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Mealey’s Bad Faith Litigation Conference 2006
A Year in Review: Discussion of Important Bad Faith Decisions, Life and Disability
Bonny G. Rafel Esq.
Livingston, NJ

Since the Last Mealey’s Bad Faith Seminar, several disability and life insurance cases have caught our eye.  In this presentation we also comment on three cases litigated under ERISA where the court determined that unreasonable denials of disability benefits supported claims of bad faith which led to awards of counsel fees far exceeding the value of the underlying claim.
INDIVIDUAL DISABILITY
Leavey v. UnumProvident et al., 2006 U.S. Dist. LEXIS 34810 (D. Ariz. May 26, 2006) Leavey is a dentist with depression, anxiety and chemical dependence. After paying benefits for three years and conducting IMEs, Unum denied further benefits.  Once suit was filed, Unum resumed paying the benefits. Testimony regarding the claims handling practices of the company, buttressed by expert testimony, landed plaintiffs a verdict in their favor.  Some of the Provident documents used to support prior large bad faith awards in California, such as Hangartner v. Provident Life & Accident, 373 F.3d 998 (9th Cir. 2004) and Chapman v. Unum,  Superior Court, State of California, County of Marin, Action No. CV 012323, were successfully used here, but as plaintiff’s counsel said during summation, the jury heard and saw more evidence on these companies than any other jury before them.
Plaintiff proved that psychiatric claims were targeted for closure. He exposed claim practices, including roundtable reviews, used to strategize a formula for the denial that followed.  A jury trial in September 2005 found in favor of Leavey, awarding $15 million in punitive damages; $4 million for mental, physical and emotional pain and suffering; and $809,000 for future policy benefits.  On appeal, the Court agreed bad faith was proven based on the defendants’ institutional practices utilized in the handling and closure of the Leavey claim.  Each category of damages was upheld on appeal including future benefits.  But the court reduced the compensatory damages from $4 million to $1.2 million for a combination of emotional distress and the injuries Leavey sustained when he self-inflicted a broken hand because in the court’s view, the award is “grossly disproportionate to the damage incurred in this case.” The court referred to State Farm v. Campbell, 123 S. Ct. 1513 (2003), as support for upholding but reducing the emotional distress damages, concluding that the Campbell $1 million compensatory award for financially related emotional distress was instructive, adding $200,000 to that figure to account for Leavey’s hand injury.
The court then upheld the jury’s decision to award punitive damages, rationalizing that the requisite “evil mind” existed because Unum knew and consciously disregarded a substantial risk that their conduct might significantly injure the rights of others.  The jury had found motivation for closure to release the reserves and meet termination goals by the use of various claim handling tools.  The court reasoned that defendants’ actions in this case represent “one instance in a company wide nationwide practice of claims handling” which weighs in favor of reprehensibility although Defendants cannot be punished for conduct outside of Arizona.  The court then reviewed the caselaw on the amount of punitive damages, and concluded that the ratio of 15-1 cannot stand under the Due Process Clause of the Fourteenth Amendment and remitted the punitive damages to a single-digit ratio to comport with due process under State Farm v. Campbell.  The court then remitted to a 1.5 to 1 ratio to the compensatory damages of $1.2 to arrive at reduced punitive damages of $3 million from the original $153 million.  If Leavey did not accept the remittitur he could proceed with a new trial.  Leavey was awarded counsel fees of $755,247.  See also Thorndal v. Provident Life and Accident Insurance Co., et al., 2005 Cal. App. Unpub. LEXIS 7288 (Ct. App. Cal. August 15, 2005) (in upholding bad faith damages of $100,000 for emotional distress and future disability benefits, the Court found substantial evidence to support Thorndal’s claim for bad faith based upon insurers acting on a financial motive to improperly deny valid disability claims and so motivated, unreasonably delayed making payments due on her claim and failed to conduct an adequate investigation.) and  Merrick Jr. v. Paul Revere, Unum Life and Provident Case No. CV-S-00731-JCM-RJJ (D.C. Nevada, June 6, 2006) 
BAD FAITH UNDER ERISA IN GROUP LONG TERM DISABILITY CLAIMS
Insurers have a duty of good faith and fair dealing that pervades contracts in the context of ERISA.  Although ERISA preempts state laws, ERISA permits and welcomes an inquiry into the claims handling practices of the insurer in determining when to award counsel fees to the victorious.   The consideration includes factors described as “the degree of the offending party’s culpability or bad faith.”
District courts have the discretion to award attorney’s fees and costs in ERISA actions. In a recent case of Winkler v. Metropolitan Life Ins. Co., 03 Civ.9656 (S.D. N.Y., August 10, 2006) (unpublished) counsel was awarded $303,098.92 after he proved that MetLife was culpable for its arbitrary and capricious denial of LTD benefits.  The fee awarded included compensation for the time spent on arguing aspects of the case which were unsuccessful.  The court reasoned, “even if a plaintiff’s success was only partial, the fee award should not be reduced simply because the plaintiff failed to prevail on every contention raised in the lawsuit.” See also  Hensley v. Eckerhart, 461 U.S. 424, 435 (1983)
In Kamlet v. Hartford Life and Accident Insurance Company, 2006 U.S. App. LEXIS 10976 (11th Cir. July 5, 2006 ) Hartford had deducted $25,700 from Kamlet’s benefits as an offset for money he earned in part time employment.  During pre suit negotiation, Hartford agreed to pay the benefits, but not counsel fees of $16,000 incurred in seeking the benefits.  Kamlet then sued Hartford and was awarded the benefits and prejudgment interest, both of which were affirmed by the 11th Circuit.  Kamlet then filed a petition for attorneys’ fees, seeking $127,184.50 plus costs.  The award by the District Court of  $87,000 was then affirmed by the 11th Circuit.
Hartford asserted that prelitigation attorneys’ fees are not recoverable under ERISA.  But when it litigated the case, Hartford challenged Kamlet’s underlying claim pertaining to the offset as well.  Thus, this case was distinguished from another case, Anderson v. Procter & Gamble Co., 220 F.3d 449 (6th Cir. 2000) where the parties resolved their dispute over benefits pre litigation, followed by a suit for solely the counsel fees incurred during that time.  The court in Anderson denied the attorneys fees.  In Kamlet, the court reasoned, “Hartford’s problems could have been avoided if Hartford actually had tendered the benefits it claimed it was willing to pay Kamlet.  Instead, Hartford opted to litigate the entire case. Hartford was entitled to pursue full adjudication of all issues, but it must accept the risks of that litigation, which include the attorneys’ fees provisions of ERISA.”  Since the court found that Hartford’s position on the payment of benefits was inconsistent with the provisions of the summary plan provisions, they were the culpable party and Kamlet was entitled to recovery of counsel fees and costs as well as the underlying benefits.
In Moon v. UnumProvident Corporation, 2006 U.S. App. LEXIS 16597 (11th Cir. June 29, 2006) the circuit court reversed the district court’s denial of attorneys fees utilizing a five factor test which includes assessing the degree of the opposing party’s culpability or bad faith.    The District Court had awarded Moon benefits, finding that Unum’s repeated denial of Moon’s claims for disability benefits was arbitrary and capricious because they did not provide a reasoned explanation that supported their outcome.  Unum engaged in bad faith or culpable conduct because
“not only did Unum deny Moon’s claims based solely on the opinion of a physician in its employ, but they also repeatedly denied her claims even though this physician ignored substantial evidence in the administrative record indicating she was disabled and the physician never examined Moon. Without question, Unum’s wholesale adoption of the opinion of an interested physician, who based his findings on selective information in the administrative records and did not examine Moon, is misconduct that supports our decision to weight this factor against Unum.”

