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Bad Facts Make Bad Law - Recent Interpretations of the Unfair Claims Settlement Practices Act

Written by AMLO.

The Advocate by M. Austin Mehr  May/June 2004  Vol. 31, No. 3

A recent Kentucky Court of Appeals' decision has introduced an interesting twist to the Unfair Claims Settlement Practices Act (UCSPA). In Phoenix Healthcare of Kentucky, L.L.C. v. Kentucky Farm Bureau Mut. Ins. Co. , Ky.App., 120 S.W.3d 726 (2003), the Court of Appeals held that KRS §§ 304.39-210 and -220 of the Motor Vehicle Reparations Act (MVRA) provided the “exclusive remedy” for the late payment or failure to pay the insured's basic reparation (PIP) benefits. The holding reaches an equitable result for this particular case, but unfortunately creates broad sweeping precedent that tilts the legal landscape of the UCSPA too far. Close review of this opinion demonstrates why our law professors taught us “bad facts make bad law.”

In Phoenix , an MRI was performed by Dr. Hays on the insured, Ms. Jones, after she was injured in a motor vehicle accident. Kentucky Farm Bureau was the insurer and a basic reparation obligor to Ms. Jones. Phoenix Healthcare of Kentucky (“Phoenix”) was the billing agent and assignee in regard to billing and receiving payments for MRIs performed by Dr. Hays.

On March 14, 2002, Phoenix mailed an invoice to Farm Bureau for $3,790.00 for the MRI. As expected (given the size of the bill) Farm Bureau sent notice that the payment was being withheld pending a peer review. While Farm Bureau conducted its peer review, it proceeded to pay other PIP bills submitted by other providers. Consequently, when Farm Bureau decided, eight days later, to pay the MRI bill, most of the $10,000 in PIP benefits had been disbursed, and Farm Bureau only made a partial payment of $2,345.95, which totally exhausted the $10,000 in benefits. The insured, Ms. Jones, received her full benefit of $10,000 in PIP benefits. She apparently had no complaint with Farm Bureau. The only one complaining was a medical provider, Phoenix Healthcare, because the delay caused by the peer review left Phoenix Healthcare “out in the cold because (Farm Bureau) had no more PIP benefits to pay out.” 1 Essentially, Farm Bureau, at worst, was two weeks late in making payment to Phoenix. Neither the opinion nor any of the briefs discuss why an MRI would cost $3,790. Phoenix sought punitive damages against Farm Bureau, even though Farm Bureau had paid out its entire contractual obligation of $10,000, claiming that Farm Bureau had acted recklessly in paying other medical providers and that it should have placed a “hold” on all payments while it conducted its peer review of Phoenix's MRI bill of $3,790.

It would be extremely difficult to infer recklessness under this set of facts, because the duties of Farm Bureau to pay PIP claims timely apply to all medical providers and the insured. To argue that Farm Bureau should delay payment on other claims, while it exercises its right to review Phoenix Healthcare's MRI bill, would necessarily subject the insurer to claims by other providers of delay. Likewise, for Farm Bureau to not investigate the propriety of a $3,790 MRI bill, without an appropriate review, could subject Farm Bureau to a claim by the insured that her limited $10,000 in PIP benefits had been squandered needlessly, leaving other medical providers unpaid. In essence, the claims handling conduct of Farm Bureau was obviously far better than the proposed conduct urged by the plaintiff.

One cannot determine whether the Floyd Circuit Court or the Kentucky Court of Appeals was influenced by the obvious flaws in Phoenix Healthcare's argument, but certainly these facts did nothing to inspire the judiciary to acknowledge a remedy for punitive damages against Farm Bureau. The Court of Appeals' opinion essentially precludes any causes of action under the UCSPA against a PIP insurance carrier for compensatory and punitive damages for failure to pay PIP benefits in good faith, the remedy for violations being limited to interest and attorney's fees.

The record in Phoenix Healthcare indicates that the appellant did not file a motion for reconsideration, or a motion for discretionary review.2 Thus, the opinion in Phoenix Healthcare became final and was published as precedent. Thus, its holding may not be the final answer to this important issue. This article will address arguments not mentioned in the parties' briefs or the opinion.

In support of its opinion, the Court reasoned: “It is well settled that ‘[w]here the statute both declares the unlawful act and specifies the civil remedy available to the aggrieved party, the aggrieved party is limited to the remedy provided by the statute.'” Id. ( quoting Grzyb v. Evans , Ky., 700 S.W.2d 399, 401 (1985)). The Court also distinguished the case at hand from State Farm Mutual Auto. Ins. Co. v. Reeder , Ky., 763 S.W.2d 116 (1988) by noting:

[I]n Reeder , the court specifically held that KRS 446.070 does not authorize a private cause of action for the violation of a statute if the statute itself specifies a civil remedy available to the aggrieved party. In Reeder, unlike the case at hand, the statute at issue did not provide a civil remedy and accordingly KRS 446.070 applied to the matter. ( Id . at 727).

