This article considers whether an insurer has a duty to advise an insured of policy benefits not claimed. Some courts require insurers to protect an insured’s interests affirmatively by informing the insured of available benefits.(1) Other courts have refused to impose this duty upon insurers.(2) Recent cases suggest a trend toward imposing this duty.
In Ramirez v. USAA Cas. Ins. Co.,(3) a California court held that an insurer who failed to inform its insured about potential first-party benefits breached the duty of good faith and fair dealing.
On November 16, 1985, Jesus Ramirez received serious injuries while a passenger on a motorcycle driven by Todd Rentsch. Rentsch carried $100,000 of uninsured motorist (UM)coverage on the motorcycle through USAA. In response to Ramirez’s counsel’s request for coverage information, USAA told counsel that Rentsch’s policy did not provide UM coverage. However, on July 17, 1987, USAA informed Ramirez about Rentsch’s UM policy and Ramirez filed a claim for UM benefits.
USAA denied Ramirez’s claim as untimely because Ramirez did not file his claim within one year of the accident. Ramirez sued USAA for bad faith based upon USAA’s failure to initially tell him about Rentsch’s UM coverage. USAA moved for summary judgment. Ramirez then moved for a new trial and the trial court granted this motion. USAA appealed.(4)
The appellate court affirmed, stating that the trial court erred in granting summary judgment for USAA. The appellate court noted that Ramirez stated a cause of action for first-party bad faith “based on the failure, negligent or intentional, to disclose the underinsured insurance coverage existed.”(5) Relying on Davis v. Blue Cross of Northern California,(6) the court stated that “[i]t is basic that an insurer has a duty to disclose policy terms to its insureds.”(7)
The Ramirez court rejected USAA’s argument that USAA had no duty to Ramirez to inform him about UM coverage because Ramirez was represented by counsel.(8) The court stated that “[i]f USAA’s point is that Ramirez dealt with it through attorneys, rather than directly, we do not perceive how USAA’s duty to disclose has been changed.”(9)
The court also rejected USAA’s arguments that USAA owed no duty to disclose UM coverage to Ramirez because Ramirez had not exhausted the liability insurance of the tortfeasor and that the Ramirez’s suit against the tortfeasor and Rentsch had not yet been resolved.(10)
In Dercoli v. Pennsylvania Nat’l Mut. Ins. Co.,(11) the Supreme Court of Pennsylvania appeared to expand an insurer’s duty to its first party insured to include a duty to provide full disclosure of all information affecting benefits available to its insured. The Supreme Court later retreated from that position in Petersen v. USAA Property & Cas. Ins. Co(12) and Miller v. Keystone Ins. Co.(13)
In Dercoli, David Dercoli died and Dorothea Dercoli received severe injuries in a car accident. Dorothea filed a claim for benefits with the two companies that insured the Dercolis’ car, Pennsylvania National Mutual (Penn National) and Grange Mutual Casualty Company (Grange). Both insurers paid and continued to pay on the claim until approximately April, 1984.
While Dorothea received benefits, the insurers’ agents advised her that she did not need independent counsel because each would see to it that she received all available benefits. Dorothea relied upon these representations and believed that she was receiving all benefits to which she was entitled. She later learned that the Pennsylvania had abolished interspousal tort immunity in Hack v. Hack,(14) making her potentially eligible for liability benefits. Dorothea did not learn of this change in the law until 1985.
Dorothea sued Penn National and Grange for failing to advise her of the change in Pennsylvania law that would allow her to receive benefits under the policies’ liability overages. The trial court dismissed Dorothea’s complaint and the Superior Court affirmed. The Supreme Court of Pennsylvania reversed, finding that both insurers breached the duty of good faith and fair dealing.(15) The Dercoli court held that “[t]he duty of an insurance company to deal with the insured fairly and in good faith includes the duty of full and complete disclosure as to all of the benefits and every coverage that is provided by the applicable policy or policies along with all requirements, including any time limitations for making a claim.”(16)
Three years later in Petersen, the Supreme Court of Pennsylvania retreated from the duty it imposed on insurers in Dercoli. Petersen held that an insurers’ duty of good faith did not require a comprehensive explanation of benefits to the insured.
