Shernoff Bad Faith Insurance Seminar
April  01, 2001

By Frank N. Darras and David T. Bamberger

Enabling the Disabled: How to Pick, Plead and Win a Disability Bad Faith Case

It's finally happened.After all these years of fender-bender and collection cases, someone has walked in your door with what appears to be an ironclad bad faith suit. He's told you all about how his disability carrier denied a claim that clearly should have been covered, and he wants you to take on the insurer.

The prospective client hasn't even finished telling you his story, and your head is already dizzy with visions of a seven-figure judgment against a deep-pocket defendant that a jury is sure to despise. But before you spend your share of the recovery, you may want to ask some hard questions about your potential client's case. What kind of plaintiff will he be? How strong are his witnesses? What theories of recovery can be pursued against a disability carrier? Are there any other defendants that should be named in the suit? How will you overcome the insurer's surveillance video and "independent" medical examiner? Will you be able to get the case to a jury, or will it be preempted by ERISA? And even if you're able to keep the case in the courts, can you come up with a trial theme that will inspire a jury to award a substantial verdict?

This syllabus is designed to help you answer these questions and others like them, and to increase the likelihood that your dreams of a substantial jury verdict for your client will become a reality.

PRE-SUIT CONSIDERATIONS -SHOULD YOU TAKE THE CASE?

At the risk of stating the obvious, the first step is to get to know your prospective client. What is your first impression? Do you believe his story? Does he appear to be forthright? Is he honest or evasive? For example, were the representations on his policy application true, complete and accurate? If his answers to medical, occupational or financial questions on the application do not fully comport with the facts, the carrier will argue that he lied to obtain the policy and thus that his claimed injury or sickness cannot be believed either. And the jury may in fact discredit him if he lied or exaggerated when he first dealt with the insurance company.

You also need to evaluate whether your potential client is articulate and likable enough to be an outstanding witness at trial.

Even if he is, does he have the emotional stamina to pursue protracted litigation and handle a trial? And does he have the financial wherewithal to litigate and the staying power to survive the appeal process, or is he looking for a quick settlement?

In addition, it is essential that you get to know the other people who will need to corroborate your client's story and confirm his damages. What kind of third-party witnesses (spouse, children, friends, employees, supervisors, co-workers, neighbors) does he have? Will a jury believe them? Are his treating physicians respected in the medical and legal communities, or are they known for providing unnecessary treatment and telling patients - and lawyers - whatever they want to hear?

You also need to evaluate the potential client's damages. How has the insurer's failure to pay benefits affected his life? Has he lost his house? Has his car been repossessed? Did his wife have to sell her wedding ring? Have his children been taken out of private school? Did he have to sell anything in a fire sale? Has he had to cash in an IRA or 401k? Has his credit been ruined? Is he getting dunning letters from credit card companies? Is his family living off cash advances? Has the gas or electricity been turned off? This analysis will give you a better idea of what the case is worth in real damages, before you start thinking about possible punitive damages.

Next, you need to obtain and review all pertinent documents in the prospective client's possession.

These would include:

• Advertising and marketing materials (newspaper or magazine ads, trade journals, flyers, brochures, etc.); these will help you understand what the "bait" was, what your potential client's reasonable expectations regarding coverage were, and whether the insurer ultimately delivered what it promised;
• The policy, including the application and all declarations pages, riders, endorsements and amendments;
• Payment information - canceled premium checks, receipts, premium lapse notices
• Claim notices and proofs of loss;
• Pertinent photographs, videos and newspaper reports;
• Previous written or recorded statements by the prospective client;
• Third party evaluations - investigator reports, witness statements, police reports
• Medical records;
• Correspondence between the potential client and the insurer, insurance agents, and any other key players;
• Additionally, have the prospective client provide you with any diaries, logs or journals he has maintained. If he doesn't have any, ask him to prepare a detailed summary of his loss, any medical treatment, and all dealings with the insurance company.

