Expanding on last week’s blog, Did You Know That An IME Provider Can Be Liable To The Insured, I want to show how an insurer’s use of a medical provider to conduct an independent medical examination can serve as evidence of bad faith against the insurer.

Hangarter v. Provident Life and Accident Ins. Co. and Paul Revere Life Ins. Co., 373 F.3d 998 (9th Ct. App. 2004) is a first party bad faith case. Joan Hangarter, a chiropractor, operated her own business and had an “own occupation” disability insurance policy with Paul Revere Life Insurance Company (“Paul Revere”). She filed a total disability claim based on shoulder, elbow and wrist pain. Paul Revere paid benefits to Hangarter for eleven months and then terminated her benefits based upon the opinions of its medical examiners and claims investigators that Hangarter was not “totally disabled,” and she continued to work and earn an income, which made her ineligible for benefits. Hangarter sued for breach of contract, breach of covenant of good faith and fair dealing and intentional misrepresentation. The jury found in Hangarter’s favor, returning a verdict of over $7 million dollars, $5 million of which was for punitive damages. Though there were several issues analyzed by the Court, I will focus on how Paul Revere’s use of an IME was used against it as evidence of bad faith.

The facts in Hangarter demonstrated that after receiving the claim, Paul Revere retained Dr. Aubrey Swartz as an “independent medical examiner” (“IME”). In sharp contrast to the two physicians who had treated Hangarter, Dr. Swartz opined that Hangarter’s condition was “normal” and that she should be able to see two chiropractic patients an hour. The Court, however, determined that substantial evidence was presented at trial supporting the jury’s determination that the defendants conducted a biased investigation in connection with the retention of the IME. Dr. Frank Caliri testified as follows:

…Paul Revere’s letter terminating Hangarter’s benefits was misleading, deceptive, and fell below industry standards as it incorrectly advised Hangarter about her rights under the policy. The letter claimed that Hangarter was ‘working,’ and therefore was in violation of the policy. This statement, as Paul Revere acknowledged in the same letter, was false because Hangarter had already sold her chiropractic business.

There was also evidence that the defendants exhibited bias in selecting and retaining Dr. Swartz as the IME.

Paul Revere used Dr. Swartz nineteen times from 1995-2000. Caliri testified that when an insurer ‘use[s] the same [IME] on a continual basis,’ the medical examiner becomes ‘biased’ because they ‘lose their independence’. Similarly, evidence showed that in thirteen out of thirteen cases involving claims for total disability, Dr. Swartz rejected the insured’s claim that he or she was totally disabled.

It is important to note that Paul Revere’s letter retaining Dr. Swartz was written by an in-house medical consultant who had never examined Hangarter. In the letter, the in-house medical consultant claimed that there were no objective findings for a disabling injury. Caliri testified that this letter biased and predisposed Dr. Swartz against finding disabling injuries by telling him the insurer’s opinion.

How many of you think that carriers send letters like the one in Hangarter to their “independent” consultants? Do you think that carriers are in the habit of telling the consultants what the insurer’s position is and then ask, either directly or indirectly, whether there is any way that the consultant can support that position? Or do insurers hire “independent” consultants for their truly “independent” opinions? Food for thought, folks…this is another type of documentation that you need to make sure you get your hands on in a bad faith discovery case against a carrier. As if this wasn’t enough evidence of a biased investigation against the carrier in Hangarter, there’s more…

The court also considered evidence that the defendants developed and applied to Hangarter’s claim a comprehensive system for targeting and terminating expensive claims, such as those stemming from “own occupation” policies where the insured was a disabled professional who had been receiving benefits for months or even years. Sound familiar? Remember Quantum Leap? Remember incentive based bonuses for claims adjusters based on lowering claims across the board? I have written about a number of programs, policies and software over the course of the last few weeks, all of which are aimed at decreasing payments on claims without regard for the individual merits of each. In Hangarter, Dr. William Feist testified that the defendants, in the mid to late 1990s, instituted “unethical” policies such as round table claim reviews designed for the purpose of achieving a net termination ratio (the ratio of the value of terminated claims compared with new claims). There was additional testimony by Dr. Caliri that internal insurer documents revealed goals were set for terminating entire groups of claims without reference to the merits of each individual claim. For those of you that have been following this blog the last few weeks, this should ring some bells – does this sound similar to the severity discussed in Don’t Forget to Consider the Severity of Your Claim? How many of you are thinking about leakage or combined loss ratio?

The Court determined that the evidence presented against the defendants was certainly enough to support a finding that the defendants engaged in a biased and, therefore, “bad faith” investigation. As such, that part of the lower court’s ruling was upheld.

As mentioned last week, the foregoing analysis should not be limited to just medical providers. This analysis can apply to engineers, appraisers, roofers and other types of consultants retained by insurers to assist them with the investigation and evaluation of claims. Consider how arguments like those in Hangarter and in Ritchie v. Krasner, M.D., et al., 211 P.3d 1272 (Ariz. Ct. App. 2009), can be applied in your cases.

Happy Thursday!