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Difficulty: MediumUnfair Claims Settlement Practices

A commercial general liability insurer is evaluating a third-party injury claim that occurred on their policyholder's premises. As the investigation progresses, the claims department initiates several procedural steps.

Which of the following actions by the insurer would constitute Unfair Claims Settlement Practices? (Select all that apply)

  1. Demanding that the claimant submit a formal proof of loss form after they have already provided a preliminary claim report that contains substantially the same information.Answer
  2. B
    Sending a written notification to the claimant explaining that the investigation will require an additional 30 days to complete and citing the specific reasons for the delay.
  3. Delaying the settlement of the bodily injury portion of the claim, where liability is reasonably clear, to influence the settlement of the separate property damage portion.Answer
  4. D
    Issuing a reservation of rights letter to the policyholder to preserve the insurer's legal defenses while continuing to investigate questionable coverage details.

Answer

The actions that constitute Unfair Claims Settlement Practices are demanding redundant paperwork (such as a formal proof of loss when a preliminary report already contains the same information) and delaying a clear-liability bodily injury settlement to improperly influence a property damage settlement.
Under the NAIC Unfair Claims Settlement Practices Act, insurers are strictly prohibited from requiring redundant paperwork (such as demanding a formal proof of loss when a preliminary report with the same information was already submitted) and from using one portion of a claim where liability is clear to leverage a settlement on another disputed portion.

Step-by-Step Solution

1
Evaluate the requirement for duplicate forms.
Demanding a formal proof of loss that duplicates a preliminary report is an unfair practice used to create unnecessary delays.
The NAIC Model Act strictly prohibits delaying investigations by requiring substantially the same information multiple times.
2
Evaluate the extension of the investigation timeline.
Notifying the claimant of a 30-day delay with valid reasons is a compliant procedural action, not a violation.
Statutory timelines allow for extensions if the insurer formally communicates the need and rationale in writing.
3
Evaluate leveraging one coverage against another.
Withholding payment on a clear-liability bodily injury claim to force a cheaper property damage settlement is an unfair practice.
Each portion of a claim must be settled in good faith on its own merits once liability has become reasonably clear.
4
Evaluate the use of a reservation of rights letter.
Issuing this letter is a standard legal step to protect the insurer, not an unfair practice.
It lawfully prevents the legal doctrines of waiver and estoppel from forcing the insurer to cover a potentially excluded loss.

Key Concept

Unfair Claims Settlement Practices
Estimated Time:1m 30s
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Unfair Claims Settlement Practices

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