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The casenote of the month is from the Disability E-News Alert! a monthly newsletter describing new disability insurance developments.  For subscription information, e-mail Mark DeBofsky or visit www.disabilityenewsalert.com .

Hangarter v. Provident Life and Accident Insur.Co., 2004 U.S.App.LEXIS 12841 (9^th Cir. 6/25/2004)(Issue: Bad Faith; Total Disability) The Ninth Circuit affirmed this ruling on which we initially reported in December 2002 in almost all respects.  The case involved a chiropractor who alleged total disability based on a severe shoulder injury that prevented her from performing manipulations.  Because Dr. Hangarter had continued to engage in some income-producing activities by continuing to perform some practice management, although aa substitute chiropractor hired by the plaintiff performed the manipulations, defendants, which had initially approved her claim, terminated benefit payments after subjecting the plaintiff to an IME.  Despite a subsequent examination by an orthopedic surgeon hired by the plaintiff which showed spinal abnormalities, nerve root compression, and rotator cuff tendonitis that prevented Hangarter from performing chiropractic medicine, defendants refused to reinstate benefits, and litigation ensued.  Following a trial, plaintiff was awarded a verdict in excess of $7.5 million, with $5 million of the verdict made up of a punitive damage award.

 The court first focused on the issue of “total disability.”  The jury was instructed with the policy definition of Total Disability followed by an explanation based on Erreca v. Western States Life Ins. Co., 19 Cal. 2d 388, 121 P.2d 689 (Cal. 1942), a case that remains one of the leading decisions on the meaning of “total disability” under a disability income insurance policy:

TOTAL DISABILITY

Plaintiff's policy defines "total disability" as follows:

"Total Disability" means that because of Injury or Sickness:

a. you are unable to perform the important duties of your Occupation; and

b. you are not engaged in any other gainful occupation; and

c. you are under the regular and personal care of a physician.

This means, according to the law in California, that plaintiff is eligible for benefits if she is unable to perform the substantial and material duties of her own occupation in the usual and customary way with reasonable continuity. *9. 

Finding the instruction appropriate, the court explained:

Contrary to Defendants' position, California law requires courts to deviate from the explicit policy definition of "total disability" in the occupational policy context where it is necessary to "offer protection to the insured when he is no longer able to carry out the substantial and material functions of his occupation." Austero v. Nat'l Cas. Co., 84 Cal. App. 3d 1, 148 Cal.Rptr. 653, 667 (Cal. Ct. App. 1978) (emphasis added), overruled on other grounds  by Egan v. Mut. of Omaha Ins. Co., 24 Cal. 3d 809, 169 Cal.Rptr. 691, 699 n.7 (Cal. 1979). Indeed, "California courts oppose strict adherence to a highly limited definition of 'total disability' in both non-occupational and general occupational disability policies." Id.; see also Moore v. American United Life Ins. Co., 150 Cal. App. 3d 610, 197 Cal.Rptr. 878, 882-83 (Cal. Ct. App. 1984) (stating that the unambiguous "policy language misstated California law as it has existed since [Erreca]. *11.

The court further explained that as an occupational disability policy, benefits were due as long as the insured could not perform her material job duties since the policy insured her “against the loss of her ability to perform her occupation as a chiropractor, not any other occupation.” *13.  Moreover, pursuant to Wright v. Prudential Ins. Co. of America, 27 Cal. App. 2d 195, 80 P.2d 752 (Cal. Dist. Ct. App. 1938), which also remains a significant ruling in this area, total disability can exist even with the inclusion of a partial disability clause in a contract.  Wright explained:

 No logical reason appears, however, why the same rule should not be applied where the policy provides for both total and partial disability in order to make the total disability clause 'operative and to prevent a forfeiture' of the indemnity provided by that clause. In either case a literal interpretation of the total disability clause would defeat the very purpose of insurance against total disability, because it rarely happens that an insured is so completely disabled that he can transact no business duty whatever. The rule quoted has been applied in many cases where the policy in suit provided for both total and partial disability. . . . The fact that the insured may do some work or transact some business duties during the time for which he claims indemnity for total disability or even the fact that he may be physically able to do so is not conclusive evidence that his disability is not total, if reasonable care and prudence require that he desist.

 Id. at 761-62 (citations omitted) (emphasis added). *14-*15.

