By Mike Abourezk and Marialee Neighbours

In the guise of "medical cost containment," insurers have established goals to deny or minimize medical claims. These goals are implemented through medical claim review procedures that are performed either by medical providers, insurance company personnel or third-party vendors. Often, the insurer will order an independent medical examination (IME) that is conducted by a medical provider who has an ongoing relationship with the insurer. These IME reports typically favor the insurer. At other times, medical claim reviews may be conducted by an insurance company employee whose performance is measured by the employee's ability to reduce medical costs. Increasingly, insurers use medical utilization review companies whose sole objective is to cut medical costs for their clients.

All Available Medical Information Must Be Considered.

Frequently, an insurer will disregard proof of a claimant's medical injury and expenses, including proof furnished by a claimant's treating physician. However, good faith and fair dealing require an insurer to consider all relevant medical information when investigating an insured's claim. See Athey v. Farmers Ins. Exchange, 234 F.3d 357 (8th Cir. 2000). In Athey, a South Dakota diversity case, the Eighth Circuit Court of Appeals relied on South Dakota law. It found that there was ample evidence that Farmers had ignored Athey's proofs of losses and denied his claim without a reasonable basis. The Eighth Circuit concluded that there was sufficient evidence to support the jury's verdict of bad faith and punitive damages

In another bad faith case, a California court found that an insurer had failed to conduct any investigation whatsoever even though the information was readily available from the insured's doctor. In McCormick v. Sentinel Life Ins. Co., the court said:

Here, Sentinel likewise failed to investigate the claim by consulting with McCormick's treating physician. Although presumably one phone call to the doctor would have supplied the omitted information Sentinel offers no explanation for why it did not offer this course of action.

153 Cal. App. 3d 1030, 1047-48, 200 Cal. Rptr. 732, 742 (Cal. App. 2 Dist. 1996). See also Egan v. Mutual of Omaha Ins. Co., 169 Cal. Rptr. 691 (Cal. 1979)(failure of disability insurer to properly investigate insured's claim by having insured examined by a doctor of its choice or by consulting with insurer's treating physician was bad faith).

In Mariscal v. Old Republic Life Ins. Co., 50 Cal. Rptr.2d. 224 (Cal. App. 2 Dist. 1996), the court found that the insurer's failure to seek evidence when an automobile accident caused a fatal heart attack could be a breach of good faith and fair dealing. In Mariscal, the insurer did not bother to call the treating physician to clarify the meaning of his words, did not understand medical terms or conditions, and did not consult with its own doctor. Moreover, the insurer's claims representatives testified that the insurer ignored evidence that supported coverage and did not fulfill its duty to investigate further.

Relying strongly on the rule of equal consideration that an insurer owes to its insured, the Mariscal court said:

The issue here is whether Old Republic considered all the information reasonably available to it at the time that it denied the claim, and whether that information provided a basis for coverage. Old Republic had a duty to thoroughly investigate the circumstances An insurance company may not ignore evidence that supports coverage. If it does so, it acts unreasonably towards its insured and breaches the covenant of good faith and fair dealing.

Id. at 227-28 (internal citations omitted).

The Court stressed that an "insurer may not just focus on those facts which justify denial of the claim." Id. at 227. See also Wilson v. 21st Century Ins. Co., 2006 WL 216682 (Cal.App. 2 Dist)(summary judgment for insurer reversed; insurer based initial determination of benefits solely on own in-house review of insured's medical records without any attempt to consult plaintiff's treating physician).

In Aetna Life Ins. Co. v. LaVoie, 505 So.2d 1050 (Ala. 1987), insureds brought an action against a health insurer for bad faith refusal to pay a claim. In affirming a jury verdict in favor of the plaintiffs, the court said it was insurer's responsibility to marshall all medical facts before denying claim:

Clearly, it was Aetna's responsibility to marshall all of the medical facts with regard to Mrs. La Voie's claim before its refusal to pay. The items which were absent from the file, the progress notes and the nurses' notes, were conceded by Aetna's own witnesses to be of critical importance in the review of any medical file where the reasonable necessity of hospitalization is in issue.

Id. at 1052-53 (emphasis in original).

