Insurers Be Aware: Minnesota Supreme Court Decision on First-Party Bad Faith

August 4, 2020

On July 29, 2020, the Minnesota Supreme Court released Peterson v. Western National, expanding the scope of what can be first-party bad faith in Minnesota. In the case, Peterson claimed the $250,000 limits of her underinsured motorist (“UIM”) coverage, alleging that a whiplash injury from a motor vehicle accident caused severe headaches that required quarterly Botox injections (a relatively novel treatment). Western National’s last offer before trial was $50,000. A jury awarded Peterson damages over $1.4 million. After trial, Peterson amended her complaint to allege bad faith against Western National. The bad-faith claim was tried to the district court judge who awarded $100,000 in costs and $97,940.50 in attorney fees. Western National appealed. The Supreme Court affirmed the district court's decision and a complete summary of the case and law is included below. 

Peterson v. Western National has broad application to all first-party claims. While only time will tell how courts apply or limit the Peterson directives, insurers must implement steps now in light of Peterson’s ruling. Consider the following:

  • Conduct a prompt and thorough investigation right after receiving notice of a first-party claim. Don’t let your investigation drag on. Carefully review all documents provided by insureds. Follow up right away to request any additional records. Use medical releases to promptly obtain medical records from third-party providers.
  • Your claim file matters! Document every part of your investigation. Document the bases for your determination of benefits. Document who makes the decisions. Expect that claims adjusters will be deposed. Make a record they can use to support the insurer’s conclusions.
  • Consider the retention of legal counsel pre-suit, after the notice of claim, to offer guidance with performing a thorough investigation and evaluating whether to accept or deny a claim.  Attorneys at Arthur Chapman are ready to help.
  • Thoroughly and fairly evaluate the insured’s claimed injuries. In a claim for bodily injury, ask the insured to submit to an independent medical evaluation early on before making any decisions about benefits. If the claim is for UM or UIM benefits, the policy likely requires insureds to cooperate with insurers and submit to a medical examination even pre-suit. In other cases, if the claimant objects, at least there is a record of the insurer requesting the examination. An early record review may be another option.
  • The experts you retain matter. Retain and consult with experts right away and rely on their advice to form your conclusions about benefits. Continue to evaluate if you have the right experts and if you need additional experts.
    • Don’t deny a claim based on records of prior treatment for a similar condition or the same body part. Have an IME/medical expert opinion to support any conclusion that a post-accident condition is a continuation of a pre-accident condition.
    • Retain an IME expert who specializes in the condition claimed and has experience with the treatment recommended for the insured (e.g., in Peterson, a headache specialist who prescribes Botox)
    • Don’t deny a claim based on psych factors, unless the IME is from a psychologist or psychiatrist.
  • In a claim for bad faith, your expert on the conduct of a reasonable insurer can carry a lot of weight. A claim for bad faith must be taken seriously. The outcome in Peterson had a lot to do with the district court’s dissatisfaction with Western National’s claim-handling practices and the court’s reliance on Peterson’s expert to opine about what a reasonable insurer would have done.   

In conclusion, insurers must tread carefully into the newly emerging law on first-party bad faith.  As Justice Anderson warned in his well-reasoned dissent:

If Peterson’s bad-faith claim does not fail as a matter of law, then any personal injury verdict in an uninsured or underinsured motorist case that substantially exceeds the last offer from the carrier (or, as here, the amount paid in settlement by others) carries with it the seeds of a bad-faith claim.

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Minnesota’s first-party bad-faith statute, Minn. Stat. § 604.18, has a two-prong test. To show bad faith, the insured has the burden to 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 first prong is supposed to be an objective one that considers what a reasonable insurer would do. But the Court changed the statutory test from evaluating if an insurer had a “reasonable basis” to deny a claim – to considering what type of investigation a reasonable insurer would conduct. The Court directed that “the factfinder should consider the level of investigation a reasonable insurer would have conducted under the circumstances of the case and how a reasonable insurer would have evaluated the claims in light of that investigation. The insurer’s evaluation of the insured’s claim must be fair. A fair evaluation means one that considers and weighs all the facts and circumstances that a reasonable insurer would consider relevant.” The Court’s standard thus requires the district court to make credibility determinations about evidence and expert testimony and determine what evidence/testimony a reasonable insurer would rely on.  

As noted by the dissent, the Court’s holding contrasts with a test requiring “the absence of a reasonable basis for denying the benefits.” Under the latter test, an insurer could not be found in bad-faith unless there was no evidence that could support an insurer’s position.  

The second prong of Minnesota’s bad-faith statute is subjective. It “requires an insured to prove that the insurer knew, or 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 for benefits.” This prong includes an analysis of the specific insurer’s actual investigation and evaluation of the claim. The Court directed that a pattern of persistent and extended negligent claims handling, together with alleged indifference to substantial medical support for an insured’s claim, can support a finding of reckless disregard. This contrasts with past cases where Minnesota courts have required the necessary evidence to show that an insurer intentionally withheld relevant evidence from experts, engaged in deliberate deceit or trickery, and/or did not conduct any investigation at all.

