Summary: Dr. Jonathan Cohan purchased a disability insurance policy from Provident Life and Accident Insurance Company, which was a subsidiary of Unum Group (Unum). The policy was to provide Cohan with replacement income and measured the amount of benefits by the income received from his occupation at the time of disability. When he became disabled in 2011, Cohan made a claim on his policy. Unum initially paid benefits to Cohan, but later terminated his benefits and demanded repayment because Cohan obtained income from sources other than his occupation. Cohan sued Unum for breach of contract and bad faith. Unum moved for summary judgment, which was granted by the United States District Court of Nevada.
When Cohan made his initial claim on the policy, he identified his job title as “Medical Doctor,” characterized the nature of his business as “Pulmonary,” and reported his annual income as $211,850.00. He attached a 2010 Form 1099 identifying “Pulmonary Associates, Inc.” as the payer, himself as the recipient, and $211,850.00 of non-employee compensation. Unum’s subsequent investigation into Cohan’s claim revealed various discrepancies between tax forms filed for multiple non-medical business ventures in which he was involved . Ultimately, Unum requested a conference with Cohan’s accountant because, as a report by Unum noted, “based on incomplete documentation, income related to healthcare from these entities has not been included in earned income as it is unclear how much, if any, would flow through to the insured’s 2010 1040 tax return.”
After its investigation, Unum determined Cohan was not entitled to benefits under the disability policy because he had not lost any income from his occupation. Rather, the income lost stemmed from sources that could not be considered his occupation. Following the denial, Cohan sued for bad faith. The district court granted Unum’s motion for summary judgment on the claim.
The court first noted a claim for bad faith “must fail if a genuine dispute exists whether an insured is covered under a policy.” This does not require the court to determine whether coverage actually existed, but only whether a “reasonable and legitimate dispute exists as to that coverage.”
Cohan was unable to avoid summary judgment primarily due to his own fault. During Unum’s investigation, Cohan submitted incomplete and often contradicting tax records in an effort to prove the amount of income he received from his occupation. Even Cohan’s oral explanations of the documents were no help because they, too, contradicted the documents. Regardless of the confusion caused by Cohan, Unum nonetheless continued its investigation and even arranged for an hour-long phone conference with Cohan’s accountant to resolve the discrepancies. Given the inconsistent documents provided by Cohan and the efforts by Unum, Unum was able to show a genuine dispute whether Cohan lost any income from his occupation.
Cohan’s next basis for asserting a bad faith claim was that Unum failed to follow its own procedures. The court did not address the merits of this claim because the documents it relied on were stricken for failure to lay a proper foundation and as hearsay.
Finally, Cohan pointed to Unum’s performance-based incentive program as evidence of bad faith. However, Cohan failed to present evidence that the bonus structure had any relationship to how Unum’s employees handled his claim. Unum was therefore entitled to summary judgment on the bad faith claim.
This case illustrates how reasonable coverage decisions and thorough investigations can protect insurers from future bad faith claims. Many jurisdictions recognize the “fairly debatable” defense which is akin to Nevada’s “reasonable and legitimate dispute” defense. When coverage decisions are “fairly debatable” (i.e., there is unsettled law and/or reasonable support for either denying or covering a claim), then the defense may be asserted in those jurisdictions which recognize the defense to defeat bad faith actions.