Free Order on Motion for Attorney Fees - District Court of Arizona - Arizona

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

Brett D. LEAVEY, Plaintiff, v. UNUM/PROVIDENT CORP., et al., Defendants.

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No. CV-02-2281-PHX-SMM MEMORANDUM OF DECISION AND ORDER

A jury trial was held in this case from September 13, 2005 to October 7, 2005. On October 7, 2005, the jury awarded Plaintiff $809,028.00 in future policy benefits, $4,000,000 in mental, emotional, and physical pain and suffering compensatory damages, and $15,000,000 in punitive damages. [Doc. No. 225] Pending before the Court are Defendants' Renewed Motion for Judgment as a Matter of Law or, In the Alternative, Motion for a New Trial and/or Remittitur, filed October 27, 2005 [Doc. No. 235] and Plaintiff's Motion for Attorneys' Fees and Related Non-Taxable Expenses, filed October 24, 2005 [Doc. No. 231]. Plaintiff responded to Defendants' Motion on December 22, 2005 [Doc. No. 261], and Defendants filed a Reply on February 3, 2006 [Doc. No. 270]. Both sides filed Supplemental Authority regarding Defendants' Motion. [Doc. Nos. 271, 272] Defendants responded to Plaintiff's Motion on February 3, 2006 [Doc. No. 269], and Plaintiff replied on February 17, 2006 [Doc. No. 273]. Plaintiff has requested oral argument on both Motions, but the Court will deny those requests, as it would not be

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significantly aided by oral argument. After considering the arguments raised by the parties in their briefs, the Court issues the following Memorandum of Decision and Order. I. BACKGROUND Plaintiff was a general dentist who purchased an "own occupation" disability insurance policy from Defendant Provident Life and Accident Insurance Company ("Provident"), a subsidiary of Defendant UNUM/Provident Corporation, on February 7, 1990. In 1998, Plaintiff became "totally disabled" under the terms of the policy due to chemical dependency and was provided with a monthly cash benefit. On December 4, 2001, after having conducted independent medical examinations of Plaintiff, Defendants sent Plaintiff a letter informing him, inter alia, "you do not qualify for continuing Total Disability benefits under the term of the policy." On March 26, 2002, Plaintiff brought this bad faith suit against Defendants, claiming bad faith and seeking compensatory and punitive damages, as well as attorneys' fees and costs. Defendants removed the case to this Court on November 13, 2002. [Doc. No. 1] Defendants maintained they did not act in bad faith and that, after receiving a statement from Plaintiff's treating physician confirming that Plaintiff was still disabled, Defendants resumed monthly payments on July 8, 2002, and has since continued to pay Plaintiff monthly. II. RENEWED MOTION FOR JUDGMENT AS A MATTER OF LAW/ NEW TRIAL/REMITTITUR Defendants renew their Motion for Judgment as a Matter of Law on the issues of bad

20 faith and punitive damages. Additionally, Defendants move this Court for a new trial on both 21 bad faith and punitive damages and/or remittitur of the compensatory and punitive damages 22 awards. The Court addresses each portion of the Motion in turn. In so doing, the Court will 23 not exhaustively recount all the documentary evidence and testimony presented at the trial. 24 Instead, the Court will discuss the pertinent testimony and exhibits highlighted by the parties 25 in support of their respective positions. 26 // 27 28
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A. Judgment as a Matter of Law 1. Standard of Review "Judgment as a matter of law is appropriate when the evidence, construed in the light most favorable to the nonmoving party, permits only one reasonable conclusion, which is contrary to the jury's verdict." Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1161 (9th Cir. 1997); see also White v. Ford Motor Co., 312 F.3d 998, 1010 (9th Cir. 2002). Thus, judgment as a matter of law may be granted "[i]f during a trial by jury a party has been fully heard on an issue and there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue...." FED. R. CIV. P. 50(a)(1); Juhnke v. EIG Corp., 444 F.2d 1323, 1325 (9th Cir. 1971) (noting that directed verdict and motion for judgment notwithstanding the verdict "are measured by the same standards as the latter is merely a renewal of the former"). In considering a Motion for Judgment as a Matter of Law under Rule 50(b), "the court must draw all reasonable inferences in favor of the nonmoving party, and it may not make credibility determinations or weigh the evidence." Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000). However, because the Court reviews the Record as a whole, the Court "should give credence to the evidence favoring the nonmovant as well as that evidence supporting the moving party that is uncontradicted and unimpeached, at least to the extent that that evidence comes from disinterested witnesses." Id. at 151 (citation and internal quotation marks omitted). Therefore, the Court's role is not to substitute its view of the evidence for that of the jury. Winarto v. Toshiba Am. Electronics Components, 274 F.3d 1276, 1283 (9th Cir. 2001). When two possible sets of inferences are supported by the Record, "the inferences that support the jury's verdict of course win the day." Id. at 1287. 2. Discussion a. Bad faith At the close of the Plaintiff's case-in-chief, Defendants moved for judgment as a matter of law ("JMOL") as to bad faith. (Trial Tr. 1420:16-18.) Defendants first argued that -3Document 274 Filed 05/26/2006 Page 3 of 44

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Plaintiff had failed to show that Defendants acted unreasonably in their investigation, evaluation, and processing of Plaintiff's claim. (Id. at 1420:24-25 - 1421:19.) Specifically, Defendants contended that the evidence showed "that [Defendant] Provident Life had legitimate concerns over whether [Plaintiff] was meeting the appropriate care requirement of the contract, and whether issues of personal choice and motivation were affecting [Plaintiff's] compliance with the appropriate care provision." (Id. at 1421:9-15.) Second, Defendants argued that Plaintiff failed to prove that Defendants knew or were conscious of the fact that their conduct was unreasonable: "there's no evidence that anyone handling this claim acted with the required mental state, that is, that either Jennifer Conrad [Provident claim representative] or Jeff Johnson [consultant to Ms. Conrad at Provident] acted knowing that they were being unreasonable, or acted with reckless disregard of the fact that they had no reasonable basis for their actions." (Id. at 1421:22 - 1422:2.) At the close of Defendants' case-in-chief, Plaintiff also moved for JMOL. (Id. at 1944:9 - 1945:13.) In response, Defendants repeated their assertion that they had legitimate concerns about appropriate care and personal choice, and also contended that they did not close Plaintiff's claim. (Id. at 1945:21 - 1947:21.) Defendants moved again for JMOL. (Id. at 1947:22-23.) The Court denied both parties' motions for JMOL as to bad faith, finding that a jury could find for either party based on the evidence presented. (Id. at 1947:24 1948:9.) In their Renewed Motion for JMOL on bad faith, Defendants reiterate their prior arguments without further briefing. (Mot. for JMOL at 2; Mem. in Supp. of Mot. for JMOL at 1, n. 2.) In Arizona, the inquiry in bad faith cases "is whether there is sufficient evidence from which reasonable jurors could conclude that in the investigation, evaluation, and processing of the claim, the insurer acted unreasonably and either knew or was conscious of the fact that its conduct was unreasonable." Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276, 280 (Ariz. 2000) (citing Noble v. Nat'l Am. Life Ins. Co., 624 P.2d 866, 868 (Ariz. 1981)). Thus, -4Document 274 Filed 05/26/2006 Page 4 of 44

