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 purchased an individual disability insurance policy, the Employee Retirement Income Security Act (“ERISA”) will not apply to your claim.  Instead, separate principles of contract law govern your claim, which includes what is often referred to as “insurance bad faith.”  Litigation of an insurance bad faith claim, as opposed to an ERISA claim, is different in part because it may allow the insured to recover damages beyond policy benefits, such as emotional distress damages.  This article briefly explains “insurance bad faith,” before discussing the top five ways insurance companies commit insurance bad faith: unreasonable delay, cherry-picking evidence, dishonest selection of experts, failing to fully inquire into all bases for coverage and engaging in coercive claims handling practices.

What is Insurance Bad Faith?

In California, every contract contains an implied promise of “good faith and fair dealing.”  In the insurance context, this means that the insurer must not injure the insured’s rights to receive benefits under the insurance policy.  To comply with its promise to act in good faith, the insurer must adhere to its duties despite its position of power over the insured.  This entails a duty to conduct a thorough, unbiased investigation of the insured’s claim.  It also includes a duty to properly inform the insured, through accurate and reasonable communication.  An insurer acts in bad faith when it unreasonably and without proper cause fails to meet its obligations.  Because of bad faith conduct, the insurer may be liable for additional damages beyond past-due and future benefits.  Depending on the nature of the conduct, the insurer may also be liable for punitive, financial or emotional distress damages exceeding the amount of the disability benefits alone.

1) Unreasonable Delay

After an insured makes a claim for disability insurance, the insurer will begin its own investigation into the claim.  At this point, the insurer may request medical records, review occupational requirements, conduct surveillance or hire additional physicians to review the claim.  On one hand, the insurer must comply with its duty to conduct a thorough review of the claim, and of course, this takes a considerable amount of time.  On the other, the insurer must not unreasonably delay in reviewing a claim, as doing so gives rise to bad faith liability.  An insurer’s delay is reasonable if it is due to the existence of a “genuine dispute” as to coverage or the amount of coverage, but the insurer must reach this position reasonably and in good faith.  Arguably, the insurer has not engaged in reasonable delay where the delay results from “doctor shopping,” or cycling through experts to get an opinion that supports denial of disability benefits.

2) Cherry-Picking Evidence

Likewise, hiring an expert will not automatically insulate an insurer from a bad faith claim based on a biased investigation.  One common way an insurer may act in bad faith in handling a disability insurance claim is by “cherry-picking” the medical evidence in a way that favors the interests of the insurer over the interests of the insured.  For example, let’s say that an insurance company hired five doctors to examine the insured and/or review his or her medical records, some of who are employed by the insurer.  Then, say, four of the doctors support the insured’s claim for disability and one does not.  If an insurer “cherry-picks” the evidence and relies on the single outlier over the four other opinions in support of the insured’s claim for disability, the insurance company may have acted in bad faith.

3) Relying on Biased or Unreasonable Peer Reviews

An insurer may also act in bad faith by dishonestly selecting experts or when the insurer’s experts were, themselves, unreasonable.  Often, an insurer will employ a physician to do a paper, not in-person, review of the insured’s disability.  After a review of the medical records, the paid “peer review” physician will render an opinion on whether the insured’s disability prevents the insured from performing the duties of his or her occupation.  However, while the insurer may represent these peer review physicians as “independent medical examiners” that is usually only technically true, as the person is not an insurance company employee.  However, typically, peer review physicians have a history of working with the insurer, which suggests that the physician may be inclined to render an opinion in favor of the insurer over the insured.  That way the insurance company will continue to hire that physician to perform “independent” reviews.  In other cases, the insurer’s experts may be, themselves, unreasonable, which can occur in situations where the opinion itself was unnecessarily limited or based on an incomplete review of the medical evidence.

4) Failing to Fully Inquire into Possible Bases for Coverage

As noted above, the insurer must conduct a thorough and balanced investigation, but this investigation should not (as it often appears) be considering possible bases to deny coverage.  Instead, the investigation should be focused on possible bases for coverage.  Accordingly, an insurer may act in bad faith by failing to properly investigate the insured’s claim, which may result from a failure to adequately inquire into all possible bases to support coverage.  Once such a situation is when the insured suffers from several disabling conditions, but the insurer fails to consider one entirely.  For example, the insured may suffer from a debilitating neurological disorder, but also have degenerative disc disease.  Under these circumstances, if the insurer denied disability benefits based solely on the neurological disorder, then it may have acted in bad faith for failing to investigate degenerative disc disease as another potential source for coverage.

5) Coercive Claims Handling Practices

In some, more extreme cases, courts find bad faith where the insurer engages in other types of coercive claims handling practices, such as threatening to rescind a policy or threatening insurance fraud without evidence to back up the claim.  For example, if the insurer threatens to rescind a policy without grounds for doing so to coerce the insured to accept a disadvantageous settlement, the insurer has acted in bad faith.  Fletcher v. Western National Life Ins. Co., 10 Cal.App. 3d 376, 392 (1970).  Similarly, accusing the insured of insurance fraud without evidence to back up the charge constitutes bad faith.  Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 575–576 (1973).

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, health and life insurance attorney matters to the success of your insurance matter.  If your claim for health, life, 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.