The Brief Case: DRI Committee News

Young Lawyers: Raising the Bar

Preventing and Defending Bad Faith Lawsuits

By Kevin Kelly

Bad Faith in Context

Bad faith most commonly arises in one of three different contexts: (1) in a claim that an insured brings against its own insurer; (2) in a claim that a third-party makes against a policyholder that an insurer is asked to defend and indemnify; and (3) when a primary carrier is responsible for handling a claim that may involve an excess insurance carrier. Although each context presents different specific challenges and obligations which should be identified, managed, and complied with, there are concepts that apply to all bad faith litigation prevention and defense.

Identifying Bad Faith Actions

The first step in preventing and defending bad faith claims is to identify the actions that can reasonably lead to bad faith allegations. The following is a non-exhaustive list of actions that could be considered bad faith:

• Sending unlicensed or inexperienced adjusters to investigate the property/accident;
• Making an offer that is not within a reasonable valuation;
• Increasing/decreasing valuation or reserves without explanation;
• Reliance on untrustworthy experts or independent adjusters;
• Ignoring or refusing to consider expert or independent adjuster opinions;
• Unreasonably delaying review, failing to review, or refusing to consider available all available information;
• Requesting records more than once or requesting records without a basis;
• Evaluation based on inadmissible facts;
• Unreasonable interpretation of policy provisions/citing inapplicable provisions in position letter;
• Failing to issue payments on undisputed portions or coverage;
• Communicating with an insured directly after they hire legal counsel;
• Misrepresentation of fact or policy provisions; and,
• Delaying or refusing to communicate.

Along with identifying actions that could be considered bad faith, understanding what is not considered bad faith will assist in preventing and defending bad faith claim. The following is a non-exhaustive list of actions that are generally not considered bad faith:

• Requesting relevant documents or an examination under oath;
• Hiring a qualified and independent expert to provide an opinion regarding the claim;
• Coverage disputes relating to scope or pricing based on a reasonable interpretation of the policy applied to the facts of the claim;
• Refusing to make an offer in a frivolous suit or standing behind a coverage determination;
• Litigating a disputed claim;
• Involvement in discovery disputes; and,
• Asserting policy defenses where insured breaches the insurance contract, i.e., failed to cooperate, failed to provide prompt notice, material misrepresentation, etc.

Preventing Bad Faith Actions

It is important to consider (1) the proper practices for claim handling, (2) any new case law explaining or changing jurisdictional precedence for what actions can be considered bad faith, and (3) the significance of training and management to avoid these issues. The most effective tools for preventing a claim from inadvertently rising to the level of bad faith are proper documentation and prompt communication. When a file is documented thoroughly, there is less room for dispute or uncertainty as to the actions that have or have not been taken. For example, if an insured tells an adjuster where they were when a fire occurred during an initial site inspection and then subsequently changes their story, without proper documentation regarding what the insured said, it is the insured’s word versus the adjuster’s. Noting that information in the file at the time it is received creates a record that supports the adjuster’s version of events. Documenting the file also allows claim handlers to review actions they have already taken to ensure that they are not skipping or repeating steps. Further, proper file documentation allows more thorough and productive management review of adjuster actions throughout the claim process to confirm that the facts of the claim are applied to the correct policy provisions. Finally, documenting the file gives defense attorneys a full picture of the claim to determine and strengths, weaknesses, or potential deficiencies to remedy.

Communicate, communicate, communicate. The benefit of prompt, thorough, and honest communication cannot be understated. A failure or lack of communication sows doubt in an insured’s mind that the claim is being handled properly. Contacting the insured, public adjuster, expert witness, investigators, excess carriers, and any other individuals that are involved with a claim on a regular basis to provide updates will avoid accusations that the insurer is unreasonably delaying payment or not working to resolve a case. If an inspection is necessary to determine coverage, if records have been requested but not provided, if an examination under oath has not yet occurred but requested, the relevant individuals should be informed. When circumstances arise that prevent resolution of a claim but that are not explained to an insured or relevant individual, they can assume that there is no basis, and the delay is frivolous. Further, explaining the basis for actions that an adjuster is taking shows that the purpose of those actions is not to delay or deny coverage under a pretext. Finally, communications should be factually accurate, include proper citations to policy language if applicable, and should be in accordance with prior positions unless new information requires otherwise.

While documentation and communication are key to effective claim handling, failing to act in accordance with internal and external policies, procedures, and requirements will often lead to allegations of bad faith. When liability has become clear or there is an undisputed aspect of coverage, insurers should make prompt payments and clearly explain the basis for those payments. When all or a portion of coverage is denied, ensure that all facts have been analyzed independently, the policy has been consulted, and state and federal law has been considered. It is imperative for insurers to avoid the mindset of denial, avoid denying portions of a claim to impact others, and avoid giving up on claim adjustment based on the expectation or anticipation of litigation. Insurers taking appropriate steps throughout the claim process to prevent and remedy bad faith actions is the best practice to avoid such allegations from the start.

