Jeremy J. Smith v. Equitable Life Assurance Society of the United States, Cross-Appellee
Docket: 94-2396, 94-2714
Court: Court of Appeals for the Seventh Circuit; September 28, 1995; Federal Appellate Court
In 1986, Jeremy Smith obtained a disability insurance policy from Equitable Life Assurance Society, which provided $4,000 monthly benefits for total disability affecting his ability to perform as the president of PC Distributing, a computer company. Following the onset of an acute anxiety disorder with agoraphobia in 1988, Smith applied for benefits in 1991 after Equitable initially accepted his claim but later denied payment. He filed a lawsuit that was moved to federal court, resulting in a judgment awarding him $164,247.88 for benefits, premiums, statutory penalties, and attorney's fees. Equitable appealed the decision, while Smith cross-appealed for pre-judgment interest. The district court's ruling was affirmed for Equitable's appeal but reversed regarding Smith's cross-appeal. Prior to his insurance application, Smith had a history of anxiety treatment but reported no recent issues, leading to Equitable's modification and approval of his policy, which defined total disability as the inability to perform substantial duties of his occupation. In 1986, PC Distributing underwent a takeover and was renamed PCx Corporation.
In the summer of 1987, Smith experienced an increase in panic attacks, characterized by symptoms such as sweaty palms, cold extremities, throat constriction, difficulty breathing, an increased heart rate, loss of peripheral vision, and feelings of losing control. A psychiatrist diagnosed him with panic disorder and agoraphobia. Following his termination from PCx in November 1987, Smith did not seek employment until March 1994. Throughout 1988 and 1989, his symptoms worsened, leading him to avoid restaurants and public places, shop at night to evade crowds, and experience multiple daily panic attacks. He struggled with severe anxiety, refusing phone calls and feeling unable to leave home.
Smith joined the Auxiliary Coast Guard in 1988 to confront his anxieties and improve his social skills, but continued to face challenges, often canceling classes he attempted to teach. From 1988 onward, he was under the care of Dr. Higgins, who prescribed various anti-anxiety medications. In February 1991, he began treatment at the Anxiety Disorders Clinic, where he was monitored by Dr. McNally and later Dr. Calamari. Smith left the program in June 1992, mistakenly believing his treatment was complete, although he had not fully recovered. He returned to the clinic in 1994, shortly before the trial.
In March 1991, Smith applied for total disability benefits, claiming he could not engage in work-related activities. Dr. McNally supported his claim with medical documentation, and in May 1991, Dr. Calamari confirmed Smith's total disability due to his panic disorder and agoraphobia, stating he was unable to perform his job functions, including traveling and public speaking.
Equitable initially paid Smith $20,000 in disability benefits but terminated these payments in November 1991 based on a psychiatric evaluation by Dr. Berc, who concluded Smith's condition was residually disabling without a direct examination. Despite further attempts at settlement that included an additional $2,000 payment in 1992, Equitable refused any more payments. In February 1993, Smith filed a complaint in state court for recovery of benefits and penalties for unreasonable delay, which Equitable removed to federal court, subsequently counterclaiming for rescission of the insurance contract due to alleged material misrepresentations by Smith.
In December 1993, Equitable engaged Dr. Ganellan, a clinical psychologist, who determined Smith was not totally disabled. Nonetheless, Smith claimed his condition had improved since his initial application in 1991. By April 1994, Smith returned to work as a chief operating officer. A bench trial occurred in August 1994, during which medical testimonies were presented from four physicians, including Dr. Calamari, who diagnosed Smith with panic disorder and agoraphobia. Dr. Calamari explained the idiosyncratic nature of agoraphobia and noted that Smith's condition severely limited his ability to engage in business activities due to intense fears of panic attacks. He described treatment approaches involving medication and gradual exposure to anxiety-inducing situations.
Dr. Higgins, Smith's treating physician, provided a deposition as he was unable to attend the trial. He testified to having treated Smith since 1988 and expressed that Smith was totally disabled from his occupation due to his panic attacks affecting his ability to conduct meetings and travel. The court allowed Dr. Higgins' deposition despite Equitable's objections, affirming compliance with procedural rules.
Dr. Berc, a psychiatrist, testified that intermittent illnesses like panic disorders are generally seen as residually disabling rather than totally disabling unless the patient is housebound. He noted that his medical conclusion did not account for the specific definition of total disability in Smith's insurance policy, of which he was unaware. Dr. Ganellan, a psychologist, evaluated Smith and determined that Smith was exaggerating his psychological issues, asserting he was not totally disabled from performing his executive duties in the computer industry. Smith presented witnesses who confirmed his disability during the relevant period.
The district judge ruled in favor of Smith, stating no material misrepresentation justified rescinding the insurance contract, that Smith was totally disabled from January 1988 to March 1994, and that Equitable's actions warranted a penalty under Illinois law for unreasonable delay in benefit payments, awarding $10,000 plus reasonable attorney's fees but denying pre-judgment interest. Equitable appealed, arguing insufficient evidence of total disability, non-compliance with policy conditions, and that the policy should have been rescinded. Smith cross-appealed for the denial of pre-judgment interest.
Jurisdiction is based on the diversity statute, applying Illinois law. Equitable claims the district court should have rescinded Smith's policy due to alleged misrepresentations of his medical history. Under Illinois law, misrepresentations can void an insurance policy if made with intent to deceive or materially affecting the insurer's risk assessment.
