SNR Denton LLP on Pedicini v. Life Insurance Co. of Alabama: Insurer Acted in Bad Faith by Refusing To Recognize Ambiguity of Policy Language

SNR Denton LLP on Pedicini v. Life Insurance Co. of Alabama: Insurer Acted in Bad Faith by Refusing To Recognize Ambiguity of Policy Language

William Barker and Ronald Kent   By William T. Barker & Ronald D. Kent, Partners, SNR Denton

In Pedicini v. Life Insurance Co. of Alabama, 682 F.3d 522 (6th Cir. 2012), the Sixth Circuit held that the relevant language in a medical insurance policy was ambiguous and further held that the insurer had acted in bad faith by refusing to recognize that ambiguity.  This commentary reviews the standards for determining when a refusal to recognize ambiguity is bad faith.

In 1990, Pedicini purchased a supplemental cancer insurance policy from Life Insurance Co. of Alabama ("LICOA").  Effective October 1, 2001, he replaced that policy with a more restrictive one to lower his premiums.  The newer policy provided for payment of "actual charges" for chemotherapy and radiation received as treatment for cancer; it defined "actual charges" as "actual charges made by a person or entity furnishing the services treatment or material."  In 2007, Pedicini was diagnosed with cancer.  After he began receiving qualifying chemotherapy and radiation treatments, LICOA made payments based on the discounted amounts the providers agreed to accept from Medicare, rather than the amounts billed.  (The actual bills were paid by Medicare and a Medicare supplemental policy, so Pedicini had no out-of-pocket cost, but this policy allowed for possible double payment.)  Pedicini sued.

The Sixth Circuit affirmed a summary judgment finding the policy language ambiguous, reasoning that:

As evidenced by the decisions of our sister circuits, the thoughtful arguments presented by both parties, and LICOA's shift in its benefit-payment practices, it is clear that "a reasonable person would find [the term "actual charges"] susceptible to different or inconsistent interpretations" thus making it ambiguous under Kentucky law. We agree with the Fifth Circuit that dictionary definitions are unhelpful, as "real" and "existing" charges could just as reasonably refer to the billed amount as well as to the amount accepted as full payment. Moreover, the fact that LICOA paid benefits equal to the amount billed for approximately twenty years prior to February 2001 seriously undermines its position that the term "actual charges" unambiguously means the amount  accepted as full payment. While perhaps LICOA is uncannily altruistic, it is more likely that the change in its benefit-payment practices reflects LICOA's own struggles with the ambiguous terms of its policies. Because the term is ambiguous, it must be construed in favor of Pedicini as a matter of Kentucky law.

But it reversed a summary judgment finding LICOA's position fairly debatable and, so, not bad faith, concluding that there was no reasonable basis for LICOA to argue that the language was unambiguous.  The commentary notes the relevant rules of bad faith law and argues that:

[T]he insurer must take due account of the applicable rules calling for construction of ambiguities against it when it denies a claim based on a disputed policy interpretation. It must have reasonable grounds to contend that the policy is unambiguous and that it refutes the interpretation urged by the insured. It should not matter if one or more courts have found the policy ambiguous on the point in question if reasonable minds could differ on the issue of ambiguity. As long as that is true, the matter remains fairly debatable.

The commentary reviews cases considering whether an insurer was obliged to recognize that policy language was ambiguous.

William T. Barker is a member of SNR Denton's Insurance Litigation & Coverage Practice Group and practices in the firm's Chicago office. He has a nationwide practice in the area of complex commercial insurance litigation, including coverage, claim practices, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author, with Ronald D. Kent of The New Appleman Insurance Bad Faith Litigation, Second Edition and with Charles Silver of the forthcoming Professional Responsibilities of Insurance Defense Counsel; he has written over 100 published articles on insurance and litigation subjects. He has been described as "[t]he leading lawyer commentator" on the relationships between insurance and civil procedure. Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995). He is an Adviser to the American Law Institute project on Principles of the Law of Liability Insurance. He is a member of the Editorial Board of The New Appleman on Insurance Law Library Edition and The New Appleman Insurance Law Practice Guide. He is Editorial Board Director and Senior Contributing Editor of Insurance Litigation Reporter and a member of the Board of Editors of Defense Counsel Journal.

Ronald D. Kent heads the Litigation Department in SNR Denton LLP's Los Angeles office. He is also Co-Chair of the Firm's National Insurance Litigation and Coverage Practice and is a member of the firm-wide Policy & Planning (Management) Committee. Since 2005, he has been named each year as a leading trial lawyer nationally and in California, based on peer and client evaluations, by Chambers USA: America's Leading Lawyers, the highly respected independent attorney rating organization. Mr. Kent has extensive experience representing major insurance companies on a wide variety of matters, including fraud and bad faith actions, class action and multiple plaintiff litigation, defense of toxic tort and other environmental claims, insurance coverage actions and general business disputes. Mr. Kent has tried matters in state and federal courts throughout California, and in other states, and has successfully handled in excess of 70 arbitrations to final resolution. In addition, he has briefed and argued numerous appellate matters in the California Supreme Court, nearly all California district courts of appeal and the Ninth Circuit Court of Appeals. Mr. Kent is the co-author of the second edition of New Appleman Insurance Bad Faith Litigation.

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