An Insurer Cannot Claim That It Was Unaware of Claims Handling Statutes As A Defense To Bad Faith

by Cozen O'Connor
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The South Dakota Supreme Court in Bertelsen v. Allstate Insurance Co., 833 N.W.2d 545, No. 26442 (June 12, 2013)  (1) held that an insurer cannot avoid bad faith liability by claiming it did not know about controlling claims handling statutes, and (2) reaffirmed that an insurer cannot rely upon claimants to provide a copy of the applicable laws (i.e., a copy of the claims handling statutes), especially in the absence of a request.

Background

Plaintiff, Bonnie J. Bertelsen, was injured in an automobile accident while driving her employer's (Universal Pediatric Services) vehicle to a patient's home to perform certain nursing duties. Plaintiff thereafter spent six weeks in a hospital, underwent multiple surgeries, lost eight months of work, and incurred a total of $382,849.92 in medical expenses as a result of the accident.

Plaintiff filed a claim for worker's compensation benefits, including her medical expenses, with American International Group (WC carrier), her employer's worker's compensation carrier. The WC carrier denied her claim in January and again in February 2006, contending that her injuries had not arisen out of and in the course of her employment with her employer. 

Plaintiff had an automobile insurance policy with her personal insurer (auto insurer) that provided $100,000 in medical payments coverage. Following the WC carrier’s denials, Bertelsen advised her auto insurer of the denial and filed a medical payments claim. By the spring of 2007, the auto insurer still had not paid plaintiff’s claim and she was experiencing increasing demands for payment from medical providers. By January 2008, plaintiff settled her worker's compensation claim with the WC carrier for $150,000, and also settled claims with other insurers for approximately $1,200,000. After subrogation and the payment of medical bills, plaintiff retained approximately $660,000.

Plaintiff, however, claimed that she was also entitled to the $100,000 medical payments policy limits from her auto insurer. Relying upon SDCL 62-1-1.31, plaintiff filed a breach of contract and bad faith action against her auto carrier for its failure to pay medical benefits immediately after learning that the WC carrier initially denied her worker's compensation claim. She contended that the auto carrier’s failure to immediately pay medical benefits was both frivolous and unfounded, and constituted bad faith causing her emotional distress up to the point in time when she began receiving settlements from the other insurance carriers. 

At trial, the court granted plaintiff’s motion for judgment as a matter of law on contract damages, awarding her $33,000. The auto insurer’s motions for judgment as a matter of law on the bad faith and punitive damages claims were denied, and the jury returned a verdict of $150,000 in compensatory damages and $1,500,000 in punitive damages. 

After trial, among other motions, the auto insurer renewed its motions for judgment as a matter of law on the bad faith and punitive damages claims, and in the alternative, sought a new trial or remittitur. Plaintiff argued that she was entitled to an additional $67,000 on the breach of contract claim (to reach a total award on the breach of contract claim of $100,000, the policy limits) and also moved for attorney's fees of $534,230. The circuit court denied the auto insurer’s motions, awarded plaintiff $180,561.51 in attorney's fees and an additional $67,000 on the breach of contract claim.

On appeal, the South Dakota Supreme Court considered (1) whether the circuit court erred in denying the auto insurer’s motions for judgment as a matter of law on the bad faith and punitive damages claims; (2) whether the circuit court erred in excluding evidence that the WC carrier accepted the worker's compensation claim in 2008; and (3) whether the circuit court erred in awarding plaintiff’s attorney's fees.

The Evidence Was Sufficient to Support Bad Faith and Punitive Damages

The Bertelsen court rejected the auto insurer’s contentions that the evidence was insufficient to support bad faith and the imposition of punitive damages. Specifically, the court relied upon its previous determination that the auto insurer’s statutory duty under SDCL 62-1-1.3 was plain, unambiguous and not susceptible to debate, and that sufficient evidence was presented for the jury to find that it knew or recklessly disregarded its obligation to immediately process and pay the claim after it learned of the WC carrier’s denial. Importantly, the court rejected the auto insurer’s argument that it was unaware of SDCL 62-1-1.3: 

"In Walz v. Fireman's Fund Ins. Co., we held that an '[i]nsurer cannot rely upon claimants to provide a copy of legal authority, especially in the absence of a request.' [citation omitted]. We further observed that the insurer 'could have contacted legal counsel or even consulted a table of cases to obtain the [controlling law].' [citation omitted]. Accordingly, Allstate cannot escape liability solely because it may have been unaware of SDCL 62-1-1.3."

The Bertelsen court also found that the evidence plaintiff presented showing that her auto insurer did not contact her for one year after it promised to investigate the WC carrier’s denial and promptly resolve her claim was sufficient for the imposition of punitive damages.

It Was an Abuse of Discretion in Excluding the WC Carrier’s Acceptance of the Worker's Compensation Claim

The Bertelsen court reversed and remanded for a new trial due to the circuit court's improper exclusion of evidence that the WC carrier ultimately accepted plaintiff’s worker's compensation claim for past, present and future medical expenses. Importantly, the auto insurer’s policy specifically excluded medical payments coverage "to the extent that the treatment [was] covered under any workers' compensation law." Therefore, once the WC carrier accepted liability and agreed to pay all of the medical expenses, the court held that the auto insurer was no longer violating any duty to pay medical expenses. The court held that although the WC carrier’s acceptance of the worker's compensation claim may not have been relevant to the auto carrier’s initial breach of contract, the evidence was critical to the issue of whether it acted in bad faith and was liable for punitive damages for its conduct from 2008 through trial.

Attorney's Fees Were Allowed

Finally, the court held that the award of attorney's fees was proper under SDCL 58-12-3, which authorizes the recovery of attorney's fees if the insurer's refusal to pay was "vexatious or without reasonable cause." 

Conclusion

The Bertelsen decision reaffirms the need for an insurer to make sure it is aware of a state’s (and federal jurisdiction’s) applicable legal authority before making a decision to delay payment or deny any claim. Without knowledge of governing authority, the insurer can unnecessarily expose itself to bad faith and punitive damages. The decision likewise serves as a reminder that in a situation where one insurer is disputing how another insurer is handling a claim, it's important to be the insurer that takes into consideration whether you should cover your insured’s claim and then seek recovery from the other insurer that is contesting coverage.

To discuss any questions you may have regarding the issues discussed in this Alert, or how they may apply to your particular circumstances, please contact Alicia Curran in Dallas at 214.462.3021 or acurran@cozen.com or Nicholas Neidzwski in Seattle at (206) 224-1249 or nneidzwski@cozen.com.

1 SDCL 62-1-1.3 provides: If an employer denies coverage of a claim on the basis that the injury is not compensable under this title due to the provisions of subsection 62-1-1(7)(a), (b), or (c), such injury is presumed to be nonwork related for other insurance purposes, and any other insurer covering bodily injury or disease of the injured employee shall pay according to the policy provisions. If coverage is denied by an insurer without a full explanation of the basis in the insurance policy in relation to the facts or applicable law for denial, the director of the Division of Insurance may determine such denial to be an unfair practice under chapter 58-33. If it is later determined that the injury is compensable under this title, the employer shall immediately reimburse the parties not liable for all payments made, including interest at the category B rate specified in § 54-3-16.

 

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