(Colorado Supreme Court Limits Availability of Independent Medical Examination in UM/UIM Bad Faith Litigation)
(April 2019) - The Colorado Supreme Court's November 5, 2018 decision in Schultz v. GEICO Cas. Co., 429 P.3d 844 (Colo. 2018) may have far-reaching impacts for UM/UIM claims handling and bad faith litigation. The Court held that in bad faith litigation, an insurance company's "conduct must be evaluated based on the evidence before it when it made its coverage decision" and that the insurance company "is not entitled to create new evidence in order to try to support its earlier coverage decision." The Court concluded it was an abuse of discretion for the trial court to order an independent medical examination ("IME") of the plaintiff in a UM/UIM bad faith case because an IME was not requested by the insurance company during its investigation of the UM/UIM claim.
In Schultz, the plaintiff was injured in a motor vehicle accident. The plaintiff claimed her injuries required knee replacement surgeries. After settling the liability claim with the underlying tortfeasor for policy limits, the plaintiff made a claim for UM/UIM benefits.
In connection with the UM/UIM claim, the plaintiff provided medical authorizations to allow the insurance company to obtain the medical records. The insurance company offered to pay its full UM/UIM policy limit without requesting the plaintiff undergo an IME.
Despite paying its UM/UIM policy limits, the plaintiff filed a bad faith suit against her insurance carrier alleging an unreasonable delay in the payment of covered benefits. The plaintiff alleged it took the insurance company over a year to make its decision to pay the UM/UIM policy limits. The insurance company denied bad faith liability, taking the position that medical causation was "fairly debatable" at the time it made its coverage decision, in part based on preexisting arthritis.
During the bad faith litigation, the insurance company sought a court order requiring the plaintiff to undergo an IME. The insurance company argued that its decision to pay the UM/UIM claim was made without resolving the issue of medical causation. The insurance company argued that medical causation was "a live issue" because "[y]ou can't delay a benefit that was never owed." The trial court ultimately ordered the plaintiff to undergo an IME.
On a direct appeal to the Colorado Supreme Court, the trial court's decision was reversed. The Court held there is "no basis on which to conclude, that newly developed medical evidence would be pertinent to the question of what [the insurance company] knew when it made its coverage decision..." The Court reasoned that "a bad faith claim requires an assessment of whether the insurer's coverage decision was unreasonable when it occurred, not whether later developments could have vindicated the Insurer's decision." Consequently, the insurance company "is not entitled to create new evidence in order to try to support its earlier coverage decision."
The Supreme Court distinguished Peiffer v. State Farm Mut. Auto. Ins. Co., 940 P.2d 967 (Colo. App. 1996). In Peiffer, the insurance company sought to introduce testimony from an expert witness who had evaluated the medical records that the insurer had obtained and reviewed before it made its coverage decision. Thus, the Supreme Court noted that the insurance company in Peiffer was not seeking to create new evidence to justify its prior decision. Rather, the expert opinion in Peiffer was intended to evaluate the evidence considered by the insurance company at the time it made a coverage decision.
The lesson of Schultz is that if medical causation is questionable, the insurance company should seek an IME and all relevant medical records as part of its claim investigation. Failure to request an IME during the claim investigation is likely to result in an inability to obtain an IME in a subsequently filed bad faith law suit. More broadly, the Schultz decision arguably limits the universe of relevant evidence in first-party insurance coverage litigation to that which was requested or considered by the insurance company before a coverage determination was made. This puts the onus on the insurance company to ensure that its claim investigation is complete before making a coverage decision.
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