Wilson v. 21st Century Insurance Company

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LIABILITY UPDATE
February 22, 2008

In Wilson v. 21st Century Insurance Company 2007 Daily Journal D.A.R 17597, the California Supreme Court held that an insurance company may be sued for bad faith if it reaches a medical conclusion about an insured’s first party claim without a good faith investigation of the claim and without a reasonable basis for genuine dispute of the claim.

An intoxicated driver made a left turn directly in front of the vehicle plaintiff Reagan Wilson (Wilson) was driving, resulting in a collision. She made a claim under her underinsured motorist coverage with her insurer, defendant 21st Century Insurance Company (21st Century). In February 2001, Donald Hall, Wilson’s attorney, told Paul Le, 21st Century’s claims examiner, that his client wanted to make a claim on her underinsured motorist (UIM) coverage. In April, after Wilson reached a settlement with the other driver for his $15,000 liability coverage, Le asked Hall to send 21st Century a demand package so he could evaluate the UIM claim.

Hall sent Le the demand letter and documentation, including medical reports from Dr. Douglas Jackson, who found no fracture degenerative change or soft tissue swelling, and those of Dr. Edward Southern, whose clinical impression was of degenerative disk changes resulting from the accident. Hall told Le that after the accident Wilson had made a long-planned trip to Europe, which was “ruined” by her injuries. At the time of the demand letter, Hall wrote, she was studying in Australia but was still experiencing pain “on a regular basis.” The general damages resulting from such an injury at Wilson’s young age, Hall asserted, exceeded the $100,000 UIM policy limits. He requested that 21st Century pay Wilson $85,000, the UIM policy benefit remaining after Wilson’s recovery of $15,000 from the other driver.

Le and Hall discussed the claim by telephone on July 6, 2001. Le asked Hall if there was any additional medical documentation for the claim. Hall said there was not, but that Dr. Southern’s report indicated disk changes that would affect Wilson later in life. Le then asked, “[w]hy is she in Australia if [her] inj[ury][is] so severe?” and observed that Wilson “is young and may not experience any pain in future from deg[enerative] disk.” Le also noted his own opinion that the “MRI does not show bulge touching the nerves.” By a memorandum dated July 9, 2001, Le sought and obtained the approval of his superior to reject Wilson’s UIM claim. Le had not attempted to contact Dr. Southern and did not speak with any other medical practitioner about the claim.

Wilson then initiated arbitration of the claim. After a diskogram was performed in June 2002, one orthopedic surgeon recommended spinal fusion surgery. In 2002, after learning of the surgery recommendation (through deposing Wilson in preparation for arbitration), 21st Century retained independent physicians to examine Wilson and review her medical records. Stephen Nagelberg, the retained orthopedic surgeon, reported to 21st Century that Wilson’s neck pain was caused by disk injuries, which resulted from the November 2000 automobile accident. He recommended surgery. Allan Chan, the claims examiner now handling the case, promptly prepared a revised evaluation of Wilson’s claim and 21st Century paid Wilson the remaining $85,000.

Wilson sued 21st Century, alleging in her second cause of action that 21st Century’s denial of benefits in July 2001, and the resulting two-year delay until the UIM claim was paid in July 2003, breached the covenant of good faith and fair dealing and caused her damages in the form of lost interest on the policy benefits, attorney fees and costs incurred to recover payment, and general damages including emotional distress. 21st Century moved for summary adjudication of this cause of action on the ground that its 2001 decision to refuse the UIM demand was, in light of the facts known to the company at the time, reasonable as a matter of law. The superior court granted the motion. The Court of Appeal reversed, holding triable issues of fact existed as to whether 21st Century had thoroughly investigated and objectively evaluated Wilson’s UIM claim before denying it. The Supreme Court granted 21st Century’s petition for review and affirmed the decision of the Court of Appeal reversing the grant of summary judgment.

The Court observed that while an insurance company has no obligation under the implied covenant of good faith and fair dealing to pay every claim its insured makes, the insurer cannot deny the claim “without fully investigating the grounds for its denial. . . . By the same token, denial of a claim on a basis unfounded in the facts known to the insurer, or contradicted by those facts, may be deemed unreasonable. ‘A trier of fact may find that an insurer acted unreasonably if the insurer ignores evidence available to it which supports the claim. The insurer may not just focus on those facts which justify denial of the claim.’ ”

Applying these principles to the facts before it, the Court agreed with the Court of Appeal that plaintiff had demonstrated a triable issue of fact as to whether 21st Century’s decision to deny her UIM claim in July 2001 was made unreasonably and in bad faith. “Wilson complained of neck pain after the accident and in subsequent weeks and months. On examination of the patient and her X-ray, Dr. Southern, an orthopedist, concluded a segment of her cervical spine was ‘obviously degenerative,’ that such a change was unusual at her age, and was probably due to her recent automobile accident. The MRI he ordered confirmed bulging disks in the vertebrae of her neck. Wilson was continuing to feel neck pain in June 2001 when, through her attorney, she made the UIM claim. [¶] Despite his receipt of this information, 21st Century’s claims examiner asserted in his internal denial memo that it was ‘unlikely’ the disk bulges were caused by the accident and that because Wilson was ‘on vacation’ in Australia her claims of severe pain should be ‘discount[ed].’ Having received approval to deny the claim, he then did so on the ground that Wilson’s pain was due only to ‘soft tissue injury superimposed by a preexisting degenerative disc disease.’ ”

Unfortunately for 21st Century’s summary judgment position, a jury could reasonably find that nothing in the material the claims examiner had received justified these conclusions. 21st Century directs us to no medical report or opinion on the basis of which the claims examiner could reasonably have ignored or disbelieved Dr. Southern’s conclusion that the changes in Wilson’s cervical spine were probably caused by her recent trauma; as far as the record reveals, the claims examiner had no basis for his contrary conclusion that such a causative link was “unlikely.” Nor is there any apparent medical basis for the claims examiner’s assertion that Wilson had “preexisting degenerative disc disease.” No such diagnosis appears in the medical reports submitted to 21st Century, and we are directed to no evidence that the company’s claims examiner had sufficient medical expertise to make such a diagnosis himself. As to the fact that Wilson was studying in Australia (not on vacation, as the claims examiner baselessly asserted) in 2001, the Court of Appeal aptly observed that “it is as possible to suffer ‘severe pain’ in Australia as in Southern California.”

The Court acknowledged that 21st Century was not obliged to accept Dr. Southern’s opinion “without scrutiny or investigation.” However, “[t]o the extent it had good faith doubts, the insurer would have been within its rights to investigate the basis for Wilson’s claim by asking Dr. Southern to reexamine or further explain his findings, having a physician review all the submitted medical records and offer an opinion, or, if necessary, having its insured examined by other physicians (as it later did). What it could not do, consistent with the implied covenant of good faith and fair dealing, was ignore Dr. Southern’s conclusions without any attempt at adequate investigation, and reach contrary conclusions lacking any discernable medical foundation. . . .”

----Andrea Lynn Rice