July 31, 2020
By Larry Rocheford and Michelle Kuhl
The Minnesota Supreme Court released its highly anticipated decision in Peterson v. Western National on July 29, 2020. This decision was the first case in which the Court interpreted the first party bad faith statute, Minn. Stat. § 604.18. As expected, the Court interpreted the statute in a way that will likely lead to more bad faith claims being asserted against first party insurers in Minnesota.
As a reminder, Peterson involved an underinsured motorist coverage claim (UIM) plaintiff who claimed increased headaches following a low speed accident with minimal vehicle damage. The plaintiff settled her liability claim against the underinsured and at-fault driver and then demanded the full $250,000 UIM policy limit from Western National. The plaintiff provided medical records and signed medical authorizations to Western National in July 2014.
Western National did not pay benefits or deny the claim for a year after the plaintiff provided medical records. The plaintiff then filed a lawsuit.
After the plaintiff filed the lawsuit, she disclosed to Western National the opinion of her treating physician, which stated her headaches were caused by the accident and she would need Botox every 3 to 4 months for the rest of her life. Western National had a neurologist conduct an independent medical (IME). The neurologist opined that the headaches were not caused by the accident and were likely caused by depression. But the Court noted that the IME neurologist did not specialize in headache medicine, had never prescribed Botox for headaches, and was not qualified to opine as to psychiatric disorders such as depression.
At trial, the jury awarded over $1.4 million. The plaintiff then claimed Western National’s failure to pay the full policy limits was bad faith. After hearing testimony from bad faith experts on both sides, the trial court awarded $100,000 in taxable costs and nearly as much in attorney fees, all pursuant to Minn. Stat. § 604.18.
Western National appealed and, after a split court of appeals decision in favor of the insured, the Minnesota Supreme Court was asked to interpret Minn. Stat. § 604.18. That statute states:
The court may award as taxable costs to an insured against an insurer amounts as provided in subdivision 3 if the insured 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 Court found the language of the statute was unambiguous, but it noted the legislature took the text for the statute from the Wisconsin Supreme Court case, Anderson v. Cont’l Ins. Co., 85 Wis. 2d 675, 271 N.W.2d 368 (1978), that created common law bad faith in Wisconsin. The Court addressed each prong in turn and found that the plaintiff had met her burden to show Western National violated both prongs and that Western National committed statutory bad faith.
Supreme Court Analysis
The First Prong
The first prong is an objective test, which asks whether a reasonable insurer under the circumstances would have denied the insured the benefits of the policy. The factfinder should consider the level of investigation a reasonable insurer would have conducted under the circumstances and whether the insurer conducted a fair evaluation that weighs all the facts and circumstances a reasonable insurer would consider relevant.
Western National had argued that the statute’s reference to an “absence of a reasonable basis” was essentially the summary judgment or directed verdict standard and, therefore, if the insurer survived a motion for directed verdict, there could be no bad faith. The Court rejected Western National’s argument, noting that unlike a judge ruling on a summary judgment motion, the insurer should not ignore all evidence that supports the insured’s position. Therefore, an insurer could act in bad faith even if there was some evidence to support a denial of the claim.
However, the Minnesota Supreme Court declined to go to the other extreme and adopt the interpretation of the first prong proposed by the plaintiff. The plaintiff’s proposed standard would have found bad faith any time the insurer failed to conduct a reasonable investigation or fairly evaluate the results of that investigation. Although the Court found these considerations relevant, they are appropriately considered only at the second prong, not the first. The first prong considers whether an insurer who had conducted a full investigation and a fair evaluation of the results of the investigation would have denied the claim, regardless of whether the insurer in the case had actually conducted such an investigation.
