The Rahm family filed a lawsuit against Kaiser Foundation Health Plan and two Kaiser health care providers.  The Rahms claimed that Kaiser improperly delayed before ordering an MRI for their daughter Anna, resulting in the eventual loss of Anna’s right leg and portions of her pelvis and spine.  Specifically, despite numerous requests by Anna’s parents that Kaiser authorize an MRI for Anna, Kaiser refused.  As a result, there was a considerable delay in discovering that Anna was suffering from a “high grade” osteosarcoma, one of the fastest growing types of osteosarcoma.  The delay significantly contributed to Anna’s poor prognosis and the need for the amputations.

The Court of Appeals indicated that “the text of the statute is unclear as to whether section 425.13 is intended to apply only to claims against health care providers, or whether it is intended to apply to claims against any type of defendant—including claims against health care service plans,” and thus turned to the legislative history.  After reviewing the legislative history, as well as Central Pathology Service Medical Clinic, Inc. v. Superior Court, 3 Cal. 4th 181 (1992) in which the California Supreme Court considered the scope of claims subject to section 425.13, the Court held that section 425.13 does not apply to claims against health care service plans.  Specifically, the Court noted that:

Defendants' argument that section 425.13 may be applied to claims against health care service plans, rather than health care providers, is also in conflict with other sections of California code. Civil Code section 3428, subdivision (c) states that “[h]ealth care service plans … are not health care providers under any provision of law, including, but not limited to … Section[] … 425.13 … of the Code of Civil Procedure.” Likewise, Health and Safety Code section 1367.01, subdivision (m) clarifies that a health care service plan's role in determining the medical necessity of a requested procedure “shall [not] cause a health care service plan to be defined as a health care provider for purposes of any provision of law, including … Section[] … 425.13 … of the Code of Civil Procedure.” The language of these statutes demonstrates a clear intent to exclude health care service plans from the procedures required under section 425.13.

Defendants have not cited a single decision that has applied section 425.13 to claims pleaded against a health care service plan or any other type of entity that was not a medical care provider.

In conclusion, the Court ruled that:

The legislative history of section 425.13 and various provisions in California code demonstrate that the procedural requirements described in the statute do not apply to claims against health care service plans. Because defendants admit that Kaiser Health Plan is a health care service plan, rather than a health care provider, the trial court did not err in refusing to strike the punitive damages allegations asserted against the Health Plan.

Based on this ruling, plaintiffs can assert punitive damage claims against health care service plan without first obtaining court approval and will therefore have an easier time holding entities such as Kaiser Foundation Health Plan or Anthem/Blue Cross liable for their actions.

We believe that the extreme reprehensibility of Philip Morris's misconduct, including the vast scale and profitability of its course of misconduct, and its financial condition justify the $13.8 million punitive damages award against Philip Morris. Our conclusion is the same regardless of whether the ratio of 16 to one can be said to significantly exceed a single-digit ratio, so we need not decide that question.  We do not mean to suggest that 16 to one would be an appropriate ratio in another case involving extreme reprehensibility or to establish any kind of presumption, but merely conclude, based on the facts in this case, that the $13.8 million punitive damages award is reasonable, not arbitrary, and does not offend due process.  Id. at 58.

However, in a footnote, the court noted that “‘[T]he presumption of unconstitutionality applies only to awards exceeding the single-digit level ‘to a significant degree.’ (State Farm, supra, 538 U.S. at p. 425.)’” (Simon, supra, 35 Cal.4th at p. 1182, fn. 7.)  Thus, the court sent a clear message that it did not believe that a 16 to 1 ratio exceeded the single-digit level to a significant degree, and left the door open for other California courts to allow punitive damages awards above the single-digit ratio.

The recent decision of the District Court, Southern District of California in Barbour v. UNUM Life Ins. Co., 2011 U.S. Dist. LEXIS 91060 (S.D. Cal. 2011),  is a primary example of how an insurer’s misuse of in-house experts and its reliance on the “genuine dispute doctrine” can result in potential bad faith liability, as well as punitive damages.

