MARCH 2009 BAD FAITH CASES COURT APPLIES REQUIRED OBJECTIVE TEST: NO BAD FAITH IF REASONABLE BASIS EXISTS, EVEN IF NOT BASIS RELIED UPON BY INSURER IN DENYING CLAIM (Philadelphia Federal)

In Robbins v. Metropolitan Life Insurance Company of Connecticut, the court granted the insurer’s motion for judgment on the pleadings on all three counts of breach of contract, violation of the consumer protection law, and statutory bad faith, finding no contractual duty to pay and insufficient facts to support the allegations.  In adjudicating the bad faith claim, the court specified that it must apply an objective test to determine if a reasonable basis for claim denial exists and there is no bad faith when one does exist, even if that is not the actual basis relied upon by the insurer.  The court found its own determination of no contractual duty to be the reasonable basis and granted the judgment.

This case was brought by beneficiaries of three life insurance policies issued for a single decedent.  Two of the policies had a rider that increased the stated amount of the policy annually on the policy’s anniversary date but the insured passed away before that date.  The insurer paid the stated amounts plus interest within four months of the claim, after conducting a contestability review according to the policy terms, but the beneficiaries demanded payment at the increased amounts and for accrued interest.  The insurer initially did not recognize the riders existed and stated it was confused by the acronym used (the policies were issued by another company that the current insurer had purchased), but subsequently denied the additional payments because the insured died before the anniversary dates.  The insurer moved for judgment on the pleadings for all three counts.

The court’s bad faith adjudication referred to part of its breach of contract findings.  In the contract claim, the beneficiaries had asserted that the policy did not terminate until the insurer paid, which occurred after the anniversary date, so they were entitled to the increased amounts from the riders.  Although the court agreed that there was no clear policy language on when the policy terminated, it determined that policy language did refer to the time of death and that the general purpose of life insurance implies that the policy terminates upon the insured’s death.  The annual increases, therefore, had not accrued so the insurer could not have breached on this basis.

In adjudicating the bad faith count, the court stated that there was a reasonable basis for denying the payment of the rider increase because the court had found, under the breach of contract count, that the contract did not require this payment.  The court explained that an objective test must be applied, so bad faith has not occurred when there is a reasonable basis for claim denial even if that is not the basis upon which the insurer relied.  The court considered the four-month delay and the insurer’s alleged lack of knowledge of the riders, but stated that even if they would otherwise amount to evidence of bad faith, they could not here because they related to the rider denial that the court already determined was reasonable.  The beneficiaries had not asserted that any other benefits were denied in bad faith, so the court granted judgment on the pleadings for the bad faith claim.  The consumer protection count was similarly dismissed based on no duty to pay and insufficient facts to support the allegations.

Date of Decision:  December 29, 2008

Robbins v. Metro. Life Ins. Co., CIVIL ACTION No. 08-0191, 2008 U.S. Dist. LEXIS 104902 (E.D. Pa. Dec. 29, 2008) (Baylson, J.)