McKennon Law Group, Author at McKennon Law Group

California law imposes an implied covenant of good faith and fair dealing in insurance contracts under which neither party may act so as to injure the rights of the other to receive benefits under the contract. Insurers whose actions harm the rights of their insureds to receive contracted-for insurance benefits breach this implied covenant of good faith and fair dealing, or act in “bad faith.” An insurer’s bad faith may occur at many stages of the claims process, even after the initial denial. Accordingly, insureds should protect their interests and be mindful of potential bad faith on the part of their insurers, from the claims determination process and in some cases, the insurer’s litigation tactics.

Bad Faith in Determining or Administering Insurance Claims

Most bad faith suits against insurers allege unlawful or improper behavior during the claims administration process. Indeed, insurers often engage in unreasonable behavior in order to deny claims and increase their bottom lines, which effectively places burdens on insureds to challenge these denials. Evidence of bad faith may arise from the affirmative actions of the insurer, such as misinterpreting claims information, conducting biased reviews, attempting to settle claims for unreasonably low amounts or setting unreasonable or impossible standards of evidence in order to avoid approving a claim. Conversely, an insurer’s bad faith may be reflected by its inactions, such as failure to communicate with insureds or failure to conduct reasonable investigations into the circumstances surrounding claims.

Bad Faith Following a Denial of an Insurance Claim

An insurer’s duty to act in good faith toward an insured continues even after it issues a denial. For example, an insurer must provide insureds with a clear and reasonable explanation for its denial decision. In general, this explanation should clarify why the claim was not payable, reference any applicable policy exclusions and in some cases provide guidance of what an insured needs to do to perfect the claim. Failure to do so may be evidence of bad faith.

Bad Faith in Coverage Litigation

The California Supreme Court has held an insurer’s duties of good faith and fair dealing do not end once litigation begins. In White v. Western Title Insurance Co., 40 Cal. 3d 870 (1985) (superseded by statute on other grounds), the Court allowed post-litigation actions, including the insurer’s unreasonable settlement efforts, as evidence to support a claim for bad faith. Although California courts have declined to broaden this holding, the decision still serves to curb abusive conduct by insurance companies. Subsequent cases have held an insurer may be acting in bad faith in failing to fully investigate a claim, even if litigation is pending, and if the insurer engages in unreasonable conduct in addition to litigation, such as by seeking declaratory relief against the insured, threatening baseless litigation and instigating criminal investigations. Although these situations occur less frequently, these examples show an insurer does not have a free pass to engage in bad faith after issuing a denial, or once litigation commences.

Insureds have a legal and contractual right to expect insurers administer claims in good faith and provide coverage when appropriate under the insurance contract. If insurers act unreasonably in order to issue denials, insureds should consult experienced insurance litigation attorneys in order to bring suit for policy benefits and other damages, including consequential damages, compensatory damages, punitive damages and attorneys’ fees and costs.

The Employee Retirement Income Security Act of 1974 (“ERISA”) seeks to protect participants in employer-sponsored plans, but lack of adequate communication and transparency is an often an unfortunate byproduct of the insurance industry. The California district court shed light on this issue in Echague v. Metro. Life Ins. Co., 2014 U.S. Dist. LEXIS 68642 (N.D. Cal. May 19, 2014) by holding an insurer breaches its fiduciary duty when providing insufficient responses and the insured may be entitled to equitable surcharge. Echague is highly beneficial to insureds and beneficiaries, as it warns plan fiduciaries (such as insurers and plan administrators/employers) to think twice before ignoring requests for information, giving incorrect information, or neglecting to provide updates regarding the policies they administer, as their inactions or providing of incorrect information about the plan may open them up to equitable remedies such as equitable surcharge which would allow plan participants to recover the full value of the plan benefits in dispute.