Significantly, the Motor Vehicle Reparations Act (“MVRA”) contains no “exclusive remedy” provisions that would apply to the 15 enumerated duties set forth in the UCSPA. The Phoenix decision would remove PIP carriers from regulation by the entire Kentucky Insurance Code (KRS Chapter 304, which encompasses the UCSPA and the MVRA), by ensuring that PIP claims are controlled by only part of that Code. However, as the Kentucky Supreme Court recognized in Farmland Mutual Ins. Co. v. Johnson , Ky., 36 S.W.3d 368 (2000):

The KUCSPA is part of a large statutory scheme entitled, the “Insurance Code.” The Insurance Code regulates the insurance industry, and an insurance company derives its right to do business in Kentucky from the Code. The Code and the UCSPA within it relate to a class encompassing all insurance companies doing business in Kentucky that are regulated by the Kentucky Insurance Commissioner. Thus the statute does not relate to only particular persons or things in that class.

Id. at 380 (Emphasis added). Consequently, it is clear that the Kentucky Insurance Code is intended to apply in toto to all insurance carriers.

In support of its decision, the Court in Phoenix cites to the Kentucky Supreme Court's decision in The Travelers Indemnity Co. v. Reker , Ky., 100 S.W.3d 756 (2003), in which the Court held that suits for insurance bad faith under the UCSPA were not available against workers' compensation insurers because of the “exclusive remedy” provision of the Workers' Compensation Act, KRS § 342.690(1), despite the enactment of KRS § 342.267 and the existence of KRS § 446.070. What separates the Workers' Compensation Act from the Kentucky Insurance Code, however, is that the latter does not contain an exclusivity provision remotely analogous to the one contained in KRS § 342.690.

The first sentence of KRS § 342.690(1) states as follows:

If an employer secures payment of compensation as required by this chapter, the liability of such employer under this chapter shall be exclusive and in place of all other liability of such employer to the employee, his legal representative, husband or wife, parents, dependents, next of kin, and anyone otherwise entitled to recover damages from such employer at law or in admiralty on account of such injury or death.

The fourth sentence of KRS § 342.690(1) further reads:

The exemption from liability given an employer by this section shall also extend to such employer's carrier, and to all employees, officers, or directors of such employer or carrier, provided the exemption from liability given an employee, officer or director of an employer or carrier shall not apply in any case where the injury or death is proximately caused by the willful and unprovoked physical aggression of such employee, officer or director.

An exclusive remedy provision this clear and explicit is not contained in the MVRA.

Indeed, the Supreme Court expressly recognized in Reker that the Kentucky Insurance Code “does not include an ‘exclusive remedy' provision prohibiting private causes of action for its violation.” Id. at 763. Moreover, as noted by the Court, the Kentucky Insurance Code is a statutory scheme that—unlike the Workers' Compensation Act—does not contain interrelated statutes providing civil remedies for an insurer's bad faith. Id. ; see also Farmland Mut. Ins. Co. , 36 S.W.3d at 380. Furthermore, the Code does not include a specific statutory provision explicitly prohibiting private civil actions against insurance carriers. Id.

The Court in Phoenix also failed to discuss Kentucky Farm Bureau Mut. Ins. Co. v. Troxell , Ky., 959 S.W.2d 82 (1997), in which the Kentucky Supreme Court implicitly recognized that a claim for lost wages under PIP could support a claim for punitive damages for insurance bad faith and unfair claims settlement practices. In Troxell , the plaintiff brought suit for recovery of UM and PIP benefits, as well as a cause of action for bad faith. The jury returned a verdict in favor of the plaintiff for $3000 in PIP lost wages and $775,000 in punitive damages. On appeal, the Court recognized that the plaintiff's “claims for bad faith and unfair claims settlement practices were premised on both UM and lost wage theories.” Id. at 85. However, because the Court found that the plaintiff presented insufficient evidence of lost wages, and because the jury's justification for punitive damages could not be specifically ascertained (that is, it could have been partially based on the unproven element of lost wages), the Court remanded the case for another bad faith trial. Id. Thus, the Supreme Court was not troubled that a claim for lost wages under PIP could support a claim for punitive damages for bad faith claims handling.