Notably, the Court’s language seems internally inconsistent regarding what type of investigation is required. At one place in the 5-2 majority opinion it states the first prong requires consideration of “the level of investigation a reasonable insurer would have conducted under the circumstances,” but, in two other places, it instructs courts to consider whether a reasonable insurer would have denied benefits after a “full investigation,” and, toward the end of the opinion, it describes the standard as a “proper investigation.” The reason for this inconsistency is unclear. It does not seem likely that the Court intended to require insurers to conduct the most thorough investigation possible for every single claim regardless of circumstances, but the use of the term “full investigation” could potentially be interpreted to impose such a burden.
Applying this standard to the facts of the case, the Court held that the trial court did not clearly err in finding Western National failed the first prong. The Court considered the following evidence relevant in establishing Western National’s failure to conduct a reasonable investigation and failure to fairly evaluate the results of the investigation:
- The medical records the plaintiff provided to Western National contained “substantial evidence” that the headaches were caused by the accident.
- The adjuster’s claim that she lacked medical records necessary to evaluate the claim was contrary to the record.
- Western National had medical authorizations, so even if it did lack medical records it could have requested them itself.
- Western National did not consult with any medical professional for a year and a half after plaintiff filed her claim.
- Plaintiff’s bad faith expert testified that a reasonable insurer would not have relied on the IME doctor because he was not a headache specialist and the trial court had discretion to consider that testimony credible.
- The adjuster’s reliance on the theory that the injury could not have been caused by an accident with such slight property damage was flawed when the investigation of the property damage was based solely on the cost of repair and “some photos” and the medical records showed evidence of causation.
- Western National’s reliance on counsel did not insulate it from a bad faith claim when counsel was not retained until after a decision to deny benefits had already been made and, upon retention, counsel had told Western National this was not a “run of the mill” soft tissue case. (Notably, as the dissent points out, despite this “run of the mill” comment, counsel’s advice to Western National was always that the plaintiff had been fully compensated by her settlement with the other driver.)
- Counsel’s advice to Western National that it could prevail at trial (i.e. convince a jury to rule in its favor) does not necessarily mean that it was reasonable to deny the benefits of the policy because the outcome of a jury trial depends on factors such as credibility determinations and evidentiary rulings that are not part of the analysis under the bad faith statute.
The Second Prong
The second prong imposes a mens rea requiring the insured to show that the insurer knew of or acted in reckless disregard of the lack of a reasonable basis for denying the benefits of the policy. Here it is appropriate to consider the adequacy of the insurer’s investigation and its evaluation of the investigation. If the insurer “knew, recklessly disregarded or remained indifferent to information that would have allowed it to know, that it lacked an objectively reasonable basis for denying the insured’s claim,” the second prong is met.
The Court held Western National failed the second prong because it ignored evidence in the medical records supporting the plaintiff’s claim and it “did not investigate [the] claim with an open mind, but rather developed an early opinion that [the] claim was of no value based on its view that the property damage to [the] vehicle was minor, and from then on, that opinion was etched in stone.” It also faulted the adjuster for requesting medical records that had already been provided and not promptly using the authorizations provided to obtain records. Finally, the adjuster’s presentation to the claims board was “imbalanced” and contained inaccuracies.
Of course, because the bad faith inquiry is fairly fact-specific, the Minnesota Supreme Court’s Peterson decision that the trial court in this case did not err in finding bad faith offers limited guidance on whether countless other factual scenarios would constitute bad faith. For example, because Peterson was mostly a dispute as to causation, the Court does not address whether a legitimate dispute over damages owed – case valuation – would be considered bad faith. The dissent warns of the potential consequences, as dissents often do, stating that under the majority’s opinion “any personal injury verdict in an uninsured or underinsured motorist case that substantially exceeds the last offer from the carrier . . . carries with it the seeds of a bad-faith claim.” That statement may be a bit too far, but it is certainly true that Peterson v. Western National adopts a plaintiff-friendly interpretation of Minn. Stat. § 604.18. Now, more than ever, first party insurers need to be aware of the possibility of Minnesota bad faith claims and should carefully consider whether they have conducted a sufficient investigation and fairly evaluated the evidence before denying a claim.