Joan Hangarter v. Provident Life and Accident Insurance Company, and the Paul Revere Life Insurance Company Unumprovident Corp.
Docket: 02-17423
Court: Court of Appeals for the Ninth Circuit; June 25, 2004; Federal Appellate Court
Joan Hangarter, a chiropractor, purchased an 'own occupation' disability insurance policy from Paul Revere Life Insurance Company in 1989. She filed a total disability claim in July 1997 due to shoulder, elbow, and wrist pain. Initially, Paul Revere paid her benefits for eleven months but later terminated payments, asserting that she was not 'totally disabled' as she continued to work and earn income. Hangarter subsequently filed a diversity action against Paul Revere and its parent company, UnumProvident Corp., claiming violations of California's Unfair Competition Act (Cal. Bus. Prof. Code. 17200), breach of contract, breach of the covenant of good faith and fair dealing, and intentional misrepresentation. The jury awarded her $7,670,849, including $5 million in punitive damages. The defendants appealed the denial of judgment as a matter of law, the damage awards, and a permanent injunction issued under the UCA. The court affirmed the denial of JMOL and the damage awards but reversed the permanent injunction. Hangarter's ongoing medical issues included severe shoulder pain requiring multiple treatments and therapies, with her condition worsening despite medical interventions.
In 1999, Paul Revere hired Dr. Aubrey Swartz as an independent medical examiner (IME) who assessed Hangarter's medical condition as 'normal' and deemed her capable of treating two chiropractic patients per hour. However, Dr. Edward Katz, an orthopedic surgeon, evaluated Hangarter two years later and disagreed with Dr. Swartz, noting significant medical issues including reduced neck range of motion, muscle spasms, grip strength deficits, and cervical disk disease. Dr. Katz indicated that Hangarter's condition was deteriorating and that she could not sustain a normal chiropractic practice.
During her time receiving benefits, Hangarter employed Dr. Parissa Peymani to manage patient adjustments, but she only treated a small fraction of patients. Financial difficulties led to Dr. Peymani's termination in May 1999 and Hangarter eventually sold her practice. On May 21, 1999, Paul Revere terminated Hangarter's 'total disability' benefits, claiming she was not 'totally disabled' and was earning income. Following this, the company seized funds from her bank account until it was depleted, resulting in policy cancellation.
Hangarter initiated a diversity action against the defendants for several claims including breach of contract and intentional misrepresentation. After an eleven-day trial, she won a unanimous verdict totaling $7,670,849, which included punitive damages, unpaid benefits, emotional distress damages, and attorney fees. The district court issued a permanent injunction under the Unfair Competition Act (UCA) and denied the defendants' motion for judgment as a matter of law (JMOL) or a new trial. The appeal followed this decision. The standard for reviewing a JMOL denial is de novo, focusing on whether a reasonable jury could find for the moving party based on the evidence presented.
JMOL (Judgment as a Matter of Law) should be granted only if a jury's verdict is against the great weight of the evidence or if it is evident that the jury reached a seriously erroneous result. A new trial is appropriate if the verdict contradicts the clear weight of the evidence, relies on false evidence, or to prevent a miscarriage of justice, with a district court's denial of a motion for a new trial reviewed for clear abuse of discretion.
In terms of jury instructions, any challenge to their legal accuracy is reviewed de novo, and errors are assessed under harmless error review. Defendants contended that the jury instruction regarding "total disability" misrepresented California law. The district court defined "total disability" based on the plaintiff's policy and California Supreme Court precedent, stating it requires the inability to perform substantial duties of one’s occupation. Defendants argued that since the policy's definition was clear, the court’s reliance on the Erreca definition was unwarranted. However, California law necessitates that courts may deviate from an explicit policy definition of "total disability" to ensure protection for insured individuals unable to perform essential functions of their occupation, as established in relevant case law. California courts generally reject a strictly limited definition of "total disability" in both occupational and non-occupational contexts.
The court in Moore v. American United Life Ins. Co. clarified that the definition of "total disability" in disability insurance policies must align with California law, which interprets total disability as the inability to perform the substantial and material duties of one's specific occupation. In this case, Hangarter's policy, which was occupational, covered her incapacity to fulfill the duties of a chiropractor rather than any other job. The district court's jury instruction correctly focused on Hangarter's ability to perform her own occupation's important duties, consistent with California legal precedent. The court referenced cases like Austero and Wright to support that the phrase "substantial and material duties" is effectively synonymous with "important duties." The defendants' argument that the total disability definition negated the policy's residual disability provision was rejected, as California courts have upheld that total disability clauses must be operative even when partial disability is acknowledged. The jury's determination of total disability is a factual question reviewed under the substantial evidence standard. The district court's jury instruction was deemed accurate and aligned with California law.
