Could Medpay be the Latest Target in California Bad Faith Claims

Could a recent court decision in a California appeals court lead to an increase in bad faith claims relating to medical payments (medpay) coverage? It depends, according to two experienced California coverage attorneys.

The California Court of Appeals, third appellate district, reversed a superior court summary judgment in the case, Justin Barnes v. Western Heritage Insurance Company.

The case involved an injury claim that was settled prior to a medpay payout request submission.

Barnes was 11 years old when he was injured in 2001 after a table fell on his back during a recreational program co-sponsored by the Shingletown Activities Council. He sustained a contusion and hematoma on his back. His treatment included x-rays, a CT scan, pain medication and physical therapy. The Western Heritage commercial general liability coverage provided to the Activities Council also provided medpay coverage of up to $5000, incurred and reported within one year of the date of accident.

A medpay claim was made against the Activities Council but when payment was requested more than a year after the date of loss, Western Heritage Insurance Company denied the request. Western Heritage asserted that to qualify for med pay coverage under the policy, Barnes had to report the claimed medical expense to the insurer within one year after the accident.

Meanwhile a separate personal injury lawsuit Barnes filed against the Activities Council and other governmental entities was settled. Western Heritage was not a party to that lawsuit.

Five years later, Barnes sued Western Heritage alleging breach of contract and breach of implied covenant of good faith and fair dealing as a result of the denial of medpay coverage.

Western Heritage sought a summary judgment of Barnes’ action which was granted by the trial court based on the fact that because he settled his personal injury lawsuit which included medical expenses, his suit was barred by collateral estoppel. To allow the action against Western Heritage would allow Barnes the opportunity for double recovery.

Barnes appealed on the basis that the trial court erred in its decision. The appeals court agreed and reversed the trial court’s decision, concluding:

1) Collateral estoppel does not bar the present action because the issues asserted in this action were not litigated or determined in the prior personal injury action;

2) A recovery in this action would not amount to an impermissible double recovery because Barnes now sues Western Heritage alleging that it breached its direct duty to Barnes under the medical payment provision of the insurance policy, a duty distinct from the obligation Western Heritage owed the Activities Council under the liability provision of the policy;

3) There is a triable issue of material fact regarding whether Western Heritage is equitably estopped to assert the policy’s one year deadline as a defense; and

4) Under the circumstances , we need not address Barnes challenges to the trial court’s evidentiary rulings.

According to Renee Callantine, a San Francisco-based coverage attorney and partner at Meckler Bulger Tilson Marick & Pearson, the Court of Appeal’s decision was flawed.

“I believe Barnes v. Western Heritage Insurance Company was wrongly decided on the collateral estoppel ground. When the plaintiff settled his action with the tortfeasor, that settlement undoubtedly took into account future medical expenses as those damages are typically pled in personal injury actions. Once that action was settled and the court made a determination that the settlement was entitled to treatment as a good faith settlement, it should have put to bed any claims for medical expenses, including claims that may have been compensable under the medical payment provision of the tortfeasor’s policy. Although this coverage is separate from liability coverage and is not dependent upon fault, it is nevertheless procured by the settling tortfeasor, not the claimant, and it should be deducted from any recovery,” said Callantine.

As far as whether the decision will increase the number of medical payments cases in California and nationwide, Callantine said the decision is unlikely to cause an increase in these types of actions.

“Probably not, as insurers can protect themselves from this result by 1) always providing the claimant with notice of this coverage and 2) including a provision in the settlement agreement between the claimant and tortfeasor that states that the settlement is being paid for by the insurer and part of that payment will be made under the medical payments coverage,” she said.

Marina Karvelas, a Los Angeles-based partner at Barger & Wolen, who focuses her practice on insurance litgation and bad faith issues, said there is the possibility the decision could increase these types of claims.

“If Barnes withstands scrutiny by the California Supreme Court, California and other states following the reasoning of this decision could see an increase in the number of medpay suits filed against insurance companies. The Barnes decision muddies the waters on the collateral source rule which up until this decision was fairly clear in California. An insurance policy taken out and maintained by the alleged wrongdoer, including its medpay provisions, is not wholly independent of him/her and thus cannot be considered to be a collateral source. Stated simply, the injured plaintiff cannot recover against the tortfeasor under the liability provisions of the tortfeasor’s insurance policy and then sue the insurance company under the medpay provision of that same policy. The Barnes court concluded differently. The medpay provision in a tortfeasor’s liability policy can be construed as a collateral source. As a third party beneficiary of the medpay provisions, all the injured plaintiff has to do is allege the insurance company committed a wrongful act against him/her when handling the medpay claim. In Barnes, Western Heritage allegedly failed to notify the injured plaintiff of the one-year time limit to present medpay claims. The alleged failure violated California’s regulations governing the fair settlement of claims. The Barnes decision is problematic for insurers not only with respect to the collateral source rule but reflects an ever increasing effort by California’s plaintiff’s bar to create private rights of action for violation of the fair claims settlement regulations,” Karvelas said.

Another concern – that insurers will discontinue the medpay provision – is unlikely.

“I doubt that this decision will motivate insurers to discontinue offering this coverage. The coverage is useful in resolving small injury claims against insureds without the need for litigation. If the insurer truly doubts damages and causation, it can document its file to demonstrate the bases for these positions and avoid extra-contractual liability. It should also be noted that extra-contractual liability, while seemingly unwarranted in this case, is also a relatively minor exposure given the small amount of coverage that was left unpaid,” Callantine said.

And while it is unlikely that medpay will become extinct, policy language changes could be on the horizon.

“It may behoove insurers to add provisions to their liability policies that the Barnes court found were missing in the policy at issue. These would include provisions that reflect an intent that payment under the liability provisions of the policy extinguishes the insurer’s obligation under the medpay provisions of that same policy,” Karvelas said.