The Minnesota Supreme Court’s recent decision affects insurers doing business in Minnesota. This article highlights key factors to help you avoid bad faith findings and the handling of intrusive discovery (associated with bad faith allegations). In Peterson v. Western National Mutual Insurance Company, 946 N.W.2d 903 (Minn. 2020), the court’s expansive interpretation of bad faith illustrates the importance of diligent and prompt claims handling.
As a matter of first impression, Peterson analyzed the liability language of Minnesota’s first-party bad faith statute, Minn. Stat. § 604.18, and affirmed a bad faith judgment against Western National Mutual Insurance Company (Western National). This clarified the test lower courts must use when considering first-party bad faith claims (i.e., claims brought by a policyholder against his/her insurer, due to an alleged wrongful denial, delay, or underestimated value of a submitted claim).
Underinsured Motorist Claim
In Peterson, Western National provided the plaintiff Alison Joel Peterson (Peterson) with a $250,000 underinsured motorist policy. After a low-speed car accident and the settlement of underlying claims with the alleged tortfeasor, Peterson demanded payment of her full policy limits. For more than one year following the demand, Western National neither paid nor expressly denied Peterson’s underinsured motorist claim. However, in the meantime, Western National retained a neurologist to conduct an independent medical examination (IME) of Peterson to determine if her claims of injury had merit. The IME doctor concluded any injury Peterson suffered as a result of the accident resolved shortly afterward, therefore; the Botox treatments for the ongoing headaches that she alleged resulted from the accident, were not needed. The IME doctor admitted to never prescribing Botox as a treatment for headaches.
Breach of Contract Awarded
Relying largely on the IME report, Western National did not pay Peterson the underinsured motorist benefits she demanded. Peterson eventually initiated a breach of contract lawsuit. The case went to trial and a jury awarded Peterson past and future personal injury damages totaling $1,414,090, which included more than $900,000 for past and future health care expenses.2 Thereafter, Peterson amended her complaint to allege bad faith in failing to pay her underinsured motorist benefits and sought the taxable costs and attorney fees allowed under Minn. Stat. § 604.18.
Bad Faith Ruling
Ultimately, the district court concluded Western National committed bad faith and awarded Peterson the statutory damages she sought.
The crux of Peterson involves interpretation of Minn. Stat. § 604.18 which lays out a two-prong test to determine whether an insurer has committed bad faith. The insured must show:
- the absence of a reasonable basis for denying the benefits of the insurance policy; and
- that the insurer knew the lack of a reasonable basis for denying the benefits of the insurance policy or acted in reckless disregard of the lack of a reasonable basis for denying the benefits of the insurance.
Peterson indicates the first prong warrants consideration of whether a reasonable insurer under the circumstances would not have denied the insured policy benefits using an objective standard. To make this determination, fact finders may consider the level of investigation a reasonable insurer would have conducted, and whether the evaluation was fair, considering and weighing all of the facts and circumstances that a reasonable insurer would consider relevant.
Applying that test, the Peterson court agreed that Western National committed multiple errors during the claims handling process, including ignoring substantial evidence that supported Peterson’s claim that her injuries were caused by the accident. Also, the delay in consulting with any medical professional for 18 months after filing her claim supported the bad faith finding.
The second prong of § 604.18’s test incorporates the mens rea element of the claim. This subjective inquiry concerns whether the insurer knew, or recklessly disregarded information that it lacked an objectively reasonable basis for denying the claim. This may be inferred and imputed to an insurance company where there is a reckless disregard or a lack of a reasonable basis for the denial, or, a reckless indifference to facts or to proofs submitted by the insured. The insurer’s actual investigation and evaluation are relevant to this prong of the analysis.
The court found Western National exhibited a reckless indifference to facts and proofs submitted by Peterson, failing to evaluate any of the evidence favorable to her claim, and failing to investigate it with an open mind. For example, the court questioned Western National’s almost blind reliance on an IME, stating:
“Of course, we do not hold that it is never reasonable for an insurer to obtain and consider an independent doctor’s opinion when determining whether to deny an insured’s claim for benefits. On the other hand, it is not always reasonable to rely on an independent doctor.”
Because of this analysis, policyholders asserting bad faith claims in the future will likely seek to scrutinize the reasonableness of the IME report, as well as the credentials of the IME doctor upon whose opinion the insurer relies.
An Increase in Bad Faith Claims?
More broadly, Peterson may lead to an increase in bad faith claims filed against first-party insurers in general. Once those claims begin, insurers will see increased scrutiny of their claims handling practices by the courts, especially with regard to delayed determinations. This could cause insurers to face more intrusive, broad discovery that pierces the proprietary information related to insurers' claims handling procedures rendering aggressive defense of these claims necessary.
What You Should Consider
Insurers should look inward and evaluate their claims handling practices. When doubt arises, insurers should consult defense counsel early to vet questions related to a particular claim and avoid a delay that could trigger a bad faith claim.
If you have any questions regarding insurance-law related topics, please contact the authors or one of the other attorneys in HKM’s Insurance Law Group at (651) 227-9411.