Washington Federal Court Rejects Insurer Efforts to Escape Lawsuit by Paying Benefits Retroactively

One important right policyholders have is to be fully compensated or “made whole” when the insurer improperly denies coverage or payment of benefits.  Some insurers argue, incorrectly, that they can avoid making the policyholder whole by paying the disputed policy benefit after the policyholder files a lawsuit.  That’s incorrect because by the time the policyholder files suit, they’ve typically lost significantly more than just the disputed policy benefit: they’ve hired lawyers or experts, paid for repairs or other bills out of pocket, or lost business income because they couldn’t afford to effect repairs without insurance coverage.

In its April 23, 2018 decision in Williams v. Foremost Insurance Co., 2:17-CV-1113-RSM, 2018 WL 1907523 (W.D. Wash. Apr. 23, 2018), the U.S. District Court for the Western District of Washington analyzed and rejected the argument that the insurer can escape a bad faith lawsuit by retroactively paying the benefits it denied in the first instance.

Williams brought a claim for vandalism damage under her insurance policy with Foremost.  Foremost denied Williams’ claim for insurance benefits, arguing that the vandalism was caused by people who were Williams’ tenants at the time of the damage.  Foremost ignored Williams’ argument the loss was covered because the vandals were former as opposed to current tenants.

Williams brought a lawsuit alleging claims for bad faith and violations of Washington’s Insurance Fair Conduct Act (“IFCA”) and Consumer Protection Act (“CPA”); those claims entitled Williams to damages beyond the amount of the disputed insurance benefit, such as attorney’s fees, court costs and treble damages.

The court promptly ruled that coverage existed and ordered Foremost to pay the disputed benefits.  Following that ruling, Foremost paid Williams $187,001.43 in benefits owed.

Foremost then asked the court to dismiss Williams’ claims for bad faith and for CPA and IFCA violations.  Foremost claimed that, since it paid the policy benefits Williams claimed, Williams had no right to assert any additional claims.  The Court rejected Foremost’s arguments.

First, and most importantly, the court rejected Foremost’s argument that Williams’ remaining claims were barred because Foremost ultimately paid the insurance benefits, and that Williams could not bring further claims without producing “her complete financial records.”  The court determined “Foremost’s insurance payment to Ms. Williams is irrelevant to the issue of bad faith” and that “Washington State law does not appear to provide that retroactive payment for an insurance claim extinguishes all the alleged harm to a plaintiff[.]”

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Snow lake trail, Central Cascades.

Next, the Court rejected Foremost’s argument that its claim denial was reasonable in light of the evidence Foremost had at the time.  The Court noted that Foremost’s evidence showed only that the vandalism was caused by former – not current – tenants, and that Foremost had no evidence that the vandals were Williams’ tenants at the time the vandalism occurred.  Moreover, Williams explicitly advised Foremost the vandals were not tenants at the time of the damage.

Finally, the Court also emphasized that an insurer’s bad faith denial of coverage injures the insured beyond merely the dollar amount of the policy benefit.  In this case, Williams suffered additional damages because Foremost’s wrongful denial delayed her ability to repair the vandalism damage to her building; Williams also had to hire an expert, take construction loans, and perform some repairs herself.

The Williams decision emphasizes insurers cannot escape bad faith lawsuits merely by paying the disputed benefits after the fact.

 

Court Rules School Buses are Not “Automobiles” Under State Farm Insurance Policy Fine Print

Whether a school bus is an automobile would seem to be a matter of common sense.  Unfortunately for the policyholder in one recent lawsuit, it’s actually a matter of reading the fine print.

Washington’s Court of Appeals recently issued a ruling that significantly limits policyholders’ coverage under many automobile insurance policies. In Koren v. State Farm Fire and Casualty Company, Case No. 34723-1-III, the court interpreted State Farm’s insurance policy as excluding coverage for injuries Mrs. Koren’s son sustained in a school bus crash.

