When insurance companies use ambiguous terms in their insurance policies, they often escape liability for bad faith by arguing the proper interpretation of the term is “fairly debatable,” so it cannot be liable for bad faith. The 6th Circuit Court of Appeal, applying Kentucky law, recently disagreed with that argument.

Ambiguous ≠ Fairly Debatable

In Pedicini v. Life Insurance Company of Alabama,1 the parties disputed the meaning of the term “actual charges” in the context of a cancer-insurance policy. The policyholder argued that “actual charges” referred to the amount billed by a medical provider, while the insurer, Life Insurance Company of Alabama (“LICOA”), argued that it refers to the amount actually accepted by a medical provider as full payment.

The policyholder sued LICOA for breach of contract and bad faith for benefits due under his policy according to the policyholder’s interpretation of “actual charges.” The lower court granted summary judgment in the policyholder’s favor on the breach-of-contract claim because the court determined the term “actual charges” was ambiguous.

The lower court incorrectly granted summary judgment for LICOA on the bad-faith claims, finding that because the term was ambiguous, the interpretation of the term was fairly debatable—and insurers cannot be liable for bad faith where the claim is “fairly debatable.”

The 6th Circuit overturned summary judgment with regard to the bad faith claim. The Court specifically noted even though Kentucky had not addressed the issue, “the Fourth and Fifth Circuits, the only circuits to address the issue squarely, have held that the term ‘actual charges’ is ambiguous.” The insurer was already aware that an ambiguous term “must be construed in favor of [policyholder] as a matter of Kentucky law.”

Given these facts, the 6th Circuit concluded,

An objective assessment of the legal landscape evidences that LICOA lacked a reasonable basis in law for disputing [policyholder’s] claim to benefits according to his interpretation of “actual charges.” . . . The term “actual charges” is “patently ambiguous,” Ward, 257 Fed.Appx. at 625–27;
. . .
In light of these facts, LICOA should have realized that . . . under Kentucky law, LICOA would lack a reasonable basis for denying those policyholders relief. LICOA points to no legal authority contemporaneous with its February 2001 policy change suggesting otherwise. The opinions that LICOA cites as “recognized authorities” in support of its position all post-date February 2001 and thus could not have informed LICOA’s determination of the reasonableness of its action at that time. . . As a result, it is difficult to see how LICOA can maintain that the proper resolution of its dispute with [policyholder] is ‘fairly debatable as a matter of law.’2

Because it was improper for the insurer to interpret the ambiguous term in its favor, rather than in favor of the policyholder, “a reasonable jury could conclude that the third element of the bad-faith test is satisfied: that LICOA acted knowingly or in reckless disregard of the lack of legal basis for its interpretation.”

This decision is good news for policyholders around the country; almost every state has case law holding that ambiguous policy terms must be construed in favor of the policyholder as a matter of law. In states that have not addressed this issue directly, policyholders’ lawyers may use this case to persuade judges that ambiguous terms in policies does not make the interpretation “fairly debatable” or shield insurers from bad faith liability.

1 Pedicini v. Life Ins. Co. of Alabama, 682 F.3d 522, 524 (6th Cir. 2012), reh’g denied (July 11, 2012).
2 Id. at 528-29. (Emphasis added).