We all know how prevalent bad faith claims are. It seems like almost every case involving disputed policy benefits includes one. Many have no merit and should be disposed of on summary judgment. The rest, however, arguably have at least some degree of legitimacy. While it may not seem that difficult to identify those that present significant exposure, the large verdicts we continue to see suggest otherwise. So how can insurers distinguish between a garden-variety bad faith claim with, at most, low six-figure exposure versus one that could result in a multimillion-dollar verdict?

First, it’s important to recognize that insurers instinctively evaluate cases based on factors that are insurer-centric: What is the amount of policy benefits? What are the terms of the policy? Did the company make the right decision? What kind of witness will the corporate representative(s) make? What will it cost to defend the case? These questions are familiar to all of us—and rightfully so. They are particularly useful for evaluating a breach of contract claim, or even a bad faith claim prior to summary judgment. However, they have less relevance once it becomes clear that the bad faith claim will be submitted to a jury. Good plaintiffs’ lawyers rely on different factors when evaluating a case: How sympathetic is the plaintiff? How badly did the plaintiff need the benefits? Has the plaintiff changed his or her position based on the denial? Did the insurer give the plaintiff the runaround? Does the basis for denial resonate with an average person? Is there evidence indicating the insurer was more concerned about the financial impact of the coverage decision than processing the claim correctly? The answers to these questions often provide the most reliable indication of whether the jury may render a headline-grabbing verdict.

$25.5 Million Oklahoma Verdict: Jackpot Justice or Case StudyA good example is the recent $25.5 million verdict in Oklahoma against Aetna. The case involved the 2014 denial of health insurance coverage for a specific cancer treatment on the basis that it was experimental. The plaintiff, Orrana Cunningham, who died in May 2015, suffered from stage 4 nasopharyngeal cancer near her brain stem. Her doctors at M.D. Anderson recommended proton beam therapy, a targeted form of radiation that could pinpoint her tumor without the potential for blindness or other side effects of standard radiation. After Aetna denied coverage for this treatment, Cunningham and her husband Ron, a retired Oklahoma City firefighter, mortgaged their dream home to pay for the $92,000 therapy. They also started a GoFundMe page.

At trial, plaintiff’s counsel presented evidence that Medicare covers proton beam therapy and that insurers often cover it for an array of pediatric cancer patients. He also presented evidence that Aetna did not carefully review the claim. For example, Aetna’s medical director testified that he sometimes reviewed up to 80 claims per day. At the same time, Aetna’s counsel told the jury that Aetna was proud of how the claim was handled. The jury disagreed. It concluded that Aetna recklessly disregarded the duty it owed to Ms. Cunningham, rendering a verdict for $15.5 million in mental anguish damages and $10 million in punitive damages.

Reviewing the factors noted above, the risk of a large verdict was obvious. The plaintiff was sympathetic. She and her husband badly needed the benefits. They had to mortgage their house as a result of the denial and ask their friends for money. And the jury didn’t buy the basis for the denial, finding instead that the insurer was more concerned about its profits than carefully administering Ms. Cunningham’s claim.

Bad faith claims are so prevalent, it is easy to become desensitized to the risk they pose.  Nevertheless, once summary judgment has been denied, these claims can present significant exposure for insurers. The factors listed above that are considered by both insurers’ and insureds’ attorneys will help you decide when to fight and when to write a check.

The Bradley team will continue to monitor and report on significant bad faith developments.

Ex-Spouse May Not Be Removed as Beneficiary of Life Insurance Policy under New York’s Revocation on Divorce StatuteA recent Second Circuit opinion highlights an important nuance in New York’s revocation on divorce statute, N.Y. Est. Powers & Trusts Law § 5-1.4. In New York Life Insurance Company v. Sahani, the Second Circuit affirmed the district’s courts finding that a decedent’s ex-spouse was entitled to life insurance policy proceeds despite divorcing the decedent the year prior.

In 2001, New York Life Insurance Company issued a $250,000 whole life insurance policy to the decedent. The decedent’s mother, Shukti Singh, was the beneficiary of the whole life policy. In 2007, the decedent married Seema Sahani. Shortly thereafter, the decedent transferred ownership of the whole life policy to Sahani and designated her as the primary beneficiary. Also in 2007, New York Life issued a $1 million term life insurance policy on the decedent’s life to Sahani. Sahani was both the beneficiary and owner of the term life policy. In 2013, the decedent and Sahani divorced. In 2014, the decedent died. Both Sahani and the decedent’s mother, Singh, made claims to New York Life under both policies.

New York’s revocation on divorce statute, EPTL § 5-1.4(a), provides that a divorce revokes any revocable disposition made by a divorced individual to his or her former spouse in a life insurance policy.  Among other things, Singh argued that New York’s revocation on divorce statute applied under these facts and revoked Sahani’s beneficiary designation under the policies. The Second Circuit disagreed. Looking “first to plain language of the statute,” the court held “§ 5-1.4(a) does not apply to the situation here.” According to the court, “the beneficiary designation was not ‘revocable’ because the decedent was not ‘empowered’ to cancel it, since Sahani—not the decedent—was the owner of both policies at the time of the divorce.” As the opinion highlights, Sahani was entitled to the policies’ death benefits because she was the owner and beneficiary of the policies. Conversely, if the facts were slightly altered and the decedent had retained ownership of the policies, the ex-spouse would not have been awarded the death benefits because New York’s revocation statute would have revoked her beneficiary designation.

