Silence May Not Always Be So Golden

09 Monday May 2011

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Since May is Disability Insurance Awareness Month (as organized by the Life Insurance Foundation for Education), it seems appropriate to look at some recent decisions from the disability benefits arena and explore what seems to be a common thread among those decisions.

First, in Schexnayder v. Hartford Life and Acc. Ins. Co., 600 F.3d 465 (5th Cir. 2010), the court pointed out that the claim administrator seemingly ignored the fact that the plaintiff was awarded social security disability benefits, stating “failure to address a contrary SSA award can suggest . . . unreasonableness in the administrator’s decision.”  Thus, while the court acknowledged that substantial evidence existed supporting the insurer’s decision that the plaintiff was not unable to perform any occupation, it nevertheless held that the insurer had abused its discretion in its benefit determination based in part on its failure to address the SSA award.

Next, in Schully v. Continental Cas. Co., 380 Fed.Appx. 437 (5th Cir. 2010), the court affirmed a district court’s decision that the administrator had abused its discretion in denying disability benefits to the plaintiff.  The court noted that there were “significant gaps” in the opinions of the experts on which the administrator based its decision.  Furthermore, although the court stated that treating physicians are not given preference over other experts under ERISA, it also explained that other experts could not arbitrarily refuse to consider credible reliable evidence from the treating physician’s records.

Finally, in Rizzi v. Hartford Life & Accident Ins. Co., 383 Fed.Appx. 738, 2010 WL 2473858 (10th Cir. 2010), the court affirmed judgment in favor of the insurer, finding that its decision to deny disability benefits was reasonable and not arbitrary and capricious.  Significantly, the court noted that review by independent physicians and the detailed consideration of all objective and subjective information including the medical reports in conjunction with surveillance evidence obtained by the insurer reduced the bias arising from the insurer’s conflict of interest and provided a reasonable basis for its decision.

So what can we take away from these decisions?  All were decided under an abuse of discretion standard of review.  All involved a claim determination where the entity making the decision would be paying the claim and thus had an inherent conflict of interest.  However, only the Rizzi court seemed to be satisfied that the administrative record showed that the decision maker considered and addressed all of the evidence put forward by the individual seeking benefits.  In Shexnayder, the record was silent with regard to a contrary SSA award.  In Schully, the record was largely silent with regard to evidence from treating physicians’ records.  But in Rizzi, the court found that because the record demonstrated “detailed consideration of all objective and subjective information” the insurer’s bias was actually reduced.  Thus, the results of these cases would appear to indicate that the best course of action during the claim process and any administrative appeal may be to explain in detail how all the information submitted regarding a disability claim was considered.  Depending on the claim, this may include providing an explanation of the differing standards for a determination of disability under social security and the plan at issue to explain why the social security award is not probative as to whether a claimant is disabled under the plan, or a detailed analysis of the evidence purportedly supporting a treating physician’s opinion.

ERISA Preemption – Having One’s Cake and Eating It Too

29 Friday Apr 2011

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Jeffrey Hansen won twice — once in the United States District Court for the District of Utah when he won summary judgment that his former employer had violated ERISA and a second time at the Tenth Circuit Court of Appeals when he won remand of a second case he filed against his former employer, a win based on the finding that he was not entitled to pursue claims under ERISA.

