Insurers often wrongfully deny policy benefits to their insureds in situations where there may be some uncertainty as to coverage.  Despite an overarching duty to act reasonably and find in favor of coverage in such situations, insurers often will deny coverage and rely on their in-house medical experts’ (i.e., nurses, doctors) analysis and opinions as a basis for denial.  In such situations, the insurer denies coverage at its peril.

California courts have consistently held that where there is a “genuine dispute” as to coverage, an insurer cannot be held liable for bad faith – this is known as the “genuine dispute doctrine.”  However, an insurer’s reliance on the genuine dispute doctrine is often misplaced and misguided, and regularly results in substantial damages awards for plaintiffs for bad faith denial of coverage.   California courts have routinely held that an insurer cannot “create” a genuine dispute to absolve itself from bad faith liability by relying on in-house experts.  Instead, the courts have created an affirmative duty in such a situation to employ independent medical experts before making a coverage decision.

The recent decision of the District Court, Southern District of California in Barbour v. UNUM Life Ins. Co., 2011 U.S. Dist. LEXIS 91060 (S.D. Cal. 2011),  is a primary example of how an insurer’s misuse of in-house experts and its reliance on the “genuine dispute doctrine” can result in potential bad faith liability, as well as punitive damages.

Barbour involved a disability policy issued by UNUM through a school district and covering the Principal of a school in the district.  The Group Salary Protection Insurance Policy (“Policy”) at issue provided Accident and Sickness Disability Benefits for one year in the event of total disability, and after one year, the Policy provided monthly long term disability income benefits for as long as the claimant remains totally disabled or otherwise qualifies for benefits, up to age 65.  The Policy defined “Total Disability” during the first two years as the inability “to perform the material duties of your own occupation.”  After two years, the Policy defined “Total Disability” as the inability “to engage in any gainful occupation for which you are reasonably qualified by training, education or experience.”  In February 2003, the insured submitted a claim for disability benefits based on abdominal pain that restricted her from driving, walking/standing and sitting for extended period, and UNUM began paying benefits.  Over the course of several years, the insured suffered multiple further injuries relating to her initial injury, which required multiple surgeries, and which rendered her totally disabled.  The insured submitted regular medical reports and updates, and UNUM continued to pay disability benefits.

In December 2007, UNUM hired an investigator to conduct surveillance on the insured to confirm the claimed disabilities.  The investigator observed a “female subject believed to be the insured” who was moving without the physical limitations represented to UNUM by the insured and her doctors.  The investigator’s report and video raised suspicion within UNUM regarding the insured’s disability, and resulted in UNUM conducting further surveillance.  UNUM investigators made a field visit in October 2008, and again conducted surveillance in January 2009.  In February 2009, UNUM’s in-house doctor/consultant reviewed the file and prepared a report which concluded that the insured’s claimed disability was inconsistent with her findings.  Then, in March 2009, UNUM’s “Designated Medical Officer” reviewed the file and determined that there were three occupations that the insured was capable of performing, notwithstanding her disability.  UNUM thereafter revoked the insured’s disability benefits effective March 31, 2009, and advised her that she had the right to file a civil action under the section 502(a) ERISA statute.  Unsurprisingly, the insured hired an attorney.

The insured’s attorney sent a letter to UNUM advising that UNUM’s determination that the claim was governed by ERISA was erroneous.  The attorney also provided a letter from the insured’s doctor stating that the person observed during surveillance in December 2007 was not the insured.  UNUM was also provided a functional capacity evaluation by the insured’s physical therapist that concluded that the insured’s “physical limitations presented a barrier to work.”  This information was reviewed by UNUM’s in-house medical experts.  On October 6, 2009, UNUM sent a letter agreeing with the insured’s position as to ERISA, but stating that the new medical information did not change UNUM’s decision to deny benefits.

UNUM filed a motion for summary judgment to dismiss the insured’s claims for breach of the implied covenant of good faith and fair dealing (bad faith), intentional infliction of emotional distress and punitive damages.  To defeat the bad faith claim, UNUM relied on the “genuine dispute doctrine.”  In rendering its ruling, the court noted that the overarching issue in a bad faith claim is whether the insurer’s claims-handling conduct was reasonable.  Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 (9th Cir. 2002).  The court then explained the applicability of the genuine dispute doctrine:

“The genuine issue rule in the context of bad faith claims allows a district court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer’s denial of benefits was reasonable–for example, where even under the plaintiff’s version of the facts there is a genuine issue as to the insurer’s liability under California law. In such a case, because a bad faith claim can succeed only if the insurer’s conduct was unreasonable, the insurer is entitled to judgment as a matter of law.” Amadeo, 290 F.3d at 1161-62 (citation omitted). “On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably.” Id. at 1162 (citation omitted)(emphasis added).

The court held that a reasonable jury could conclude that UNUM acted unreasonably when it was informed that the evidence UNUM relied upon to deny the insured’s claim was wrong (i.e., the surveillance was of someone other than the insured).  The court further determined that there was no evidence that UNUM’s experts evaluated the evidence with an eye towards favoring the insured and in a manner which would indicate that she was indeed disabled as she and her doctors asserted.  The court relied upon the facts as viewed “in the light most favorable to Plaintiff” to determine that a jury could conclude that UNUM acted unreasonably, and thus in bad faith when it denied the insured’s claim.  The court therefore denied UNUM’s motion for summary judgment.

The court also discussed UNUM’s initial erroneous determination that the claim was governed by ERISA, and held that it created evidence of insurer bias, which could also indicate and support a claim for bad faith. Hangarter v. Provident Life & Acc. Ins. Co., 373 F.3d 998, 1010 (9th Cir. 2004) (citing Chateau Chamberay Homeowners Ass’n v. Associated Int’l Ins. Co., 90 Cal. App. 4th 335, 348 (2001)).

The court placed a premium on UNUM’s apparent failure to reasonably and thoroughly investigate the insured’s claim.  In particular, the court found that UNUM’s failure to seek an independent medical examination of the insured supported her claim that UNUM acted unreasonably.  In so finding, the court discussed a line of cases which suggest that an insurer’s sole reliance on its own in-house experts, and its failure to obtain an independent medical examination, is clear evidence that an insurer has acted unreasonably.

Based on these findings, the court held that the insured’s claims for intentional infliction of emotional distress and for punitive damages were equally as viable based on UNUM’s potentially unreasonable conduct in evaluating the insured’s claim.

With this decision, the court made it very clear that an insurer cannot escape liability for bad faith by relying on its own in-house experts and ignoring evidence presented by an insured which, when viewed in favor of the insured, would indicate coverage should be afforded.  An insurer cannot create a “genuine dispute” as to coverage on which it can deny an insured’s claim simply by relying on its own in-house experts.  An insurer who does so, does so at its own peril, and opens itself up to claims for bad faith and punitive damages.