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the test for bad faith liability is two-pronged, with the first prong being an objective assessment of the insurer's actions and the second prong being a subjective look at whether the insurer knew or was conscious of its unreasonable conduct. Defendants contend that they had legitimate concerns regarding whether Plaintiff was receiving appropriate care as required under his policy because, inter alia, Plaintiff misled his doctors and went against their recommendations of abstinence when he enrolled in a methadone clinic and because Plaintiff's treatment lacked direction and supervision. Defendants also argue they had legitimate concerns about whether Plaintiff had made a choice that he simply did not want to return to dentistry. (Id. at 1421:9-15.) In support of that argument, Defendants offered the testimony of Dr. Brown, Defendants' lead medical director for psychiatry, and the records of physicians who evaluated Plaintiff and indicated that elements of personal choice and motivation affected Plaintiff's treatment and prognosis. The evidence showed that Dr. Brown requested independent medical examinations ("IMEs") by Dr. Stonnington and Dr. Obitz. After Dr. Stonnington's and Dr. Obitz' initial reports to Dr. Brown, Dr. Brown wrote them and telephoned them. Plaintiff argued that Dr. Brown provided the examiners with a "slanted" synopsis of Plaintiff's treatment history, and that Dr. Brown pressured Dr. Stonnington and Dr. Obitz about their conclusions. Defendants countered that those communications were to follow-up and to clarify the situation, and further emphasized that neither doctor felt pressured to change their opinions. Plaintiff further argued that every doctor who treated or evaluated Plaintiff opined that Plaintiff was receiving appropriate care. Plaintiff pointed to the reports of Dr. Stonnington and Dr. Obitz, and contended that Dr. Brown followed up with those examiners only after he did not receive a response supporting termination of Plaintiff's benefits. Plaintiff argued that only after further prodding did Dr. Brown finally elicit statements from those examiners that Defendants were seeking.

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In their Motion for JMOL, Defendants contend that Plaintiff's claim was never actually closed, despite Ms. Conrad's December 2001 letter to Plaintiff which read in part "We regret to inform you . . . you do not qualify for continuing Total Disability benefits under the terms of your policy," and despite the PACE computer system showing that Plaintiff's claim was closed for benefits and the reserves associated with the claim had been released. At trial, each side presented its position on whether the claim was actually closed. Ms. Conrad explained her December 4, 2001 letter as being "poorly worded" and not clearly explaining what she meant. (Id. at 754:7-8.) She further testified that she did not take certain actions that she customarily takes when closing a claim, such as placing a telephone call to the insured and including appeal language in the letter. (Id. at 766:3-767:11.) Ms. Conrad testified that "[t]he claim was closed in the payment system" but that "we [Defendants] didn't close the handling of his claim." (Tr. 739:7-8, 740:3.) To support their contention that Plaintiff's claim was not closed, Defendants emphasized that the letter provided for six months' payment and offered further treatment, and that Plaintiff never stopped receiving benefits. (Id. at 1239:2-5, 1240:17-1241:21.) Plaintiff, however, argued that the letter meant what it said ­ that Plaintiff no longer qualified for benefits and would no longer receive payment ­ and that PACE reflected that fact because it showed the reserves relating to Plaintiff's claim were released in December 2001. (See, e.g., id. at 2026:21-25.) Plaintiff further suggested that Defendants resumed paying Plaintiff benefits only after Plaintiff filed this lawsuit. (See id. at 2128:7-13.) Finally, Plaintiff pointed to a referral from Ms. Conrad to Mr. Johnson before the letter was sent which said in part "recommend close claim for benefits" to which Mr. Johnson annotated "Agreed." (Id. at 670: 6-18.) Plaintiff also offered a large amount of evidence about Defendants' claim handling practices and the history of the specific type of disability insurance covered by Defendants in this case. First, Plaintiff's expert, Ms. Fuller, testified that Defendants underpriced -6Document 274 Filed 05/26/2006 Page 6 of 44

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disability insurance geared towards certain professions, such as medicine and dentistry, in their efforts to gain market share. (Id. at 145:18-19, 147:3-16.) Ms. Fuller testified that as time progressed, Defendants began losing considerable money on those policies, because the insureds were getting older and because the policies were poorly underwritten, too liberal, and could not be canceled by Defendants. (Id. at 148:23-149:1, 149:10, 150:6-8; see Ex. 22.) She further testified that, in response to financial losses they were suffering, Defendants stopped selling those policies and set goals for terminating claims. (Id. at 148:14-24; see, e.g., Ex. 46, Internal Mem. ("We continue to improve the termination level and have a good chance of meeting our goal of $132 million of terminations for the quarter.") and Ex. 42, Internal Mem. ("As a result of the claim initiatives undertaken and special efforts such as the Legal Review sessions, terminations should be much stronger in the 2nd quarter.")). Ms. Fuller described various methods utilized by Defendants to meet those goals. Ms. Fuller testified, and Plaintiff offered documentary evidence of, Defendants' targeting of psychiatric claims because of the "gray area" and subjectivity involved in assessing those claims. (See Ex. 27, Internal Mem. stating "since there is a larger 'gray' area in psych claims, there is a greater chance of some type of resolution."). In addition, each claim representative drafted a "Top 10" list "of ten claimants where intensive effort will lead to successful resolution of the claim." (Ex. 135.) Plaintiff also offered several witnesses who discussed another of Defendants' practices, roundtable reviews. At a roundtable review, claim representatives, lawyers, physicians, and management would address individual claims and how to resolve them. Plaintiff offered the testimony of a former employee of Defendants' who stated that the purpose of roundtables was to terminate claims. (Tr. 1041:19-1042:11.) Further evidence showed that roundtable reviews (also called "legal review meetings") were considered by Defendants to be "worthwhile" because they resulted in closing claims. (Ex. 46.) Plaintiff's claim was roundtabled on April 26, 2001, where it was decided that Plaintiff would be examined by two independent medical examiners. Plaintiff argued that as a result of the efforts sparked by the April 2001 roundtable, Plaintiff's claim was terminated and the -7Document 274 Filed 05/26/2006 Page 7 of 44

