No Insurer Bad Faith for Delay of Claim Payment Due to Uncertain Medicare Secondary Payer Obligations, Says Kentucky Court
The United States District Court for the Western District of Kentucky, applying Kentucky law, has held that an insurer did not act in bad faith by delaying payment of policy limits until it determined the exact amount of what the court termed "a known Medicare lien." Wilson v. State Farm Mut. Auto. Ins. Co., No. 3:10-CV-256-H, 2011 U.S. Dist. LEXIS 63430 (W.D. Ky. June 15, 2011). Given the widespread difficulties insurers have faced in gathering the information needed with respect to obligations under the Medicare secondary payer scheme at the time of settlement or judgment on bodily injury claims, this is an important ruling.
The plaintiff in this case was the passenger of an automobile insured by the insurer when it was involved in a collision with another vehicle. Because the driver of the other vehicle was at fault and uninsured, the insurer agreed that the passenger was due uninsured benefits up to the policy limits of $50,000. The passenger, however, had already incurred significant medical bills from the accident, some of which were paid by Medicare. As a result, the insurer attempted to determine the value of Medicare's payments, asking first for permission to discuss what it called the Medicare "lien" with Medicare and then suggesting that Medicare be included as a payee on the settlement check. Refusing both requests, the passenger instead proposed to hold the insurer harmless from any claim by Medicare if the insurer deposited the full policy limits in an escrow account. Because Medicare was not involved or bound by this agreement, the insurer decided to await Medicare's determination of the value of its interests, whereupon it would issue separate checks to Medicare and the passenger. In response, the passenger filed a lawsuit against the insurer, claiming that the insurer acted in bad faith by delaying payment of the policy limits. The insurer learned the value of the Medicare "lien" two months later, and paid both Medicare and the passenger the following day.
Under applicable Kentucky law, to have acted in bad faith, the court stated that an insurance company must (1) have an obligation to pay the claim at issue; (2) not have a reasonable basis for failing to pay the claim; and (3) know that it lacked a reasonable basis to delay payment or act in reckless disregard to the existence of that basis. The court noted that Kentucky law suggests that an insurer has not acted in bad faith if the reason for denying payment was "fairly debatable as to either the law or the facts," and that bad faith is outrageous conduct where the insurer had either an evil motive or reckless indifference to others' rights.
Holding that the insurer did not act in bad faith, the court concluded that the insurer had a reasonable basis to delay payment. In so holding, the court noted that although the passenger had the primary responsibility to repay Medicare, the insurer would liable to Medicare should the passenger not satisfy Medicare's interests from his settlement funds, citing 42 C.F.R. §411.24 (i)(1) ("If Medicare is not reimbursed . . ., the primary payer must reimburse Medicare even though it has already reimbursed the beneficiary or other party."). The court further stated that the insurer might have had an obligation to protect Medicare's interests under the Medicare Secondary Payer Act and its corresponding regulations, citing 42 U.S.C. § 1395y(b)(2) and 42 C.F.R. § 411.24(i)(1). The court reasoned that the insurer's consideration of these statutory and regulatory obligations "seems responsible," and therefore concluded that for the insurer "to comply with federal law and to protect its own legitimate interest against overpayment is reasonable and certainly is not in bad faith."
Although the insurer's compliance with federal law may have served its self interest, the court nevertheless recognized that such action was not bad faith, especially when the passenger refused to cooperate with the insurer's attempts to pay the claim more quickly, i.e., by refusing permission for the insurer to discuss with Medicare the amounts it would claim, and refusing a check that included Medicare as a payee.
The court also rejected a separate claim under KRS 304.12-235, a Kentucky statute that allows for 12 percent interest on the value of the final settlement "[i]f an insurer fails to make a good faith attempt to settle a claim within the time prescribed" and reasonable attorney's fees "[i]f an insurer fails to settle a claim within the time prescribed . . . and the delay was without reasonable foundation." KRS 304.12-235(2) and (3). The court noted that the passenger might have a lower burden under this statute. In response, the insurer suggested that it did not receive a complete "proof of claim" until it knew the value of Medicare's interest. Since the insurer paid both the passenger and Medicare the day after it received notice of the value of Medicare's claim, the insurer contended that it acted well within the statutory guidelines. For the same reasons it rejected the common law bad faith claim, the court held that there also was no viable claim under the Kentucky statute.
Although this case will not resolve all of the difficulties faced by insurers seeking to comply with the federal Medicare secondary payer scheme and protect themselves from overpayment, it at least avoids compounding those difficulties and refuses to credit a claimant's bad faith allegations based on an insurer's efforts to determine the extent of Medicare's interest before making a claims payment. Although litigation over insurers' obligations and ability to protect themselves under the Medicare statute and regulations will undoubtedly continue, this opinion is a welcome precedent in a still unsettled area of law.