Insurers Must Exercise Caution in Denying PIP Claims Without Sound Medical Evidence or Risk Exposure to Claims Of Bad Faith
The court held, in McGee-Grant v. American Family Mutual Ins., 2016 WL 126429 (W.D. Wash. Jan. 12, 2016), that the insurer violated Washington’s Unfair Claims Settlement Practices Regulation 284–30–370 by failing to complete its investigation within 30 days and acted in bad faith by denying a claim without a medical basis; and deciding to refuse payment prior to an independent medical examination (IME) or medical records review.
Penny McGee-Grant’s policy included personal injury protection (PIP) coverage. In July 2012, she was injured in an automobile accident and was examined shortly thereafter for shoulder pain. She was re-examined in October 2012 due to ongoing pain and an MRI revealed a rotator cuff tear in the shoulder that required surgery.
In December 2012, an American Family Mutual Insurance (AmFam) claims manager recommended denial of coverage pending an IME based on the belief that the injury was not related to the accident. Because of a delay in obtaining the IME, in January 2013, AmFam requested the opinion of McGee-Grant’s doctor as to whether the shoulder injury and surgery were related to the accident. Given conflicting versions of injury and examinations, AmFam denied payment pending a records review to resolve the conflicting information. After the records review, AmFam concluded that the cause of McGee-Grant’s injury was normal/usual wear and tear. Thus, AmFam closed its file in March 2013.
McGee-Grant filed a lawsuit and moved for summary judgment on the alleged bad faith claim. She argued that the claims manager did not have the requisite information and expertise to deny a claim where her doctor vouched for the relatedness of the treatment and where there was no IME/records review to displace that opinion. She also argued that AmFam’s failure to communicate the basis for its refusal to pay for several months constituted bad faith. AmFam argued that McGee-Grant could not support a bad faith claim on the basis of several good faith mistakes. McGee-Grant rebutted that argument by highlighting that the investigation took 107 days and AmFam could have relied on the answers of her doctor to conclude its investigation.
The court found that AmFam had denied payment solely on its belief that the shoulder injury was not related to the automobile accident, based on the delayed onset of symptoms, delayed treatment and the fact that McGee-Grant continued to work as a hairdresser requiring significant movement of the shoulder, even though there was no evidence that these statements were medically valid or that AmFam knew of these facts before it denied coverage. According to the court, the only basis AmFam had for denying coverage prior to its receipt of the records report were McGee-Grant’s medical records and her doctor’s report, which indicated the injury was related to the accident. The court also noted the fact that her first examination showed less of an injury than the subsequent examination did not, by itself, demonstrate that the injury was not related to the accident.
An insurer must be mindful of all state laws and regulations regarding claim handling, including specific deadlines for completion of coverage investigations. Insurers must also be diligent in conducting a coverage investigation; otherwise, there is a risk of bad faith exposure in some states for denying a claim without sufficient evidence or support, here a medical basis, even though a later investigation provides support for the denial.
Use It or Lose It! So Says The Iowa Supreme Court: Claim Preclusion Barred “Bad Faith” That Insured Failed to Assert in Breach of Contract Action
By Todd S. Schenk, Partner in the Chicago Office
In Villarreal v. United Fire & Cas. Co., 2016 WL 97328, (Iowa Jan 8, 2016), the Iowa Supreme Court held that an insured is typically required to bring its bad faith claim in the same lawsuit as the breach of contract claim, and a subsequent lawsuit asserting the bad faith claim is subject to claim preclusion.
In Villarreal, Ben Villarreal purchased commercial property insurance from United Fire & Casualty Company (United Fire). A dispute arose between Villarreal and United Fire after a fire loss, and Villarreal sued for breach of contract. Villarreal prevailed on the breach of contact claim and, three months later, filed a separate bad faith lawsuit, alleging United Fire lacked a reasonable basis to deny the claim. In response, United Fire asserted an affirmative defense of claim preclusion, arguing the judgment in the breach of contract lawsuit barred the bad faith claim in the subsequent lawsuit.
The Iowa Supreme Court first cited to the body of case law that stands for the proposition that "a breach of contract verdict in favor of the insured and against his or her insurer precludes a subsequent action for first-party bad faith, at least where the claim is based on events that predate the filing of the breach of contract lawsuit." Claim preclusion generally applies to any claim that arises out of the same transaction or set of events as a claim that has already been determined in a prior action and, as the court noted, "a first-party bad-claim claim based on denial of insurance benefits without a reasonable basis ordinarily arises out of the same transaction as a breach of contract claim for denial of those same benefits."
