In K.N.T. v. American Family Mutual Insurance Company, 2015 Iowa App. LEXIS 576 (Iowa Ct. App. July 9, 2015), the Iowa Appellate Court addressed emotional distress arising out of the claims process and whether lax claims handling warranted awarding punitive damages.
Eleven-year-old K.N.T. was involved in a serious accident as a passenger in an all-terrain vehicle. She was in the hospital for twenty-three days and incurred approximately $250,000 in hospital expenses. K.N.T.’s mother filed an uninsured motorist claim.
A claims manager reviewed the claim on October 27, 2010 and determined the claim should be denied. A reservation of rights was issued. On November 29, 2010, the claims manager indicated that the claim should be formally denied. However, the clause relied on for the denial was not in the insurance policy. K.N.T.’s and her mother’s counsel contested the decision via letter. The claims manager did not read the letter, however, and denial letter was then formally issued. K.N.T. and her mother brought a bad faith claim based on claims handling.
The jury found that the insurer committed bad faith because it knew or recklessly disregarded the lack of a reasonable basis to deny the K.N.T.’s claim. It also found that the insurer acted with the requisite willful and wanton disregard to award punitive damages. The jury awarded K.N.T. $5,000 and her mother $45,000 in emotional distress damages. The jury was not asked to determine the amount of punitive damages. Ultimately, the court granted the insurer’s motions for directed verdict as to the emotional distress damages award to K.N.T. and the award of punitive damages.
The appellate court affirmed that K.N.T. did not suffer compensable emotional distress arising out of the claims process. It stated that K.N.T.’s brief testimony at trial showed at worst a discomfort with the litigation process. It did not show emotional distress arising from the insurance claim process.
However, the appellate court determined that the issue of whether to award punitive damages and the size of the award should have gone to the jury. First, it stated that the insurer’s intentional acts of repeatedly denying the claim without confirming the terms of the controlling policy could be deemed unreasonable and highly probable to cause harm. Second, it held that the pay-for-performance program in place at the insurance company, which incentivized employee pay based on the amount of funds paid on a claim, may give rise to an inference that the claims manager was incentivized to deny the claim or approach the claim with the goal of denying it because the denial would reflect favorably on his metrics and result in additional pay for him. Finally, the court stated that the claims manager’s denial of coverage on multiple occasions between October of 2010 and March of 2011 was evidence of legal malice, recklessness and/or conscious indifference. The appellate court concluded that the evidence of multiple reviews of the claim, failure to review the actual policy, and continued denial of a valid claim in the face of documentation showing the consequences of the failure to cover the claim could constitute clear, convincing, and satisfactory evidence of willful and wanton behavior to a reasonable fact-finder. Thus, the matter should have been presented to a jury.
Therefore, the appellate court remanded the matter for a new trial solely on the issue of the amount of punitive damages to be awarded.