Free Order on Motion for Partial Summary Judgment - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Pending for ruling is the last of the trilogy of dispositive motions: Defendants' 17 Motion For Summary Judgment On Issues Other Than ERISA (doc. # 99), filed on May 13, 18 2005. After considering all the pleadings submitted on the subject motion and the relevant 19 case law, the Court concludes: (1) that Dr. Roehrs' degenerative lumbar stenosis first 20 manifested itself during the policy period, no later than August 13, 1997, (2) that genuine 21 issues of material fact exist for jury resolution on the amount of benefits, if any, Plaintiffs 22 are entitled under the subject disability policy, (3) that Plaintiffs are not entitled to an award 23 of punitive damages as a matter of law, (4) that no genuine dispute of material fact exists 24 whether Plaintiffs' tort claim of bad faith is barred by Arizona's two-year statute of 25 limitations, and (5) that Defendants are entitled to summary judgment on Plaintiffs' 26 negligence claims because Plaintiffs concede that Arizona law does not recognize an 27 independent cause of action based upon an insurer's negligent handling of a claim. Thus, the 28 subject motion will be denied in part and granted in part.
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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

John Roehrs, M.D. and Jean Roehrs, his) ) wife, ) ) Plaintiffs, ) ) vs. ) ) Minnesota Life Insurance Company, et al.,) ) ) Defendants. ) )

No. CV-03-1373-PHX-LOA ORDER

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DISCUSSION The Court will not repeat here the facts and claims well-known to the parties, nor will the Court restate the controlling law on summary judgment, which have been adequately set forth in the other two summary judgment orders except as it may be necessary to explain the Court's rulings herein. Because Plaintiffs do not dispute that Dr. Roehrs' degenerative lumbar stenosis first manifested itself no later than 1997 and that Arizona law does not recognize an independent cause of action of an insurer's negligent handling of a claim, summary judgment will be granted to Defendants on these issues. PLAINTIFFS' CLAIM FOR DISABILITY BENEFITS BEYOND FEBRUARY, 2004 Defendants seek summary judgment that Dr. Roehrs' entitlement to benefits, if any, ended no later than February, 2004, when Dr. Roehrs applied for the highest level of pulmonary and critical care privileges at the Veterans Administration Medical Center ("VAMC") in Phoenix. Dr. Roehrs accepted a job in the pulmonary division at the VAMC in May, 2004 where he is currently employed. Defendants presumably are arguing that Dr. Roehrs has returned to his regular occupation subsequent to his disability claim submitted on May 25, 2000. (DSOF, Exh. 6) Recognizing, however, that Dr. Roehrs testified that he was not performing any critical care functions at the VAMC, Defendants point to contradictory evidence in the record that he is. Plaintiffs contend that whether he is currently performing critical care work or not, Dr. Roehrs' income from his VAMC employment is substantially less than what he was averaging in Nebraska while in private practice and, therefore, Dr. Roehrs is entitled to a proportionate benefit of his lost income as provided in the subject policy. (PSSOF, ¶ 59) Plaintiffs also point to the subject policy's definitions within the "Definition of Disability" section that provides "if because of disability you are . . . engaged in your regular occupation but earning not more than [$9,342. per month], we will pay [$9,342. per month], regardless of income earned outside your regular occupation." (DSOF, Exh. 1; (PSSOF, ¶ 55) Defendants respond, in part, by arguing that Dr. Roehrs voluntarily left PMS in 1999 and presumably are contending that his income while

