McKennon Law Group, Author at McKennon Law Group

Every insurance contract is accompanied by an implied covenant of good faith and fair dealing, meaning that the insurer cannot “unfairly frustrate” or unreasonably “deprive” the insured of the benefits of the insurance contract. This implied covenant applies to all types of insurance policies, including disability insurance, life insurance, health/medical insurance, long-term care insurance, accidental death and dismemberment insurance, and homeowners insurance. If the insurer unreasonably or without proper cause refuses to pay a benefit due under in insurance policy, the insurer may have acted in “bad faith.” This may allow an insured to collect extra-contractual damages, such as emotional distress damages, attorney’s fees and punitive damages. Typically, bad faith allegations follow a decision by the insurance company to deny a valid claim for benefits.

However, a recent Central District of California decision confirmed that a bad faith claim can be asserted even in the absence of a claim denial, if the insured can assert that any benefit of the policy was withheld by the insurance company. A bad faith claim does not necessarily only follow the denial of a claim. An insurer’s decision to unreasonably withhold anything of value regarding the insurance policy can be an act of bad faith.

That case, EFG Bank AG, Cayman Branch v. Transamerica Life Insurance Co., 2017 WL 3017596, 2017 U.S. Dist. LEXIS 109780 (C.D. Cal., July 6, 2017), involved a dispute between Transamerica and the owners and beneficiaries of 68 universal life insurance policies. Under the policies, premiums were deposited into an account for each policy, and each month, Transamerica withdrew a monthly deduction from each account and deposited a separate amount of interest. The amount in each policy’s account is known as the “Accumulation Value.” The plaintiffs alleged that Transamerica breached those insurance contracts, and did so in bad faith, by wrongfully increasing the monthly deduction rates (“MDR”) on the policies, and in doing so reduced the Accumulation Value of the policies.

Transamerica filed a motion to dismiss, claiming that its actions in calculating the MDR were proper and consistent with the plain language of the policies. The Court denied the motions to dismiss, in full, and in the process, confirmed that insurers can be liable for bad faith, even in the absence of a claim denial decision.

First, the court denied Transamerica’s motion to dismiss the breach of contract claim, finding that the policies did not give Transamerica “unfettered discretion” to set the MDR lower than the guaranteed maximum rate included in the policies.

Turning to the bad faith claim, the Court first ruled that it was not duplicative of the breach of contract claim because the plaintiffs alleged that Transamerica “exercised its discretion [in setting the MDR] in a way that was intentionally designed to unfairly frustrate the agreed purposes of the Policies.”

Next, the Court analyzed Transamerica’s argument that plaintiffs could not maintain a bad faith claim because they did not allege that Transamerica “withheld a benefit,” an allegation necessary to maintain a bad faith claim. See, e.g., Benavides v. State Farm General Insurance Co., 136 Cal. App. 4th 1241, 1250 (2006) (“[T]he essence of the tort of the implied covenant … is focused on the prompt payment of benefits under the insurance policy, there is no cause of action … when no benefits are due.”). The Court rejected Transamerica’s argument, explaining that if Transamerica improperly increased the MDR, that reduced plaintiffs’ Accumulation Value in the policies and forced them to pay increased premiums, and that impermissibly increasing premiums could constitute a breach of the implied covenant of good faith and fair dealing. See, e.g., Notrica v. State Comp. Ins. Fund, 70 Cal. App. 4th 911 (1999).

Typically, bad faith insurance claims are asserted only after an insurance company wrongfully denies a benefits claim. This case further confirms that an insurance company can be liable for bad faith damages for actions other than denying a claim. Basically, if the insurance company withholds anything of value under an insurance policy from an insured or causes the insured to unnecessarily pay increased premiums, they are potentially liable for bad faith damages.

When individuals are enrolled in a group benefit plans, they are typically provided with a “Summary Plan Description” (“SPD”) which is a document that communicates plan rights and obligations to participants and beneficiaries under their ERISA plan. While the actual Benefit Plan Trust Agreement, which contains the formal provisions that make up a benefit plan, is usually made available to participants, the separate SPD is traditionally provided in order to summarize the material provisions of a Benefit Plan documents in a way that can be understood by an average benefit plan participant, as the actual Benefit Plan document can be extremely lengthy and complex. However, sometimes the provisions in the SPD can differ from those in the Benefit Plan or can contain provisions that are not found in the Benefit Plan. The United States Supreme Court determined that if the terms of a SPD differ from those contained within the ERISA plan documents, the provisions in the ERISA plan documents control (See CIGNA Corp. v. Amara, 563 U.S. 421 (2011)). A recent decision by the Ninth Circuit Court of Appeals, however, determined that a SPD may in fact constitute a formal Plan document, and its provisions may be enforced, when it adds provisions required by ERISA but does not conflict with the Benefit Plan.

