In lawsuits involving the propriety of rescissions, insurers typically face breach of contract claims. But insurers may also face tag-along bad faith claims – despite the absence of alleged bad conduct independent of the rescission itself. Although the adjudication of bad faith claims is typically perceived as fact-intensive and thus inapposite for summary judgment, the right strategy may pave the way for an insurer to prevail in defending a bad faith claim as a matter of law. This is true even in cases where there remains a factual question as to the alleged breach of contract (i.e., the rescission itself). See, e.g., Berkshire Life Ins. Co. of Am. v. Dorsky, 178 F. Supp. 3d 625 (N.D. Ohio 2016); Smith v. United of Omaha Life Ins., 2016 WL 4133535 (E.D. Wisc. 2016); Evans v. Liberty National Life Ins. Co., 2015 WL 1650192 (N.D. Okla. 2015); Ross v. Am. Gen. Life Ins. Co., 2015 WL 3407420 (W.D. Ky. 2015). In this publication, we review circumstances and strategies that may be useful in defending a bad faith claim.
Insurers Have a Clear, Contractual Right to Contest
Courts have been persuaded as a matter of law that an insurer’s rescission of a policy, in the absence of other alleged bad conduct, was reasonable in light of the unambiguous terms of the policy permitting contestable investigations. In Dorsky, 178 F. Supp. 3d at 635, and Smith, 2016 WL 4133535 at *4, for example, the district courts relied on the contestability clause to support the insurer’s right to investigate a claim. The courts explained that the contestable investigations were undertaken pursuant to the express terms of the respective contracts and, therefore, did not constitute bad faith.
In defending bad faith claims, an insurer should educate the court about the contractual right of contestability. This may be sufficient for the court to conclude that the insurer acted reasonably in accordance with the express terms of the contract.
Do Not Overlook Admissions and/or Information Submitted at Claim
Conflicting information provided by a claimant, even if ultimately deemed immaterial, may also provide a reasonable basis for rescission, thereby defeating bad faith claims as a matter of law. For example, information regarding a deceased-insured’s medical condition may be provided by a claimant in his or her contestable claim submission. If that information conflicts – directly or indirectly – with the representations made by the insured on the application materials, such information alone may provide a reasonable basis for an insurer’s decision to rescind the policy.
In Smith, medical records obtained during the contestable claim investigation revealed the insured’s diagnosis of chronic obstructive pulmonary disease (COPD). On the application, the insured had denied having COPD. The insurer rescinded the policy on this basis. The local medical examiner’s office subsequently determined that the insured did not have COPD, and the physician who had diagnosed the insured retracted his diagnosis. Without regard to whether the insured had in fact made material misrepresentations, the Smith court determined on summary judgment that the insurer did not act in bad faith when it rescinded the policy based upon the COPD diagnosis because it had a reasonable basis to debate the claim at that time. Smith, 2016 WL 4133535 at *4.
In short, even if factual questions remain as to the rescission, such as the insured’s knowledge of the misrepresentation or the materiality of the misrepresentation(s), bad faith will not lie when the insurer had a reasonable basis for rescinding the policy in the first place. The receipt of information at the time of claim or as part of the contestable claim investigation, if obviously contradictory to what was represented on the application, constitutes a reasonable basis for rescission. Insurers may be able to defeat bad faith claims as a matter of law by citing receipt of conflicting information.
Nature of Certain Misrepresentations May Warrant Summary Judgment
Although courts typically require a fact finder to address whether alleged misrepresentations were knowing and/or material, certain types of misrepresentations may be so significant that courts will deem them knowing and material as a matter of law. Courts in these circumstances find that no reasonable juror could conclude otherwise. For example, questions concerning an insured’s knowledge or intent are appropriately decided on summary judgment when the circumstances were such that the insured “must be said to have been aware of their falsity at the time, or that an inference of fraud is otherwise irresistible, as for instance where an unreported illness or disability of [the] insured was so serious and so recent that he could not have forgotten it.” Evans v. Penn Mutual Life Ins. Co. of Phila., 186 A. 133, 138-39 (Pa. 1936).
In Bujak v. Old Line Life Ins. Co., No. 97-3358, 1998 WL 34361139 (E.D. Pa. Apr. 14, 1998), for example, the district court held that the insured’s failure to disclose on an application for life insurance his prior hospitalizations, the most recent of which had lasted three days and occurred only three months before the insured completed the application, sufficed as a matter of law to support a finding of bad faith under Pennsylvania law.
Although typically perceived as creating a factual dispute, allegations of bad faith against an insurer may be resolved as a matter of law. In circumstances such as those outlined above, dispositive motions therefore may be advisable.
- Berkshire Life Ins. Co. of Am. v. Dorsky, 178 F. Supp. 3d 625 (N.D. Ohio 2016) (precluding summary judgment on insurer’s rescission claim, but granting summary judgment on bad faith claim where there was reasonable justification for the claim denial because the contract was susceptible to two different interpretations).
- Smith v. United of Omaha Life Ins., 2016 WL 4133535 (E.D. Wisc. 2016) (granting summary judgment on bad faith claim because insurer had a reasonable basis to debate the claim).
- Evans v. Liberty National Life Ins. Co., 2015 WL 1650192 (N.D. Okla. 2015) (precluding summary judgment on breach of contract claim, but granting summary judgment on bad faith claim when insurer’s actions followed the terms of the policy or resulted from legitimate disagreement).
- Ross v. Am. Gen. Life Ins. Co., 2015 WL 3407420 (W.D. Ky. 2015) (precluding summary judgment on breach of contract claim, but granting summary judgment on bad faith claim where the insurer’s actions were reasonable).