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employed at PMS can not be considered in determining his proportional benefits under the subject policy. The Court concludes that there are too many disputes centering around the policy's contractual terms and there are factual disagreements related to Dr. Roehrs' claims for disability benefits under the subject policy to appropriately grant summary judgment at this time. Moreover, it is the function of the jury, not the court, to determine credibility and compute the amount of damages, if any, Plaintiffs may be entitled under the subject policy. Rhue v. Dawson, 173 Ariz. 220, 841 P.2d 215, 228 (1992). Defendants' motion in this regard will be denied. PLAINTIFFS' ENTITLEMENT TO AN AWARD OF PUNITIVE DAMAGES Plaintiffs seek an award of punitive damages against Defendants because of "the companies' intentional action in not sending a policy conversion letter to its insureds when the annual [or semi-annual] premium was not timely paid."1 (document # 108, p. 4, ll 12 - 16) Plaintiffs contend that by not sending "[t]he letter . . . until after the 31-day grace period had expired[,]" "Minnesota Life intentionally and clandestinely took away from its insureds their benefits by failing to notify its insureds of nonpayment of the annual premium and impending lapse. (Id.)(Emphasis in original) Claiming this failure was financially motivated, Plaintiffs assert that "[t]his intentional policy . . . evidences a pattern and practice of placing the insurance company's interest above that of the insured and evidences the 'evil hand' guided by an 'evil mind' necessary to establish punitive damages." (Id.)

Defendants point out that Plaintiffs failed to seasonably supplement their April 26, 2004 answer to Defendants' interrogatory that sought the factual basis for Plaintiffs' claim for punitive damages as required by Rule 26(e), FED.R.CIV.P. (DSOF, ¶ 82 and ¶ 83) Plaintiffs' basis for an award for punitive damages was initially raised in their Response to the subject motion, not in a supplemented answer to the foregoing interrogatory. Rather than summarily granting the subject motion on technical grounds for Plaintiffs' failure to seasonably supplement, the Court elects to address the merits of Plaintiffs' punitive damage claim raised in their Response. -3Document 127 Filed 10/17/2005 Page 3 of 10

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Defendants counter Plaintiffs' argument that Plaintiffs are entitled to an award of punitive damages by pointing out that (1) there is no legal duty to send out such a conversion letter, (2) the subject policy's reinstatement provisions have been present in the policy since it was first issued, and (3) even if the Defendants timely sent out such a letter, it is factually unlikely and sheer speculation that Dr. Roehrs would have received and read the letter and then paid the premium in a timely fashion.2 (document 116, pp. 2 - 3) The Court agrees with Defendants that if Defendants had no legal duty to send out such a conversion letter at a time when the premium was overdue but before the 31-day grace period expired, there can be no liability, much less punitive damage liability, for failing to issue such a letter. Thus, it is unnecessary for the Court to discuss the other factual reasons why Plaintiffs are not entitled to punitive damages in this case. Surprisingly, Plaintiffs offer no legal (case law or statutory) authority from any jurisdiction, much less Nebraska or Arizona, that imposes a duty upon an insurer to send a conversion letter, or any other kind of notice for that matter, when a premium is overdue but before the 31-day grace period has expired. Defendants, however, cite several cases, and the Court's independent research has uncovered others, that hold that, absent a statutory or policy provision or proof of a course of dealing establishing a custom of sending such notice, an insurer has no duty to send a notice of the lapse of a policy for nonpayment of the premium. Scarberry v. Peoples Sec. Life Ins. Co., 938 F.Supp. 356, 361 (S.D. W.Va. 1996); American Life Ins. Co. v. Hooker, 622 P.2d 775, 779 (Utah 1980)("We agree generally that in the absence of a policy provision or statute requiring notice of premium due, or proof of a course of dealing establishing a custom of sending such notice, notice need not be given as a prerequisite to a policy lapsing for nonpayment of premium."); Sorenson v. National Life Insurance Company, 56 Wis.2d 92, 201 N.W.2d 510 (Wisc. 1972); Premsingh, v. UNUM Life Ins. Co. of America, 929 F.Supp. 1391 (D. Kan. 1996), affirmed by 117 F.3d 1428 (10th Cir. 1998)(assignee of benefits brought action against insurer to recover under doctor's

See, Defendants' Reply, p. 3, footnote 3. (document 116) -4Document 127 Filed 10/17/2005 Page 4 of 10