Furthermore, there is no law suggesting that the MVRA and the UCSPA cannot be simultaneously applicable. The Kentucky Court of Appeals also held in Phoenix that, “[b]ecause KRS 304.39-210 specifically applies to late payments of basic reparation benefits, as opposed to the more general language of KRS 304.12-230 and –235,” the former statute precludes recovery under the USCPA or for punitive damages in a case involving basic reparations benefits. As an initial matter, it should be noted that the Court must harmonize the law so as to give effect to all statutes, if possible. See Allen v. McClendon , Ky., 967 S.W.2d 1, 3 (1998). With this in mind, there is no inherent conflict between the MVRA and the UCSPA that would necessitate deciding whether to use a “specific” or “general” statute. See Reker , 100 S.W.3d at 763 (stating that it is necessary for a specific provision to take precedence over a general provision only “when [the] two statutes are in conflict”).

Moreover, in FB Ins. Co. v. Jones , Ky. App., 864 S.W.2d 926 (1993), the Kentucky Court of Appeals addressed the contention, supported by Gryzb v. Evans , Ky., 700 S.W.2d 399 (1985), that the passage of KRS § 304.12-235 precluded further suits under the UCSPA via KRS § 446.070. The Court concluded that “KRS 304.12-230 and KRS 304.12-235 are different statutes which address different kinds of culpable behavior…” “KRS 304.12-235 appears to be intended as a prod to prevent laxity in the adjustment of claims. KRS 304.12-230, however, speaks out against more egregious behavior.” Id. at 929. This decision was reached even though KRS § 304.12-235(2) provides a penalty of 12% per annum interest for a “[failure] to make a good faith attempt to settle a claim within the time prescribed.”

Similarly, KRS § 304.39-210(2) allows for a penalty of 12% per annum for overdue payments and 18% per annum for a delay without reasonable foundation. While this language is comparable to KRS § 304.12-235, it explicitly prohibits suits under the UCSPA, nor does it speak to the same type of conduct that is prohibited by the UCSPA.

Furthermore, a bad faith lawsuit requires different proof than 304.39-210:

[A]n insured must prove three elements in order to prevail against an insurance company for alleged refusal in bad faith to pay the insured's claim: (1) the insurer must be obligated to pay the claim under the terms of the policy; (2) the insurer must lack a reasonable basis in law or fact for denying the claim; and (3) it must be shown that the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed....

Wittmer v. Jones , Ky., 864 S.W.2d 885, 890 (1993) (quoting Federal Kemper Ins. Co. v. Hornback , Ky., 711 S.W.2d 844, 846-47 (1986) (Liebson, J., dissenting)). The requirement of showing intent or reckless disregard in a bad faith action is different from the requirement in KRS § 304.39-210 that only a lack of reasonable foundation for delay be shown.

The Court notes that State Farm Mut. Auto. Ins. Co. v. Reeder , Ky., 763 S.W.2d 116 (1998) and Grzyb v. Evans hold that “[w]here the statute both declares the unlawful act and specifies the civil remedy available to the aggrieved party, the aggrieved party is limited to the remedy provided by the statute.” Reeder , 763 S.W.2d at 118; Grzyb , 700 S.W.2d at 401. The PIP remedies, contained in KRS §§ 304.39-210 and –220, however, only speak to “overdue payments” or overdue payments resulting from “delay … without reasonable foundation.” They do not speak to any of the enumerated violations set forth in the UCSPA, nor do they speak to the heightened requirements for showing bad faith. Consequently, it is unclear how these statutes provide civil remedies for violations of the UCSPA in PIP cases, the Court held in Phoenix .

This particularly holds true when one considers that KRS § 304.12-235, part of the UCSPA, provides for interest and attorney's fees for “delay[s] without reasonable foundation” and failures “to make a good faith attempt to settle a claim.” This statute, contained in the UCSPA, does not prohibit the bringing of claims for punitive damage causes of action—as this Court held in FB Ins. Co. v. Jones —it would appear to be just as reasonable that KRS 304.39-210 and –220 do not prohibit such causes of action.

In conclusion, as the Kentucky Supreme Court made clear in State Farm Mut. Ins. Co. v. Reeder , Ky., 763 S.W.2d 116, 118 (1988): “[The UCSPA] is intended to protect the public from unfair trade practices and fraud. It should be liberally construed so as to effectuate its purpose.” Indeed, “this Court's duty in construing statutes is to ascertain and give effect to the intent of the General Assembly.” White v. Check Holders, Inc. , Ky., 996 S.W.2d 496 (1999). Making the UCSPA inapplicable to basic reparation benefit carriers, even when those carriers are engaged in conduct not anticipated by the MVRA, is entirely antithetical to the idea that insurers hold a fiduciary duty to their insureds. Moreover, it is entirely antithetical to the policy and purpose behind the MVRA itself. See KRS § 304.39-010.

Reply Brief of Phoenix Healthcare pp. 3-4.

The record indicates that Phoenix Healthcare changed attorneys midway in the appeal.