Karas v. American Family Ins. Co., Inc.

• Decision Date: 18 October 1994
• Docket Number: Nos. 94-1089,94-1090 and 94-1092,s. 94-1089
• Citation: 33 F.3d 995
• Parties: Lynnette KARAS, Plaintiff-Appellant, v. AMERICAN FAMILY INSURANCE COMPANY, INC., a Wisconsin Corporation, Defendant-Appellee. Lynnette KARAS, Plaintiff-Appellee, v. AMERICAN FAMILY INSURANCE COMPANY, INC., a Wisconsin Corporation, Defendant-Appellant. Lynnette KARAS, Plaintiff-Appellant, v. AMERICAN FAMILY INSURANCE COMPANY, INC., a Wisconsin Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 995

33 F.3d 995

Lynnette KARAS, Plaintiff-Appellant, v. AMERICAN FAMILY INSURANCE COMPANY, INC., a Wisconsin

Corporation, Defendant-Appellee.

Lynnette KARAS, Plaintiff-Appellee, v. AMERICAN FAMILY INSURANCE COMPANY, INC., a Wisconsin

Corporation, Defendant-Appellant.

Lynnette KARAS, Plaintiff-Appellant, v. AMERICAN FAMILY INSURANCE COMPANY, INC., a Wisconsin

Corporation, Defendant-Appellee.

Nos. 94-1089, 94-1090 and 94-1092.

United States Court of Appeals Eighth Circuit.

Submitted June 13, 1994.

Decided Aug. 29, 1994.

Rehearing Denied Oct. 18, 1994.

Steven C. Beardsley and Steven J. Oberg, Rapid City, SD, argued, for appellant.

Robert L. Morris, Belle Fourche, SD, argued, for appellee.

Before BOWMAN and LOKEN, Circuit Judges, and WEIS, ^* Senior Circuit Judge

WEIS, Senior Circuit Judge.

In this diversity case, we conclude that the record does not support recovery of damages for mental anguish in claims based on an insurance agent's misrepresentations of the amount of coverage in the plaintiff's health insurance policy. Therefore, to the extent that the jury verdict included an award for mental suffering, it must be set aside. Having established a case of misrepresentation, however, plaintiff is entitled to those benefits to which she was led to believe she would receive by the agent's statements, even though the benefits were not in fact the terms of the policy. We will reverse the judgment of the district court and will remand for the entry of a judgment in the amount of the plaintiff's hospitalization expenses not yet paid by the carrier.

After giving birth to her second child by a caesarean section in June 1988, plaintiff Lynnette Karas submitted a claim to defendant American Family Insurance Company for hospital expenses totaling $4,593.09. The carrier paid the hospital $500, but denied any further liability under the policy. Plaintiff filed suit in state court seeking payment not only for the remainder of her hospital expenses, but for punitive and emotional distress damages as well. Defendant removed the case to the United States District Court for the District of South Dakota.

At trial, plaintiff testified that after her first child was born by caesarean section, her husband's health insurance company notified him that it would not pay any further maternity benefits. In early 1987, during their search for a replacement, plaintiff and her husband contacted several insurance carriers, none of whom would write a policy that would pay for caesarean sections. Plaintiff then met with William Frankman, an agent for American Family. According to plaintiff, Frankman told her that an American Family medical policy would cover caesarean sections just as it would other surgical procedures, paying 80% of the costs with the remaining 20% to be borne by plaintiff.

At trial, Frankman denied that he had made such representations. He said that he had discussed with plaintiff a policy that would provide coverage of $500 for caesarean procedures, but that if her hospital confinement exceeded six consecutive days, expenses for the seventh and succeeding days would be paid on an 80%/20% basis. The policy ultimately issued to plaintiff, however, contained a waiver that eliminated the coverage for expenses incurred after a six-day hospital stay and provided only for a flat $500 benefit. Frankman testified that he delivered the policy to plaintiff at her home and that she signed the waiver at that time.

Plaintiff denied that she had seen the restrictive waiver form and said that her signature had been forged. She produced a forensic document expert to support her position on that point. Defendant in turn called an expert who testified that the contested signature on the waiver was that of plaintiff. The trial court found that the waiver had no relevance inasmuch as plaintiff had been confined to the hospital for less than the prerequisite six-day stay. The court nevertheless admitted the evidence about the alleged forgery for the limited purpose of aiding the jury to assess credibility.

Other witnesses were called to support the plaintiff's claim for mental suffering damages. Her obstetrician, her family members, and friends testified about her depression during the years following the company's denial of full insurance benefits.