In Mull v. Motion Picture Industry Health Plan, No. 15-56246 (9th Cir. Aug. 1, 2017), the plaintiff was injured in a car accident and her health insurance plan (the “Plan”) extended $147,948.38 in benefits for the treatment of her injuries. The plaintiff subsequently recovered $100,000.00 from the third party that was responsible for the car accident, and the Plan sought reimbursement from future payments pursuant to the overpayment provision contained in the SPD. The plaintiff sued the Plan seeking (1) a declaration prohibiting the health insurance plan from offsetting future benefits pursuant to the reimbursement provision, (2) reimbursement for offsets that were taken, and (3) recovery of future benefits. The district court granted summary judgment in favor of plaintiff, holding that because the reimbursement provisions the Plan sought to enforce were found only in the SPD and not within the Plan, the provisions were not legally enforceable under ERISA.

The Ninth Circuit Court of Appeals reversed the decision holding that because the Plan did not provide a basis on which payments were to be made to and from the Plan, but the SPD provided the basis for payments in great detail, the SPD constituted a Plan document. Therefore the ERISA Plan included the SPD. The Court determined that its decision did not conflict with the Supreme Court’s decision in Amara, as that decision only addressed the circumstance where both a governing plan document and a SPD existed and a plan administrator seeks to enforce a provision in the SPD over the terms found in a governing plan document. Here, the Court determined the SPD is a part of the plan itself as it provided for the basis on which payments were to be made and it did not conflict with the Plan.

This decision is important because it clarifies that a SPD may constitute a substantive plan document rather than merely a summary of the provisions contained in the Benefit Plan. The court in Mull found significant importance in the fact that the SPD at issue was clearly designed to constitute part of the Plan, and the court also found it important that the SPD contained a provision required by ERISA that was not contained within the other documents in the Plan. Therefore, the extent to which a SPD can be considered part of a plan’s controlling documents remains somewhat ambiguous. Nevertheless, the Mull decision clarifies that the SPD can be a substantive plan document, at least when it is clearly intended to be a substantive plan document and it adds a provision to a plan that is required by ERISA that is not contained within the other plan documents.

If your claim for life, retirement, health, short-term disability or long-term disability benefits has been denied, you can call (949) 387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling both ERISA insurance claims and non-ERISA state law insurance bad faith claims.

On July 20, 2017, the Los Angeles Daily Journal quoted Robert McKennon of McKennon Law Group PC in an article entitled “Insurance Claim Denial Because Airbnb Rental May Have Wider Implications,” by Andy Serbe. The article discusses a recently filed complaint, and its broader applications regarding insurance coverage exclusions involving rentals and the impact on the potential for insureds to lose important coverage rights when they engage in once only or sporadic rentals of all or parts of their home. In the article, Mr. McKennon explains that the insurer failed to define the terms in the exclusion, specifically the phrase “other structures reserved for rental.” Accordingly, those terms were ambiguous as applied to the facts of the case (the complaint alleges that the insurer did not cover a claim for damages because the owner used part of the home for an Airbnb rental, which Travelers denied based on this exclusion). Mr. McKennon further explains that, under California law, such ambiguity in exclusions are narrowly construed in favor of the insured. Additionally, the insurer bears the burden of proof when it comes to proving that such an exclusion applies.

The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of law. To speak with a highly skilled Los Angeles life insurance lawyer at the McKennon Law Group PC, call (714)406-5582 for a free consultation or go to our website at mslawllp.com and complete our free consultation form today.

Has your spouse designated you as the beneficiary under his or her life insurance policy? This is critically important, especially if his insurance is through his work. Group policies issued to employers for the benefit of their employees are, with few exceptions, governed by a federal law called the Employee Retirement Income Security Act of 1974 (“ERISA”). Section 514(a) of that law provides that ERISA “supersede[s] any and all State laws insofar as they may … relate to any employee benefit plan.” Thus, your spouse’s life insurance obtained as an employee benefit from his or her work is governed by federal ERISA law, not state law.

