E-Newsletter, February 2008

In this issue:

Maryland’s First Party Bad Faith Statute

James P. Steele

On October 1, 2007, a new law became effective in Maryland that, for the first time, permits insureds with first party property claims to sue their insurers for failing to act in good faith.  The law, which Governor Martin O’Malley signed on April 24, 2007, did three things.  First, it created a cause of action enabling policyholders to sue their insurers for failure to act in good faith in settling a first party claim under a property and casualty insurance policy.  Second, it amended Maryland’s Unfair Claims Settlement Practices Act to include as an unfair claims settlement practice the failure of an insurer to act in good faith in deciding first party property claims.  Third, the law set forth the procedure an insured must follow to prosecute the claim.

The new cause of action, which is found in Maryland Code, Insurance Article §3-1701, applies to actions to determine whether coverage exists in the first place, or the extent to which the insured is entitled to recover for a covered loss.  Under either scenario, the insured must allege that the insurer has failed to act in good faith, and seek (1) actual damages, (2) litigation costs and expenses and (3) interest.  An insured who proves his or her claim may recover actual damages (not to exceed policy limits), expenses and costs, including reasonable attorneys’ fees (not to exceed 1/3rd the amount of actual damages recovered) and interest.  An insurer will not be found to have failed to act in good faith based solely on delay in determining coverage or amount of payment for a covered loss if the insurer acts within a time specified by a statute or regulation.

Acts that violate §3-1701 now constitute violations of Maryland’s Unfair Claims Settlement Practices Act, Maryland Code, Insurance Article §§27-303(9) and 27-304(18).  In other words, it is an unfair settlement practices act for an insurer to fail to act in good faith in settling a first party property or casualty claim, either on one occasion or with such frequency as to indicate a general business practice.  The law empowers Maryland’s Insurance Commissioner to impose a penalty of not more than $125,000 for each violation of the Unfair Claims Settlement Practices Act, or applicable regulations.  The Commissioner may also order as restitution the damages recoverable under §3-1701.

The new bad faith law does not limit a party’s right to file a civil action for damages or other legal remedies.  However, an insured must follow an administrative procedure before electing a jury trial .  This procedure, which is found at Maryland Code, Insurance Article §27-1001, requires an insured to file a complaint with the Maryland Insurance Administration (MIA).  The complaint must include all documents the insured submitted to the insurer as proof of the loss, specify applicable coverage and the amount of the claim, and state the amount of actual damages and costs.

The MIA will forward a copy of the insured’s complaint to the insurer.  This triggers a thirty (30) day period in which the insured must submit a written response to the complaint.  The response must attach copies of each document from the claims file that will enable the MIA to reconstruct the insurer’s activities on the claim in question.  These documents include each pertinent communication, transaction, note, work paper, claim form, bill or explanation of benefits on the claim.  The insurer must serve a copy of its response with attachments to the insured.

Under the applicable regulations, an insurer may withhold from its production to the insured documents it believes are privileged or are otherwise protected by law from disclosure.  The insurer must provide the insured with an index, analogous to a privilege log, that describes the withheld documents.  The MIA will make an in camera inspection of the withheld documents and determine whether the insurer must disclose them.  If the MIA rules the insurer must disclose them, the MIA shall consider that the insurer withheld them when rendering its decision on the claim.

These regulations have grave implications for insurance companies concerning materials it believes are privileged or otherwise protected.  The MIA in camera review is not conducted by a trial judge, and complying with an MIA order to produce a document arguably waives a privilege that a Circuit Court judge may otherwise find exists.  In addition, an insurer may believe in good faith that it is withholding such materials only to be punished for doing so if the MIA disagrees with the insurer’s position.  It remains to be seen how these issues will play out, but I anticipate they will be hotly litigated for the next few years.

The MIA must, within ninety (90) days after it receives the filing, render a decision that determines:

  1. Whether coverage exists under the first party property or casualty claim;
  2. The amount of actual damages to which the insured is entitled;
  3. Whether the insured breached its obligation to pay the claim;
  4. Whether the carrier acted in good faith in so breaching; and

5. The amount of the damages award.

The law deems a failure of the MIA to render its decision within ninety (90) day period to be a decision in the insurer’s favor on the bad faith and breach issues.  Either way, this event brings the parties to the next step in the administrative process.

A party who feels aggrieved by the MIA’s decision has thirty (30) days to request an administrative hearing.  An MIA administrative law judge hears the matter de novo, and the ALJ’s ruling is considered a final decision on the claim. A failure to request a hearing within the thirty days renders the MIA’s decision final.

