This article explains why understanding Louisiana’s laws governing “bad faith” in property and title insurance policies is important to property owners and insurance companies alike.

Why Understanding “Bad Faith” in Property and Title Insurance Matters

Hurricane season may be an annual reminder, but it is always important for commercial and residential property owners and insurance companies to fully understand Louisiana’s laws governing property and title insurance. One aspect of these policies that insureds and insurers alike should be familiar with are the laws that govern insurers’ “bad faith” in adjusting and paying property-related insurance claims.

For the people and businesses that purchase property or title insurance, they need to be aware of their rights to prompt service, frequent communication and timely tender of payment by the insurers under the policy. For those in the insurance industry, they need to understand these guidelines because courts that find insurers in “bad faith” can award the insured claimant damages, substantial penalties and attorney’s fees.

What the Law Says

Property-related “bad faith” law is codified in Louisiana’s Insurance Code under La. R.S. 22:1892 and in Louisiana’s Fraud and Unfair Trade Practices Act under La. R.S. 22:1973(B)(5). Both statutes prohibit the same conduct: failure to timely pay (or offer to settle) a claim after receiving satisfactory proof of loss when the failure to pay is “arbitrary, capricious or without probable cause.” The primary difference in the statutes is that La. R.S. 22:1892 requires an insurer to pay the claim within 30 days of receiving satisfactory proof of loss, while La. R.S. 22:1973 applies a 60–day period.

An insured claimant seeking bad faith penalties must prove three things:

• The insurer received a satisfactory proof of loss;
• The insurer failed to pay the claim within the applicable time period; and
• The insurer’s failure to pay was arbitrary, capricious or without probable cause.

For Property Owners, “Satisfactory Proof of Loss” Must Be Written and Timely

“Satisfactory proof of loss” does not require any formal style, but it must be sufficient to fully apprise the insurance carrier of the claim and the extent of damages. Those who are making insurance claims should inform their insurer of the claim in writing and provide all relevant information, such as damage descriptions and estimates, as quickly as possible. They should also comply with the insurer’s requests for additional information because courts often refuse to award “bad faith” penalties when the insured does not cooperate or withholds information.

For Insurers, the Payment of Claims Must Be Within a Designated Time Period

When an insurer determines that it has a satisfactory proof of loss, it generally must pay or offer to settle the claim within 30 days. If the insurer fails to pay the claim within the designated time period, the question becomes whether the failure to pay is “arbitrary, capricious or without probable cause.” This will depend on the individual facts of each case. Courts have found that penalties are inappropriate when the insurer has a reasonable basis to defend the claim and acts in good-faith reliance on that defense. Further, an insurer need not pay a disputed portion of a claim where there are substantial and legitimate questions as to the extent or cause of the insurer’s liability or the insured’s loss.

However, an insurer must pay any undisputed amount, or the amount over which reasonable minds could not differ. Failure to tender an undisputed amount will result in “bad faith” penalties. Notably, insurers generally bear the risk of erroneously interpreting their own policies, and courts may impose penalties if they find that an insurer failed to pay a claim, or a portion of the claim, based on such an erroneous interpretation.

Investigating Claims and Initiating Loss Adjustment Must Happen Within a Definitive Time Period

In addition to the obligation to timely tender payment of claims, Louisiana’s Insurance Code also requires insurers to investigate the claim and initiate loss adjustment within 14 days after notification of the loss by the claimant, or in the case of catastrophic loss, within 30 days after notification of the loss. This requires the insurer to take “substantive and affirmative steps” to accumulate the facts that are necessary to evaluate the claim; simply opening a file is insufficient.

In addition, the insurer must keep the insured advised of the status of the litigation and respond to all inquiries within 14 days. Of course, insurers are also prohibited from making misrepresentations to their insureds about the facts of the case or coverage under the policy.

The Upshot for Both Property Owners and Insurance Companies

Both insured parties and insurance companies should keep these principles in mind during the claims adjustment and payment process. If a question arises regarding whether these standards are being followed, the insured or insurer should consult legal counsel. Counsel can help determine whether the activity rises to the level of “bad faith” and advise insureds and insurers of theirs rights and obligations related to the potential “bad faith” activity.