Most of us are well aware of the basic provisions of our automobile insurance policies.  For example, we know that if we back into something in a parking lot and damage our bumper, insurance will fix it.  We also know that if we have an accident that’s our fault and cause damage to someone else, or insurance covers it.  What most people are not as familiar with is what insurance adjusters and lawyers refer to as “Med Pay” coverage.  Not everyone has elected to pay for this coverage, but if Med Pay exists on your policy it can be a very important and beneficial coverage. You need to know if you have “Med Pay” when you are involved in an accident.

A typical Med Pay provision in a standard auto policy generally provides the insurance company will pay (subject to some exclusions, of course) reasonable medical expenses for necessary medical services because of bodily injury sustained by an insured person, including family members and others in your car.  This can be a very valuable coverage, depending on the policyholder’s circumstances following an accident.

While this coverage may seem fairly straightforward, bad faith litigation may arise from it.  Insurance companies are only obligated to pay “reasonable” and “necessary” medical bills under the Med Pay provision of the policy.  The questions of what medical treatment is “necessary” and what medical bills are “reasonable” can lead to disputes between insurance companies and policyholders.  After an accident, a policyholder will often receive treatment from his doctors and incur medical bills as a result and make a claim under his “Med Pay” coverage, only to find his insurance company claims the treatment and/or bills are not “reasonable and necessary.”

As in other claim situations, the insurance company has a duty of good faith in handling Med Pay claims.  So, the insurance company has to have a good faith basis for denying payment of Med Pay benefits.  The insurance company has to investigate fully and fairly and evaluate the evidence even-handedly.  Unfortunately, some insurance companies have attempted to deny and/or reduce payments under the Med Pay coverage by utilizing doctors and/or nurses (who often market themselves as cost savers to the industry) to evaluate the “reasonableness” and “necessity” of their policyholders’ Med Pay claims.  When done inappropriately, this practice amounts to an effort to create the appearance of a “legitimate dispute” to avoid bad faith liability.  If bad faith litigation results in a situation like this, the focus is often on the qualifications of the doctors/nurses hired by the insurance company, the quality of their analysis and the evidence of the insurance company’s cost-saving motive in sending claims to such doctors.

Insurance companies are entitled to analyze claims closely, including using outside experts if needed, but they are not entitled to manufacture disputes using biased experts in an effort to save money they otherwise owe their policyholders.  The way some insurance companies deal with Med Pay claims crosses this line.

What happens in a situation where a policyholder (an individual or a business) is alleged to have caused damage to someone else?  What if there is an auto accident and the other driver claims the policyholder caused it?  Or what if a customer comes in to the policyholder’s place of business, trips and falls and is injured?  This is where a policyholder’s “liability coverage” comes into play.  When there is such coverage, the insurance company owes both a “duty to indemnify” (pay the claim against the policyholder if it is valid) and a “duty to defend.”

There are several aspects of an insurance policy commonly thought of as “coverage” provided to the policyholder.  Under an auto policy, if your car is damaged there is “coverage” to repair or replace it.  Under a homeowners policy, there is “coverage” to fix your roof after a hailstorm.  Most people don’t think of the insurance company’s obligation to defend them as part of the “coverage” because most folks never get sued.  This can be a very valuable policy benefit if a policyholder is unfortunate enough to have a lawsuit filed against them.

When the “duty to defend” is triggered, the insurance company is required to hire a lawyer for the policyholder, at the insurance company’s expense, to defend the lawsuit.  However, not every claim that might be made against a policyholder is covered.  If there is no coverage under the insurance policy for the claim made against the policyholder by the allegedly injured person, there is no duty to defend.

The rub comes when it is not entirely clear there is or is not coverage for the claims being made against the policyholder.  Oklahoma law provides the insurance company’s “duty to defend” is triggered when there is the potential for coverage for the claims against the policyholder.  The question of whether there is the potential for coverage must be answered by looking beyond the “four corners” of the lawsuit filed against the policyholder to all of the facts of the allegations against the policyholder.

If an insurance company denies it has a duty to defend a lawsuit against a policyholder, it has concluded there is not even the potential for coverage under the facts of the claim.  This can be dangerous territory for an insurance company.  If the policyholder takes issue with the insurance company’s position on coverage (and thus the duty to defend) the insurance company’s investigation and evaluation of the coverage dispute could be subject to scrutiny in a bad faith case.   The insurance company must be able to prove it had a good faith basis for its coverage analysis and decision.