In Echague, Carol Echague (“Mrs. Echague”) opted for a basic life insurance policy and a supplemental life insurance policy worth a total of $440,000 through her employer, Pacific Coast Bankers’ Bank (“PCBB”). The policies were issued as part of a cafeteria-type plan by TriNet Group, Inc. (“TriNet”), the plan administrator and Metropolitan Life Insurance Company (“MetLife”), the claims administrator. In January 2011, Mrs. Echague was diagnosed with breast cancer and took medical leave. Mrs. Echague sent TriNet an inquiry stating she did not want her policies to lapse, inquired which policies she needed to pay on her own, and where to send the premium payments. TriNet resent two confusing form letters which did not address that the policies were in danger of lapsing. Following Carol Echague’s death, TriNet notified her husband (“Mr. Echague”), that it submitted a life insurance claim on his behalf to MetLife. This was the first time TriNet informed the Echagues that MetLife was the claims administrator. However, the life insurance policies lapsed due to nonpayment of premiums, and MetLife denied the claim. MetLife also denied Mr. Echague’s appeal, which argued neither he nor his wife ever received notice that the policies were at risk of terminating, or that PCBB ceased premium payments. Subsequently, Mr. Echague sued MetLife, TriNet and PCBB, for benefits under 29 USC section 1132(a)(1)(B) and equitable relief for breach of fiduciary duty under 29 USC section 1132(a)(3).

The court granted summary judgment for TriNet, PCBB and MetLife as to Mr. Echague’s first claim for reinstatement of the life insurance benefits under section 1132(a)(1)(B), holding the denial was proper. Here, MetLife did not act with a conflict of interest in denying Mr. Echague’s claim. The only information MetLife needed to issue a decision on the claim was whether premium payments were made to continue the policy, and proof of Mrs. Echague’s death. Here, MetLife already had this information and accordingly, did not need to conduct an investigation or state with specificity what additional information it needed. Finally, TriNet and PCBB were not proper defendants, as MetLife had sole authority to issue denials on the life insurance claims.

However, the court held Mr. Echague presented a different theory under section 1132(a)(3) for breach of fiduciary duty and thus the claim survived. The court explained Mr. Echague’s (a)(1)(B) claim was directed at MetLife for its failure to pay benefits, while his section 1132(a)(3) claim was primarily directed at TriNet for its failure to provide adequate notice and act in a fiduciary manner. TriNet cannot escape liability by claiming MetLife had discretion for claims determination, because TriNet retained responsibility for interpreting the Plan, applying the terms and administering the Plan. As such, TriNet had a duty to deal fairly and honestly with fiduciaries under ERISA by providing complete, thorough and accurate information. Prior to Ms. Echague’s death, the Echagues sent several inquiries to TriNet requesting information on her disability and supplemental policies. TriNet responded by sending form letters that did not provide information relating to Ms. Echague’s life insurance policies. The letters pointed her to an overarching cafeteria plan, a Summary Plan Description which did not provide answers to her questions, and a non-existent employee handbook. TriNet failed to refer the Echagues to the Certificate of Insurance, the only document which describes how to convert or continue life insurance coverage, and explain when the premiums for the policies would end. Therefore, TriNet breached its fiduciary duties because its response failed to provide complete and accurate information to the claimant’s specific questions. Accordingly, the court granted Mr. Echague the face value of the policies under the doctrine of equitable surcharge.

Echague is a clear win for insureds in several ways. First, Echague clarifies that even if an insurer denies a claim on a reasonable basis, insureds may assert breach of fiduciary duty claims. Secondly, the district decision expanded a plan fiduciary’s duty to provide insureds with complete and accurate policy/plan information. The court indicates that insurers must provide specific answers when asked specific questions, and implies a general response referring an insured to a number of documents may be insufficient. In addition, the insurer must provide specific answers even when an insured asks a general question—such as providing Ms. Echague with information pertaining to her life policies when her questions inquired as to all insurance policies. Finally, this court allowed insureds to sue simultaneously for benefits and for breach of fiduciary duty where these claims request alternate relief, distinguishing cases that held to the contrary.