Mrs. Koren’s State Farm policy covered harm “caused by an automobile accident.” After Ms. Koren’s son was injured in a school bus crash, Mrs. Koren submitted a claim under her State Farm policy. State Farm denied coverage, claiming school buses are not “automobiles” under State Farm’s policy.

The Court of Appeals agreed with State Farm. State Farm had added to its policy a limited definition of “automobile,” which meant, under the policy, only automobiles “designed for carrying ten passengers or less.” Mrs. Koren relied on existing Washington Supreme Court precedent holding that the term “automobile accident” in an insurance policy may be broader than the definition of the individual term “automobile.” The court rejected this argument, noting that Washington’s insurance statutes had a similar definition of “automobile” to State Farm’s.

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Dry riverbed in the Arizona desert.

Most policyholders would likely be surprised to learn a school bus or Port Authority bus is not an “automobile” covered under their insurance policy. Perhaps recognizing this, the court noted Mrs. Koren’s “concerns must be raised with the legislature.” Unless and until the legislature acts or the Washington Supreme Court reverses this ruling, policyholders should carefully review the terms and fine print of their policies to make sure their coverage comports with their own understanding.

Insurance Regulators Investigating Aetna for Training Employees to Deny Coverage Without Reviewing Patient’s Medical Records

Aetna, the country’s third largest health insurer, is under investigation by state insurance regulators following Aetna’s admission that it routinely denies medical treatment coverage without reviewing the insured’s medical records. Aetna’s admission surfaced in a lawsuit by a California man who claimed Aetna improperly denied coverage for his medical treatment. The insured has a rare autoimmune disorder requiring monthly dosages of an expensive medication.

Aetna’s physician admitted in the course of the lawsuit that he routinely denied coverage for insured’s treatment without reviewing the insured’s medical records. Aetna’s training, the physician testified, permitted him to simply follow the recommendations of Aetna’s nurses.

Since the physician claimed to have followed Aetna’s normal procedures, other Aetna insureds may similarly have had coverage for necessary treatment erroneously denied by reviewing physicians who failed to examine their medical records.

Insurance coverage for chronic conditions has become a hot-button issue. In recent years, patients with rare chronic diseases have faced increasing challenges getting insurers to cover treatment. Insureds’ difficulty covering treatment for chronic diseases is often complicated by pharmaceutical companies’ increasingly common practice of raising prices on chronic disease medications by several hundred percent in a single increase.

Washington insureds who suspect their health coverage was improperly denied have ample legal recourse. If the insurance plan is through an employer, the federal Employee Retirement Income Security Act (“ERISA”) gives the patient the right to appeal a coverage denial, to sue in federal court if the appeal is wrongfully denied, and to obtain coverage and attorneys’ fees. For non-employer insurance, Washington’s Insurance Fair Conduct Act and Consumer Protection Act give insureds the right to bring a lawsuit to obtain coverage as well as exemplary damages and attorneys’ fees.

 

How Do I Make An Insurance Claim After Wildfires, Floods, Hurricanes or Other Natural Disasters?

Disasters have been in the news a lot in the last 12 months, between west coast wildfires, Texas floods and Florida hurricanes.  Disasters raise a number of insurance issues for policyholders, especially when they’re busy digging out of the wreck already.  Disasters also strain overworked insurance company personnel, who might make hasty guesses about your loss that wind up being inaccurate. Here are some steps you might consider taking if that happens (after making sure everyone is safe of course):