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related reserves were released in December 2001 -- just in time for end-of-quarter and endof-year financial reporting. (See, e.g., Tr. 2040: 7-25.) Defendants, however, argued that those practices did not affect the processing of Plaintiff's claim. (Id. at 2116:2-9.) In support of this assertion, Defendants offered the testimony of Ms. Conrad and Mr. Johnson, who said they felt no pressure to close claims. (Id. at 713:2-7, 761:2-7.) Thus, Defendants argue in their Motion for JMOL that they acted reasonably because of their legitimate concerns concerning appropriate care and personal motivation, and that Ms. Conrad and Mr. Johnson did not possess the required mental state. (Id. at 1421:111422:2.) Plaintiff, on the other hand, argues Defendants did not act reasonably in their processing of the claim and that Defendants knew or were conscious of the fact that their conduct was unreasonable. The Court, drawing all inferences in favor of Plaintiff and the jury's verdict, finds that reasonable jurors could conclude that Defendants acted unreasonably in their evaluation and processing of Plaintiff's claim. Taking the evidence in the light most favorable to Plaintiff, the Court notes that Defendants did not notify Plaintiff that he was not receiving appropriate care before they sent him the December 2001 letter. Instead, after roundtabling Plaintiff's claim, Defendants conducted numerous IMEs and probed the examiners' reasoning in letters and telephonically. One could reasonably infer that Defendants' conduct in this case, through Ms. Conrad, Mr. Johnson and Dr. Brown, was a result of their institutional practices to terminate claims to affect the bottom line. See Zilisch, 995 P.2d at 280 (finding there was sufficient evidence from which a jury could find that the insurer acted unreasonably and knew it, in part due to "evidence that [the insurer] set arbitrary goals for the reduction of claims paid"). The jury heard days of testimony regarding the care Plaintiff received, Defendants' institutional practices, and the circumstances surrounding the alleged closure of Plaintiff's claim, including the December 2001 letter and the PACE system. After weighing the evidence and assessing the credibility of the witnesses, the jury rendered their clear verdict -8Document 274 Filed 05/26/2006 Page 8 of 44

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in favor of Plaintiff. Because the Court finds a legally sufficient basis for a jury to find for Plaintiff, the Court will not disturb the jury's conclusion. Accordingly, the bad faith portion of Defendants' Rule 50(b) Motion will be denied. b. Punitive damages Defendants also moved for judgment as a matter of law on the issue of punitive damages at the close of Plaintiff's case-in-chief. (Tr. 1420: 16-19, 1948: 16-19.) The Court took that motion under advisement and allowed the punitive damages question to go to the jury. (Id. at 1971:1-9.) Defendants renewed their Motion, which has now been fully briefed. In Arizona, "punitive damages are recoverable in a bad faith action when the defendant's conduct is 'aggravated, outrageous, malicious or fraudulent' combined with an evil mind as evidenced by a showing that the defendant was consciously aware of the needs and rights of the insured and nevertheless, ignored its obligations." Linthicum v. Nationwide Life Ins. Co., 723 P.2d 675, 681 (Ariz. 1986) (citing Rawlings v. Apodaca, 726 P.2d 565, 578 (Ariz. 1986)). Plaintiff must not only show that Defendant acted in bad faith; there must be "something more than the conduct required to establish the tort" of bad faith. Id. Thus, in addition to bad faith, "[P]laintiff must also show that the evil hand that unjustifiably damaged the objectives sought to be reached by the insurance contract was guided by an evil mind which either consciously sought to damage the insured or acted intentionally, knowing that its conduct was likely to cause unjustified, significant damage to the insured." Rawlings, 726 P.2d at 578. Plaintiff must meet this standard by clear and convincing evidence, not simply by a preponderance of the evidence as required for tort liability. Linthicum, 723 P.2d at 681. An "evil mind" may be demonstrated in a number of ways. For instance, a defendant possesses an evil mind through "deliberate, overt and dishonest dealings" such as a "willful and knowing failure to process or pay a claim known to be valid," Farr v. Transamerica Occidental Life Ins. Co., 699 P.2d 376, 383 (Ariz. Ct. App. 1984). Also, an evil mind is shown if the facts are those "from which the jury can conclude that even though defendant -9Document 274 Filed 05/26/2006 Page 9 of 44

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had neither desire nor motive to injure (i.e., neither intent nor spite), he acted to serve his own interests, having reason to know and consciously disregarding a substantial risk that his conduct might significantly injure the rights of others." Bradshaw v. State Farm Mut. Auto. Ins. Co., 758 P.2d 1313, 1324 (Ariz. 1988) (citing Gurule v. Illinois Mut. Life & Cas. Co., 734 P.2d 85, 87 (Ariz. 1987); Rawlings, 726 P.2d at 578-79; and Linthicum, 723 P.2d at 67980) (applying bad faith case law and principles to the tort of malicious prosecution). Indeed, "punitive damages may be assessed even though the injury to the individual plaintiff was 'relatively small and innocuous,' so long as the cumulative harm suffered by all victims, plaintiffs and non-plaintiffs, is significant, large, or 'tremendous.'" Bradshaw, 758 P.2d at 1324 (citing Volz v. Coleman Co., 748 P.2d 1191, 1194 (Ariz. 1987); and Hawkins v. Allstate Ins. Co., 733 P.2d 1073, 1085 (Ariz. 1987)). Defendants argue in their JMOL on punitive damages that it made no economic sense to deny the claim to harm Plaintiff, when any relapse would exacerbate Plaintiff's condition and thus entitle him to benefits again. (Reply in Supp. of Mot. for JMOL at 1-2.) Defendants also contend that no nexus exists between high-level Provident memoranda and documents, which pertained to claim termination ratios and the like, and how Plaintiff's particular claim was handled. (Mem. in Supp. of Mot. for JMOL at 6-7.) Finally, Defendants maintain that Plaintiff was not harmed by any attempts by Ms. Conrad and Mr. Johnson to conceal whether they closed Plaintiff's claim. (Id. at 7-9.) Plaintiff, however, counters that numerous pieces of evidence support punitive damages in this case. First, Plaintiff contends that Defendants denied his claim pursuant to a pattern of unfair practices towards their insureds, thus engaging in "aggravated, outrageous, malicious or fraudulent conduct." (Resp. to Mem. in Supp. of Mot. for JMOL at 11.) Defendants targeted his claim, Plaintiff argues, because it was a psychiatric claim that involved a large sum of money. (Id. at 11, 13.) Though lower-level employees may not have known of upper-level memoranda about claims-closing strategies, they were pressured to meet claim termination goals. (Id. at 13.) In addition, Plaintiff argues that Defendants knew - 10 Document 274 Filed 05/26/2006 Page 10 of 44