A party may appeal the MIA’s decision, or a decision of the ALJ, to a Circuit Court.  A Circuit Court judge likewise hears the matter de novo.  In cases that involve two or more insureds, where one requests a hearing and one appeals to the Circuit Court, the matter is transferred to Circuit Court and the hearing matter is consolidated with the Circuit Court appeal.

Maryland’s legislature, the General Assembly, for years tried, without success, to pass legislation creating such a cause of action.  Two events set the ball in motion to make the new law a reality.  First, in September 2003, Hurricane Isabel hit the mid-Atlantic region and caused an enormous amount of property damage in Maryland.  Many Maryland policyholders believed that the insurance companies were not paying their Isabel claims fairly or were unfairly denying coverage outright.  Second, Hurricane Katrina’s devastation of the gulf coast states brought renewed focus on the issue of first party property and casualty claims, enabling the law’s proponents to pass the legislation.

In March 2007, Governor O’Malley wrote the Chairman of the state House Judiciary Committee to support passage of the legislation, arguing that the “bill will reduce litigation, as it will encourage insurers to make fair offers, in good faith, and not force policyholders to pursue litigation to collect what is due to them.”  Insurance companies have valid reasons to decline coverage on some claims, and, contrary to the Governor’s assertion, this new law gives policyholders incentive to sue their carriers for claims that are denied.  So, will the new law discourage or encourage litigation?  The answer should become apparent in the next few years as Maryland wades into the new waters of first party bad faith.

1 An insured need not follow the procedure if the matter is within the small claims jurisdiction of the state District Court, if the parties agree to waive the requirement or if the action applies to a commercial insurance policy on a claim involving an applicable liability limit exceeding $1,000,000.

Applications and Interviews for Employment – Current Legal Requirements

Edward J. Krill and Tina Maiolo of Carr Maloney P.C.

Employers understandably want to know as much as possible about individuals who they may decide to hire.  An employer may believe, rightly or wrongly, that family circumstances, prior health history, credit problems, zealous religious observance orr sexual orientation can adversely influence an employee’s productivity, morale in the workplace or obtaining the right “fit” into existing corporate culture. Today, immigration status is a confusing and risky subject for all employers. Nonetheless, many of these personal topics are completely off limits during the employment Application and interview process.

This article provides an overview of the most important subjects that may come up during the period leading to an offer of employment.  The intent is to provide a summary of the subjects that an employer can legitimately inquire into and those that will create evidence of discrimination on the basis of prohibited criteria.  In an employee selection process, if improper inquiries have been made, it is presumed that the employer used that information in making the decision to offer employment to one person over another.  The applicant who is not selected is then in a position to assert that the unfavorable decision was made on the basis of an illegal consideration.

Before asking for any information from applicants, the employer needs to determine what that information has to do with the ability to do the job in question.  Random questions into personal characteristics such as “Do you have any hobbies?” “Who is your most admired person?” and “Name the last book you read.” are at times viewed as a back door means of learning the applicant’s private life, relationships and attitudes on subjects that would be off limits if asked directly.  Keep the Application focused on information that can predict how the applicant would perform the work.

For example, the inquiry “Can you speak, read and write English?” should really be three questions, and perhaps not all three are legitimate.  In the case of a retail clerk, writing English is not a bona fide question, since there is no need to write anything in the particular position applied for.  However, a clerk must speak to customers with some frequency, thus “Can you speak English?” is a legitimate occupational requirement for that position.  Reading English may or may not be essential to adequate job performance, since all purchases are bar coded and scanned for their price.  If an employer plans to ask about any ability, expertise, credential or personal characteristic, it must be related to whether or not the applicant needs that quality to do the job.

Applications for employment should focus on the following as relevant to the exact position sought, in an effort to determine qualification for a specific position.  Every question should be a version of the inquiry: “Can you do this job?” The following information, in most instances, will be considered a proper subject for an employment Application:

  • name, address, telephone number, start date
  • education, including degrees and dates of attendance
  • military service, branch, rank and location of service
  • employment including position title and compensation
  • significant work accomplishments, projects, duties
  • advancement during employment, promotions and awards
  • name of supervisor and reason for leaving prior employers
  • ability to perform specific tasks, such as typing, computer use
  • physical capacity to walk, stand, lift, carry if part of job duties
  • evidence of the right to work legally in the United States
  • personal, business and prior employment references
  • foreign languages read and spoken if relevant to the work
  • ability and willingness to work evenings, weekends and overtime

Asking for this information does not usually appear to be an effort on the part of the employer to identify and exclude protected classes of employees, a practice that can lead to charges of unlawful discrimination.  Stating on the Application that “The applicant should not list anything that may suggest race, religion, gender, marital status, age, color, national origin or physical handicap” is recommended to avoid having an apparently neutral question result in an unfortunate disclosure.