The court, in awarding counsel fees also looks at the deterrent effect this case may have in the future and commented, “the facts of this case are not so unique that they fail to serve any deterrence value to other insurance companies under similar circumstances.  For instance, a plan administrator should ensure that the opinions upon which they rely to make their decisions to terminate are based on a thorough review of the administrative records.” Under certain circumstances, the opining physician’s opinion should also be based upon an actual examination of the claimant.      
LIFE INSURANCE

A case from my home state reflects some common issues that arise in a life insurance case.  In Feit v. Great-West Life and Annuity Insurance Company, 2005 U.S. Dist. LEXIS 24686 (D.N.J. October 18, 2005), Dr. Feit drove off the highway and crashed into a guardrail.  Autopsy results and death certificate indicated that Dr. Feit died from a “myocardial infarction, old due to atherosclerotic obstruction of coronary arteries.” The autopsy report did not include any detail regarding his head or nervous system.  His widow sought both the life insurance proceeds and accidental death benefits based on her claim that the automobile accident caused his ultimate death.  The policy provided that in order to receive the accidental death benefit, an insured’s death must be the result of a bodily injury that is caused solely by accidental means.  When Great-West failed to honor the ‘accidental death’ policy provision, Ms. Feit asserted a claim for the failure to act in good faith in reviewing her accidental death benefits claim.  The court explained that an insurer may be liable for breaching the covenant of good faith and fair dealing by the "bad faith" review of an insured's claim or otherwise.  Pickett v. Lloyds, 131 N.J. at 481, 621 A. 2d at 457 (N.J. 1993). The Pickett court explained that "in the case of denial of benefits, bad faith is established by showing that no debatable reasons existed for denial of the benefits."  Id.  This rule is recognized as the "fairly debatable" standard.  See Tarsio v. Provident Ins. Co., 108 F. Supp 2d 397, 401 (D.N.J. 2000).  An insurer did not act in bad faith if a plaintiff's claim was "fairly debatable" at the time the insurance company made the coverage decision. Tarsio, Id at 401.  The court then went on to analyze the fairly debatable standard with reference to summary judgment standards, holding that a claimant who would not be entitled to summary judgment based on its substantive claim would not meet the fairly debatable standard. The court then turned to the facts of the case, and the evidence before Great-West when they evaluated the claim.  Although the plaintiff had offered evidence from two medical experts that supported her claim that Dr. Feit died from the injuries as a result of the crash, these experts had not been submitted to Great-West when they made their decision. The court noted both that reasonable minds could differ as to whether Dr.Feit died of natural causes or as a result of the car crash, and that based on the evidence before Great-West at the time of their decision, Mrs. Feit’s claim was fairly debatable, thus defeating the right to summary judgment based on her substantive claim.  The claims for bad faith were thus dismissed.  The crucial lesson of this case setting, aside the ‘fairly debatable standard” conundrum, is the value of submitting all proofs of a claim to the insurance company before litigation, to provide them the opportunity to evaluate all of the evidence and arrive at their final decision.  Here, it is possible that the court may have found for the plaintiff, had he submitted his expert reports to Great-West before the litigation.  What is unclear is why the court did not consider bad faith committed during the litigation process, since once irrefutable proofs of Dr. Feit’s cause of death was established, the duty of good faith and fair dealing requires the company to pay a claim when ever it becomes clear that it is obligated to do so, even during litigation.