After setting forth the bad-faith test, the Minnesota Supreme Court applied the test to review the district court’s determination of bad faith. On appeal, the Court applied a differential standard, reviewing the district court’s determination of bad faith for clear error. The Minnesota Supreme Court thus did not hold the actions of Western National constituted bad faith as a matter of law; rather, the Court concluded the district court did not commit clear error when it found at trial that Western National’s actions constituted bad faith.  

First, the Court noted that Peterson’s medical records supported her claim that her headaches were the result of the 2009 accident. It also noted the testimony of Peterson’s bad-faith expert, who opined that a reasonable insurer would have discounted the opinion from Western National’s IME doctor. The Court concluded that the district court did not commit any clear error when it determined that a reasonable insurer, who had the information that Western National had, would have relied on Peterson’s evidence and not denied her claim for benefits.  

The Court noted that Western National did have evidence to support its conclusion about benefits, but held the district court did not err in discounting the evidence. As the Court analyzed, the district court was critical of Western National’s alleged dismissal of Plaintiff’s medical records and also critical of Western National’s independent medical expert. Western National waited over a year and a half to consult with a medical professional. Further, Western National’s IME doctor was not a headache specialist and had never administered Botox as a treatment for headaches. The IME doctor opined Peterson’s chronic headaches were “most likely due to underlying psychological factors, most likely depression,” but the IME doctor was not qualified to diagnose Peterson with a psychiatric disorder.  The IME doctor also opined that Peterson’s post-accident headaches were a continuation of her pre-accident headaches, unfairly dismissing, according to the court, the differences between the pre- and post-accident headaches.

Western National also based its denial on the relatively minor damage to Peterson’s car resulting from the accident and its equation of minor motor vehicle damage with minor injuries. Western National’s adjuster reached this conclusion on review of the cost to repair the vehicle and some photos of the damage. The district court credited the testimony of Peterson’s bad-faith expert that a reasonable insurer would not have relied on this evidence in light of Peterson’s medical records suggesting otherwise.  

The Court also affirmed the district court’s conclusion that a reasonable insurer would not have relied on advice of Western National’s outside litigation counsel. Western National did not retain outside counsel until Peterson filed suit, at which point the Court said that Western National had already made its determination on benefits and was simply hiring legal counsel to defend its position.

Next, considering the second prong of the bad-faith test, the Court held the district court did not commit clear error in holding that Western National recklessly disregarded the lack of a reasonable basis for denying benefits. The district court credited the opinion of Peterson’s bad-faith expert that Western National did not fairly evaluate Peterson’s medical records with an open mind, but rather “developed an early opinion that [Peterson’s] claim was of no value based on its view that the property damage to [Peterson’s] vehicle was minor.” In addition to the evidence referenced with regards to prong one, the district court also examined Western National’s claim handling practice. It found that Western National did not properly and fairly investigate Peterson’s claim for benefits. The claims adjuster repeatedly asked for medical records Peterson already had provided, and failed to obtain records with medical release forms Peterson had provided, causing the file to drag on for over a year without resolution. It held the claims adjuster’s presentation to Western National’s claims board was imbalanced and misstated certain important facts. The Minnesota Supreme Curt rejected Western National’s argument that the evidence supported nothing more than a claim for negligent claims handling and did not support a reckless disregard for facts. The Court concluded the “pattern of persistent and extended investigate failures in this case is additional probative evidence—additional to Western National’s indifference to substantial medical records supporting Peterson’s claim—about whether Western National recklessly disregard information that would have demonstrated to a reasonable objective insurer that Western National should not have denied Peterson benefits.”

The dissent, in contrast, held that Western National had at least three reasonable bases to deny Peterson’s claim: (1) the lack of a causal connection, established by competent medical evidence or even common knowledge, tying Peterson’s car accident injury to her Botox treatment for headaches; (2) an expert opinion from its independent medical examiner who opined that Peterson’s headaches were not caused by the collision; and (3) an evaluation from its claims board, as well as independent outside counsel, that Peterson had already been fully compensated for her injuries related to the car accident.

Given the case-by-case analysis required by the holding in Peterson, the same actions by the same insurer could—or could not—be found to be bad faith. A lot depends on the district court judge. The procedural posture of the bad-faith claim also matters. In Peterson, the bad-faith claim was tried to the district court judge and thus reviewed on appeal using the differential clear error standard. The Minnesota Supreme Court did not hold the actions of Western National constituted bad faith as a matter of law; rather, the Court concluded the district court did not commit clear error in holding the actions of Western National constituted bad faith. As noted by the dissent, future cases are likely to consider whether the express language of Minnesota’s bad faith statute requires a determination of bad faith to be made based on motions and not at trial. Rule 119 motions are subject to a de novo review standard on appeal. 

The members of Arthur Chapman’s Insurance Coverage Group and Automobile Law Group are ready to walk you through these emerging issues of first-party bad faith. 

Arthur Chapman’s Insurance Coverage Group submitted an Amicus Brief on the case for amicus curiae American Property Casualty Insurance Association (APCIA).