You may be concerned that the potential client will be offended by your extensive inquiries and take his seven-figure case to some other lawyer. But for most prospects, your thoroughness and selectiveness will simply enhance your credibility, and confirm that the real question is whether he is worthy of your representation - not whether you are a good enough attorney for him. And if the potential client balks at your investigation, the odds are that his case isn't as strong as he claims and that you would be better off without investing your reputation, your time, your resources and the emotional penicillin it takes to guide any client through the trial phase.

After the prospective client has left your office, you should conduct the classic 3-step analysis for first-party bad faith cases: (1) Determine the insurer's contractual liability (i.e., whether it was obligated under the terms of the contract to pay the insured's claim for policy benefits), (2) evaluate whether the insurer's failure to pay or delay in paying subjects it to extra contractual liability for compensatory damages over and above whatever is owed under the policy, and (3) analyze whether punitive damages might be recoverable based upon the insurer's conduct (e.g., whether the insurer acted with "oppression, fraud or malice" within the meaning of California Civil Code section 3294(a)).

And if an insurer is on notice that answers in the application are inconsistent or inaccurate but fails to further inquire as to those statements, it waives the right to assert that the information was material. Anaheim Builders Supply, Inc. v. Lincoln Nat. Life Ins. Co. (1965) 234 Cal.App.2d 719, 43 Cal.Rptr. 494.

Moreover, the insured's failure to disclose information in response to questions on an application will not justify rescission where he did not know about the non-disclosed medical condition or appreciate its significance, or where that condition related to "minor indispositions" rather than "serious ailments which undermine the general health". Thompson, 9 Cal.3d at 915-916, 109 Cal.Rptr. at 480, 513 P.2d 353

Additionally, where the insured did disclose the condition to the insurer's agent but the agent failed to include it in the application or told the insured it was not relevant, the insurer may not rescind the policy. Boggio v. California-Western States Life Ins. Co. (1952) 108 Cal.App.2d 597, 599-600, 239 P.2d 144, 146-147; Byrd v. Mutual Benefit Health & Acc. Ass'n (1946) 73 Cal.App.2d 457, 463, 166 P.2d 901, 904. And an agent is deemed to be the insurer's agent where the insurer has filed a notice of agency appointment with the Department of Insurance, even if the insured believes the agent to be the insured's own agent. Loehr v. Great Republic Ins. Co. (1990) 226 Cal.App.3d 727, 732-734, 276 Cal.Rptr. 667, 670-672.

Finally, a disability insure's attempt or threat to rescind the policy because of claimed material misrepresentations or concealments by the insured, if found to be unreasonable, may subject the insurer to extra contractual liability. [Fletcher v. Western Nat'l Life Ins. Co. (1970) 10 Cal.App.3d 376, 89 Cal.Rptr. 78].

III. Interplay of Incontestability Clauses, Pre-Existing Condition Provisions and "First Manifest" Restrictions

Even if an insured fails to disclose information on an application, the potential for having the policy rescinded is not open-ended. Disability policies typically contain "incontestability" clauses which provide that once a certain time period (commonly two years) following issuance of the policy has expired, the insurer can no longer "contest" the policy on the grounds that the insured did not fully disclose some bit of medical history or financial information during the application process.

institute declaratory relief or other litigation against its insured only where it has a reasonable basis for doing so;18

refrain from construing a disability policy term in a more restrictive manner than the accepted legal definition;19 and refrain from imposing additional preconditions to coverage beyond those set forth in the policy.20

And it is important to consider the possibility of naming defendants other than the insurance company, especially if you are trying to defeat federal diversity jurisdiction. Potential defendants include the agent who procured the policy for the insured,21 the insurer's claim investigator,22 the physician retained by the insurer to perform an "independent" medical examination of the insured,23 and the insurer's claim adjusting agency.24 The theories of recovery against those defendants may include conspiracy to defraud,25 intentional infliction of emotional distress,26 misrepresentation of coverage,27 and/or professional negligence.28

DISCOVERY IN A DISABILITY ACTION

After filing a detailed, fact-intensive complaint, your first step will be to develop a comprehensive discovery plan.Your discovery should be designed to corroborate your client's story, document the insurer's delay, denial and bad faith, bolster your client's chances of recovering punitive damages, and otherwise prepare the case for trial.

