|
The Ninth Circuit Court of Appeals vacated a jury's punitive damages award against two insurers because the District Court's failed to instruct the jury that punitive damages could not be awarded to punish the insurers for injuries inflicted upon nonparties.
Plaintiff G. Clinton Merrick, Jr. ("Merrick") purchased an "own occupation" disability policy from defendant Paul Revere Life Insurance Company ("Paul Revere"). The policy entitled him to benefits in the event that he was unable to perform the important duties of his own occupation because of sickness or injury.
Merrick's doctors diagnosed him with Chronic Fatigue Syndrome and Paul Revere began paying disability benefits. After Merrick made an unsuccessful attempt to return to work, Paul Revere offered to settle his claim for an amount equal to four months of disability benefits. Merrick declined the settlement and Paul Revere thereafter arranged for an Independent Medical Examination by Dr. James Donaldson. Dr. Donaldson concluded that, although Merrick was fatigued, it was caused by depression and not by Chronic Fatigue Syndrome. Although Dr. Donaldson's report did not state whether Merrick was capable of returning to work, Paul Revere interpreted his report as implying that he could not do so.
Following an extensive review of Merrick's claim file, Paul Revere concluded that "there does not appear to be any neuropsychologically-based disability." After a second offer by Paul Revere to settle the claim was denied, Paul Revere denied the claim on the grounds that "no objective medical documentation" supported Merrick's inability to perform the duties of his own occupation.
Merrick filed suit against Paul Revere and its parent corporation, Unum Provident, for breach of contract and of the duty of good faith and fair dealing.
During discovery, Merrick sought all documents added to Paul Revere's claim file after Merrick filed suit. The insurers objected to the request based upon the attorney-client privilege but failed after court order to provide a privilege log. When the insurer filed another response claiming privilege with no log, and asserting responsive documents had been produced, the court ordered that all privilege objections were waived and ordered the insurers to produce all responsive documents. No additional documents were provided and Unum Provident reiterated the attorney-client privilege in a subsequent discovery response. The court later granted Merrick's motion in limine excluding all later acquired documents, including those not produced and three memos analyzing the non produced material (these rulings were upheld on appeal).
At trial, Merrick offered the testimony of Stephen Prater, an insurance industry expert. Prater testified that Unum Provident had a history of engaging in aggressive and unethical claim closing practices, including pressuring claimants to settle for small amounts, insisting upon "objective medical evidence" even though no such requirement existed in the policy, using biased physicians to support claim denials, and holding "round tables" with lawyers, doctors, and claims handlers to discuss ways to "triage" the most expensive claims. He testified Unum Provident financially benefited in the 1990s by using these "best practices." However, there was no evidence linking any of these "best practices" specifically to Merrick's case.
The jury awarded Merrick $1,147,355 in unpaid benefits and $500,000 for mental and emotional distress. In addition, the jury imposed punitive damages upon Paul Revere in the amount of $2,000,000 and $8,000,000 upon Unum Provident. In addition, the District Court awarded Merrick $500,000 in attorney's fees.
Motion for new trial was denied and this appeal followed. The Merrick Court applied the abuse of discretion standard and found that the evidence was "more than sufficient" for the jury to have found bad faith under Nevada law (i.e., the insurer acts unreasonably and with knowledge that there is no reasonable basis for its conduct) since the jury could have found that the insurers conducted a biased investigation of Merrick's claim or that they misrepresented the terms of the policy as requiring "objective medical evidence" of disability. In addition, the jury could have concluded that the insurers acted with oppression, fraud, or malice by engaging in "claim-scrubbing procedures" intended to ensure denial of Merrick's claim. Consequently, the record did not show a "complete absence of evidence" supporting the jury's verdict and the District Court's denial of the insurers' motion for a new trial was upheld.
Furthermore, the insurers appealed the jury's award of punitive damages arguing that the District Court should have granted its request that the jury be instructed to the effect that it may not punish Defendants for conduct or practices that did not affect Plaintiff, even if the jury believed that such conduct or practices were wrongful or deserving of punishment. The court agreed with this argument, even though the proposed instruction was inadequate since it did not tell the jury that it could consider such conduct in determining the wrongfulness of the conduct or the level of reprehensibility of the carrier. Though no adequate instruction was proposed by the parties, it was nonetheless incumbent on the trial court to give a correct instruction, which informed the jury that it could not punish the insurers for conduct that only harmed non parties but it could consider such conduct in determining the wrongfulness or reprehensibility of the conduct.
The Merrick Court vacated the punitive damages verdict and remanded the case for a new trial on punitive damages.
Click here for opinion.
| 