 The court then examined the evidence and determined the verdict was supported by the evidence.  Based on the testimony of three physicians that Hangarter could not maintain a chiropractic practice with reasonable continuity, the fact that the plaintiff made some attempts to return to work did not preclude an award of benefits for total disability.  Nor did the plaintiff’s attempt to keep her practice going by hiring a chiropractor and working as the office manager detract from the total disability finding since she was insured for her occupation of “chiropractor” and “occasional stints as an office manager do not constitute the occupational practice of chiropractic medicine.” *19.  The fact that Hangarter made a profit while working as an office manager was also deemed “immaterial” based on Erreca since the policy insures against loss of ability to work in one’s occupation, not against loss of income.

The court also upheld the bad faith finding.  Citing Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 (9th Cir. 2002) and Chateau Chamberay Homeowners Ass'n v. Associated Int'l Ins. Co., 90 Cal. App. 4th 335, 108 Cal.Rptr.2d 776, 784 (Cal. Ct. App. 2001), the court explained the key to a finding of bad faith was whether the insurer’s conduct was unreasonable.  If the evidence shows the insurer’s investigation of the claim was biased, a finding that a “genuine dispute” existed may be precluded.  Chateau Chamberay explains how bias may be shown:

1. The insurer may have misrepresented the nature of the investigatory proceedings;

2. The insurer's employees lied in depositions or to the insured;

3. The insurer dishonestly selected its experts;

4. The insurer's experts were unreasonable; or

5. The insurer failed to conduct a thorough investigation;

 Chateau Chamberay, 108 Cal.Rptr.2d at 785; cf. Sprague v. Equifax, Inc., 166 Cal. App. 3d 1012, 213 Cal.Rptr. 69, 79 (Cal. Ct. App. 1985) (fraudulent termination exists if insurer arranges "an inadequate medical examination, producing a false conclusion, which would form an apparently plausible basis for wrongfully terminating payments"). *23.  Finding substantial evidence supported plaintiff’s charge of a biased investigation, the jury verdict was upheld.   

The court found that expert testimony from Frank Caliri was properly admitted; and that the testimony showed that defendant’s investigation fell below appropriate standards in that the insurer falsely misrepresented the policy terms by telling the doctor she was ineligible for benefits because she was “working,” and by not advising about rehabilitation benefits upon inquiry.  The court also faulted defendants for falsely advising that the ERISA law governed her claim. 

 In addition, the evidence showed that the “IME” physician had been used by defendant 19 times between 1995 and 2000 and in 13 out of 13 evaluations in which the claims involved total disability, that examiner found in favor of the insurer.  Moreover, the court found persuasive evidence showing that UnumProvident had developed and applied to plaintiff’s case a system for identifying and targeting for closure expensive “own occupation” claims and that other documents showed that the company was intentionally working with its adjusters to “resolve” claims, meaning termination.

The court also upheld the court’s award of future damages.  Based on Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 620 P.2d 141, 169 Cal. Rptr. 691 (Cal. 1979), the California Supreme Court stated that:

 We have never held, however, that future policy benefits may not be recovered in a valid tort cause of action for breach of the implied covenant of good faith and fair dealing . . . . Thus, in applying to these facts the general rule for fixing tort damages . . ., the jury may include in the compensatory damage award future policy benefits that they reasonably conclude, after examination of the policy's provisions and other evidence, the policy holder would have been entitled to receive had the contract been honored by the insurer.

 Id. at 149 n.7 (emphasis added).  *29.  The court explained that when the claim for future policy benefits is based on the tort claim of breach of the duty of good faith and fair dealing, such damages are available.  Likewise, the award of punitive damages was upheld based on California law which allows such damages when the plaintiff proves “by clear and convincing evidence that [Defendants] have been guilty of oppression, fraud or malice.” *30 (citing Cal.Civ.Code §3294(a)).  The court explained further:

The evidence proffered at trial that Defendants disregarded Erreca's definition of total disability, engaged in biased medical examinations, misinformed Hangarter regarding her potential benefits, and employed policies to achieve net termination ratios could support a jury's finding that Defendants had a "conscious course of conduct, firmly grounded in established company policy" that disregarded the rights of insureds. Neal v. Farmers Ins. Exch., 21 Cal. 3d 910, 582 P.2d 980, 987, 148 Cal. Rptr. 389 (Cal. 1978).