  • Promptly Notify Your Insurer – Your first step if you think you might have a claim is to tell your insurer. Delayed claim notice is a basis to deny an otherwise valid claim.  It’s also wise to make sure the insurer has your updated contact information.
  • Read Your Policy – Your insurance policy is an important starting point. It spells out your rights and the company’s obligations.  It contains important time limits and similar rules you need to follow in order to make a valid insurance claim.  It also specifies your coverage in detail; don’t assume the overworked adjuster processing thousands of similar claims will identify all coverage that might benefit you. It may require you consult with the company before undertaking any repairs, or have similar rules you need to follow.
  • Protect Yourself From Further Loss – Protecting yourself and your property from further damage is common sense. It’s also explicitly required by many insurance policies.  If you sustain further loss because you failed to take reasonable preventative measures, your insurer may have a valid basis to refuse to cover the additional loss you could have avoided.  But keep in mind that your policy may provide that non-emergency repairs require you to consult with the company before undertaking the work.
  • Make a Paper Trail – Take notes when you speak to the adjuster or contractors, and save your receipts for all disaster-related expenses such as repairs or hotel bills. Make sure you get important statements from the insurer, like requests for information or coverage statements, in writing. Keep an inventory detailing the full scope of the loss.
  • Get Repair Quotes – Get an estimate from the contractor or another appropriate person of the cost to repair the damage. This will give you a reasonable basis to double-check your insurer’s estimate.
  • Be Present During the Inspection – Your adjuster will likely inspect your property to ascertain the scope of the damage. It’s often wise to attend the inspection in person.  That way, you can point out the full extent of the damage and make sure the adjuster doesn’t miss anything.
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Light snow in the Olympics.

Ninth Circuit Decision Shows Life Insurance Pitfalls for Policyholders; Clarifies Jurisdiction in Insurance Disputes

The Ninth Circuit’s recent ruling in Elhouty v. Lincoln Benefit Life, Case No. 15-16740 (March 27, 2018) is notable for two reasons.  It illustrates the pitfalls of certain life insurance policies that supposedly pay for themselves, and it clarifies the jurisdictional standard governing when insurance disputes can be litigated in federal as opposed to state courts.

Elhouty purchased a flexible premium adjustable life insurance policy from Lincoln Benefit Life Company with a $2 million face value.  Adjustable life policies are often marketed as giving the policyholder all the advantages of death benefit protection, an interest-bearing account for investment purposes, and flexibility as to how premiums are paid.  The policies often come with a sales pitch that the policy’s investment component will effectively pay off the future premiums, without mentioning that the investment returns are often inadequate to cover future premium increases.

Elhouty’s case illustrates this pitfall: for years, Elhouty arranged for his premiums to be IMG_1030paid directly out of the policy’s net surrender value, but failed to notice when the net surrender value was exhausted and he was sent a bill for $55,061.49 to keep the policy in force.  Since Elhouty never paid the additional premium, Lincoln Benefit claimed the policy lapsed.  Elhouty disputed Lincoln Benefit properly notified him of the additional premium he owed, and filed a lawsuit seeking a court declaration that the policy remained in force.

Elhouty sued in state court, and Lincoln Benefit removed the action to federal court (conventional wisdom holds federal courts are more insurer-friendly than state courts).  To properly remove the action, Lincoln Benefit was required to establish that the amount of money at issue in the lawsuit exceeded $75,000.00.  Lincoln Benefit argued the amount at issue was the full $2 million policy face value; Elhouty claimed it was only the $55,880.08 in premiums he allegedly owed Lincoln Benefit.

On the jurisdictional issue, the Ninth Circuit agreed with Lincoln Benefit.  The court determined the unpaid premiums were not in dispute because Lincoln Benefit did not seek to recover them from Elhouty.  Elhouty had had the option to pay $55,880.08 to keep the policy in force, but the real dispute in the lawsuit was the policy’s validity.  The court clarified that, in cases where the “controversy relates to the validity of the policy and not merely to liability for benefits accrued,” the policy’s face value is the amount in controversy for jurisdictional purposes.  Thus, the court ruled the amount in controversy was $2 million and federal courts had jurisdiction.

The court also agreed with Lincoln Benefit on the merits of the dispute.  Elhouty argued Lincoln Benefit’s policy termination notice for unpaid premiums was defective because Elhouty never received notice.  But the court ruled that the language of the policy and applicable state law required only that the notice be mailed, not that the policyholder actually receive it.

For insurance lawyers, Elhouty is useful for its clarification of the jurisdictional standard. For policyholders, Elhouty is a reminder of the importance of keeping your premium payments up to date and not taking the insurer’s promotional materials at face value.