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when they sent Plaintiff the December 2001 letter that depriving him of his benefits would likely cause a relapse, which could cause serious bodily harm or even suicide. (Id. at 11-13.) Finally, Plaintiff contends that Defendants' cover-up of whether the claim was actually closed occurred in tandem with their wrongful conduct, and therefore Defendants' litigation conduct may also be considered in the punitive damages inquiry. (Id. at 14.) The Court must uphold the jury's verdict "if it is supported by substantial evidence." Johnson v. Paradise Valley Unified Sch. Dist., 251 F.3d 1222, 1227 (9th Cir. 2001) (citing Gilbrook v. City of Westminster, 177 F.3d 839, 856 (9th Cir. 1999)). Substantial evidence is defined as "evidence adequate to support the jury's conclusion, even if it is also possible to draw a contrary conclusion from the same evidence." Id. Moreover, the Court "may not substitute its view of the evidence for that of the jury." Id. The Court must not engage in "improper usurpation of the jury's basic factfinding authority, including the authority to draw inferences from the facts established and to believe some witnesses but not others." Id. at 1229. Here, the jury heard days of evidence and testimony concerning Plaintiff, the treatment Plaintiff received, Defendants' claim-closing strategies, and how Defendants handled Plaintiff's claim in particular, including the circumstances surrounding the independent medical examinations, the December 2001 letter, and the PACE computer system. The Court provided the jury with clear instructions that adequately stated the law and how to apply the facts, which were in great dispute, to the law. The Court cannot and will not parse out, or even attempt to speculate, as to which theory or theories of punitive damages liability the jury adopted or to which piece or pieces of evidence the jury gave more or less weight. Instead, the Court concludes that evidence adequate to support the jury's award of punitive damages exists based on the evidence presented at trial. Reasonable jurors could infer from the testimony and evidence that Dr. Brown misrepresented Plaintiff's medical treatment in his contact with independent medical examiners (i.e., focusing only on the negative aspects of Plaintiff's treatment and omitting - 11 Document 274 Filed 05/26/2006 Page 11 of 44

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the positive aspects). In addition, a reasonable juror could conclude that Ms. Conrad and Mr. Johnson's testimony about whether or not they entirely closed the claim, together with the unambiguous language of the December 2001 letter and the PACE screens which show the claim was indeed closed, demonstrated that Defendants intentionally closed the claim and disregarded the risk that Plaintiff's rights would be injured.1 Also, Plaintiff proffered documentary evidence of Defendants' goals for terminating claims and their claim-closing strategies, as well as evidence that at least one of those strategies (the roundtable review) was used in Plaintiff's claim. From that clear and convincing evidence, a reasonable juror could conclude that Defendants targeted Plaintiff's claim for closure in their own self-interest of profitability, and therefore that punitive damages are warranted. See Bradshaw, 758 P.2d at 1324. It is clear from the jury's verdict that Plaintiff successfully demonstrated that Defendants knew or had reason to know and consciously disregarded a substantial risk that their conduct might significantly injure Plaintiff's rights. See id. "Although the evidence was far from overwhelming, and the jury was not compelled to conclude that" Defendants acted with an evil mind, "neither can it be said that the jury's conclusion to that effect was unsupported by substantial evidence." See Johnson, 251 F.3d at1229. Because clear and convincing evidence exists on the Record from which a reasonable jury could award punitive damages under the standards set by Arizona law discussed supra, the Court will

Defendants argue that whether Ms. Conrad and Mr. Johnson lied to cover up their conduct cannot be a basis for punitive damages because their conduct did not harm Plaintiff and because that conduct did not occur in tandem with the conduct giving rise to Plaintiff's injury. The Court first notes that it is unknown whether the jury based any part of their punitive damages liability on a "cover-up" by Ms. Johnson and Mr. Conrad. Rather, the jury could simply have deemed Ms. Johnson and Mr. Conrad not credible and left it at that. However, the Court finds that efforts to conceal their actions occurred in tandem with the conduct, and that a reasonable juror could construe those efforts as an attempt to avoid further liability, which in turn harmed Plaintiff. - 12 Document 274 Filed 05/26/2006 Page 12 of 44

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deny the punitive damages portion of Defendants' renewed Motion for Judgment as a Matter of Law. 3. Conclusion on JMOL The Court will deny Defendants' Motion for JMOL as to both bad faith and punitive damages, for it concludes that, taking the evidence in the light most favorable to Plaintiff, a reasonable jury could conclude by a preponderance of the evidence that Defendants were liable for bad faith and by clear and convincing evidence that Defendants were liable for punitive damages. Finally, because the Court denies Defendant's Motion for JMOL, the Court will also deny Defendants' request for a conditional new trial under Rule 50(c)(1) of the Federal Rules of Civil Procedure. B. New Trial/Remittitur 1. Standard of Review When reviewing a jury's award of compensatory or punitive damages in a diversity case, "the role of the district court is to determine whether the jury's verdict is within the confines set by state law, and to determine, by reference to federal standards developed under Rule 59, whether a new trial or remittitur should be ordered." Browning-Ferris Indus. of Vermont, Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 279 (1989) (regarding punitive damages); Gasperini v. Center for Humanities, Inc., 518 U.S. 415, 435 n.18 (1996) (regarding compensatory damages). Under Rule 59 of the Federal Rules of Civil Procedure, the Court "may grant a new trial if 'the verdict is contrary to the clear weight of the evidence, or is based upon evidence which is false, or to prevent, in the sound discretion of the trial court, a miscarriage of justice.'" Silver Sage Partners, Ltd. v. City of Desert Hot Springs, 251 F.3d 814, 819 (9th Cir. 2001) (quoting United States v. 4.0 Acres of Land, 175 F.3d 1133, 1139 (9th Cir. 1999)); see also Union Oil Co. of Cal. v. Terrible Herbst, Inc., 331 F.3d 735, 742 (9th Cir. 2003) (a "trial court may grant a new trial only if the jury's verdict was against the clear weight of the - 13 Document 274 Filed 05/26/2006 Page 13 of 44

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evidence"). But when a motion for a new trial is based on insufficiency of the evidence, "a stringent standard applies . . . [and] a motion for a new trial may be granted on this ground only if the verdict is against the great weight of the evidence or it is quite clear that the jury has reached a seriously erroneous result." Johnson, 251 F.3d at 1229 (quoting Venegas v. Wagner, 831 F.2d 1514, 1519 (9th Cir. 1987)). While the Court may weigh the evidence and assess the credibility of witnesses, it may not grant a new trial "merely because it might have come to a different result from that reached by the jury." Roy v. Volkswagen of America, Inc., 896 F.2d 1174, 1176 (9th Cir. 1990) (citation omitted); see also Union Oil Co., 331 F.3d at 743 ("It is not the courts' place to substitute our evaluations for those of the jurors."). Indeed, "the trial judge does not sit to approve miscarriages of justice . . ., [but] a decent respect for the collective wisdom of the jury, and for the function entrusted to it in our system, certainly suggests that in most cases the judge should accept the findings of the jury, regardless of his own doubts in the matter." Landes Const. Co., Inc. v. Royal Bank of Canada, 833 F.2d 1365, 1371 (9th Cir. 1987) (citations omitted). 2. Discussion a. Liability With respect to bad faith, Defendants repeat their arguments in support of their renewed Motion for JMOL and contend that the jury's finding of liability was against the great weight of the evidence. (Mem. in Supp. of Mot. for JMOL at 10.) The Court disagrees. Though the jury's verdict may not have been the same as what the Court would have concluded, the Court finds sufficient evidence exists and supports the jury's verdict such that a new trial on liability is not warranted. Under Arizona law, Defendants are liable for bad faith if they acted unreasonably in the investigation, evaluation, and processing of the claim, and either knew or were conscious of the fact that their conduct was unreasonable. See Zilisch, 995 P.2d at 280. At trial, Plaintiff proffered testimony and evidence regarding Defendants' termination goals and ratios and their claim-closing strategies. The evidence - 14 Document 274 Filed 05/26/2006 Page 14 of 44

