... and Justice for All

Bad Faith Insurance Practices and Ambiguous Policy Terms

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.

Robert L. Abell
www.RobertAbellLaw.com 

 

 

The U.S. Chamber of Commerce Looks To Run The Table In the Supreme Court This Term

During his confirmation hearings Chief Justice John Roberts compared the role of a Supreme Court Justice to that of a baseball umpire, simply calling balls and strikes.  But what if an umpire always called strikes in favor of one team? Would that umpire be considered fair? Baseball fans can figure that one out.

Meanwhile, according to a report prepared by the Constitutional Accountability Project, the U.S. Chamber of Commerce is looking at running the table before the Supreme Court this term by achieving a perfect record: so far the Court has ruled in favor of the position advocated by the Chamber of Commerce in every case so far.  In other words, the Chamber has thrown nothing but strikes in every case. 

Insurance Policy's Step-Down Provision Unenforceable Under Reasonable Expectation Doctrine, Kentucky Supreme Court Rules

The doctrine of reasonable expectations applicable to insurance policies recognizes that (a) the insured is entitled to all the coverage he may reasonably expect to be provided under the policy, and (b) only an unequivocally conspicuous, plain and clear manifestation of the insurance company's intent to excluded coverage will defeat that expectation.  The Kentucky Supreme Court recently applied the reasonable expectations doctrine and held that a permissive used step-down provision in an auto policy was unenforceable. The Court's unanimous opinion in Bidwell v. Shelter Mutual Insurance Company, No 2010-SC-560 (June 21 2012) was written by Justice Will T. Scott.

Danielle Bidwell was injured while riding in a car driven by Joshua Tarlton that was owned and insured by Frank and Missy Gaines. The Gaines' car was insured by Shelter Mutual Insurance Company; Tarlton had no auto insurance coverage.  Bidwell's injuries were severe and she made a claim for $250,000, which was the amount of coverage stated on the Declarations page of the vehicle's insurance policy.  Shelter said its liability was limited only to $25,000 due to a permissive step-down provision in the policy.  

The Kentucky Supreme Court applying the doctrine of reasonable expectations and applying its precedent in Simon v. Continental Ins. Co., 724 S.W.2d 210 (Ky. 1986) ruled that the permissive user step-down provision was unenforceable.  First, the Court noted that "the Declarations page is silent with respect to any limitation included later in the policy, even though the step-down provision radically limits the amount of coverage that is listed on that page," and the "Declarations page indicates, in unqualified terms, that the limit of Shelter's liability for bodily injury is $250,000 per person, and $500,000 per accident." Second, the step-down provision was mentioned in limited and confusing terms, referring to a "financial responsibility law applicable to the accident" rather than stating clearly the coverage limit.  Third, the policy did not include any clear references to where coverage limitations could be found, and Shelter informed the insured that they should check the Declarations page to make sure their coverages are correct.  

Robert L. Abell
www.RobertAbellLaw.com 

Railroad Crossings: When Are They Ultra-Hazardous Under Kentucky Law?

Where a railroad crossing presents ultra-hazardous conditions under Kentucky law duties are imposed on train crews to avoid accidents and collisions at these crossings. The Sixth Circuit examined whether ultra-hazardous conditions existed at the railroad crossing at issue in Dugle v. Norfolk Southern, N0-10-6551 (June 21, 2012):

• an ultra-hazardous crossing is "one that obscures the view of the traveling public approaching a crossing. This may consist of cuts, embankments, vegetation or other obstacles that obstruct the view of the traveling public in close proximity to the crossing."
  
  
• "a real and substantial obstruction to sight or hearing" must be present
  
  
• "such an obstruction may include the overgrowth of vegetation and similar transitory conditions."

The court then reversed a summary judgment granted the railroad and ruled that the existence of ultra-hazardous conditions at the crossing were for the jury to decide:

... no Kentucky case has concluded that sight linges of over-400 feet mandate that the crossing be considered safe as a matter of law. At what point a sight line becomes sufficient to render a crossing not ultra-hazardous is thus a question of fact for the jury.

Robert L. Abell
www.RobertAbellLaw.com 

 

 

Lawyer That Terminates Representation Because of Disagreement Over Settlement Not Entitled to Fee, Kentucky Supreme Court Rules

Is a lawyer that terminates representation under a contingent fee contract over a disagreement with the client regarding the client's refusal to accept a settlement offer entitled to an attorney fee if the case later settles? "No" the Kentucky Supreme Court has answered unanimously in Lofton v. Fairmont Specialty Insurance Managers, No 2010-SC-749 (June 21, 2012).

