Hanson By and Through Hanson v. Prudential Ins. Co. of America

• Citation: 783 F.2d 762
• Decision Date: 25 February 1986
• Docket Number: No. 84-2283,84-2283
• Parties: Glen HANSON, a Minor, By and Through his Guardian Ad Litem, Catherine HANSON, and Duane Hanson, Plaintiffs-Appellants, v. The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 762

783 F.2d 762

Glen HANSON, a Minor, By and Through his Guardian Ad Litem, Catherine HANSON, and Duane Hanson, Plaintiffs-Appellants, v. The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant-Appellee.

No. 84-2283.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Aug. 13, 1985.

Decided Sept. 27, 1985.

As Modified on Denial of Rehearing and Rehearing En Banc

Feb. 25, 1986.

Clifford B. Mitchell, Nancy K. Delaney, Mitchell, Dedekam & Angell, Eureka, Cal., for plaintiffs-appellants.

Bruce A. Beckham, Adams, Duque & Hazeltine, Los Angeles, Cal., for defendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before NORRIS, and REINHARDT, Circuit Judges, and JAMESON, ^* District Judge.

NORRIS, Circuit Judge:

The Hansons, insured under a group medical insurance policy issued by Prudential Insurance Company (Prudential), filed an action against Prudential to recover policy benefits for treatment received by Glen Hanson at Clear Water Ranch Children's House (Clear Water Ranch), a residential treatment facility. The Hansons appeal a judgment for Prudential, contending that (1) the district court erred in finding that Clear Water Ranch was not a "hospital" within the meaning of the insurance policy; and (2) Prudential acted in bad faith in failing to investigate the claim thoroughly. The district court had jurisdiction under 28 U.S.C. Sec. 1332(a)(1). We vacate and remand the district court's judgment on the Hansons' contractual claim and affirm its judgment on the bad faith claim.

I

Prudential issued a group medical insurance policy to employees of Pitney-Bowes. In February 1975, Glen Hanson, stepson of Duane Hanson, a Pitney-Bowes employee, was accepted as a patient at Clear Water Ranch, a residential treatment facility specializing in the treatment of preadolescent children suffering from functional nervous disorders. The staff at Clear Water Ranch included one registered nurse, who was on duty seven hours a day, five days a week; child care workers who were on duty twenty-four hours a day; and licensed clinical social workers, all of whom were supervised by a psychiatrist.

In April 1975, the Hansons submitted to Prudential a claim for payment of policy benefits. Prudential denied the claim on the ground that Clear Water Ranch did not qualify as a "hospital" within the meaning of the policy because it failed to provide "twenty-four hour a day nursing service" as required by the policy.

In April 1976, the Hansons sued Prudential to recover the costs of treatment provided by Clear Water Ranch. The district court granted summary judgment for Prudential. This court, in an unpublished memorandum decision, vacated the judgment and remanded on the ground that a triable issue of fact existed regarding "whether enforcement of the particular restrictions to coverage that Prudential relies on would be unreasonable or absurd in light of the policy's coverage of treatment of mental illnesses." Hanson v. The Prudential Insurance Company of America, 665 F.2d 1052, slip. op. at 3 (9th Cir.1981). On remand, the district court ruled for Prudential after a six-day trial. It found that Clear Water Ranch failed to meet the policy definition for a hospital because it did not provide twenty-four hour a day nursing service as required by the policy.

II

The interpretation of a contract presents a mixed question of fact and law subject to de novo review. See Matter of Beverly Hills Bancorp, 752 F.2d 1334, 1338 (9th Cir.1984) (settlement agreement reviewed de novo); In re U.S. Financial Securities Litigation, 729 F.2d 628, 631-32 (9th Cir.1984) (same); Healy Tibbits Construction Company v. Insurance Company of North America, 679 F.2d 803, 804 (9th Cir.1982) (insurance policy exclusionary clause reviewed de novo). If a district court relies upon extrinsic evidence to interpret an ambiguous contract, however, to the extent that interpretation is a factual determination, this court will reverse only if the district court's construction is clearly erroneous or if the court applied an incorrect legal standard. U.S. Financial Securities, 729 F.2d at 632; Culinary & Service Employees Union v. Hawaii Employee Benefit Administration, 688 F.2d 1228, 1230 (9th Cir.1982); cf. Martin v. United States, 649 F.2d 701, 703 (9th Cir.1981) (interpretation of meaning of words in contract in light of surrounding circumstances presents question of law freely reviewable on appeal). Because the issue in this case concerns the proper construction of language on the face of the insurance contract without reference to disputed extrinsic evidence, the district court's interpretation is freely reviewable. See Dillingham Shipyard v. Associated Insulation Co., 649 F.2d 1322, 1326 (9th Cir.1981).

