Stella Duir v. John Alden Life Insurance Company, a Foreign Insurance Corporation

Citations: 754 F.2d 245; 1985 U.S. App. LEXIS 29010Docket: 83-3138

Court: Court of Appeals for the Seventh Circuit; February 7, 1985; Federal Appellate Court

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Stella Duir filed a bad faith action against John Alden Life Insurance Company (JALIC) for refusing to pay medical expenses under her group health insurance policy. The United States Court of Appeals for the Seventh Circuit affirmed the district court's summary judgment in favor of JALIC. 

Duir, a Wisconsin resident, worked for Stark's Gamble Store and had a group insurance policy with JALIC, which included an exclusion for injuries connected to employment or covered by workers' compensation. After receiving treatment for a back issue, which JALIC initially claimed was a preexisting condition, Duir settled a previous lawsuit against JALIC for $1,000, although JALIC had paid over $11,000 for her back treatment since then.

On December 29, 1979, Duir sustained a back injury at work and subsequently claimed disability benefits. JALIC requested information regarding any workers' compensation benefits Duir was receiving. Her employer confirmed that Duir's injury was compensable under workers' compensation and that she was receiving benefits. JALIC informed Duir that her group policy benefits would be reduced by the amount of workers' compensation payments she received.

On March 26, 1980, Heritage informed Duir that it would not pay additional worker's compensation benefits due to the inability to link her back injury to a work-related incident. Subsequently, Duir communicated this decision to her attorney, Roy Traynor, who formally retained to represent her on claims related to her injury. Duir subsequently filed a claim against Heritage for temporary total disability benefits, medical expenses, and permanent partial disability benefits. Following disputes regarding the origin of her back injury, a settlement of $10,000 was reached, resulting in Duir receiving $8,657.65 after deductions for prior payments. The settlement was approved by the Wisconsin Department of Industry, Labor, and Human Relations in June 1981.

On June 30, 1981, Traynor forwarded the settlement details to JALIC but did not include the doctors' reports, indicating he had not previously contacted JALIC as he was focused on the worker's compensation claim. Traynor argued that JALIC was liable for Duir's unpaid medical expenses under the group policy, as the Heritage settlement did not clarify liability. JALIC's representative, Myers, initiated negotiations for a settlement, questioning JALIC's obligation given the existing settlement with Heritage.

Negotiations continued, with Myers noting that the Heritage settlement did not clearly indicate whether Duir's injury was work-related. In April 1982, Traynor requested further medical bills and noted additional incurred expenses. Myers responded that JALIC's legal team needed to assess liability in light of the settlement.

By October 1982, JALIC decided to pay Duir $1,500 for six months of lost time benefits without admitting liability. In January 1982, Traynor informed Myers that Duir had received disability relief from the Social Security Administration, and he indicated that this might impact the ongoing settlement discussions with JALIC. Traynor expressed his intention to re-engage with Myers once the situation regarding Social Security benefits was clarified.

In late April 1982, the Social Security Administration granted Duir total disability benefits retroactive to June 1980. Following this, Traynor informed Myers of the award on November 30, 1982, and subsequently requested an extension of benefits and a waiver of premiums. On January 11, 1983, Traynor provided Myers with the Social Security award and a summary of Duir's pre-existing back problems, asserting that these issues were exacerbated by an on-the-job injury. Duir received reimbursement of $2,236.36 from JALIC for premiums paid since June 1980 on March 4, 1983, but later sued JALIC on March 30, 1983, claiming bad faith refusal to cover her medical expenses, seeking compensatory and punitive damages.

The district court granted JALIC summary judgment, citing Duir's failure to provide requested proof of claim and noting that a settlement with a workers' compensation carrier indicated her injuries were work-related, thus excluded from the policy. The court found JALIC had reasonable grounds for denying the claim pending judicial clarification on the injury's cause. On appeal, Duir argued the court misinterpreted the law regarding insurance company bad faith and their investigative obligations.

Wisconsin law recognizes a tort for bad faith in insurance claims, allowing insured individuals to sue insurers for bad faith refusals to honor claims. This tort is distinct from breach of contract and is rooted in the insurer's duty of good faith and fair dealing. To establish a bad faith claim, the insured must demonstrate that the insurer lacked a reasonable basis for denial and was aware of this lack or acted with reckless disregard. Courts assess whether a reasonable insurer would have denied the claim and whether the insurer disregarded the absence of a reasonable basis. Bad faith is characterized as an insurer's knowing failure to exercise informed judgment regarding a claim. However, if an insurer conducts a diligent investigation and finds the claim to be "fairly debatable," it may contest the claim in good faith until a legal determination is made.

