example, claiming that an insurer did not properly handle a given loss.

Business income loss

Clear Blue, Ltd., located in an upper Midwest city, incurred a fire loss in the late 1990s. The business was a very large account for the agent, who had been writing its insurance for more than 20 years. he first wrote the account when the business was operating out of an old Main Street brick building. At the time of the loss, the insured business was located in a large, automatically sprinkled building. Its owners were also in the midst of securing financing to build another structure.

There was almost enough insurance on the structure and business personal property. Time element or business income insurance was the problem. Less than 10% of the business income exposure was insured. The insured had furnished to the agent a copy of its year-end financial statements. Many of us are familiar with the business income worksheet CP 15 15, developed and furnished by the Insurance Services Office. Determining the proper amount of business interruption is usually a tedious process. A common problem is that clients' accountants use different words to label the required information.

In this case, there was no need to complete a business income worksheet to determine the amount of loss of income exposure. Clear Blue's accounting had already determined the proper limit. Page 2 of the business's financial statements listed the annual business income exposure. In fact, it also showed the prior year's loss of income exposure. Using those two numbers, an insurance agent could easily make a projection of the loss of income exposure for the coverage period.