Since 2008, Minnesota has had a bad-faith statute that penalizes an insurance company for its unreasonable denial of a first-party insurance claim. But it was only earlier this month that a Minnesota appellate court interpreted the statute to require insurance companies to conduct a reasonable investigation and fairly evaluate its results to establish a reasonable basis for denying the claim. In so doing, the court rejected the interpretation offered by the insurance company: that the policyholder must prove there are no facts or evidence upon which the insurance company could rely to deny coverage. That interpretation would have allowed insurers to rely on post hoc justifications for denying coverage. The court’s rejection of that argument is an important development in bad-faith law that will likely affect both suits brought in Minnesota and those in other jurisdictions where courts might look to this decision for guidance in connection with many types of insurance claims.
The case, Peterson v. Western National Mutual Insurance Company, concerned a policyholder who was injured in an automobile collision. After Peterson’s doctor opined that her injuries were permanent and she would likely need treatment for the rest of her life, she sent a written demand to Western for payment up to the policy limits of $250,000.
Even though Western made several requests for medical documentation, it never made a coverage determination. Nearly a year after sending her demand letter, Peterson sent a second letter seeking an update on her claim. Western didn’t respond, so she sued. After the lawsuit was initiated, Western obtained an independent medical examination, prepared a summary report of the claim and assigned it a value of zero.
At trial, the jury returned a unanimous verdict and awarded Peterson damages of over $1.4 million. The court then permitted her to amend her complaint to add a bad-faith claim. In a separate bad-faith trial, she prevailed again, with the court holding that Western lacked a reasonable basis to deny the claim and awarding her an additional $100,000. Western appealed the bad-faith decision.
The court of appeals was asked to interpret Minnesota’s bad faith statute, M.S.A. § 604.18. Under the statute, a court may award costs to a policyholder if the policyholder can show: (1) “the absence of a reasonable basis for denying the benefits of the insurance policy,” and (2) “that the insurer knew of the lack of a reasonable basis for denying the benefits of the insurance policy or acted in reckless disregard of the lack of a reasonable basis for denying the benefits of the insurance policy.” The parties disagreed over the meaning of the phrase “absence of a reasonable basis,” which the statute did not define.
Because each party offered a reasonable interpretation, the court found the phrase ambiguous and looked to its legislative history for clarification. Based on this review, the appellate court held that pursuant to the Minnesota statute, “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 claims. 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.”
Having determined the meaning of the statute, the court applied its standard to Peterson’s case and affirmed the lower court’s ruling that Western acted in bad faith because it: (1) delayed settling or denying Peterson’s claim for nearly a year, (2) ignored Peterson’s evidence supporting her claim, (3) prepared a claims summary that contained misstatements of facts, and (4) failed to evaluate a competing medical opinion. The court also affirmed the ruling that Peterson met the second prong of the statute, which required her to show that Western knew of, or acted in reckless disregard as to, the lack of a reasonable basis for denying the claim. Because Western assigned a 100% probability of its likelihood of defeating the claim, it recklessly ignored and disregarded facts that would have resulted in at least some probability of success for Peterson.
Peterson’s interpretation of Minnesota’s bad faith statute is a pro-policyholder one, and one that policyholders should note when evaluating whether to file suit against their insurance companies in Minnesota or elsewhere for a wrongful denial of a claim.