Merrick v. Paul Revere Life Ins. Co., 05-16380.

Citation500 F.3d 1007
Decision Date31 August 2007
Docket NumberNo. 05-17059.,No. 05-16380.,05-16380.,05-17059.
PartiesG. Clinton MERRICK, Jr., Plaintiff-Appellee, v. PAUL REVERE LIFE INSURANCE COMPANY; Provident Life & Accident Insurance; Unum Provident, Defendants-Appellants. G. Clinton Merrick, Jr., Plaintiff-Appellee, v. Paul Revere Life Insurance Company; Provident Life & Accident Insurance; Unum Provident, Defendants-Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Evan M. Tager, Mayer, Brown, Rowe & Maw, Washington, DC, for the defendants-appellants.

Thomas L. Hudson, Osborn Maledon, Phoenix, AZ, for the plaintiff-appellee.

Appeal from the United States District Court for the District of Nevada; James C. Mahan, District Judge, Presiding. D.C. Nos. CV-00-00731-JCM, CV-00-00731-JCM.

Before: CYNTHIA HOLCOMB HALL, DIARMUID F. O'SCANNLAIN, and SANDRA S. IKUTA, Circuit Judges.

HALL, Senior Circuit Judge:

Defendants Paul Revere Life Insurance Company and Unum Provident Corporation (collectively "the insurers") appeal the district court's jury verdict awarding $1.65 million in compensatory and $10 million in punitive damages to plaintiff G. Clinton Merrick, Jr. for breach of contract and of the duty of good faith and fair dealing, stemming from the insurers' denial of Merrick's disability insurance claim. Among other issues, this appeal requires us to examine the constitutional limits upon the use of evidence of injury inflicted upon nonparties, as discussed in Philip Morris USA v. Williams, ___ U.S. ___, 127 S.Ct. 1057, 1063, 166 L.Ed.2d 940 (2007). The district court had jurisdiction pursuant to 28 U.S.C. § 1332. This court has jurisdiction pursuant to 28 U.S.C. § 1291. We affirm in part, reverse in part, and remand for a new trial on punitive damages due to the district court's failure to give an adequate limiting jury instruction under Williams.

I. Background
A. History of Merrick's Claim

G. Clinton Merrick, Jr. purchased an "own occupation" disability policy from defendant Paul Revere Life Insurance Company in 1989. Under that policy, if Merrick was "unable to perform the important duties of [his] Occupation" due to "Injury or Sickness," he was entitled to a "total disability" benefit of $12,000 per month for the duration of his disability. At the time, Merrick was one of three partners at a venture capital firm, responsible for raising capital, evaluating investment options, and participating as a director in companies in which the firm invested. Merrick had entered the venture capital arena following a successful career as a marketing executive, where his accomplishments included campaigns for Country Time Lemonade, Crystal Light drink mix, and the "Kool-Aid Man."

In the early 1990s, Merrick began suffering from fatigue, muscle pain, mental confusion, and other difficulties that affected his work performance. His attending physician, Dr. Simon Epstein, referred him to several specialists to identify the problem. In August 1993, Dr. Stuart Mushlin indicated that Merrick may be suffering from Chronic Fatigue Syndrome (CFS) and found him unable to work. This diagnosis coincided with his partners' decision to buy out Merrick's interest in the firm due to recent underperformance, which Merrick attributed to his health problems.

Merrick first alerted Paul Revere to his disability on May 31, 1994, stating that he was "suffering from a disabling condition" but was not yet filing a claim. Merrick then met with additional specialists and underwent a battery of specialized tests at the Mayo Clinic, some of which showed normal results and some of which indicated abnormalities. Dr. Michael Silber, summarizing the Mayo Clinic results, diagnosed Merrick as suffering from CFS and Lyme Disease, and advised that he "restart work at a much lower stress level than previously." By this time Merrick was under the regular care of Dr. Alan Rapaport rather than Dr. Epstein; both Epstein and Rapaport concurred with the CFS diagnosis and found Merrick unable to work.

Following the Mayo Clinic's confirmation of the CFS diagnosis, Merrick filed a formal claim with Paul Revere. Paul Revere's in-house physician reviewed Merrick's documentation, questioned the diagnosis but ultimately agreed that the records supported a finding of "significant impairment." Therefore Paul Revere began paying out Merrick's claim as of December 1994, when his benefits began to accrue.