Moreover, the Sahani opinion is instructive for an additional reason—it is an interpleader action. When faced with Sahani’s and Signh’s claims, New York Life interplead the funds and moved for discharge pursuant to 28 U.S.C. § 2361. Early in the lawsuit, the district court granted New York Life’s motion and dismissed New York Life from the lawsuit. Unlike some states’ revocation on divorce statutes, New York’s statute does not expressly insulate insurers from liability to a former spouse when interpleading the contested funds (compare § 5-1.4 with Tex. Fam. Code Ann. § 9.301(c)(2), insulating insurer from liability where insurer interpleads proceeds). However, interpleader should still be considered a viable option where uncertainty exists as to the facts or operation of the statute. Insurers are afforded some protection under the New York law. In New York, insurers are not liable for making a payment to a former spouse unless the insurer “received written notice of the divorce, annulment, or remarriage” at the insurer’s “main office.”

This blog continues a series of blogs addressing this issue and the particulars of revocation on divorce statutes nationwide. If there is a specific state you are interested in or a global question that needs to be addressed, please comment below.

DOL Regulations on Association Health Plans: How Will They Affect the Health Insurance Marketplace?Last year, the President issued an Executive Order directing the Secretary of the Department of Labor (DOL) to issue regulations to expand access to association health plans (AHPs). Earlier this year, the DOL issued final regulations and FAQs on AHPs. The regulations broaden the definition of an “employer” under the Employee Retirement Income Security Act (ERISA). The revised definition is intended to assist employers in joining together as a group or association of employers by geography or industry to sponsor a group health plan. This change is significant because a plan treated as being adopted by a large single employer can potentially avoid some Affordable Care Act (ACA) reforms applicable to the individual and small group insurance markets, such as the requirement to provide essential health benefits. More recently, the DOL has issued a Compliance Assistance Publication that provides more informal guidance on the changes.

The key aspects of the guidance are:

  • Commonality of Interest — Employers may band together as a group to offer health coverage if they are either (1) in the same trade, industry, line of business, or profession; or (2) have a principal place of business within a region that does not exceed the boundaries of the same state or the same metropolitan area (even if the metropolitan area includes more than one state). The group or association of employers must have at least one “substantial business purpose” unrelated to offering and providing health coverage or other employee benefits to its employer members and their employees, even if the primary purpose of the group or association is to offer the coverage to its members. The final regulations include a safe harbor under which a substantial business purpose is considered to exist in cases where the group or association would be a viable entity even in the absence of sponsoring an employee benefit plan.
  • Employer Control — The regulations set forth a requirement for employer control. The control test provides that the functions and activities of the group or association must be controlled by its employer members, and the group or association’s employer members that participate in the group health plan must control the plan. Control must be present both in form and in substance; control is determined based on a facts-and-circumstances test. Members are not required to manage the day-to-day affairs of the group, association, or plan. The final regulations include a requirement that a group or association cannot be a health insurance issuer as defined in ERISA or be owned or controlled by such a health insurance issuer, although the prohibition does not apply to entities that participate in the group or association in their capacity as employer members of the group or association.
  • Eligible Participants — The group of eligible participants includes employees of a current employer member of the group or association, former employees of a current employer member of the group or association who became entitled to coverage under the group’s or association’s group health plan when the former employee was an employee of the employer, and beneficiaries of such individuals (e.g., spouses and dependent children). For working-owner coverage (discussed below), a special provision in the regulations provides that, except as may be required for purposes of COBRA continuation coverage, an individual eligible for coverage under the group health plan as a working owner (and the individual’s beneficiaries) cannot continue to be eligible for coverage under the group health plan for any plan year after it is determined that the individual does not meet the conditions for being treated as a working owner under the final regulations.
  • Working Owners — A working owner without common law employees may qualify as an employer and employee for purposes of an AHP. Plan fiduciaries have a duty to reasonably determine that the conditions of the working-owner requirement are satisfied and to monitor continued eligibility for coverage under the AHP. The hours-worked provision for a working owner is an average of 20 hours per week or 80 hours per month.
  • Nondiscrimination — Using existing nondiscrimination requirements under the Health Insurance Portability and Accountability Act (HIPAA), a group or association cannot restrict membership in the association based on any health factor. The HIPAA rules define a health factor as health status, medical condition, claims experience, receipt of healthcare, medical history, genetic information, evidence of insurability, or disability. AHPs cannot treat member employers as distinct groups of similarly situated individuals. However, AHPs are not precluded from making distinctions between employer members in all circumstances. Distinctions based on a factor other than a health factor (such as industry, occupation, or geography) are permitted, and several examples are provided in the regulations.

The regulations became effective on September 1, 2018, for plans that are fully insured and that meet the requirements for being an AHP sponsored by a bona fide group or association of employers. The effective date is January 1, 2019, for any plan that is not fully insured, was in existence on June 21, 2018, meets the requirements that applied before June 21, 2018, and chooses to become an AHP sponsored by a bona fide group or association of employers. On April 1, 2019, the regulations become effective for any other plan established to be, and operated as, an AHP sponsored by a bona fide group or association of employers.

We will continue to monitor developments on the new regulations and what impact they may have on health insurers.

If you have any questions about the regulations, contact David Joffe at djoffe@bradley.com.