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showed that at least one of those strategies, the roundtable review, was conducted in Plaintiff's case. Shortly after that roundtable review, Dr. Brown contacted independent medical examiners and provided information that one could reasonably conclude did not provide a complete picture of Plaintiff's situation. In addition, Plaintiff received a letter which unambiguously notified him that he no longer qualified for benefits. The author of that letter recommended to her consultant that Plaintiff's claim be closed for benefits, and the benefit computer system reflects that the claim was indeed closed for benefits and the reserves were released. Thus, the Court concludes that the "great weight" of the evidence does not compel a new trial. Because the evidence supports the jury's verdict and a finding of liability under Zilisch, and because the jury's finding of liability was not the product of passion or prejudice as discussed infra, the Court will deny the liability portion of the Rule 59 Motion for a new trial. b. Compensatory Damages The jury awarded Plaintiff $809,028.00 in future policy benefits and $4,000,000 in mental, emotional, and physical pain and suffering compensatory damages. For the reasons stated just above, the Court will not grant a new trial on the imposition of compensatory damages. However, the Court now considers whether the compensatory damages awarded by the jury were excessive. In a diversity action, the federal court determines excessiveness by applying state law. Gasperini, 518 U.S. at 426-39. Therefore, this Court determines whether the jury's award was excessive by applying Arizona law. In Arizona, a court may not disturb a jury's damage verdict "unless it finds the amount so unreasonable that it 'shocks the conscience' of the court" and the verdict is "the result of passion and prejudice." Sheppard v. Crow-Barker Paul No. 1 Ltd. P'ship, 968 P.2d 612, 622 (Ariz. Ct. App. 1998) (citation omitted). A verdict is the product of passion and prejudice if it is not "within the range of credible evidence." See Flieger v. Reeb, 583 P.2d 1351, 1353 (Ariz. Ct. App. 1978); see also Bahman v. Estes Homes, 710 P.2d 1087, 1090 (Ariz. Ct. App. 1985). - 15 Document 274 Filed 05/26/2006 Page 15 of 44

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Defendants argue that the jury's $4 million award shocks the conscience and that Plaintiff only suffered temporary emotional distress about finances. (Mem. in Supp. of Mot. for JMOL at 10-12.) Plaintiff counters that he suffered physical injury when he broke his own hand to obtain prescription drugs, he relapsed, and Defendants' conduct caused major upheaval in his life when they sent him the December 2001 letter stating that he would no longer receive benefits. (Resp. to Mot. for JMOL at 7-8.) Also, Plaintiff contends that he could not be sure that Defendants would not attempt to terminate his benefits again in the same fashion that they did in December 2001. (Id. at 9.) The Court, however, finds the jury's award of $4 million for emotional, mental and physical pain and suffering excessive. Here, Plaintiff suffered one slight physical injury, a broken hand, and he relapsed. Plaintiff himself testified at trial that his self-induced hand injury was "slight" and "certainly nothing that would require treatment in any way." (Tr. 1125: 7-8.) In addition, his relapse lasted from January to March of 2002. (Id. at 5-24.) With regard to his financial situation, he did not miss a payment of benefits, although it is questionable whether benefits would have begun in June 2002 but for him filing this lawsuit in early March 2002. After the December 2001 letter, Plaintiff worried about his finances and moved into an apartment to save money. (Id. at 1124: 19-24.) In addition, Plaintiff continued to worry about whether Defendants would arbitrarily discontinue benefits again after his claim was re-opened. (Id. at 1128:25-1129:10.) Taking the totality of those injuries, the Court concludes that $4 million to compensate for Plaintiff's "slight" physical injury, relapse, and mental and emotional distress caused by worrying about his financial security shocks the conscience. Therefore, a $4 million award is "grossly disproportionate to the damage incurred" in this case. See Filasky v. Preferred Risk Mut. Ins. Co., 734 P.2d 76, 83 (Ariz. 1987). The Court finds that, while the jury's finding of liability for bad faith was not the result of passion and prejudice, the $4 million compensatory award is outrageous and the product of passion and prejudice because it is not "within the range of credible evidence." See Flieger, 583 P.2d at 1353. Therefore, the Court - 16 Document 274 Filed 05/26/2006 Page 16 of 44

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must determine an appropriate amount of compensatory damages for Plaintiff's pain and suffering. In the seminal case of State Farm Mut. Auto. Ins. Co. v. Campbell, the United States Supreme Court determined that: The compensatory award in [Campbell] was substantial; the Campbells were awarded $1 million for a year and a half of emotional distress. This was a complete compensation. The harm arose from a transaction in the economic realm, not from some physical assault or trauma; there were no physical injuries . . ., so the Campbells suffered only minor economic injuries for the 18-month period in which State Farm refused to resolve the claim against them. . . . 538 U.S. 408, 426 (2003) (emphasis added). Although the plaintiff in Campbell suffered no physical injury and Plaintiff in the case at bar suffered some physical injury (albeit selfinduced and classified by Plaintiff himself as being "slight" and "certainly nothing that would require treatment in any way"), the Court finds the Campbell decision instructive because the damages in both cases are largely due to financially-related emotional distress. With $1 million being a "substantial" compensatory award for emotional distress alone and Plaintiff having suffered primarily emotional distress and only a "slight" physical injury and a relapse, the Court concludes that $1.2 million adequately "redress[es] the concrete loss that the plaintiff has suffered by reason of the defendant[s'] wrongful conduct." Id. at 416, 426. Thus, the Court will remit Plaintiff's compensatory damages for pain and suffering from $4 million to $1.2 million, unless Plaintiff chooses to have a new trial on damages in lieu of accepting the remittitur. Plaintiff's award of $809,028 in future policy benefits remains unaffected by the Court's decision. Plaintiff's total compensatory damages award, if accepted by Plaintiff, would therefore amount to $2,009,028. c. Punitive Damages Defendants challenge the jury's award of punitive damages on three primary grounds: (1) that the finding of punitive damage liability went against the great weight of the evidence and cannot stand; and (2) that $15 million is so excessive that it violates their due process rights; and (3) that the $15 million award was the product of passion and prejudice, such that - 17 Document 274 Filed 05/26/2006 Page 17 of 44