Barbour involved a disability policy issued by UNUM through a school district and covering the Principal of a school in the district.  The Group Salary Protection Insurance Policy (“Policy”) at issue provided Accident and Sickness Disability Benefits for one year in the event of total disability, and after one year, the Policy provided monthly long term disability income benefits for as long as the claimant remains totally disabled or otherwise qualifies for benefits, up to age 65.  The Policy defined “Total Disability” during the first two years as the inability “to perform the material duties of your own occupation.”  After two years, the Policy defined “Total Disability” as the inability “to engage in any gainful occupation for which you are reasonably qualified by training, education or experience.”  In February 2003, the insured submitted a claim for disability benefits based on abdominal pain that restricted her from driving, walking/standing and sitting for extended period, and UNUM began paying benefits.  Over the course of several years, the insured suffered multiple further injuries relating to her initial injury, which required multiple surgeries, and which rendered her totally disabled.  The insured submitted regular medical reports and updates, and UNUM continued to pay disability benefits. 

In December 2007, UNUM hired an investigator to conduct surveillance on the insured to confirm the claimed disabilities.  The investigator observed a “female subject believed to be the insured” who was moving without the physical limitations represented to UNUM by the insured and her doctors.  The investigator’s report and video raised suspicion within UNUM regarding the insured’s disability, and resulted in UNUM conducting further surveillance.  UNUM investigators made a field visit in October 2008, and again conducted surveillance in January 2009.  In February 2009, UNUM’s in-house doctor/consultant reviewed the file and prepared a report which concluded that the insured’s claimed disability was inconsistent with her findings.  Then, in March 2009, UNUM’s “Designated Medical Officer” reviewed the file and determined that there were three occupations that the insured was capable of performing, notwithstanding her disability.  UNUM thereafter revoked the insured’s disability benefits effective March 31, 2009, and advised her that she had the right to file a civil action under the section 502(a) ERISA statute.  Unsurprisingly, the insured hired an attorney.

The insured’s attorney sent a letter to UNUM advising that UNUM’s determination that the claim was governed by ERISA was erroneous.  The attorney also provided a letter from the insured’s doctor stating that the person observed during surveillance in December 2007 was not the insured.  UNUM was also provided a functional capacity evaluation by the insured’s physical therapist that concluded that the insured’s “physical limitations presented a barrier to work.”  This information was reviewed by UNUM’s in-house medical experts.  On October 6, 2009, UNUM sent a letter agreeing with the insured’s position as to ERISA, but stating that the new medical information did not change UNUM’s decision to deny benefits.

UNUM filed a motion for summary judgment to dismiss the insured’s claims for breach of the implied covenant of good faith and fair dealing (bad faith), intentional infliction of emotional distress and punitive damages.  To defeat the bad faith claim, UNUM relied on the “genuine dispute doctrine.”  In rendering its ruling, the court noted that the overarching issue in a bad faith claim is whether the insurer’s claims-handling conduct was reasonable.  Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 (9th Cir. 2002).  The court then explained the applicability of the genuine dispute doctrine:

"The genuine issue rule in the context of bad faith claims allows a district court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer's denial of benefits was reasonable--for example, where even under the plaintiff's version of the facts there is a genuine issue as to the insurer's liability under California law. In such a case, because a bad faith claim can succeed only if the insurer's conduct was unreasonable, the insurer is entitled to judgment as a matter of law." Amadeo, 290 F.3d at 1161-62 (citation omitted). "On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably." Id. at 1162 (citation omitted)(emphasis added).

The court held that a reasonable jury could conclude that UNUM acted unreasonably when it was informed that the evidence UNUM relied upon to deny the insured’s claim was wrong (i.e., the surveillance was of someone other than the insured).  The court further determined that there was no evidence that UNUM’s experts evaluated the evidence with an eye towards favoring the insured and in a manner which would indicate that she was indeed disabled as she and her doctors asserted.  The court relied upon the facts as viewed “in the light most favorable to Plaintiff” to determine that a jury could conclude that UNUM acted unreasonably, and thus in bad faith when it denied the insured’s claim.  The court therefore denied UNUM’s motion for summary judgment.

The court also discussed UNUM’s initial erroneous determination that the claim was governed by ERISA, and held that it created evidence of insurer bias, which could also indicate and support a claim for bad faith. Hangarter v. Provident Life & Acc. Ins. Co., 373 F.3d 998, 1010 (9th Cir. 2004) (citing Chateau Chamberay Homeowners Ass'n v. Associated Int'l Ins. Co., 90 Cal. App. 4th 335, 348 (2001)). 

The court placed a premium on UNUM’s apparent failure to reasonably and thoroughly investigate the insured’s claim.  In particular, the court found that UNUM’s failure to seek an independent medical examination of the insured supported her claim that UNUM acted unreasonably.  In so finding, the court discussed a line of cases which suggest that an insurer’s sole reliance on its own in-house experts, and its failure to obtain an independent medical examination, is clear evidence that an insurer has acted unreasonably. 