There has been a good deal of bad faith litigation in Oklahoma involving denials by insurance companies of their “duty to defend.”  These can be highly technical cases involving interpretation of arcane insurance policy provisions.  However, if it is determined the insurance company breached its duty to defend in bad faith, the policyholder may recover the out-of-pocket cost they incurred in hiring a lawyer on their own and any resulting financial impact (and other compensatory damages for bad faith) they suffered.  Punitive damages may also be in play.

Uninsured/Underinsured motorist or “UM” coverage is one of the most important coverages a person can buy.  State law requires all drivers to carry liability insurance, which is there to pay for property damage and personal injuries caused by the policyholder.  However, plenty of drivers violate that law every day and operate vehicles on the roads all over our state without carrying liability insurance at all.   Also, many people carry only the state-mandated minimum amount of liability coverage of $25,000.00.  If you are unfortunate enough to be involved in an accident caused by an uninsured driver or one who does not have enough liability coverage to compensate you for all your damages, UM coverage becomes critically important.

UM coverage is not mandatory under Oklahoma law.  You can choose to buy it or choose to reject it.  Your insurance company is required by law to offer UM coverage to you in the same amount as your liability coverage.  If you choose not to buy UM or to buy it in an amount less than your liability coverage, you must do so in writing on a statutory form your insurance agent provides you to sign.

Here is an example of how UM coverage might work in a common situation.  A UM policyholder is involved in an accident with a driver who has $25,000 in liability limits.  The UM policyholder is seriously injured, and ends up with medical bills of $50,000 from the accident.  The UM policy has $100,000 in policy benefits available to the policyholder.  The policyholder makes a claim to the UM carrier.  The UM carrier then has to fully and fairly investigate and even-handedly evaluate the claim.  To do so, the UM carrier must determine who was at fault for the accident (UM benefits are only available to the policyholder if the accident was the uninsured motorist’s fault) and the amount of the policyholder’s damages (like medical bills, lost wages, physical and mental pain and suffering, etc.)  If the UM carrier determines the accident was the policyholder’s fault or that the policyholder’s damages do not exceed the $25,000 in liability limits of the other driver, they will deny the claim.

There has been a great deal of bad faith litigation involving UM claims in Oklahoma.  The allegations by policyholders have ranged from unreasonable delay, to improper investigation, to under-evaluation of the policyholder’s damages, to reliance by the insurance company on biased experts, to improper policy langauge interpretation and so on.  A UM claim can be complicated (the adjuster must determine who caused the accident and the nature/extent of the policyholder’s damages – both questions can be nuanced and difficult) and there is a great deal of room for disagreement between the insurer and the policyholder.  An insurance company must take its duty of good faith very seriously and be proactive in its handling of a UM claim, or allegations of bad faith by the policyholder may very well follow.

There are three basic categories of damages a policyholder can recover if she wins a bad faith case.  Bad faith cases can be worth significant amounts of money.  In fact, a meritorious bad faith case can result in far more money being paid to the policyholder than what she was entitled to recover under the insurance policy in the first place.

The first category of damages a policyholder can recover is “contract” damages.  This is the amount of money the insurance company should have paid the policyholder under the insurance contract (the insurance policy) in the first place if it had not acted in bad faith.  For example, if the insurance company properly owed its policyholder the policy limits of $25,000.00, but denied the claim in bad faith, the insured is entitled to recover the $25,000.00.

The second category of damages is “compensatory damages for bad faith” or “bad faith damages.”  The policyholder who can prove bad faith is entitled under Oklahoma law to recover money from the insurance company, above and beyond the “contract” damages under the policy.  These damages are to compensate the policyholder for the harm done to them as a result of the insurance company’s  bad faith conduct.  If the evidence supports it, the jury in a bad faith case is allowed to award the policyholder monetary damages for things like:  financial losses, embarrassment and loss of reputation, and mental pain and suffering.  (See Oklahoma Uniform Jury Instruction No. 22.4 – it should be noted the Comment to this OUJI allows it to be altered by the trial court to fit the evidence of the policyholder’s damages).   If the claim denial by the insurance company caused, for example, the policyholder to lose money in their business, have their credit adversely affected and suffer mental upset, the jury may award the policyholder money for these things at trial.

