April 2007 Bad Faith Cases No Bad Faith In Delaying Coverage While Investigating Claim; And Dispute As To Insured’s Potential Misrepresentation In Application Not Material To Bad Faith Claim

In Estakhrian v. Continental General Insurance Company, the insured plaintiff submitted an online application for health insurance.  Thereafter, a representative of the insurer conducted a telephone interview to verify the information in the application.  The insured plaintiff failed to inform the insurer that she had underwent in the previous months three mammograms and a biopsy of her breasts, all of which were inconclusive.  Seven months later, the plaintiff insured was diagnosed with breast cancer and ultimately underwent a double mastectomy and major reconstructive surgery.  The plaintiff contended that she was never informed of the purpose of the biopsy or that the calcifications in her breasts were abnormal.

The insurer wrote to the plaintiff’s insurance agent to inquire whether the plaintiff had disclosed additional information to him that was not included in the insurance application, and the agent responded in writing that he recalled “no medical history not disclosed on the app[lication].”  The insurer informed the plaintiff that she had the option of signing a coverage rider excluding payment for breast conditions or discontinuing the policy and receiving a refund of net premiums. The insurer also gave the plaintiff additional time for her doctor to submit additional information for their coverage investigation.  The plaintiff’s doctor prepared a letter stating that the plaintiff’s breast cysts necessitating the bilateral mastectomy were not related to the abnormalities discovered in her previous mammograms and biopsy.  Thereafter, the insurer once again contacted the agent regarding the insurance application.  This time, in the insurer’s opinion, the tone of the agent’s response seemed to change, and he could not definitively state if all medical history disclosed to him was included in the application.  At this point, after approximately one year had passed since the plaintiff had first submitted her claim, the insurer extended coverage.

The plaintiff brought a bad faith suit against the insurer.  The plaintiff alleged that the insurer’s conduct during the application process constituted bad faith in that the online application “failed to contain a question . . . specifically geared to breasts” and that the insurer “failed to ask specific questions regarding breasts or mammograms” in the telephone interview.  The court, on the insurer’s motion for summary judgment, ruled that nothing in the record came close to showing bad faith during the application process.  “There is no legal support for plaintiff’s suggestion that the failure of defendant to inquire about any particular health condition arises to any showing, let alone a showing by clear and convincing evidence, of bad faith.”

The plaintiff also alleged bad faith in the processing of her claim, including (1) that the insurer failed to keep written notes regarding plaintiff’s claim; (2) that the letter sent by the insurer requesting a rider did not specifically inform the plaintiff of her right to appeal, but rather the right to appeal was communicated one month after the letter; and (3) that the underwriter did not obtain additional information from the plaintiff’s doctors before issuing his coverage opinion.  While the court noted that the insurer certainly could have done things differently in its claims processing, that the processing could have been improved does not mean that unimproved actions arose to bad faith.  “The crux of a bad faith claim is that the insurer lacked a reasonable basis for its action and it acted knowingly and recklessly in disregard of that lack of a reasonable basis.”  The court noted that while a dispute of fact existed as to whether the plaintiff fraudulently misrepresented material information such that the insurer would have been entitled to rescind the policy, such a dispute was not material to the bad faith claim.  Rather, the bad faith claim can be resolved as long as the insurer can demonstrate that it had a reasonable basis for its actions.  Therefore, the court granted summary judgment to the insurer.

Date of Decision:  December 18, 2006

Estakhrian, et al v. Continental General Insurance Company, et al., United States District Court for the Eastern District of Pennsylvania, No. 2:06-CV-00218, 2006 U.S. Dist. LEXIS 95607 (E.D. Pa. Dec. 18, 2006) (Davis, J.)