The facts are described as follows:  Mr. Hansen went to work for Harper Excavating, Inc. (“Harper”) in November 2003.  At that time, Harper provided him with a benefit disclosure and acknowledgement form that stated he would be eligible for benefits beginning on the first day of the month following 90 days of employment.  In January 2004, Harper asked its insurer, Blue Cross Blue Shield (“BCBS”), to change its hire and rehire effective dates to the first day of the month following 60 days of employment.  BCBS made the change; however, Harper never notified Mr. Hansen of the change.  Once he became eligible on March 1, 2004, Mr. Hansen completed and submitted application forms to enroll in the various insurance plans offered by Harper.  Mr. Hansen’s application for health insurance was dated March 9, 2004; however, Stacy Henderson, Harper’s employee who was in charge of benefits, treated his application as though it was subject to a 60-day waiting period, listed the “effective date” of his application as February 1, 2004 and submitted the application to BCBS.  Harper also immediately began deducting insurance premiums from Mr. Hansen’s paychecks for insurance, including health insurance through BCBS.  Mr. Hansen’s application for health insurance was denied by BCBS as untimely since Harper had applied the 60-day policy instead of the 90-day policy.  Mr. Hansen terminated his employment with Harper in late April 2004, at which time he had not been informed by Harper that he was not covered by the health insurance plan.  It was not until early June 2004 that Ms. Henderson informed Mr. Hansen that had not been covered by the health insurance plan, at which time she sent to Mr. Hansen a check reimbursing him for the health insurance premiums that had been deducted from his paychecks since his “enrollment” in March 2004.  This was after Mr. Hansen sought medical treatment at a hospital in May 2004 and was told his coverage had terminated.

In November 2005, Mr. Hansen filed suit against Harper in the United States District Court for the District of Utah, invoking ERISA jurisdiction and seeking damages under ERISA.  Mr. Hansen won summary judgment against Harper on his claim that Harper breached its fiduciary duties to Mr. Hansen under ERISA, with damages, attorneys’ fees and costs to be determined during a bench trial.  Hansen v. Harper Excavating, Inc., No. 2:05-cv-00940-DAK (“Hansen I”), Memorandum Decision and Order at 9, Dkt. 99 (D. Utah May 8, 2007).  As set forth in the Findings of Fact and Conclusions of Law and Order dated March 13, 2008, Dkt. 127, the Court ordered Harper to pay Mr. Hansen $57,182.33 in medical expenses and $102,056.88 in fees and costs.  Harper did not appeal the judgment.

On June 6, 2007, after winning summary judgment in Hansen I, but before the bench trial on damages, Mr. Hansen filed a second lawsuit in the Third Judicial District Court in and for Salt Lake County, Utah, Case No. 070907873 (“Hansen II”), urging five causes of action–fraudulent nondisclosure, negligent misrepresentation, conversion, breach of contract/good faith and fair dealing, and special damages.  Mr. Harper stated the lawsuit was based on information he learned in discovery in Hansen I.  Harper removed Hansen II in September 2007 (2:07-cv-00679-BSJ) and moved to dismiss the case.  Mr. Hansen moved for remand, but the district court denied remand and dismissed Hansen II.  In the opinion, Dkt. 25, the district court found that in Hansen I, Mr. Hansen had requested and received benefits under ERISA, that Hansen II alleged no duties breached by Harper that were outside the scope of ERISA, that ERISA limits remedies to those enumerated in ERISA, that Hansen II pled facts duplicative of Hansen I and that Hansen I was res judicata to Hansen II. 

Mr. Hansen appealed to the Tenth Circuit Court of Appeals, which concluded that Mr. Hansen’s claims were not completely preempted by ERISA and the district court erred in denying Mr. Hansen’s motion to remand.  Discussing the distinction between ordinary preemption and complete preemption, the Tenth Circuit Court described that only the latter makes a state-law claim “purely a creature of federal law” and therefore removable to federal court from the outset.  Hansen II, No. 08-4089 (10th Cir. Apr. 13, 2011), citing Felix v. Lucent Techs., Inc., 387 F.3d 1146, 1154-55 (10th Cir. 2004).  The Tenth Circuit Court then explained that a lawsuit falling within Section 502(a) of ERISA is removable.  Section 502(a) authorizes civil actions by a “participant or beneficiary” to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.  Focusing on the requirement that the plaintiff be a participant or beneficiary, the Tenth Circuit Court quickly dismissed the possibility that Mr. Hansen was a beneficiary since neither party asserted he was.  Quoting the Supreme Court’s opinion in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117 (1989), the Tenth Circuit Court then described the requirements to be a participant–either employees in, or reasonably expected to be in, currently covered employment, or former employees who have a reasonable expectation of returning to covered employment or who have a colorable claim to vested benefits. 

