One Claim, Two Lenses: Legal and Practical Implications of Splitting The Claim File
In the insurance industry, insurers often maintain split files for complex liability claims as an administrative control that enables their defense of an insured(s) while simultaneously investigating coverage issues. While some insurers maintain split files for all claims, others may do so on a claim-by-claim basis or upon request from the insured(s) if warranted under the circumstances of a particular claim. Insurers that have adopted split files in their administration of all claims generally maintain a coverage file and a defense file. Where insurers split the file on a claim-by-claim basis, the insurer is typically splitting the file so that there are separate files for insureds whose interests are adverse to one another in the litigation but at times, may also maintain separate defense and coverage files. Under either approach, what was once a single narrative in the claim file now becomes a duet, sometimes harmonious, sometimes discordant.
This article discusses the rationales behind splitting claim files and examples of cases where courts have held the manner in which the insurer implemented a split file may give rise to bad faith.
In a recent decision, the District Court for the Southern District of New York granted summary judgment for the insurer finding no defense or indemnity obligation for legal malpractice claims where the insured attorney and law firm received a notice letter prior to inception of a renewal policy but failed to timely report the letter in accordance with the requirements of the policy.[1] Among other arguments, the insureds asserted that the insurer was estopped from denying coverage based on its failure to split its claim file. In responding to the insureds’ arguments, however, the District Court remarked that the insureds could cite no authority for the proposition that New York law requires insurers to create an internal wall between the files maintained for their coverage investigation and the underlying liability defense at the first sign that the insurer might ultimately disclaim coverage. Rather, the longstanding precedent in New York confirms that a reservation of rights does not automatically create a conflict of interest between the insurer and the insured. The District Court instead remarked that the insurer had followed the textbook course of action in cases where coverage is questionable by defending the insured subject to a reservation of rights and seeking a declaratory judgment prior to its withdrawal from the defense. Accordingly, the insurer’s failure to split the file and appoint separate adjusters to handle defense and coverage did not support a claim against the insurer for breach of the implied covenant of good faith and fair dealing or result in coverage by estoppel.
The District Court for the Central District of California reached a different result, however, where the insureds alleged that the insurer failed to timely agree to their requests for independent counsel in response to an actual conflict of interest under California law. [2] In that case, the insurer argued there could be no conflict from its defense of both sides of the litigation because it had already split the claim files for each insured and appointed segregated liability adjusters. However, in reviewing the insurer’s motion to dismiss the pleading, the Court was limited to the allegations of the pleading and therefore, the insureds’ allegation that the insurer had assigned a single claims adjuster to oversee both files and that the adjuster had commingled information received from the policyholders, was sufficient to maintain their bad faith claims at the initial pleading stage.
This is consistent with the conclusions reached by the District Court for the Western District of Washington in permitting certain bad faith claims to proceed regarding the insurer’s handling of split files while rejecting others.[3] In that case, the District Court declined to find the timing of the file splitting unreasonable, unfounded or frivolous absent some showing of harm or prejudice from the insurer’s failure to split the file earlier. In its decision, the District Court detailed its review of the evidence in the record which suggested that the insurer may have improperly leveraged its knowledge of the two files in coordinating its responses to settlement negotiations. More specifically, the District Court pointed to cross-file communications which revealed in some instances “the separation between the files was occasionally functional.” In others, however, the communications “hint[ed] at what could have been improper file coordination” regarding a key coverage issue in a manner that could support the insureds’ assertion that the insurer ultimately prioritized its ability to disclaim coverage after trial. Thus, the District Court did not take issue with statements regarding the shared limits applicable to the claim, but expressed concerns about the discussions between the adjusters prior to their decision not to settle. In sum, the District Court found the notes and timing of these discussions could support a bad faith claim if the insurer improperly used information garnered from both files to determine that the insurer would be in the best position to disclaim after trial of the underlying matters and therefore, chose not to try to settle the claims prior to trial.
In sum, the available authority suggests that insurers do not have any obligation to split claim files and assign separate adjusters for the defense and coverage investigations simply because the insurer has agreed to defend the insured under a reservation of rights. However, where the insurer has agreed to provide counsel to multiple insureds whose interests are adverse in the underlying litigation, splitting the file may be appropriate to maintain the confidentiality of information provided by each adverse insured. Moreover, the procedures employed by the insurer in maintaining separate files and the manner in which the insurer uses the information received from the insureds may create bad faith exposure regardless of when the claim file is split. As such, insurers who maintain split claim files are encouraged to establish defined roles and boundaries between adjusters including appropriate barriers and limitations on cross-file communications and clear documentation protocols.
[1] Berkley Assurance Company v. John H. Fisher, P.C., 771 F.Supp.3d 292 (S.D.N.Y. Mar. 20, 2025).
[2] L.A. Terminals, Inc. v. United National Insurance Company, Case No. 8:19-CV-00286, 2020 WL 5820981 (Sept. 30, 2020).
[3] Specialty Surplus Ins. Co. v. Second Chance, Inc., No. C03–0927C, 2006 WL 2459092 (Aug. 22, 2006).