Deborah Petersen suffered injuries in an automobile accident. Petersen carried $20,000first-party auto insurance with USAA and health insurance with Blue Shield. The BlueShield policy excluded coverage for temporo mandibular joint syndrome (TMJ) from which Petersen suffered after the accident. Petersen exhausted her $20,000 auto policy benefits and applied for benefits under the Blue Shield policy. Blue Shield denied Petersen’s request pursuant to a TMJ exclusion.
Petersen sued both USAA and Blue Shield for bad faith. Petersen alleged that both insurers owed her a duty to explain their respective policies to her. Peterson asserted that this duty included an explanation to her of how the policies interacted with each other and how that interaction affected the availability of benefits to her. The trial court granted the insurers’ demurrers to Petersen’s complaint. The appellate court sustained the demurrers. The Supreme Court of Pennsylvania affirmed.(17)
Petersen argued that Dercoli imposed a duty upon insurers to thoroughly advise insured about policy terms, including coverage exclusions and interaction with other policies. The court rejected these arguments observing that:
“the duty [imposed on insurers] in Dercoli was premised upon three factors: (1) the insurer had assumed the responsibility for processing its insured’s claims; (2) the insurer knew that the insureds was relying exclusively on its advice and counsel; and,(3) the insurer had knowledge regarding an additional claim for benefits to which Mrs. Dercoli was entitled and it failed to disclose such information.”(18)
In 1994, the Supreme Court of Pennsylvania further limited Dercoli’s scope in Miller v.Keystone Ins. Co.(19) Miller held that an insured was not entitled, as a matter of right, to be advised about potential benefits available in the future.
John Miller died in a car accident. Keystone insured Miller and promptly paid funeral, collision, and survivor’s loss benefits to his mother and executor, Mary Miller. In August,1986, Mary Miller sued Keystone for post-mortem work loss benefits, although she had not requested these benefits before filing suit. The trial court granted summary judgment for Keystone. The Superior Court reversed.(20) The Supreme Court of Pennsylvania reversed the appellate court and ordered the trial court’s summary judgment for Keystone reinstated.(21)
Miller argued that Keystone had a duty to advise her that her son’s estate might be entitled to post-mortem work loss benefits. She asserted that Keystone’s failure to advise hereabout these benefits breached Keystone’s duty of good faith and fair dealing as defined in Dercoli.(22) The Supreme Court of Pennsylvania disagreed, holding that “[the] Superior Court was incorrect in holding that Dercoli imposes an affirmative duty upon an insurer to advise and inform an insured of all potential claims when the insurer assumes responsibility for processing the claim.”(23) The Miller court distinguished Dercoli, stating”[c]learly, the insurer’s knowing and purposeful misrepresentation was critical to this Court’s determination [in Dercoli] that the insurers were bound to disclose all of the benefits to which the claimant was entitled.”(24)
In Weber v. State Farm Mut. Auto. Ins. Co.,(25) the district court held that an insurer’s duty to disclose available coverage to an insured is not extinguished simply because the insured has retained counsel.(26)
On November 28, 1988, Richard Weber, his wife, Mary Weber, and their three minor children were involved an auto accident in which Richard, Mary, and one of their children were killed. The children’s grandmother, Edith Kelly, was appointed guardian and conservator of the two surviving children.
State Farm assigned claims representative Steve Logan to handle the Weber file. Logan spoke with claimant’s attorney Robert Todd on December 7, 1988 about available coverage for medical and funeral expenses and collision damage. Although Logan knew that the estates and surviving children were potentially entitled to UM benefits, he did not discuss UM benefits with Todd. At a meeting with Todd on January 6, 1989, Logan again failed to disclose the existence of UM coverage to Todd. Prior to that meeting, Logan’s supervisor advised Logan that he did not have to “explain the law to attorneys.”(27)
In April, 1989, Edith Kelly hired attorney Daniel Cahill to “find money in the form of insurance benefits for the two Weber children.”(28) Cahill then requested a copy of the Weber policy from Logan. Logan wrote to Cahill enclosing an identical sample, but not the actual policy. Logan’s supervisor then reviewed Logan’s letter and advised Logan to send another letter to Cahill disclosing “all coverage under the policy.”(29) Logan sent the recommended letter to both Cahill and Todd on May 5, 1989. Logan then sent another letter, this time to Cahill only, advising that UM coverage applied. Cahill then sued State Farm for UM benefits. That suit settled for $185,000. The Webers then sued State Farm for first-party bad faith.
