By Mark F. Seltzer, Esq.
The word “Faith” is ingrained in American society and the American way of life. It is the bastion of religious belief as well as the trust that allows us to achieve a comfort level to deal with others in our every day lives. So too is this “faith” ingrained in the very fiber of a contractual relationship between parties. The Restatement of Contracts 2nd speaks of the basic premise upon which all contracts are based as the concept of “Good Faith and Fair Dealing” which is assumed in the performance of contractual obligations and provisions.
It is then no surprise that this very same premise is presumed in the performance of the Disability Insurance Company’s obligations and commitments under the terms of its contract with its insured. Most states, understanding the extreme importance of an Insurance Company’s performance, at a time when its insured is most vulnerable, have legislatively mandated laws intended to enforce an insurance company’s commitments. They have enacted State Insurance Bad Faith Statutes for this purpose. These laws/causes of action are provided for the insured that is harmed by, or the victim of, the carriers’ acting in “Bad Faith” when handling its insured’s claim under his/her policy of insurance.
What Is Bad Faith, Anyway?
Black’s Law Dictionary defines bad faith as, “the opposite of good faith, generally implying or involving actual or constructive fraud, or a design to mislead or deceive another, or neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one’s rights or duties, but by some interested or sinister motive.”
The Pennsylvania Superior Court has defined Insurance Bad Faith to be, “…any frivolous or unfounded refusal to pay proceeds of a policy. It is not necessary such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e. good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.” Terletsky v. Prudential Property and Casualty Insurance Company.
The Pennsylvania State Insurance Bad Faith Statute applies, “…if the Court finds that the insurer has acted in Bad Faith toward the insured.85” In that situation, the Court may award interest, punitive damages, and/or attorney’s fees and Court costs.
Does Bad Faith Apply To Disability Insurance Claims?
There are essentially two types of Disability Insurance Policies: the Long Term Disability or Group Policy (LTD) and the Individual Disability Income Policy (DI).
LTD Policies are generally governed by ERISA, or the Employee Retirement Income Security Act of 1974. Recent Federal Court decisions have, for all intents and purposes, determined that there is no State Insurance Bad Faith cause of action under ERISA.
The U.S. Supreme Court held in Aetna Health v. Davila (2004) that ERISA preempts a state statute cause of action in a non-LTD ERISA case. The 3rd Circuit Court of Appeals held in Barber v. UNUM Life Insurance Company of America (2004) that the Pennsylvania Insurance Bad Faith Statute is preempted by ERISA in an LTD case. Therefore, it is this author’s opinion that the U.S. Supreme Court would hold that ERISA preempts a State Statutory Bad Faith claim in an LTD case when or if presented with these facts. This then leaves no “toothful” punitive remedy to enforce the covenant of “Good Faith and Fair Dealing” in an ERISA LTD case. The Courts have effectively condoned any claims practice in LTD cases.
On the other hand, the Pennsylvania Bad Faith Statute (as well as other States’ similar Statutes) does apply to DI claims. However, as an insured physician, you need to understand that Insurance Bad Faith is very hard to prove and is often confused with either claims handling conduct that does not rise to the Bad Faith level of severity, or with an adverse decision, despite your disagreement, with a reasonable basis.
What Types Of Events Can Constitute Bad Faith?
There are many different actions or inactions that may constitute Bad Faith on behalf of your disability insurance carrier. The Pennsylvania Unfair Insurance Practices Act (UIPA) lists multiple potential acts by an insurance company which may constitute an unfair insurance practice. While a violation of the UIPA may not constitute Bad Faith, it certainly acts as a good starting point to understand what types of actions the State’s Insurance Department has determined as constituting unfair and inappropriate claims practices.
Disability Insurance Companies are obligated to conduct a full, fair, thorough and objective investigation of every claim. This investigation not only includes the medical component of the claim or the potential “disabling condition,” but also includes properly assessing and evaluating the occupational component. Depending on the facts, an unreasonable or incomplete investigation, presumably with adverse consequences to the insured physician, may constitute Bad Faith.
In addition, should a Disability Insurance Company misapply or misrepresent its policy provisions or contract language to its insured, this action, depending on the facts, may also constitute Bad Faith. This issue may be extremely compelling because, after all, it’s their policy, they wrote it, and presumably they know what it means. You, on the other hand, probably have never read your policy, and even if you have, don’t understand it. Therefore, you are putting your complete trust in the Company to advise you as to what needs to be satisfied in order to obligate it to pay you benefits under your policy. The insured physician may be very vulnerable to agendas that create confusion or misguidance.
How Will Bad Faith Affect Me?
The Pennsylvania Supreme Court case of Mishoe v. Erie Insurance held that there is no right to a jury trial in a Bad Faith case in Pennsylvania State Court. Therefore, if you desire a jury trial, with regard to your Bad Faith claim, you must file your cause of action in Federal Court. In addition, the U.S. Supreme Court case State Farm v. Campbell has set a “bright line,” single digit ratio of punitive damages to compensatory damages. Campbell refers back to the three criteria enumerated in the Supreme Court case of BMW of American, Inc. v. Gore when considering the relationship between punitive damage awards and due process of law: the degree of reprehensibility of the misconduct, the variance between the actual or potential harm and the punitive damage award, and the relationship between the punitive damage award and penalties awarded in similar cases.
The “bright line” standard may or may not be argued to actually be a single digit ratio, and strategic considerations must be evaluated as to the Court selected, and jury versus non-jury issues. Even assuming that the factual scenario in your case is compelling enough to proceed with a Bad Faith claim, and even if you are successful in the prosecution of your claim, the application of complicated case law and procedure will not be over. Any favorable verdict or award will likely be appealed by the Company. It is one thing to be held responsible for breaching a contract; it is totally another thing to be held liable for improper conduct and claims practices that rise to the level of Bad Faith. And, especially, if your case shows Company-wide pattern and practice, which may get you a larger punitive damage award, you can expect a “tooth and nail” fight for the duration. Prosecuting your case can become the legal equivalent of a migraine headache.
You hope, if you are or become disabled, that your Disability Insurance Company will keep its promise. Remember, we are talking about the Company’s contractual obligations to you, not charity. After all, you have put your faith in your Disability Insurance Company to pay you benefits if you become disabled. The problem is that all the faith, hope and charity in the world may not get you paid. Your Disability Insurance Company has the obligation to handle your claim, and otherwise act, in good faith. Insurance Bad Faith is a complicated and difficult issue that will likely be fought to the end. Remember, the best medicine for a Bad Faith headache is always documentation and preparation.
Mark F. Seltzer, Esq., is the founder of the law firm of Mark F. Seltzer, P.C., representing physicians and professionals with Disability Insurance claims. The firm is located in Philadelphia, Pa.