The Tenth Circuit Court went on to analyze whether Mr. Hansen was a participant.  First, the court analyzed the point at which standing should be determined– as of the time of filing the complaint or as of the time when the wrongful behavior occurred.  Citing Felix, the Tenth Circuit Court held that standing to sue under ERISA is assessed as of the filing of the complaint.  The court then reviewed an argument urged by Harper–that but for Harper’s wrongful behavior, Mr. Hansen would have been a participant in the plan.  The Tenth Circuit Court reiterated its position as a minority jurisdiction (along with the Fourth and Eleventh Circuits) rejecting the doctrine of “but for” standing.  Determining that standing could therefore be based only on whether Mr. Hansen was a participant of the plan at the time he filed his complaint in June 2007, the Tenth Circuit Court analyzed the various possibilities.  The court found that Mr. Hansen would not have standing as a current employee given he was no longer employed by Harper and that Mr. Hansen could not have standing as a former employee with a reasonable expectation of returning to covered employment since there was no evidence to that effect.  The Tenth Circuit Court then rejected the final possibility, that Mr. Hansen could have standing as a former employee with a colorable claim for benefits.  Specifically, the court dismissed the idea that Mr. Hansen would fulfill eligibility requirements in the future and further dismissed the idea he would prevail in a suit for benefits.  It is this last finding that is most interesting.  According to the court, because Mr. Hansen had already prevailed in a suit for benefits in Hansen I, he no longer had a colorable claim he would prevail in the future.  Thus, Mr. Hansen had no standing to sue under ERISA and his claim could not be completely preempted.  The Tenth Circuit Court also declined to use the principle of judicial estoppel to hold that Mr. Hansen was bound by his urging of ERISA jurisdiction in Hansen I–“In our view, complete preemption is meant to be a narrow exception to the well-pleaded complaint rule, and we are not inclined to widen it by holding that a party may establish subject-matter jurisdiction based on complete preemption via judicial estoppel.”  What the state court will do with Hansen II remains to be seen but the case has survived to see another day.  Click here to read the Tenth Circuit Court opinion.

Will Tort Reform Cap Damages in Actions for Breach of the Insurer’s Duty of Good Faith and Fair Dealing?

26 Tuesday Apr 2011

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Governor Fallin recently signed House Bill 2128 in an act described as a significant step toward tort reform in Oklahoma.  House Bill 2128, which becomes effective November 1, 2011, contains both a damage cap and a cap lifting feature.  Section 1(B) provides the cap by imposing a $350,000 limit on noneconomic losses (defined to include, among other items, pain and suffering, mental anguish and other intangible loss) in civil actions arising from claimed bodily injury.  Section 1(C) provides the mechanism by which the cap can be lifted by providing there is no limit on the amount of noneconomic damages “in a civil action arising from a claimed bodily injury resulting from negligence” if the judge and jury finds by “clear and convincing evidence” reckless disregard, gross negligence, fraud or intentional conduct.  Although House Bill 2128 appears designed primarily for conventional negligence suits, e.g., automobile accidents or physician malpractice, its terms suggest potential applicability in actions for breach of the insurer’s duty of good faith and fair dealing, more commonly referred to as “bad faith” actions.

It seems relatively clear that Oklahoma law allows claims for mental pain and suffering in bad faith actions.  See generally, Timmons v. Royal Globe Ins. Co., 1985 OK 76, and Badillo v. Mid Century Ins. Co., 2005 OK 48.  See also, OUJI 22.4.  Moreover, certain types of bad faith actions involve direct claims for bodily injury, e.g., claims arising from an insurer’s failure to authorize certain medical treatments.  Thus, it could certainly be argued that the cap provided by House Bill 2128 applies in some bad faith actions.  But does the cap lifting provision also apply?