The dual roles insurers hold, as funding sources and claim administrators of disability plans, often impact their impartiality. Indeed, insurers have the discretion and financial incentive to deny claims and often do so improperly. Claimants may shudder at the thought of an insurer’s access to nearly unlimited resources, trained claims personnel and attorneys, and stop fighting for their benefits in light of their insurer’s seeming decided advantage. Although recovering long-term disability insurance benefits can be an uphill battle, pursuing a denied claim for benefits is very often well worth the effort.

If insurers deny insurance claims in bad faith or by abusing their discretion, claimants may be entitled to recover past-due policy benefits plus future benefits, consequential damages, emotional distress and punitive damages (for individual policies) and attorneys’ fees and costs and interest (for employer-sponsored policies governed by the Employee Retirement Income Security Act of 1974 (“ERISA”)). Accordingly, claimants should consult with an attorney experienced in handling disability/ERISA insurance claims before forfeiting their claims for disability benefits. Experienced attorneys can help evaluate claims, communicate with insurers and preserve litigation rights. Below are a few cases in which we have helped clients recover their disability benefits:

Following a field engineer’s an on-the-job accident, examining doctors determined he was over 50% functionally impaired and unable to compete in the job market. The insurer terminated his long-term disability benefits after about a year, stating he was capable of working “any occupation.” Less than three months into litigation, McKennon Law Group PC convinced the insurer to reinstate his benefits and pay interest on the past due benefits. In addition, McKennon Law Group PC is currently pursuing a bad faith claim against the insurer for attorneys’ fees, consequential damages, emotional distress and punitive damages worth several million dollars.
When a dental hygienist purchased two individual disability policies, the insurer’s agent negligently misrepresented her income on her applications. Based on this misrepresentation, the insurer issued, and the hygienist paid for, policies with higher premiums and benefits than it otherwise would have. When the hygienist filed for disability benefits, the insurer accused her of fraud and denied the claims. McKennon Law Group PC convinced the insurer to pay all of the past-due and ongoing benefits under the policies as issued and obtained a large six-digit settlement against the agent. McKennon Law Group PC is currently pursuing a bad faith claim against the insurer for attorneys’ fees, consequential damages, emotional distress and punitive damages worth several million dollars.
An escrow officer was diagnosed with a variety of debilitating conditions. The insurer terminated her long-term disability benefits after one year, based on its paid physician’s determination that her medical diagnoses, evaluated individually, did not render her disabled. McKennon Law Group PC convinced the insurer to reverse its decision, reinstate the escrow manager’s full benefits without a mediation and pay interest on her past-due benefits. A motion for attorneys’ fees and costs is pending.
A courier was forced to stop working after her arthritis caused severe hip and abdominal pain such that she could not tolerate the extensive driving, bending and lifting required for her occupation. The insurer ignored evidence of multiple surgeries and other serious medical issues, and denied the claim. McKennon Law Group PC challenged the insurer’s denial and the insurer placed the courier back on claim and paid all past-due benefits and is paying all future benefits. In addition, the insurer paid her substantial attorneys’ fees.
After an attorney became disabled, she worked another part-time job. Her insurer denied her claim, stating improperly that she was capable of working at this second job. McKennon Law Group PC convinced the insurer reverse its decision and pay a six-digit settlement to buy out her policy.
A senior analyst at Bank of America stopped working due to severe arthritis. The insurer paid some short-term disability benefits then terminated the disability insurance claim. McKennon Law Group PC contacted the insurer, and the insurer conducted another review of the senior analyst’s claim, overturned its initial denial, paid back the past-due short term benefits and approved his long term disability claim.
A software developer was unable continue working following postoperative complications which caused persistent pain. McKennon Law Group PC subsequently filed a complaint and argued the insurer misinterpreted the medical evidence. While the case was pending, McKennon Law Group PC convinced the insurer to place the software developer back on claim and to pay all past-due disability benefits and to pay on-going disability benefits. McKennon Law Group PC then obtained a court order requiring the insurer to pay the software developer’s attorneys’ fees and costs.