Defending Bad Faith Actions

Once bad faith has been claimed, whether via a demand or suit, the first step to effective defense is determining the claim’s validity, both procedurally and substantively. Each jurisdiction has different procedural requirements for bad faith including but not limited to; sending a time limited demand, allowing an insurer to correct coverage or claim handling deficiencies, including specific language that puts an insurer on notice of the intent to seek damages, notifying state departments of insurance about the bad faith allegations, and complying with policy conditions, and having a payable claim. Understanding the state specific procedural requirements for bringing a bad faith action is critical to defending such actions. Every bad faith claim should be taken seriously but when the proper procedures have not been followed for raising bad faith claims, procedural methods can be utilized to defend against the allegations. Counsel should utilize all methods available to advocate for their clients and a failure to understand a procedural defense to bad faith may prevent the raising of a proper defense.

After determining that procedural requirements have been met, look to the substantive allegations that have been raised as well as how bad faith is measured jurisdictionally. Bad faith allegations based on legitimate policy defenses, disputes between the opinions of qualified expert witnesses, disagreements between reasonable interpretations of insurance policies, refusals to settle frivolous cases, or cases where scope or pricing disputes exist generally do not rise to the level of bad faith. When cases involve these issues, use discovery and the litigation toolbox to explore the facts behind the allegations. Consider retaining consulting expert witnesses to review the opinions that have been formed during the case, seek out documents justifying the allegations, take depositions to determine the validity of the allegations, and continue reevaluating each case on a regular basis. In jurisdictions where bad faith is measured until the time of trial, actions that an attorney takes can impact a client both positively and negatively. If a payment has not been made that should have been, make it. If an expert witness made a mistake, seek to correct or explain the error, when new information arises, consider how that will play to both a judge and a jury.

It is important to understand the jurisdiction standards for dispositive motions on bad faith. When moving for bad faith, a dispute of fact regarding coverage can show that no bad faith exists. This is a unique situation for a dispositive motion because in most cases, the absence of disputed material facts is required for a court to find in favor of the moving party. However, explaining how a dispute of fact regarding coverage shows the absence of bad faith in an insurer’s determination can assist in obtaining judgements in favor of those insurers. Additionally, reliance on the advice of an independent expert witness and a reasonable interpretation of policy provisions can be a basis to argue that a dispositive motion should be granted on a bad faith claim. These jurisdictional distinctions should be reviewed and considered when determining the likelihood of success in dispositive motions on bad faith.

Conclusion

Bad faith claims raise many issues, only some of which have been discussed here, but the best defense is prevention. Proper adjustment is not a science, but training, management, communication, documentation, and thorough review can assist in avoiding bad faith from the start. When these claims arise, use the available resources to explore the basis for the allegations, to counter the allegations, and formulate a defense strategy that evolves as necessary.

Kevin Kelly is an insurance defense attorney representing domestic and international insurance carriers on first-party property claims defense and litigation involving various insurance coverage disputes, including loss of electronic data, bad faith, arson and fraud. Kevin believes in continuous communication with his clients and, as such, provides regular status updates and risk exposure analysis at all stages of litigation.

Young Lawyers Seminar Nashville, Tennessee: June 12-14, 2024 Round-Up

By Brianna Weis

The Young Lawyer Seminar was a great success in Nashville. Young lawyers from across the United States and Canada participated in presentations, fireside chats, dine-arounds, Fast Pitch, and networking opportunities throughout the seminar. Participants also helped with the DRI Cares service project by providing weekend meals to children through Blessings in a Backpack. Thank you again to all our sponsors who helped make our seminar a success.

Applications to join the steering committee are anticipated to be sent out near the end of July. Individuals interested in applying can reach out to Emily Ruzic (eruzic@bradley.com) or Tom Wyatt (twyatt@qgtlaw.com), if they did not get a chance to sign in at the business meeting during the seminar.

You can follow the DRI Young Lawyers (@driyounglawyers) on Instagram, Facebook, X, and LinkedIn.

Brianna Weis handles complex litigation matters including personal injury, breach of contract, and breach of warranty/consumer complaint. She works on a diverse range of matters for a variety of industries including manufacturing, trucking, and commercial/business enterprises.

Member Spotlight: Kristen Soucy

How and why did you first get involved with DRI?

I got involved with DRI through a Shareholder at my firm, Catherine Leatherwood, who encouraged me to become a member and attend a Young Lawyers Seminar. At that Seminar, I met other young lawyers and gained valuable knowledge from the sessions and I realized I wanted to continue my involvement. The next year, I decided to apply for a position on the Young Lawyers’ Steering Committee and am now on the DRI Cares Subcommittee.

