Bad Faith Denial of Long-Term Disability Claim Warrants Award for Emotional Distress, Loss of Reputation, Economic Injury, Punitive Damages, and Attorney Fees
Long-Term Disability policies that are provided to employees by private employers are normally enforceable in federal court under the Employee Retirement Income Security Act of 1974 (ERISA). However, ERISA does not apply to long term disability plans that are provided to employees who work for the government, such as school districts, municipalities, state and federal agencies. Government plans must therefore be enforced under state common law.
It is well-settled by the Supreme Court of Wisconsin that if an insurer fails to deal in good faith with its policyholder by refusing, without proper cause, to compensate for a loss covered by the policy, such conduct may give rise to a cause of action for bad faith. By virtue of the relationship between the parties created by a long term disability insurance contract, a special duty arises. The act of bad faith is a separate intentional wrong, which results from a breach of duty imposed as a consequence of the relationship established by contract. When such a breach occurs, the insurance company is liable for any damages which are the proximate result of that breach.
To establish a claim for bad faith, the disabled person must show the absence of a reasonable basis for denying benefits of the policy and the insurance company's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. The policyholder must establish that, under the facts and circumstances, a reasonable insurer could not have denied or delayed payment of the claim. In other words, the Court measures the insurer's conduct against what a reasonable insurer would have done under the particular facts and circumstances.
The legal claim of bad faith was created to protect the policyholder. Its primary purpose is to redress all economic harm proximately caused by an insurer's bad faith. Permitting the aggrieved policyholder to obtain extracontractual damages, the bad faith action is in the forefront of consumer protection litigation. Policyholders who prove that their long-term disability insurers acted in bad faith may recover damages for emotional distress, loss of reputation, and economic injury.
The Supreme Court of Wisconsin recognizes that an insurance company has a special "fiduciary" relationship to its insured which derives from the great disparity in bargaining positions of the parties. It is this fiduciary relationship that is the key element justifying the use of compensatory remedies for the insurer's breach of the contractual obligation.
Under the well-established American Rule, parties to litigation are generally responsible for their own attorney's fees unless recovery is expressly allowed by either contract or statute. However, when an insurer acts in bad faith by denying long term disability benefits, it is liable to the insured for any damages which are the proximate result of that conduct. Accordingly, when the insurer's bad faith forced the disabled policyholder to retain an attorney to obtain the benefits, those expenses are recoverable.
Finally, punitive damages can be imposed against an insurer who denies its disabled policyholder’s claim in bad faith. Punitive damages are designed to punish and deter the insurance company from engaging in unlawful conduct now and in the future. Such an award is based upon the egregiousness of the insurance company’s conduct, its wealth, and the amount of money it would take to change the insurer’s behavior.
Alan C. Olson practices disability law from his offices in New Berlin, Wisconsin, and throughout the United States. AOlson@GetMyLTDbenefits.com
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