Based on these findings, the court held that the insured’s claims for intentional infliction of emotional distress and for punitive damages were equally as viable based on UNUM’s potentially unreasonable conduct in evaluating the insured’s claim.

With this decision, the court made it very clear that an insurer cannot escape liability for bad faith by relying on its own in-house experts and ignoring evidence presented by an insured which, when viewed in favor of the insured, would indicate coverage should be afforded.  An insurer cannot create a “genuine dispute” as to coverage on which it can deny an insured’s claim simply by relying on its own in-house experts.  An insurer who does so, does so at its own peril, and opens itself up to claims for bad faith and punitive damages.

The most common causes of action against insurers in the non-ERISA context are breach of contract and bad faith. 

The breach of contract claim allows an insured to recover policy benefits owed under the insurance policy plus applicable interest from the date the benefits were due (or at the rate of 10% on delayed disability payments in California).  The benefits due will depend on the type of policy at issue.  They may be a specific amount (e.g., death benefits) or may depend upon a proof of loss (e.g., value of property damaged or destroyed).

There are three primary categories of damages recoverable in these types of actions:

1. Contract Damages – In first-party cases, the measure of contract damages is the benefits due under the policy.  In third-party cases, the measure is the amount expended or liability incurred by the insured up to the policy limits.  Consequential damages are also recoverable where appropriate, and are defined as those damages the parties should have foreseen as likely to result from a breach when they entered into the contract.  Thus, an insured may recover damages that were within the parties’ reasonable expectation at the time of contracting. 
2. Tortious (Extracontractual) Compensatory Damages – In bad faith actions, an insured may recover extracontractual compensatory damages based on an insurer’s tortious conduct.  This includes all damages caused by the insurer’s tortious conduct, including both economic loss and non-economic harm (e.g., emotional distress).  This will often include attorney’s fees reasonably incurred to compel payment of benefits due under an insurance policy (called Brandt fees).
3. Punitive Damages – In an action against an insurer where, in addition to bad faith or other tortious conduct, there is clear and convincing evidence of oppression, fraud or malice on the part of the insurer, the insured may recover punitive damages.  Punitive damages will be awarded to punish an insurer for tortious conduct giving rise to an action not based on the terms of the insurance contract (e.g., fraud).

In addition to breach of contract and bad faith, other claims available to insureds are fraudulent and negligent misrepresentation, intentional and negligent infliction of emotional distress, invasion of privacy, and intentional interference with economic advantage.  Each of these causes of action may allow for recovery of alternative and additional damages, including punitive damages.

For additional information on this and other insurance matters you can visit the FAQ section of our website:  www.mslawllp.com.  

If you need to consult with an attorney about a possible insurance bad faith or ERISA matter, please contact our office. 

In a press release, California Insurance Commissioner Steve Poizner said that "upholding this award means that that hundreds of millions of dollars will be available to pay the claims of workers injured on the job through the California Insurance Guarantee Association (CIGA) and other guarantee associations.”  "This is huge and welcome news," Poizner said.

U.S. Life is a subsidiary of American International Group (AIG) and was a reinsurer for five California workers' compensation insurance companies that were liquidated in 2000. U.S. Life argued that Superior National and its affiliates failed to disclose to U.S. Life all pertinent information regarding the adequacy of its outstanding reserves for payment of claims, and exposing U.S. Life to substantial losses, CDI said.

On June 25, 2007 the U.S. District Central District in Los Angeles entered an original judgment against U.S. Life for $443.5 million. U.S. Life subsequently appealed to the Ninth Circuit. Fourteen months after arguments were heard and the case submitted, the original judgment was unanimously upheld by a three-judge panel. U.S. District Court Judge Edward F. Shea wrote the opinion confirming the original judgment against U.S. Life.

Posner explained that including post-judgment interest, the judgment is now more than $517 million. Interest will continue to accrue until payment is received from U.S. Life.

Although the court upheld the judgment, U.S. Life still may seek to file a motion to reconsider or request a hearing en banc, which may be filed within 14 days, or within 90 days of the judgment being affirmed it may seek review by the United States Supreme Court. Given that this appeal relates to the affirmation of an arbitration award, it is not expected the Court will grant further review.

The press release stated “[a]t no time were people in the workers' compensation system at risk of not being paid. CIGA The California Insurance Guarantee Association has been paying the claims of injured workers whose policies were reinsured by U.S. Life. Once the money is collected from U.S. Life or from the $600 million bond AIG posted as security, it will be distributed to CIGA and other guaranty associations. CIGA will receive about 90 percent of the final amount.”

