10.3 Liability Loss Investigation, Evidence Gathering & Dealing with Coverage Disputes

Liability Loss Investigation, Evidence Gathering & Dealing with Coverage Disputes

Quick Answer: In a third-party liability claim, the adjuster must determine whether the insured is legally liable in tort and verify the claimant's damages. Remember two classic PSI exam distinctions: (1) an insurer can demand an Examination Under Oath (EUO) only from an insured (never from a third-party claimant or witness, who can only be compelled via a court deposition during litigation), and (2) when a coverage question arises, a Reservation of Rights (ROR) letter is unilateral (signed only by the insurer), whereas a Nonwaiver Agreement is bilateral (signed by both the insurer and the insured).

Unlike first-party property claims—where the adjuster deals directly with the policyholder under contract terms—third-party liability claims require evaluating tort liability, preserving admissible evidence, and protecting both the insured and the insurer when coverage questions arise.

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1. Liability Loss Investigation & Michigan Comparative Fault

To owe a third-party liability payment, the insured must be legally obligated to pay damages because of bodily injury or property damage covered by the policy. Unless strict liability applies, the adjuster evaluates the four elements of negligence:

1. Legal Duty: Did the insured owe a duty of reasonable care to the claimant?
2. Breach of Duty: Did the insured fail to act as a reasonably prudent person (or violate a safety statute)?
3. Proximate Cause: Was the insured's breach the direct, unbroken cause of the injury (sine qua non / "but for" causation without an unforeseeable superseding intervening cause)?
4. Actual Damages: Did the claimant suffer quantifiable special damages (economic out-of-pocket medical bills, lost wages, repair costs) and/or general damages (non-economic pain, suffering, mental anguish, disfigurement)?

Apportioning Fault Under Michigan Modified Comparative Negligence (MCL 600.2959 & 500.3135)

Michigan follows Modified Comparative Negligence (the 51% Bar Rule for Non-Economic Damages):

• Economic (Special) Damages: Reduced strictly in proportion to the claimant's percentage of fault, even if the claimant is more than 50% at fault.
• Non-Economic (General / Pain & Suffering) Damages: Reduced by the claimant's percentage of fault if the claimant is 50% or less at fault, and completely barred ($0 recovery) if the claimant is more than 50% (51% or more) at fault!

Worked Example: In a premises slip-and-fall lawsuit, a jury awards a claimant $100,000 in economic medical/wage damages and $200,000 in non-economic pain and suffering, but finds the claimant 60% at fault for ignoring warning cones (and the insured store 40% at fault). Because the claimant is more than 50% at fault, the entire $200,000 non-economic award is barred ($0), and the claimant recovers only 40% of the economic damages ($40,000).

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2. Evidence Gathering, Witness Interviews & Damages Verification

Physical Evidence, Chain of Custody & Spoliation

A thorough liability investigation secures objective evidence before scenes change or memories fade:

• Physical & Scene Evidence: High-resolution scene photographs, scaled intersection diagrams showing sightlines and traffic controls, skid-mark and yaw-mark measurements, vehicle Event Data Recorders (EDRs / "black boxes") capturing pre-impact speed and braking, store surveillance or dashcam footage, weather data, and sweeping/maintenance logs.
• Official Reports: Michigan UD-10 Traffic Crash Reports, fire marshal origin-and-cause reports, MIOSHA citations, and municipal building code inspection records.
• Chain of Custody & Preventing Spoliation: When a product defect or mechanical failure (such as a ruptured braided water supply line, defective space heater, or sheared brake caliper) caused a loss, the adjuster must preserve the physical artifact in a secure evidence facility under a signed Chain of Custody log documenting every person who handled, transported, or non-destructively tested the item. Destroying, discarding, or altering key physical evidence is spoliation of evidence, which can result in severe court sanctions against the insurer or defeat subrogation.

