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Recent Court Cases
By Kevin McGillicuddy - JT Parker & Associates

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AMERICAN INTERSTATE INSURANCE COMPANY v. HINSON, 172 S.W.3d 108 (Tex.App.—Beaumont 2005, review denied)

Intoxication

FACTS – William Hinson was employed by Constructors and Erectors (C&E) and fell from a steel structure while working as a steel connector on a raising gang at a paper mill. Although he had about 5 years of experience in his trade before his accident, he had worked for C&E for only 4 days before the injury. On the day of injury, his work began at 7:30 a.m. and he fell at about 11:45 a.m. He had had no problems doing his work prior to the accident. Just before the fall, he and a co-worker detached a steel clip that weighed about 75 pounds from the end of a steel cross-piece while sitting on horizontal beams above ground level. When Hinson moved the clip from the cross-piece, the cross-piece it swung up and allegedly struck him in the face, knocking him to the ground. He was unaware that the bolts he had used to secure the opposite end of the cross-piece had been removed by a co-worker. Hinson had neglected to reattach his safety lanyard after moving to the spot where he sat on the beam. He tried to excuse that failure to an alleged exception to the usual tie off rules while working under overhead loads. He brought a claim for WC benefits and the TWCC apparently found that he was intoxicated at the time of his injury.

CASE HISTORY – Hinson appealed and testified at trial that prior to the injury that morning he had walked across beams approximately 30-35 feet above the ground and had had no trouble aligning the beams in the structure. He also testified that he had used marijuana regularly (2-3 times a week, sometimes daily) since he was 16 years old. He also testified that when he began working as a steel connector he continued to use marijuana regularly but not on weekdays. He maintained that he never used marijuana while on a job or before he went to a job. When he did smoke marijuana he smoked an average of 3-5 joints but denied that this made him “drunk.” He testified that he felt the effects of the marijuana 5-10 minutes after smoking a joint and that the effect lasted 25 to 30 minutes. He also testified that the morning after using marijuana he felt no different than on a morning where he had not smoked marijuana. He testified that the marijuana relaxed him mentally but never affected him physically. He had been using marijuana on a regular basis for four years prior to the accident. He denied smoking any marijuana during the two days prior to the accident. He denied any physical or mental impairment the morning of the accident, claimed that no one complained that he was not working at a normal speed or complained about his work performance. He admitted that the urine sample taken after the accident tested positive for marijuana and presented no expert testimony regarding whether his marijuana use would have caused mental or physical impairment. He was the sole witness that testified on his behalf.

American Interstate called three witnesses to testify. One was Hinson’s foreman, who testified that there were no excuses for Hinson’s failure to tie off the safety lanyard, that the failure to do so violated company safety policies and was not normal behavior. He disputed Hinson’s testimony that there was other steel suspended above Hinson prior to the accident and that immediately prior to the accident he observed Hinson walking across a beam without being tied off. He stated that he was concerned that he might distract Hinson if he yelled at him, so he began to walk toward the structure to correct Hinson’s failure to follow safety rules. Hinson fell to the ground just as he reached the structure. He did not provide any testimony that Hinson appeared intoxicated at any time prior to the accident, nor did he describe any other incidents that might have evidenced any impairment in Hinson’s normal use of his mental or physical faculties. A second witness, a safety director, testified that he investigated the accident and concluded that the cause of the accident was Hinson’s failure to use the safety lanyard, which violated company policy. The witness also testified that his investigation was inconclusive regarding whether the cross-piece hit Hinson prior to his fall. He also testified that he was advised that Hinson’s post-accident urinalysis showed 264 nanograms per milliliter of marijuana metabolite in Hinson’s urine, however he did not testify regarding when the sample was taken.