In Roby v. McKesson Corporation, plaintiff Charlene Roby filed alleged a wrongful termination and harassment action against McKesson and her supervisor Schoener claiming she was fired because of a medical condition and a related disability. The jury found in favor of Roby on all causes of action and awarded compensatory damages of $3,511,000 against McKesson and $500,000 against the supervisor, Schoener. The jury also awarded punitive damages: $15,000,000 against McKesson and $3,000 against Schoener. The trial court reduced the compensatory damages against McKesson to $2,805,000 because some of the damage awards overlapped.  

The California Court of Appeal reduced the compensatory damages award to $1.4 million, finding there was insufficient evidence for a harassment verdict against McKesson and that the $15 million punitive damages award was excessive under the federal due process clause. The Court of Appeal determined that the maximum permissible punitive damages award, based on the facts of the case and size of the compensatory damages award, was $2 million, or 1.4 times the amount of the compensatory damages award.

The California Supreme Court decided two important issues: whether personnel actions undertaken by a supervisor can be used as evidence of harassment and whether the punitive damages award against McKesson was excessive. As to the first issue, the Supreme Court reversed the Court of Appeal holding that there was insufficient evidence of Roby’s harassment claim. Rather, the Supreme Court held that biased personnel actions can be used as evidence of harassment because they can contribute to harassment by communicating hostility and evidence the discriminatory animus of the person taking the personnel action. These actions included demeaning comments about her body odor, arm sores, and the demeaning manner in which her supervisor acted towards her, including refusing to respond to greetings, failing to give gifts and other less favorable treatment. The Court found that none of these events was fairly characterized as official employment actions or personnel actions, and thus, could not be conduct that fell within the supervisor’s business and management duties. Thus, it reinstated the jury’s verdict finding for Roby on the discrimination claim. The Court also found there was sufficient evidence for the jury to infer the supervisor discriminated against Roby based on her medical condition, and that the constant hostility was also based on medical conditions, constituting harassment and in violation of applicable laws.

The California Supreme Court reversed, holding that there was sufficient evidence to support the harassment verdict and affirming $1.9 million in compensatory damages. However, although the Supreme Court agreed that the award of $15 million in punitive damages was excessive, it relied on U.S. Supreme Court precedent to determine that the ratio of punitive damages to compensatory damages could not exceed one-to-one.  In reaching its decision, the California Supreme Court based its determination on an analysis of the five "reprehensibility factors" articulated by the U.S. Supreme Court in State Farm Mut. Auto Ins. Co. v. Campbell, 538 US 408 (2003): (1) the harm caused was physical as opposed to economic, (2) the defendant's indifference to or reckless disregard of the health or safety of others, (3) the plaintiff's financial vulnerability, (4) the defendant's conduct involved repeated actions or an isolated incident, and (5) the harm was the result of intentional malice, trickery or deceit.  The Court found that only the first three factors were present, and that the defendant's conduct "was at the low end of the range of wrongdoing."  

With respect to the first of these reprehensibility factors, the Court explained that the harm to Roby was “physical” in the sense that it affected her emotional and mental health, rather than being a purely economic harm.  With respect to the second reprehensibility factor, the Court determined that it was objectively reasonable to assume that employer McKesson‟s acts of discrimination and harassment toward Roby would affect her emotional well being, and therefore McKesson‟s “conduct evinced an indifference to or a reckless disregard of the health or safety of others.”  The third reprehensibility factor was likewise present: Roby was a relatively low-level employee who quickly depleted her savings and lost her medical insurance as a result of her termination, and therefore it appears that she “had financial vulnerability.” 

With respect to the fourth reprehensibility factor of the State Farm test, however, the Court found it was not present.   Schoener‟s wrongful conduct was repeated, as she subjected Roby to a series of discriminatory disciplinary actions and harassed Roby on an almost daily basis, but there was no indication of repeated wrongdoing by McKesson, as discussed below.

Concerning the discrimination claim, McKesson’s wrongdoing was limited to its one-time decision to adopt a strict attendance policy that, in requiring 24-hour advance notice before an absence, did not reasonably accommodate employees who had disabilities or medical conditions that might require several unexpected absences in close succession.  The Court stated that McKesson’s act of discharging Roby (including the perfunctory investigation that accompanied it) was simply an application of this attendance policy.  Although te jury found that McKesson’s adoption of this flawed attendance policy constituted “oppression” or “malice,” justifying an award of punitive damages under Civil Code section 3294(a), nevertheless, McKesson’s adoption of this attendance policy was a single corporate decision.  