The jury found that the Plaintiff, Hangarter, was unable to perform the substantial and material duties of her chiropractic occupation at the time her benefits were terminated. Defendants claimed that evidence showed Hangarter was managing her business profitably and engaged in a gainful occupation, which they argued violated her insurance policy's terms. However, the court focused on whether there was substantial evidence supporting the jury's finding of total disability, regardless of evidence suggesting policy violations.
Three doctors testified that Hangarter was physically incapable of maintaining a normal chiropractic practice, supporting the jury's conclusion of total disability. Attempts by Hangarter to return to work were deemed insufficient to overturn this determination, as California law allows for a finding of total disability even if there are futile attempts to resume work.
Hangarter's hiring of another chiropractor to treat patients while she performed clerical tasks did not disqualify her from being considered totally disabled, as incidental tasks do not equate to practicing her profession. Additionally, the profitability of Hangarter's business during this period was deemed irrelevant, as disability insurance is designed to replace lost earning capacity due to injury or illness, not to consider income derived from business management. The court emphasized that one can be considered totally disabled even if they receive income from a business they can no longer actively manage.
Substantial evidence supports the jury's finding that Hangarter was totally disabled and unable to perform her duties as a chiropractor. The district court did not err in upholding this finding. In the context of insurance bad faith, a breach of the implied covenant of good faith and fair dealing allows a plaintiff to claim tort damages. Under California law, the reasonableness of an insurer's denial of coverage is typically a factual question. A genuine dispute regarding an insurer's liability can determine the reasonableness of its denial.
While a genuine dispute may protect an insurer from liability, a jury may still find that an insurer's investigation was biased, which can negate the genuine dispute defense. Factors indicating bias include misrepresentation of investigations, dishonesty in depositions, biased selection of experts, unreasonable expert opinions, and inadequate investigations. Evidence presented at trial indicated that the insurer, Paul Revere, engaged in a biased investigation. Testimony revealed that their termination letter was misleading, incorrectly stated Hangarter was "working" despite her selling her business, and inaccurately claimed she was ineligible for residual benefits. Furthermore, the letter failed to address recovery or rehabilitation benefits and erroneously stated that the policy was governed by ERISA, which would limit Hangarter’s legal remedies.
Evidence indicated that the Defendants showed bias in their selection and retention of Dr. Swartz as the Independent Medical Examiner (IME). Dr. Swartz had been utilized by Paul Revere nineteen times between 1995 and 2000, leading to concerns about his independence, as noted by Caliri, who asserted that repeated use results in bias. In all thirteen cases concerning total disability claims, Dr. Swartz denied the insured's claims of total disability. A letter from the Defendants retaining Dr. Swartz, authored by an in-house medical consultant who had not examined Hangarter, asserted that there were no objective findings for a disabling injury, which Caliri claimed biased the doctor against recognizing disabling injuries by conveying the Defendants' opinion.
Additionally, evidence showed that the Defendants had implemented a system aimed at targeting and terminating costly claims, particularly those related to 'own occupation' policies for disabled professionals. Dr. William Feist testified about unethical practices, including 'round table claim reviews' intended to achieve a favorable termination ratio of claims. Caliri supported this by stating that such practices violated the insurance industry's principle of objectively assessing each claim.
The district court determined that there was substantial evidence for the jury to conclude that the Defendants engaged in a biased investigation, constituting 'bad faith.' Regarding future damages, the jury was instructed that if the Defendants breached their duty of good faith and fair dealing, they could award Hangarter future contract benefits that the jury reasonably concluded she would have received had the contract been honored. The Defendants contended this instruction misrepresented California law, but the court found their argument unpersuasive. Citing Egan v. Mutual of Omaha Ins. Co., the California Supreme Court affirmed that future policy benefits could be awarded in tort claims for breach of the implied covenant of good faith and fair dealing. The Court of Appeal further supported this interpretation, indicating that future damages for bad faith claims based on tort theories are permissible, distinguishing them from contractual causes of action.