The third witness was Dr. Thomas Kurt, a physician specializing in medical toxicology. He has been licensed to practice medicine since 1978 and testified that about 1/3 of his time is spent preparing to testify or testifying in matters regarding causes of injury or death where toxicology is an issue. He testified that based on reasonable medical probability, Hinson was intoxicated as that term is defined in the Texas Labor Code. He further testified that his opinion was based on the proper collection of a urine specimen within a few hours of the accident. He noted that the urinalysis was performed by gas chromatography mass spectrometry, which he described as state-of-the-art. He testified that in his opinion Hinson was mentally impaired at the time of the accident, though not physically impaired. He testified that chronic marijuana users suffer impairment in mental function. Because of the fairly significant level of marijuana metabolite revealed by the urinalysis, Dr. Kurt questioned Hinson’s testimony that he had not smoked marijuana for two days prior to the accident. He explained that a urinalysis result of about 100 to 150 nanograms is typical in a subject tested about 2-3 hours after smoking one joint. He also testified that he and other toxicological colleagues believed that impairment begins at about 100 nanograms per milliliter, and that given Hinson’s level of 264, there was no question on his impairment. On cross-examination, he testified that the metabolite in the urine is inactive from a psychoactive standpoint and does not affect the brain at the point it is found in the urine. He also admitted that in heavy marijuana users, the metabolite can stay in the urine for up to 2 weeks or longer before being completely out of the system. He questioned some studies that reported a lack of mental deficits in individuals with much higher levels of metabolite than Mr. Hinson had. He also testified that one could measure the active chemical produced by marijuana in the blood, and testified that there were studies that extrapolate the level of active chemicals in the blood from urine tests. However, he admitted that because the chemicals that lead to the presence of marijuana metabolite in the urine are stored in organs and body fat, it would be important to know the blood level of the active ingredient in marijuana. He did not testify as to the level of active chemicals in Hinson’s blood based on the urinalysis test result. He also testified that blood testing for marijuana is not routinely done in employee testing programs, and no blood tests were submitted to him in this case. The jury found that Hinson was not intoxicated at the time of his injury, which was his burden to prove since he had lost before the TWCC. The trial court rendered judgment for Hinson that he was not intoxicated at the time of his injury.

HOLDING – American Interstate appealed, and the court of appeals states that §401.013(a)(2)(B) of the Labor Code defines intoxication as including not having the normal use of mental or physical faculties resulting from the voluntary introduction into the body of a controlled substance or controlled substance analogue, as defined by Section 481,002 of the Health and Safety Code. Marijuana is one such controlled substance. There is no specific level of presence in the body that will establish intoxication, other than by alcohol, so the issue is not whether marijuana was present in Hinson’s body at some time after the accident, but rather whether he was physically or mentally impaired at the time of the accident. The court of appeals states that Hinson’s testimony provided some evidence that he had the normal use of his mental and physical faculties at the time of the injury. The court also states that it is unaware of any case that has held that an expert must be called to provide testimony regarding intoxication in a case of this type. Although the evidence offered by Hinson to prove he had the normal use of his mental and physical faculties was controverted, a reasonable jury was entitled to believe his testimony, along with other consistent evidence that he was not impaired at the time of the accident even in the face of expert opinion, which the court of appeals here described as largely conclusory (without a sufficient showing of the link between the data relied on and the opinion offered). The court of appeals also considered that fact that Dr. Kurt testified that he had no baseline on Mr. Hinson to establish what was “normal” for Hinson when he had no marijuana in his body, and he also did not define what “normal” use of mental faculties was. This left the jury free to determine what was normal use in Hinson’s case. The court of appeals also states that there was evidence that the urine specimen was collected 16 days after the injury, not within a few hours of the accident, and Dr. Kurt did not address how a urine sample collected so long after the accident would correlate to the injury occurring over two weeks before. The carrier also did not offer evidence to explain why the evidence showed the urine sample was taken so late. Therefore, the court of appeals states that the evidence offered by Dr. Kurt did not establish that Hinson was intoxicated at the time of his accident. A dissenting judge points out, however, that there was in fact evidence that the sample was taken within an hour or so of the accident, no one asserted at trial or on appeal that the sample was not taken until 16 days after the accident, and it was likely that the dated cited by the majority judges was actually the date the sample was tested rather than the date it was taken.

SIGNIFICANCE – Primarily, this decision points out the need for eyewitness testimony regarding whether the claimant had the normal use of his mental or physical faculties at the time of an injury. Although expert testimony as to intoxication can be very helpful, and it is better to have such testimony than not to have it, the lack of eyewitness testimony can hurt a carrier’s presentation of the intoxication defense as it is fairly easy for a claimant to state that he or she was unimpaired. While a jury might also decide to reject eyewitness evidence of intoxication, the more evidence of intoxication presented to a jury, the better for the defense. We think there was something else important about this case, but we’re kind of hungry now and are going out for a pizza or two.




