Salopek, Tr. for Salopek Family Heritage Tr. v. Zurich Am. Life Ins. Co., 446 F. Supp. 3d 886 (D.N.M. 2020)
(Pre-Policy Behavior Is Not a Basis For a Bad Faith Claim)
(February 2021) - In Salopek, the U.S. District Court for the District of New Mexico addressed the issue of whether an insurer has a duty to conduct a certain type of investigation before accepting the risk of insuring a particular insured.
The Salopek case arose out of a dispute between plaintiff Marcie Salopek, widow of Mark Salopek (“Mr. Salopek”) and Trustee for The Salopek Family Heritage Trust (“plaintiff”), and defendant Zurich American Life Insurance Company (“Zurich”). The plaintiff alleged that Zurich improperly rescinded a life insurance policy it issued to Mr. Salopek. Zurich alleged that because of Mr. Salopek's material misrepresentations about his alcohol and tobacco use in his application for life insurance, Zurich properly rescinded the policy within the statutory two-year contestability period. The plaintiff countered that Zurich knew or had reason to know at the time Mr. Salopek applied with Zurich that Mr. Salopek's representations were inaccurate and therefore, when Zurich rescinded the life insurance policy, Zurich breached the contract and did so in bad faith.
During the application process, Zurich asked Mr. Salopek to fill out a questionnaire regarding his alcohol and tobacco use, as well as his prior medical history, as a condition for him to receive coverage. On the questionnaire, Mr. Salopek indicated that usually he drank between one and two beers daily and that while in the past he had used chewing tobacco on hunting trips, he had not used it since 2009. He also checked “no” in response to a question asking whether he had been treated for cancer, tumor, or disorder of the skin. Mr. Salopek signed a release permitting Zurich to obtain all of his insurance and medical information. Zurich gathered medical information during the underwriting process, but it did not require Mr. Salopek to undergo a new medical examination or blood testing. Instead, it relied on a prior medical examination conducted for Mr. Salopek's application to another insurer for life insurance. That other insurer denied Mr. Salopek’s application based on Mr. Salopek’s medical records. Evidence was presented that Zurich’s underwriting file included a medical record stating that Mr. Salopek used excessive amounts of alcohol intermittently.
In December of 2015, Zurich issued a life insurance policy to Mr. Salopek. In January of 2016, Mr. Salopek went to a hospital complaining of severe stomach pains. He underwent exploratory surgery, which resulted in a diagnosis of metastatic colon cancer. He died in August of 2016, and the family submitted a claim for life insurance benefits under the Zurich policy. Following Mr. Salopek’s death, Zurich’s claims investigator interviewed Mr. Salopek’s wife and other family members. During the interviews, the family indicated that Mr. Salopek did not discontinue chewing tobacco in 2009, that he drank significantly more than he represented in his application to Zurich, and that in 2013, as confirmed by his wife, Mr. Salopek underwent surgery for skin cancer. Zurich denied the family’s claim based on inconsistencies in Mr. Salopek’s application regarding his previous alcohol and tobacco use as well as his failure to disclose pre-policy skin cancer treatment. In response, the plaintiff sued Zurich for breach of contract and bad faith.
Zurich moved for summary judgment on the plaintiff's bad faith claim, arguing that the plaintiff had not provided any evidence that it was unreasonable for Zurich to deny the claim or that its investigation of the claim was conducted in bad faith. In the complaint, the plaintiff’s allegations that Zurich acted in bad faith fell into three categories: (1) allegations regarding pre-policy events; (2) allegations that Zurich’s denial of the plaintiff's claim was unfounded; and (3) allegations that Zurich investigated the claim in bad faith. With respect to pre-policy events, the court held that pre-policy behavior was not a basis for a bad faith claim. The court further explained:
A plaintiff may establish bad faith in two ways: 1) by showing that an insurer did not deal fairly with an insured in assessing a policy claim; and/or 2) by showing that an insured did not act in good faith in the performance of the contract. See Salas v. Mt. States Mut. Cas. Co., 2009-NMSC-005, 145 N.M. 542, 202 P.3d 801, 805 (N.M. 2009); Am. Nat'l Prop. & Cas. Co. v. Cleveland, 2013-NMCA-013, 293 P.3d 954, 958 (N.M. Ct. App. 2012). Plaintiff's claim that [Zurich] acted in bad faith when it failed to conduct "a proper, independent investigation before accepting the risk of coverage but waiting to do such an investigation until after Mr. Salopek's death" does not fall into either category . . .
With this argument, Plaintiff posits that [Zurich] had a duty to conduct a certain type of investigation before accepting the risk of insuring Mr. Salopek. The Court has already ruled that [Zurich] did not have a duty to do an expansive investigation before accepting Mr. Salopek's Application. In the absence of that duty, the failure to do so cannot be evidence of bad faith . . . .
Id. at 33-35.
The court cautioned that while an insured does not owe an underwriting duty of care to a potential insured and is not required to obtain any specific information, “when an applicant gives sufficient information to alert an insurance company to his particular medical condition or history, the [insurer] is bound to make such further inquiry as is reasonable under the circumstances in order to ascertain the facts surrounding the information given” (Id., citing Ellingwood v. N.N. Investors Life Ins. Co., 1991-NMSC-006, 111 N.M. 301, 805 P.2d 70, 77).