A state court's interpretation of its statutes is binding on federal courts unless it conflicts with the federal Constitution, as established in Adderley v. Florida. The court in Pistorius interpreted the Egan ruling to apply broadly to insurance bad faith claims. Defendants proposed a narrow interpretation of tort damages limited to past and present harms, which is not supported by Egan’s clear stance that future policy benefits can be included in tort damage awards for breaches of the implied covenant of good faith and fair dealing. The California Court of Appeal's rulings on state law must be followed by federal courts unless there is compelling evidence suggesting otherwise. Defendants failed to provide such evidence regarding future damages in Pistorius or the current case, affirming the district court's correct jury instruction on potential future damages liability.
Regarding punitive damages under California law, a plaintiff may obtain them if they demonstrate, by clear and convincing evidence, that the defendants acted with oppression, fraud, or malice. The jury's award of punitive damages for Hangarter was consistent with California law, as supported by the precedent in Bertero v. National General Corp. California courts have upheld punitive damages based on similar conduct, such as when an insurance policy violates California law, which may influence the assessment of punitive damages. The jury could reasonably conclude that the defendants' deceptive claims practices were particularly harmful since they were likely to go unnoticed by laypersons. Furthermore, biased medical evaluations and claims practices can also justify punitive liability. The jury's findings indicated that the defendants pursued a deceitful strategy, misleading insured individuals and denying claims in bad faith, despite indications of total disability from the plaintiff's treating physician.
California courts permit punitive damages when evidence indicates a defendant's intent to injure, specifically through a "conscious disregard" of another's rights. Cited cases illustrate that evidence showing defendants ignored disability definitions, conducted biased examinations, misinformed a claimant, and followed policies leading to unfair terminations may support a jury's finding of such disregard. The district court upheld the jury's punitive damages award as consistent with California law.
Regarding constitutional due process, the Supreme Court mandates that the reasonableness of punitive damages be assessed through the reprehensibility of the defendant's conduct. Key factors include the nature of the harm (physical vs. economic), indifference to health and safety, financial vulnerability of the victim, whether the conduct was repeated, and whether it involved malicious intent or deceit. The jury's punitive damages award aligns with these principles, as the evidence suggests the defendants acted recklessly against Hangarter's rights while exploiting her vulnerability.
Defendants contended that the Supreme Court's ruling in State Farm implied punitive damages should not exceed $1,000,000, proposing that their conduct was less reprehensible than in that case. However, the ruling in State Farm does not impose a strict ratio of punitive to compensatory damages, as the Court has rejected a rigid mathematical formula for determining constitutional limits on punitive damages. Consequently, higher ratios may be permissible if justified by particularly egregious conduct, regardless of the economic damages involved.
The punitive damages ratio in this case is approximately 2.6:1, which aligns with the Supreme Court's guidelines for constitutional awards, suggesting that single-digit multipliers are generally acceptable under due process. The due process standard only prohibits 'grossly excessive' awards, allowing states considerable latitude in determining the reasonableness of damages necessary for punishment and deterrence. Consequently, the district court's conclusion that the jury's punitive damages award was constitutionally permissible was not erroneous.
For a jury verdict to be reversed due to evidentiary error, defendants must demonstrate that the district court abused its discretion and that the error was prejudicial, meaning it likely affected the verdict.
Regarding expert testimony, Rule 702 of the Federal Rules of Evidence requires that an expert be qualified based on knowledge, skill, experience, training, or education, with a broad interpretation of these qualifications. Defendants challenged the admission of Frank Caliri's testimony, claiming he lacked sufficient qualifications to address claims adjustment standards in an insurance bad faith case. Caliri possesses 25 years of experience in the insurance industry, including roles in claims evaluation and consultation. He has been deemed qualified to testify about insurance practices in various cases, including one involving bad faith, and has not been disqualified in any instance. His extensive industry knowledge satisfies the minimal requirements for expert testimony, leading the district court to correctly determine his qualifications. Moreover, expert testimony on ultimate issues is not inherently improper.
According to Rule 704(a), expert testimony is admissible even if it addresses an ultimate issue of fact, but experts cannot provide legal conclusions on ultimate issues of law. The court retains the exclusive authority to instruct the jury on the applicable law. Defendants argue that Caliri's testimony on their failure to meet industry standards improperly constituted a legal conclusion regarding bad faith and unlawfully instructed the jury. However, the court found this argument unpersuasive, noting that Caliri's testimony did not assert a legal conclusion of bad faith but rather supported such a finding. Additionally, although Caliri referenced California law, these references were ancillary to the main issue of bad faith and did not usurp the court's role. Thus, the district court did not abuse its discretion regarding the admissibility of Caliri's testimony.