MID-CENTURY INSURANCE COMPANY v. TEXAS WORKERS’ COMPENSATION COMMISSION, 187 S.W.3d 754 (Tex.App.—Austin 2006, no pet.)

Lifetime income benefits

FACTS – In 2001, the TWCC amended Rule 131.1. Among other things, that rule requires that lifetime income benefits (LIBs) be paid retroactively from the original date of disability. The amendments in question became effective January 3, 2002.

CASE HISTORY – In January of 2004, Mid-Century Insurance Company sought a declaration that this rule was invalid to the extent that it exceeded the statutory authority of the TWCC. Specifically, Mid-Century challenged the requirement that as to some types of injuries carriers pay LIBs retroactively from the date of disability rather than from the date the employee first qualified for LIBs. The types of injuries included in this requirement are injuries to both hands or feet at or above the wrists or ankles, a hand and a foot, or certain burns. Mid-Century argued that the effect of the amendment was to make the carrier liable for LIBs months or even years before some injured workers become eligible for LIBs. The trial court rendered judgment against Mid-Century.

HOLDING – Mid-Century appealed, and the court of appeals reverses the trial court’s judgment and renders judgment for Mid-Century. When the amendments to Rule 131.1 were being considered for adoption, one comment from the public was that some compensable injuries may not immediately be severe enough to qualify for LIBs but might qualify at a later time. For example, an employee might have an injury to the hands and draw temporary income benefits, and possibly even return to work, before that injury gradually deteriorates to the point that the employee has total loss of use of the hands. This might not occur until months or years after the employee first had disability. In its responses to comments, the TWCC stated that carriers would be permitted a credit for any prior payments, but that it maintained that LIBs would become due for these types of injuries as of the date of disability. The court of appeals writes that when the legislature confers a power on a state agency, it intends that the agency have whatever powers are reasonably necessary to fulfill its functions and duties. However, while regulatory agencies are given a large degree of latitude to carry out their regulatory functions, such power is not unlimited. Agencies may not exercise “implied” new powers or powers that are contrary to statute, nor can agencies “contravene specific statutory language, run counter to the general objectives of the statue, or impose additional burdens, conditions, or restrictions in excess of or inconsistent with the relevant statutory provisions.” The court writes that with respect to TIBs, IIBs and SIBs, the legislature specified a beginning date for each type of benefits. To the contrary, in Texas Labor Code §408.161, which addresses LIBs, the legislature merely provided that “Lifetime income benefits are paid until the death of the employee for” seven categories of injuries that are enumerated in that section. Some of these injuries are of types that would “obviously and immediately” qualify an employee for lifetime income benefits. Other types of injuries could develop slowly, such as one involving later total loss of use of a body part, as opposed to amputation at the time of the injury. The court of appeals states that by adopting §408.161, the legislature demonstrated its intent that employees receive LIBs “if and when an employee becomes eligible to receive them-not before.” Employees become eligible to receive LIBs on the date the employee suffers from one of the enumerated conditions. The court of appeals also addresses the provisions of §408.082, which provides for payment of income benefits after a period of disability. The court states that this provision applies only to temporary income benefits. In addition, §408.082 addresses the accrual of income benefits only in relation to disability, yet §408.161 defines the entitlement to LIBs without regard to the existence of disability. Therefore, the court of appeals concludes that the legislature did not intend for §408.082 to govern when LIBs become payable. In addition, the court of appeals rejects the TWCC’s position that the Act should be construed liberally to permit employees to begin receiving the benefit of the annual 3% increase in benefits provided for in §408.161. Benefits simply cannot be increased or decreased in a manner inconsistent with the Act. Therefore, the court of appeals holds that Rule 131.1 is invalid to the extent that it requires payment of LIBs beginning from the original date of disability rather than from the date the employee became entitled to receive LIBs.