Section 1 (C) on its face only applies to “actions resulting from negligence.”  If the phrase “actions resulting from negligence” is meant to refer to actions that are founded on breach of a simple negligence standard, then Section 1(C) could certainly be read as not applicable in actions for bad faith because the Badillo Court was very clear in holding that bad faith actions are not negligence actions.

To the extent American Fidelity & Casualty Co. v. L.C. Jones Trucking Co., 321 P.2d at 687, may have implied that a simple negligence standard was approved or adopted as to the level of culpability necessary to be shown for liability to attach to an insurer for breach of the duty of good faith and fair dealing in relation to the handling of a third party claim made against the insured, i.e., the situation involved here, that case is expressly overruled, but only to such extent.

2005 OK 48 at ¶27.  And, it stands to reason the Legislature had something in mind when it constructed a cap that is not written using the same language as the cap lifting feature in the same bill.  Thus, a bad faith plaintiff seeking damages for bodily injury seems pretty clearly subject to the $350,000 cap for those damages.  More guidance will be necessary to be sure that same plaintiff may also avail herself of the cap lifting provision.

The Door May Have Been Opened, but Only a Crack: Continued Limitations on Discovery in ERISA Cases in the Wake of Murphy v. Deloitte & Touche

04 Monday Apr 2011

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Those familiar with ERISA jurisprudence know that the rule in federal court is that claimants must present all evidence and argument supporting their claims to the claim administrator or plan trustee in the first instance. Sandoval v. Aetna Life & Cas. Ins. Co., 967 F.2d 377, 380 (10th Cir. 1992). As a consequence, when reviewing an administrator’s decision, a court generally “may consider only the arguments and evidence before the administrator at the time it made that decision.” Id. Discovery beyond the official “administrative record” is therefore not allowed.

Despite the frequent reaffirmation of this rule by courts in the Tenth Circuit, the plaintiff’s bar has continually pushed for discovery in ERISA cases, if not into the merits of a claim, then at least into alleged conflicts of interest on the part of the claim administrator. The United States Supreme Court arguably opened the door to such discovery when it decided Metropolitan Life Insurance Company v. Glenn, 554 U.S. 105, 128 S. Ct. 2343 (2008). However, as discussed below, while the proverbial door to discovery may have been opened, the courts have made clear that the opening is very narrow.

In Murphy v. Deloitte & Touche Group Insurance Plan, 619 F.3d 1151 (10th Cir. Sept. 8, 2010), the Tenth Circuit Court of Appeals held that, while courts should still disallow discovery beyond the administrative record regarding the merits of a claim under ERISA, they may allow limited discovery into the nature and extent of a conflict on the part of a claim administrator. It should be noted that the court emphasized that discovery may be had on the conflict of interest issue only when necessary and that “[t]he discovery must be relevant and cannot serve as ‘a license to engage in an unwieldy, burdensome, and speculative fishing expedition.’” Murphy, 619 F.3d at 1163. If the court permits such discovery, it must apply Rule 26(b)(1) of the Federal Rules of Civil Procedure and allow only relevant discovery. Id. at 1162-63.

The district courts in the Tenth Circuit have reinforced the strict limitations on discovery into conflict of interest issues in several recent decisions. Most recently, in Todd v. CP Kelco et. al., 2011 WL 838848, slip op. at 5 (E.D. Okla. Mar. 1, 2011), a case in which our firm represented the defendants, the court for the Eastern District of Oklahoma allowed only limited discovery “to ascertain the potential effect of [the claim administrator’s] conflict of interest,” but went on to deny almost all of the plaintiff’s specific discovery requests. (The one exception was the request for the relevant claims manual, which was produced only following the entry of an agreed protective order.) Of note, the court denied all discovery requests pertaining to the handling of the claim and how the claim administrator had decided other “similar” claims in the past. Todd, No. 10-cv-00085-KEW, slip op. at 6. In this regard, the court specifically held that the administrator’s “review of other long term disability claims and the resulting decisions are not matters which would be calculated to determine whether [the administrator] had a conflict of interest in Todd’s case.” Id.

