Failure to conduct a thorough investigation before denying a claim under a policy could result in a finding of bad faith under Pennsylvania law.

In Mohney v. Am. Gen. Life Ins. Co., the insured obtained two disability policies from American General Life Insurance, which was to provide for benefits in the event he became “totally disabled” as defined by the policies.

The insured injured his back, and was unable to return to work.  Initially, American began making payments under the policies. After conducting a limited investigation into the claim (e.g. reviewing status reports from the insured and the insured’s doctor), American discontinued benefits contending that the insured was not “totally disabled,” a requirement to receive payments under the policies.

In response, the insured sued American alleging breach of contract and bad faith.  The court found that the insured produced sufficient evidence showing he was “totally disabled” as defined by the insurance policies, and found that American breached its contract.  In addition, the court reviewed the investigation American conducted in determining that the insured was not “totally disabled” and found it insufficient.  The court noted that the reports were ambiguous regarding the insured’s medical status, and American failed to clarify the discrepancies.  Additionally, although American reviewed status reports provided by the insured, it failed to gather information from other relevant medical/benefit providers.  American also failed to conduct its own independent medical examination.  Furthermore, the court noted that American was unable to cite any Pennsylvania law supporting its interpretation of “totally disabled”.  Thus, the court held that American’s denial of benefits under the policies constituted bad faith.

This case shows that to avoid potentially being found liable of bad faith, an insurer must conduct a thorough independent investigation into an insured’s claim (and not merely rely on the documentation provided by the insured and the insured’s doctors), and ensure that its interpretation of policy terms is supported by applicable and relevant case law.

Thanks to Colleen Hayes for her contribution to this post.