SIGNIFICANCE – This may appear to be a fine point, but it can make a significant difference in cases where a claimant’s condition worsens over time. Since LIBs are owed once an employee’s condition qualifies him or her, even though the employee is able to work, a carrier could have an enormous liability for LIBs that might not become apparent until years after the date of injury. Take a case of bilateral carpal tunnel syndrome that results in a finding of entitlement to LIBs. Assume the employee’s date of injury is January 15, 2002 and that the employee has two weeks of disability and then returns to work earning full wages. In February of 2004, however, the employee undergoes surgery and worsens to the point that the employee has “total and permanent loss of use” of the hands (qualifying the employee for LIBs under the “total and permanent loss of use” language of §408.161(b)). In such a case, Rule 131.1 would require the carrier to go back and pay LIBs from the original date of disability, even though the employee worked for at least two years before the condition worsened to the point where the employee has a condition entitling the employee to LIBs. This court of appeals decision would require the carrier to pay LIBs only from the date the employee eventually sustained total loss of use of both hands. We have seen increasing use of §408.161 to argue entitlement to LIBs in cases of loss of use, including cases involving back injuries that do not result in paralysis, but “mere” radiculopathy. In such cases “total loss of use” is something of a fuzzy concept, since an employee may be found to have total loss of use even though the employee is able to work. Total loss of use is also not dependent on a finding of amputation or complete loss of function, such as paralysis. Rather, loss of use means the member no longer possesses any substantial utility as a member of the body; or the condition of the injured member is such that the worker cannot get and keep employment using the member. This is the so-called “Seabolt test,” which comes from the case of Travelers Insurance Company v. Seabolt, 361 S.W.2d 204, 206 (Tex. 1962). That standard is still used today. The Seabolt test is disjunctive, and a claimant need only satisfy one prong of the test in order to establish entitlement to LIBs. While carriers still have a great deal of exposure because of the rule set in Seabolt, at least the Mid-Century holding limits the exposure of carriers to LIBs to the point in time that the employee becomes qualified for LIBs, and that is no longer necessarily tied to the date of disability.




PROGRESSIVE COUNTY MUTUAL INSURANCE COMPANY v. BOYD, 177 S.W.3d 919 (Tex.2005)

Bad faith

FACTS – Barry Boyd was involved in a pre-dawn auto accident when his car hit a freeway guardrail. He was insured by Progressive, and his policy included UM coverage, which covers damage to the car resulting from being struck by an “uninsured motor vehicle,” which was defined to include “a hit and run vehicle whose operator or owner cannot be identified.” Boyd sought payment under his UM coverage, alleging that his car was rear-ended by a hit-and-run vehicle and pushed into the guardrail. After an investigation, Progressive denied his claim.

CASE HISTORY – Boyd sued Progressive, alleging that Progressive breached the insurance contract by denying coverage. He also alleged that Progressive denied his claim in bad faith and that the denial violated the common-law and statutory duties imposed by article 21.21 of the Insurance Code. He also alleged that Progressive violated the Deceptive Trade Practices Act and alleged that Progressive’s failure to timely pay his claim was a violation of article 21.55 of the Insurance Code. He also alleged that Progressive’s failure to pay the car’s storage fees at a private storage lot caused his car to be converted. The trial court severed the extra-contractual claims from the breach of contract claim and granted summary judgment on the bad faith claims. The breach of contract claim was later tried to a jury, in September 2000, and the jury found that Boyd had not been involved in an accident with a hit-and-run vehicle. Boyd appealed from both judgments. The court of appeals considered the two together and affirmed the breach of contract judgment, but held that the trial court erred in granting summary judgment on the extra-contractual claims. The court of appeals held that summary judgment could not be affirmed on grounds not raised in the trial court, the jury’s finding in the breach of contract case was not before the court at the time it granted summary judgment in the bad faith action, and the conversion, DTPA, 21.21 and 21.55 claims were improperly addressed by the Progressive’s motion for summary judgment, which erroneously asserted that these claims were bad-faith claims, when they in fact required different elements of proof. The court of appeals also held that even if it could consider the jury’s finding of no coverage on the breach of contract claim, that would not entitle Progressive to summary judgment on the common law bad faith claim as a finding of “’no breach of contract’ would not necessarily mandate a conclusion of ‘no bad faith.’”