All of these clients came to our firm desperate to have their disability insurance benefits paid. While your case may be different, these success stories show how the attorneys at McKennon Law Group PC have helped a variety of policyholders who had their disability insurance claims denied receive the benefits they deserved. If you are in need of highly experienced and qualified attorneys to handle your ERISA or individual disability insurance claims denials, call us for a free consultation.

McKennon Law Group PC founding partner Robert J. McKennon was named as a 2014 “Top Attorney” by the Orange County Register’s OC Metro Magazine. This prestigious list identifies the top attorneys practicing in Orange County, California. Mr. McKennon was recognized for his work handling insurance coverage claims and litigation.

An insurer has a duty to defend even if the causes of action in a lawsuit are not expressly covered by a liability policy if the factual allegations may support a potentially covered claim. This was expansive interpretation of the duty to defend adopted by the United States District Court Southern District of California in Millennium Laboratories, Inc. v. Darwin Select Insurance Company, __ F. Supp. 2d ___ (S.D. Cal. May 13, 2014). This highly significant decision further buttresses the now well-established position of courts in California that all of the facts and allegations in a lawsuit, not just the stated causes of action and facts stated in the complaint, must be considered in determining whether there exists a potentially covered claim triggering an insured’s duty to defend.

In Millennium, the insured, Millennium Labs, was covered under a commercial general liability insurance policy issued by Darwin Select Insurance Company. The policy provided coverage for “claims alleging Personal or Advertising Injury caused by an offense that takes place during the policy period.” “Personal or Advertising Injury” under the policy was defined to include, “injury, other than bodily injury, arising out of … [o]ral or written publication, in any manner, that slanders or libels a person or organization or disparages a person’s or organization’s goods, product or services.”

The insured sought coverage under the policy for two separate lawsuits involving its competitors. In the first lawsuit, the plaintiff alleged seven causes of action against the insured including: false advertising, injunctive relief and damages for violations of unfair trade practices and consumer protection statutes in various states and common law unfair competition violations. The second lawsuit was initiated by the insured, but the defendant filed counter claims against it for: interference with contractual relations, unjust enrichment and unfair and deceptive practices in violation of a state statute. Both of these actions were tendered to the insurer for defense, but the insurer denied coverage for both stating that no coverage was available for either claim under the policy because “those actions did not allege any instances of Personal or Advertising injury within the meaning of the policy.”

The insured filed suit against the insurer for coverage, alleging causes of action for declaratory relief, breach of contract and breach of the covenant of good faith and fair dealing. Thereafter, the insured moved for partial summary judgment that the insurer had a duty to defend the insured in the two actions against it and the insurer filed a cross-motion for summary judgment that it has no such duty and that it did not act in bad faith. In granting the insured’s motion for summary judgment, the district court reiterated the well-established rule in California that “the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.” Indeed, the court reaffirmed just how broad the duty to defend is in stating that “the precise causes of action pled by the third party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could be fairly amended to state a covered liability.” Based on this expansive interpretation of the duty to defend, the court found that the insured burden of showing that the underlying actions may fall within policy coverage because allegations in the two lawsuits that the insured attacked its competitors alleging that they harm patients and engaged in “bad science” fell within the ambit of the policy’s coverage for “disparagement of an organization’s goods, product or services.” Thus, the court held that the insurer had a duty to defend the insured against both claims and that the bad faith claim against it is a triable issue of fact for the jury to determine.

