By: Gina Foran
The Minnesota Supreme Court issued its long-anticipated ruling regarding the requirements an insured must prove in order to satisfy the state’s first party bad faith statute. Minn. Stat. § 604.18 creates a direct cause of action by an insured against its insurer if the insurer fails to act in good faith. Under section 604.18, subd. 2, a court may award costs to an insured against an insurer, provided the insured can make certain showings. The court held that the statute’s two-prong test requires that: (1) the insured prove, under an objective analysis, that after conducting an investigation and fairly evaluating the evidence, a reasonable insurer would not have denied the insured’s claim; and (2) the insured prove, under a subjective analysis, that the insurer knew, or recklessly disregarded information that would allow it to know, that it lacked a reasonable basis for denying the insured’s claim for benefits.
In Peterson v. Western National Mutual Insurance Company, 946 N.W.2d 903 (Minn. 2020), plaintiff held a Western National Mutual Insurance Company (“Western National”) auto insurance policy with limits of $250,000. After being involved in a car accident, plaintiff suffered bodily injuries, including chronic headaches, necessitating treatment. Plaintiff sued the driver of the other car and notified Western National that her damages would exceed the limits of the other driver’s insurance, such that she would seek underinsured motorist benefits under her Western National policy. After plaintiff settled with the other driver, she sent a settlement demand to Western National, seeking the policy’s limit. Plaintiff provided medical bills and authorized Western National to obtain additional medical records. The medical records showed that plaintiff experienced and sought treatment for chronic headaches after the accident. Western National failed to pay plaintiff her benefits, expressly denied plaintiff’s claim, and failed to respond to a renewed policy limits demand. Western National also failed to accept that plaintiff’s headaches were caused by the car accident.
As a result of Western National’s denial, plaintiff in the underlying action filed suit against Western National. Western National’s expert, who was not a headache specialist, concluded that plaintiff made a complete recovery from the motor vehicle accident and that her headaches were a result of “underlying psychological factors” and preexisting conditions. Plaintiff’s expert concluded that there was substantial evidence showing that the car accident caused plaintiff’s headaches and that plaintiff would need treatment for the rest of her life. At trial, a jury awarded plaintiff $1.4 million in damages. The district court also ruled in plaintiff’s favor for taxable costs and attorney fees under section 604.18. Western National appealed and the court of appeals affirmed. Western National then appealed to the Minnesota Supreme Court.
The Minnesota Supreme Court looked at the two-prong test outlined under section 604.18. Under the first prong, the insured must show the absence of a reasonable basis for denying the benefits of the insurance policy. The court disagreed with the insurer’s proposed standard – that if an insurance company could identify “any evidence to support its denial of the benefits of the insurance policy, even if there is substantial – even overwhelming – evidence to the contrary, it is not liable[.]” The court concluded that the appropriate inquiry looks to whether a reasonable insurer, having conducted a full investigation and a fair evaluation that considers and weighs all of the facts, would have denied the insured the benefits of the policy. In analyzing this first prong, “the factfinder should consider the level of investigation a reasonable insurer would have conducted under the circumstances of the case and how a reasonable insurer would have evaluated the claims in light of that investigation.”
For the second prong, the court held that an insured must prove that the insurer knew, or recklessly disregarded or remained indifferent to information that would have allowed it to know, that it lacked an objectively reasonable basis for denying the insured’s claim for benefits. The court stated that the proper test was a subjective one where the insurer’s actual investigation and evaluation are relevant inquiries.
Based on the court’s interpretation of section 604.18, the court looked at whether the lower court erred in holding that plaintiff met the two-part test. For the first prong, the court determined that the district court did not clearly err in finding that the insured proved the insurer did not have a reasonable basis for its denial. The court reasoned that there was substantial evidence in the records available to Western National supporting plaintiff’s claims of bodily injury. This evidence included medical records and testimony from plaintiff’s expert who testified that the records included a “mountain…of evidence” in favor of plaintiff. While plaintiff had preexisting headaches, the evidence supported the facts that the headaches post-accident were different and that a reasonable insurer would have concluded same. Further, while the court reasoned it is not unreasonable for an insurer to rely on an independent doctor’s opinion, Western National’s medical examiner, who was not a headache specialist, directly contradicted evidence in the medical record. And, it was unreasonable for the insurer to base its denial of the claim on the relatively minor damage to plaintiff’s car.
With respect to the second prong of section 604.18, the court held that the district court did not err in its determination that Western Heritage recklessly disregarded information that would have allowed it to know that an objectively reasonable insurer would not have denied plaintiff’s claim. The court reasoned that the insurer failed to evaluate any of the evidence favorable to plaintiff’s claim and “developed an early opinion” that plaintiff’s claim was of no value based on its view that the damage to plaintiff’s vehicle was minor. Further, Western National repeatedly asked for medical records that plaintiff had already provided, causing the analysis of the claim to drag on for more than a year without resolution.