The fairly or reasonably debatable defense to an insurance bad faith claim as generally applied across the United States was under the microscope in Hayes v. Acuity, No. CIV 17-5015-JLV, 2020 WL 1322269 (D.S.D. March 20, 2020). The plaintiff's motion for partial summary judgment was granted in that case. The Court ruled that on the record the defense was not available to the carrier, with a proviso that a jury question would be presented should the carrier change its position that it denied coverage for reasons other than a fairly or reasonably debatable defense. The carrier's "actual intent remains a jury question consistent with this order." Hayes, 2020 WL 1322269, at *9.
Hayes involved a worker's compensation carrier. Putting aside issues of immunity that arise in other jurisdictions,1 this case addresses when the fairly or reasonably debatable defense applies to any carrier accused of bad faith.
Hayes was a case in which the issue involved a question of law, i.e., the carrier's interpretation of statutes. Hayes, 2020 WL 1322269, at *7. In what would become only the first administrative hearing on the plaintiff's claim, the carrier answered the plaintiff's claim that the plaintiff's claim met the requirements of coverage. Then the claim was dismissed without prejudice because the plaintiff and the carrier settled and stipulated to dismissal. Hayes, 2020 WL 1322269, at *3.
Then came a second administrative hearing, in which the plaintiff filed a new claim that his circumstances changed and he met the requirements for additional coverage. The carrier denied the claim. The administrative agency ruled in the carrier's favor because it found that the injury was not covered in the first place. The plaintiff appealed to the Circuit Court, which affirmed the administrative agency's decision. Hayes, 2020 WL 1322269, at *3. The plaintiff then appealed directly to the State Supreme Court.
The Supreme Court reversed. It held that the carrier's admission of coverage in the first administrative proceeding was a judicial estoppel that there was coverage in the first place. The Supreme Court held that judicial estoppel prevented the carrier from contending later that there was no coverage. Hayes, 2020 WL 1322269, at *4.
The plaintiff then sued the carrier for insurer bad faith, among other things. The plaintiff made several arguments in the bad faith case. One was derived from the Supreme Court's finding of judicial estoppel in the underlying case:
The plaintiff's provocative argument based on judicial estoppel in this particular case is worth reading in its own right:
A “fairly debatable” showing is not made by the fact that a party convinced/tricked a tribunal into accepting barred arguments. If it were otherwise, insurers would have significant incentive to “cheat” the system and “pervert the judicial machinery,” because they would have an “absolute” legal defense to bad faith. Bad action should not be rewarded; the law cannot permit a party to profit from its deception. Essentially, [the carrier in this case] is again attempting to gain “unfair advantage” as a result of its own estopped arguments.... These arguments should be judicially estopped, here.
“Getting away with it” is not a defense. [The carrier's] argument that it should have an absolute legal defense because it succeeded in perverting the judicial machinery is an absurd argument and that asks for an untenable result.
Hayes, 2020 WL 1322269, at *6.
The Federal District Court ultimately accepted one of the plaintiff's arguments that there was no room in this case for a fairly or reasonably debatable defense. However, the Court did not rule on mendacity or the possible appearance of it in this particular case.
Besides judicial estoppel, the plaintiff also argued that when the Circuit Court affirmed the administrative agency it was an error of law. Significantly, the plaintiff urged that the trial court was simply wrong in its interpretation of the applicable statutes. Hayes, 2020 WL 1322269, at *5.
The plaintiff's legal argument based on interpretation of statutes at the time the agency and the court denied the plaintiff's claim appears to have been the basis for the Federal Court's rulings. The Federal Court granted the plaintiff's motion for partial summary judgment and denied the carrier's motion for partial summary judgment on whether the fairly or reasonably debatable defense was available in this bad faith case. The Federal Judge ruled:
The question of [the insurance carrier's] actual intent is a factual matter which must be resolved by the jury should the defendant claim the breach of its duty to Mr. Hayes “occurred for reasons other than fairly misunderstanding its legal obligation under the statute.” [Citation omitted.] What the decisions of the South Dakota Supreme Court before Hayes clearly prohibited was an argument [that the carrier] reasonably believed it had the right to terminate benefits to Mr. Hayes [before he petitioned the administrative agency and its ruling was affirmed by the Circuit Court in this case].
Defendant’s motion for summary judgment is denied and plaintiff’s motion for partial summary judgment is granted, with the proviso that [the insurance carrier's] actual intent remains a jury question consistent with this order.
Hayes, 2020 WL 1322269, at *9.
The effects of this ruling will predictably extend beyond the borders of the particular case and the particular place in which it was made, to other insurer bad faith cases across the United States.
1The immunity of worker's compensation carriers from bad-faith claims, recognized in many jurisdictions, is explored at length in Section 11:14, Waiver, in 2 DENNIS J. WALL, LITIGATION AND PREVENTION OF INSURER BAD FAITH (3d Edition & 2019 Supplements, with 2020 Supplements in process, published by Thomson Reuters West).
Please read the disclaimer. ©2020 Dennis J. Wall. All rights reserved.
