Ambiguous terms in an insurance policy, an insurance company’slong-standing practices interpreting the term and its sneaky way of changing – without notice to its policyholders – all added up to support a bad faith insurance practices claim the Sixth Circuit held recently in Pedicini v. Life Insurance Company of Alabama, Nos 10-6270/6301 (June 21, 2012). This was the second time in a month that the court had reversed a summary judgment granted an insurance company on a bad faith insurance practices claim; the case last month was Phelps v. State Farm, No 10-6085 (May 25, 2012) as discussed in an earlier post, What Is An Insurance Company Required To Do? Make a Good-Faith Attempt To Settle A Claim Promptly on Fair and Equitable Terms.
Italo Pedicini bought a supplemental cancer-insurance policy from the Life Insurance Company of Alabama (LICOA). A supplemental cancer insurance policy pays what are essentially income benefitsthe insured receives cash payments in an amount equal to charges for qualifying cancer treatments received. The insured may use the payments to cover the cost of treatment, offset it or for any other purpose.
Pedicini pay the premiums for many years, all the while seeing their amount escalate. To abate the continuing premium increases Pedicini negotiated a new policy, one that capped the amount of benefits payable annually. This new policy tied the benefits to "actual charges" for qualifying cancer treatments and defined "actual charges" as "actual charges made by person or entity furnishing the services treatment or material."
However, unbeknownst to Pedicini and undisclosed to LICOA’s policyholders, it had changed some eight months earlier its benefit-payment practices. For the prior 20 years or so LICOA paid benefits tied to "actual charges" according to the amount billed by the medical providers regardless of the amount medical providers except as full payments. But around the time that Pedicini got his new policy LICOA change and its policy and began paying benefits equal to the amount accepted as full payment by medical providers, a change that often result in lower benefit payments because of discount rates required by Medicare and/or private health-insurance.
Pedicini became a cancer patient and began receiving qualifying treatment. When he got his first benefit payment from LICOA, Pedicini realized that it was not paying him benefits equal to the amount billed by's medical provider but only an amount equal to the discount the provider had accepted in light of Pedicini’s Medicare status. Pedicini sued LICOA for breach of contract and for bad faith insurance practices. The district court ruled in Pedicini’s favor on the breach of contract claim but entered summary judgment in LICOA’s favor on the bed-faith claim.
The Sixth Circuit ruled "that the term ‘actual damages’ is ambiguous." Rulings by other courts informed this decision as did LICOA’s own long-established practices:
… the fact that LICOA paid benefits equal to the amount billed for approximately 20 years prior to February 2001 seriously undermines its position that the term “actual charges” unambiguously means the amount accepted as full payment. While perhaps LICOA is uncannily altruistic, it is more likely that the change in its benefit-payment practices reflects LICOA’s own struggles with the ambiguous terms of its policies. Because the term is ambiguous, it must be construed in favor of Pedicini as a matter of Kentucky law.
The court also ruled that there was evidence LICOA had acted knowingly or in reckless disregard for the lack of any sound legal basis for its assertion that the term “actual charges” was not ambiguous. First, “LICOA did not alter its benefit-payment practices in an open and transparent manner." Policyholders receiving benefits at the time of the change learned of it only when they received a reduced benefit payment, while others like Pedicini did not learn of it until years later. The evidence that the change produced a $3.7 million positive change in LICOA’s profitability further supported a finding of bad faith.