Wilson v. State Farm Mutual Automobile Insurance Companies
Filing
34
MEMORANDUM OPINION AND ORDER signed by Judge John G. Heyburn, II on 6/14/2011. For the reasons set forth, 24 State Farm's Motion for Summary Judgment is SUSTAINED and the complaint is DISMISSED WITH PREJUDICE. 25 Wilson's Motion for Summary Judgment is DENIED. This is a final order. cc: Counsel (AEP)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
CIVIL ACTION NO. 3:10-CV-256-H
STEVEN WILSON
PLAINTIFF
V.
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY
DEFENDANT
MEMORANDUM OPINION AND ORDER
Plaintiff, Steven Wilson, claims State Farm Mutual Automobile Insurance Company
(“State Farm”) acted in bad faith and delayed payment of his claim. Both parties have moved for
summary judgment. The basic issue is whether State Farm acted in bad faith by delaying
payment of the policy limits until it determined the exact amount of a known Medicare lien. For
the reasons that follow, the Court will deny Plaintiff’s motion and sustain Defendant’s.
I.
The parties agree on the basic facts. On August 29, 2009, Plaintiff was the passenger of a
Jeep Grand Cherokee insured by State Farm when it was involved in a collision with another
vehicle. The driver of the other vehicle was at fault and uninsured. As a result of the accident,
Plaintiff had significant medical bills, some of which were paid by Medicare. State Farm agreed
that Plaintiff was due uninsured benefits up to the policy limits of $50,000.
State Farm attempted to determine the value of Medicare’s lien and asked for permission
to discuss the lien with Medicare. Plaintiff refused the request and instead asked State Farm to
deposit the full policy limits in an escrow account from which the Medicare lien would be paid.
Plaintiff agreed “to hold State Farm . . . harmless from any claim by Medicare.” Medicare was
not involved in nor bound by this agreement. As an alternative, State Farm suggested including
Medicare as a payee on the settlement check. Plaintiff rejected this request. Finally, State Farm
decided to await Medicare’s determination of the value of its lien and then issue separate checks
to Medicare and Plaintiff.
While waiting for the information from Medicare, Plaintiff filed the instant action,
claiming it was bad faith to delay payment of the $50,000 more than thirty days merely to protect
Defendant from later liability to Medicare. Two months later, State Farm learned the value of
the Medicare lien. The following day, State Farm paid both Medicare and Plaintiff.
II.
Plaintiff makes two claims. The first is a traditional bad faith claim under KRS 304.12230, the statutory embodiment of common law bad faith claims. Under this statute, “[n]ot
attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which
liability has become reasonably clear” can constitute bad faith. KRS 304.12-230(6). In addition,
he asserts a separate claim under KRS 304.12-235, which requires that “[a]ll claims arising
under the terms of any contract of insurance shall be paid to the named insured person or heath
care provider not more than thirty (30) days from the date upon which notice and proof of claim,
in the substance and form required by the terms of the policy, are furnished the insurer.” KRS
304.12-235(1).
Summary judgment is appropriate when “there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). A genuine
dispute exists if “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In this case, the
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parties only dispute the relevance of the facts to the applicable law.
III.
To have acted in bad faith, an insurance company must (1) have an obligation to pay the
claim at issue; (2) not have a reasonable basis for failing to pay the claim; and (3) know that it
lacked a reasonable basis to delay payment or act in reckless disregard to the existence of that
basis. Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993) (quoting Fed. Kemper Ins. Co. v.
Hornback, Ky., 711 S.W.2d 844, 846-47 (Ky. 1986)).1 The parties dispute whether State Farm
had a reasonable basis to delay payment.
Mere delay of payment alone does not constitute bad faith. Motorist Mut. Ins. Co. v.
Glass, 996 S.W.2d 437, 452 (Ky. 1997). Furthermore, Kentucky law suggests that an insurer has
not acted in bad faith if the reason for denying payment was “fairly debatable as to either the law
or the facts.” Empire Fire & Marine Ins. Co. v. Simpsonville Wrecker Serv. Inc., 880 S.W.2d
886, 890 (Ky. Ct. App. 1994). In fact, “[b]efore the cause of action exists in the first place, there
must be evidence sufficient to warrant punitive damages . . .” Wittmer, 864 S.W.2d at 890. In
other words, bad faith is outrageous conduct because State Farm had either an evil motive or
reckless indifference to others’ rights. Id. (quoting Restatement (Second) Torts, Sec. 909(2)
(1979)).
It appears that Plaintiff has the primary responsibility to repay Medicare. 42 C.F.R. §
411.24(h). However, State Farm is absolutely liable to Medicare should Plaintiff not satisfy the
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Plaintiff also argues Defendant acted in bad faith because Defendant violated KRS 304.12-235(1) in that
payment occurred more than thirty days after Wilson submitted his claim to State Farm. However, “there can be no
private cause of action [for bad faith] for mere ‘technical violation’ of the UCSPA [Unfair Claims Settlement
Practices Act].” Motorists Mut. Ins. Co. v. Glass, 996 S.W.2d 437, 452 (Ky. 1997)(quoting Wittmer, 864 S.W.2d at
890).