The third category of damages is “punitive damages.”  Punitive damages are designed to punish a defendant in a lawsuit, if the defendant’s conduct is deemed sufficiently improper.  These damages are not designed to compensate the policyholder, but instead to deter the defendant and others from engaging in the punishable conduct in the future.  In a bad faith case, punitive damages may be awarded by the jury to make an example of the defendant insurance company so that they refrain from the same bad faith conduct in the future, and to send a message to the insurance industry that the bad faith conduct being punished is unacceptable.  Punitive damages can be awarded in addition to “contract” damages and “compensatory damages for bad faith.”

In theory, the law on damages in a bad faith case serves as a check against insurance companies denying claims without properly investigating, evaluating and paying them fairly, if owed.  If there was no monetary remedy for compensatory damages (and, in the right circumstances, punitive damages), insurance companies could deny claims in bad faith with the only downside to them being the policyholder recovering what was owed under the policy in the first place.

Not all bad faith cases filed are meritorious.  However, the ones that are can serve the valuable function of leveling the playing field between policyholders and the insurance industry.

The “legitimate dispute” defense is asserted in many, if not most, bad faith cases.  As noted in a previous post, using this defense, insurance companies often argue there is a “legitimate dispute” with the policyholder about the insurance claim in question, and there can therefore be no bad faith liability.  Policyholders often argue in response that the dispute is not “legitimate” but instead based on an improper investigation, skewed evaluation of the issues, biased expert analysis, etc.

In the recent case of Falcone v. Liberty Mutual Insurance Co., the Oklahoma Supreme Court took on the “legitimate dispute” issue in the context of an uninsured motorist (“UM”) claim.  In Falcone, the policyholder, Malinda Falcone, was injured in an automobile accident when an uninsured driver ran a stop sign and crashed into the vehicle in which she was riding.  Ms. Falcone was taken to the emergency room at OU Medical Center.  There, the ER doctors transferred her to the “Level 2” trauma center at the ER.  The total medical bill from OU Medical Center submitted to the UM carrier (Liberty Mutual) was $47,203.00 (including $24,420.25 for the Level 2 ER).  The total medical bills from all providers were $67,098.23.  Ms. Falcone had $100,000.00 in UM coverage available to her.

Liberty Mutual took issue with the amount of the ER bill, and had the medical records reviewed by two out-of-state “utilization review” doctors, both of whom gave the opinion that Ms. Falcone did not need to go to the Level 2 trauma ER.  The doctors also took issue with specific treatment, including CT scans.  Liberty Mutual then offered significantly less than its UM limits to settle the claim.  Ms. Falcone refused to settle for less than her policy limits and filed a bad faith lawsuit against Liberty Mutual.

After the suit was filed, Liberty Mutual paid its $100,000.00 policy limits.  Then, Liberty Mutual moved for summary judgment, asking the trial judge to find as a matter of law there was no bad faith.  The trial judge granted that motion, and Ms. Falcone appealed.  The Oklahoma Supreme Court unanimously overturned the summary judgment in favor of Liberty Mutual, finding it is up to the jury to determine “whether a lack of good faith is shown” by Liberty Mutual’s conduct.

Justice Gurich wrote a separate concurring opinion (with Justice Reif joining her) stating in her opinion Liberty Mutual committed bad faith as a matter of law.  Justice Gurich opined the case should be remanded to the trial court with instructions to submit the case to the jury only for a determination of whether Ms. Falcone was entitled to actual and punitive damages.  The concurring opinion was critical of Liberty Mutual’s reading of its policy language.  Further, the concurring opinion also stated:  “The very act of using the utlization reviewers as pretext to deny payment of the emergency room bill in this case is bad faith.  Liberty Mutual had no justifiable reason for withholding payment under the policy.”

By way of this opinion, the Oklahoma Supreme Court has reinforced the principle that a bad faith case in which the insurance company relies on the “legitimate dispute” defense should be decided, at least in most cases, by a jury – not on summary judgment.  As a result, lay juries will continue to most often be the arbiters of whether an insurance company’s adverse claim position constitutes a “legitimate dispute” or not.  Policyholders and their lawyers are likely pleased with this result.

Not every denial of an insurance claim is an act of bad faith by an insurance company.  In fact, the law in Oklahoma provides an insurance company has a right to be wrong about a decision on a claim without automatically being in bad faith.  However, not every dispute is “legitimate.”  If every claim denial amounted to a “legitimate dispute,” there would never be a bad faith case.  Instead, the insurance company would simply claim they legitimately thought they were on the right side of the dispute with the policyholder and seek to insulate itself from all bad faith liability.

