Insurance Company’s Duty to Reasonably Investigate Claims Under Washington law

The Washington State Association for Justice recently published McKean Evans’ article regarding insurers’ duty to reasonably investigate claims. The article, entitled Insurance Company’s Duty to Reasonably Investigate Your Client’s Claim a Powerful Tool for Making Client Whole, discusses the legal basis for insurers’ duty to reasonably investigate claims. Evans discusses how insurers’ breach of this duty is actionable and can be used to rebut typical insurer defense strategies in insurance bad faith litigation.

Among other things, the article explores:

  • How an insurer’s breach of its duty to investigate establishes liability in an insurance bad faith action;
  • The Washington Supreme Court’s seminal decision in Coventry Assocs. v. Am. States Ins. Co., 136 Wn. 2d 269, 276, 961 P.2d 933, 935 (1998), establishing that the duty to reasonably investigate claims is a fundamental part of the benefit the policyholder receives in exchange for their premiums;
  • How the duty to reasonably investigate requires an insurer to base its coverage decisions on “adequate information” and not “overemphasize its own interests;” consider new information the insured provides in response to the insurer’s denial of her claim; and reasonably consider a policyholder’s final coverage demand under the Insurance Fair Conduct Act;
  • Facts to look for in investigating an insurer’s bad faith that would help prove the insurer failed to reasonably investigate the claim.

 

Court Rejects ERISA Insurer’s Effort to Discredit Treating Physicians in Awarding Disability Benefits

A recent decision from federal court in Oregon is an interesting example of how ERISA disability benefit disputes can arise where the claimant suffers from complex and hard-to-diagnose conditions such as fibromyalgia. Since conditions like fibromyalgia defy easy identification, these cases often turn on the claimant’s treating doctor’s documentation of the claimant’s symptoms.

Jane Medefesser sued her LTD carrier, MetLife, after MetLife denied her disability insurance claim. Medefesser suffered from a host of medical conditions including fibromyalgia and migraines. Medefesser’s doctors opined her medical conditions impacted her ability to function even in a sedentary job.

MetLife initially approved Medefesser’s disability claim. But MetLife subsequently changed its position and terminated Medefesser’s benefits after an “independent” doctor hired by MetLife determined Medefesser could perform sedentary work. MetLife also relied on opinions from its physicians that Medefesser’s doctors were, supposedly, exaggerating Medefesser’s symptoms.

The court disagreed with MetLife that Medefesser’s doctors were exaggerating her symptoms. To the contrary, the court noted that, given the complexity of Medefesser’s condition, the treating doctors who personally examined Medefesser were in the best position to reliably assess her disability.

This ruling is notable because it addresses a common issue in ERISA disability cases involving conditions like migraines or fibromyalgia. Where the claimant’s disability arises from complex conditions that defy easy diagnosis, disability insurers have an incentive to rely on the supposed lack of “objective” findings or review by “independent” consultants. These consultants’ opinions typically boil down to: “if it doesn’t show up on an x-ray, it’s not real.” The Medefesser decision is a great example of a judge rejecting such an argument.

 

Ninth Circuit Emphasizes Importance of ERISA Claims-Handling Regulation in Reversing LTD Benefit Denial

ERISA-governed disability benefit claims are subject to the Department of Labor’s regulation requiring full and fair investigation of claims. The regulation includes rules requiring claims administrators apply plan provisions correctly and thoroughly investigate claims. A claims administrator’s failure to adhere to the rules expressed in the regulation can be the difference-maker if the benefit dispute proceeds to litigation. A recent unpublished Ninth Circuit Court of Appeals decision, Alves v. Hewlett-Packard Comprehensive Welfare Benefits Plan, emphasizes this.

Alves applied for short-term disability and long-term disability under his employee benefit plan. The plan’s claims administrator, Sedgwick, determined Alves’ condition did not render him disabled, i.e., that Alves could still perform his job duties. On that basis, Sedgwick denied both the short- and long-term disability claims. The federal district court agreed with Sedgwick.