Other courts in the Tenth Circuit have followed suit, continuing strictly to limit discovery beyond the administrative record. See Hurley v. Dyno Nobel, Inc., 2011 WL 587591, slip op. at *3 (D. Utah Feb. 09, 2011) (denying plaintiff’s request for extra-record discovery because it did “not appear to be necessary for ‘a fair and informed resolution of claims’ and would prevent a ‘speedy, inexpensive, and efficient resolution of those claims ….’” and holding that “the benefit of the discovery is outweighed by the potential burden and cost because ‘the inherent dual role conflict makes [the DNI Plan’s] financial interest obvious’”); Tillotson v. Life Ins. Co. of N. Am, 2011 WL 285815, slip. Op. at 3-4 (D. Utah Jan 28, 2011) (disallowing discovery into alleged conflict of interest where the claim administrator was not responsible for the payment of disability benefits and finding that contractual relationships between the entity responsible for paying benefits and the claim administrator and between the claim administrator and independent medical reviewer did not create conflicts that would warrant discovery).

In addition to limiting the scope of discovery, in Murphy the Tenth Circuit also provided some tips on how discovery on the conflict of interest issue might be averted completely. Specifically, the court observed that, “[i]f the administrative record does not specifically address” whether the claim administrator “has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances[,]” then discovery might be necessary for the plaintiff to prove a serious conflict exists, or, conversely, for the insurer/administrator to prove that it has taken steps to mitigate the effects of an inherent conflict. Id. at 1158. Implicit in this observation is that, by including this information in the administrative record in the first instance, a claim administrator can obviate the need for discovery beyond the administrative record. Adding support to the notion that this approach could avoid the need for discovery, the court noted that “the administrator has better access to information regarding the steps it has taken [to reduce potential bias] and could include these materials in the administrative record if it so chooses.” Id. at 1158 n.2. Thus, an insurer who also plays the role of claim administrator may protect against discovery beyond the administrative record simply by including information about claim handling procedures, the method for engaging independent medical review and claim handler compensation and other protections against bias in the administrative record, thereby preventing the door to discovery from being opened at all.

The Case of the Vanishing Policy Exclusion

29 Tuesday Mar 2011

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The Oklahoma Supreme Court has yet again narrowed the application of automobile policy exclusions with the case of Mulford v. Neal, 2011 OK 20.  In Mulford, both the mother and father (who were not living together) of a teenager had taken out policies (with the same insurance company) both of which had specifically excluded their teenage son as a driver.  Of course, naturally the kid went out and got in an accident, followed by the lawsuit and the insurance company relying on its exclusion in denying coverage.  A judgment was taken against the policy holders, followed by the inevitable garnishment of both policies. The insurer lost the garnishment, then took it to the Oklahoma Supreme Court. 

Up to this point, the Named Driver Exclusion had been one of the only surviving exclusions – most others had fallen by the wayside at least to the extent of statutory minimum limits of $25,000.  The case relied upon by the insurer here was Pierce v. Oklahoma Property & Casualty Ins. Co., 901 P.2d 819 (Okla. 1995), which had upheld the viability of the exclusion.  The Mulford Court noted both Pierce and 47 O.S. §7-324(b)(3), which provides that the owner’s policy “may include a separate endorsement between a named insured and the insurer to exclude any person or persons designated by name from coverage under the policy”.  Despite this seemingly clear and specific statute, the Supreme Court nevertheless held that public policy mandated that to the extent of minimum limits the exclusion was invalid, unless the exclusion was based upon the “poor driving record” of the person sought to be excluded. 