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remittitur is not an adequate remedy for the excessive verdict. The Court addresses each of these arguments in turn. 1. Punitive damages liability The Court first considers whether a new trial on the issue of punitive damages liability is warranted under Rule 59. Defendants contend that insufficient evidence exists to hold them liable for punitive damages, and they reiterate the arguments presented in their Rule 50 Motion. (Mem. in Supp. of Mot. for JMOL at 10.) Under Rule 59, when a motion for a new trial is based on insufficiency of the evidence, "a stringent standard applies . . . [and the motion] may be granted on this ground only if the verdict is against the great weight of the evidence or it is quite clear that the jury has reached a seriously erroneous result." Johnson, 251 F.3d at 1229. Although the Court may weigh the evidence and assess the credibility of witnesses in a Rule 59 inquiry, it may not grant a new trial "merely because it might have come to a different result from that reached by the jury." Roy, 896 F.2d at 1176; see also Union Oil Co., 331 F.3d at 743 ("It is not the courts' place to substitute our evaluations for those of the jurors."). Here, the Court declines to grant a new trial. After considering the evidence presented at trial, the Court concludes that awarding punitive damages was not against the "great weight" of the evidence. As previously described in this Order, evidence and testimony were presented at trial that showed that even though Defendants may not have had neither desire nor motive to injure (i.e., neither intent nor spite), "[they] acted to serve [their] own interests, having reason to know and consciously disregarding a substantial risk that [their] conduct might significantly injure the rights of others." Bradshaw,758 P.2d at 1324. Various pieces of trial testimony and documentary evidence, when considered in their totality, demonstrated an "evil mind" as defined by Arizona law. First, after assessing the credibility of witnesses and weighing the evidence, the Court concludes that Ms. Conrad and Mr. Johnson intentionally closed Plaintiff's claim. Despite - 18 Document 274 Filed 05/26/2006 Page 18 of 44

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their testimony that they did not entirely close the claim, the unambiguous language of the December 2001 letter and the PACE screens which show the claim was indeed closed for benefits and reserves were released tell a different story. In addition, the documentary and testimonial evidence regarding Defendants' claim-termination goals and strategies was clear. Defendants instituted termination goals and used various tools to reach them, such as "topten" lists of high-dollar claims to terminate and roundtable reviews, and Defendants targeted psychiatric claims because of the subjectivity in assessing them. (Exs. 27, 135.) The evidence also showed that at least one of those strategies, the roundtable review, was used in Plaintiff's claim. Although Defendants make much of the testimony of Plaintiff's expert witness that roundtables could be a good thing, documentary evidence showed that Defendants called roundtables "worthwhile" because they resulted in claim closures. (Ex. 46.) Testimony by a former employee of Defendants' also indicated that roundtables were a tool used to terminate claims. (Tr. 1041:23 - 1042:11.) Furthermore, it appears Plaintiff's claim may have been targeted because of the high-dollar amount involved and because it was a psychiatric claim. Following the roundtable, independent medical examinations led to the intentional closure of Plaintiff's claim. The Court therefore concludes that punitive damages are not against the "great weight" of the evidence, even though it may not have reached the same conclusion as the jury. Accordingly, the Court will deny Defendants' request for a new trial on whether to award punitive damages. See Union Oil Co. of Cal., 331 F.3d at 742 (a "trial court may grant a new trial only if the jury's verdict was against the clear weight of the evidence"). 2. Excessiveness of the punitive damages award Next, the Court must determine whether the punitive damages awarded by the jury were excessive. "In reviewing an award of punitive damages, the role of the district court is to determine whether the jury's verdict is within the confines set by state law, and to determine, by reference to federal standards developed under Rule 59, whether a new trial or remittitur should be ordered." Browning-Ferris Indus., 492 U.S. at 279. Thus, the Court - 19 Document 274 Filed 05/26/2006 Page 19 of 44

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will look to Arizona law regarding permissible punitive damages awards after considering whether the punitive damages awarded violate due process under guidelines set by the United States Supreme Court. i. Due process A punitive damages award which is "grossly excessive" in relation to the goals of punishment and deterrence violates due process. See Campbell, 538 U.S. at 416-17; BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 562 (1996). To determine whether punitive damages are excessive, a court should consider the size of the punitive damages award in light of three factors: (1) the "reprehensibility of the of the defendant's conduct . . . [or] the enormity of the offense," (2) the ratio of the compensatory damages to the exemplary damages, and (3) the civil or criminal penalties that could be imposed for comparable conduct. See Gore, 517 U.S. at 574-75; Campbell, 538 U.S. at 418. Guidepost 1: Reprehensibility of Defendants' conduct The first, and "most important[,] indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant's conduct." Gore, 517 U.S. at 575. To assess reprehensibility, the Court must consider whether: the harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involve repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, or deceit, or mere accident. Id. at 576-577. The Court now considers those factors in turn to determine the degree of reprehensibility of Defendants' conduct in this case. The Court first looks at whether the harm caused was physical or economic. As described supra, Plaintiff relapsed and suffered a "slight" physical injury that he described as "slight" and "certainly nothing that would require treatment in any way." (Tr. 1125:7-8.) Therefore, Plaintiff's injuries were, for the most part, due to emotional distress or economically related. This first factor therefore does not weigh in favor of reprehensibility.

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Next, the Court considers whether Defendants' conduct demonstrated an indifference or reckless disregard for the safety or health of others. As the Court detailed in a previous Order: Dr. Brown and other employees of Defendant Provident Life were well aware that Plaintiff had struggled with an addiction to Vicodin for at least three years before Defendants convened a Roundtable Review of Plaintiff's claim. In addition, Dr. Brown was also aware that at least one of the independent medical examiners found, with regard to Plaintiff's case, that "there is a significant risk of relapse and if he did relapse it would lead to more depression and anxiety and inability to function generally." Dr. Stonnington told this to Dr. Brown by letter dated October 11, 2001. . . . Thus, Defendants, primarily through Dr. Brown, had reason to know that if Plaintiff returned to dentistry, there was a very good chance he would relapse into drug addiction, and possibly sink further into depression. Despite these risks of harm to Plaintiff's health and psychological well-being, Dr. Brown recommended to Conrad that Plaintiff could return to work following six months of aggressive treatment. [Doc. No. 139 at 26.] Those facts were also presented through evidence at trial. (Tr. at 1483:10-23, 1504: 22 - 1505:22, Ex. 1 at 901-04, 1017-24.) Defendants argue that it would have made no sense for them to send Plaintiff a letter discontinuing his benefits and thereby triggering a relapse because he would have again become entitled to benefits due to his relapse. (Reply in Supp. of Mot. for JMOL at 1-2.) The Court, however, finds this argument unpersuasive in light of Defendants' December 4, 2001 letter to Plaintiff, which stated, "While relapse is possible, that possibility does not create a right to benefits under the policy." (Ex. 1 at 1028.) Therefore, although Plaintiff was entitled to benefits in the event of a relapse, Defendants' letter could reasonably be read to inform Plaintiff that if he relapsed, he would not qualify for benefits under his policy. The Court thus concludes that Defendants' conduct demonstrated an indifference or reckless disregard for Plaintiff's health or safety. Third, the Court considers whether the target of Defendants' conduct, Plaintiff, was financially vulnerable. Defendants argue that, for this factor to weigh towards

reprehensibility, Plaintiff had to be targeted because of his financial vulnerability. "The mere happenstance" that Plaintiff was financially vulnerable is insufficient, according to Defendants. (Mem. in Supp. of Mot. for JMOL at 16.) However, Defendants provide no case - 21 Document 274 Filed 05/26/2006 Page 21 of 44

