The Minnesota Supreme Court affirmed the Minnesota Court of Appeals decision in Peterson v. Western National Mutual Insurance, A18-1081 (Minn. July 29, 2020), holding that an insured may succeed on a bad-faith claim against the insurer when the insured proves two prongs: first, that after conducting a full investigation and fairly evaluating the evidence, a reasonable insurer would not have denied the insured’s claim for benefits; and second, the insurer knew, or recklessly disregarded information that would have allowed it to know, that it lacked a reasonable basis for denying the insured’s claims.
On October 21, 2009, Alison Peterson was involved in a car accident and suffered whiplash. As a result, Peterson had frequent, severe headaches and, after exhausting other treatment options, began Botox injections in December of 2012. Peterson was not at fault and settled with the at-fault driver’s insurer for $45,000. Peterson notified Western National Mutual Insurance that she intended to seek underinsured motorist limits of $250,000 and provided extensive medical records and bills. Future medical expenses were estimated to be $300,000. Western National, after Peterson brought suit, conducted an IME and had independent evaluations performed by experienced claims adjusters and independent counsel. Western National concluded Peterson’s injuries were caused from past motor vehicle accidents and did not warrant a lifetime of Botox injections.
A jury eventually awarded Peterson 1.4 million dollars and the court, post-verdict, granted Peterson leave to add a claim of bad-faith. Subsequently, the court found Peterson proved her claim of bad-faith and awarded her $100,000 (50% of the difference between the policy limits demand and offer of $50,000), plus $97,940 in attorney-fees.
The Minnesota Supreme Court began its review by looking directly at Minn. Stat. § 604.18, subd. 2(a), known as the insurer “bad-faith” standard of conduct statute. The “bad-faith” statute provides the court may award as taxable costs to an insured against an insurer amounts as provided in subdivision 3 if the insurer can show the absence of a reasonable basis for denying benefits and that the insurer knew of the lack of reasonable basis. In interpreting this statute de novo, the court reviewed the case that the statute was drawn directly from Anderson v. Continental Ins. Co., 271 N.W.2d 368, 371 (Wis. 1978).
Based upon Anderson and the plain text of the statute, the court concluded the burden rests with the insured to establish that the insurer violated the standard of conduct. There are two independent facts that the insurer must establish. First, that the insurer did not have a reasonable basis for denying benefits of the policy. This is an objective test and thus the question becomes whether a reasonable insurer under the circumstances would not have denied the benefits of the insurance policy. The court advised factfinders to consider the level of investigation a reasonable insurer would have conducted and how a reasonable insurer would have evaluated the claim in the light of that investigation. The insurer, the court instructed, cannot ignore unfavorable facts but must conduct a fair evaluation that considers and weighs all facts.
Second, the insured must establish that the insurer knew, or recklessly disregarded information that would have allowed it to know, that it lacked a reasonable basis for denying the claim. This is a subjective test and thus, the insurer’s actual investigation and evaluation are relevant to this prong. The court considered Western National’s delay in conducting a thorough investigation and its failure to hire a proper IME doctor. (Notably, the IME doctor did not specialize in headache medicine and was unfamiliar with Botox procedures to resolve headaches). Because Western National ignored facts that the courts believe show that Peterson’s headaches were caused by the accident, it knew or should have known that it lacked a reasonable basis for denying Peterson’s claim. The decision, leaving many questions for insurers, notes the court does not hold that it is never reasonable for an insurer to obtain and consider an IME opinion, however it is not always reasonable.
Justice Anderson dissented, explaining that Minnesota common law is quite clear that an insured may recover only benefits owed by the policy, not additional damages for the wrongful conduct of the insurer. Because Minn. Stat. § 604.18 is contradictory, it should be strictly construed. Nowhere in the “bad-faith” statute is an insurer required to conduct a reasonable investigation, only that there is a reasonable basis for denial. Justice Anderson argues that Western National’s conduct was reasonable because the claim was based on a new medical treatment, believed Peterson’s headaches were from past collisions, and had the claim evaluated by independent counsel, a board certified neurologist, and a claim board. It is therefore hard for Peterson to meet her burden that Western National “knew” its denial was unreasonable, or that it recklessly disregarded that fact. Ultimately, Justice Anderson addresses what may become a lasting impact: simply because an insurer chooses to litigated and loses its case does not mean it acted unreasonable. While a jury may decide to weigh evidence in a different way than an insurer, that insurer did not necessarily act in bad faith.