So what now?  Basically people will be unable to exclude teenage/unlicensed drivers from their policies and will thus pay more for their auto insurance, unless the exclusion is based upon a “poor driving record”.  Insurance rates will go up across the board, unless legislative action is taken to address the Court’s concerns (which seems unlikely, though because it would have the effect of lowering premiums may happen).  Further, the guess here is that insurers will have to get an actual copy of the allegedly poor record if they want to rely on this now quite-narrowly-construed exclusion.   (Note that Mulford is techncially not yet final but once any Motion for Rehearing is likely denied, probably soon will be).

Is requiring an insured to sign a release in return for policy benefits bad faith?

21 Monday Mar 2011

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Is it permissible for an insurer to require its insured to sign a release when the insurer has paid policy benefits?  The answer is generally yes, as long as the release is not overly broad and does not encompass matters as to which the insurer has no right to request a release.  This issue often arises in liability and uninsured motorist claims, where the insurer agrees to pay its insured for a covered loss and then requests a release from the insured as a condition to payment. It can, however, come up in other types of claims as well.

Where the insurer has met its full obligation under the policy, it is reasonable for the insurer to ask the insured for a release that covers the full extent of that liability. Where the insurer pays less than the full obligation, or where the insurer pays its full obligation but attempts to obtain a release that includes liability for other claims (e.g., “bad faith” claims or claims arising from unrelated matters), then the matter may be different, depending upon the circumstances.

In Beers v. Hillory, 2010 OK CIV APP 99, the Court of Appeals found that it was not a breach of the duty of good faith for an insurer to require an insured to sign a release of contractual claims as a condition to receiving the maximum amount of UM benefits insured by the policy. While the insured’s attorney argued that the release was too broad and included a release of other claims, the Court found that the release could not be interpreted so broadly. The Court also noted that before suing the insured’s attorney never made that assertion to the insurer, nor did he ask that the insurer clarify the release language. The Court found that Oklahoma’s Unfair Claims Settlement Practices Act, 36 O.S. Sec. 1250.1 et seq (Act) did not prohibit the practice of asking for a release, and in fact seemed to endorse the practice, as it only proscribed asking an insured “to sign a release that extends beyond the subject matter that gave rise to the claim payment.” The Court also noted that the breach of a duty set forth in the Act was not necessarily a violation of the Act, and that the Act does not create a private right of action. Also, a violation of the Act  does not necessarily give rise to a bad faith claim.

The Court went on, however, to conclude that a provision in the release that would have required the insured to “defend, indemnify and hold harmless” the insurer from third-party claims, which went beyond the contract claim, may be considered as unreasonable under the circumstances. While the insurer claimed that it needed the hold harmless clause to protect it against lien claims by medical providers, the Court found that the insurer was protected against such claims by Oklahoma’s lien statute. Thus, a fact issue existed as to whether the insurer’s request was reasonable or a breach of the covenant of good faith.

 The takeaway from Beers and the Oklahoma statute is that insurers should be careful when asking insureds to sign releases in return for payment of policy benefits or proceeds.  A release of a contractual claim in return for full payment of contractual benefits should not pose a problem, so long as the release is limited solely to the contractual benefits at issue. If there are any non-monetary obligations on the part of the insured that survive the payment and need to be preserved, an insurer may be entitled to ask the insured to take on such obligations in the release (duty to cooperate, preserve records, etc.). However, where the insurer is paying less than full policy benefits and/or is not compensating the insured for a release of potential claims as part of the resolution, is seeking to obtain a broad release of claims that goes beyond the matter at issue, or is seeking to require an insured to defend, indemnify or hold the insurer harmless where there is no chance of the insurer being exposed to such liability, the insurer may be asking for trouble, depending upon the specific circumstances.  The best practice in these circumstances is for the insurer to seek legal advice concerning its rights in asking for a release.

Expansion of Bad Faith Tort Recovery in Oklahoma – Embry v. Innovative Aftermarket Systems L.P., 2010 OK 82.