HOLDING – Progressive appealed, and the Texas Supreme Court writes that the court of appeals was correct in stating that the summary judgment cannot be affirmed on grounds not raised in the trial court, and that the jury’s finding was not before the trial court at the time of its summary judgment. However, that error is harmless if it can be subsequently shown that the summary judgment was correct. Here, the breach of contract claim resulted in a finding of no coverage, and since that finding was before the court of appeals, the trial court’s error in granting summary judgment in the bad faith claim was harmless. With respect to Boyd’s conversion claim, that claim was also negated by the finding of no coverage. Progressive did not put his vehicle in storage or keep it there. Since Progressive had no duty to pay storage fees because there was no coverage, he cannot prevail on the conversion claim. Likewise, with respect to his art. 21.55 delay claim, there can be no liability unless the claim is covered. Boyd’s common law bad faith claims are negated by the trial court’s determination in the breach of contract claim for the same reason. Citing American Motorists Insurance Co. v. Fodge, 63 S.W.3d 801 (Tex.2001) and Republic Insurance Co. v. Stoker, 903 S.W.2d 338 (Tex.1995), the Court states that although it had previously left open the possibility that a carrier’s actions could be so extreme so as to amount to common-law bad faith even when there was no coverage, Boyd did not make any such allegation in this case. He only claimed that Progressive improperly denied his claim and failed to fairly investigate the facts of the accident. Any error in the trial court’s grant of summary judgment on the common law bad faith claims, as with the other extra-contractual claims, was harmless. The Supreme Court also writes that since the common-law bad faith standard is the same as the statutory standard, Boyd’s claim for treble damages predicated on bad faith pursuant to article 21.21 of the Insurance Code and §17.46 of the DTPA also fail, citing Stewart Title Guar. Co. v. Aiello, 941 S.W.2d 68 (Tex.1997). This also disposes of Boyd’s claim under §17.50 of the DTPA. Therefore, the Supreme Court reverses the court of appeals’ judgment and renders judgment that Boyd take nothing.

SIGNIFICANCE – We sometimes see workers’ compensation bad faith cases where the plaintiff alleges that the carrier improperly denied or delayed payment, but the carrier eventually prevails on the merits of the underlying claim. The Boyd decision, even though it involves an uninsured motorist claim, should help in laying such claims to rest. However, note that the Court still left open the possibility that a carrier’s conduct could be so extreme and outrageous so as to amount to common-law bad faith even when there was no covered claim. Therefore, we can continue to expect to see such allegations in bad faith claims, which means that the actions of adjusters, medical case managers, and so forth will be microscopically examined for evidence of any misconduct. Also, although there was no discussion of the carrier’s investigation in this opinion, it is interesting to note that the Supreme Court stated that one of Boyd’s allegations was that the carrier failed to fairly investigate. In the current pattern jury charges in WC bad faith cases, the carrier’s action in denying a claim when it has failed to reasonably investigate is listed as a separate basis for finding bad faith liability. We have wondered how the courts would deal with an allegation of a carrier’s failure to properly investigate in a case where in fact there was no coverage, and this opinion lends some support to the argument that those claims should be subject to summary judgment. The court of appeals’ opinion in this case does discuss the extent and quality of the carrier’s investigation, including the carrier’s reliance on an expert’s investigation that Boyd alleged was not impartially prepared. The fact that the Supreme Court did not find it necessary to separately discuss the reasonableness of the carrier’s investigation may provide some support for the argument that even if a jury finds that a carrier’s investigation was not reasonable that this does not support a finding of bad faith when the claim is not covered. The court of appeals’ opinion can be found at 170 S.W.3d 579.




