By Greg Johnson. In 2008, the Minnesota Legislature passed a statute, Minn. Stat. § 604.18, that limits liability for “bad-faith” denial of first-party insurance policy benefits.  This article summarizes the reported case law, all from the Minnesota Court of Appeals and all opinions unpublished.

Under the statute, bad faith cannot be pled in the complaint. Rather, after filing suit, the plaintiff must move to amend the complaint by filing a motion based on affidavits establishing prima facie evidence of “the absence of a reasonable basis for denying the benefits of the insurance policy” and “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.” Minn. Stat. § 604.18, subd 2(a). If the court finds prima facie evidence in support of the motion, the court may grant the policyholder permission to amend the complaint to pursue a bad faith claim.

If the jury returns a verdict in the plaintiff’s favor, the court (not the jury) determines whether there was “bad faith.”  If so, the court is allowed to add bad-faith damages as taxable costs to the jury award. Bad faith awards are limited to the lesser of: (1) one-half of the proceeds awarded by the jury in excess of the amount offered by the insurer at least ten days before trial began, or (2) $250,000. The court may also award “reasonable attorney fees actually incurred to establish the insurer’s violation” of the statute, but fees are capped at $100,000. Punitive damages are not available under the law. Minn. Stat. § 604.18, subd 3(a).

Exemptions

The law exempts political subdivisions providing self-insurance and pools and the Joint Underwriting Associations operating under Ch. 62F or 62I. Workers’ compensation policies and written agreements of health carriers are also exempt.

Effective Date

The statute became effective on August 1, 2008 “and applies to causes of action for conduct that occurs on or after that date.” 2008 Minn. Laws ch. 208, § 2, at 524.

In Crawford v. State Farm Mut. Auto. Ins. Co., 2012 WL 6554434 (Minn. Ct. App. Dec. 17, 2012), State Farm denied no-fault benefits to Crawford in January 2004. In an attempt to argue the statute applied to her claim, Crawford argued that State Farm engaged in “continuing conduct” after August 1, 2008 by offering to settle the lawsuit for an amount less than that ultimately awarded by the jury. The appellate court rejected the argument. Because the relevant conduct is the insurer’s denial of benefits (see Minn. Stat. § 604.18, subd. 2(a)) and State Farm denied benefits long before the effective date of Minn. Stat. § 604.18, the district court did not abuse its discretion by denying Crawford’s motion to amend the complaint to add a bad faith claim.

Procedural Requirements

 To add a claim of bad faith, the plaintiff must file a formal motion to amend the complaint. In Krupke v. North Star Mut. Ins. Co., A12-1422, 2013 WL 1188015 (Minn. Ct. App. Mar. 25, 2013), the court rejected plaintiff’s bad faith arguments because the plaintiff did not amend her complaint to seek recovery under Minn. Stat. § 604.18, subd. 4(a) (requiring a litigant to amend her complaint to seek recovery for bad-faith denial of first-party insurance claims). See also Greene v. W. Bend Mut. Ins. Co., 2011 WL 292151 (Minn. Ct. App. Feb. 1, 2011) (denying request to amend complaint to plead relief under bad faith statute made in memorandum in response to insurer’s motion for summary judgment as opposed to formal motion to amend).

Standard: “Fairly Debatable”

The majority of states with statutes similar to Minn. Stat. § 604.18 have adopted a “fairly debatable” standard when evaluating an insurer’s denial of benefits. Friedberg v. Chubb & Son, Inc., 800 F.Supp.2d 1020, 1025 n. 1 (D.Minn.2011).

 The Minnesota Court of Appeals applied the “fairly debatable” standard in Homestead Hills Homeowner Ass’n v. Am. Family Mut. Ins. Co., 2012 WL 5896829 (Minn. Ct. App. Nov. 26, 2012), which involved a hail damage claim. Homestead Hills Homeowner’s Association sued after American Family denied coverage for damage to several units in the association. Thereafter, Homestead filed a motion to amend the complaint to allege bad faith. The trial court denied the motion, concluding prima facie evidence did not exist to establish bad faith on the part of American Family.