Asking for Social Security numbers is a special situation. Although employers may ask for this on the Application, this information is better requested once an offer of employment has been accepted.  An employer needs the SSN to complete the W-2 Form and should verify the SSN using the Social Security Number Verification Service.  However, given the current risks of identity theft, asking for it on all Applications appears unnecessary unless essential to a background check

Based on the Title VII of the Civil Rights Act of 1964, subsequent amendments and court decisions, it is never appropriate to ask an applicant to disclose any of the following information:

  • age: whether directly or indirectly, especially when the question would identify the applicant as between 40 and 64 years, a protected status under Age Discrimination in Employment.
  • citizenship: the Application can ask: “Are you legally authorized to work in the United States, yes or no; after an offer of employment has been accepted it is proper and required to obtain evidence of the right to work legally in order to complete INS Form I-9, however inquiry beyond that, such as whether the individual was born here or was naturalized, is unlawful.
  • national origin: a prospective employer cannot inquire into the country of origin of the applicant, his family or his parents, e.g. “what is your native language?”
  • affiliations: an employer should not ask “what organizations do you belong to?” since that inquiry has no relationship to job responsibilities and would be seen as an indirect effort to determine religious, political and other private information that an employment decision cannot be based upon.
  • marital status/family: in the pre-employment setting, questions regarding whether an employee is married, has children, is in a committed relationship or has been divorced are completely improper; only after hiring has been completed may such information be sought and then solely for benefit plan purposes.
  • contacts: while it is proper to ask who is to be notified in the case of an emergency after a person has been hired, this question is seen as an indirect way to determine marital status.
  • gender: in most cases this is an evident factor but the Application/interview process should not address it, including the applicant’s attitudes towards working with or being supervised by persons of the same or opposite gender.
  • political/party affiliation: since political orientation can tend to suggest an applicant’s views on prohibited subjects, it is best to leave this topic out of the Application and interview conversation.
  • plans for the future: asking how long the Application expects to be available for work suggests an inquiry into potential pregnancy when the applicant is female and into family responsibilities when the applicant is male, and is thus to be avoided.
  • physical characteristics/disabilities:  asking the height, weight, strength or past medical history of an applicant for a secretarial position bears no relationship to what would be required to perform that job and can be seen as part of a plan to eliminate individuals who may have physical conditions that are protected as disabilities under the ADA.

On the last point, using the retail checkout clerk as an example, asking “Can you stand for up to 6 hours a day at work?” appears legitimate.  But if the simple accommodation of a stool will obviate the need to stand, and especially if some current clerks use that support, the question would tend to needlessly screen out applicants who have moderate disability and, therefore, it is not a proper inquiry.  The ability to stand for up to 6 hours is simply not a requirement of the job.  Asking “Do you have a driver’s license?” is legitimate only if driving will be part of the job, not merely the means of travel to work.

Applicant’s express written consent should always be obtained for any inquiry beyond the employment interview.  This includes any credit check, criminal record search, contact with previous employers and references.  The disclosure of information by an applicant does not imply permission to verify it.  Under the Fair Credit Reporting Act, written applicant consent is required and if the report comes back with unfavorable information, the applicant must be told of that and given an opportunity to correct information that may not be accurate.  A form directed to each prior employer or reference by name, with the applicant’s express written consent to release information, together with the applicant’s waiver of liability for the release of information is suggested as most employers will not discuss a former employee without those assurances.

Criminal record searches are seen by some as improper unless the position is considered “security sensitive” since many view such events as past, closed and “the debt to society has been paid.”  An inquiry of the Application after each prior position that is listed, asking “May we contact this employer at this time?” is essential to paving the way for any contact with a previous job.  Many employers retain outside firms to make all inquiries and background checks of prospective employees.  This is recommended since such firms are familiar with the lawful methods of doing this and can protect the employer from liability from claims of employment discrimination and invasion of privacy.

If the employer will require testing, further background check, additional information as a condition of employment after an offer of employment has been accepted, this should be disclosed to all applicants.  For example, if a drug screen or other physical examination must be performed, the Application should so state and a consent form for the exam should be furnished.  The Application should also state that the results of such further steps may be grounds for terminating employment or withdrawing the offer of employment.

In summary employers should observe the principle that they should ask for and receive only that information about applicants that relate to the ability to perform the exact job applied for and should avoid all investigation of subjects such as race, gender and national origin.  If these principles are followed, the employment Application process should not become a source of liability for the employer.