What DRI committees (Other than YL) are you most interested in, and why?

I am also interested in the Construction Law Committee as a large portion of my practice is within the construction industry and I am finding that there is always more to learn.

What is your favorite part about being a lawyer?

One of my favorite parts about being a lawyer is being able to make a client feel more comfortable after being informed of the complaints against them. For those that have not been through the process before, it can be intimidating. Being able to give them some practical next steps and basic information to make them feel more comfortable affirms my decision to become a lawyer.

When you are not practicing law, what do you enjoy doing?

I enjoy getting out of the office and getting some fresh air. That often entails attending a sporting event, walking in nature, or just getting to the beach with a good book.

Biggest Success in Your Legal Career?

One of the biggest successes of my legal career was drafting a Motion for Summary Judgment on a tricky issue of the law that was ultimately granted.

What is the most important piece of advice you have been given related to practicing law?

I think the most important advice given to me was to be observant. That includes considering other lawyers’ strategy when arguing motions, taking depositions, etc. as well as to be observant of judges, parties, and witnesses. Being observant of all aspects of the law has helped me tremendously in my own practice to inform my own strategy, avoid pitfalls, and to simply learn new information.

What is the greatest sporting event you’ve ever been to?

In early 2020, I attended a game between the South Carolina and UConn Women’s basketball game at the height of the rivalry between the two. The arena was packed and the fans were spirited. It was a great game and an even better win for the Gamecocks. As a Gamecock fan, I am still a little bitter that our team was unable to complete the 2020 season due to Covid. Thankfully 2024 was our year!

First Job?

My first job was at Target, stocking shelves with products.

Kristen Soucy is an associate at Rogers Townsend and focuses on construction defect and business litigation. She graduated from the University of South Carolina School of Law.

Interested in joining Young Lawyers Committee? Click here to more information.

Life, Health & Disability News

Ninth and Second Circuit Courts of Appeals Rule that Preauthorization Process Does Not Impose Independent Contractual Liability on Issues of First Impression in Both Circuits

By Gregory Bennici

Within days of one another, the US Court of Appeals for the Ninth and Second Circuits ruled—on issues of first impression for both—that ERISA expressly preempts state law breach of contract and promissory estoppel claims asserted by out-of-network providers who allege that preauthorization communications with claim administrators impose reimbursement obligations independent and irrespective of the terms and conditions contained in a patient’s ERISA-governed health benefit plan. The decisions are Bristol SL Holdings, Inc. v. Cigna Health & Life Ins. Co., 103 F.4th 597 (9th Cir. 2024) and Park Ave. Podiatric Care, P.L.L.C. v. Cigna Health & Life Ins. Co., No. 23-1134-CV, 2024 WL 2813721 (2d Cir. June 3, 2024).

Preauthorization of benefits is a routine but vital part of the managed care system. It is a vehicle through which ERISA-governed health benefit plans (both plans that are self-funded by employers and plans that are fully insured by health insurers) maintain and promote the delivery of quality and affordable care, by ensuring that non-participating, also known as out-of-network (OON), providers deliver only services that are medically necessary.

Because OON providers typically charge rates that are either not negotiated in advance of treatment or are simply unknown, many ERISA-governed health benefit plans require preauthorization as a condition of coverage of OON services. Preauthorization, however, is not the only requirement for coverage of an OON provider’s services. Before the claim administrator of a health benefit plan can determine the appropriate reimbursement for charges billed by an OON provider, the administrator must also undertake a host of additional assessments relevant to a coverage determination—assessments that can only be performed after services are rendered and billed because they depend not only upon what services were performed, but also upon how the provider billed those services (and their specific components), and what the patient-beneficiary’s governing health plan requires for purposes of accepting and reimbursing the billed charges. These aspects of claim administration include, but are not limited to, evaluating which billed services (or, really, claim lines) were necessary for the approved treatment, whether the charges were correctly coded on the provider’s claim, whether the charges were correctly bundled on the provider’s claim, the appropriate reimbursement rate for each necessary service, and the patient’s cost-share. Put another way, a host of independent coverage-related variables exist between the moment of a preauthorization and the moment a reimbursement check issues. The existence of these variables prevents many essential coverage determinations from being made until after a preauthorized service has been rendered and the provider’s charges have been submitted for reimbursement. Thus, while preauthorization is a critical precondition that must be satisfied before a plan beneficiary can obtain coverage for OON services, ERISA-governed health plans contain a number of terms (which administrators have a fiduciary duty to follow) that may nonetheless result in denial of coverage for reasons independent of any determinations made during the preauthorization process.