Why is this important? Many states, including California, have community property laws that protect a surviving spouse’s interest in the deceased spouse’s life insurance policy. Under California State law, specifically its community property laws, a surviving wife, for example, may give a community property right up to half of his or her spouse’s life insurance proceeds even if the surviving spouse is not designated as the beneficiary. There is no such right, however, if the subject life insurance policy is governed by federal ERISA law. Under ERISA, all of a current or former spouse’s life insurance benefits go to the person who is designated as the beneficiary in accordance with the employer’s plan requirements – which usually means filling out the beneficiary form, signing it and returning it to the employer. So, for example, if your husband forgot to switch the beneficiary from his ex-wife to you, you are out of luck. Or, if your spouse designated his or her children as beneficiaries, the children are likely entitled to all his life insurance benefits. California’s community property laws will not help you. In other words, if you are not the named beneficiary under an employer-sponsored ERISA plan, you have no right to the proceeds (unless perhaps you can show the beneficiary waived his/her rights to the benefits after the designation or if you can show the beneficiary exercised undue influence). While that seems harsh for a spouse that simply forgot to make the switch on the employer’s beneficiary form, community property rights will not supersede the beneficiary designation under ERISA.

This is because ERISA preempts state community property laws, including California’s laws. The Ninth Circuit and its federal district courts agree that when a beneficiary has been identified in an ERISA-regulated life insurance plan, a state does not have the authority to supersede the designated beneficiary of the proceeds through community property laws. Instead, under federal ERISA law, the life insurance proceeds must be paid to the designated beneficiary. See Orr v. Prudential Ins. Co. of America, 2012 WL 2122157 (D. Idaho, June 12, 2012). Relying upon the United States Supreme Court’s decision in Egelhoff v. Egelhoff, 532 U.S. 141 (2001), the Orr court held: “In accordance with Egelhoff, the Court finds that ERISA preempts Idaho community property laws when such laws require an ERISA plan administrator to pay ERISA life insurance proceeds to someone other than the designated beneficiary.” Orr at *2. The Ninth Circuit Court of Appeals agrees. See Carmona v. Carmona, 603 F.3d 1041, 1062 (9th Cir. 2010).

In Orr, the insured decedent/employee named his minor son as the beneficiary of his group life insurance policy provided by his employer. Upon the decedent’s death, his surviving spouse sought the proceeds of the group life insurance policy on the basis that Idaho’s community property laws entitled her to a one-half interest in those life insurance proceeds. The Orr court, however, held that the surviving spouse’s state law arguments were completely preempted by ERISA and, under the provisions of ERISA, the proceeds were to be paid to the named beneficiary (the minor son) and not to the unnamed surviving spouse. Id. at *2.

The lesson learned from Orr is that, if a spouse is enrolled in a group life insurance plan governed by ERISA, that spouse must properly designate you as the beneficiary in accord with the plan’s requirements.

Underlying every insurance contract in California is an implied promise of “good faith and fair dealing,” which requires that the insurer act in good faith when handling the insured’s claim. If the insurer has a “genuine dispute” as to coverage, then the insurer will typically be found not to have acted in bad faith. In a recent opinion, the California State Court of Appeal reversed a lower court ruling granting summary judgment in favor of the insurer on the genuine dispute doctrine. Ultimately, the Court found that the insured raised an issue of material fact regarding whether the insurer reasonably relied on an expert opinion to repeatedly undervalue her claim. In this article, we cover some of the basics of insurance bad faith and the “genuine dispute” doctrine as it applies to expert opinions. Next, we cover the Court’s ruling in Zubillaga v. Allstate Indemnity Co., and how that ruling is favorable for insureds when they fight insurance company claim denials.

Bad Faith Basics

The implied covenant of good faith and fair dealing requires, among other things, that an insurer refrain from engaging in conduct that would harm an insured’s rights to receive benefits under that insurance contract. Under California law, when an insurer acts “unreasonably” or “without proper cause,” it will likely have acted in bad faith. When determining reasonableness of an insurer’s conduct, courts typically look to certain well-established standards or duties that are expected of the insurer. For example, the insurer has a duty to conduct a thorough and fair investigation into all potential bases for coverage. If an insurer fails to adhere to these duties, the insurer may be found to have acted in bad faith and consequently, may be liable for substantial additional damages, including emotional distress, consequential and punitive damages.

What is the Genuine Dispute Doctrine?