Equitable contends that determining material misrepresentation under Illinois law is a mixed question of fact and law, warranting de novo review. However, the court has established that appellate review of such mixed questions should adhere to the clear error standard, as the trial judge is better positioned to assess the facts and their significance. In Smith's case, the district court found no clear error in concluding that he did not materially misrepresent his medical history, as Smith disclosed all relevant doctor visits, and Equitable adjusted his policy based on information obtained from his doctor, Dr. Levy.
Regarding total disability, Equitable argues that Smith did not meet the policy's definition of total disability, which is a factual determination subject to clear error review. A finding is deemed clearly erroneous if the reviewing court is firmly convinced a mistake was made. Smith's policy defined total disability as the inability to perform the substantial duties of his regular occupation, which was identified as President/CEO of a closely held corporation focused on purchasing computer hardware for resale. Thus, his policy is categorized as "occupational," providing benefits if he could no longer fulfill his occupational responsibilities.
Ample evidence supported the district court's conclusion that Smith was unable to perform the essential duties of a corporate executive due to his disability. Smith's testimony indicated he was sometimes housebound, refused to travel, and feared social situations, corroborated by witnesses including his girlfriend and a Coast Guard instructor. Medical opinions from Dr. Calamari and Dr. Higgins confirmed Smith's total disability. Equitable contested these opinions, arguing that Dr. Higgins was not a specialist and Dr. Calamari had not treated Smith directly; however, the court emphasized that it would not reweigh evidence or override the district court's findings.
Equitable further argued that Smith did not meet the requirement of being under regular medical care as needed for a total disability determination, but the court found he was under the care of multiple doctors during the relevant period, with no clear error in this finding.
Regarding policy conditions, Equitable asserted that Smith needed to submit monthly statements verifying his ongoing disability to receive benefits. Smith had submitted such statements until January 1992, yet Equitable stopped payments in October 1991, claiming he was not totally disabled. The court noted the inconsistency of requiring ongoing reports when Equitable had already deemed him non-disabled. Under Illinois law, ambiguities in insurance policies are construed against the insurer, which led to the conclusion that Smith was not obligated to continue submitting statements after Equitable contested the initial claim.
Lastly, Equitable challenged the district court's decision to impose attorney's fees and a statutory penalty, arguing a bona fide dispute existed regarding Smith's disability status. Illinois law allows for penalties against insurers for unreasonable delays in processing claims.
A finding of vexatious or unreasonable delay requires a comprehensive evaluation of the circumstances and is upheld unless there is a demonstrated abuse of discretion. In this case, the district court determined that Equitable's delay in payment was unreasonable, supported by evidence in the record. Notably, while Smith's attending physicians indicated he was totally disabled, Equitable relied on an expert who had not examined Smith and was unaware of the specific definition of "total disability" in his insurance policy. Equitable conducted a medical examination two and a half years after Smith's benefits application, and two years after denying his claim.
Smith cross-appealed the denial of pre-judgment interest, asserting it was an abuse of discretion under Illinois law, which mandates such interest for unreasonable delays in payment of insurance benefits. Given the district court's finding of unreasonable delay, the denial of pre-judgment interest was deemed an abuse of discretion. The district court's judgment is affirmed in part and reversed in part regarding the denial of pre-judgment interest. The document also clarifies that Smith is an Illinois citizen and Equitable is a New York corporation, with the amount in controversy exceeding $50,000. Additionally, the court found no abuse of discretion in allowing Dr. Higgins' deposition into evidence, as the evidence of Smith's total disability was also supported by other testimonies.
The statute allows for the recovery of reasonable attorney's fees and costs in cases involving a company's liability on an insurance policy where the delay in settling a claim is found to be vexatious and unreasonable. The court may award up to 25% of the amount recovered or a maximum of $25,000, as specified under 215 ILCS 5/155 (1995). A finding of vexatious delay must consider all circumstances, and such findings are upheld unless there is an abuse of discretion.
In the case reviewed, the district court found Equitable's delay in payment unreasonable, supported by evidence that the company relied on an unexamined expert's opinion while ignoring the assessments of Smith's attending physicians. Furthermore, Equitable delayed conducting a medical examination for two and a half years after Smith's application for benefits, which contributed to the court's conclusion of unreasonable delay.
Smith cross-appealed the denial of pre-judgment interest, arguing it was an abuse of discretion. The court agreed, noting that Illinois law mandates pre-judgment interest on amounts withheld due to unreasonable delay, as stated in 815 ILCS 205/2. The district court's denial of this interest was thus deemed an abuse of discretion. The judgment of the district court was affirmed in part and reversed in part.
Barbara B. Crabb, Chief Judge of the Western District of Wisconsin, is presiding in this case. Agoraphobia is defined as a complex phobic disorder involving significant fear of being alone or in public spaces, leading to avoidance behaviors that severely restrict normal activities. The plaintiff, Smith, is a citizen of Illinois, while the defendant, Equitable, is a New York corporation, with the amount in controversy exceeding $50,000. Equitable contends that the district court improperly admitted Dr. Higgins' deposition into evidence; however, the court found no abuse of discretion, as the deposition met the Federal Rules of Evidence criteria. Even without this deposition, Smith's total disability was well-supported by testimonies from Dr. Calamari, Smith, and lay witnesses. Additionally, under Illinois law, in cases involving insurance disputes where the court finds the company's delay or action vexatious, it may award reasonable attorney's fees and costs, with limits set at either 25% of the recovery amount or $25,000.