Rule 702 permits the admission of expert testimony if it aids the jury in understanding evidence or determining a fact in issue. The Daubert and Kumho Tire cases establish that judges have a gatekeeping role for all expert testimony, emphasizing discretion rather than a rigid application of factors. The trial court has broad latitude to assess the reliability of expert testimony and the methods used to determine that reliability.
The reliability of non-scientific testimony, such as that of Caliri, is primarily based on the expert's knowledge and experience, rather than the applicability of traditional "Daubert factors" like peer review or error rates. Although the district court incorrectly stated that Daubert did not apply to Caliri's testimony, this error was deemed harmless. The court conducted a sufficient reliability assessment by evaluating Caliri's qualifications through pre-trial hearings and motions, concluding that his background provided an adequate foundation for reliability. A formal Daubert hearing was not necessary, as the court's probing met its gatekeeping obligations. For William Feist, the district court held an extensive hearing regarding his qualifications, determining he was sufficiently qualified as either an expert or percipient witness. Feist’s credentials include being a board-certified specialist in insurance medicine and having practical experience in insurance policy law and claims adjudication. Thus, the court did not err in finding him qualified to discuss Provident's disability claims handling.
Defendants contend that the district court incorrectly deemed Feist "unavailable" due to his residence in Alabama, which is beyond the subpoena power of the court under Fed. R. Civ. P. 45. Consequently, his deposition testimony was admissible under Fed. R. Civ. P. 32(a)(3) since he was more than 100 miles from the trial site. The deposition, taken in the United Policyholders v. Provident Life case, allowed for cross-examination by a partner of Defendants' counsel, fulfilling the requirements of Fed. R. Evid. 804(b)(1), which permits the use of deposition testimony if the party against whom it is offered had a chance to develop the testimony.
Additionally, for evidence to be admissible under Fed. R. Evid. 402 and 403, it must be relevant and not substantially outweighed by unfair prejudice. Defendants argued that Feist's testimony on Provident's claims-handling was irrelevant to Hangarter's claim against Paul Revere. However, the jury could reasonably infer a connection given that both companies were under the same parent company, UnumProvident, and shared similar claims-handling practices. This inference was supported by various internal documents and testimonies from other witnesses, indicating minimal potential for prejudice.
Lastly, Defendants challenged the admission of certain documents from Provident, claiming they were improperly authenticated and lacked relevance. However, Robert Parks certified that these documents were produced by Provident and related companies in response to a document request, establishing the necessary authentication for their admission as evidence.
Defendants acknowledged at trial that most documents relied upon were business records from Provident, which were authenticated as exempt from hearsay due to their nature as business records under Fed. R. Evid. 803(6). The documents established a connection to Hangarter's claim, demonstrating that Provident's claims handling practices were adopted by Paul Revere after their merger with Unum in 1999. Testimony indicated that employees from both companies collaborated to transition these practices, and a round table review of Hangarter's claim was conducted to explore termination options consistent with UnumProvident's policies. The court acted within its discretion by permitting the introduction of these documents from a different lawsuit.
The district court excluded Stephen Rutledge's testimony regarding overall increases in disability claims and payouts, as it did not specifically address the own occupation disability claims relevant to Hangarter's case. This decision was upheld as the testimony could confuse the jury and was deemed irrelevant under Rules 402 and 403.
Regarding trial bifurcation, the district court's decision to try liability for contract damages and punitive damages together was not an abuse of discretion. Defendants' argument for bifurcation was unsupported by relevant case law, as the cited cases did not address bifurcation issues. The court's approach adhered to established trial procedures and aimed to balance convenience and the avoidance of prejudice.
Compensatory and punitive damage claims are typically tried together due to substantial overlap in evidence, with the jury receiving instructions to differentiate the burdens of proof. The district court correctly instructed the jury on these different standards. Evidence regarding the defendants' financial status and practices was relevant to the breach of contract claim. The court found the evidence of racially discriminatory conduct pertinent to both liability and punitive damages. The decision not to bifurcate the issues was deemed within the district court's discretion.
Regarding standing under the Unfair Competition Act (UCA), the district court ordered defendants to cease various unlawful practices but erred in concluding that the plaintiff, Hangarter, had standing for injunctive relief. Article III standing requires a concrete, imminent injury, which Hangarter lacked as there was no current contractual relationship with the defendants. Although California law allows actions for injunctive relief even without individual injury, a plaintiff must still meet Article III requirements in federal court. Consequently, the injunction is to be vacated upon remand.