State Farm moved for summary judgment, arguing that an insurer has no duty to disclose policy benefits to an adversary insured. The Webers also moved for summary judgment. The district court denied State Farm’s motion and granted the Webers’.(30)
The court dismissed State Farm’s contention that it owed no duty to the Webers to disclosethe UM coverage because they assumed an adversarial posture. The court held that”nothing in the record indicates either Todd or Cahill threatened to sue State Farm prior to May, 1989. There is no evidence that an adversarial relationship existed between the insured or the insureds’ attorneys and State Farm until the plaintiffs filed the suit against Richard Weber’s estate on May 19, 1989.”(31)
The court noted that “the defendant was under a duty to exercise reasonable care to disclose the uninsured motorist coverage provisions of the policy.”(32) The court rejected State Farm’s argument that it had no duty to advise its insured about potential UM benefits because the insured retained counsel. The court stated that “the retention of counsel by plaintiffs did not extinguish the defendant’s duty to disclose that [UM] coverage.”(33)
In MFA Mut. Ins. Co. v. Flint,(34) the Supreme Court of Tennessee ruled that an insurer is obligated to advise an insured of available UM benefits about which that the insurer knows the insured is unaware. (35)
In MFA, the insureds suffered injuries in an auto accident with an uninsured driver. The adverse driver was completely at fault. An MFA adjuster visited the insureds and explained that medical bills and lost wages would be paid but did not advise them about UM coverage. MFA then paid the insureds and obtained releases. After learning of UM benefits, the insureds sued MFA for first-party bad faith and to have the releases set aside based upon MFA’s withholding of UM benefits. The trial court set aside the releases and found that MFA acted in bad faith. The appellate court affirmed. The Supreme Court of Tennessee affirmed.(36)
MFA maintained that its relationship with its UM insureds was strictly contractual and did not require it to inform the insureds about UM coverage. The MFA court rejected this argument, stating that “it does not necessarily follow that the insurer owes no duty that isnot specifically spelled out in the contract drawn by the insurer.”(37) The court further commented that “an insurer is under the duty of dealing with its insured fairly and in good faith in settling a claim by its insured under the uninsured motorist provision of an automobile liability insurance contract.”(38)
The MFA court focused on three factors. First, there was never a question that the uninsured motorist was fully at fault for the accident. Second, MFA knew that its insured were entitled to UM benefits. Third, MFA’s adjuster knew the insureds were unaware of their entitlement to such benefits. Based upon these particular circumstances, the court upheld the lower court’s finding of bad faith.
In Wedzeb Enterprises, Inc. v. Aetna Life & Cas. Co.,(39) the court ruled that an insurer has no good faith duty to determine that an insured is aware of all policy terms and conditions which may provide coverage before submitting a release to the insured.
Wedzeb distributed heating and air conditioning parts. Wedzeb stored the parts in a warehouse insured by Aetna. A fire destroyed the warehouse and the stored parts. During the fire, the parts released toxic polychlorinated biphenyls into the surrounding environment, which required cleanup and removal. Wedzeb subsequently filed a claim in federal court for benefits from Aetna.
Aetna and Wedzeb disagreed about whether the policy covered the cleanup cost. Wedzeb then sued Aetna to determine if the policy covered the cleanup. While that case proceeded, the Indiana Environmental Management Board (EMB) sued Wedzeb in state court seeking an injunction and civil penalties pursuant to the cleanup and removal of the toxic waste. This suit was resolved by consent decree requiring Wedzeb to pay for cleanup and debris disposal.
The federal court subsequently entered judgment for Wedzeb in its suit against Aetna, holding that the policy covered the cost of cleanup and disposal.(40) Aetna then paid Wedzeb $474,326 on the claim and obtained a release from Wedzeb forever discharging Aetna from liability related to the fire cleanup and toxic debris removal.