Recorded Statements vs. Examinations Under Oath (EUO) vs. Depositions

Exam Trap Alert: If a question asks whether an insurer can demand an Examination Under Oath (EUO) from a third-party bodily injury claimant or an independent eyewitness to an auto crash, the answer is NO! Because third parties and witnesses never signed the insurance contract, the insurer has zero contractual right to compel them to attend an EUO. They can only be compelled to give sworn testimony through a court deposition subpoena after a lawsuit is filed.

Verifying Special & General Damages

To verify a bodily injury claim, the adjuster obtains:

• A signed HIPAA-compliant Medical Authorization allowing the adjuster to collect emergency room charts, diagnostic imaging, prior medical history (to distinguish pre-existing conditions from acute trauma), and itemized billing codes (CPT/ICD-10);
• An Employer Wage and Salary Verification Form confirming the claimant's occupation, hourly rate or salary, dates missed from work, and physician disability restrictions; and
• An Independent Medical Examination (IME) by a physician of the insurer's choosing when causation, medical necessity, or maximum medical improvement is disputed (authorized by statute under MCL 500.3151 for Michigan No-Fault PIP claims and MCL 418.385 for Michigan Workers' Compensation claims).

Determining the Value of Intangible (General) Damages

Pain and suffering, mental anguish, loss of enjoyment of life, and disfigurement come with no invoice, so the adjuster builds a reasoned settlement range from the facts:

• Nature and duration of the injury: severity, objective medical findings, length of treatment, any permanent impairment, and scarring.
• Special damages as a reference point: some evaluators apply a multiplier to the medical specials (higher for serious, permanent injuries) or a per diem amount for each day of recovery—these are starting points, not legal rules.
• Liability and Michigan thresholds: reduce the value by the claimant's share of fault, apply the more-than-50% bar on noneconomic damages (MCL 600.2959), and in auto cases confirm the No-Fault tort threshold—death, serious impairment of body function, or permanent serious disfigurement (MCL 500.3135).
• Venue and claimant factors: local verdict and settlement history, credibility, age, occupation, and the documented effect on daily life.
• Documentation: record the evaluation, the range, and the reasons in the file so a supervisor, defense counsel, or reviewer can follow the reasoning.

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3. Dealing with Coverage Disputes: Waiver, Estoppel, ROR, Nonwaiver & Dec Actions

How Waiver and Estoppel Arise in Claims Handling

• Waiver: The voluntary and intentional relinquishment of a known right (either express or implied by conduct inconsistent with enforcing a policy condition).
• Estoppel: An equitable doctrine that bars (estops) an insurer from asserting a coverage defense when the insurer's words or conduct led the insured to reasonably believe coverage applied, and the insured detrimentally relied on that conduct.

The Danger Zone for Adjusters: If an adjuster continues investigating a claim, takes control of settlement negotiations, or retains defense counsel to defend a lawsuit against the insured while knowing of a potential coverage defense (such as late notice, an excluded intentional act, or business pursuits exclusion) without formally notifying the insured that coverage is in question, a court may hold that the insurer waived its coverage defense or is estopped from denying coverage because the insured was deprived of the opportunity to control their own defense!

Comparing the Three Tools for Preserving Coverage Defenses

Duty to Defend vs. Duty to Indemnify & Formal Written Denials

• Duty to Defend Is Broader Than Duty to Indemnify: An insurer's duty to defend is triggered whenever any allegation in the third-party plaintiff's complaint even potentially or arguably falls within policy coverage (the "eight-corners rule" comparing the four corners of the complaint to the four corners of the policy). When an insurer defends a lawsuit under a Reservation of Rights because the complaint alleges both covered negligence and an excluded intentional tort, a conflict of interest may arise over how the defense is conducted, entitling the insured to independent defense counsel.
• Formal Written Denial (MCL 500.2026(1)(n)): If the investigation confirms that the loss is not covered, the adjuster must issue a prompt formal written denial letter that quotes the exact policy language and explains the specific basis in the policy in relation to the facts or applicable law. In Michigan, formal written denial is also critical because statutory limitation tolling on fire policies (MCL 500.2833(1)(q)) and No-Fault PIP claims (MCL 500.3145(3)) continues until the insurer formally denies the claim in writing.