III

Under well settled principles of California law, any ambiguities or uncertainties in insurance contracts are construed against the insurance company. Reserve Insurance Co. v. Pisciotta, 30 Cal.3d 800, 808, 640 P.2d 764, 768, 180 Cal.Rptr. 628, 632, (1982); Insurance Co. of North America v. Sam Harris Construction Co., 22 Cal.3d 409, 412, 583 P.2d 1335, 1337, 149 Cal.Rptr. 292, 294, (1978); Endo Laboratories Inc. v. Hartford Insurance Group, 747 F.2d 1264, 1268 (9th Cir.1984). If two or more interpretations are reasonable, we must adopt the interpretation that favors coverage. Pisciotta, 30 Cal.3d at 811, 640 P.2d at 770, 180 Cal.Rptr. at 634; State Farm Mutual Auto Insurance Co. v. Jacober, 10 Cal.3d 193, 202-03, 514 P.2d 953, 958-59, 110 Cal.Rptr 1, 6-7 (1973); see also Producers Dairy Delivery Co. v. Sentry Insurance Co., 160 Cal.App.3d 141, 155, 206 Cal.Rptr. 485, 492 (1984) (ambiguous phrase "must be interpreted as broadly as possible" to effect coverage). Moreover, the insurance contract must be considered in light of the reasonable expectations of the insured at the time he purchased coverage. Pisciotta, 30 Cal.3d at 809, 640 P.2d at 768, 180 Cal.Rptr. at 633; McLaughlin v. Connecticut General Life Insurance Co., 565 F.Supp. 434, 441 (N.D.Cal.1983). With these principles in mind, we turn to the insurance policy at issue.

The Hansons' policy defines "illness" as a "bodily or mental disorder of any kind." "Hospital" is defined as "an institution which is operated pursuant to law and is primarily engaged in providing on an in-patient basis for the medical care and treatment of sick and injured persons through medical, diagnostic and major surgical facilities, all of which facilities must be provided on its premises under the supervision of a staff of Physicians with twenty-four hour a day nursing service." The term "nursing service" is not further defined.

In finding that Clear Water Ranch was not a hospital the district court emphasized the lack of twenty-four hour nursing service by registered nurses. The Hansons argue that the district court erred in finding that Clear Water Ranch failed to provide twenty-four hour nursing service within the meaning of the policy. They contend that the nursing service requirement was satisfied by the child care workers who were on duty twenty-four hours a day and provided therapeutic services appropriate for the treatment of children with functional nervous disorders. Their contention is persuasive.

Prudential's experts testified that the phrase "nursing service" means services by or under the supervision of a licensed or registered nurse; that when the policy refers only to "nursing service," industry practice requires that those services be performed by licensed nurses; and that child care workers and licensed clinical social workers did not perform nursing services within the meaning of the policy.

However, the policy itself does not so limit the definition of "nursing service," and nothing suggests that the Hansons had any reason to be aware of the meaning Prudential placed upon that language even assuming that it was consistent with industry practice. Moreover, Dr. Stubbelbine, a psychiatrist who visited Clear Water Ranch at the Hansons' request, testified that in view of the nursing needs of the patient population at Clear Water Ranch, that is, preadolescent children with functional nervous disorders, the child care workers provided adequate nursing service and it was unnecessary to have a registered nurse on duty twenty-four hours a day.

Because the policy does not define "nursing service," the meaning of that term must be ascertained by reference to the Hansons' reasonable expectations of coverage. See Insurance Co. of North America, 22 Cal.3d at 412-13, 583 P.2d at 1336, 149 Cal.Rptr. at 294. We think that the Hansons reasonably would...