14 Monday Mar 2011

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By Timothy A. Carney and Leah P. White

Oklahoma traditionally recognized that while every contract contains an implied covenant of good faith and fair dealing, the breach of that covenant would give rise only to a claim for breach of contract.  The Oklahoma Supreme Court first recognized a tort remedy for a party’s breach of the performance of a contractual duty in Christian v. American Home Assurance Co., 577 P. 2d 899, 1977 OK 141. In Christian, the Court found that a “special relationship” existed between an insurer and an insured, given the quasi-public nature of insurance, the fact that the terms of insurance contracts are dictated by insurers, the unequal bargaining strength in such relationships, and the potential for an insurer to unscrupulously exert its power at a time when the insured is most vulnerable. The Christian Court held that in light of this special relationship, the breach of the implied duty of good faith may give rise to tort liability for bad faith.

Since Christian, the Oklahoma courts have shown restraint when asked to expand the tort of bad faith beyond the context of the insurer-insured relationship. For example, Oklahoma courts have declined to extend the duty to at-will employment relationships (Hinson v. Cameron, 742 P.2d 549, 1987 OK 49); claims against banks relating to commercial loans (Rogers v. Tecumseh Bank, 756 P.2d 1223, 1988 OK 36); claims against banks relating to guaranty agreements (First Nat’l Bank & Trust Co. of Vinita v. Kissee, 859 P.2d 502 1993 OK 96); and claims under take-or-pay gas contracts (RJB Gas Pipeline Co. v. Colorado Interstate Gas Co.,1989 OK CIV APP 100, 813 P.2d 1), to name a few.  In these cases, the courts found that the contracts created in these commercial relationships do not have the same characteristics as an insurance contract, but instead are generally arms-length, negotiated contracts between sophisticated parties.  The Oklahoma Supreme Court has cautioned that recognizing tort liability for a breach of the contract in these types of relationships would only serve to “chill” commercial transactions.

However, in certain other limited contexts beyond the traditional insurer-insured relationship, Oklahoma courts have recognized a tort claim for breach of the duty of good faith, such as in the context of a claim brought by a depositor for a willful and intentional wrongful dishonor of checks by his bank (Beshara v. S. Nat’l Bank, 928 P.2d 280, 291, 1996 OK 90); a claim brought by an obligee on a surety contract for a bad faith failure to pay (Worldlogics Corp. v. Chatham Reinsurance Corp., 108 P.3d 5, 2005 OK CIV APP 16); and a claim by a beneficiary of a self-insured plan against a third-party administrator, at least where the administrator may share in the losses occasioned by paying claims  (Wathor v. Mutual Assurance Administrators, Inc., 87 P.3d 559, 2004 OK 2).  These contexts were deemed to be more akin to the type of relationship identified in Christian as worthy of this extra protection.  

Very recently, the Oklahoma Supreme Court issued two opinions relating to bad faith claims addressing whether the contract in question was an insurance contract, and whether a bad faith tort claim could be asserted if the contract in question was not an insurance contract.  In Embry v. Innovative Aftermarket Systems L.P., 2010 OK 82, a vehicle purchaser entered into an agreement with a company as an addendum to a vehicle financing contract under which the company agreed that in the event of a total vehicle loss, if the purchaser’s insurance was insufficient to pay the remaining vehicle debt, the company would pay that deficiency.  After the purchaser’s vehicle was totaled in an accident, and insurance was applied, there was a deficiency owed to the vehicle financing company, and so the purchaser sought payment of the deficiency under the contract.  However, the company delayed paying the contract benefits and subsequently computed the deficiency and paid much less than the purchaser anticipated.  The purchaser then brought various claims, including one for bad faith. Embry, 2010 OK 82 ¶1.

