Present: All the Justices
NATIONWIDE MUTUAL INSURANCE COMPANY
v. Record No. 990161 OPINION BY JUSTICE ELIZABETH B. LACY
January 14, 2000
JOEL ST. JOHN
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Theodore J. Markow, Judge
In this appeal we consider whether the trial court
properly determined that an insurance company did not act in
good faith under Code § 8.01-66.1(A).
I.
Joel St. John, a twelve-year-old boy, had his nose, knee,
neck, and back injured in an automobile accident on May 17,
1994. His mother scheduled an appointment with his family
physician and with a chiropractor who had treated Joel's
father. On May 24, 1994, Joel was treated by his family
physician for his knee and nose injuries. The next day Joel
was examined by Dr. David M. deBarros, the chiropractor. Dr.
deBarros' examination disclosed objective findings of
fixations of the spine, positive findings of a shoulder
depression indicating either a muscle tear or nerve
compression or stretching, a positive Schepelmann's test which
showed pain while flexing the head to the right, and a
vertebra that had moved out of position, called a T-12
subluxation. According to Dr. deBarros, all these injuries
were caused by the automobile accident.
Initially Joel was treated for these conditions three
times a week, and then twice a week for four weeks. Following
reevaluation on August 8, 1994, his treatments were reduced to
once a week. Joel was periodically reevaluated and his
treatment continued at a frequency consistent with his
condition at the time of reevaluation. Joel was dismissed
from Dr. deBarros' care on April 5, 1995.
Joel was an insured under an automobile liability
insurance policy issued to his father by Nationwide Mutual
Insurance Company (Nationwide). A medical expense claim of
$1,960 for Joel's treatment was submitted to Nationwide.
Nationwide referred the claim to Dr. James W. Walker, a
chiropractor, for review and evaluation of Joel's medical
records. Based on Dr. Walker's review, Nationwide paid
$378.50 for medical expenses incurred prior to June 15, 1994,
and disallowed all expenses incurred after that date.
Joel, by his mother as next friend, filed suit against
Nationwide in the General District Court of the City of
Richmond seeking recovery of the medical costs for the ten
months of chiropractic care disallowed by Nationwide.
Nationwide removed the case to the Circuit Court of the City
of Richmond. The jury returned a verdict in favor of Joel for
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$1,581.50, approximately the amount of the unpaid balance of
the chiropractic medical bills. Citing Code § 8.01-66.1(A),
Joel asked the trial court to double the amount of the damages
and award attorneys' fees because Nationwide acted in bad
faith when it refused to pay for chiropractic care incurred
after June 15, 1994. * The trial court determined that
Nationwide's refusal was not made in good faith and entered
judgment against Nationwide for $3,162.00 in damages plus
attorneys' fees of $1,500. Nationwide filed an appeal
asserting that the trial court erred in holding that
Nationwide did not act in good faith under § 8.01-66.1(A).
*
Code § 8.01-66.1(A) provides:
Whenever any insurance company licensed in
this Commonwealth to write insurance as defined in
§ 38.2-124 denies, refuses or fails to pay to its
insured a claim of $2,500 or less in excess of the
deductible, if any, under the provisions of a
policy of motor vehicle insurance issued by such
company to the insured and it is subsequently
found by the judge of a court of proper
jurisdiction that such denial, refusal or failure
to pay was not made in good faith, the company
shall be liable to the insured in an amount double
the amount otherwise due and payable under the
provisions of the insured's policy of motor
vehicle insurance, together with reasonable
attorney's fees and expenses.
The provisions of this subsection shall be
construed to include an insurance company's
refusal or failure to pay medical expenses to
persons covered under the terms of any medical
payments coverage extended under a policy of motor
vehicle insurance, when the amount of the claim
therefor is $2,500 or less and the refusal was not
made in good faith.
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II.