The relevant facts were as follows: In August 2009, an adjuster from American Family inspected five of Homestead’s roofs and stated that “in his opinion, each of the five … roofs had suffered hail damage as a result of the [July storm.]” The following day, a supervising adjuster from American Family led a second inspection of three additional roofs. After the second inspection, the supervising adjuster determined that the initial adjuster “had been incorrect in his assessment.” The supervising adjuster stated that the damage was caused by a “manufacturing defect” in the shingles and there was “no hail damage that would result in a claim.” The initial adjuster participated in the second inspection and “never disagreed with any statements made by the [s]upervising [a]djuster.”

The Minnesota Court of Appeals upheld the trial court’s ruling. In light of the supervising adjuster’s conclusion that Homestead’s roofs were damaged by a manufacturing defect rather than hail, Homestead’s hail damage claim was “fairly debatable.” As a result, Homestead failed to establish prima facie evidence in support of its motion to amend and could not pursue a bad faith claim against American Family.

In N. Nat. Bank v. North Star Mut. Ins. Co., 2012 WL 4052835 (Minn. Ct. App. Sept. 17, 2012), review denied (Minn. Nov. 27, 2012), the trial court determined the plaintiff was entitled to recover bad faith damages under Minn. Stat. § 604.18, based upon North Star’s “not agreeing to the appraisal process to resolve the claim” and “for the delay in making payment.”

Initially, North Star adjusted the loss and tendered payment of $118,847.40 to plaintiff. At some later point, plaintiff had an independent appraisal performed, but did not share the results with North Star. Two years after the loss, plaintiff presented an appraisal demand. North Star resisted an appraisal hearing based on its interpretation that plaintiff was not an “insured” within the meaning of the policy for purposes of the appraisal process. Plaintiff filed a motion to compel appraisal proceedings with the district court and prevailed on the issue. Once the arbitration panel made its award, North Star deposited funds with the district court in the amount of the difference between the appraised ACV at the time of the loss and what it had already paid.

The Minnesota Court of Appeals reversed the district court’s ruling that plaintiff was entitled to bad faith damages from North Star. The appellate court held that North Star’s initial position on the availability of appraisal did not expose it to bad faith:

 The only incorrect position taken by [North Star] during these proceedings was its initial resistance to the appraisal hearing based on its interpretation that appellant was not an “insured” within the meaning of the contract for purposes of the appraisal process. Appellant prevailed on that issue. It was on this basis that the district court properly determined appellant to be the prevailing party. However, the majority of the states with statutes similar to Minn. Stat. § 604.18 have adopted a “fairly debatable” standard when evaluating an insurer’s denial of benefits. Friedberg v. Chubb & Son, Inc., 800 F.Supp.2d 1020, 1025 n. 1 (D.Minn.2011). Although ultimately found to be incorrect by the district court, under the unique circumstances of this case, [North Star’s] position on the availability of appraisal was “fairly debatable.

The appellate court also rejected bad-faith damages based on North Star’s delay in making payment of the full ACV, finding the delay was primarily attributable to the plaintiff. Almost two years had passed after the date of the loss before plaintiff presented an appraisal demand. Nothing in the record indicated that, prior to requesting the appraisal, plaintiff had even informed North Star it had obtained a different valuation of the loss. “Thus [North Star] could not possibly have understood that there was disagreement on the value of the loss until its receipt of appellant’s motion to compel appraisal proceedings.”

In Bernstrom v. Am. Family Mut. Auto. Ins. Co., 2012 WL 1970073 (Minn. Ct. App. June 4, 2012), review denied (Aug. 7, 2012), the Bernstroms contended that American Family acted in bad faith when it offered to settle their underinsured motorist (UIM) claim for $15,000, knowing that they were entitled to the UIM policy limits of $50,000. The Bernstroms rejected the offer and moved to amend their complaint to add a claim for bad faith pursuant to Minn. Stat. § 604.18. The district court granted the motion.