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disability insurance policy for failure to make timely premium payments where insured received notices of unpaid premiums). Sorenson involved the assignment of a life insurance policy as collateral security for the payment of indebtedness owed by the insured/debtors to the assignee/plaintiff. There, unlike the facts of the case sub judice, the insurer had actual notice of the assignment to the assignee/plaintiff yet no notice was ever given by the insurer to the assignee of the insured's failure to pay a semi-annual premium. In affirming judgment in favor of the insurer, the Supreme Court of Wisconsin used language equally applicable to Dr. Roehrs: "In light of the fact that the policy provided for a thirty-one-day grace period after the due date of the premium in which the policy would still be in force, it would have been easy for the appellants to either make inquiries of [the insurer] as to whether premiums had been paid, or at least attempt to enter into a separate agreement with it, whereby [the insurer] would send them notice of the periodic premiums due, together with notice of any default." Sorenson, 201 N.W.2d at 513. Assuming no federal question jurisdiction existed on ERISA,which has yet to be decided, a federal court exercising diversity jurisdiction must apply the law of the state in which it sits. Erie R.R. v. Tompkins, 304 U.S. 64, 78-79, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). In doing so, federal courts are bound by the pronouncements of the state's highest court on applicable state law. Davis v. Metro Productions, Inc., 885 F.2d 515, 524 (9th Cir. 1989). "Where the state's highest court has not decided an issue, the task of the federal courts is to predict how the state high court would resolve it." Dimidowich v. Bell & Howell, 803 F.2d 1473, 1482 (9th Cir. 1986), modified at 810 F.2d 1517 (9th Cir. 1987). In assessing how a state's highest court would resolve a state law question - absent controlling state authority federal courts look to existing state law without predicting potential changes in that law. Moore v. R.G. Industries, Inc., 789 F.2d 1326, 1327 (9th Cir. 1986). Plaintiffs have not referred the Court to any portion of the subject policy which would require Defendants to give notice to Dr. Roehrs' that the policy was about to expire for lack of timely premium payment. Additionally, Defendants assert that "[n]either Arizona nor Nebraska have enacted a statutory requirement that a disability insurer give notice of an -5Document 127 Filed 10/17/2005 Page 5 of 10

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impending lapse for nonpayment of premium. (document # 116, p. 4, fn. 4) The Court's own legal research supports Defendants' assertion and Plaintiffs have provided nothing to the contrary. Although the Court is not aware of any Arizona case directly on point, the Court believes the Supreme Court of Arizona would follow the decisions of other states which hold that absent a statute, a contract, or actions by the insurer giving rise to a duty to notify the insured, a disability insurer has no duty to notify its insured or the employer of its insured on a "list bill" form of invoicing that a policy was lapsing for nonpayment of premium. In Tomeoka v. Mid-Century Ins. Co., 118 Ariz. 394, 397, 577 P.2d 245, 248 (1978), the Arizona Supreme Court found that an automobile insurance policy provision requiring a ten-day notice prior to the date of cancellation was inapplicable where the policy also provided an automatic termination if the insured failed to pay a renewal premium. The court held that: Since a failure to pay a renewal premium is not one of the conditions that activates the "right to cancel" provisions of the policy, we agree with appellee [insurer] that no "notice of cancellation" is required by that provision in order for the policy to be effectively terminated for failure to pay a renewal premium. Since the [plaintiff] has not demonstrated that some other provision of the policy required the insurance company to send a notice of cancellation in order to effectively terminate the policy, we agree with the [insurer] that the [insured's] failure to pay the renewal premium prior to August 29, 1972 caused the policy to lapse automatically on that date under the expiration provision of the policy, and that the insurance company was not obligated to notify its insured of that fact. 118 Ariz. at 397, 577 P.2d at 248 (Emphasis added)(citing Kapahua v. Hawaiian Insurance

20 and Guaranty Co., 50 Haw. 644, 447 P.2d 669 (1968); Shepard v. United States Fidelity and 21 Guaranty Co., 210 Kan. 652, 504 P.2d 228 (1972)). If the Arizona Supreme Court would 22 hold that an automobile insurance company has no obligation to notify its insured that a 23 policy will lapse for nonpayment of the insurance premium in a state where automobile 24 liability insurance is mandatory under its statutory scheme and the state's public policy is the 25 protection of the traveling public from financial hardship resulting from the operation of 26 motor vehicles by financially irresponsible persons, certainly non-mandatory insurance, like 27 disability insurance, may similarly lapse without such notice. Arizona's Vehicle Insurance 28 -6Case 2:03-cv-01373-LOA Document 127 Filed 10/17/2005 Page 6 of 10