Denise Maxey hired lawyer Rodger Lofton to represent her in a personal injury and accident case on a contingent fee basis. Maxey was required to cover costs associated with the claim but Lofton's fee was contingent. After Maxey rejected a $25,000 offer to settle her claim at a mediation conference, Lofton withdrew as her counsel, a withdrawal for which he had to obtain permission from the circuit court. Subsequently, Maxey did settle her claim for $25,000.  Lofton claimed that he was entitled to an attorney's fee based on at least a quantum meruit basis.

The Kentucky Supreme Court, in an opinion written by Justice Bill Cunningham, ruled unanimously that Lofton was not entitled to any fee.  The Court's opinion offers a clear-eyed and straightforward of the attorney-client relationship:

Before accepting a case, an attorney has the opportunity to investigate the value of a claim and determine whether to advocate the cause.  This frequently calls for work to be performed before a formal attorney-client relationship is formed.  The work often goes uncompensated.  For the attorney, time and effort must be spent in evaluating a possible claim. Once that information is gathered, the attorney has the power to proceed with the case or part ways with the client, fully aware of the risks involved in his representation in a claim or suit.  But once the contract is signed, the client is vested with the power to determine the ends of the representation and claim.

    ****

There are bound to be disagreements between attorneys and clients during the relationship, but such a conflict does not merit termination of  the entire relationship.  Attorneys and clients do not stand on equal ground in making decisions about the ends or goals of such a relationship.  A disagrement with a client over whether to accept a settlement offer is not good and sufficient cause for an attorney to withdraw with expectation of a quantum meruit fee.

    ***

We simply find that a disagreement as to the value of a case does not provide sufficient good cause which rises to that level.  We would view the matter differently if the attorney and the client had reached a mutual understanding as to what the settlement goals would be, and then the client later departed from that understanding and adopted a substantially different settlement objective.  Here, however, Lofton and Maxey did not discuss in advance of the first mediation their respective settlement objectives.

This dispute highlights two absolutely essential points: (1) the vital importance for both client and attorney of educating the client about the lawsuit process and how their claim would be valued both in settlement considerations and by a jury; and, (2) the client, of course, has the final say on whether or not the accept a settlement offer, which has always been the case pursuant to Kentucky Supreme Court Rule 1.2(a). The Court's caveat -- "we would view the matter differently" -- indicates its view that an attorney that properly and fully educates a client as to the value of the client's claim yet finds the client unreasonably rejecting a settlement offer (here the client was apparently steadfast in demanding not less than $1.2 million prior to Lofton's withdrawal but later accepted the same offer of $25,000 that Lofton advised her to take) will be deemed to have earned at least a quantum meruit fee.  

Robert L. Abell
www.RobertAbellLaw.com 

What Is An Insurance Company Required to Do? Make A Good-Faith Attempt to Settle A Claim Promptly On Fair and Equitable Terms

The Kentucky Unfair Claims Settlement Practices Act is aimed at promoting at least a good faith attempt to settle a claim promptly on fair and equitable terms.  In the recent case, Phelps v. State Farm, No 10-6085 (May 25, 2012), the Sixth Circuit found real questions about whether State Farm had acted in good faith in taking nearly three years to settle Phelps' rather routine claim.  An earlier post, How Long Is Too Long? Settling Injury Claims With Insurance Companies and the Kentucky Unfair Claims Settlement Practices Act, set out the lengthy time line for settlement of this claim. 

After noting that the purpose of the Unfair Claims Settlement Practices Act was to promote at least good-faith attempts to settle claims promptly and on fair and equitable terms, the Sixth Circuit identified several other salient points:

• An insurance company should not force a claimant to go through needless adversarial hoops to achieve her rights under the policy
• An insurance company cannot lowball claims or delay claims hoping that the insured will settle for less
• State Farm failed to reasonably account for Phelps’s pain and suffering or future wage loss by omitting any consideration or allowance for these damages in its initial settlement offer
• A jury could find State Farm's delay of nearly 3 years to be unreasonable, since shorter periods of time constitute evidence of bad faith according to prior cases. See Med. Protective Co. v. Wiles, 2011 WL 2420011, at *9 (Ky. Ct. App. Oct. 21, 2011) (involving a delay of 27 months between the injury and the initial settlement offer); King v. Liberty Mut. Ins. Co., 54 F. App’x 833, 837-38 (6th Cir. 2003) (involving a delay of 18 months from the date of a follow-up inquiry about the settlement through the date that the company finally checked its purged files)
• State Farm offer no explanation for its failure to timely obtained Phelps’s 1999 injury records, other than the claims adjuster was replaced, a switch that is also unexplained
• State Farm offered no explanation for switching claims adjusters four times
• State Farm’s claims that it doubted the extent of Phelps’s injuries must be discounted since it failed to ask that she be medically examined

Robert L. Abell
www.RobertAbellLaw.com