Written by Brian James
The relationship between an insurance carrier and the insured is fluid and dynamic. When a claim is initially received by the insurer, considerations of good faith and fair dealing require the insurer to make investigation of the claim within a reasonable time. Griggs v. Bertram, 88 N.J. 347, 360 (1982) (citing Fireman’s Fund Ins. Co. 72, NJ 63, 73 (1976)). While this investigation may ultimately be for the benefit of the insured, in that it results in the payment of benefits, a thorough investigation may uncover that the damages sustained by the insured were caused by a risk not anticipated by the policy. New Jersey Courts have explicitly indicated that upon the receipt of a claim or notice of a potential claim, “an insurer is entitled to a reasonable period of time in which to investigate whether the particular incident involves a risk covered by the terms of the policy.” Id. at 357.
The operative term is reasonable. After this reasonable time for an investigation has lapsed, or the carrier has “learned of grounds for questioning coverage”, the insurer has an affirmative duty to “promptly inform its insured of its intention to disclaim coverage or the possibility that coverage will be denied or questioned.” Id. (citing Merchants Indemnity Corp. v. Eggleston 37 NJ 114, 131 (1962).
The duty to inform the insured exists because, during that reasonable time during which the carrier performs an investigation, an insured could, theoretically, undertake his/her own investigation and preparation of the claim. Id. at 360. The Courts are clear in their view that the terms of the policy essentially grant the insurer the “exclusive right …to control the claim and to effectively deter the insured from taking any action that will interfere with the insurer’s right to control the matter.” Id. at 362. Absent any indication from the insurer to the insured that is “inconsistent with, or…clearly indicative of a repudiation of its contractual rights” under the policy, the Courts respect an insured’s reasonable expectation that the insurance company will “fully protect the insured’s interest under the policy.” Id. If a substantial amount of time has passed between the insurer’s receipt of the claim, and a notice of disclaimer of coverage, during which the insured has justifiably relied on the insurer to protect the insured’s interests, the Court may consider the notice untimely and prevent the insurer from disclaiming coverage at that later juncture. A late notice of disclaimer of coverage is fodder for a bad faith claim; a timely notice of disclaimer of coverage can keep the file updated, the insured well informed and will prevent the likelihood of a bad faith claim.
What is “reasonable” is almost always a factual determination, which will likely be determined by the complexity of the claim, and how well informed the insured is during the process. An adjuster that conducts a thorough investigation will have good claims notes that argue strongly that a reasonable time was taken for a claim investigation. An adjuster that keeps good notes and gives the insured prompt notice of the claim drastically reduces the chances of being hit with a headache inducing bad faith claim.