The significance of this opinion lies partly in the fact that the California Supreme Court has issued so few opinions on punitive damages in recent years. But the primary significance seems to be that the court has put the final nail in the coffin of the argument that the portion of State Farm calling for a one-to-one ratio limit is mere dicta that should does not apply in California.  However, where the reprehensibility factor is considerably more egregious than was present in this case, it would appear that single digit punitive damages well above the one-to-one ratio could be mandated.

Bosetti was employed by the Palos Verdes Peninsula Unified School District. As part of her employment benefits, she was covered under a group long-term disability insurance policy issued by The United States Life Insurance Company in the City of New York (“U.S. Life”).

Bosetti‘s job was eliminated for economic reasons. Shortly after she learned that her employment would be terminated, she saw a doctor for depression and was placed on temporary disability. Her disability extend beyond two years, and had a physical component as well as an emotional one.  Under the policy, Bosetti could obtain disability benefits for two years if she was disabled from her own occupation. After that time, she could only obtain disability benefits if she was disabled from “any occupation.”  U.S. Life concluded that Bosetti was not disabled from any occupation and terminated her disability benefits at the end of two years. That determination was based primarily upon the two-year benefits limitation for mental or nervous disorders, the results of a functional capacity examination, and an independent physician consultation.

After the U.S. Life moved for and was granted summary judgment, Bosetti appealed.  The court of appeal held that the limitation was ambiguous and was not applicable if the claimant’s physical problems contributed to her disabling depression or were a cause or symptom of that depression. The Bosetti court further concluded that the insurer’s denial of benefits based upon that two-year limitation was not in bad faith under the genuine dispute doctrine.

The Bosetti court explained that the insured’s disability had both mental and physical elements, noting that one of her doctors had suggested that her physical disability arose out of her emotional disability and another that her emotional disability or depression arose out of her physical problems and chronic pain. The court held that the two-year mental limitation was ambiguous because it “does not clearly explain whether the limitation applies when the total disability is due in part to a mental, nervous …disorder” and because an insured’s reasonable expectations are that disabling depression arising from a physical condition like fibromyalgia and, correspondingly, disabling physical symptoms arising from depression, would not fall within the mental/nervous limitation.  

As part of its analysis, the court rejected the rationale of Equitable Life Assurance Society v. Berry, 212 Cal. App. 3d 832, 835, 840 (1989), a California opinion concerned with an insured who was diagnosed with manic-depressive illness, a condition which has a chemical (physical) etiology, rather than a purely mental one. The Berry court concluded, as a matter of law, that there was no coverage due to a disability policy‘s exclusion for “[m]ental or nervous disorders” and a health policy‘s limitation on benefits for treatment for a neurosis, psycho-neurosis, psychopathy, psychosis, or mental or nervous disease or disorder of any kind, on the basis that these exclusions were unambiguous and referred solely to symptoms, rather than causes.  Id. at 840.  The court disagreed with Berry for two reasons: it disagreed with its analysis and its holding was abrogated by statute.

The court found that the holding of Berry did not survive Insurance Code section 10123.15, which provides that “every group policy of disability insurance which covers hospital, medical, and surgical expenses on a group basis, and which offers coverage for disorders of the brain shall also offer coverage in the same manner for the treatment of the following biologically based severe mental disorders: schizophrenia, schizo-affective disorder, bipolar disorders and delusional depressions, and pervasive developmental disorder. Coverage for these mental disorders shall be subject to the same terms and conditions applied to the treatment of other disorders of the brain.”  It appears that based on the court’s ruling, the two-year mental or nervous disorders limitation can never be applied in California to the biologically based severe mental disorders of “schizophrenia, schizo-affective disorder, bipolar disorders and delusional depressions, and pervasive developmental disorder.”

The court adopted the Ninth Circuit’s approach in Patterson v. Hughes Aircraft Co., 11 F.3d 949, 950 (9th Cir. 1993) where the court concluded that a limitation on benefits resulting from “mental, nervous or emotional disorders of any type” was ambiguous as to whether mental disorders referred to causes or symptoms, and whether a disability is mental when it results from a combination of physical and mental factors.  The court resolved the ambiguity in favor of the insured, holding that the limitation on coverage did not apply if the insured‘s disability was caused, in any part, by his physical symptoms.