If an insurer can establish that there is a genuine dispute as to coverage, it typically will not be held liable for insurance bad faith. However, the dispute itself must be a legitimate one. In other words, the insurer cannot create an artificial reason to dispute coverage, the genuine dispute must be reached in a reasonable manner. Often, whether there is a genuine dispute revolves around the insurer’s reliance on an expert opinion. Where an insurer relies on independent experts, then a basis may exist for invoking the genuine dispute doctrine. However, expert testimony alone does not automatically insulate an insurer from a bad faith claim. The expert’s opinion and the insurer’s reliance on that expert’s opinion must also be reasonable.

Zubillaga v. Allstate Indemnity Co.

In Zubillaga v. Allstate Indemnity Co., No. G052603, 2017 WL 2627997 (June 19, 2017), the California Court of Appeal addressed an important issue regarding the genuine dispute doctrine and reasonable reliance on an expert opinion. The facts of the case began when a driver ran a red light and hit plaintiff Carmen Zubillaga’s (“Zubillaga”) car. Following the accident, Zubillaga suffered recurrent back pain and saw several doctors. Based on that lower back pain, and her need for ongoing treatment with expensive epidural injections, Zubillaga submitted a claim for $30,000 to Allstate Indemnity Co. (“Allstate”). Over time, Zubillaga repeatedly offered new evidence in support of her need for the epidural injections and, consequently, the higher settlement demand. Allstate refused to meet Zubillaga’s demand, offering much less than $30,000. In doing so, Allstate relied on the opinion of a medical expert to show that there was a reasonable and good faith dispute (genuine dispute) about the value of Zubillaga’s claim.

The trial court granted a motion for summary judgment in favor of Allstate based on the genuine dispute doctrine concerning Allstate’s reliance on an expert opinion. However, the California Court of Appeal took issue with Allstate’s reliance on an expert opinion without reevaluation of material new information which had been provided to Allstate. Since the initial expert opinion, Zubillaga received several treatments and new recommendations from doctors supporting her need for epidural injections. Instead of addressing this latest information, Allstate continued to rely on an opinion which had considered only stale, non-updated evidence. Ultimately, the Court found that Allstate’s assertion was without merit and inconsistent with Allstate’s duty to conduct an adequate and thorough investigation. Accordingly, the Court found potential for bad faith conduct even though Allstate relied on an expert opinion.

In sum, this ruling is favorable to insureds because it reinforces the principle that having an expert opinion is not enough to shelter an insurer from bad faith. Aside from the fact that the expert’s opinion must, itself, be reasonable, the insurer’s reliance must also be reasonable. That also includes addressing material new evidence supplied by the insured, even if that means the insurer has to hire another expert to review updated information. This case and the principles enunciated in it apply not only to automobile insurance claims but also to other types of insurance claims, such as medical insurance, life insurance, and disability insurance claims where updated medical information is often submitted to an insurer after it has made an initial decision based on stale medical information. If the insurer has not investigated the updated medical or other information, this case may help an insured argue that the insurer acted bad faith by not adequately considering the updated information.

The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of law. To speak with a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949)387-9595 for a free consultation or go to our website at mslawllp.com and complete our free consultation form today.

If you have an individually purchased insurance policy that provides coverage for accidental death or dismemberment, the Employee Retirement Income Security Act (“ERISA”) does not govern your claim. Instead, state law applies to your dispute, including a body of law known as “insurance bad faith” if you live in a state such as California that recognizes the tort of breach of the implied covenant of good faith and fair dealing. In this article, we discuss insurance bad faith in the specific context of accidental death or dismemberment coverage. First, we provide some brief background on insurance bad faith. Next, we discuss the top five ways insurers commit insurance bad faith in the context of accidental death or dismemberment coverage: improper attempts to attribute the cause of injury to a non-accident, improper attempts to rescind, improper lapse of the policy, improper misrepresentation of the policy provisions and improper reliance on the policy exclusions.

What is Insurance Bad Faith

When an insurer enters an insurance contract with the insured, both parties promise to adhere to the express terms of the contract. However, underlying the express terms of the insurance contract is an implied promise of “good faith and fair dealing.” The implied promise of good faith and fair dealing requires that the insurer refrain from engaging in conduct that would harm the insured’s rights to receive benefits under the insurance contract. If the insurer fails to do so, the insurer is said to have acted in “bad faith.” The courts have read certain duties into that implied promise of good faith and fair dealing, such as the duty to conduct a thorough and fair investigation into all potential bases for coverage. Failure to adhere to these duties may result in a breach of the implied promise to act in good faith. Determining whether the insured has acted in bad faith is important, in part, because it directly affects the insured’s potential recovery. When an insurer acts in bad faith, the insured may have access to a substantial additional recovery, including emotional distress, consequential and punitive damages.

