A Wrongful Denial Does Not Mean Bad Faith

All insurance cases have to looked at closely by insurance attorneys. Not every time an insurance company denied a claim means that the insurance company has breached its duty of good faith and fair dealing. The 2006, Texas Supreme Court case Minnesota Life Insurance Company v. Vasquez is a good illustration of this. Here is the relevant information on this case.
Minnesota Life issued a Mortgage Accidental Death Insurance policy to Joe and Elia Vasquez, promising to pay their home mortgage in the event either died due to an accident. In June 2000, Joe Vasquez became ill, was hospitalized, suffered a seizure, and lapsed into a coma. Twelve days later, he emerged from the coma and was transferred to a hospital room. Later that day, while no one else was present, he apparently fell, hit his head, and died.
On October 6, 2000, Elia Vasquez filed a claim with Minnesota Life requesting payment of the balance due on her mortgage (about $41,000) and submitted copies of the death certificate and autopsy report. After reviewing the documents, Minnesota Life sought advice from a medical consultant as to whether Mr. Vasquez’s death resulted from an accident “independently of all other causes,” as required by the policy. The consultant advised that he needed to see the relevant medical records.
To obtain the records, Minnesota Life employed PMSI, a vendor specializing in that line. PMSI requested the medical records several times without success.
The records were at last produced on March 25, 2001. As it turned out, they disclosed no additional details about Mr. Vasquez’s death. Deciding there was no other way to determine exactly what occurred, Minnesota Life paid the remaining balance on the Vasquez’s mortgage on March 28th.
Two days later, Minnesota Life was served with Ms. Vasquez’s suit.
At trial two years later, the jury found that Minnesota Life knowingly violated the Insurance Code and that Ms. Vasquez was entitled to damages.
The dispositive issue in this appeal is whether there is any evidence that Minnesota Life knowingly committed an unfair settlement practice. As the claim was paid shortly after suit was filed, no breach of contract claim remains. Further, the insurer admited it owes interest at the rate of 18 per cent for failing to pay the claim within 60 days.
But the insurer contests the awards for mental anguish and additional damages, both of which are recoverable only if the Insurance Code violation was committed knowingly. Minnesota Life contends there was no evidence that it had actual awareness of the falsity, deception, or unfairness of its handling of this claim.
Two unfair settlement practices were alleged and submitted to the jury:
● failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim with respect to which the insurer’s liability has become reasonably clear; and,
● failing within a reasonable time to affirm or deny coverage of a claim to a policyholder.
It is undisputed that all Minnesota Life ever knew about the cause of death here was what appeared in the autopsy report and death certificate. Those documents described an “accident” in which Joe Vasquez “fell and hit back of head”. But both documents listed his cause of death as “seizure disorder with encephalopathy followed by blunt force trauma to the head.”
The policy here provided coverage if “death results directly and independently of all other causes . . . from an accidental injury”. As the documents here listed both a seizure disorder and a blow to the head as the cause of death, they unquestionably disclosed an “accidental injury,” but not one that was the sole cause of death “independently of all other causes.”
Similarly, the policy excluded payment of benefits if “death results from or is caused directly or indirectly by . . . bodily or mental infirmity, illness or disease”. Again, by listing both a seizure and an accident, the documents suggested that a bodily infirmity or illness had contributed at least indirectly to the death.
Though somewhat cryptic, these official documents were all the insurer had. Both listed a seizure disorder and a blunt force as a single cause of death. One of these was an accidental injury, the other was not. While the documents said only that the head injury “followed” the seizure disorder, listing both as a single cause reasonably suggested the two were related and that both played a role in the death. Nothing in these documents suggested the insured’s seizure disorder was so remotely connected with the subsequent injury that it could not constitute legal cause. Nor did either suggest that all forces generated by any seizure “had come to rest” before the blow to the head, or merely placed the insured in the wrong place at the wrong time. As these documents were all the insurer had, if coverage was not reasonably clear from them, it was not reasonably clear at all. Since the policy covered death caused independently of any bodily infirmity, it was not reasonably clear here. Accordingly, the court held there is no evidence that the insurer failed to pay the claim after coverage had become reasonably clear.
At trial, the insurer presented undisputed evidence that the hospital from which the records were requested was slow to return calls and unresponsive to repeated requests. According to what the insurer was told by its vendor, there had been more than a dozen efforts to contact the hospital and obtain delivery. The head of the hospital’s medical records division confirmed that, during the period here, four-month delays like this one were not infrequent. As the court of appeals noted, “Minnesota Life was stymied by the hospital records department during its investigation, and it had no control over this delay.”
But what is missing from the record is any evidence that Minnesota Life was aware that its protracted efforts to obtain the medical records were false, deceptive, or unfair to Ms. Vasquez. There is nothing to suggest that it intentionally prolonged the investigation or that its efforts were a sham to avoid paying what it admits was a relatively small claim. There is no evidence it gave Ms. Vasquez false reasons for the delay or that it knew Ms. Vasquez was suffering mental anguish in the interim. Even Ms. Vasquez’s expert admitted at trial that he would not have paid her claim based on the autopsy report and death certificate alone. As it turned out, the medical records added nothing new to those documents, but it is undisputed that no one knew that at the time.
This court agreed that when coverage is not reasonably clear, an insurer cannot sit on its hands or draw out an investigation to keep things that way. Under the Insurance Code, an insurer that fails to pay claims promptly must pay for actual damages it causes as a result. But payments beyond that cannot be based on negligence or hindsight; there must be evidence that the insurer was actually aware that it was handling the claim in a way that was false, deceptive, or unfair. As there is no such evidence here, the lower courts erred in awarding extra-contractual damages.
Accordingly, damages for bad-faith were denied.

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