Not only does the court’s decision in Millennium serve as an affirmation of the breadth of insurer’s duty to defend in California, but it also expands the scope of coverage under those policy to include typically uncovered claims for unfair competition, false advertising and trademark if the claim also contains implied allegations of disparagement. This decision reminds insureds that an insurer’s duty of defend is very broad and does not turn solely on whether the stated causes of action are covered under the terms of a general liability policy and that even facts that could be reasonably alleged forms a basis for potential coverage under a liability policy.

Finally, in a similar vein, on June 12, 2014, the state Supreme Court clarified the scope of a commercial general liability insurer’s duty to defend an insured under the policy’s personal and advertising injury coverage against a claim of disparagement. In Hartford Casualty Insurance Co. v. Swift Distribution Inc., 2014 DJDAR 7443, the court held that a claim of disparagement requires a plaintiff to show a false or misleading statement that (1) specifically refers to the plaintiff’s product or business and (2) clearly derogates that product or business. Absent a claim meeting these criteria, an insurer has no duty to defend a company under a commercial general liability insurance policy providing coverage for disparagement.

The Employee Retirement Income Security Act of 1974 (“ERISA”) provides an exclusive remedial scheme for insureds who have been denied benefits. 29 USC section 1001 et seq. Under ERISA, a plan participant may sue “to recover benefits due to him under the terms of their plan, to enforce their rights under the terms of the plan, or to clarify their rights to future benefits under the terms of the plan.” 29 U.S.C. § 1132(a)(1)(B). However, before plan participants can pursue a lawsuit against the plan/plan administrator for benefits, attorneys’ fees and costs, they must first pursue their ERISA appeal rights under the doctrine of exhaustion of administrative remedies. 29 USC section 1133. If they do not do so, they may lose all of their rights to pursue an appeal or litigation of a disability, life or health insurance claim denial.

Although not expressly set out in ERISA, federal courts require that an ERISA plan participant avail himself of a plan’s own internal review procedures before bringing suit in court. This generally means that if a claim for benefits is denied or adversely decided, the plan participant must timely file an administrative appeal with the plan administrator within the time period provided by the plan. Under ERISA, plan participants have at least 180 days to file an appeal. It is crucial for plan participants/claimants to note that, failure to request an administrative appeal within the time period provided will be deemed a waiver of their future rights to dispute the decision, including the right to file suit against the plan.

If a plan participant files a lawsuit without exhausting his administrative remedies first, the plan/plan administrator may file a motion under Federal Rules of Civil Procedure 12(b) to dismiss the case for failure to exhaust administrative remedies. The plan may even seek to dismiss the action with prejudice. Typically, courts will likely either remand the case to the plan’s administrative appeals board with instructions to hear the plan participant or dismiss the case without prejudice where it finds that the plaintiff failed to exhaust their administrative remedies prior to filing suit.

However, courts may find that administrative remedies have been exhausted even if a formal appeal was not filed where an ERISA plan fails to establish or follow the claims procedures required under ERISA. The plan participant is deemed to have exhausted the administrative remedies available under the plan and may pursue a lawsuit against the plan where: (1) the initial claims was not completed within 90 days, or 45 days for disability claims; (2) the plan administrator did not give the beneficiary written notice stating the specific reasons for the denial, and “written in a manner calculated to be understood” by the beneficiary; or (3) the plan failed to afford a reasonable opportunity to the beneficiary whose claim has been denied for a “full and fair review by the appropriate named fiduciary.” 29 USC section 1133. Additionally, because the general rule of exhaustion of administrative remedies is not a statutory requirement, a court may waive the exhaustion requirement where exhaustion would be futile.

Given the complexities involved in the ERISA claims and litigation process, it is absolutely crucial for claimants to seek the advice to attorneys who have knowledge and experience in this highly specialized area of law. The attorneys at McKennon Law Group PC specialize in handling ERISA disability insurance claims, in litigation or on appeal, and we have successfully litigated hundreds of disability insurance cases over the past 28 years.

For additional information, please see our Disability Insurance FAQs and Insurance Bad Faith FAQs.