No Breach of Contract No Bad Faith

ACTUAL DAMAGES REQUIRED TO BREACH INSURANCE CONTRACT

Barry Zalma

Jan 14, 2025

Transcript

BACKGROUND

The Potovskys’ policy covered “actual expenses incurred” for qualified long term care should one of them become “chronically ill”- which the policy defined as requiring “[s]ubstantial [s]upervision to protect [themselves] from threats to health and safety due to severe [c]ognitive [i]mpairment.” The policy only covered those who had been receiving qualifying care for ninety days or more and then submitted a claim for reimbursement.

Mrs. Potovsky began to experience mental decline in her eighties. Mr. Potovsky contacted Lincoln to begin filing a claim under the policy in September 2022, because he intended to hire a caregiver for Mrs. Potovsky. Out of caution, Mr. Potovsky first asked Lincoln for a determination of Mrs. Potovsky’s eligibility.

Lincoln denied the claim. In its denial letter, after summarizing the medical record, Lincoln determined: “The supervision does not rise to the level of Substantial Supervision secondary to severe Cognitive Impairment as per the policy definitions…. There is no clear indication that Ms. Potovsky requires supervision on a continuous basis ….

“While the medical documentation on file does support Ms. Potovsky has a Cognitive Impairment, there is nothing in the file to support the Cognitive Impairment is severe and requires Substantial Supervision. The claim will now be closed.”

Although the Potovskys internally appealed this denial, Lincoln’s decision was unchanged.

The Potovskys filed suit. The district court predicted “[t]he breach of contract claim ultimately may be better suited as an anticipatory breach claim, which the plaintiff’s opposition seems to suggest.” The Potovskys added a claim for anticipatory breach to their original suit. They claimed that Lincoln’s denial confirmed it would not perform under the contract, and that this repudiation excused any lack of additional performance. Lincoln moved to dismiss again because the anticipatory breach lacked the element of damages. The district court granted dismissal with prejudice.

ANALYSIS

The elements of a cause of action for breach of contract are (1) the existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to the plaintiff. In short, the Potovskys failed to allege any recoverable damages, an essential element of a breach of contract claim. Damages are an element that must be proved to prevail on the merits of a contract claim.

Damages excluded from coverage by an insurance policy are typically not within the contemplation of the parties. The Potovskys’ only alleged damages are in the form of home health care services that Mrs. Potovsky would have received had Lincoln acknowledged her entitlement to be reimbursed for supervised care or in the form of the care provided by Mr. Potovsky.

Care given by family members is expressly exempted from the policy’s coverage.

Lincoln’s denial letter and its course of conduct were not inconsistent with an intent to enforce the right to wait until expenses were actually incurred.

The Potovskys’ two other claims-bad faith and elder abuse-cannot prevail without a predicate breach of contract.

ZALMA OPINION

People, and some lawyers, forget that an insurance policy is a contract. In this case the breach of contract claim failed because the Potovskys’ incurred no damage because Mr. Potovsky wanted assurance (or didn’t have the funds) before spending money to care for Mrs. Potovsky. The Potovskys’ incurred no damages and could not, therefore, prove a breach of contract and claims of bad faith.