No debris was cleaned up or removed for over two years. The EMB sued Wedzeb again. Wedzeb filed a declaratory judgment action against Aetna requesting that Aetna pay the cleanup costs. The court granted summary judgment for Aetna. Wedzeb appealed.(41) The Indiana Court of Appeals affirmed judgment for Aetna.(42)
Wedzeb argued that Aetna acted in bad faith because it did not inform Wedzeb of “potential coverage rights” under the policy.(43) The court held that Aetna did not owe Wedzeb a duty to advise it about all potential coverage under the policy because Wedzeb was represented by counsel and was engaged in litigation against Aetna.(44)
Wedzeb cited MFA Mut. Ins. Co. v. Flint(45) to support its contention that Aetna’s duty of good faith included a duty to advise it of policy coverages. The court distinguished Flint on the basis that 1) the insured in that case was unrepresented; 2) the insurer knew the extent of the insured’s injuries; and 3) the insurer knew the insured’s injuries were covered under the policy.
In Schoonover v. Am. Family Ins. Co.,(46) the court held that an insurer’s duty of good faith did not require that the insurer furnish an insured with a copy of the policy without a request for the policy. Schoonover does not squarely address whether an insurer’s duty of good faith and fair dealing requires an insurer to advise an insured of a policy’s contents. However, in finding that the insurer had no duty to spontaneously furnish an insured a copy of the policy, Schoonover supports the proposition that insurers are not obligated to advise insureds of available policy benefits.
John Schoonover purchased a homeowner’s policy from American Family, effective November 16, 1987. Fire destroyed the insured house on November 20, 1987. However, Schoonover did not file his claim until March 10, 1988. American Family denied the claim on May 9, 1988. Schoonover then sued American Family to recover the value of the lost house and his attorney’s fees.
American Family moved for summary judgment on grounds that Schoonover did not file suit within the policy’s one-year suit limitation period. The trial court denied the motion, accepting Schoonover’s argument that he was not bound by the suit limitation clause because he did not have a copy of the policy. American Family appealed. The Illinois Appellate Court reversed and remanded the case for entry of summary judgment for American Family.(47)
The Schoonover court found that the insurer was not obligated to provide the insured a copy of the policy unless asked to do so. The court noted “[i]t is clear that actual or manual delivery of a policy is not essential to the completion of an insurance contract, unless the contract expressly indicates delivery is a requirement as a condition of the consummation of the contract.”(48) Relying on the presumption that the insured is charged with knowledge of the policy terms, the court observed that “[t]he insured cannot blame the insurance company for his failure to read the policy to discover the requirements for bringing suit. It is not the duty of the insurer to inform the insured of his duties.”(49) The court cited an extension of the time for filing the claim which the insurer had granted to the insured as evidence the insured knew that the policy existed and that he should obtain a copy if he did not have one. The court also considered Schoonover’s legal representation, commenting that “numerous courts have determined that representation by an attorney precludes an insured from alleging that he was misled by the terms of a policy or was ignorant of certain provisions in the policy.”(50)
There is no consensus that an insured’s retention of counsel extinguishes an insurer’s good faith duties to inform insureds of coverage. Some courts hold that an insured who hires an attorney and immediately assumes an adversarial posture is not owed the same duty of good faith as a non-adversary insured.(51) However, some cases hold that insurers owe the same duty to represented and unrepresented insureds where no suit is threatened.(52)
In Dercoli v. Pennsylvania Nat’l Mut. Ins. Co.,(53) the court held that the insurer’s representations to the insured that she did not need to hire independent counsel to protect her interests supported a finding of bad faith. Later, in Miller v. Keystone Ins. Co.,(54) the court found an insurer’s misrepresentations about the need to hire counsel “critical to this Court’s determination that the insurers were bound to disclose all of the benefits to which the claimant was entitled.”(55) This suggests that insurers who make such representations may find a concomitant good faith duty to advise their insured of all available coverage.
Courts take a dim view of failing to disclose known policy benefits to an insured unless an uninsured has filed suit or is engaged in adversarial tactics.(56)
Courts have demonstrated distaste for insurers that fail to fully advise an insured where the insurer knows the insured is relying upon its employees or agents for advice. As the Miller court reiterated, this conduct will lead to a finding of bad faith.
Whether an insurer will be found to have a duty to advise its insured about the scope of available coverage depends upon several factors. Some courts impose this duty when the insurer undertakes to advise or otherwise control information available to the insured, even when the insured is represented by counsel. Other courts limit this duty, even when the insureds is not represented by counsel. Recent cases suggest a trend toward imposing this duty.