The trial court dismissed the counts for negligent or intentional infliction of emotional distress and bad faith refusal to pay a claim. The judge then charged the jurors that plaintiff could prevail on the remaining claims if they found that Frankman had "either intentionally or negligently misrepresented the amount of coverage," and that plaintiff had relied on the misrepresentation to her detriment. The jury was further instructed that plaintiff could recover damages for mental anguish in addition to the policy benefits that agent Frankman had allegedly promised.

The jury returned a verdict for plaintiff in the amount of $75,000. She then filed post-trial motions for a new trial on punitive damages and for attorneys' fees. The trial judge denied the motion for a new trial on punitive damages after "conclud[ing] that there was no credible evidence upon which a reasonable belief could be formed that the defendant was guilty of willful, wanton, or malicious conduct." In a separate order, the court also denied the motion for attorneys' fees. Otherwise, the judgment in favor of plaintiff was allowed to stand.

On appeal, plaintiff reasserts her claims for punitive damages and attorneys' fees. In addition, she argues that the trial court erred in failing to instruct the jury on her claims of fraud and deceit, breach of duty of good faith, and negligent or intentional infliction of emotional distress. Defendant cross-appeals from the judgment on the jury's verdict.

The liability issue in this case is straightforward. Whether plaintiff was entitled to prevail essentially depended upon whether Frankman, the American Family agent, told her that her coverage for caesarean procedures would be based on the 80%/20% formula. Although Frankman denied that he had made any such statement, the jury resolved the matter against his version of the circumstances. We conclude that, under the substantive law of South Dakota which is applicable in this diversity case, plaintiff established a claim of misrepresentation of her insurance coverage by the defendant's agent. See Aesoph v. Kusser, 498 N.W.2d 654, 656 (S.D.1993); Moore v. Kluthe & Lane Ins. Agency, Inc., 89 S.D. 419, 426-28, 234 N.W.2d 260, 264-65 (1975).

It is regrettable that so much of the trial and arguments on appeal were devoted to the alleged forgery of the waiver. As noted earlier, the terms of that endorsement had no application to the theory upon which plaintiff based her claims. She had no complications that resulted in a hospital stay exceeding a six-day period and, thus, incurred no expenses that would have been affected by the waiver. The issue of the alleged forgery of the waiver was simply not pertinent to the plaintiff's claims, and she had no basis for introducing evidence on that point.

The plaintiff's case depended on the jury finding her version of the events in this case more credible than that of Frankman, American Family's agent. No one at the company other than Frankman made any representations to plaintiff about her insurance coverage. For the forgery evidence to affect credibility, therefore, it had to be directed, not at the company, but at Frankman--in other words, that the testimony tended to show that he had something to do with placing the plaintiff's signature on the waiver form.

Plaintiff's counsel conceded that there was no evidence against Frankman on that point. In arguing the claim of fraud before the district judge during trial, the plaintiff's counsel said:

"And, Judge, at no point have I ever said Mr. Frankman forged that signature. At no point have I said Mr. Frankman did this in 1991; I don't think he did. At no point have I said who forged this document because I don't know. But the only one that had control of it, the only one using it, the only one perpetuating by using that waiver is American Family Insurance Company, Judge. It can't be anybody else. Nobody else in the world cares."

Tr. at 497.

Counsel's candor was commendable in admitting that he did not know who committed the forgery and that he did not believe Frankman was responsible. ¹ We likewise find no evidence in the record to impute culpability to Frankman. Moreover, Frankman had ceased being an agent for American Family in the fall of 1987, and the records of policies written by him remained at the insurance company's office. The plaintiff's claim did not arise until June 1988.

The company did not offer the waiver in evidence, and it was error for the district court to admit testimony about the alleged forgery. To allow the evidence to affect the credibility of the company as a whole was inappropriate when concededly the alleged forgery was not imputed to Frankman, the individual charged with misrepresentation. The issue is close, but in view of the trial judge's limiting instruction, we cannot say that the admission of the evidence constituted reversible error.

Aside from the forgery issue, however, the record is adequate to support the jury's finding that a misrepresentation had been made. Therefore, the company was liable for the 80% share of the hospital bill. The award for mental anguish, however, requires some discussion.

It is not clear under what legal theory plaintiff is pursuing in her claim for damages for mental suffering. The trial court and parties at times referred to breach of contract, but on other occasions treated the misrepresentation as a tort.

There is a substantial basis for characterizing the plaintiff's claim as one for breach of contract. In Farmers Mut. Auto. Ins. Co. v. Bechard, 80 S.D. 237, 248, 122 N.W.2d 86, 92 (1963), the Supreme Court of South Dakota held that an insurance company was...