JUNE 2015 BAD FAITH CASES: SUPERIOR COURT VACATES JUDGMENT ON BAD FAITH CLAIM AFTER CLOSE FACTUAL ANALYSIS; AND DIRECTS TRIAL COURT ON REMAND TO ALLOW EXPERT TESTIMONY CONCERNING ADJUSTER’S OBLIGATION TO CLARIFY LEGAL INTERPRETATION OF POLICY TERMS, BUT NOT TO CONSIDER INSURED’S POST-DENIAL CONDUCT (Superior Court)
In Mohney v. American General Life Insurance Company, the Superior Court reversed the trial court, and remanded the insured’s statutory bad faith case against his disability insurer for a new trial. At the time of this decision, the case had been pending in some form for 20 years.
The insurer originally paid total disability benefits, based upon policy definitions of the insured’s “total disability”. The insurer’s adjuster later made the decision, on his own understanding, to terminate benefits on the basis that the insured’s doctor stated the insured could work in some limited capacity. However, the doctor’s statements upon which the adjuster based his decision were in fact equivocal and highly qualified as to whether the insured could perform alternative work in the future.
In an earlier trial on the breach of contract claim, the court found the insurer breached its contract. In a second trial, on bad faith, the trial court found there was no bad faith. While the insurer was incorrect in terminating benefits, it had not been unreasonable in its position or investigation, nor had it knowingly or recklessly disregarded that fact. The appellate court disagreed.
The Superior Court stated that “bad faith” encompasses a variety of possibilities including “a frivolous or unfounded refusal to pay the proceeds of a policy done with dishonest purpose, motivated by self-interest or ill will”, conduct “lack[ing a] good faith investigation into facts, and failure to communicate with the claimant”, “where the insurer intransigently refused to settle a claim that could have been settled within policy limits, where the insurer lacked a bona fide belief that it had a good possibility of winning at trial, thus resulting in a large damage award at trial”, and it “may also extend to the insurer’s investigative practices”.
The appellate court recited the bad faith standards: proof must be by clear and convincing evidence, the insurer’s position must have been unreasonable, and the insurer must have knowingly or recklessly disregarded the unreasonable nature of its position.
In a clarifying footnote, the court reiterated its rulings in Nordi (2010) and Greene (2007) that the insured is not required to prove a motive of self-interest in or ill will as a third element of statutory bad faith; rather, evidence of self-interest or ill will are probative of the second element, i.e., that the insurer knew or recklessly disregarded the unreasonableness of its position.
The Superior Court then firmly rejected the trial court’s factual conclusion that the insurer’s termination of benefits was reasonable; thus, the insured met the burden on the first prong of the bad faith test. The court went into an extremely detailed analysis of the factual record in reaching this conclusion.
As to the second prong, the appellate court likewise drilled down into facts going to the insurer’s state of mind. It approved a standard that the insurer “’was required to conduct an investigation sufficiently thorough to provide it with a reasonable foundation for its actions.’”
The absence of a reasonable basis to deny coverage was the cornerstone of undermining the insurer on the knowing or reckless disregard standard. The appellate court found that the trial court largely ignored substantial evidence that the insurer’s investigation “was not sufficiently thorough to obtain the necessary information regarding [the insured’s] ability to work.”
The appellate court also referenced evidence from the record that could establish knowing or recklessly culpable conduct by the insurer, in the nature of misrepresentations of fact in terminating the benefits, and conduct constituting a lack of honest or objective review.
Thus, the Superior Court rejected the trial court’s conclusion that there was no evidence supporting the second bad faith prong. However, it did not automatically then rule for the insured. Rather, it held that “while [the] misrepresentations are evidence of bad faith, they do not without more establish knowing or reckless misconduct as a matter of law by clear and convincing evidence on the record before us.” That issue could not be decided on appeal.
The insurer argued that the adjuster making the decisions on the claim at issue had broad discretion, within his experience, to evaluate the claim based on available medical records and his common sense. In the insurer’s training practices, the key policy term “total disability” was left to the adjuster’s common sense interpretation, based on his prior experience.
While the adjuster could seek advice from an attorney, he did not do so “because he did not believe that any additional legal construction of the term ‘total disability’ was necessary. Instead, he applied a plain and common sense meaning to the certificates’ definition of ‘total disability.’”
The appellate court had already ruled that the adjuster’s interpretation was contrary to the policy language itself, as well as Pennsylvania appellate law.Thus, the court stated that “in the absence of a standard policy manual or other specific guidance, it was left solely to [the adjuster’s] ‘common sense’ and discretion to decide whether it was necessary to consult with legal counsel on the proper (legal) interpretation of the policy term at issue.”
There was no evidence in the record of industry standards on training adjusters in legal interpretations of policy language, or providing adjusters guidance of when to seek guidance from staff attorneys.
Prior to trial, the insured did provide an expert report stating, among other things, that insurers and their professionals “be informed on the established law which they would be expected to apply in the course of handling claims, specifically including the law regarding the interpretation of policy provisions and definitions.”
That expert’s trial deposition also stated that there was a “need for adjusters to be trained in the proper application of established case law on applicable policy terms.” However, the expert report and testimony were excluded at trial, on the basis that they “consisted of legal conclusions that were improper and inadmissible, the facts underlying [the] bad faith claim were ‘readily ascertainable by the Court without the aid of expert testimony,’ and [the expert’s] testimony would not assist in the resolution of [the] bad faith claim.”
The Superior Court found this was an abuse of discretion because: “The issue in question, involving the standards in the insurance industry for the training of claims adjusters in applying legal precedent when deciding insurance claims, is sufficiently complex to permit the introduction of expert testimony. The … Trial Court’s written decision does not reflect that it had any specific knowledge of the industry standards in this area. Instead, the … Trial Court merely accepted [the adjuster’s] testimony that there was no need to consult with staff attorneys in this case, and in the absence of expert testimony … [the insured] had no ability to offer contradictory evidence to rebut [the adjuster’s] testimony.”
Thus, the lower court’s ruling on bad faith was vacated, and the case remanded for a new trial.
On remand, the Superior Court instructed that the trial court was not to consider evidence of the insured’s post denial conduct, which it had earlier done. Further, the trial court had precluded the insurer’s expert report as a sanction, and the appellate court left it to the trial court as to whether it would revisit that sanction; but it did not vacate the sanction itself.
Finally, the appellate court upheld the trial court’s decision not to allow an amended complaint to add bad faith allegations based upon litigation conduct, as being so untimely as to be prejudicial; but the appellate court did note that the insured never raised the more general argument that the insurer’s litigating this matter for 20 years, when there was no reasonable basis to do so, could conceivably be the basis for a bad faith claim.