A long-term disability (LTD) policyholder's breach of contract and bad faith claims against his insurer were preempted by the Employment Retirement Income Security Act of 1974 (ERISA) and the statute of limitations, a panel of the 11th Circuit U.S. Court of Appeals ruled Dec. 30, upholding a trial court's grant of summary judgment to the insurer (Stuart S. Johnson v. Unum Provident, et al., No. 09-13687, 11th Cir.; 2009 U.S. App. LEXIS 28697).
Every contract has an implied covenant or promise of good faith and fair dealing. Insurance policies are merely contracts between the insurance company and the person who purchased the insurance and people who qualify for insurance benefits under the terms of the contract. Thus, every insurance policy in the United States has a promise imposed by law upon an insurance company to act fairly towards its policy holder and the beneficiaries in the performance of the contract. This is true whether or not such a clause is specifically include in the policy, because courts will read such covenant into the policy as a matter of contract law.
Insurance carriers must therefore meet the objective reasonable expectations of the policy holders and insurers must give equal consideration to the financial interest of its insurer as it does its own interest. Thus, when an insurance company does not have to put its interests behind that of its insured, it cannot protect itself while abandoning its policy holder.
In cases, commonly referred to as bad faith cases, the essential question is whether or not the insurance carrier met its duty of good faith and fair dealing in the situation presented by the performance of its contract obligations. Examples of bad faith include delaying payments, paying less than what is owned, denying benefits or coverage, or failing to settle claims within the policy limits. The insurance companies also have obligations imposed upon them including the duty to promptly investigate all claims, and where appropriate to defend their insured under the terms of the policy. Bad faith action insurance companies policies, practices, and customs will be at issue to show how the insurance company acted, to show its motive, intent, plan and knowledge concerning the particular facts of the case. It is not necessary to show that a insurer acted intentionally to cause harm. Bad faith is a state of mind and may be evidenced by both acts and circumstances on the part of the insurer, but amounts to more than a mistake.
Specific facts that may indicate bad faith on the part of the insurer include demand that the insurer contribute to the settlement, ignoring settlement advice, not disclosing policy limits to a claimant, failing to foresee probable excess verdicts, taking and employing hard line settlement tactics, and properly investigating a claim and properly evaluation a claim, failing to litigate a claim, failing to provide a proper defense, failing to consider settlement, ignoring setting advice, failing to communicate with the insured about the case, or failing to advice the insured about the potential of excess judgments, failing to advise the insured about the policy coverage, failing to advise the insured about existence of settlement offers, acting on behalf of one insured to the detriment of another insured.
It is clear that when people buy an insurance policy that they are seeking protection from the risks insured. If the insurer fails to satisfy their obligations to the policy holder, the policy holder will face the financial risks for which they had purchased protection, as well as the emotional distress as a result of the breach of the policy agreement. Policy holders and beneficiaries are obviously in a vulnerable position when they must rely on their insurance carrier to protect their interest, particularly if the insurance company does not share information, or take appropriate actions to protect the insured's interests, because an insurance company generally has superior knowledge concerning the facts and law, and in all cases where the insured is the wrongdoer, the insurance company is in control of the defense. Therefore, bad faith lawsuits promote not only compensation by injured policy holders and beneficiaries, but provide deterrence from insurance companies acting oppressively towards their customers.
Given all the attention of the media and public on insurance related matters, I think this story is worthy of revisiting. A Missouri Appellate Court did not believe Allstate Insurance company's assertion that its failure to settle the claims of two car accident victims in a timely manner was not bad faith. Despite its slick commercials and claims of customer service Allstate's conduct spoke volumes about the way it handles claims. Allstate has long been viewed by Missouri personal injury lawyers as one of the worst when it comes to timely and fair claims payment.
The Allstate lawsuit stemmed from a car accident that occurred in March of 2000, when a truck driven by an intoxicated Wayne Davis Jr. collided with the subcompact car carrying Edward Johnson and his wife, Virginia. Both the Johnson's survived, but their medical bills came to at least $320,000.
The Johnson's initially agreed to settle for Davis' minimal insurance policy limits of $50,000, but Allstate did not respond until six months later. That was after the statutory 60-day limit for accepting had expired.
The Johnson's were forced to sue Davis, and he agreed to a judgment in excess of $5 million. However, the Johnson's also agreed not to collect on that judgment in return for Davis assigning to them of most of his claim against Allstate for its refusal to settle. The couple and Davis then sued Allstate in Jackson County Circuit Court, alleging the insurer had acted in bad faith when it did not respond in a timely fashion to the Johnsons' initial settlement offer.
