The insured had a life insurance policy with a $25,000 coverage amount. The original policy included a two-year suicide exclusion. Two other insurers acquired the original policy. The insured later increased her coverage under that policy to $100,000. Twelve years later, she obtained a replacement policy, also with a coverage amount of $100,000.
In connection with the replacement policy, the insured received a “Notice” which informed her, in pertinent part, that in switching to the replacement policy: “You should recognize that a policy that has been in existence for a period of time may have certain advantages to you over a new policy….Under your existing policy, the period of time during which the issuing company … deny coverage for death caused by suicide, may have expired or may expire earlier than it will under the proposed policy.”
After the insured’s death by suicide, her husband, on behalf of his children, filed a death benefit claim for the full $100,000, but the insurers refused under the suicide exclusion, and instead offered to pay a refund of $285.12 plus interest, representing the premiums paid on the policy.
AMBIGUITIES AND REASONABLE EXPECTATIONS FAVOR INSURED
The insured sued for the $100,000 policy coverage, and also brought a statutory bad faith claim, and claim for breach of implied covenant of good faith and fair dealing. The court ultimately granted the Plaintiffs summary judgment on the breach of contract claim.
Working under contra proferentem principles, the court did an extensive latent and patent ambiguity analysis of the policy language, and whether the insured’s long history of making payments for the same $100,000 was the applicable time period, rather than the replacement policy’s inception date.
The court also separately ruled summary judgment should be entered for the Plaintiffs under a reasonable expectations theory.
The replacement policy’s suicide exclusion language presented a “latent ambiguity,” and the above-quoted Notice did not alleviate that ambiguity because it did not “conclusively compel the reading that the suicide exclusion period started anew… [with the replacement policy’s inception].”
The court also determined the insured “could have reasonably believed that the suicide exclusion expired two years after she first began paying premiums on a life insurance policy . . . worth $100,000,” which started 12 years before the replacement policy, thus providing her with a reasonable expectation of coverage.
The replacement policy’s suicide exclusion was only two sentences long: “If the insured dies by suicide … we will not pay any death proceed[s] payable on amounts of insurance which have been in effect for less than 2 years. If the suicide … is within the first 2 contract years, we will pay as death proceeds the premiums you paid.”
The court’s analysis was lengthy, but the outcome basically hinged on the idea that the insured had been paying on the same “amounts of insurance” for over ten years, and that even what constituted “the first 2 contract years” was unclear when reading the policy as a whole.
With respect to the bad faith claims, the court made a distinction concerning insurance contract interpretation and bad faith claims. Thus, while the “[discovery] ambiguity should be resolved in favor of the Plaintiffs because of Pennsylvania’s judicially constructed principles favoring the insured in the specific context of insurance contracts,” “no such principle applies to the breach of implied covenant of good faith or the statutory bad faith claim.”
IMPLIED COVENANT CLAIM NOT DISTINCT FROM CONTRACT CLAIM
The court also recognized that “a claim for breach of the implied covenant of good faith and fair dealing is a breach of contract action, not an independent action for breach of a duty of good faith and fair dealing.”
“Pennsylvania law does not recognize a separate breach of contractual duty of good faith and fair dealing.” Thus, “a plaintiff would be barred from proceeding on both claims if they are based on the same conduct.” While Plaintiffs earlier alleged that the insurers made a “promise” to the insured regarding her benefit amount, “after the benefit of full discovery” they “failed to adduce any additional evidence” that the insurer’s conduct is separate “from Defendants’ denial of coverage based on their interpretation of the contract.”
Additionally, Plaintiffs only evidence on this issue is the insurer’s denial letter based on its “interpretation of the suicide exclusion—i.e. the same conduct that forms the basis of Plaintiff’s breach of contract claim.”
POLICY INTERPRETATION FAVORING INSURER, BY ITSELF, IS NOT BAD FAITH
Lastly, the court granted summary judgment on the statutory bad faith claim. The court stated that “’bad faith’ means ‘any frivolous or unfounded refusal to pay proceeds of a policy.’” Moreover, “knowledge or reckless disregard of a lack of a reasonable basis for denial of coverage is necessary.” Thus, “[a] reasonable basis is all that is required to defeat a claim of bad faith.”
In granting summary judgment, the court explained: “Plaintiffs openly acknowledge that their cause of action is founded upon [the insurer’s] refusal to pay the insurance claim in light of the language of the [suicide] exclusion … instead of presenting any evidence of bad faith obtained in discovery.” Further, “Plaintiffs do not challenge or even mention Defendants’ investigative process before denying the claim.”
Plaintiffs only argued, that the insurers “acted in bad faith because they relied on an interpretation more favorable to themselves when interpreting an ambiguous exclusion,” without the requisite proof by clear and convincing evidence that this interpretation was unreasonable and made in knowing or reckless disregard of that fact. The court could not conclude on the record “that [the insurers’] denial of the benefits based on their interpretation of the exclusion was so unreasonable that it amounts to bad faith.”
Date of Decision: June 28, 2018
Lomma v. Ohio National Life Assurance Corp., U. S. District Court, Middle District of Pennsylvania No. 3:16-CV-2396, 2018 U.S. Dist. LEXIS 108705 (M.D. Pa. June 28, 2018) (Mariani, J.)