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.

Texas Supreme Court Issues Highly Anticipated Bad Faith OpinionOne year after its initial decision in a significant bad faith case, the Texas Supreme Court has issued its much-awaited opinion in USAA Tex. Lloyds Co. v. Menchaca. The case involved a homeowner whose post-Hurricane Ike property damage claim was denied by USAA Texas Lloyds Company (USAA). At trial, the jury found that USAA did not breach the policy, but that the company did violate the unfair settlement practices provisions of the Texas Insurance Code.

Given that “substantial confusion” existed in Texas courts regarding the relationship between contractual claims for breach of an insurance policy and statutory bad faith claims under the Texas Insurance Code, the Texas Supreme Court attempted to set clearer precedent in its original opinion in April 2017. However, the ruling was met with concern that it further muddied Texas insurance law and set negative precedent for insurers by reviving claims for treble damages under the Texas Insurance Code. In an unusual move, the Texas Supreme Court agreed to a rehearing.

In the newly released opinion, which replaces the 2017 ruling, the court reiterates the five “distinct but interrelated rules that govern the relationship between contractual and extra-contractual claims in the insurance context” it previously identified last year. Importantly, the court further clarifies the critical point for insurers that generally an insured cannot recover damages under the Texas Insurance Code without establishing a breach of the policy, and that exceptions to the general rule are narrow.

The five rules developed by the Texas Supreme Court that should be applied by Texas courts to the interplay between contractual and Texas Insurance Code statutory claims are:

  1. The General Rule: An insured cannot recover policy benefits under a Texas Insurance Code violation if the insured does not have a right to those benefits under the policy. This rule derives from the fact that the Texas Insurance Code only allows an insured to recover actual damages “caused by” the insurer’s statutory violation.
  2. The Entitled-to-Benefits Rule: An insured who establishes a right to receive policy benefits can recover the benefits as “actual damages” under the Texas Insurance Code if the statutory violation causes the loss of benefits. The court refers to this rule as a “logical corollary to the general rule.”
  3. The Benefits-Lost Rule: An insured can recover benefits as actual damages under the Texas Insurance Code even if the insured has no right to those benefits under the policy if the insurer’s conduct caused the insured to lose that contractual right. This principal is recognized where an insurer misrepresented a policy’s coverage, waived its right to deny coverage or is estopped from doing so, or committed a violation that caused the insured to lose a contractual right to benefits that it otherwise would have had.
  4. The Independent-Injury Rule: This rule has two aspects:
    1. If an insurer’s statutory violation causes an injury independent of the insured’s right to recover policy benefits, the insured may recover damages for that injury even if the policy does not entitle the insured to receive benefits. However, when an insured seeks to recover damages that “are predicated on,” “flow from,” or “stem from” policy benefits, the general rule applies and precludes recovery unless the policy entitles the insured to those benefits; and
    2. An insurer’s statutory violation does not permit the insured to recover any damages beyond policy benefits unless the violation causes an injury that is independent from the loss of benefits.
  5. The No-Recovery Rule: An insured cannot recover any damages based on an insurer’s Texas Insurance Code violation unless the insured establishes a right to receive benefits under the policy or an injury independent of a right to benefits. This rule is considered “the natural corollary to the first four rules.”

The court also provided additional context and guidance for these rules. Ultimately, with respect to the claims at issue in this particular case, the court remanded the case to the trial court for a new trial consistent with its opinion.