We begin by addressing the legal principles relevant to
our review of the trial court's judgment in this case. First,
although we have not previously considered the principles to
be applied by a trial judge when considering whether an
insurer acted in bad faith within the meaning of § 8.01-
66.1(A), we have addressed that issue in the context of
§ 38.2-209. That section allows an insured to recover costs
and reasonable attorneys' fees in a declaratory judgment
action brought by the insured against the insurer, if the
trial court determines that the insurer was not acting in good
faith when it denied coverage or refused payment under the
policy. In CUNA Mutual Insurance Co. v. Norman, 237 Va. 33,
38, 375 S.E.2d 724, 726-27 (1989), we observed that § 38.2-209
was intended to be both remedial and punitive and concluded
that a standard of reasonableness should be applied in
evaluating the conduct of the insurer. See also Scottsdale
Ins. Co. v. Glick, 240 Va. 283, 397 S.E.2d 105 (1990). The
parties suggest that this standard should be applied in this
case. We agree.
Section 8.01-66.1(A), like § 38.2-209, is a remedial
statute. It is limited to claims of $2,500 or less. Without
the statutory authorization for recovery of multiplied
damages, together with attorneys' fees and expenses, the
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expense of litigation to recover such claims would preclude
that course of action in many cases. Section 8.01-66.1(A)
operates as a punitive statute in the same manner as § 38.2-
209 because both punish an insurer whose bad faith dealings
force an insured to incur the expense of litigation.
Considering the similar purposes of the two statutes, we
conclude that the standard of reasonableness enunciated in
CUNA should be utilized when applying § 8.01-66.1(A).
The standard of reasonableness requires the consideration
of the following issues when determining whether an insurer
acted in bad faith under § 8.01-66.1(A):
whether reasonable minds could differ in the
interpretation of policy provisions defining
coverage and exclusions; whether the insurer had
made a reasonable investigation of the facts and
circumstances underlying the insured's claim;
whether the evidence discovered reasonably supports
a denial of liability; whether it appears that the
insurer's refusal to pay was used merely as a tool
in settlement negotiations; and whether the defense
the insurer asserts at trial raises an issue of
first impression or a reasonably debatable question
of law or fact.
CUNA, 237 Va. at 38, 375 S.E.2d at 727.
Next, while the parties agreed on the reasonableness
standard, they disagreed on the quantum of proof required to
prevail under this standard. Nationwide asserts that State
Farm Mutual Automobile Insurance v. Floyd, 235 Va. 136, 366
S.E.2d 93 (1988), imposes a clear and convincing evidentiary
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standard on the insured in this case. We disagree with
Nationwide.
Nothing in Floyd suggests that the principles established
in that case are appropriate for application in this case. In
Floyd, an insured was required to show by clear and convincing
evidence that its insurer acted in bad faith when it failed to
settle a previous tort action resulting in a judgment in
excess of the policy limits against the insured. Id. at 144,
366 S.E.2d at 98. However, the action in Floyd was a common
law breach of contract action, not a claim under a remedial
statute allowing recovery of additional damages for refusal to
pay claims based on the bad faith of the insurer.
Furthermore, to recover in the breach of contract action, the
insured had to show that the insurer "acted in furtherance of
its own interest, with intentional disregard of the financial
interest of the insured." Id. at 144, 366 S.E.2d at 97. Such
a showing is significantly different than the reasonableness
analysis to be applied to determinations of bad faith in this
case.
The higher evidentiary standard of clear and convincing
evidence applied in Floyd is inconsistent with the remedial
purpose of § 8.01-66.1(A) and, absent legislative directive
otherwise, an insured's evidentiary burden under this remedial
statute is the preponderance of the evidence standard.
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A third principle relevant to our review is that the
facts are reviewed in the light most favorable to the party
prevailing below. The trial court's judgment will be upheld
unless it appears from the evidence that the judgment is
plainly wrong or without evidence to support it. § 8.01-680;
RF&P Corporation v. Little, 247 Va. 309, 319, 440 S.E.2d 908,
915 (1994). We now apply these principles to the issue in
this case.
III.
Nationwide asserts that its decision to deny payment of
Joel's medical expenses incurred after June 15, 1994 was
reasonable. Nationwide contends that it conducted a
reasonable investigation by engaging Dr. Walker to review the
medical records connected with Joel's claim and that it was
reasonably debatable whether Joel suffered any back or neck
injury as a result of the accident.