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and Financial Responsibility Act, A.R.S. §§ 28-4001 through 28-4153; Farmers Insurance Co. of Arizona v. Young, 195 Ariz. 122, 985 P.2d 507 (Az. Ct. App. 1998). The Court concludes that under Arizona law, absent a statute, a policy provision or proof of a course of dealing establishing a custom of sending such notice, Defendants had no legal obligation to send a notice of an impending lapse of the policy for nonpayment of the premium to Dr. Roehrs or PMS. If there is no such legal obligation, it is axiomatic that there can be no liability for failure to give such notice, much less the high standard of proof to warrant an instruction on punitive damages in Arizona. Linthicum v. Nationwide Ins. Co., 150 Ariz. 326, 331, 723 P.2d 675, 680 (1985)("In whatever way the requisite mental state is expressed, the conduct must also be aggravated and outrageous. It is conscious action of a reprehensible character."); Gurule v. Illinois Mut. Life and Cas. Co., 152 Ariz. 600, 734 P.2d 85 (1987)(insurer was not liable for punitive damages for its denial of payments to insured where there was insufficient evidence that insurer intended to injure insured or acted in conscious disregard of insured's interests). Defendants are entitled to summary judgment on Plaintiffs' punitive damage claim. STATUTE OF LIMITATIONS AND BAD FAITH Finally, Defendants claim that Plaintiffs' tort claim for breach of the covenant of good faith and fair dealing ("bad faith") is barred by Arizona's two-year statute of limitations. A.R.S. § 12-542; Ness v. Western Sec. Life Ins. Co., 174 Ariz. 497, 500, 851 P.2d 122, 125 (Az. Ct. App. 1992). Because Plaintiffs' claim was denied on November 9, 2000 yet Plaintiffs' lawsuit was not filed until July 18, 2003, Defendants seek summary judgment that Plaintiffs' bad faith claim is time-barred. (DSOF, ¶¶ 41 - 43, Exh. 11) The November 9, 2000 letter provides, in part, that Minnesota Life is "unable to consider benefits at this time" because Dr. Roehrs' disability is "due to his lumbar spinal stenosis" which, according to Defendants, is a disease or sickness that did not first manifest itself until after reinstatement of the policy in December, 1999. (Exh. 11) On the other hand, Plaintiffs argue that although the initial denial was on November 9, 2000 by Minnesota Life, there exists numerous letters back and forth from both Plaintiff's attorney, Louis C. Webb, and Defendants' agents, -7Document 127 Filed 10/17/2005 Page 7 of 10

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indicating that Dr. Roehrs' claim was not finally and unequivocally denied until a January 9, 2003 letter was authored and mailed by Defendant Standard Insurance Company's ("Standard") Linda Engle, Benefits Review Specialist. (PSSOF, ¶ 73; Exhs. 14) Between the time of Minnesota Life's November 9, 2000 letter and the filing of Dr. Roehrs' complaint in July, 2003 over three years later, Defendant Standard Insurance notified Dr. Roehrs by letter on July 5, 2001 that there was a "change in the administration of claims on its individual disability insurance policies" and beginning March 1, 2001, Standard would administer all new claims on such policies issued by Minnesota Life. (Exh. 14, STND 41900354) Thus, Plaintiffs argue, Dr. Roehrs' complaint was timely filed only seven months thereafter on July 18, 2003. Ness discusses, in part, that [i]n Arizona, an insurance company commits bad faith when it (1) intentionally (2) denies, fails to process, or fails to pay a claim (3) without a reasonable basis for such action. (citations omitted) The cause of action arises only when all three elements are present. A limitations period starts when the cause of action arises. Norton v. Steinfeld, 36 Ariz. 536, 288 P. 3 (1930). Therefore, Ness's cause of action did not arise, and the limitations period did not begin to run, until [the insurer] had intentionally denied, failed to process, or failed to pay his claim without a reasonable basis. Ness, 851 P.2d. at 500. Ultimately, the Ness Court adopted "the better reasoned rule [] that the cause of action [for insurance bad faith] accrues at the time all settlement negotiations end" and found that the record in Ness included evidence that the insurer did not definitively and unequivocally deny the claim for disability insurance benefits until a much later denial letter. Id at 501. Thus, the Arizona court in Ness concluded that because the insurer held out hope to the plaintiff that additional benefits might be paid, summary judgment was inappropriate as a genuine dispute of material fact existed regarding the timeliness of the complaint. Id. A fair reading of the letters sent by and to Standard's representatives indicate that Standard, clearly Minnesota Life's agent for purposes of its non-delegable duty to fairly investigate and adjust Plaintiffs' claim, Fireman's Fund Am. Ins. Co. v. Escobedo, 80 Cal.App.3d 610, 621, 145 Cal.Rptr. 785 (1978)(holding that the duty to investigate may not be delegated); Philadelphia Indem. Ins. Co. v. Findley, 395 F.3d 1046 (9th Cir. 2005), did -8Document 127 Filed 10/17/2005 Page 8 of 10