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law that supports their assertion. Defendants cite Gore, but the Supreme Court in that case noted only that when "the target is financially vulnerable," a substantial penalty can be warranted. 517 U.S. at 576. The Supreme Court's language in Gore, and later in Campbell, does not require that the plaintiff be targeted specifically because of that vulnerability. Id. at 576; Campbell, 538 U.S. at 419. In addition, a review of recent Ninth Circuit case law reveals that the Ninth Circuit does not command that a plaintiff be targeted due to his financial vulnerability. See e.g., Bains LLC v. Arco Prods. Co., 405 F.3d 764, 775 (9th Cir. 2005), Hangarter v. Provident Life and Acc. Ins. Co., 373 F.3d 998, 1014 (9th Cir. 2004). Rather, the Ninth Circuit looks to whether a plaintiff was financially vulnerable when Defendants' conduct took place. See id. Therefore, contrary to Defendants' argument, Plaintiff is not required to demonstrate that he was targeted by Defendants due to his financial vulnerability. Instead, case law dictates that Plaintiff must have been financially vulnerable when the conduct occurred in order for this factor to weigh towards reprehensibility. The evidence showed, and Defendants acknowledge (Mem. in Supp. of Mot. for JMOL at 16, Reply in Supp. of Mot. for JMOL at 12), that Plaintiff was financially vulnerable. Accordingly, the Court concludes that this factor weighs in favor of

reprehensibility. The Court next determines whether Defendants' conduct involved repeated actions or was merely an isolated incident. When considering this factor, the Court looks at whether Defendants' actions in this case "formed part of a nationwide pattern of tortious conduct." Gore, 517 U.S. at 576-77; see also Campbell, 538 U.S. at 423 ("courts must ensure the conduct in question replicates the prior transgressions" towards other insureds). Indeed, after considering the evidence regarding Defendants' claim practices, the Court concludes that Defendants' actions in this case represent one instance in a company-wide, nationwide practice of claims handling. Thus, this factor weighs in favor of reprehensibility. However, the Court also notes that Defendants may not be punished for conduct outside of Arizona. Gore, 517 U.S. at 572. - 22 Document 274 Filed 05/26/2006 Page 22 of 44

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Last, the Court considers whether the harm was the result of intentional malice, trickery, or deceit, or mere accident. It is plain to the Court that Defendants' actions were no accident; Defendants intentionally sent Plaintiff the December 4, 2001 letter informing him that he no longer qualified for benefits and closed his claim. However, the Court does not find that Defendants maliciously set out to harm Plaintiff. Thus, the Court concludes that this factor does not weigh in favor of reprehensibility. Therefore, two of the reprehensibility factors do not weigh in favor of reprehensibility and three do. However, after considering the reprehensibility factors, the Court concludes that "a more modest punishment for this reprehensible conduct [than the jury's punitive damages award] could have satisfied the State's legitimate objectives" of punishment and deterrence. See Campbell, 538 U.S. at 419. Guidepost 2: Ratio of compensatory to punitive damages The Supreme Court has held there is no bright line beyond which punitive damages may not go. S. Union Co. v. Southwest Gas Corp., 415 F.3d 1001, 1009-10 (9th Cir. 2005) (citing Campbell, 538 U.S. at 425). However, "few awards exceeding a single-digit ratio of compensatory to punitive damages, to a significant degree, will satisfy due process." Campbell, 538 U.S. at 425. Indeed, a punitive damages award of four times the amount of compensatory damages borders on constitutional impropriety. See id. (citing Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 23-24 (1991) and Gore, 517 U.S. at 581). In Campbell, the Court pointed to "a long legislative history, dating back over 700 years and going forward to today, providing for sanctions of double, treble, or quadruple damages to deter and punish." 538 U.S. at 425 (citing Gore, 517 U.S. at 581, and n.33). These ratios "are instructive," and "[s]ingle-digit multipliers are more likely to comport with due process, while still achieving the State's goals of deterrence and retribution." Id. Moreover, the Supreme Court noted in Campbell that "[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee. The precise award in any case, of course, - 23 Document 274 Filed 05/26/2006 Page 23 of 44

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must be based upon the facts and circumstances of the defendant's conduct and the harm to the plaintiff." Id. As discussed, supra, the Plaintiff's compensatory damages, remitted to $1.2 million plus $809,028 in future policy benefits, are substantial. See id. at 426 (finding that compensatory award of $1 million for a year and a half of emotional distress was "substantial"). With this Court having remitted Plaintiff's compensatory damages for pain and suffering to $1.2 million, the jury's $15 million punitive damages award -- a 15-to-1 ratio -cannot stand under the Due Process Clause of the Fourteenth Amendment. Id.; Baker v. Hazelwood (In re Exxon Valdez), 270 F.3d 1215, 1228-31, 1238-46 (9th Cir. 2001) (12-to-1 ratio of punitive damages to compensatory damages is too excessive to withstand constitutional scrutiny). Instead, the Court must remit the punitive damages to a single-digit ratio to comport with due process. See Campbell, 538 U.S. at 425. In light of the Supreme Court's "admonitions and suggested boundaries" in Campbell, see S. Union Co., 415 F.3d at 1010, the Court concludes that a punitive damages ratio of 1.5-to-1 is reasonable, appropriate, and satisfies due process. Guidepost 3: Comparable civil and criminal penalties The last, and least important, of the Gore guideposts is the disparity between the punitive damages award and the civil and/or criminal penalties that could be imposed for comparable conduct. Campbell, 538 U.S. at 428. In this case, both sides agree that the applicable civil penalties are found in A.R.S. § 20-220, and A.R.S. § 20-456 could possibly apply also. Each of those statutes contains a maximum penalty of $5,000 for each intentional violation of state insurance laws, capped at $50,000 within a six-month period. A.R.S. §§ 20-220(B)(2), 20-456(B). Thus, the punitive damages awarded by the jury far exceed the maximum penalties under Arizona's statutes. Plaintiff also argues, however, that Defendants could have lost their Arizona insurance license under A.R.S. § 20-220(A)(1) and (4), thereby "costing Defendants hundreds of millions of dollars." (Resp. to Mem. in Supp. of Mot. for JMOL at 20.) From what source - 24 Document 274 Filed 05/26/2006 Page 24 of 44