The jury awarded Bernstrom over $425,000 ($100,000 for past pain, disability, and emotional distress, $2,176.84 for past wage loss, $23,526.87 for past health care expenses; $200,000 for future pain, disability, and emotional distress, $3,000 for loss of future earning capacity and $125,000 for future health care expenses). The jury also awarded Gordon Bernstrom $25,000 for loss of consortium. The district court entered judgment in favor of respondents for the UIM policy limits of $50,000 and then held an evidentiary hearing on the bad-faith claim. The Bernstroms testified, and they also offered expert testimony on insurance claims-handling practices. American Family presented its in-house counsel, who made the claims decisions, and an expert who opined that it had acted reasonably in denying the claim for policy limits.

The district court issued an order denying the bad-faith claim. The district court found the Bernstroms had “not shown by a preponderance of evidence” that American Family lacked a reasonable basis for denying payment of full policy benefits.

On the contrary, the district court found a reasonable basis existed “at least” because of pre-existing-condition evidence in testimony of Dr. Damle and report of Dr. Starzinski. The district court also noted “the conservative venue” and the need for a large verdict to permit recovery over benefits already paid. The court emphasized that American Family had not denied the UIM claim, but rather had offered to settle the claim for $15,000, which American Family believed was an appropriate settlement, given the Bernstroms’ previous receipt of $20,000 in no-fault benefits under their own policy and $45,000 under the negligent driver’s liability policy. The court also noted that American Family had relied on the advice of its counsel — who had represented it in both the liability and UIM suits — to determine that the $15,000 offer was reasonable.

On appeal, the Bernstroms argued the district court erred by disregarding the evidence favoring a high damages recovery and in particular the medical opinions that the injuries were caused by the accident, rather than the preexisting condition. They also asserted that American Family acted in bad faith by failing to adequately investigate their UIM claim. The Bernstroms asserted that, under the Wisconsin case law from which Minnesota’s statutory language is derived, an insurer must conduct an adequate investigation in order to have a reasonable basis for denying a claim. See, e.g., Weiss v. United Fire & Cas. Co., 197 Wis.2d 365, 541 N.W.2d 753, 757 (Wis.1995) (explaining that first prong of test requires evaluation of insurer’s investigative efforts). According to their claims expert, the deficiencies in American Family’s investigation of the UIM claim included the failure to depose Bernstrom during the UIM proceedings, failure to ever depose Gordon Bernstrom, and failure to request a third IME in connection with the UIM proceedings.

The Minnesota Court of Appeals rejected these arguments. First, the district court and appellate court acknowledged the medical opinions stating the injuries were caused by the accident, but nevertheless found that they did not establish the lack of a reasonable basis for American Family’s actions, given the conflicting evidence regarding causation.

Second, while the court did not necessarily agree that Minn. Stat. § 604.18 requires an adequate investigation as a separate element, it agreed with the district court that the Bernstroms had not shown that American Family’s investigation was inadequate. During the entire course of the UIM claim and UIM litigation, American Family had the benefit of access to and knowledge of the complete discovery and investigation previously conducted in the underlying liability claim and access to all of Bernstrom’s medical records, employment records, and tax returns. It also had the transcript of Bernstrom’s deposition from the liability proceedings and its counsel had also met with Gordon Bernstrom. The Berstrom’s own expert conceded that it would be a judgment call whether an insurance company employing the same outside counsel that it did for a liability suit would choose to re-depose the same plaintiff in a subsequent UIM suit.

On this record, the district court did not clearly err by finding that appellants had “not shown by a preponderance of the evidence that [American Family] failed to conduct a reasonable investigation.”

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2014.