Implied in every insurance contract is a promise of “good faith and fair dealing,” which means that the insurer must not take unreasonable steps to prevent an insured’s right to receive benefits under the policy. To comply with its promise to act in good faith, the insurer must adhere to certain duties, such as the duty to adequately investigate a claim made by an insured. An insurer acts in bad faith when it fails to meet those duties unreasonably and without proper cause. Determining whether there has been bad faith conduct is important, in part, because it directly affects the insured’s potential recovery. If the insurer is found to have acted in bad faith, the insured may have access to a substantial additional recovery, including attorneys’ fees, emotional distress, consequential and punitive damages. An insured’s ability to sue for insurance bad faith is his or her most potent and effective legal weapon to wield against rogue insurance companies. It is common knowledge that a policyholder can assert a bad faith claim against an insurer. But what about an insured’s ability to sue a Third Party Administrator (“TPA”)?
TPAs are not insurers, although they typically perform some of the insurer’s functions: billing, recordkeeping and processing of life insurance, disability insurance and medical insurance claims. Many insurers “outsource” such claims processing tasks to TPAs and grant TPAs broad discretion to interpret policy provisions, investigate claims and deny or approve claims as they see fit. But, although TPAs often spend the most “face-time” with individual policyholders, their primary relationship is with the insurance company and not the insured. Even though TPAs may commit bad faith by making unreasonable claims decisions, most traditional legal theories immunize TPAs from liability for claims handling misconduct. Rather, the insurer is typically liable for any bad faith conduct by the TPAs. Consequently, TPAs may lack incentives, financial or otherwise, to properly handle and process an insured’s life, health or disability insurance claim.
However, new legal theories adopted by McKennon Law Group PC appear to be shifting the course on TPA accountability. One theory our firm has successfully utilized in several recent cases is joint venture liability. Under joint venture liability theory, the policyholder alleges that, unlike agents or employees of the insurer, the TPA entered into the business of insurance as a joint venture with the insurer. As such, both the TPA and the insurer may be held legally accountable for their bad faith conduct. In this article, we discuss TPAs, joint venture liability theory and the Firm’s recent success in alleging the joint venture liability of a TPA.
Third Party Administrators
In the insurance industry, it is commonplace for a TPA to provide claims handling services for an insurer. Typically, the insurer funds the insurance policy and pays the benefits, whereas the TPA interprets the policy provisions, handles the claims, and ultimately decides whether a claim should be paid. Customarily, the insurer’s agents and employees are exempt from liability for breach of contract and bad faith. In other words, if the insurer’s long-term disability claims specialist improperly denies your claim, he would be immunized from a lawsuit because he is not a party to the contract for insurance and he acted as an agent of the insurer. This agent-principal theory also shields TPAs from liability for breach of contract and bad faith, despite the fact that TPAs are distinct, sophisticated entities often independently exercising broad discretionary authority in the administration of claims under the policy.
TPAs and Joint Venture Liability Theory
Despite the more traditional law that immunizes TPAs from bad faith liability, non-insurer defendants may be held liable under insurance contracts if they jointly ventured with the insurer. In this instance they are not considered agents or employees of the insurer, but instead a partner of sorts, known as a joint venturer, engaged in a particular business venture with an insurer. Where there is a joint venture, all are liable for agreements entered into by the joint venturers in furtherance of the joint venture. To establish a joint venture requires (1) an intent to become partners; (2) a community of interest in the undertaking; (3) an understanding to share profits and losses; and (4) authority and right to direct and control the conduct of all co-venturers with respect to the joint venture.
In Forest v. Equitable Life Assurance Society of U.S., No. C99-5173 SI, 2001 WL 1338809, at *5 (N.D. Cal. June 12, 2001), the court allowed plaintiff’s theory for TPA liability based on a joint venture theory. Plaintiff alleged that the companies, including two acting TPAs, Paul Revere and Provident Life, and one acting insurer, Equitable, were joint-venturers who were all subject to bad faith under California law. The “joint venture” encompassed a series of agreements between Equitable, Paul Revere and Provident Life, with the latter two offering claims management services similar to what many other TPAs also provide. The agreements supported inferences that Paul Revere, Provident and Equitable shared a community of interest in the business of claims administration and shared profits and losses through an incentive fee scheme. In response to a legal challenge to this joint venture liability, the court found that the TPA “Paul Revere exercised broad discretion and control while Equitable retained final authority in most matters.” The court also noted that the parties shared a variety of resources, including information, bank accounts, human resources and joint marketing development. Based on these agreements, the court found that “it cannot be said as a matter of law that Paul Revere, Provident Life and Equitable were not in a joint venture for the business of offering and providing disability insurance policies such as plaintiff’s policy.” Thus, the court upheld the bad faith claims against the TPAs, Paul Revere and Provident Life.
Sharkh v. Continentale Krankenversicherung A.G.
In a recent ruling in Sharkh v. Continentale Krankenversicherung A.G., No. SC127208 (L.A. Super. Ct. Jan. 17, 2018), the court found in favor of Plaintiffs, rejecting a legal challenge to Plaintiffs’ causes of action for breach of contract and bad faith as to Defendant and TPA Global Medical Management, Inc., (“GMMI”). In this lawsuit, Plaintiffs, represented by Robert McKennon and Scott Calvert of the McKennon Law Group PC, filed an amended complaint against Defendants Continentale Krankenversicherung A.G. (“Continentale”) and GMMI. The amended complaint alleged liability on multiple theories, including joint venture liability against GMMI based on the Defendants’ denial of numerous health insurance claims without good cause relative to two sick young children, one of whom who is gravely ill. On December 11, 2017, GMMI demurred to Plaintiffs’ amended complaint on the grounds that the breach of contract and bad faith causes of action alleged were improper. Specifically, GMMI asserted that it could not be subject to causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing (bad faith) because it was not a party to the underlying insurance contract, acting only as a TPA.
On January 3, 2018, Plaintiffs, via counsel, responded, opposing GMMI’s demurrer. As the opposition explained, GMMI and Continentale co-ventured into the business of health insurance. Both parties shared a community interest in profits and losses, as well as the ability to independently exercise broad discretionary authority. The policy also reflected an intent to become partners, identifying GMMI as the claims administrator. Following briefing, the court issued an order in favor of Plaintiffs, finding that the amended complaint sufficiently alleged a theory of joint venture liability in the administration of the health insurance policy at issue by both the TPA, GMMI, and the insurer Continentale.
Ultimately, an insured’s ability to hold TPAs accountable is a good thing for insureds. Without some accountability, TPAs will exercise unbridled discretionary authority over the claims handling process without any liability whatsoever.