Clearly, this is not the way the system works.  The real inquiry is whether the insurance company had a good faith basis for its claim decision.  If it did, then there is no bad faith liability.  However, under the law, an insurance company is not allowed to manufacture a dispute where none should exist.  An insurance company cannot use biased experts (like biased doctors or engineers, for example) against its insured.  It cannot investigate the claim only to find reasons to deny the claim while ignoring facts indicating the claim should be paid.  It cannot unreasonably and unfairly interpret policy language against an insured in an effort to avoid coverage.

The “legitimate dispute” defense is raised as a defense in almost every bad faith case.  The insurance company and its lawyers attempt to focus on whatever evidence might exist to support a claim denial, and argue a legitimate dispute exists.  On the other hand, the policyholder and her lawyer hammer away at the weaknesses in the insurance company’s investigation of the claim and reasoning for the denial, arguing whatever dispute exists about the claim is unfounded and manufactured in a bad faith.  Policyholders and their lawyers often claim the insurance company’s denial was not based on a fair evaluation of the evidence, but on a desire by the insurance company to avoid paying a legitimate claim.

When an insurance company raises the “legitimate dispute” defense in response to a bad faith case, the company’s investigation and decision-making process are placed directly in the crosshairs of the policyholder’s lawyer’s attack.  Bad faith cases are won or lost based on the quality of the adjusters’ work, their ability to defend their positions under cross-examination, and the relative skill of the lawyers on both sides of the case.  This is definitely true when the “legitimate dispute” defense is in play.

This story appeared recently in Claims Journal indicating Farmers Insurance is beginning to use drones to inspect homeowners’ roof damage claims.  Other companies are sure to follow (if they haven’t already).  The idea appears to be that adjusters have been trained to fly drones over a policyholder’s house after a storm damage loss to determine whether the house has been damaged and the extent of any such damage.  In theory, this would allow the adjuster to “see” the roof without being required to climb on top of the house to look. Before this new approach (and other aerial photography methods), adjusters would climb ladders and inspect roof damage to a policyholder’s home with their own two eyes.  This same approach has traditionally been taken by roofing contractors who are hired to repair damaged roofs.  Experienced adjusters and roofers can look at a roof and see damage from, for instance, hail stones striking the shingles.  Using drones to do this work will undoubtedly change the game.

Certainly, insurance companies are like other businesses in that they are looking for ways to apply new technologies in an effort to operate more efficiently and cost-effectively.   The insurance industry has likely concluded that inspecting roofs with drones can be done more quickly and cheaply than the old way.  In this context, using drones may also protect adjusters from climbing up ladders onto sometimes steep or slippery roofs.  This may turn out to be especially useful in “catastrophe” situations where dozens or even hundreds of houses are damaged in the same storm event (like the tornadoes and major hail storms we have become all too familiar with here in Oklahoma).

Innovation in the insurance industry can be a good thing, as long as the insurance companies keep in mind their basic mission is to handle claims in good faith.  Insurance companies must resist the temptation to implement technological “solutions” in a way to trim or cut fair claim payments to insureds.  It will be interesting to see whether drones as the “eyes” of the adjuster lead to quicker, more accurate claim payments or whether the drone program leads to increased disputes between insurance companies, their policyholders and the roofing contractors hired to repair storm-damaged roofs.  Ultimately, the duty of good faith applies to claim handling practices, whether the insurance company has decided to use technology to assist in adjusting the claim or not.

As noted in a previous post, there is no comprehensive list of acts of bad faith by an insurance company under Oklahoma law.  Further, the legal definition of bad faith leaves a lot of gray area to be filled in based on the facts of each case.  As a result, the question of whether an insurance company committed bad faith with regard to any particular claim is, from a practical standpoint, answered by applying the “smell test.”

In other words, it often happens that a policyholder believes his insurance company has acted in bad faith in handling a claim, while on the other hand the insurance company believes it acted in good faith.  In these situations, there is often no clear cut rule in the law that says the insurance company’s conduct was bad faith or not.  When this happens, the lawyers representing the policyholder and the insurance company attempt to cast the facts of the case in the light most favorable to their respective clients.

Oftentimes, the definition of bad faith found in Badillo v. Mid-Century (discussed in a previous post) must be applied to facts that lend themselves to interpretation by both sides.  Therefore, whether the insurance company acted in bad faith is most times left to a jury to decide.  A jury in a bad faith case, as in all civil cases, is made up of citizens of the venue where the case is being tried who have been called to jury duty.  They represent the collective wisdom of the community in which they live.  When it gets right down to it, the jury must weigh the evidence and determine if they believe the insurance company’s conduct amounted to more than “simple negligence” (or an honest mistake).  They do not have to decide the insurance company’s conduct rose to the level of “reckless.”

