Prieto v. Paul Revere Life Ins. Co.

• Decision Date: 09 January 2004
• Docket Number: No. 02-15637.,02-15637.
• Citation: 354 F.3d 1005
• Parties: Vincente PRIETO, Plaintiff-Appellant, v. PAUL REVERE LIFE INSURANCE COMPANY, a Massachusetts corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

354 F.3d 1005

Vincente PRIETO, Plaintiff-Appellant, v. PAUL REVERE LIFE INSURANCE COMPANY, a Massachusetts corporation, Defendant-Appellee.

No. 02-15637.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 24, 2003.

Filed January 9, 2004.

COPYRIGHT MATERIAL OMITTED

Frederick C. Berry, Jr., Frederick C. Berry, Jr., P.C., Phoenix, AZ, for the plaintiff-appellant.

Scott Bales, Lewis and Roca LLP, Phoenix, AZ, for the defendant-appellee.

Appeal from the United States District Court for the District of Arizona; Mary H. Murguia, District Judge, Presiding. D.C. No. CV-98-01484-MHM.

Before KOZINSKI and T.G. NELSON, Circuit Judges, and RESTANI,^* Judge.

OPINION

RESTANI, Judge.

I. INTRODUCTION

Vincente Prieto ("Prieto") appeals the district court's grant of partial summary judgment and amended judgment entered in favor of Paul Revere Life Insurance Company ("Paul Revere"). We have jurisdiction under 28 U.S.C. §§ 1291 and 1294(1) (2000). For the reasons that follow, we affirm the district court's grant of summary judgment to Paul Revere on Prieto's bad faith and punitive damage claims. We reverse the district court's sua sponte finding of waiver and remand with instructions to award Prieto residual benefits for the period of August 1996 to August 1997.

II. FACTUAL AND PROCEDURAL BACKGROUND

Prieto purchased a disability insurance policy ("the policy") from Paul Revere in 1983. The policy provided for two types of disability benefits — total and residual. The policy defined total disability as follows:

"Total Disability" means that because of Injury or Sickness:

a. [the insured is] unable to perform the important duties of [his] regular occupation; and

b. [the insured is] not engaged in any other gainful occupation; and

c. [the insured is] under the regular and personal care of a Physician.

Total disability benefits were not payable until the ninety-first day of the disability. This ninety-day period was referred to as the "elimination period." The policy also provided for residual disability benefits, which were defined as follows:

"Residual Disability" means that because of Injury or Sickness:

a. (1) [The insured is] unable to perform all of the important duties of [his] regular occupation but [is] performing one or more important duties of that occupation; or

(2) [The insured is] engaged in another occupation; and

b. [The insured's] Monthly Earnings are reduced to 80 percent or less of [his] Prior Earnings; and

c. [The insured is] under the regular and personal care of a Physician.

Residual benefits were payable only if the disability immediately followed a period of total disability lasting for the specified "qualification period." The qualification period here was 30 days.

Prieto, who suffers from diabetes, was a chiropractic physician for 20 years. In late 1995, he developed an infection in his left foot that required the amputation of one toe on February 10, 1996. He was hospitalized for some time while his physician performed muscle and skin grafts.

Following his release, Prieto submitted a claim for disability benefits. On April 8, 1996, a Paul Revere representative, Tom Jolicoeur ("Jolicoeur"), met with Prieto at his home. During that meeting, Jolicoeur determined that Prieto was totally disabled as defined by the policy. In addition, Prieto informed Jolicoeur that he believed he would be disabled for at least five months. Because of the policy's ninety-day elimination period, Jolicoeur determined that Prieto would be entitled to two months of disability payments. Although benefits were typically paid after the ninety-day period ended, Prieto requested that he be paid in advance due to financial difficulties. Jolicoeur agreed and issued a check at that time.¹ Jolicoeur then told Prieto that if his disability continued beyond the anticipated five months, he should contact Paul Revere.

In August 1997, Prieto contacted Paul Revere to request additional benefits dating back to 1996. The following month, he sent Paul Revere a letter in which he described his disability and its effect on his ability to work, and asked Paul Revere to reconsider his claim for total or partial disability.² In addition to relaying what he believed would be evidence supporting his claim, Prieto mentioned that he had attempted to return to work on a part-time basis from mid-May through October 1996.

