Health Administration Responsibility Project

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The Covenant of Good Faith and Fair Dealing

• Should apply to ERISA cases in some states.
  • Pilot Life v. Dedeaux rejected a bad faith argument against an insurer because the state law applied to ALL contracts, not just Insurance contracts, so wasn't protected from preemption by the ERISA 'insurance saving clause'(29 USC 1144(b)(2)(A)).
  • However California, Colorado, Oklahoma, and Alabama DO limit the cause of action to the insurance industry, so those laws should not be preempted.
  • The California Supreme Court has stated in Foley v. Interactive Data Corp., 47 Cal3d 654 (1988), and in Cates v. Talbot, 21 Cal4th 28 (1999) that the bad faith tort is limited to insurance contracts.
  • For Oklahoma, see Lewis, 78 F.Supp.2d at 1215.
  • For Alabama, see Hill, 117 F.Supp2d at 1212.
  • For Wisconsin, see McEvoy v. Group Health Co-op, 213 Wis.2d 507 (1997)
• Should apply to HMOs as well as Insurers
  • In Met Life v. Mass., 471 US 724, 741 (1985), the US Supreme Court rejected any distinction between "traditional and innovative insurance laws".
  • In Sarchett v. Blue Shield, 43 Cal3d 1 (1987), the Calif. Supreme Court held that any distinction between conventional insurance companies and HMOs is "immaterial".
    see also: Smith v. Pacificare Behavioral Health (2001) 93 Cal.App.4th 139.
  • In Washington Physician Service v. Gregoire, 147 F3d 1039, 1045-46 (9th Cir. 1998), the 9th Circuit held that "any nominal variance between HMOs and traditional insurers is a distinction without a difference".
  • 1st Circuit: Ocean State Phys. H.P. v. Blue Shield of RI, 883 F2d 1101, 1107 (1989)
  • 5th Circuit: Corporate Health Ins. v. Texas Dept. of Insurance, 215 F3d 526, 538 (2000)
  • 6th Circuit: Kentucky Assn. of Health Plans v. Nichols, 227 F3d 352,364 (2000)
  • 7th Circuit: Anderson v. Humana, 24 F3d 889, 892 (1994)
  • In Warren-Guthrie v. Health Net, 84 Cal.App.4th 804,814, a Calif. appeals court construed an HMO as it would an insurance plan.

• Duty not to impair rights of claimant
  • The covenant of good faith and fair dealing implied in all contracts requires each contracting party to refrain from doing anything to impair "the right of the other to receive the benefits of the agreement."
  • Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 940
• Duty to act reasonably
  • As applied to insurance contracts, it does not merely "connote the absence . . . of positive misconduct of a malicious or immoral nature . . . ."
  • Neal v. Farmers Ins. Exchange (1978) 21 Cal. 3d 910, 922, fn. 5
  • it demands that the insurer act reasonably. (Id. at p. 925.)
• "Duty not to withhold unreasonably payments due under a policy."
  • Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573
• "Consistency with the justified expectations of the other party."
  • Neal v. Farmers Ins. Exchange, 21 Cal.3d at p. 922, fn. 5.
• Policy language must be construed liberally
  • "'reasonable expectation of the insured'" requires that the policy language be construed liberally "so that uncertainties about the reasonableness of treatment will be resolved in favor of coverage."
  • Sarchett v. Blue Shield of California (1987) 43 Cal.3d 1, 10
• Insurer need not defer to the judgment of the treating physician on the issue of medical necessity.
  • "'medical necessity' or similar policy language is an objective standard to be applied by the trier of fact, . . ."
  • Sarchett v. Blue Shield of California (1987) 43 Cal.3d 1, 9
• Construction of medical necessity consistent with community standards that will minimize the patient's uncertainty of coverage in accepting his physician's recommended treatment.
  • Hughes v. Blue Cross of N.Cal., 215 Cal.App.3d 832 (1989)
• A liberal definition of Medical Necessity
  • A restricted definition of medical necessity, frustrating the justified expectations of the insured, is inconsistent with the liberal construction of policy language required by the duty of good faith.
  • Hughes v. Blue Cross of N.Cal., 215 Cal.App.3d 832 (1989)
• Proper investigation of claim
  • "an insurer may breach the covenant of good faith and fair dealing when it fails to properly investigate its insured's claim."
  • Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 817.
• Reasonable efforts to obtain all relevant medical records
  • In reviewing the medical necessity of hospitalization, this duty of investigation surely entails an obligation to make reasonable efforts to obtain all medical records relevant to the hospitalization.
  • Hughes v. Blue Cross of N.Cal., 215 Cal.App.3d 832 (1989)
• Letters must be drafted so as to elicit an informed response
  • By not identifying the records on which the consultant's recommendation was based, the letters tended to assure that the staff's earlier failure to secure all relevant records would go undetected.
  • And by omitting any explanation of the medical grounds for the intended denial of coverage, the letters placed an undue burden of inquiry on the insured's physician.
  • Hughes v. Blue Cross of N.Cal., 215 Cal.App.3d 832 (1989)
  • Burden is on the insurer to seek information relevant to the claim. not on the ref. MD to have to volunteer it.

• The "Genuine Issue" rule was first announced in Safeco v. Guyton (9th Cir. 1982) 692 F.2d 551,557 as: "...since the policy in dispute involved a genuine issue regarding legal liability, [the carrier] could not, as a matter of law, have been acting in bad faith by refusing th pay the ... claims".
• This doctrine was imported into California case law in Opsal v. USAA (1991) 2 Cal.App.4th 1197. Recent uses include Fillipo v. Sun Ins. (1999) 74 Cal.App.4th 1429 and Fraley v. Allstate (2000) 81 Cal.App.4th 1282.
• The doctrine was applied to Factual disputes in Guebara v. Allstate (9th Cir. 2001) 237 F.3d 987, and Chateau Chamberay v. Assoc. Intern. Ins. (2001) 90 Cal.App.4th 335.
• Bad Faith requires more than mere negligence, ie: bad intent or conscious disregard of an insured's rights.
• However, those courts said an insurer couldn't insulate itself from a bad faith claim by a biased investigation, such as where:
  1. the insurer misrepresented the nature of the investigation,
  2. the insurer's employees lied to the insured or in deposition,
  3. the insurer dishonestly selected its experts,
  4. the insurer's experts were unreasonable, or
  5. the insurer failed to conduct a thorough investigation.
  (Chateau Chamberay p.348)
• Insurers were nevertheless hiring questionable "experts" to create bogus issues.
• This practice may have been put to rest by decisions in Amadeo v. Principal Mut. (9th Cir. 2002) 290 F.3d 2002, and Hubka v. Paul Revere (S.D.Cal 2002) 215 F.Supp.2d 1089., to wit:
  • "The genuine issue rule in the context of bad faith claims allows a district court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer's denial of benefits was reasonable - for example, where even under the plaintiff's version of the facts there is a genuine issue as to the insurer's liability ... [A]n insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably."
  Amadeo, p. 1161.