In Walker v. Progressive Direct Insurance Co., No. 09-CV-556-TCK-PJC (N.D.Ok. 10/29/2010), the United States District Court for the Northern District of Oklahoma, dealt with a case accusing an insurer of fraud in the handling of an automobile theft claim. The court found that at all times relevant Plaintiffs Rocky Walker ("Rocky") and Kristi Walker ("Kristi") (collectively "Plaintiffs") were covered by a Progressive insurance policy ("the Policy") that provided "comprehensive coverage" for Plaintiffs' 2003 Chevrolet Tahoe ("Vehicle").

On or about July 27, 2008, the Vehicle, which had been affixed with a "For Sale" sign, was stolen from an empty parking lot where it had been left by Plaintiffs. The Vehicle was thereafter found abandoned on the property of a Mr. James Duvall. On July 29, 2008, Kristi reported the theft to Progressive. Kristi also informed Progressive that there were two keys to the Vehicle and that Plaintiffs were in possession of both keys. Kristi further informed Progressive that she and Rocky were in Branson, Missouri at the time the vehicle was stolen.

On August 5, 2008, Melissa Piper ("Piper"), a Progressive employee, inspected the Vehicle at Garrett Wrecker Service, Inc. to determine if the Vehicle's column had been compromised and whether the Vehicle was totaled. Piper concluded the column was not compromised and the Vehicle could be repaired. Piper prepared an estimate for the Vehicle of $2,296.11. Thereafter, the Vehicle was, at the request of Plaintiffs, transported to Jim Glover Chevrolet of Tulsa, Oklahoma ("Jim Glover"). Jim Glover prepared an estimate for repair of the Vehicle, totaling $11,668.80.

As explained by Progressive in its Motion for Summary Judgment and undisputed by Plaintiffs, there are "red flags of fraud" that have been identified by insurers and serve as indicators of insurance fraud. Specifically, it is standard in theinsurance industry to refer a claim to a Special Investigations Unit ("SIU") for fraud when a vehicle is "for sale" at the time of loss, the column is not compromised, the vehicle is a "gas guzzler," and all keys are in the insured's possession after the reported loss. Because these factors were present in the instant case, Progressive sent a letter to Plaintiffs on August 25, 2008, informing them that their claim was being investigated by Progressive's SIU and under a reservation of rights. The letter stated that it was "not a denial of coverage" and that Progressive would inform Plaintiffs "of the coverage decision as soon as a determination is made."

Also on August, 25, 2008, Kristi requested another inspection of the Vehicle because she was dissatisfied with the estimate previously provided by Progressive. That same day, a Progressive employee responded to her request and conducted a second inspection of the Vehicle. During this inspection, the Progressive employee was made aware of the fact that despite Kristi's previous assertion that there were two keys to the Vehicle, there were actually three keys. The court accepted a February 25, 2010 expert report by Barry Zalma ("Zalma"), Progressive's expert, that cited the existence of the third key to conclude that Plaintiffs "misrepresented a material fact" in reporting only two keys to the Vehicle. Thereafter, during a March 30, 2010 deposition of Jim Glover employee Todd Gilliart ("Gilliart"), Progressive learned the origin of the third key - namely, that Gilliart made the third key for his use after the Vehicle was brought to Jim Glover.

A supplemental estimate was prepared by Progressive on September 4, 2008, which totaled $7,040.92. Thereafter, on September 9, 2008, Progressive asked Kristi to provide all sets of keys to the Vehicle and copies of vacation photographs as proof of Plaintiffs' assertion that they were in Branson, Missouri at the time of the theft. On September 25, 2008, Progressive received copies of Plaintiffs' vacation photos and a single key to the Vehicle. Upon review of the photographs, Progressive concluded that the photos had been altered and were not originals.

A note in Plaintiffs' claim file dated October 22, 2008 states that the SIU investigation "determined there [was] no evidence to indicate that [Plaintiffs] were involved in the theft/bur[n]ing of their [Vehicle]." The note listed the "evidence" as follows: (1) Plaintiffs produced three keys to the Vehicle; (2) Plaintiffs sent pictures from their vacation; and (3) Plaintiffs admitted that the Vehicle was for sale and parked at a public lot. The note further stated that Plaintiffs had ceased cooperation, and that SIU would continue the investigation to determine the cause of loss if and when Plaintiffs resumed cooperation.

