On Monday, the Minnesota Court of Appeals handed down a decision that could have far-ranging impacts for insurance companies. The decision in Peterson v. W. Nat'l Mut. Ins. Co., No. A18-1081, 2019 WL 2332400 (Minn. Ct. App. June 3, 2019), suggests that insurance companies' fears about impacts of the 2008 bad faith statute, Minnesota Stat. § 604.18, which imposes liability on insurers that fail to settle first-party cases in "good faith," may come true. The following are the four main takeaways from this decision. I have also attempted to distill the case down to a few pages in the following sections.
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- Courts are prepared to allow detailed scrutiny of an insurer's claims process when evaluating liability under the bad faith statute.
- During a bad faith trial, the insurance representatives will be examined about even minor mistakes in internal evaluations and will be called to explain all delays in responding to claims.
- Possibly because of the clarity of 20/20 hindsight, traditional indicators of a weak claim will not necessarily defeat a bad faith claim. In Peterson these included: subjective injuries; similar pre-existing injuries or complaints; a strong IME report; a low-speed impact; lack of immediate medical care; and the absence of any pre-suit connection of the injury to a permanent medical condition.
- Finally, cases that involve costly ongoing medical treatment, such as claims that seek damages for Botox treatment, must be taken very seriously. An adverse verdict may find the Plaintiff extending the insurer's total exposure through use of Minnesota's bad faith statute.
The "Bad Faith" Statute
In 2008, Minnesota enacted Minn. Stat. § 604.18, which imposes liability on insurers that fail to settle first-party cases in "good faith." Thus, in cases involving first-party benefits, including property claims, UM and UIM claims, and PIP claims, an insurer faces penalties which result in exposure beyond the policy limits. The statutory penalty includes "an amount equal to one-half of the proceeds awarded that are in excess of an amount offered by the insurer at least ten days before the trial begins or $250,000, whichever is less." Minn. Stat. section 604.18, subd. 3 (2018). The statute also allows a successful plaintiff attorney fees for prosecution of the bad faith proceeding. When the statute was passed, insurers feared that these proceedings would be conducted with the benefit of 20/20 hindsight. The very recent decision in Peterson v. W. Nat'l Mut. Ins. Co., No. A18-1081, 2019 WL 2332400 (Minn. Ct. App. June 3, 2019), suggests that these insurers' fears were well founded.
Facts in the Peterson Case
Peterson was involved in a motor vehicle accident and sustained a whiplash injury. She claimed to have experienced severe daily headaches following the accident and after years of other treatments started a course of Botox injections, which she reported reduced her headaches 50%. Her treating neurologist testified that her headaches were permanent and that she would need Botox injections every 3-4 months for the rest of her life.
Peterson settled with the other driver for $45,000 on a $50,000 liability policy and then served notice of a demand for the Western National UIM policy limits of $250,000.
Western National made several requests for medical information over the next 11 months, but did not accept or deny the demand. At this point, Plaintiff's counsel inquired about the status of the claim, but received no response. Two months later, having received no response, Peterson sued Western National. Western National then obtained an IME. The IME doctor opined that there was no causal relationship between the accident and the headaches. Western National's counsel opined that Western National's UIM exposure was "slim to none."
At mediation Western National offered only $2,000. Peterson offered to settle for $200,000, but this demand was rejected. The decision notes that following the mediation, Plaintiff's counsel prevailed in a Botox case in Hennepin County with an award of $1.1 million. Western National declined to adjust its offer based on this prior verdict on the grounds that Peterson had pre-existing headaches and the IME doctor in the other case was a "very bad witness for the defense." Nevertheless, Western National increased its offer, first to $10,000, and then, after medical depositions, to $50,000.
At trial both parties presented contradictory evidence as to the cause of Peterson's headaches. The jury returned a verdict of $1.4 million, including more than $900,000 for past and future medical expenses. Western National paid Peterson its $250,000 policy limits.
The Bad-Faith Claim
After the judgment on the merits, the trail court granted Peterson leave to amend her complaint to include a bad-faith claim, pursuant to the statutory procedure found in 604.18.
At the trial on the bad-faith claim, both parties presented witnesses on insurance claim handling practices. Peterson's expert testified that Western National lacked a good faith basis for denying the claim and had acted unreasonably by:
- Failing to investigate the claim
- "Cherry-picking" her prior medical records
- Unreasonably relying on the dollar value of the vehicle damage in assessing severity
In contrast, Western National's expert testified that there was a sufficient basis to deny the claim, including:
- A favorable IME
- Pre-existing headaches
- Hereditary component to the headaches
- Minor sideswipe collision
- Peterson's multiple sclerosis was a reasonable alternative explanation for her headaches
The trial court found that there was no reasonable basis for denying the claim and that Western National knew of, or acted with reckless disregard of, the lack of a reasonable basis for denying the benefits of the UIM policy.
The Court of Appeals Majority Decision
The matter was heard by a panel of three Court of Appeals judges, with two joining in the majority decision. The majority opinion noted that the statute's term "reasonable basis" is subject to interpretation and adopted a Wisconsin-based test, the "Anderson test" that requires "reasonable investigation" and "fair evaluation" before denying a claim.
It also affirmed the district court on the grounds that the claims adjuster failed to present the merits of Peterson's claim fairly to an internal claims committee and that her report to the claims committee contained numerous errors and did not to include reference to a second doctor's medical report that said Peterson would need Botox injections for the rest of her life.
Judge Schellhaus wrote a detailed dissent, suggesting that there was a reasonable basis for denying the claim. The dissent refers to a wealth of information that on its face would be of the type that might lead an insurer to deny a claim:
(1) Peterson had been in previous car accidents, including one in 2003, which involved a rollover crash in which she struck her head, and had a history of headaches; (2) Peterson had been under the care of a chiropractor since 2000; (3) the low-speed, side-swipe collision in 2009 caused only $ 2,973 in damage to Peterson's vehicle, after which her car was drivable, and she did not visit a doctor until after work; (4) prior to litigation, Peterson's medical records did not tie the 2009 accident to a permanent injury or classify her headaches as migraines; and (5) in the opinion of the board-certified neurologist retained by Western National to evaluate the claim, Peterson's headaches were not caused by the collision and were likely psychosomatic in origin, and Botox injections were not appropriate for her type of headache.
Peterson v. W. Nat'l Mut. Ins. Co., No. A18-1081, 2019 WL 2332400, at *8 (Minn. Ct. App. June 3, 2019). The dissent also criticized the majority's comparison of the amount of possible damages to the amount of the offers and rejected the notion that an unrelated personal injury verdict should be seen as a benchmark, ultimately concluding that when a claim "is 'fairly debatable,' an insurer is entitled to debate it." Moreover, the dissent would have applied the law from cases holding that an imperfect investigation is not a sufficient basis for recovery if the insurer had an objective basis for denying the claim.
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