California Disability Insurance Bad Faith Attorneys

Short-Term-Disability (“STD”) and Long-Term-Disability (“LTD”) insurance offer income replacement if, because of an accident or sickness, you are unable to continue working and are residually or totally disabled.  Insurance companies often deny disability claims, making the hiring of an experienced disability claim denial lawyer essential.  If an insurance company denies your disability claim, you are not helpless.  In many cases, what may seem like a proper denial is improper under the law.  If your insurer improperly denied your disability claim under California law, you can bring a bad-faith claim for policy benefits, “consequential damages” (damages that are caused by a company’s bad faith conduct), emotional distress, punitive damages, attorneys’ fees and interest on past-due benefits (typically at the legal rate of 10%).  If your disability claim denial is subject to the Employee Retirement Income Security Act of 1974, known as ERISA, federal law applies, and there are limits on the type of compensation you may recover.

Bad Faith: What is it?

Implied in every insurance contract is a promise of “good faith and fair dealing,” which means that the insurer must not violated the insured’s rights to receive benefits under the policy.  To comply with its promise to act in good faith, the insurer must adhere to certain duties, such as the duty to adequately and accurately communicate with the insured.  An insurer acts in bad faith when it fails to meet those duties unreasonably and without proper cause.  Determining whether there has been bad faith conduct is important, in part, because it directly affects the insured’s potential recovery.  If the insurer is found to have acted in bad faith, the insured may have access to substantial additional recovery, including emotional distress, consequential and punitive damages.

1) Improper Attempts to Rescind the Policy

Most disability insurance policies have a two-year incontestability clause.  An incontestability clause is a policy provision that prevents an insurer from denying a claim or rescinding (i.e., voiding) a policy after it has been in force for a specified period of time.  California Insurance Code Section 10350.2 states that all disability insurance policies must contain an incontestability provision, and further provides that every disability policy must contain specific language either limiting the contestability period to two years or having no limitation in time, but requiring that insurer prove fraudulent intent.  During the contestability period, an insurer can void the policy or deny a claim based on a material misrepresentation made on the application.  A material misrepresentation is a statement made by a potential insured person in the application process that is factually incorrect.  The misrepresentation is considered material if knowledge of the misstated fact would have caused the insurer to refuse to issue the policy or would have caused the insurer to issue the policy with limitations or a higher premium.

An insurer must take immediate action to cancel the policy or deny the claim if it discovers a material misrepresentation during the contestability period.  A mere declaration that it intends to void the policy will have no legal force unless the policy is rescinded within the contestability period.  An insurer can unintentionally waive the right to rescind the policy in the contestability period if it continues to accept premium payments after it has asserted that it can rescind the policy.

2) Insurers Must Investigate Claims With an Eye Toward Finding Coverage

The implied covenant of good faith and fair dealing requires an insurer to “thoroughly and fairly investigate, process and evaluate the insured’s claim.”  Wilson v. 21st Century Ins. Co., 42 Cal.4th 713, 723 (2007).  This means that an insurer must conduct a fair and thorough claims review in which it must search for available evidence that might support coverage.  The insurer’s unreasonable failure to conduct a thorough investigation is evidence of bad faith.  Several California courts have held that an insurer cannot reasonably and in good faith deny payments to its insured without fully investigating the grounds for its denial.  The duty to investigate is not passive but requires the insurer to affirmatively look for all possible bases that might support coverage under the policy.

3) An Insurer’s Failure to Conduct an IME When Circumstances Warrant It

Most disability insurance policies include provisions that allow an insurer to conduct an independent medical examination (“IME”) of the insured to assess a claim for benefits.  If an insurer decides to deny a disability benefits claim without examining the insured via an IME, this can be evidence of a biased, deficient investigation.  While conducting an IME is not necessarily a prerequisite to a thorough investigation, not doing this can be evidence of bad-faith conduct where circumstances warrant an IME.  Disability insurers sometimes only rely on “paper reviews” of claims, or on a doctor’s mere review of a claimant’s file without conducting an in-person examination.  It may also be considered unreasonable or bad faith conduct if an insurer relies exclusively on its experts, fails to conduct an IME and/or disregards the opinions of the claimant’s treating physicians.  This may be an indicator of bias by the insurer.

4) Unreasonable Delay in Paying the Claim

After a claimant makes a claim for benefits, the insurer will begin its own investigation into the claim.  At this point, the insurer may request additional records regarding the claimant’s disability, evidence about the claimant’s job, the claimant’s medical history or other records related to the application for the policy.  The insurer must balance competing duties: on the one hand, its duty to conduct a thorough review, and on the other, the duty to not unreasonably delay.  The “reasonableness” of an insurer’s delay may revolve around whether a “genuine dispute” as to coverage, or the amount of coverage, exists, and the evaluation of this will be focused on whether the delay in paying the claim was unreasonable, given all of the underlying circumstances that caused the delay.  However, the insurer must reach this position in good faith, and this does not include an improper investigation to retroactively rescind the policy.

5) Misrepresentation of the Policy Provisions

Insurers may improperly interpret the policy as including terms, provisions or requirements for coverage that are not clearly outlined in the policy.  Misrepresenting relevant coverage provisions to the insured can give rise to a claim for insurance bad faith.  Sometimes the agent is the culprit regarding such misrepresentations.  We have seen several situations in which the agent who sold the policy at issue to the insured misrepresented the relevant coverage provisions, to the detriment of the insured.  In those instances, California law requires that insurers do not deny coverage based on an agent’s negligent misrepresentation of those coverage provisions.  When insurers ignore their agent’s statements regarding coverage, they may be committing bad faith.  When it comes to life and disability insurance policies, agents who sell these policies are considered to be the agent of their principal, the insurance company.  This aspect of the law can have a profound impact on the liability of the insurance company.

If your claim is governed by California or another state’s insurance bad faith law, you may be entitled to substantial, additional compensation for suffering caused by a wrongful denial.  Having an experienced disability, health and insurance litigation attorney is crucial to the success of your insurance matter.  If your claim for health, life, short-term-disability or long-term-disability insurance has been denied, call 1-800-682-4137 or complete our free consultation form for a free consultation with the attorneys of McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and non-ERISA disability insurance claims.

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