MINNESOTA LIFE INSURANCE COMPANY v. VASQUEZ, 192 S.W.3d 774 (Tex.2006)

Bad faith

FACTS – In November 1998, Minnesota Life issued a Mortgage Accidental Death Insurance Policy to Joe and Elia Vasquez, promising to pay their home mortgage in the event either died due to an accident. In June 2000, Joe became ill, was hospitalized, suffered a seizure, and lapsed into a coma. Twelve days later he came out of the coma and was transferred to a hospital room. Later that day when no one else was present with him, he apparently fell, hitting his head, and he died. On October 6, 2000, Elia Vasquez filed claim with Minnesota Life for payment of the balance of their mortgage, approximately $41,000. She submitted copies of the death certificate and autopsy report with her claim. Minnesota Life reviewed the claim and then sought the advice of a medical consultant as to whether Mr. Vasquez’ death resulted from an accident “independently of all other causes” as required by the policy. The medical consultant advised that he needed to see the relevant medical records. Minnesota Life employed PMSI to obtain the medical records. PMSI is a specialist in obtaining such records. That company requested the records several times without success. Minnesota Life kept Ms. Vasquez informed of these activities, although sometimes they sent their notices to her old address. On January 25, 2001, Ms. Vasquez’ attorney sent Minnesota Life a $110,000 demand letter for violations of the Texas Insurance Code. Minnesota Life’s efforts to obtain the records continued with no success until it sent its own demand letter to the hospital. The records were produced on March 25, 2001. Those records disclosed no additional details about Mr. Vasquez’ death. Minnesota Life decided that there was no other way to determine exactly what occurred, so it paid the remaining balance on the mortgage on March 28, 2001.

CASE HISTORY – On March 30, 2001, Minnesota Life was served with Ms. Vasquez’ suit. It was removed to federal court but remanded to Texas state court. At trial two years later, the jury found that Minnesota Life knowingly violated the Insurance Code and found that Ms. Vasquez was entitled to $60,000 for mental anguish, $250,000 in additional damages (reduced to $120,000 in the judgment) and $37,000 in attorney’s fees. Minnesota Life appealed, and the court of appeals affirmed the judgment.

HOLDING – Minnesota Life appealed to the Texas Supreme Court. The Court states that the dispositive issue is whether there is any evidence that Minnesota Life knowingly committed an unfair settlement practice. Minnesota Life admitted that it owed interest at the rate of 18% for failing to pay the claim within 60 days under art. 21.55 (now codified as §§542.056(d), 542.058 and 542.060 of the Texas Insurance Code).

However, Minnesota Life did contest on appeal the awards for mental anguish and additional damages which are recoverable only if the Insurance Code violation was committed knowingly, as provided by art. 21.21, §16(b)(1) (now codified as §541.152(b) of the Texas Insurance Code).

The Supreme Court states that two unfair settlement practices were alleged and submitted to the jury. These were, (1) whether Minnesota Life failed to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim with respect to which the carriers’ liability had become reasonably clear (art. 21.21, §4(10)(a)(ii), now codified as §541.060(a)(2)(A)) and (2) whether Minnesota Life failed within a reasonable time to affirm or deny coverage of a claim to a policyholder (art. 21.21, §4(10)(v)(A), now codified as §541.060(a)(4)).

The court of appeals found some evidence that Minnesota Life failed to pay the claim after coverage had become reasonably clear, but it reached that conclusion by considering “only the evidence offered in support of the finding.” The Supreme Court writes that it recently noted in City of Keller v. Wilson, 168 S.W.3d 802 (Tex.2005) that this standard in insurance bad faith cases is problematic because coverage will almost always be reasonably clear if reviewing courts must disregard all evidence that liability was unclear. The Supreme Court states that in such cases, the reviewing court should look at all of the evidence, crediting favorable evidence if reasonable jurors could do so, and disregarding contrary evidence unless reasonable jurors could not. Under that standard, the Court says that it agrees with Minnesota Life that there was no evidence that it failed to settle this claim after coverage had become reasonably clear. The Court states that it is undisputed that all Minnesota Life knew about the cause of death was what appeared on the autopsy report and death certificate. Those documents described an “accident” in which Joe Vasquez “[f]ell and hit back of head.” However, both documents listed his cause of death as “[s]eizure disorder with encephalopathy followed by blunt force trauma to the head.” The Court notes that while Minnesota Life might have discovered more information had it been more diligent, there was no evidence that it actually knew anything more before the claim was paid.