In Wisconsin, courts assessing claims of bad faith by insured individuals evaluate the insured's compliance with policy requirements, the promptness of the insurer's claim evaluation, and the reasonableness of the insurer’s basis for denying or delaying claims. Notable cases illustrate these principles, such as **Poling v. Wisconsin Physicians**, where a jury found bad faith when a group insurer failed to honor claims for nursing home care, despite later admitting the care was skilled, indicating inadequate initial investigation. Additionally, the insurer was deemed to have no reasonable basis for denying benefits based on a non-existent doctor's report at the time of denial. Similarly, in **Benke v. Mukwonago-Vernon**, the court ruled that an insurer acted in bad faith by prematurely attributing building damage to snow, disregarding evidence to the contrary until it found supporting expert testimony. The court emphasized that insurers must conduct neutral investigations and apply ordinary diligence. Ultimately, the district court ruled in favor of JALIC, concluding that Duir did not present a genuine issue of material fact regarding JALIC's good faith in handling her claim, thereby granting summary judgment under Rule 56(c) of the Federal Rules of Civil Procedure.

JALIC had a reasonable basis for delaying benefit payments to Duir due to her injury, which occurred while working at Stark's Gamble Store. Upon receiving Duir's claim, JALIC's representative, Myers, informed Duir that her benefits would be reduced by her worker's compensation payments. After requesting details from Duir's employer, Myers learned from Heritage, the worker's compensation insurer, that Duir was receiving $77.33 per week for her compensable injury. Following a thorough investigation, JALIC found sufficient grounds to deny Duir's claim.

Later, JALIC maintained this stance even after discovering that Heritage would not cover additional medical expenses, as they received a compromise settlement indicating a "genuine dispute" regarding liability for Duir's injury. This lack of clarity on whether her back injury was work-related justified JALIC's classification of the claim as fairly debatable, necessitating further resolution of legal and factual questions before benefits could be granted.

Wisconsin case law supports that an employer could be liable if an employee's work-related injury exacerbates a preexisting condition. Despite Heritage's determination that the injury was preexisting, JALIC reasonably concluded that it might still be liable if work caused a significant aggravation. JALIC also noted that the settlement with Heritage appeared to cover all expenses incurred by Duir, further justifying its decision not to pay additional benefits.

Regarding Duir's claim of bad faith, the court found no genuine issue of material fact indicating that JALIC acted with knowledge of a lack of reasonable basis or in reckless disregard of such. JALIC demonstrated a good faith effort in processing and responding to Duir's claims, contrasting with cases of insurer indifference.

Myers repeatedly requested that Duir and Traynor complete claim forms due to insufficient information to process Duir's claims. Despite these requests, Traynor failed to communicate for over a year, leading JALIC to conclude that Duir either chose not to pursue her claims or had received worker's compensation benefits. After a settlement between Heritage and Duir, JALIC expressed willingness to negotiate a fair settlement. Traynor acknowledged Myers' cooperation regarding Duir's case, particularly in relation to a Social Security Administration award affecting negotiations with JALIC. JALIC acted honestly and diligently in response to Duir's inquiries, without knowledge or reckless disregard for the basis of denying her claim. The district court affirmed summary judgment in favor of JALIC. Additionally, it was noted that Duir was not entitled to benefits under the group policy due to the exclusion of coverage for work-related injuries, regardless of her receipt of worker's compensation benefits. The court found no need to assess the validity of JALIC's interpretation of the policy exclusion, as it maintained a reasonable basis for denying Duir's claim.

Duir contends that JALIC should have disbursed her benefits under the group policy while her worker's compensation claim was pending. She references the case of Silberg v. California Life Ins. Co., arguing that JALIC could have provided her with these benefits and later asserted a lien against any future worker's compensation benefits she might receive. However, the court declines to adopt this precedent, emphasizing that Wisconsin law permits insurers to contest claims when there are unresolved legal or factual questions before being obligated to pay. The court cites Benke v. Mukwonago-Vernon Mutual Ins. Co. to support its stance. Additionally, it notes that Traynor took a year to respond to a request for further information regarding Duir's injury after her worker's compensation claim was denied, and there was no indemnification agreement signed, which would have allowed JALIC to pay benefits in exchange for a lien on any compensation received.