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Medicare lien from his settlement funds. 42 C.F.R. §411.24 (i)(1) (stating “If Medicare is not
reimbursed . . ., the primary payer must reimburse Medicare even though it has already
reimbursed the beneficiary or other party.”). Moreover, State Farm may have an obligation to
protect Medicare’s lien under the Medicare Secondary Payer Act and its corresponding
regulations. See 42 U.S.C. § 1395y(b)(2) and 42 CFR § 411.24(i)(1). For State Farm to consider
these obligations seems responsible.
Kentucky courts have not addressed this particular issue in the context of a bad faith
claim. However, several courts have found it reasonable to include Medicare as a payee on a
settlement check. Lewis v. Allstate Ins. Co., No. 09-05-225-CV, 2006 WL 665790 (Tex. App.
March 16, 2006) and Wall v. Leavitt, Civ. No. S-05-2553 FCD GGH, 2008 WL 4737164, at *8
(E.D. Ca. Oct. 29, 2008) (stating that “it is only through the exercise of an extreme formalism,
even stubbornness, that the Secretary can state that Medicare is not ‘required’ to be named as a
payee on third-party settlement checks in a situation where the settlement check will be issued
prior to an initial determination”). Certainly, where the Medicare lien is determinable, State
Farm had sound reasons to try to determine the amount of it and take reasonable precautions to
protect itself from overpayment.2 Moreover, for State Farm to suggest including Medicare as a
co-payee was certainly reasonable.
Plaintiff argues that State Farm acted in pure self interest and that such overriding self
interest coupled with the delayed settlement payment could constitute bad faith. The Court
concludes, however, that to comply with federal law and to protect its own legitimate interest
2
In a slightly different circumstance, the Kentucky Supreme Court has said that in a first party claim an
insured’s willingness to settle on a reasonable basis is a precondition to a bad faith claim. See Motorist Mut. Ins.
Co., 996 S.W.2d at 455.
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against overpayment is reasonable and certainly is not in bad faith. Defendant did not delay
payment in order to pay less or harass Plaintiff. Motorists Mut. Ins. Co., 996 S.W.2d at 452-453
(stating that “there must be proof or evidence supporting a reasonable inference that the purpose
of the delay was to extort a more favorable settlement or to deceive the insured with respect to
the applicable coverage”). While it may serve Defendant’s self interest to comply with federal
law, such action was not bad faith, especially when Plaintiff apparently refused to cooperate with
Defendant’s attempts to pay the claim more quickly.3
These undisputed facts cannot constitute bad faith on State Farm’s part.
IV.
Next, Plaintiff attempts to assert a separate claim under KRS 304.12-235. In addition to
payment of the claim amount, this statute allows for twelve percent interest on the value of the
final settlement“[i]f an insurer fails to make a good faith attempt to settle a claim within the time
prescribed” and reasonable attorney’s fees “[i]f an insurer fails to settle a claim within the time
prescribed . . . and the delay was without reasonable foundation.” KRS 304.12-235(2) and (3).
Plaintiff might have a lower burden under this statute. See United Servs. Auto Ass’n v. Bult, 183
S.W.3d 181, 190 n. 9 (Ky. Ct. App. 2006) (stating that KRS 304-230 has a “much higher burden
of proof” than KRS 304.12-235) and FB Ins. Co. v. Jones, 864 S.W.2d 926, 929 (Ky. Ct. App.
1993) (stating that “KRS 304.12-235 appears to be intended as a prod to prevent laxity in the
3
Plaintiff has cited to a Pennsylvania state court opinion that is neither binding nor on point. Zaleppa v.
Seiwell, 9 A.3d 632, 639 (Pa. Super. Ct. 2010). Though this case decided “that the MSPA . . . prohibits private
entities from asserting the interests of the United States government in a post-trial motion or any other phase of the
litigation,” that court was presented with a post-trial motion seeking to add Medicare as a payee on the judgment
when no evidence of Medicare payments had been presented. Though the decision speaks broadly of the inability of
an individual or company to assert Medicare’s rights, the opinion does not even remotely address the notion that an
insurance company acts in bad faith in considering a Medicare lien during settlement. Furthermore, a Florida
appellate court came to a contrary conclusion, requiring Medicare be notified of the settlement and receive the
portion of settlement it is due. Pollo Operations, Inc. v. Tripp, 906 So.2d 1101, 1105-06 (Fla. Dist. Ct. App. 2005).
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adjustment of claims. KRS 304.12-230, however, speaks out against more egregious
behavior.”).
Defendant suggests that it did not receive a complete “proof of claim” until it
knew the value of Medicare’s lien. Since State Farm paid both Plaintiff and Medicare the day
after it received notice of the value of Medicare’s lien, State Farm believes it acted well within
the statutory guidelines. For all the reasons stated in Section III, State Farm’s delay in payment
does not constitute bad faith, and, in fact, its multiple attempts to speed settlement suggest just
the opposite. Defendant had a “reasonable foundation” to delay settlement by seeking
assurances concerning the amount and payment of the lien.
Being otherwise sufficiently advised,
IT IS HEREBY ORDERED that State Farm’s motion for summary judgment is
SUSTAINED and the complaint is DISMISSED WITH PREJUDICE.
IT IS FURTHER ORDERED that Wilson’s motion for summary judgment is DENIED.
This is a final order.
June 14, 2011
cc:
Counsel of Record
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