The Supreme Court notes that the policy provided coverage if “death results directly and independently of all other causes…from an accidental injury.” Since the documents noted above listed both a seizure disorder and a blow to the head as the cause of death, they did not disclose that an accidental injury was the sole cause of death. The policy also excluded payment of benefits if “death results from or is caused directly or indirectly by…bodily or mental infirmity, illness or disease.” Here, the documents that Minnesota Life had to review suggested that a bodily infirmity or illness contributed at lease indirectly to the death. While the Court admits that the documents were “somewhat cryptic,” both suggested that the seizure disorder and blow to the head were related and played a role in the death. Since these documents were all that Minnesota Life had, and if coverage was not reasonably clear from them, then it was not reasonably clear at all. The Court therefore holds that there was no evidence that the insurer failed to pay the claim after coverage had become reasonably clear.

The jury was also instructed that the insurer violates the Insurance Code by “failing within a reasonable time (A) to affirm or deny coverage of a claim to a policyholder or (B) submit a reservation of rights to a policyholder.” (see art. 21.21, §4(10)(a)(v)) Although the Court states that there is some question whether this provision applies only to liability insurers, the Court reviews Minnesota Life’s legal sufficiency challenge to the charge as it was submitted. The Insurance Code contains several penalties for delayed investigation and payment of claims. See, for example, at. 21.55. Failure to meet those deadlines entitles the insured to 18% interest and reasonable attorney’s fees. However, the Insurance Code also defines failing to affirm or deny coverage within a reasonable time as an “unfair settlement practice.” (art. 21.21, §4(10(a)(v)) Such violations entitle an insured only to actual damages and attorney’s fees, unless the insured can show that the conduct was committed knowingly, in which case mental anguish and additional damages are available.

Here, Minnesota Life conceded that it failed to pay the claim within a reasonable time after Ms. Vasquez provided everything requested from her. After receiving the death certificate and autopsy report, Minnesota Life and its agents requested medical review, received notice from the medical reviewer that medical records might help confirm the cause of death, hired PMSI to obtain the records, PMSI requested the records, was told authorization was needed, hired an attorney to obtain the records, sent a demand letter, and received the records (on the 171st day after receiving the death certificate and autopsy report). The claim was paid 3 days later. Minnesota Life provided undisputed evidence at trial that the hospital was slow to return calls and was unresponsive to repeated requests for records. PMSI advised that it made more than 12 efforts to obtain the records. The head of the hospital’s records division confirmed that four-month delays like this were not infrequent. While other possible avenues for obtaining the records were suggested by an expert for Ms. Vasquez, there was no evidence that Minnesota Life knew that any of these avenues would have resulted in a complete set of records any earlier. Some of those suggestions were that Minnesota Life could have interviewed the Medical Examiner, who had a copy of the medical chart, and the insurer might have interviewed the doctors involved, but there was no evidence that they would have been willing to respond or able to recall anything helpful. The Court states that there was plenty of evidence of unaccountable delays in the carrier’s investigation, but there was no evidence that Minnesota Life was aware that its protracted efforts to obtain the medical records were false, deceptive, or unfair to Ms. Vasquez. There was no evidence that Minnesota Life intentionally prolonged the investigation or that its efforts were a sham to avoid paying what it admits was a relatively small claim. There was no evidence it gave Ms. Vasquez false reasons for the delay or knew that Ms. Vasquez was suffering mental aguish in the meantime (there was evidence that Ms. Vasquez had received $25,000 from another insurance policy on her husband’s life and was able to pay her bills while her claim was pending). Even Ms. Vasquez’ expert at trial admitted he would not have the claim based only on the autopsy report and death certificate.

The Court concludes that when coverage is not reasonably clear, an insurer cannot “sit on its hands or draw out an investigation to keep things that way.” And under the Insurance Code an insurer that delays payment must pay actual damages it causes, but damages beyond actual damages cannot be based on negligence or hindsight. “There must be evidence that the insurer was actually aware that it was handling the claim in a way that was false, deceptive, or unfair.” Since the Court holds that there was no such evidence in this case, it holds that the lower courts erred in awarding extra-contractual damages.

SIGNIFICANCE – It is unclear just how far the courts will go with this case in the future. Many bad faith cases seem to turn on the quality of the carriers’ investigation. All missteps and omissions are criticized, but here, the Court holds that based on the evidence that the carrier had, its liability was not reasonably clear, even though it could have done a better investigation.

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