How does a jury of regular people decide this?  The apply their fundamental sense of fairness and their knowledge of the difference between right and wrong.  In other words, the “smell test.”

As a young lawyer starting to work on bad faith cases, I was anxious to do the legal research necessary to find a list of acts by an insurance company that qualified as “bad faith.”  I began looking in the law books (we didn’t use computerized research much back in the stone ages).  I quickly learned there is no one place to find a laundry list of things the law deems to be acts of bad faith.

This was a little frustrating.  I felt like there ought to be clear guidance to insurance companies, policyholders and lawyers handling bad faith cases as to what constitutes bad faith.  While there are some Oklahoma court decisions that hold certain factual scenarios presented in individual cases either are or are not bad faith, there is no case that sets forth a comprehensive list.

As far as statutes go, Oklahoma has its version of the Unfair Claims Settlement Practices Act (the “UCSPA”).  That statute provides some guidance by defining actions by insurers that are deemed “unfair claims settlement practices.”  But the UCSPA does not allow for a “private cause of action” when an insurance company violates the Act.  This means a policyholder can’t sue an insurance company and base her claim on a violation of the UCSPA.  Certainly, the UCSPA helps define industry standard claim practices and it can be relevant in many ways in a bad faith case, but it is not exactly what I was looking for as a young lawyer.  In reality, nobody with much experience in bad faith cases would believe it contains a comprehensive list of actions that constitute bad faith.

The answer to the question:  “What is bad faith?,” like so many questions people pose about the law, is:  “it depends on the facts of the case.”  Perhaps the best way to understand this somewhat unsatisfying state of affairs is to refer to the seminal case of Badillo v. Mid-Century.  The Oklahoma Supreme Court was called upon to define bad faith in that case, and along those lines stated:

“. . .[T]he minimum level of culpability necessary for [bad faith] liability against an insurer to attach is more than simple negligence, but less than the reckless conduct necessary to sanction a punitive damage award against said insurer.”

In effect, Oklahoma law requires an insurance company to do more than make an honest mistake in order to be held liable for bad faith.  But, an insurance company does not have to engage in conduct that rises to the level of recklessness to be in bad faith either.  So, in light of this, when people ask me what bad faith conduct is, I tell them it requires more than the equivalent of running a stop sign, but less than running a stop sign at 80 mph while driving drunk.  There is a lot of space between simple negligence and recklessness and that is where the tort of bad faith begins.  The facts of each case must be evaluated to determine if the insurer’s conduct arises to the level of bad faith.

The truth is, from a practical standpoint, bad faith is often best identified by the “smell test.”  Later posts will address how this “test” is applied to real examples.

A trend is developing in the insurance industry with regard to the use of “artificial intelligence” throughout an insurance company’s business operation, including handling claims submitted by policyholders.  A recent survey of insurance executives revealed that many of them believe artificial intelligence will revolutionize their companies and the insurance industry at large in the next handful of years.

I suppose I could buy the idea that an insurance company could improve its efficiencies in various areas like underwriting risk or streamlining the process for soliciting, selling and issuing policies and the like.  On the other hand, the idea of artificial intelligence (basically a computer program developed by the insurance company or one of its vendors) investigating, evaluating and deciding on claims submitted by policyholders is deeply concerning.

In Oklahoma, an insurance company owes a duty of good faith and fair dealing to its policyholder. That means when a policyholder makes a claim, the insurance company has to act reasonably, fairly and in good faith with regard to the specific facts and circumstances surrounding that policyholder’s claim. If the policyholder’s claim involves, for example, a personal injury suffered in an accident, how can a computer possibly take into account the human elements involved with such an injury and place a fair value on it? What about a claim that requires an evaluation of the truthfulness/credibity of an eyewitness account of an incident?  Only a properly trained, experienced, unbiased human being can do these things in good faith.

Why would an insurance company replace the judgment of its adjusters with a computer program’s judgment? Because insurance executives believe doing so saves their companies money.  Where does this savings come from? From lower claim payments. Who pays the price for lower claim payments?  Policyholders.  Is this good faith? The lawsuits that are sure to follow such a move by the insurance industry will tell the tale.