Next, the court explained that claim preclusion is applied liberally, as "perfect identity of evidence is not the standard in Iowa for whether claim preclusion applies." Rather, in the insurance context, a defendant insurer need show only a "substantial overlap" of proof and witnesses between the bad faith claim and the breach of contract claim.
There was no dispute that Villarreal "could have raised" the bad faith claim in the breach of contract action because he was aware of United Fire’s alleged bad faith conduct when the first lawsuit was filed. For instance, Villarreal was only paid a fraction of the coverage to which he believed he was entitled. Further, his attorney had twice accused United Fire of bad faith.
Although Villarreal argued that some of the evidence supporting its bad faith claim was not uncovered until discovery was conducted in the subsequent bad faith case, the court found this fact unpersuasive because the new information would have come to light in the first lawsuit if both the bad faith and breach of contract claims had been asserted and litigated in that action. The court placed great weight on "judicial economy and efficiency" in deciding the bad faith claim in the second lawsuit was barred in light of the judgment in the first lawsuit.
Under Iowa law, like most states, an insured is generally not permitted to split its claims by bringing a breach of contract claim in one lawsuit, and a bad faith claim in a subsequent lawsuit. Even though the court may choose to bifurcate discovery or trial of the claims, the insured must assert them in a single lawsuit. The question left open in Villarreal is whether an insured can bring a bad faith claim based on conduct that post-dates the filing of the breach of contract lawsuit – for example, litigation conduct – in a subsequent action. The specific nature and timing of the litigation conduct (assuming litigation conduct is even actionable as bad faith) will likely factor heavily in the application of claim preclusion in such a scenario.
Despite No Duty To Defend, Insurer’s Lack of Due Diligence Prevents Summary Judgment in its Favor on Breach of Implied Covenant of Good Faith and Fair Dealing
By Reginald D. Cloyd III, Associate in the Chicago Office
In Travelers Property Casualty Co. of America v. Federal Recovery Services, Inc., 2016 WL 146453 (D. Utah Jan. 12, 2016), the U.S. District Court for the District of Utah denied an insurer’s motion for summary judgment on the insured’s counterclaim for breach of the implied covenant of good faith and fair dealing, despite having found no coverage under the insurance policy.
In Travelers, Federal Recovery Services (FRS) tendered the defense of a lawsuit against it under a CyberFirst Technology Errors and Omissions Liability Form Policy (the CyberFirst Policy). Travelers initially denied coverage and filed a declaratory relief lawsuit against FRS, seeking a determination that there was no duty to defend. During the course of the declaratory relief suit, after FRS made another tender, Travelers accepted the defense subject to a full and complete reservation of rights, including the right to seek a judicial declaration that it had no duty to defend.
In the declaratory relief, following the federal court’s denial of FRS’ motion for summary judgment on the duty to defend, Travelers moved for summary judgment on the counterclaims against it for breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty.
Based on its earlier finding that there was no coverage and no duty to defend under the policy, the federal court first held that there could be no breach of contract or breach of fiduciary duty.
With regard to the bad faith claim, FRS argued that the absence of coverage did not preclude its claim because Travelers acted improperly during the claims investigation by: (1) requiring it to first receive suit papers in the underlying lawsuit before initiating a claim under the policy; and (2) failing to "diligently investigate, fairly evaluate, and promptly and reasonably communicate" with FRS during the claim investigation. FRS provided expert testimony stating Travelers’ conduct did not measure up to the standard required for insurance claims investigations and that a claim, not a "suit," triggered Travelers’ duty to diligently investigate the claim.
Despite finding no coverage and no breach of contract under Utah law, the federal court held that the narrow issue of whether Travelers inappropriately required the filing of suit papers in contravention of the policy provisions, which may have resulted in a dilatory denial of defense causing severe financial consequences to the insured, is a factual issue and should be submitted to the jury.
This case highlights the atypical result in some jurisdictions of allowing a bad faith case to proceed even after a finding of no coverage and no breach of contract. It is a reminder that, even when there is a supportable basis for denying coverage, the insurer must conduct a diligent claim investigation, document the file, maintain communication with the insured during the claim investigation process and be timely in responding to the claim.
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