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Plaintiff derived the "hundreds of millions of dollars" figure is unclear. Moreover, the Supreme Court has found that a loss of license argument based on references to a "broad fraudulent scheme drawn from evidence of out-of-state and dissimilar conduct" fails. Campbell, 538 U.S. at 428. The Court finds that analysis applicable here and will likewise reject Plaintiff's argument regarding loss of license. The Court concludes that the penalties afforded by Arizona law are far less than the jury's punitive damages award in this case. ii. Arizona law In addition to the federal guideposts, Arizona courts have established factors to consider when conducting a post-verdict review of a punitive damages award. The Arizona criteria are: (1) the proportionality of the award to the wrongdoer's financial position to ensure that the goals of punishment and deterrence are served without financially devastating the defendant; (2) the reprehensibility of the defendant's conduct, including the duration of the misconduct, the defendant's awareness of the risk of harm, and any concealment; and (3) the profitability to the defendant of the wrongful conduct. Hilgeman v. Am. Mortgage Sec., Inc., 994 P.2d 1030, 1037-38 (Ariz. App. 2000) (citing Hyatt Regency Phoenix Hotel Co. v. Winston & Strawn, 907 P.2d 506, 520 (Ariz. 1995)). The Court now examines those three Arizona factors. First, the Court considers the proportionality of the jury's punitive damages verdict to Defendants' financial position to ensure that the goals of punishment and deterrence are served without financially devastating Defendants. Though a higher punitive damages award is needed to punish a wealthy defendant, "the award must not financially kill the defendant." Hawkins, 733 P.2d 1073, 1084 (Ariz. 1987). Defendants reported over $8 billion in assets, $1.3 billion in surplus funds, and net income of $329 million. (Ex. 5.) The jury's punitive damages award of $15 million therefore represents 16½ days' net income or less than 1% of

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Defendants' total assets. Therefore, the Court determines that the jury's verdict would not "financially kill" Defendants.2 Next, the Court examines the reprehensibility of Defendants' conduct, including the duration of the misconduct, Defendants' awareness of the risk of harm, and any concealment. The Court previously discussed reprehensibility in this Order, supra, but notes here that Defendants' misconduct towards Plaintiff lasted a relatively short period of time. However, the claim practices Defendants utilized in Plaintiff's case were employed on a broader scale for a longer amount of time.3 As stated previously, the Court concludes that Defendants were aware of Plaintiff's risk of relapse but acted regardless. Last, apart from some of Defendants' employees who may not have been completely forthcoming throughout the course of this litigation, the Court does not find concealment of the harm occurred in this case. Finally, the Court considers the profitability to Defendants of their wrongful conduct. By closing claims, Defendants release the reserves held for those claims, thus reducing their liabilities. However, the Court does not have hard numbers as to how much Defendants profited from that practice. The Court is therefore unable to fully evaluate this factor. The Court notes, though, that Defendants released $380,895.00 in reserves when Plaintiff's claim was terminated. (Ex. 373) iii. Conclusion on excessiveness After considering the Record in this case and engaging in the multi-factor analysis required by federal and state law, the Court concludes that a $15 million punitive damages award is excessive and disproportionate to the wrong committed. Although Defendants' conduct was surely reprehensible, the Court concludes a more modest award would adequately serve the goals of punishment and deterrence. Furthermore, the jury's punitive Additionally, the court notes that "[t]he wealth of a defendant cannot justify an otherwise unconstitutional punitive damages award." Campbell, 538 U.S. at 427. As the Court acknowledged earlier in this Order, Defendants may not be punished for conduct occurring outside of Arizona. Gore, 517 U.S. at 572. - 26 Document 274 Filed 05/26/2006 Page 26 of 44
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damages award (when compared with the Court's remitted compensatory damages award) far exceeds the constitutional parameters suggested by the Supreme Court, and the Court concludes that a 1.5-to-1 ratio is constitutionally sound and appropriate in this case. Thus, in light of the above analysis and this Court's previous determination that $1.2 million in compensatory damages is sufficient, the Court will remit the punitive damages from $15 million to $3 million. In order to preserve Plaintiff's Seventh Amendment jury rights, the court will not order a remittitur without also offering the option of a new trial. See, e.g., Morgan v. Woessner, 997 F.2d 1244, 1258-59 (9th Cir. 1993); see also Denholm v. Houghton Mifflin Co., 912 F.2d 357, 361 n.5 (9th Cir. 1990) ("the permissibility of the 'either remittitur or new trial' decision has been uniformly accepted"). Thus, the Court will offer Plaintiff a choice between a new trial on damages or accepting a remittitur of the punitive damages award. Plaintiff shall have until June 26, 2006, to notify the Court of his choice to either accept the remittitur or proceed with a new trial on the issue of damages. d. Passion and prejudice Defendants also contend that remittitur is not an adequate remedy because both damage awards are the result of passion and prejudice. (Mem. in Supp. of Mot. for JMOL at 22.) Defendants base their argument on three grounds, which the Court addresses in turn. First, Defendants argue that "the enormity of both the emotional-distress award and the punitive award, and the fact that the jury awarded five times the emotional-distress damages suggested by [Plaintiff's] counsel, suggest that the jury was animated by passion and prejudice." (Id.) The Court notes that Defendants' interpretation of what Plaintiff's counsel suggested as a measure of damages is incorrect. In his closing argument, counsel for Plaintiff stated that "this kind of emotional trauma which something like this causes is worth at least as much as the benefits they're seeking to cheat him out of." (Tr. 2049:15-18.) (emphasis added) Therefore, Plaintiff's counsel requested at least $809,028, not exactly $809,028. Moreover, the Court notes that, contrary to Defendants' argument, the size of an award alone - 27 Document 274 Filed 05/26/2006 Page 27 of 44

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does not demonstrate that the jury acted with passion or prejudice. Hawkins, 733 P.2d at 1084. Thus, Defendants' first argument that remittitur is inadequate because of passion and prejudice fails. Second, Defendants contend that the "bad company" evidence had the capacity to instruct the jury from its proper tasks of determining whether they acted in bad faith and, if so, setting an appropriate amount of damages. (Mem. in Supp. of Mot. for JMOL at 22.) The Court disagrees with Defendants. After allowing both sides to express their views on the matter of whether to allow the "bad company" evidence, the Court admitted the evidence over Defendants' objections because it was relevant and its probative value was not substantially outweighed by prejudicial concerns. See FED. R. EVID. 402, 403; Hangarter, 373 F.3d at 1019-20 (9th Cir. 2004) (affirming the admissibility of evidence regarding insurance company's claims handling practices when certain of those practices was used in processing the claim at issue). Third, Defendants contend that improper statements made by Plaintiff's counsel during final summation warrant a new trial. (Mem. in Supp. of Mot. for JMOL at 22.) In such a situation, "[t]he question [for the Court] is whether counsel's misconduct so permeated the trial as to lead to the conclusion the jury was necessarily influenced by passion and prejudice in reaching its verdict." Cooper v. Firestone Tire and Rubber Co., 945 F.2d 1103, 1107 (9th Cir. 1991) (citing Kehr v. Smith Barney, Harris Upham & Co., 736 F.2d 1283, 1286 (9th Cir. 1984)). Applying that standard, the Court addresses the offending comments in turn. Defendants first argue Plaintiff falsely implied during final summation that the jury "had a unique responsibility to account for all of the insureds whose claims supposedly have been wrongly denied over the years." (Reply in Supp. of Mot. for JMOL at 15.) Th