Study 4: Risk and Governance - Summary (Part 2) Flashcards
Principles of estoppel
Party A is barred from relying on a position that Party A would normally be entitled to rely on, because Party A did or said something that:
- caused Party B to believe Party A would not rely on that position (directly or by interference), and
- caused Party B to do something that would be to Party B’s detriment if Party A were to later rely on their position
In this circumstance, Party A is estopped from doing something they would otherwise be entitled to do
Difference between estoppel and waiver
A waiver is when Party A intentionally gives up its ability to rely on a position they normally would rely on, and communicates this to Party B
Risk of estoppel in a fraud claim and policy fraud investigation
- Risk of an insurer being estopped comes from the actions, or inaction, of the insurer during its investigation because the outcome is not yet known
- Best practices to avoid estoppel: transparency with the policyholder that an issue exists that is worthy of investigation
- Best practice should also include explanation of investigative process, timing, and potential consequences
Effect of investigation delays in fraud cases
- Delays are the most common contributor to the risk of estoppel
- Policyholders can argue that they believed everything was proceeding normally during periods of silence or inactivity
- Ex. an insurer takes an extra month to conclude no fraud on a property loss, so an estoppel defence could be successful for steps the policyholder took to remediate the loss of their house and contents
Two key mechanisms to remove estoppel
- Non-waiver agreement between parties
- Reservation of rights letter
Non-waiver agreement
- Presented by the insurer to the insured when the insurer believes coverage may not apply, based on their knowledge of the claim circumstances
- Insurer is protected from claims of waiver or estoppel
- Involves joint acknowledgement that the insurer’s investigation does not waive the insurer’s right to deny or contest coverage later
- Little benefit to the insurer if the insured signs the agreement without understanding it
Non-waiver agreement forms can become confusing for an insured when…
- the insurer’s representative explains that some circumstances listed in the form do not apply to the current issue or circumstances;
- legal language used to set out the agreement is difficult for the insured to comprehend; and
- the reason for requesting the agreement is related to fraud, yet there is no mention of a fraud-related concern in the agreement.
Reservation of rights letter
- Unilateral notification by an insurer to an insured that the insurer intends to investigate, or is investigating, without prejudicing its rights or position
- Insured should not assume entitlement simply because insurer is investigating
- Commonly used when cause of loss is not yet known, or when coverage of the loss is unclear
- Removes estoppel and asserts the insurer is not waiving any of its rights by investigating
Non-waiver agreements or reservations of rights in potential fraud cases
When an insurer issues a reservation of rights letter or requests an insured to enter into a non-waiver agreement, and the issue is potential fraud, it is incumbent on the insurer to cite potential fraud as the reason.
Best practices for insurers when requesting an insured enter into a non-waiver agreement or reserve its rights
- include in the process a recorded interview, establishing a record of the explanation from the insurer’s representative of the content and reason for the reservation of rights or non-waiver agreement; and
- ask the insured to state his or her understanding of the explanation. This often requires back-and-forth dialogue until the insurer’s representative is satisfied with the insured’s level of understanding.
Two types of legal privilege
- Solicitor–client privilege—This is the protection of confidential communication between a lawyer and a client.
- Litigation privilege—This is the protection a lawyer has in collecting privileged information to prepare a case for or during litigation.
Common insurer practices to protect disclosure of an investigation of a claim using litigation privilege include…
- retaining a lawyer (usually an in-house lawyer);
- ensuring all investigative activity is organized by the lawyer;
- addressing or copying investigative and expert reports to the lawyer;
- labelling all communications, documents, and reports as “privileged and confidential”; and
- having the lawyer manage and retain the relevant portion of the claim file rather than the insurer.
Requirements for litigation privilege in claim investigations
For insurers, there can be a false sense of protection when retaining a lawyer and invoking privilege. If challenged, the insurer may not be able to rely on privilege and must disclose the record, unless they can demonstrate:
- the existence of litigation
- that it anticipated litigation; or
- that the opposing party anticipated litigation
Best practices for use of litigation privilege in potential falsified claim fraud investigations
- In circumstances involving potential fraud, there should never be a situation where information gleaned during an investigation that supports a conclusion of fraud or presumed fraud needs to be protected by litigation privilege.
- At the time an insurer is investigating a case that it considers to be potential falsified claim fraud, the insurer should investigate with the mindset that no information or record in the investigative file will be protected by legal privilege.
Bad faith
- Conduct that is contrary to utmost good faith
- Utmost good faith must always prevail, even during matters alleging fraud
- Insurer is typically heavily scrutinized to ensure they do engage in bad faith practices