Even though preauthorization is not designed to establish an independent contractual relationship, OON providers and their counsel have increasingly petitioned state and federal courts nationwide to turn preauthorizations into independent contractual commitments between the OON provider and the plan’s claims administrator to pay for all services billed for a preauthorized treatment, irrespective of the ERISA-governed plan’s terms of coverage or the administrator’s discretion to interpret and apply those terms. This argument was recently rejected by both the Ninth Circuit and the Second Circuit. 

In Bristol SL Holdings, Inc.,  an OON provider’s successor-in-interest sued a health benefit plan administrator seeking to recover denied reimbursements on the theory that the OON provider’s preauthorization communications with the administrator created independent contractual obligations. Rejecting the OON provider’s theory, the Ninth Circuit Court of Appeals observed that preauthorization is a common condition to coverage of out-of-network services, and that preauthorization necessarily “entail[s] some form of communication between the plan administrator and the provider, through which the plan administrator relays the patient’s eligibility for benefits.” 

The Ninth Circuit thus recognized that, as a practical matter, “the context for” a preauthorization call is to determine “whether reimbursement [i]s available under the ERISA plan[,]” not secure a contractual commitment from a claim administrator on a specific payment amount:

By [the OON provider]’s theory of state contract law liability, however, every time a plan administrator verifies plan coverage in standard pre-treatment calls, but then later denies reimbursement …, the insurer would be legally bound to make payment based on the earlier call. That obligation would be at odds with the way ERISA plans operate, because reimbursement under a plan is ultimately contingent on information and events beyond the initial verification and preauthorization communications.

The Ninth Circuit’s understanding of the operation of the managed care system and ERISA’s application to that system is important. Bristol SL Holdings was, at its core, an invitation by OON providers to the Ninth Circuit to force upon claim administrators a black-and-white choice that risked unraveling the managed care system and its ERISA-secured protections: either abandon preauthorization requirements or risk contractual liability for preauthorized claims irrespective of the terms and conditions of a patient’s health benefit plan. As the Ninth Circuit observed, either outcome is legally untenable:

[P]lan administrators typically cannot determine [reimbursements] until after services have been preauthorized, rendered, and submitted for reimbursement. Subjecting plan administrators to the prospect of binding contracts through pre-treatment calls would thus risk stripping them of their ability to enforce plan terms that cannot be applied prior to treatment, whether related to fee-forgiving or otherwise. The resulting Catch-22—that administrators must abandon either their plan terms or their preauthorization programs—is the kind of intrusion on plan administration that ERISA’s preemption provision seeks to prevent. …

[I]f providers could use state contract law to bind insurers to their representations on verification and authorization calls regardless of plan rules on billing practices, benefits would be governed not by ERISA and the plan terms, but by innumerable phone calls and their variable treatment under state law. This is the type of discordant regime that “ERISA’s comprehensive pre-emption of state law was meant to minimize.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 105 n.25, (1983).

Rejecting the OON provider’s invitation to transform routine preauthorization calls into independent contractual commitments, the Ninth Circuit declared that the OON provider’s breach of contract and promissory estoppel claims were expressly preempted by ERISA because they were premised upon the existence of health benefit plans, unduly intruded upon central matters of plan administration, and impermissibly interfered with nationally uniform plan administration. 

Just three days later, the Second Circuit reached a similar conclusion in Park Ave. Podiatric Care, wherein the Court ruled that ERISA expressly preempted an OON provider’s claims that its preauthorization communications formed an oral contract with a claim administrator completely independent of the terms of a patient’s ERISA-governed plan. Recognizing a number of themes similar to those implicated in Bristol SL Holdings, the Second Circuit Court of Appeals declared: “[A]ny legal duty Cigna has to reimburse [the OON provider] arises from its obligations under the patient’s ERISA plan, and not from some separate agreement or promise” allegedly entered in the preauthorization process.   

In Bristol SL Holdings and Park Ave. Podiatric Care, both the Ninth and the Second Circuit recognized that permitting state common law to dictate the design and administration of ERISA-governed health benefit plans subjects those plans to a morass of conflicting state rules that would defeat Congress’s central objective in enacting ERISA: provision of a single, uniform national scheme for plan administration. This interference violates ERISA’s express preemption statute, 29 U.S.C. § 1144(a). As rulings on issues of first impression within the Ninth and Second Circuits, Bristol SL Holdings and Park Ave. Podiatric Care, are important decisions that will substantially limit, if not outright bar, OON providers from establishing contractual liability merely because an ERISA-governed health benefit plan engaged in routine preauthorization processes.

Gregory Bennici is Counsel at Robinson & Cole and regularly litigates disputes related to group welfare benefits, the Employee Retirement Income Security Act (ERISA), health insurance, disability insurance, and life insurance coverage. Greg also maintains a substantial business litigation practice, representing a variety of stakeholders in complex commercial disputes.

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