The court affirmed the denial of a judgment as a matter of law (JMOL) and the jury's damage award, but reversed the permanent injunction under the UCA, leading to an order for costs to be borne by the defendants.
Hangarter's policy is classified as an occupational policy, which insures against total disability preventing the insured from performing the substantial and material duties of their specific occupation, distinguishing it from nonoccupational policies that cover broader definitions of total disability. California courts have consistently upheld this distinction, particularly in cases like Austero. The instruction provided to the jury properly focused on Hangarter's ability to perform her occupation's specific duties, despite the original policy language requiring that she not engage in any other gainful occupation. Attempts to engage in her occupation that do not meet the policy's terms do not affect the jury's total disability determination. Furthermore, any incidental income earned by Hangarter does not alter her total disability status. Even if the jury instruction's omission of certain policy elements was an error, it was deemed harmless, as the defendants acknowledged that Hangarter was not working when her benefits were terminated. The policy also entitles the insured to residual disability benefits under specific conditions related to the performance of important duties and earnings loss. The defendants' reliance on Dietlin v. Gen. Am. Life Ins. Co. to argue for a strict interpretation of the policy is misplaced, as the case did not adequately justify its conclusions based on the existence of partial disability provisions. The subsequent case of Erreca clarified that the denial of benefits in Dietlin was based on the interpretation of substantial duties, not on the existence of partial benefits.
Hangarter reported that most of her earnings were consumed by overhead costs and indicated that she saw only five to seven patients in a year before hiring Dr. Peymani to take over her practice. After replacing Dr. Peymani, Hangarter eventually sold her practice. Following the termination of her benefits, she was not engaged in any occupation. Defendants argue that under California law, insurers are not obligated to inform insured parties about benefits clearly outlined in the policy, yet this does not address Caliri's point that Defendants' lack of communication regarding Hangarter's rights was below industry standards. If an insurance policy is part of an ERISA-governed employee welfare benefit plan, state law claims related to that policy are preempted by federal law, as established in Pilot Life Ins. Co. v. Dedeaux and Kanne v. Conn. Gen. Life Ins. Co. Caliri also testified, referencing internal Provident documents, that Defendants aimed to terminate entire blocks of claims without evaluating the merits of individual claims; adjusters were instructed to maintain lists of claimants for targeted resolution, which meant termination. In terms of jury instructions, while Defendants did not object to the jury instruction itself, they raised concerns about the admission of evidence regarding future policy benefits in a motion in limine. Though their objection was not aligned with Rule 51's requirements, it was deemed to fall within an exception for situations where further objection would be futile. Lastly, there are factual differences between this case and State Farm, as Hangarter's emotional distress damages were significantly less than her economic damages, mitigating concerns about duplicative awards seen in the State Farm case.
Defendants' out-of-state conduct, which was legal where it occurred in State Farm, had minimal relevance to the plaintiff's harm. Unlike State Farm, a significant connection exists between Defendants’ corporate policies and the termination of Hangarter's benefits. Defendants do not claim that their actions were lawful in any U.S. jurisdiction. The court found that evidence presented indicated that the challenged policies were company-wide, contrasting with the scant evidence in State Farm.
Defendants argue that Caliri lacked specialized knowledge regarding insurance bad faith claims, referencing City of Hobbs v. Hartford Fire Ins. Co., where a witness was excluded for lacking specific knowledge of New Mexico bad faith cases. However, the Tenth Circuit did not assert that a lack of specific knowledge would preclude the admission of general expertise in such matters. Furthermore, Defendants' reliance on Thompson v. State Farm Fire & Casualty Co. is similarly misguided, as it merely confirmed the discretion of the trial court regarding the admissibility of bad faith testimony, not an absolute rejection of such testimony.
Caliri's testimony focused on whether Defendants' practices aligned with industry standards, relying on his knowledge and experience in the insurance field. Defendants’ concerns regarding Caliri’s document selection pertain to the weight of his testimony rather than its admissibility, as the credibility of an expert's opinion is typically examined during cross-examination.
The court granted Defendants' motion to augment the Excerpts of Record and noted Ralph Mohney’s role in managing group disability claims following the acquisitions of Paul Revere and Unum. The court refrains from determining the viability of Hangarter's UCA claim under California law.
