Amadeo v. Principal Mut. Life Ins. Co.

• Decision Date: 22 May 2002
• Docket Number: No. 00-55333.,00-55333.
• Citation: 290 F.3d 1152
• Parties: Joan Cherie AMADEO, Plaintiff-Appellant, v. PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

290 F.3d 1152

Joan Cherie AMADEO, Plaintiff-Appellant, v. PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, Defendant-Appellee.

No. 00-55333.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 18, 2001.

Filed May 22, 2002.

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Stanley K. Jacobs and Thomas F. Borcher, Jacobs, Jacobs & Rosenberg, Los Angeles, CA, for the plaintiff-appellant.

Margaret Levy and Becky J. Belke, Manatt, Phelps & Phillips, LLP, Los Angeles, CA, for the defendant-appellee.

Appeal from the United States District Court for the Central District of California; Nora M. Manella, District Judge, Presiding. D.C. No. CV-98-03097-NM.

Before: BROWNING, FERNANDEZ and FISHER, Circuit Judges.

FISHER, Circuit Judge.

Joan Amadeo filed this suit after Principal Mutual Life Insurance Company ("Principal") denied her benefits under her disability income insurance policy. Principal based its denial on its contention that Amadeo's "regular occupation ... just prior to her disability" was "unemployed," despite Amadeo's 20 year career in the securities industry before she became unemployed during a period of severe depression. The district court granted partial summary adjudication against Amadeo on her claim that Principal breached the implied covenant of good faith and fair dealing ("bad faith claim") because it found that Principal's denial of benefits was reasonable as a matter of law.

First, as a matter of our jurisdiction, we hold that Amadeo's voluntary dismissal of her breach of contract claim does not preclude her from pursuing her appeal of the district court's ruling on the bad faith claim. Second, we reverse the district court's grant of summary judgment on the bad faith claim. Amadeo presented sufficient evidence from which a jury could conclude that Principal's denial of benefits to Amadeo was based on a bad faith interpretation of its policy and an inadequate investigation into the basis of Amadeo's claim.

I. BACKGROUND

Amadeo began working in the securities industry in the mid 1970s, rising to the position of a securities compliance officer in 1986. In 1987 she purchased a disability income insurance policy from Principal ("the policy"). Amadeo continued to be employed in the field of securities compliance for the next seven years, including as vice president of compliance for Liberty Securities Corporation between 1991 and 1993 and as vice president for compliance at Griffin Securities Corporation in 1994.

In 1992 or 1993, Amadeo began treatment with a therapist, Dr. Cassel, for depression. Dr. Cassel attributed Amadeo's condition to the jailing of her grandson Vinny, who had been in Amadeo's custody since being removed by court order from her daughter who abused drugs. Amadeo's condition worsened in 1994, when Vinny was charged with first degree murder for killing a prison guard. That year, Amadeo told Griffin Securities about the charges against Vinny and the president allegedly told her that "we don't need people like you around," after which Amadeo left her job.

Amadeo continued to consult with Dr. Cassel through March 1995, when Cassel recommended that, due to the increasing severity of Amadeo's depression, she see a psychiatrist for a medical consultation. In January 1996, Amadeo began treatment with Dr. Lovelace, a psychiatrist, and Dr. Klemp, a therapist. Dr. Lovelace recorded that Amadeo was suffering from symptoms including "sadness, insomnia, lethargy, panic attacks, headaches, poor concentration, [and] flashbacks" that "first appeared in a milder form in 1991." He diagnosed her as suffering from severe Post Traumatic Stress Disorder (PTSD) and depression. In his recommended treatment plan, he stated that "work is not appropriate" but noted that Amadeo was experiencing a delusion that she was able to work.

Dr. Klemp's notes reflect that Amadeo began a job training program in 1996 but was "unable to stay" because of "headaches, nausea and episodes of unexpected, `irrational' crying." In part as a result of Dr. Klemp's interventions in therapy, Amadeo admitted to herself that she could not return to employment in the securities industry and applied for disability benefits under her insurance policy and through the Social Security Administration in June 1996. The Social Security Administration granted Amadeo disability benefits dating back to January 1996.

