Strategies, Challenges, and Answers

Nevada Allows Policyholders To Sue Certain Managing General Agents and Third-Party Administrators For Bad Faith

Law scales, judge gavel on table front of USA flag retro photoAn agent who acts for a disclosed principal is not liable for commitments made by the agent in the principal’s behalf.  See ALI’s Restatement (Second) of Agency § 320 (1958).  In the field of insurance, managing general agents, third-party administrators and independent adjusters have regularly shielded themselves from claims of bad faith brought by policyholders’ against the insurance company for which that agent works.  But that rule of hornbook law is beginning to erode following insurance decisions arising in Nevada, Arizona and other states. 

In Nevada, the seminal case is Albert H. Wohlers & Co. v. Bartgis, 969 P.2d 949 (1998).  In Wohlers, the policyholder Bartgis owned a major medical policy written by Allianz (North American Life and Casualty).  Allianz hired managing general agent, Albert H. Wohlers & Co. to administer their Nevada claims.  Prior to Bartgis’ surgery, the coverage provisions on the policy changed.  Wohlers provided Ms. Bartgis with a new certificate of insurance.  However, it failed to communicate to Ms. Bartgis the details in the changes to the hospitalization coverage.  Mr. Bartgis testified that she was unware that her coverage would be substantially reduced if her hospitalization exceeded 24 hours.

Because Ms. Bartgis’ post-surgery hospital stay exceeded 24 hours, her insurance would only cover 10% of her total hospitalization costs.  Ms. Bartgis presented her case to a jury.  The jury awarded her not only the cost of the unpaid medical bills but also gave her $275,000 in emotional distress.  The jury then assessed punitive damages, $500,000 against Wohlers and $7,500,000 against Allianz.

The jury granted Wohlers a little relief.  It found that Nevada’s Unfair Claims Settlement Practices Act NRS 686A.310 did not apply to insurance administrators.  The court agreed that the statute did not regulate managing general agents like Wohlers.  The Nevada legislature has in essence overturned this decision by making NRS 686A.310 specifically applicable to insurance adjusters.  See our blog post on this topic HERE about NRS 684A.035.

On the issue of bad faith, the outcome was not as favorable for Wohlers.  Regarding the issue of intermediary liability, the court acknowledged the hornbook rule but explained:

In general, no one “is liable upon a contract except those who are parties to it.” County of Clark v. Bonanza No. 1, 96 Nev. 643, 648-49, 615 P.2d 939, 943 (1980). However, according to a well-established exception to this general rule, where a claims administrator is engaged in a joint venture with an insurer, the administrator “may be held liable for its bad faith in handling the insured’s claim, even though the organization is not technically a party to the insurance policy.” William M. Shernoff, et al., Insurance Bad Faith Litigation § 2.03[1], at 2-10 (1998).

114 Nev. at 1262, 969 P.2d at 959.

The Supreme Court reviewed the evidence and found it sufficient to sustain the jury’s finding of joint venture.  The evidence showed that Wohlers “developed promotional material, issued policies, billed and collected premiums, paid and adjudicated claims, and assisted Allianz in the development of the ancillary charges limitation provision. Further, because Wohlers shared in Allianz’s profits, it had a direct pecuniary interest in optimizing Allianz’s financial condition by keeping claims costs down.”

114 Nev. at 1263

If you need advice as a third-party administrator, managing general agent or independent adjuster, call Mills & Associates.  They will do their best to help you manage your bad faith risks.  Mike Mills can be reached at 702-240-6060×114.