Allstate defended itself by claiming that it lost the letter proposing the offer and responded late because it did not receive the Johnsons' medical records. Allstate, in like so many companies making insurance denials asserted that it was unsure the crash had caused the Johnsons' injuries, even though the couple had to be cut out of the wreckage, were life flighted by helicopter to the hospital and received care in an intensive care unit (ICU).
At the circuit court level, the jury did not accept Allstate's defense, and in November 2006, it found that Allstate had acted in bad faith. The jury unanimously awarded compensatory damages of $5.8 million plus 9 percent interest since the date of the judgment to the Johnsons. By a vote of 10-2, it also hit Allstate with $10.5 million in punitive damages.
Allstate appealed, but on Tuesday a three-judge panel of the Missouri Court of Appeals held that the jury's verdict was justified.
"Allstate's failure to recognize the severity of the Johnsons' injuries and the probability that the claim would far exceed Davis's policy limits; its failure to investigate the claim and respond to the demand in accordance with insurance industry standards and its own good faith claim handling manual; and its failure to advise Davis of the demand, his likely exposure for an excess judgment, and his right to retain counsel, are all circumstances supporting a reasonable inference that Allstate's refusal to settle was in bad faith," Judge Paul Spinden wrote in the panel's decision.
Missouri recently passed a new law which purports to provide better access and more protection to life insurance purchasers. House Bill 577, which will become law this August makes several changes to the insurance law, but in reality offers little for consumers of life insurance. The only protection is that an insurance company may not deny an applicant for past or future lawful foreign travel unless based upon sound actual or reasonable experience.
The strongest protection from abusive life insurance denials in Missouri continues to be common law actions, and first party actions for Vexatious Refusal. Unfortunately these remedies while successful in obtaining payment lack the punch to stop abusive practices in the first place.
People purchase life insurance policies as a way to help their loved ones after they pass away. A life insurance policy can provide surviving beneficiaries with financial stability after a family member dies. In the process of selling the policy, Life insurance companies consider a variety of factors including medical history, height and weight, whether you use tobacco or drink and if your job presents particular occupational hazards. These factors are used to determine insurability and premium (price) on the life insurance policy for a particular person.
People believe that if life insurance is obtained and the premiums paid, that upon death, collecting the life insurance will be easy. Unfortunately, that is not always what happens.
Life insurance companies review each claim carefully before paying the benefits. Insurance companies will want the certified death certificate, and a claim form as part of the claims process. One of the most common reasons for denial is that there was a "material misrepresentation" on the life insurance application. Of course the applicant is now dead, so any proof they could offer is gone. The insurance company may claim that the misrepresentation occurred in the original application for insurance or in a later amendment to the application. In almost every such case the insurance company will obtain medical records of the deceased and may have the application, records and other facts reviewed by medical specialists.
In such situations the beneficiaries will find that instead of financial security they have a fight on their hands with an insurance company that is motivated to keep its dollars. While a family can sue for breach of contract, this only recovers the benefits and not expenses and attorneys fees. Missouri's Vexatious Refusal Statutes Section 375.296 and 375.420 provide for attorneys fees, but have laughable penalties that provide no financial incentive for Missouri insurance companies to not try their luck at the denial game. Missouri needs true first party bad faith so that insurance companies that unfairly and purposefully deny claims can be held accountable for their actions. Only when poor treatment of Missouri insurance policyholders is more expensive than fair treatment will abusive practices stop.
American Family Mutual Insurance Company has lost its appeal to the 8th Circuit in a bad faith and breach of contract case after accusing its insured of burning down his own home. Arson is a felony and the accusations resulted in not only economic loss but serious emotional and physical distress of the insured. The Court of Appeals upheld the district court verdict which resulted in a compensatory damage award of $49,564.96 and $1,150,000.00 in punitive damages.
The court upheld a jury instruction that allowed the jury to consider violations of Prohibited Practices in Insurance Business Act as evidence of bad faith. The court also upheld the punitive damages award based upon American Family's "tortious conduct" of labeling their insured an arsonist based on insufficient grounds. The court found that that conduct "evinced an indifference to or disregard of" the insured's financial, emotional and physical well-being. Notably the insured presented evidence that American Family, without first conducting an adequate investigation, sent documents to the State Insurance Commissioner and the Property Loss Insurance Register that the insured's claim was denied for arson and fraud. The evidence presented was that such a report would have a devastating effect on the insured's ability to obtain other insurance and thereby hurt his family business.
Insurance companies cannot deny claims without a valid basis, or without conducting a prompt, fair and full investigation. In Missouri, the tort of bad faith known as vexatious refusal to pay can be brought to obtain the benefits the insured is owed and to recover punitive damages and attorneys' fees.