Amadeo's disability income insurance policy provided that a monthly premium would be paid to Amadeo if, "[s]olely due to Injury or Sickness, you are unable to perform the substantial and material duties of your regular occupation in which you were engaged just prior to the disability." Dr. Gallagher, Principal's reviewing psychiatrist, examined Amadeo's application, including the records of her treatment, several times. In his first memorandum to Principal's claims adjusters, he reported that "it appears [Amadeo] has a past history of depression or panic attacks some years ago, approximately 1990 or 1991." He indicated that "[t]here are a great number of stressors at this time, the most obvious of which is her grandson being charged with attempted murder." He also noted that Amadeo was subjected to physical abuse by her husband for many years, "thus, the origin of the diagnosis of PTSD," and was "apparently being stalked by the son of the man that [Vinny] is accused of murdering." Finally, he stated that the symptoms listed by Dr. Lovelace "would suggest that this patient was not able to work at the time."

After more complete records were received, Dr. Gallagher reviewed Amadeo's application a second time. Apparently at the instruction of one of Principal's claims adjusters, he conducted this review solely on the assumption that her "regular occupation" under the policy was "an unemployed person." He concluded that, "reviewing the file more fully and from the vantage point of an unemployed person, it would seem that, although distressed, she was capable of carrying on her activities of daily living" and therefore "was not evidently disabled from her occupation as an unemployed person." Principal thereupon denied Amadeo's claim for payment of benefits because "we must consider your [regular] occupation as that of an unemployed person" and "you have been able to continue many of your daily activities as an unemployed person."

Dr. Gallagher reviewed the file again when Amadeo appealed Principal's initial decision. At that time, Amadeo submitted additional evaluations from Drs. Lovelace and Klemp and the Social Security Administration's grant of disability benefits. Dr. Gallagher recorded that "[i]t is clearly stated in [Dr. Klemp's letter] that this woman is incapable of working which, given the symptoms and [Global Assessment of Functioning of 35], seems to be so. However, I don't know that this information changes our original opinion about her disability status as an unemployed person." On June 25, 1997, Principal rejected Amadeo's appeal based on its continued position that she was not too disabled to perform the substantial duties of her regular occupation of unemployment.

Amadeo filed this action against Principal in California state court for tortious bad faith and breach of contract. Principal removed the action to federal court on the basis of diversity jurisdiction and filed a motion for partial summary adjudication of Amadeo's bad faith claim and prayer for punitive damages. The district court granted Principal's motion, finding as a matter of law that Principal's denial of disability benefits to Amadeo was not unreasonable. The parties then stipulated to a dismissal with prejudice of the remaining breach of contract claim in order to pursue this appeal.¹

II. JURISDICTION

Principal argues that we lack jurisdiction to hear this appeal because the voluntary dismissal of Amadeo's breach of contract claim had the effect of barring her bad faith claim. We disagree.

"There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. This principle is applicable to policies of insurance." Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 328 P.2d 198, 200 (1958) (citation omitted); accord Kransco v. Am. Empire Surplus Lines Ins. Co., 23 Cal.4th 390, 97 Cal.Rptr.2d 151, 2 P.3d 1, 8 (2000); Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 169 Cal.Rptr. 691, 620 P.2d 141, 145(1979). The responsibility of the insurer to act in good faith "is not the requirement mandated by the terms of the policy itself" but is imposed by law, breach of which sounds in tort notwithstanding that the denial of benefits may also constitute breach of the contract. Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032, 1037 (1973). Thus, when an insurer acts in bad faith to withhold benefits due under the policy, "the plaintiff will ordinarily have freedom of election between an action of tort and one of contract." Crisci v. Security Ins. Co., 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173, 178 (1967) (quoting Comunale, 328 P.2d at 203); see also 1 Witkin, Summary of Cal. Law § 749 (9th ed. 1987) ("The plaintiff may elect to sue either in contract or in tort, to gain whatever substantive or procedural advantages the election may give.").

Amadeo initially brought this action alleging both breach of contract and tortious bad faith. Principal argues that because the parties agreed to dismiss Amadeo's breach of contract claim "with prejudice" under Rule 41(a)(1), we must proceed as if a finding was rendered that Amadeo's insurance contract did not require the payment of disability benefits to her, and therefore Principal's denial of benefits could not have been in bad faith. This argument has no merit.

Principal is correct that the "precise nature and extent of the duty imposed by [the] implied promise will depend on the contractual purposes," Egan, 169 Cal. Rptr....