In Muckelman v. Companion Life Insurance Company, the insured brought claims against his health insurer. The insured was treated for cancer during the policy period, and alleged that he had requested that the insurer give authorization for additional specialized treatments beyond what he was undergoing. After months of review, without any prior notice to the insured, the carrier rescinded the policy and returned the premium. The rescission was based upon a failure to provide information in the insurance application, as to the results of a medical test from some years earlier. On the record, there did not appear to be a dispute that this alleged failure to disclose these results was either fraudulent, intentional, or material. The carrier refused to pay the outstanding costs for the treatments taken, as well as for the additional treatments. The insured brought bad faith, breach of contract, and UTPCPL claims.
On the bad faith claim, the court made general statements of the law in beginning its analysis. It stated, among other things, that section 8371 bad faith concerns the duty of good faith and fair dealing in the parties’ contract and the manner in which an insurer discharged its obligation to pay for a loss in the first party claim context. While bad faith may be found in circumstances other than an insurer’s refusal to pay, a reasonable basis is all that is required to defeat a claim of bad faith.Per Pennsylvania’s Superior Court, since the statute is not limited to an insurer’s bad faith in denying a claim, a plaintiff may also successfully assert an action for an insurer’s bad faith in investigating a claim. Examples include a failure to conduct a sufficiently thorough investigation to yield a reasonable foundation for the insurer’s action based upon available information; and failure to communicate with the claimant. The court also stated that delay is a relevant factor in determining whether bad faith has occurred. Neither negligence nor bad judgment, however, constitutes bad faith. Rather, to support a finding of bad faith, the insurer’s conduct must be such as to import a dishonest purpose, and the plaintiff must show that the insurer breached its duty of good faith through some motive of self-interest or ill will.
In his complaint, the insured alleged that (1) the insurer delayed payment, resulting in economic harm; (2) the insurer denied the use and benefit of monies to which the insured was entitled; (3) the carrier’s interest was misplaced; (4) the insurer engaged in post-claim underwriting; and (5) the insurer decided to rescind the policy without a reasonable basis, and in violation of the Patient Protection and Affordable Care Act. The court found a plausible claim pleaded under Twombly/Iqbal.
The complaint, viewed in the light most favorable to the plaintiffs, contained allegations of potentially unacceptable delays in denying rights under the policy and paying benefits under the policy. The insured alleged that for a period of 10 months, the insurer was allegedly aware of the insurance claims submitted by the plaintiffs; but rather than providing a prompt response, the insurer allegedly misled the plaintiffs into believing that their claims would be covered under the insurance policy. Moreover, the length of the delay was suspect given the insurer’s ultimate reason for denying coverage for the cancer treatments and rescinding the policy; a reason apparently unconnected to the insured’s condition for which he sought insurance coverage, and a reason that should have and could have been easily established once the insurance application was first submitted. Additionally, prior to rescinding the policy, the insurer did not notify the insured that his claim would be denied. Further, the insurer never informed the insured that his response to application question at issue was material. Similarly, it was not clear that the insured’s answer was in fact material, fraudulent, or intentional. In relation to the one question at issue on the application, there was evidence of only a single doctor visit that occurred five years before applying for insurance coverage. At the pleading stage, finding that this was a material misrepresentation or that the insurer engaged in a sufficiently thorough investigation “would be putting the cart before the horse and have the potential effect of chilling litigation in this area of the law.” The court stated that: “Health insurance companies would effectively be permitted to simply comb through insurance applications to later find reasons for denying coverage knowing full-well that the insured, despite a well-pleaded complaint, would not be permitted to look behind the curtain to see the wizard.” Thus, the case called for discovery on the insurer’s claims handling, and the motion to dismiss was denied.
The Magistrate Judge then found the UTPCPL claim barred by the economic loss doctrine, following Judge Rambo’s decision in Sarsfield v. Citimortgage, Inc., 707 F.Supp.2d 546 (M.D. Pa. 2010).
Date of Decision: January 15, 2014 Report and Recommendation, adopted March 12, 2014
Muckelman v. Companion Life Ins. Co., CIVIL NO. 4:13-CV-00663 , 2014 U.S. Dist. LEXIS 32868, (M.D. Pa. January 15, 2014) (Schwab, M.J.), adopted, 2014 U.S. Dist. LEXIS 31960 (M.D. Pa. Mar. 12, 2014) (Brann, J.)