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not definitively deny Plaintiffs' claim, but rather, affirmatively held out hope after January 9, 2003 to Dr. Roehrs and his attorney that his disability claim may be resolved absent litigation. For example, Standard's letter, dated September 13, 2001, by Linda J. Lowe, a Senior Disability Technical Specialist, indicates that "[t]he initial review of your disability claim has been completed[]" but she writes that "additional information is needed to help us make a determination on your claim." (PSSOF, Exh. 14, STND 419-003923) On October 2, 2001, she again writes that "[w]hen all necessary information is received, we [Standard] will promptly complete our review of your claim and notify you of the claim decision." (PSSOF, Exh. 14, STND 419-00407) Again in late October, 2001 and early November, 2001, Standard is continuing to review Dr. Roehrs' claim and representing that it "will notify you once a decision has been made on your claim." (PSSOF, Exh. 14, STND 419-00449) On January 29, 2002, Standard requests additional earnings information from Dr. Roehrs, (PSSOF, Exh. 14, STND 419-00513), and "extra time to review the claim" in a February 27, 2002 letter. (PSSOF, Exh. 14, STND 419-00524) In March, 2002, Standard requests a signed medical authorization from Dr. Roehrs. Although there is other correspondence from Standard thereafter that may have continued to toll the running of the statute of limitations, on April 12, 2002, Standard wrote to Dr. Roehrs and advised him that "[u]nfortunately, based upon our review, your claim must be denied because you do not meet your policy's definition of disability." (PSSOF, Exh. 14, STND 419-00612) Plaintiff' complaint, filed on July 18, 2003, was clearly timely filed within two years of this letter. Defendants' motion that Plaintiffs' bad faith claim is time-barred is not only denied but at trial there will be no statute of limitations issue because no reasonable jury could return a verdict for the Defendants on this issue. In fact, Defendants' motion on this issue borders on a Rule 11, FED.R.CIV.P., violation as self-evidenced by Defendants' failure to even address this issue in their reply brief. Accordingly,

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The copy provided to the Court in PSSOF was not fully copied for the Court to be confident that this Bates number is accurate.
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IT IS ORDERED that Defendants' Motion For Summary Judgment On Issues Other Than ERISA (doc. # 99) is DENIED in part and GRANTED in part as follows: (1) that Dr. Roehrs' degenerative lumbar stenosis first manifested itself during the policy period, no later than August 13, 1997, (2) that genuine issues of material fact exist for jury resolution on the amount of benefits, if any, Plaintiffs are entitled to recover under the subject disability policy, (3) that Plaintiffs are not entitled to an award of punitive damages as a matter of law, (4) that no genuine dispute of material fact exists whether Plaintiffs' tort claim of bad faith is barred by Arizona's two-year statute of limitations, and (5) that Defendants are entitled to summary judgment on Plaintiffs' negligence claims because Plaintiffs concede that Arizona law does not recognize an independent cause of action based upon an insurer's negligent handling of a claim. IT IS FURTHER ORDERED setting an informal Rule 16(b) scheduling conference before the undersigned in chambers on Friday, October 28, 2005, at 10:00 a.m. for purposes of setting the final pretrial conference and trial in this matter and discussing other issues regarding the resolution of this matter. Counsel are directed to bring their calendars to this conference DATED this 12th day of October, 2005.

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