The amount of the punitive damages was also found to satisfy the framework set out by the Supreme Court in State Farm Mut.Auto.Insur.Co. v. Campbell, 538 U.S. 408 (2003).  The court explicitly ruled: “The evidence, viewed in Hangarter's favor, can support the conclusion that Defendants' conduct was in reckless disregard of the rights and the physical well-being of Hangarter; was threatening to an individual who was economically vulnerable; was part of a general corporate policy and not an isolated incident; and caused harm in a deceitful manner.” *34-*35.  The court also rejected an argument that punitive damages could be no more than the amount of compensatory damages, finding the verdict (the ratio of punitives to compensatory damages was 2.6:1) to be well within the Constitutional limits described in Campbell.

The court likewise upheld the lower court’s evidentiary rulings.  Frank Caliri, plaintiff’s expert, was found qualified to testify on insurance practice and standards based on prior cases finding him to be a qualified expert, as well as his past employment by defense firms on the same issues for which he was employed by the plaintiff.  Under the standards of Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999) which were applied to Caliri’s testimony, the court ruled that because the lower court held a hearing to evaluate the witness’s competence to testify, the “gatekeeping” function of the federal court was preserved.  In addition, the court found it was appropriate to have considered William Feist’s testimony by deposition in relation to claim handling at Provident.  Despite defendant’s objection that Feist’s testimony was not directly relevant to how Paul Revere handled the claim, the court found:

The jury could have reasonably inferred that the claims handling procedures at Provident were carried over to Paul Revere as a subsidiary of UnumProvident after Unum and Provident merged. This inference was not unwarranted given that Ralph Mohney controlled claims-handling at both Provident and Paul Revere and Paul Revere's handling of Hangarter's claim employed practices similar to those used at Provident. See Murray v. Toyota Motor Distribs., Inc., 664 F.2d 1377, 1379-80 (9th Cir. 1982) (ruling admissible deposition testimony of an unavailable former employee of a company against an affiliated company with a similar motive where both affiliates were controlled by the same parent company). Moreover, the deposition was corroborated by a number of internal Provident and Paul Revere documents, and by the testimony of Chris Ryan, Ralph Mohney, Joseph Sullivan, Sandra Fryc, and Frank Caliri. Any possible prejudice caused by the deposition was thus marginal. *50-*51.

The same reasons justified admission of documents relied on by the plaintiff.  The court found the documents sufficiently authenticated and also showed that practices instituted at Provident were carried over to Paul Revere after Provident’s acquisition of that company.  Likewise, the court upheld the exclusion of a Provident witness who was going to testify that claims payouts increased.  The court noted,

Defendants' contention is unpersuasive. The district court rejected Rutledge's testimony because it related to all individual disability claims, and not to only own occupation disability claims. Hangarter's entire case was premised upon the theory that Defendants purposefully terminated her claim because it was a high cost, own occupation disability claim. An increase in disability payouts does little to disprove Hangarter's theory that Defendants intended to terminate claims such as Hangarter's. The district court therefore was within its discretion in excluding this evidence as irrelevant and prejudicial under Rules 402 and 403, particularly given its potential to confuse the jury. See McEuin v. Crown Equip. Corp., 328 F.3d 1028, 1034 (9th Cir. 2003) (citing Longnecker v. Gen. Motors Corp., 594 F.2d 1283, 1286 (9th Cir. 1979) ("Trial judges are better able to sense the dynamics of a trial than we can ever be,  and broad discretion must be accorded them in balancing probative value against prejudice.")).  *54-*55.

Nor did the court find any merit in defendant’s argument that liability for contract damages and liability for punitive damages should have been bifurcated into two proceedings.  The court ruled that the district court merely applied normal procedures when the evidence overlaps.  However, the court found the district court improperly entered an injunction against defendants under the Unfair Competition Act.  The plaintiff was found to lack standing to pursue such a claim in federal court.

Discussion:           Despite the determination on the Unfair Claim Act, this ruling was essentially a complete slam dunk win for the plaintiff.  This ruling reaffirms the vitality of older cases recognized as the lead cases around the country on issues of total disability and bad faith.  Last month, we reported on Gross v. UnumProvident Life Insurance Co., 2004 U.S.Dist.LEXIS 9902 (C.D.Cal. 5/18/2004), which was litigated by Bourhis & Wolfson in San Francisco, the winners in this case as well.  Those lawyers have done an outstanding job in educating the courts and clarifying the law on these issues which will undoubtedly control the outcome of similar cases for many years to come.

This note appeared in the Disability E-News Alert! For subscription information, please go to www.disabilityenewsalert.com .