In response, Paul Revere sent another representative to interview Prieto, requested his medical records, and reviewed the financial records of his chiropractic office. As a result of this investigation, Paul Revere determined that Prieto did not qualify for total disability because he still worked as a chiropractor in a limited capacity. Paul Revere also concluded that Prieto was not entitled to residual benefits because his chiropractic practice had been in decline before his 1996 surgery and it believed Prieto's reduced earnings were therefore not caused by his injury. Prieto subsequently declined Paul Revere's offer to buy out the remainder of his policy for $25,000.

On July 16, 1998, Prieto brought suit against Paul Revere in Arizona state court. Paul Revere removed the case to federal court on diversity grounds. After some discovery, Prieto filed a motion for summary judgment on his breach of contract claim, seeking an award of total disability benefits. Paul Revere filed a cross-motion for summary judgment as to Prieto's bad faith and punitive damages claims.

The district court denied Prieto's motion and held that Paul Revere had presented evidence raising a genuine issue of material fact regarding Prieto's ability to perform the important duties of his occupation. The district court granted Paul Revere's cross-motion, finding that Prieto had not submitted evidence from which a reasonable juror could conclude that Paul Revere acted in bad faith.

After a bench trial, the district court entered judgment for Prieto. It found that he was entitled to residual disability benefits from August 1996 to September 1999, and as a result of an additional toe amputation that occurred during litigation, total disability benefits from October 1999 onward. The district court also found sua sponte that, because Prieto failed to contact Paul Revere between August 1996 and August 1997, Prieto had waived any claim to benefits for that time period. Prieto was awarded a total of $243,487.06 inclusive of pre-judgment interest, $124,585.50 of which was related to the August 1996-September 1999 period at issue here. This appeal followed.

III. DISCUSSION

A. Bad Faith

A claim of bad faith arises "when the insurance company intentionally denies, fails to process or pay a claim without a reasonable basis for such action." Noble v. Nat'l Am. Life Ins. Co., 128 Ariz. 188, 624 P.2d 866, 868 (1981). In this case, the district court held that Prieto had not presented evidence from which a reasonable juror could find that Paul Revere acted in bad faith and thus granted partial summary judgment to Paul Revere. On appeal, Prieto argues first that the district court misapplied Arizona law, and second that there was sufficient evidence to create a material issue of fact as to whether Paul Revere acted reasonably in denying his claim.

1. Arizona Law

Prior to 2000, Arizona courts generally held that "[a] bad faith claim cannot exist for claims that are `fairly debatable.'" Tobel v. Travelers Ins. Co., 195 Ariz. 363, 988 P.2d 148, 156 (1999) (citing Noble, 624 P.2d at 868). In other words, if the insurance company's grounds for denying the claim had some reasonable basis, plaintiff's bad faith claim failed. In Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 995 P.2d 276 (2000), the Arizona Supreme Court changed its approach somewhat, finding that while fair debatability is a necessary condition to avoid a claim of bad faith, it is not always a sufficient condition. The appropriate inquiry 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.

995 P.2d at 280 (citing Noble, 624 P.2d at 868). At issue here is whether the district court erred in finding that bad faith could be decided as a matter of law on summary judgment. We review the district court's application of state substantive law in diversity cases de novo. See, e.g., Salve Regina Coll. v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991).

The Zilisch court held that "[w]hile an insurer may challenge claims which are fairly debatable ... its belief in fair debatability `is a question of fact to be determined by the jury.'" 995 P.2d at 279 (quoting Sparks v. Republic Nat'l Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127, 1137 (1982)). The district court in this case held that "the conduct alleged by[Prieto did] not raise a genuine issue of material fact whether Paul Revere dealt unfairly or dishonestly with [Prieto's] claim or failed to give fair and equal consideration to his interests." Order (Feb. 27, 2000). Because this standard of law enunciated by the district court is consistent with Zilisch³ and its predecessors, the district court did not err in its construction of Arizona law.

2. Sufficiency of Evidence

Prieto next argues that the district court erred in granting summary judgment to Paul Revere because there was sufficient evidence from which a reasonable juror could have found that Paul Revere intentionally denied his claim and thus acted in bad faith. Specifically, Prieto points to Paul Revere's: (1) focus on Prieto's loss of income; (2) minimal investigation into Prieto's medical condition; and (3) various offenses as testified to by an expert.

a. Focus on Loss of Income

Prieto argues that his loss of income was irrelevant to his disability claim and Paul Revere's focus on his finances is thus evidence of bad faith. The...