Continuing, the court concluded that once good faith has been breached, insurer cannot later justify denial by gathering information it should have had in first place:

Once the bad faith has occurred, once the duty to use good faith in considering insurance claims has been breached, the insurance company cannot later seek to justify its denial by gathering information it should have had in the first place. "[A]n insurer purchases insurance and not an unjustified court battle when he enters into the insurance contract."

Id. at 1053, citing Gulf Atlantic Life Ins. Co. v. Barnes, 405 So.2d. 916, 925 (Ala. 1981).

Biased or Incompetent Medical Claims Reviews

The use of biased or incompetent medical claim reviews establishes wrongful intent in a bad faith action. Increasingly, courts have recognized that medical claim reviews conducted by persons that are biased or incompetent lead to predictably arbitrary claim decisions. For instance, in Athey, discussed above, an insured was injured in an automobile accident by an uninsured (UI) driver and, subsequently, brought a diversity action against Farmers for breach of contract and bad faith. 234 F.3d 357 (8th Cir. 2000). Farmers requested an independent medical examination (IME) of Athey. After the doctor performing the IME recommended that Athey stop all medical and chiropractic treatment, Farmers terminated Athey's no fault benefits.

During trial, the jury heard evidence that Farmers' attorney had recommended the doctor who conducted the IME because of his bias. The doctor had a reputation for regularly recommending the termination of medical treatment for patients who had suffered back injuries. A jury found Farmers liable for breach of contract and bad faith. On appeal, the Eighth Circuit Court of Appeals found that there was sufficient evidence to support the district court's rulings, including admission of the IME evidence.

ERISA cases are also instructive on this issue. The arbitrary and capricious standard under ERISA is analogous to the reasonableness standard applied in insurance bad faith cases. Generally, the plan administrators involved in these cases are insurance companies. For instance, in Nagele v. Electronic Data Systems Corp., a former employee brought an ERISA action against her employer and the plan administrator Metlife. 193 F.R.D. 94,111 (W.D.N.Y. 2000). During discovery, the employee requested information about the relationship between Metlife and the doctor it used to conduct an examination of the plaintiff. The Nagele court held that the plaintiff's discovery requests were relevant:

"Whether a medical advisor to a plan administrator exercises independent judgment or functions as an arm of the administrator is relevant to the issue of arbitrary decision making as are the credentials of such advisors."

Id. at 111, citing Bedrick By and Through Humrickhouse v. Travelers Insurance Company, 93 F.3d 149, 153-54 (4th Cir.1996).

In Bedrick, an ERISA action, the Court noted that a doctor put her financial interest with the insurer above her fiduciary duty to the claimant:

To put it charitably, we think it abundantly clear that Dr. Pollack at least 'unconsciously' put the financial interest of Travelers above her fiduciary duty to Ethan.

Bedrick, 93 F.3d at 154.

In discussing a biased medical review, the court noted that a doctor had not practiced in years and viewed himself as a supporter of the insurer's legal department:

Moreover, Dr. Robbins... views himself as a 'supporter' of Travelers 'legal department' and 'field office.' He has not seen patients in seven years, and he admitted that he is not familiar with textbooks or treatises on cerebral palsy. His opinion was based on a single medical journal article, which is uncited here.


Paper Reviews

Repeatedly, courts have held that paper reviews of medical records by consultants who do not actually examine the patient are entitled to little credence. See Nelson v. Heckler, 712 F.2d 346, 348 (8th Cir. 1983) ("We have held that such reports 'deserve little weight in the overall evaluation of disability.'"); Woo v. Delux Corp., 144 F.3d 1157,1161 (8th Cir. 1998)(Eighth Circuit held that claims administrator reached decision of non-compensability without reflection and judgment when it relied upon a review of medical records by a consultant which contradicted the conclusions reached by treating physicians.)

In one such decision, the Eighth Circuit Court of Appeals held that:

. . . to attempt to evaluate disability without personal examination of the individual and without evaluation of the disability as it related to the particular person is medical sophistry at its best.

Landess v. Weinberger, 490 F.2d 1187,1190 (8th Cir. 1974); see also Nelson v. Heckler, 712 F.2d 346, 348 (8th Cir. 1983).

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