Merrick tried to start a new venture capital firm in late 1994, but his illness prevented him from getting beyond the initial stages. Merrick's other insurer, Northwestern Mutual, notified Paul Revere in June 1995 that Merrick was seeking to enter a new business venture. That August, a Paul Revere field representative offered to settle Merrick's claim for an amount equal to four months of disability benefits, citing the "return to work and recovery" provision of his claim. Merrick declined, whereupon the representative left him with a check for one month of benefits. Merrick returned this check because he believed an endorsement provision on the check would have settled his claim upon cashing.

Paul Revere then arranged for Dr. James Donaldson to perform an Independent Medical Examination in December 1995. Dr. Donaldson's report was inconclusive: based on his tests, he concluded that Merrick "does not have either an active neurological problem or active Lyme disease" but did note his chronic fatigue, attributing it to depression. He also found that Merrick "deserves aggressive treatment, both pharmacotherapy and psychotherapy, by a seasoned psychiatrist." Paul Revere's claim file shows that the company interpreted Donaldson's report as supporting "significant impairment," and as implying that Merrick could not return to work.1 Dr. Rapaport, Merrick's treating physician, disputed Dr. Donaldson's conclusions and reiterated his CFS diagnosis.

Paul Revere conducted an intensive review of Merrick's claim file, which concluded that "there does not appear to be any neuropsychologically-based disability." The field representative again offered a compromise settlement, which Merrick refused. On December 9, 1996, Paul Revere denied Merrick's claim on the ground that the internal review showed "no objective medical documentation which supports an inability to perform the duties of your occupation as a venture capitalist." After Merrick protested, Paul Revere agreed to pay two additional months of benefits while Merrick provided the company with objective medical evidence. But the company's medical consultants rejected the two follow-up reports Merrick offered to document his illness, so Paul Revere continued to deny Merrick's claim. Merrick filed suit against Paul Revere and its parent corporation, Unum Provident, in April 2000, claiming breach of contract and of the duty of good faith and fair dealing.

B. Pretrial Motion in Limine

Merrick sought production of all documents added to Paul Revere's claim file after Merrick brought suit. The insurers resisted this request, citing among other reasons attorney-client privilege. After Merrick brought a motion to compel production, the magistrate judge warned the insurers that failure to produce a privilege log would waive privilege and instructed the insurers not to invoke the privilege unless the claim file actually included privileged material. Paul Revere then reiterated its privilege objection in a supplemental response to Merrick's document request, without producing a privilege log, and attested that "[n]otwithstanding and subject to these objections," it had produced all responsive documents.

In the meantime, Merrick discovered that when he filed this suit, counsel for the insurers assumed active management of the Merrick claim file. As a result, he became concerned that the insurers were using the attorney-client privilege to shield otherwise responsive documents from discovery, by claiming they were privileged communications between the insurers and counsel rather than routine documents related to claims adjustment. Merrick sought another hearing before the magistrate judge, who granted Merrick's motion to compel, held all privileges waived and ordered the insurers to produce all responsive documents. The insurers produced no additional documents in response; indeed, Unum Provident reiterated its privilege claim in a later discovery response.

Merrick then brought a motion in limine to suppress all documents in his claim file acquired after litigation commenced, on the ground that the insurers were picking and choosing which documents would be produced in discovery. In response, the insurers stated that no documents had been withheld on the basis of privilege, although at the hearing counsel for the insurers suggested in passing that such privileged documents existed. Merrick found this representation incredible, given that the insurers had collected over 3,000 pages of documents following the filing of the suit yet produced only three short memos analyzing that material. Merrick insisted before the district judge that the insurers were hiding evidence and demanded production of all "post-litigation notes" and other documents reflecting the "thought processes" underlying management of Merrick's claim. The district court judge granted the motion in limine, and at trial suppressed much of this documentation on the ground that defendants were picking and choosing which documents to produce. After the court granted the motion in limine, the insurers submitted a declaration stating that they did not with-hold any documents on the basis of privilege.

C. Trial

At trial, Merrick argued that the denial of his claim was part of a larger scheme to "scrub" the company's liability for expensive and noncancellable "own occupation" disability policies. Merrick relied largely upon the testimony of Stephen Prater, an insurance industry expert, who testified regarding Unum Provident's allegedly aggressive and unethical claim-closing...

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