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Insurance Industry Practice of Splitting Claims Files Between Merits and Coverage Adjusters

September 21, 2021

A variety of potential conflicts of interest may arise when an insurance company defends its insured under a reservation of rights, such as the insurer may not defend a matter as vigorously as it normally would if the insurer knows that it can later assert a “no coverage position.” One common practice used by insurance companies to safeguard against potential conflicts of interest, or the appearance of impropriety, is to split the claims file between a merits adjuster and a coverage adjuster.

Splitting the claim file (sometimes referred to as creating a “conflict screen”) requires the insurance company to create one file for the investigation and defense of the liability claim (“merits”), and a separate file for the investigation of coverage issues. The insurer also assigns different adjusters to each of the separate files. In theory, this approach prevents the dissemination of potentially sensitive factual information discerned during the investigation and prosecution of the liability defense from being used by the insurance company to the disadvantage of the insured in the coverage action.

Although the case law addressing the issue of conflict screens in the insurance context is limited, the limited commentary recognizes the appropriateness of utilizing conflict screens for adjusting losses.

No Legal Duty to Split the File

The California Court of Appeals has held that the failure to utilize a conflict screen is not prima facia bad faith. State Farm Fire & Cas. v. Superior Court, 216 Cal.App.3d 1222, 265 Cal.Rptr. 372 (Cal. App. 1989). In State Farm Fire & Cas., the insureds sued their homeowner’s insurer, State Farm, for bad faith in relation to State Farm’s denial of coverage and alleged failure to defend the insureds adequately in an action against them by purchasers of their home who claimed damages for foundation defects.

State Farm accepted the defense under a reservation of rights and filed a declaratory relief action against the insureds. State Farm also satisfied its legal obligation under California law to provide independent counsel to the homeowners by agreeing to pay the fees of the attorney they had previously retained (“merits counsel”). State Farm then retained other counsel to pursue its declaratory relief action disputing coverage (“coverage counsel”). Instead of splitting the claims file between a separate merits adjuster and a coverage adjuster, State Farm had the same insurance adjuster handle both the liability action and the coverage action. The adjuster communicated directly with both the insureds’ independent merits counsel and State Farm’s coverage counsel.

Other jurisdictions have followed suit and held that while insurance companies may opt to split the claim file in appropriate cases, they have no duty to do so. See, e.g., Employers Ins. Of Wausau v. Albert D. Seeno Constr. Co., 945 F.2d 284, 286-88 (9th Cir. 1991) (the insurer had no duty to segregate liability and coverage activities, and the fact that other insurers chose to do so reflects a precautious decision to avoid later complaints of mishandling by the insured rather than an obligation to do so); United Servs. Auto Ass’n v. Bult, 183 S.W.3d 181, 187-188 (Ky. Ct. App. 2003) (concluding that insurer’s failure to assign two adjusters to claim involving multiple insureds and a single loss did not support bad faith claim); State Farm Fire & Cas. Co. v. King Sports, Inc., 827 F. Supp.2d 1364, 1378 (N.D. Ga. 2011) (rejecting, in a case applying Georgia bad faith law, the insured’s contention that the insurer had a duty to split the file and noting that the insured had cited no authority in support of its contention); Travelers Indem. Co. v. Page & Assocs. Constr. Co., 2002 WL 1371065, *10 (Tex. App. Ct. June 25, 2002) (rejecting insurer’s failure to split file as a basis for imposing liability under Texas Insurance Code and Deceptive Trade Practices Act).

Practical Considerations for Splitting the File

Even though an insurer may not have a legal obligation to split the file between a merits adjuster and a coverage adjuster, there are practical reasons why an insurer should do so. First, splitting the file may limit an insurer’s exposure to bad faith claims and coverage by estoppel in jurisdictions recognizing this doctrine. Under Wisconsin law, coverage that otherwise does not exist cannot be created through waiver or estoppel if the insurer does not issue a reservation of rights to its insured. Maxwell v. Hartford Union High Sch. Dist., 2012 WI 58, 341 Wis. 2d 238, 814 N.W.2d 484.

Second, splitting the file avoids even the appearance of bad behavior and may provide the insured assurance that he or she is being treated in good faith. Even the appearance of impropriety can result in a bad faith lawsuit; therefore, splitting the file provides evidence that the insurer acted in good faith to protect the interests of its insured. Finally, in the event of litigation with the insured, splitting the file may in some jurisdictions enhance the insurer’s ability to successfully assert the attorney-client privilege or work product immunity over coverage-related communications with the insurer’s in-house lawyers or outside coverage counsel. Under Wisconsin law, bifurcation of trial on an insured’s first party claim and the bad faith claim is proper and helps to prevent an insurer from potentially having to turn over coverage-related communications while litigating the first party claim. See, e.g. Dahmen v. Am. Family Mut. Ins. Co., 2001 WI App 198, 247 Wis. 2d 541, 635 N.W.2d 1 (if a plaintiff attempting to prove the validity of a claim against an insurer could obtain the insurer’s investigative files merely by alleging the insurer acted in bad faith, all insurance claims would contain such allegations)


Although not legally necessary, splitting claim files between a merits adjuster and a coverage adjuster helps to ensure that the person making the determination on the proper settlement amounts for the claim against the insured is not the same person who is making the determination of whether the insurer will decline coverage or what will be paid for settlement of the coverage dispute. Dividing these responsibilities helps rebut an argument that the final decision by the insurance company was unreasonable or conducted in bad faith. A division of the file responsibilities also prevents the sharing of confidential information to the detriment of the insured which may result in the loss of all coverage defenses.


This article is a publication of MWH Law Group LLP and is intended to provide general information regarding legal issues and developments to our clients and other friends. It should not be construed as legal advice or a legal opinion on any specific facts or situations. For further information on your own situation, we encourage you to contact the author of the article or any other member of the firm.

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