The Ninth Circuit Court of Appeals reversed the district court. The Ninth Circuit agreed that Sedgwick’s decision Alves didn’t qualify for short-term disability benefits was adequately supported by Alves’ medical information. But the court found Sedgwick incorrectly evaluated Alves’ long-term disability claim. Sedgwick denied Alves’ long-term disability claim because Sedgwick concluded Alves failed to meet the plan’s one-week waiting period. The court concluded Alves’ clearly met this requirement. Accordingly, the court remanded Alves’ long-term disability claim to Sedgwick for further investigation. The Ninth Circuit admonished Sedgwick to follow ERISA’s rules requiring full and fair investigation of claims in reviewing Alves’ long-term disability clam on remand.

The Ninth Circuit’s opinion is unpublished, meaning it is only persuasive precedent. Lower courts may follow this decision if they find it persuasive, but they are not required to.

The Alves decision is an important reminder that ERISA claims administrators can be held accountable for failing to correctly apply plan provisions and failing to investigate claims in compliance with ERISA’s implementing regulation.

Wildfires Making Insurance Coverage Hard to Get – California Expands State Coverage Fund

California recently announced new wildfire insurance rules that might be a glimpse into the future for Washington State homeowners having trouble getting insurance coverage in wildfire-prone parts of Washington. California’s new rules help people who can no longer get homeowner’s insurance coverage due to increased wildfire risk. The new rules expand a California state-run program acting as the insurer of last resort for homeowners living in areas at high risk of wildfires.

Like Washington and Oregon, California has seen significant damage from large wildfires in recent years. This has caused many insurance companies to cancel homeowner’s insurance policies for homes in high-risk areas. Even where coverage remains available, premiums have increased significantly. Many California homeowners have complained about being abruptly dropped by their homeowner’s carriers, or facing exorbitant price increases. In 2017 and 2018, California wildfires caused over 124,000 claims and about $26 billion in losses. Like other mass-disaster claims, wildfire insurance claims are often difficult due to the scope of the losses and the size of the claims.

California’s Fair Access to Insurance Requirements (FAIR) plan collects contributions from California insurance companies to support a fire loss coverage fund. Starting in April, FAIR will cover up to $3 million in damages, and will eventually be expanded to cover other non-fire liabilities, such as water damage or personal liability, typically covered by traditional homeowners insurance. The goal is that homeowners covered by FAIR should have adequate coverage without having to buy additional insurance.

The move was, predictably, applauded by consumer advocates but criticized by the insurance industry, which said the changes could hurt consumer choice.

Court of Appeals Confirms Insured Can Reform Policy Language to Provide The Coverage The Insured Purchased

The Washington Court of Appeals recently answered an important question for policyholders: what if your agent sells you coverage but the insurance policy fine print fails to reflect the coverage you thought you purchased?

On November 4, 2019, the Washington Court of Appeals decided Digitalalchemy, LLC v. John Hancock Insurance Company (USA). The court held Digitalalchemy could sue John Hancock for denying coverage under a life insurance policy because, even though the policy language supported John Hancock’s denial, Digitalalchemy had purchased broader coverage than the policy reflected.

Digitalalchemy bought John Hancock’s life insurance policy to cover its key executives. When buying the policy, John Hancock’s agent agreed to backdate the insurance coverage’s start date. That means the policy would effectively begin providing coverage before the date Digitalalchemy purchased the policy. However, due to a mistake, the policy language failed to reflect the backdated start date.

One of the covered executives died by suicide, and Digitalalchemy made a claim under the policy. John Hancock denied coverage under the policy’s suicide exclusion. The policy excluded coverage if the insured died by suicide within two days of the “issue date.” Because the parties agreed to backdate the policy start date, the insured died after the two-year exclusion period, and John Hancock should have paid the claim. But because the policy failed to reflect the backdating, John Hancock denied coverage under the suicide exclusion.

The court agreed with John Hancock that the policy language did not backdate the start date. However, the court also found that Digitalalchemy sufficiently alleged the parties had agreed to backdate the policy and that the failure to reflect the backdating in the policy was a mistake. Accordingly, the court agreed Ditigalalchemy could argue the policy should be reformed to reflect the backdated start date because that was what both parties had intended.

That ruling is important because it is another recent case confirming insureds can still obtain recourse if they purchase coverage but the insurer writes a policy failing to accurately reflect the purchased coverage.