1. Requests for production of documents

Generally, the documents you should request from the insurance company include (1) the insurer's complete claim file (local, regional and home office), including all documents regarding the processing, payment and/or denial of your client's claim; (2) medical reports; (3) investigative reports; (4) photographs and videos; (5) underwriting manuals; (6) claim manuals, including additions, deletions and other revisions from previous versions; (7) other materials used to train adjusters; (8) advertising and marketing materials concerning the policy purchased by your client; and (9) training materials and other documents sent to independent agents to teach them how to advertise, promote and sell the policy bought by your client.

It is always a good idea to propound your document request (and other written discovery) as early as possible. But you should resist the temptation to simply notice the deposition of a claim adjuster or company executive and have him produce documents at his deposition. Instead, be sure to obtain, review and prepare questions regarding the documents well before the depositions start.

You also should direct the responding insurer to prepare a privilege log for all withheld documents.29 Additionally, have the insurer's counsel Bate stamp all produced documents to conform with the order in which they were maintained in the insurer's normal course of business. And of course, if the insurer refuses to produce any documents to which you believe you are entitled, be sure to file a motion to compel further production of documents.

After you have the insurer's documents, you will want to input the documents into your litigation support database system, if any. Also, you will need to do a comprehensive claim file analysis (either in-house or, if necessary, by an outside consultant).

As part of that analysis: (1) watch for drafts of letters that differ from what your client ultimately received; (2) look for letters that purport to confirm conversations with third parties but have no corresponding written note in the file; (3) check to see if the insurer promptly and thoroughly followed up on all leads; (4) look for time gaps, delays, and inconsistencies; (5) evaluate whether the insurer looked to the claim with an eye toward paying it or manufacturing grounds to deny it; (6) identify any documents that did not copy well so that you can obtain good copies at a custodian of records deposition; and (7) make a list of all key players by name, title, and place in the insurer hierarchy, and decide whom you need to depose and in what order.

In addition to requesting documents from the insurer, be sure to serve subpoena duces tecums to obtain pertinent documents from third party witnesses. For example, if the insurer has asserted the "advice of counsel" defense in its answer (and thereby waived the attorney-client privilege), serve the insurer's attorney with a subpoena duces tecum seeking a copy of the attorney's file.

Also, be sure to check the court records in your jurisdiction - and, if at all possible, in other jurisdictions as well - to find out about other bad faith actions against the insurer in your case. Then, contact the lawyers representing the plaintiffs in those cases to see if they have any depositions of insurer executives, claim file memos, or other documents that suggest a pattern and practice of treating policyholders in the manner your client was treated (e.g., failing to thoroughly and timely investigate claims, repeatedly relying on the same "independent" medical examiners, imposing preconditions to coverage beyond those set forth in the policy, paying claims then suing for reimbursement, offering policy buyouts for amounts far less than loss reserves, targeting high-exposure claims for denial, or rewarding employees who deny or discontinue the most benefits). These are the types of documents that could spur your jury to award substantial punitive damages to your client.

2. Interrogatory

Like document requests, interrogatories should be propounded early in the litigation.When you do so, be sure to ask for the names (and addresses and telephone numbers, if no longer employed by the insurer) of all individuals involved in the handling of your client's claim. In addition, you should request the dates and amounts of all payments made or denied. Also, have the insurer set forth the specific policy provisions on which it based its payments or denials of benefits. And be certain to propound contention interrogatories asking the insurer to detail all facts, documents and witnesses that it contends support each and all of its affirmative defenses.

You also will want to include interrogatories aimed at confirming that the insurer engaged in acts of the type that harmed your client with such frequency as to indicate a general business practice. In California, these interrogatories are based on Colonial Life & Acc. Ins. Co. v. Superior Court (1982) 31 Cal.3d 785, 183 Cal.Rptr. 810. In some instances, this type of discovery will be enough to bring the insurer to the bargaining table with significant settlement monies in a case with limited damages.