On November 3, 2008, Progressive received an e-mail from Rocky, stating that "no one ha[d] called [Plaintiffs] in over a month about [the Vehicle] and no one [would] tell [them] anything about [the Vehicle." That same day, Progressive employee Doug Mallory ("Mallory") spoke with Kristi, who denied receipt of the October 16, 2008 Letter. Mallory asked Kristi about the Branson photographs, and Kristi explained that the photos were taken with a blank background at a location named "Dixie Stampede" and that they were able to then select a background. Kristi also provided a website where Mallory could review the photos. Mallory reviewed the website and confirmed that the pictures and dates matched those forwarded to Progressive by Plaintiffs.

On November 17, 2008, Progressive rescinded its reservation of rights letter and concluded that it had resolved the coverage issue, and advised the insured that Progressive will be providing coverage for your loss. The record reflects that after the investigation was closed, Plaintiffs did not authorize repair work to be completed on their Vehicle until April 2008 due to, inter alia, the discrepancy in the estimates provided by Progressive and Jim Glover. Prior to such authorization, on February 2, 2009, Progressive issued payment to Plaintiffs in the amount of $6,040.92, which constituted the amount of Progressive's estimate less the $1,000.00 deductible as provided for under the Policy. As of the date of filing of Progressive's Motion for Summary Judgment, Plaintiffs had not cashed said check.

On June 12, 2009, Plaintiffs brought suit against Progressive in the District Court in and for Tulsa County, State of Oklahoma, asserting a single claim of bad faith and requesting punitive damages.

The District Court noted that a central issue is whether the insurer had a good faith belief in some justifiable reason for the actions it took or omitted to take that are alleged to be violative of the duty of good faith and fair dealing. A party prosecuting a claim of bad faith carries the burden of proof and must plead all the elements of the intentional tort. A jury question arises only where the relevant facts are in dispute or where the undisputed facts permit different inferences as to the reasonableness and good faith of the insurer's conduct.

Plaintiffs make clear that their bad faith claim is founded on the contention that Progressive's investigation was both "untimely" and "improper," and does not concern the disagreement between the parties concerning the value of loss or Progressive's right to conduct a fraud investigation. Plaintiffs' allegation that Progressive conducted an "untimely" and "improper" investigation is based upon Progressive's handling of (1) the third key and (2) the photographs from Plaintiffs' Branson vacation. With regard to the third key, Plaintiffs contend that Progressive's actions were unreasonable because Progressive "drew an inference that there had to be an extra key [and] its expert relied on [Progressive's] statements that there was a third key, but it was later determined that the third key was made at request of and was in the possession of [Jim Glover]."

Plaintiffs provided scant argument in support of their assertion that Progressive's investigation was unreasonable. Although Plaintiffs take issue with the manner in which Progressive handled the third key and the Branson photographs, the Court does not find the specific allegations asserted by Plaintiffs to rise to the level of bad faith. For example, although Progressive did not immediately call Dixie Stampede to confirm the legitimacy of the Branson photographs, as Plaintiffs contend should have occurred, Progressive determined the validity of the pictures by other means.

Moreover, the court noted that Plaintiffs' reliance on Zalma's use of the third key in his expert report is misplaced, as this report was prepared in the course of this litigation and was not part of Progressive's investigation, making it inapplicable to Plaintiffs' bad faith claim and was used to explain the reason for the additional SIU investigation. Although it might have been preferable for Progressive to determine the origin of the third key prior to Gilliart's deposition, the court noted that the law holds that "an insurer's investigation need only be reasonable, not perfect."  The Court found that Progressive's investigation was indeed reasonable and does not encompass conduct supporting a bad faith claim.

This case is important to all insurance fraud investigators since it establishes that a fraud investigation, properly documented, and the delays required by such an investigation, do not rise to the level of bad faith. I was pleased to participate in the case and to assist the court in understanding why insurance fraud investigations are important to the public as well as the industry and that a reasonable and thorough fraud investigation is a defense to a suit for bad faith. Plaintiffs' counsel should note that when an insurer agrees to pay a claim within a reasonable time after starting its investigation under a reservation of rights, counsel and clients waste their time and money pursuing a bad faith claim.


Barry Zalma, Esq. CFE, is an insurance fraud expert.  He acts as an expert witness in legal actions involving insurance fraud.  Readers may write to Barry Zalma at zalma@zalma.com