Dr. Walker, after reviewing Joel's medical records
concluded that "it was difficult to draw any direct causal
relationship between the vehicle accident and the diagnosis
[of subluxation of T-12 alone]," that other objective findings
were made by Dr. deBarros indicating a "sprain/strain" and
that "since the doctor didn't keep very good records . . . it
was legitimate to consider chiropractic care through June 15th
of '94, but not care beyond that time." Even though Dr.
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Walker expressed some hesitation at this point concerning the
relationship between the accident and the T-12 subluxation
diagnosed by Dr. deBarros, Dr. Walker did not question Dr.
deBarros' diagnosis that Joel had been injured and recommended
payment for treatment Joel had received for those injuries.
Dr. Walker's recommended limitation on the length of time
for which payment should be made does not alter his conclusion
that the payment by Nationwide for some treatment was
appropriate. Nationwide paid for at least a portion of the
medical treatment bills, thereby acknowledging that Joel was
injured in the accident. Therefore, Nationwide's own actions
contradict its assertion that whether Joel's injuries were
caused by the May 14, 1994 accident was fairly debatable.
Nationwide also argues that even if Joel was injured in
the May 14, 1994 accident, his injuries were so minor that
treatment after three weeks was medically unnecessary.
However, Dr. Walker's recommended limitation on payment of
post-June 15, 1994 medical bills was not based on his opinion
that the treatment beyond June 15 was not medically necessary.
Instead, it was based on the fact that Dr. Walker couldn't
tell whether or not the treatment was required because Dr.
deBarros "didn't keep very good records."
The medical necessity of continued treatment was
addressed in the pre-trial depositions of Dr. Walker and Dr.
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deBarros which were admitted in evidence at trial. Dr. Walker
maintained his position that the lack of good record keeping
was the basis for his decision not to recommend payment for
treatment after June 15. Dr. deBarros testified to a
reasonable degree of medical certainty that Joel's injuries
were caused by the May 14, 1994 accident, and that all the
treatment administered to Joel for those injuries was
reasonably necessary. Dr. deBarros testified in detail
regarding the periodic evaluations of Joel's condition, the
conditions requiring treatment, and the necessity for that
treatment until Joel was discharged from Dr. deBarros' care.
This testimony was not contradicted by Dr. Walker.
Thus, prior to trial, Nationwide had no medical evidence
that the injuries were not caused by the May 14, 1994
accident, no medical opinion that the medical treatment
received by Joel after June 15, 1994 did not relate to
injuries received in the accident, and no medical opinion that
the post-June 15 treatment was not medically necessary and
reasonable. Nevertheless, Nationwide refused to pay the
remaining balance of Joel's medical bills and thus forced the
matter to proceed to a trial.
Based on this review, we conclude that there is support
in the record for the trial court's determination that
Nationwide acted in bad faith in refusing to pay Joel's claim
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for medical expenses incurred after June 15, 1994, and the
trial court's judgment was not clearly erroneous. We,
therefore, will affirm the judgment of the trial court.
Affirmed.
JUSTICE COMPTON, concurring in the result.
On May 17, 1994, the 12-year-old plaintiff was injured
while riding in a vehicle operated by his mother that collided
with another vehicle. In the collision, the plaintiff
sustained a blow to his nose and one knee. As a result of the
accident, he developed tenderness in his neck and back.
The plaintiff was entitled to medical payments coverage
under a policy of automobile liability insurance issued by
defendant Nationwide Mutual Insurance Company. The policy
contract provided that defendant would pay all reasonable and
necessary expenses for, among other things, medical and
chiropractic expenses resulting from the accident.
A week after the accident, the plaintiff was treated by
his "family doctor." The next day, the plaintiff was examined
by a chiropractor, who found the plaintiff had sustained
muscular and soft-tissue injuries to his neck and back in the
accident. The plaintiff was treated by the chiropractor until
he was released from treatment about 11 months following the
accident. The chiropractor was of the opinion, within a
reasonable degree of medical certainty, that his treatment and
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services rendered to the plaintiff were medically necessary as
a result of the injuries plaintiff sustained in the accident.
