Glen Hanson, a Minor, by and Through His Guardian Ad Litem, Catherine Hanson, and Duane Hanson v. The Prudential Insurance Company of America

The Hansons, insured under a group medical insurance policy issued by Prudential Insurance Company (Prudential), filed an action against Prudential to recover policy benefits for treatment received by Glen Hanson at Clear Water Ranch Children’s House (Clear Water Ranch), a residential treatment facility. The Hansons appeal a judgment for Prudential, contending that (1) the district court erred in finding that Clear Water Ranch was not a “hospital” within the meaning of the insurance policy; and (2) Prudential acted in bad faith in failing to investigate the claim thoroughly. The district court had jurisdiction under 28 U.S.C. § 1332 (a)(1). We vacate and remand the district court’s judgment on the Han-sons’ contractual claim and affirm its judgment on the bad faith claim.

I

Prudential issued a group medical insurance policy to employees of Pitney-Bowes. In February 1975, Glen Hanson, stepson of Duane Hanson, a Pitney-Bowes employee, was accepted as a patient at Clear Water Ranch, a residential treatment facility specializing in the treatment of preadolescent children suffering from functional nervous disorders. The staff at Clear Water Ranch included one registered nurse, who…