After various proceedings, which included findings concerning whether the contract was an insurance contract, the Supreme Court found that regardless of whether the contract was in fact an insurance contract, a bad faith claim could be asserted. The Court first noted that, “Tort recovery for bad faith is one of the two remedies provided for breach of the implied covenant to deal fairly and in good faith in the performance of a contract.” Id. ¶ 4.  The Court then stated that it had “expressed reluctance to extend tort recovery for bad faith beyond the insurance field…,” but that “an insurance contract is not required to support tort liability for bad faith….” Id. ¶ 6.  Rather, the Court found, “such liability depends upon the existence of a ‘special relationship’ under a contract (like the ‘special relationship’ of an insurer and insured).” Id.   

The Court then held that the “’special relationship’ that gives rise to tort liability for bad faith is marked by (1) a disparity in bargaining power where the weaker party has no choice of terms, also called an adhesion contract; and (2) the elimination of risk.”  Id. ¶ 7.  Tort liability is allowed in such instances, the Court found, because “breach of the implied duty to deal fairly and in good faith, precipitates the precise economic hardship the contract was intended to avoid.” Id. 

The Court went on to review the specific facts, and found that the purchaser could pursue a tort remedy for bad faith because such a special relationship existed.  The Court found that the company alone chose the contract language, including the method used to calculate the amount of deficiency.  Id. ¶8.  Additionally, the company’s marketing brochure illustrated the importance of the contract benefit and its internet website emphasized that the protection would help customers during a “stressful time” when money is needed for a replacement vehicle.  And, the company’s failure to pay the full deficiency in accordance with the representations made to the purchaser brought about the precise economic hardship the purchaser sought to avoid in entering into the contract.  Id. ¶8-9.

The primary takeaway from Embry is that Oklahoma courts will continue to recognize tort liability in relationships that resemble the “special relationship” of insurer-insured, highlighted by an adhesion contract and a disparity in bargaining power, with the contract’s specific intention of eliminating a particular risk.  A tort duty may arise even where one party specifically attempts to avoid creating such a relationship. In Embry, the company went out of its way to make clear that it was not offering insurance, and never intended to create that type of relationship.  Id. ¶10. Nonetheless, the relationship created by the contract had all of the same characteristics of the insurer-insured relationship, and was specifically designed to eliminate the financial risk associated with a vehicle loss.

In McMullan v. Enterprise Financial Group, Inc., 2011 OK 7, the Court found that a vehicle service contract entered into in connection with the purchase of a used car was a contract of insurance under Oklahoma, the breach of which would give rise to a tort claim for bad faith.  In McMullan, the Court found that the vehicle service contract met the Oklahoma Insurance Code’s definition of “insurance” because it was a “contract whereby one undertakes to indemnify another or to pay a specified amount upon determinable contingencies.”  Also, the Act defined an insurer to mean “every person engaged in the business of insurance or indemnity.” The Court also relied upon the Oklahoma Service Warrant Insurance Act in finding the contract to be one of insurance, in that this Act defined service warranties as indemnity contracts (while excluding maintenance contracts). The Court found that although neither Act identified service warranty issuers as insurers, the similarities between vehicle service contracts and insurance policies, including the fact that such warranties essentially “function and perform” just like insurance policies, rendered them subject to the same covenant of good faith that insurers must meet. While the Court noted its earlier decision in Embry, in a footnote, it did not apply Embry or engage in any extensive discussion of the decision.   

The takeaway from McMullan is that even if a contract is not expressly identified as insurance or brought under the regulation of the insurance department, it may still be considered as insurance as a matter of Oklahoma law.  Also, although it is not possible to identify all relationships that may constitute insurance under this type of analysis (or, if not insurance, that may otherwise give rise to tort liability under Oklahoma law based upon Embry), it may be wise for companies to have counsel review their customer agreements, warranty agreements, advertising or marketing materials, and any indemnity-type relationships, to determine whether there may be ways to limit potential liability, such as by including damage limitations or waivers and/or provisions demonstrating that the other party does have bargaining power, or by considering other terms that could minimize the concerns expressed by the Court in these two opinions.

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