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Court rejects insurer’s appeal in bad-faith denial case

 By: Barbara L. Jones  June 7, 2019 0

An insurance investigation of an automobile collision claim was unreasonable under Minn.

Stat. § 604.18 where it did not consider the plaintiff’s evidence or the opinions of her expert
witnesses, a divided Court of Appeals ruled last week.

The Court of Appeals upheld the verdict of a Hennepin County District Court judge, who
awarded the plaintiff $100,000 in damages plus $97,949.50 in attorney fees for her bad-faith
claim against her insurer, which had denied her claim for underinsured motorist benefits.

The opinion was written by Judge Randall Slieter, who was joined by Judge Renee Worke.
Judge Heidi Schellhas dissented. The case is Peterson v. Western National Mutual Insurance
Co.

Katherine Barrett Wiik, one of the attorneys for the plaintiff, said in an email to Minnesota
Lawyer, “This is a significant legal development because previously, there was little appellate
authority interpreting Minn. Stat. § 604.18, which protects policyholders from bad-faith
denials of their first-party insurance claims. The decision honors the Legislature’s intent to
deter insurers from making low-ball offers rather than appropriately evaluating a
policyholder’s actual damages under the policy that they purchased.”

$1.4 million bad faith verdict

Alison Peterson began to experience severe daily headaches after an automobile accident on
Oct. 21, 2009. In December 2012, she started receiving Botox injections to alleviate her
pain. Two neurologists told her that her injuries were permanent and she would likely need
to keep getting Botox, possibly for the rest of her life.

The driver had liability limits of $50,000 and Peterson settled for $45,000. She then sent
Western a settlement demand for payment of the $250,000 UIM limits.

Thirteen months later, when the company had not responded except to ask for medical
documentation, Peterson sued. Western had an independent medical evaluation and the
doctor said she had only minor soft tissue injuries and found no causal connection between
the accident and the headaches. At a mediation, Western made a nuisance-value offer of
$2,000 and did not accept Peterson’s offer of $200,000.

In May 2016, Western’s attorney tried another Botox-treatment headache case in Hennepin
County. That jury awarded its plaintiff $1.1 million.
Western raised its offer to $50,000 but Peterson rejected it. The jury awarded her more than
$1.4 million. Western paid its limits and the judge granted leave for Peterson to amend her
complaint to add a bad faith claim.
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A court trial on the bad faith was held in July and August 2017, resulting in an award of
$100,000 for damages and $97,940.50 for attorney fees.

Reasonable insurer test

A statutory two-prong test for the unreasonable denial of a first-party claim is set forth in
Minn. Stat. § 604.18. It requires the insured to show the absence of a reasonable basis for
denying the claim and that the insurer knew there was no such reasonable basis, or acted in
reckless disregard of the lack of a reasonable basis.

Section 604.18 does not define “absence of a reasonable basis,” and no Minnesota cases
have addressed the issue, Slieter wrote. The court determined that the statute is ambiguous
and proceeded to evaluate the legislative intent.

The legislative history demonstrated that the Minnesota’s law is similar to several other
states’ first-party, bad faith jurisprudence and that the bill’s author, then-Sen. Tarryl Clark,
said in a floor debate that the test is the same as that used in Wisconsin, known as the
Anderson test. The test measures the insurer’s conduct against what a reasonable insurer
would have done under the particular facts and circumstances to conduct a fair and neutral
evaluation of the claim.

The court concluded that the Legislature intended to use the Anderson framework. It
thereby rejected Western’s argument that because it had any “competing evidence,” e.g.,
the IME, that a claim under section 604.18 should fail. Western also advocated with no
success that a “reliance-on-counsel defense” should be read into the statute, arguing that if
an insurer relies on the advice of counsel, no bad-faith claim should be allowed.

“Thus, pursuant to Minn. Stat. § 604.18, subd. 2(a), an insurer must conduct a reasonable
investigation and fairly evaluate the results to have a reasonable basis for denying an
insured’s first-party insurance-benefits claim. If, after a reasonable investigation and fair
evaluation, a claim is fairly debatable, an insurer does not act in bad faith by denying the
claim.” Slieter said.

No reasonable evaluation of claim

The Court of Appeals went on to say that the District Court did not abuse its discretion in
determining that Peterson proved her bad faith claim because Western National failed to
properly investigate and fairly evaluate her claim.

“[T]he district court found that Western National (1) delayed settling or denying Peterson’s
claim for nearly a year without properly investigating her claim, (2) ignored Peterson’s
evidence supporting her claim, (3) prepared a claims summary that misstated significant
facts, and (4) failed to evaluate and weigh the competing medical opinions,” the Court of
Appeals noted.

It then turned to the subject of Western National’s knowledge of the lack of a reasonable
basis for denying the claim. The Court of Appeals noted that the District Court found that
Western National made no settlement offer for more than a year after Peterson presented
her claim, and its eventual settlement offers were based purely on nuisance value, not on a
reasonable evaluation of the merits of the claim.”

The District Court concluded that Western National recklessly ignored and disregarded facts
that, fairly evaluated, would have resulted in at least some probability of success being
assigned to [Peterson’s] position. It agreed with the District Court that knowledge of the lack
of a reasonable basis may be inferred and imputed to an insurance company where there is
a reckless disregard of a lack of a reasonable basis for denial or a reckless indifference to
facts or to proofs submitted by the insured.

The District Court also used the verdict in the unrelated Botox-treatment case tried by
Western National’s counsel as part of its legal analysis. The District Court noted that while
 one jury may disagree with another, the unrelated case verdict was a significant data point
that Western National should have evaluated by considering both its similarities and its
differences as compared to this case. Western National objected to the use of the unrelated
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case, but the Court of Appeals found no error.

Dissent: Mistake is not the same as bad faith

Schellhas wrote in her dissent that the insurance company may be wrong in its evaluation of
entitlement to benefits, but that does not mean the company acted in bad faith. Under both
prongs of the statute, “the court focused on record support for a jury finding that Peterson’s
UIM claim was warranted, not whether Western National had a reasonable basis for denying
the claim in the first instance,” the dissent said.

The dissent said that “Given the available information about the collision and Peterson’s
history, the record amply supports a determination that whether previous payments fully
compensated Peterson, so that she was not entitled to UIM benefits, was at least fairly
debatable.”

Schellhas continued, “Even more attenuated from the statutory standard is the district
court’s reliance on a jury’s determination in unrelated litigation, over an unrelated collision,
that Botox treatments were warranted.”

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