In California, “[t]he key to a bad faith claim is whether or not the insurer’s denial of coverage was reasonable,” which ordinarily is question of fact for the jury.  Guebara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir. 2001).  However, if it is undisputed or indisputable that the basis for a disability insurer’s claim denial was reasonable, then a court may dismiss a bad faith claim as a matter of law.  See Lunsford v. Am. Guar. & Liab. Ins. Co., 18 F.3d 653, 656 (9th Cir. 1994) (“a court may conclude as a matter of law that an insurer’s denial of a claim is not unreasonable, so long as there existed a genuine issue as to the insurer’s liability”).  Many disability insurance companies thus attempt to escape bad faith liability by showing a genuine issue exists as to their liability for denying disability benefits.  This defense strategy is often employed in disability insurance bad faith cases that involve interpretations of ambiguous language in disability insurance policies.

For example, in Buck v. Unum Life Ins. Co. of America, a California district court dismissed a disability insurance bad faith claim against Unum after concluding as a matter of law that Unum’s basis for denying a dentist’s disability claim was not unreasonable.  The dispute in Buck arose after Unum ceased paying disability benefits to a disabled dentist, whose suffering of bilateral post traumatic carpal tunnel syndrome rendered him incapable of practicing dentistry.  Unum terminated disability benefits because the dentist did not comply with its demands to undergo “carpal tunnel release” surgery, which Unum claimed would enable him to practice dentistry again and for which Unum claimed he was an excellent candidate.

After Unum terminated his disability benefits, the disabled dentist sued claiming breach of contract and disability insurance bad faith.  Unum argued that termination was justified because, in its view, the contractual provisions conditioned the dentist’s eligibility for benefits on his undergoing of available surgery.  Unum further argued that even if Unum had incorrectly terminated disability benefits by misinterpreting the contract, the claim of bad faith should be dismissed as a matter of law “because there exists a genuine dispute as to coverage under both policies.”

After deciphering contractual ambiguities in favor of the disabled dentist, the California court determined that Unum was not justified in terminating disability benefits under the contractual provisions upon which it relied.  However, the court dismissed the disabled dentist’s claim of disability insurance bad faith. It reasoned that a genuine issue as to Unum’s bad faith liability existed because (1) “at the time of the termination of benefits, there existed no California state court decision interpreting such policy language or similar language”; therefore, it could not be unreasonable for Unum to interpret the provisions differently than what the court held; and (2) Unum relied on three different consulting physicians who each opined that carpal tunnel release surgery would be effective.

This California case incentivizes disability insurers to include ambiguous language in disability insurance policies.  Although courts generally resolve ambiguities in favor of insureds, they may form a basis for a disability insurance company to escape bad faith liability, as Buck demonstrates.  For this reason, it is important to consult with a disability insurance lawyer who is familiar with the laws of your state to help you understand your rights under the policy.  An experienced disability insurance lawyer can ensure your disability claim is handled appropriately and will hold a disability insurer accountable for any bad faith conduct.