3. Depositions of insurer representatives

Consider deposing not only the handling claims adjuster, but also his supervisor, claims managers, and corporate executives. Either start at the top of the corporate ladder and go down, or start at the bottom and work your way up.

You also should consider taking the deposition of the insurer's "persons most knowledgeable" (PMK) regarding areas specified in your deposition notice. For example, you may want to notice PMK depositions concerning the company hierarchy, authentication of documents, training of adjusters, investigation of plaintiff's claim, denial of plaintiff's claim, plaintiff's alleged comparative fault, and/or company-wide practices. The major advantage of PMK depositions is that they keep you from floundering around trying to ascertain which executives in the corporate hierarchy should be deposed.

You will want to ask the insurer representative about his education, employment history, and training (initial classroom training, claim manuals, seminar updates, etc.). In addition, you will need to examine him regarding his duties and responsibilities.For example, have him testify concerning his duties as they were prescribed by his superiors, claim manuals, and/or company memoranda. Also, have the deponent testify regarding his understanding of what key policy terms mean.

At the same time, try to weave in the law (statutes, insurance regulations and cases) regarding insurers' duties. Also, get the deponent to commit to his understanding of an insurer's duties, including the implied duty of good faith and fair dealing. Get him to admit that the implied covenant is part of the insurance contract. If relevant to your case, ask the deponent to agree that the implied covenant of good faith and fair dealing includes the duty to thoroughly and objectively investigate claims, timely respond to inquiries, and promptly settle claims where liability is reasonably clear.

Of course, you also will need to examine the insurer representative regarding the handling of your client's claim. For example, did he follow the insurer's claim manual and other company guidelines, policies and procedures concerning investigation, payment, denial and other claim handling? Was help available, as he felt it necessary? Was he free to consult as needed with a claim committee, a medical advisor, in-house counsel and/or outside counsel? And how did he interact with his superiors? Whom did he report to regarding the file? What was his supervisor's role in the handling of the file? How about the claims manager, Vice-President of claims, and home office? If they were not involved, why not? Also, has he ever been reprimanded concerning his handling of your client's file? Did it ever come up in any annual or semi-annual performance reviews?

During your depositions of the insurer's various adjusters, supervisors and executives, always look for someone who can wear the "black hat" at trial. And in deciding whom that will be, evaluate the witnesses' demeanor and attitude as much as their substantive answers. Are they rude or courteous? Are they responsive or evasive? Do they seem credible and sincere, or calculating and deceptive? Do they make or avoid eye contact? Will a jury trust them or suspect them?

Consider taking the deposition Monday morning, to increase the likelihood that any deposition preparation will be stale (because it was done the previous Friday) or short (because it was done early Monday morning). And try not to let the deponent get too comfortable. Instead of easing into the deposition with background inquiries (education, prior employment, etc.), consider starting off with the tough questions. If you spend the entire morning on easy background material, the deponent's counsel can do further preparation for the meatier inquiries during the lunch break.

Also, try to go to the insurer's home office to take your depositions, especially of senior executives. And be sure to videotape the depositions. Videotaping will help curb overzealous defense attorneys who interject excessive objections, overly coach the deponents, or take too many breaks. It also tends to reduce the number of "I don't know", "I'm not sure" and "I can't recall" answers given by deponents. And a videotaped deposition can be an effective forum for making the insurer aware of any "smoking gun" documents you may have discovered.

MOTION PRACTICE IN DISABILITY CASES

It is virtually inevitable that the insurer will file a motion for summary judgment or, at the very least, a motion for summary adjudication seeking dismissal of your claim for punitive damages. In opposing a motion for summary adjudication of a bad faith claim, it should be emphasized that "the reasonableness of an insurer's claims handling conduct is ordinarily a question of fact",30 and that "[w]hether an insurer's denial of a claim is unreasonable . . . remains a question of fact unless only one inference may be drawn from the evidence".31 Similarly, punitive damages are an issue "wholly within the control of the jury",32 and thus are singularly inappropriate for summary adjudication.

Instead of waiting for the insurer's motion, consider filing an offensive motion for summary judgment or summary adjudication.