When the plaintiff's parents submitted a claim to
defendant for reimbursement of medical expenses under the
medical payments provision of the policy, defendant referred
the claim to another chiropractor to review the plaintiff's
medical records and to render an opinion on the medical
necessity of the plaintiff's treatment as it related to the
accident. Following this review, the chiropractor opined that
based on the medical records he "couldn't draw a direct causal
relationship between the accident" and the diagnosis made by
plaintiff's chiropractor of "T-12 subluxation." Preferring to
err on the side of the plaintiff, even though he felt the
medical records were unclear, the defendant's chiropractor
advised that the medical care rendered for only about one
month after the accident "could be considered" as related to
the accident.
The defendant's refusal to pay the full amount of medical
expenses claimed generated this lawsuit. In January 1998,
plaintiff, through his mother as next friend, filed this
action seeking recovery of $1,960, alleging breach of contract
and "breach of the defendant's duty to deal with the plaintiff
fairly and in good faith."
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In an October 1998 jury trial, the breach of contract
claim was litigated. At that time, defendant had paid $378.50
of the plaintiff's claim.
The sole issue presented to the jury was whether
defendant had breached its contract with plaintiff. More
specifically, the jury had to determine whether the treatment
and services rendered by the plaintiff's chiropractor were
medically necessary as a result of the injuries plaintiff
sustained in the accident.
The jury found in favor of the plaintiff and fixed the
contract damages at $1,581.50, the amount claimed reduced by
the sum defendant had paid.
Following discharge of the jury, the plaintiff moved the
trial court to "award double damages and reasonable attorney's
fees and cost," relying on Code § 8.01-66.1(A). Without
taking additional evidence and following oral argument, the
court granted the motion, finding "that defendant's denial of
payment was not in good faith." The defendant appeals that
portion of the October 1998 judgment order which found
defendant failed to act in good faith.
When an insurer under these circumstances "denies,
refuses or fails to pay its insured a claim of $2,500 or
less," Code § 8.01-66.1(A) authorizes the trial court, upon a
finding "that such denial, refusal or failure to pay was not
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made in good faith," to find the insurer liable for "double
the amount otherwise due and payable" under the policy's
provisions, "together with reasonable attorney's fees and
expenses."
In evaluating the performance of an insurer when there is
a claim that it acted in bad faith in withholding payment to
an insured, courts should apply a "reasonableness standard."
CUNA Mut. Ins. Co. v. Norman, 237 Va. 33, 38, 375 S.E.2d 724,
726-27 (1989).
In actions against insurers based upon breach of contract
for failure to use good faith, we have held "that bad faith
must be proved by clear and convincing evidence in cases of
this kind." State Farm Mut. Auto. Ins. Co. v. Floyd, 235 Va.
136, 144, 366 S.E.2d 93, 98 (1988). This is because the
concept of "'bad faith' runs counter to the presumption that
contracting parties have acted in good faith." Id.
Contrary to the plaintiff's contention, it makes no sense
in this insurance contract action alleging bad faith to adopt
a preponderance-of-the-evidence standard of proof. Bad faith
means the same in any insurance contract context, no matter
under what circumstances the lack of good faith is sought to
be proved.
Applying the foregoing principles, I would hold, however,
that the trial court did not err in finding bad faith in this
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case, given the record with which it was presented. The two
chiropractors testified by video deposition. The deposition
of the defendant's chiropractor was taken about three weeks
before trial. The deposition of plaintiff's chiropractor was
taken two weeks prior to trial. Thus, well in advance of
trial, defendant was armed with the information that the
plaintiff's witness would give an unqualified opinion of
medical necessity while its own witness would give an
inconclusive opinion on the subject. In effect, prior to
trial defendant's representatives knew, or should have known,
that it had no evidence to rebut the plaintiff's evidence on
the only issue in the case.
Additionally, when the plaintiff made his post-verdict
motion, there was no request from the insurer to offer
evidence on the charge of bad faith, an allegation that had
been made when the action was filed. The court was not
presented with any testimony on the subject of reasonableness
from a claims supervisor or claims adjuster upon how the
insurer finally evaluated the claim, given the medical
testimony, or upon the insurer's reasoning to support its
decision to deny the claim and to force the plaintiff to
trial.
Therefore, I would affirm the judgment of the trial
court.
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