1) Improper Attempts to Attribute the Cause of Injury to a Non-Accident

At the heart of accidental death or dismemberment coverage is the promise that, if the insured is dismembered or dies as a result of an accidental injury, the insured or his beneficiaries may recover accidental death or dismemberment benefits under the terms of such a policy. However, the key provision to keep in mind is that the underlying injury must be the result of an accident. How each individual insurance policy defines an accident varies, but it typically includes some language stating that the death, injury or dismemberment resulted from an “accident,” “accidental means” and/or “unforeseeable event” being the “direct and independent cause.” In these cases, the insurer will often assert that an accident did not cause the death or dismemberment. They may challenge the fact that there was an accident or say that some other sickness or injury caused or contributed to the dismemberment or death. To the extent that the insurer’s assertions are disingenuous, or merely an improper attempt to avoid coverage, the insurer has acted in bad faith. As a recent example, McKennon Law Group PC handled a case for our clients’, the son and daughter of a woman who died when she slipped and fell in the shower onto a handheld sprayer cord. The insurer denied the accidental death claim arguing her death was a suicide, not an accident. We hired an accident reconstruction expert and proved it was an accidental injury. The insurer reversed the decision and paid the claim.

2) Improper Rescission of the Policy

Before a potential insured enters an insurance contract, he or she must apply for insurance coverage with the potential insurer. On this application, the potential insured must answer detailed questions regarding his or her medical history. For example, the application may ask whether the potential insured has been treated for chronic back pain within the last ten years. Most policies also have a two-year incontestability clause meaning that, after two years that the policy is in force, an insurer may rescind a policy based only on material misrepresentations made on an insurance application. Often an insurer will, instead of investigating reasons to approve a valid claim, spend its time investigating ways to cancel or rescind the policy. To the extent that the insurer is only conducting the investigation to avoid paying death benefits or is representing immaterial facts as material, it has likely acted in bad faith. Defending such actions requires an experienced attorney, but if the insurer did not act reasonably or with proper cause in denying the claim, the insurer may be subject to significant bad faith damages.

3) Improper Lapse of the Policy

Most insureds pay regular monthly premiums for years without a problem. Occasionally, after an unfortunate accident the insured may be forcibly hospitalized or in a coma, and thus, may uncharacteristically fail to pay the monthly premium. In this unfortunate situation, it does not matter that the insured has paid premiums faithfully for many years. If the insured misses those last few premium payments, the insurer will lapse the policy. However, California recognized this issue in 2012 and so it enacted a statue to protect the insured from this situation. Accordingly, if your accidental death or dismemberment coverage arises from a rider to your life insurance policy, arguably a lapse due to nonpremium payment falls under this California Law and the insurer is required to adhere to certain notice and grace period requirements before it can lapse the policy. A failure to do so may result in improper lapse and potentially, bad faith.

4) Misrepresentation of the Policy Provisions Regarding Coverage

Occasionally, an insurer may improperly interpret the policy as including terms, provisions or requirements for coverage not clearly outlined in the policy. Misrepresenting coverage provisions may give rise to a claim for insurance bad faith if it is improperly communicated to the insured. Sometimes the agent is the culprit regarding such misrepresentations. We have seen several situations where the agent that sold the insured the policy at issue misrepresented the relevant coverage provisions, likely in an effort to gain commission. In those instances, California law requires that insurers do not deny coverage based on an agent’s negligent misrepresentation of those coverage provisions. When insurers ignore their agent’s statements regarding coverage, they may commit bad faith.

5) Misrepresentation of the Policy Provisions Regarding Exclusion from Coverage

Accidental death or dismemberment coverage always contains exclusions. Exclusions carve out exceptions for certain types of injuries and the language of these exclusions is often ambiguous. Under California law, such ambiguity in exclusions is interpreted narrowly, against the insurer (as the entity that drafted the insurance contract). Contrary to that principle, insurers often broadly construe the exclusion provisions and use them to routinely deny claims. To the extent that such an interpretation of the exclusions was disingenuous or overbroad, the insurer may have committed insurance bad faith and will be subject to further damages.

If your claim is governed by insurance bad faith, you may be entitled to substantial, additional compensation for suffering caused by a wrongful denial. Having an experienced disability, life and health insurance bad faith attorney matters to the success of your claim. If your claim for health, life, accidental death or dismemberment, short-term disability or long-term disability insurance has been denied, call (949)387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and Non-ERISA insurance claims.