Eichenseer v. Reserve Life Ins. Co.

• Citation: 894 F.2d 1414
• Decision Date: 09 February 1990
• Docket Number: No. 88-4421,88-4421
• Parties: Patricia Stephenson EICHENSEER, Plaintiff-Appellee, v. RESERVE LIFE INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1414

894 F.2d 1414

Patricia Stephenson EICHENSEER, Plaintiff-Appellee, v. RESERVE LIFE INSURANCE COMPANY, Defendant-Appellant.

No. 88-4421.

United States Court of Appeals, Fifth Circuit.

Feb. 9, 1990.

L.F. Sams, Jr., John S. Hill, Donna M. Barnes, Tupelo, Miss., for defendant-appellant.

Dewitt T. Hicks, Jr., Thomas L. Kesler, Columbus, Miss., for plaintiff-appellee.

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

Before RUBIN, POLITZ and JOHNSON, Circuit Judges.

ON PETITION FOR REHEARING AND SUGGESTION FOR REHEARING EN BANC

(Opinion September 5, 1989, 5th Cir.1989, 881 F.2d 1355)

Petition for rehearing denied.

JONES, Circuit Judge, dissenting from denial of rehearing en banc, joined by GEE, JOLLY and SMITH, Circuit Judges.

A panel of our court held that assuming arguendo the applicability of the Due Process Clause to awards of punitive damages, no violation of due process can be found on the facts of this case. By their lights, the defendant Reserve Life was "provided with adequate notice of the type of conduct which would subject it to significant punitive damages," and the district court's award was within Mississippi's "well-established guidelines for the imposition of punitive damages." The panel thus affirmed a $500,000 punitive damage award for Reserve's delay and belated payment of a $6,658.38 medical claim, amounting to a penalty 75 times the value of the claim.

Notwithstanding the decision of my brethren to the contrary, this case should be reheard en banc. Notwithstanding its demurrer on the due process issue, the rationale of the panel opinion sets no due process limit on awards of punitive damages for bad faith refusals to pay insurance claims governed by Mississippi law. ¹ I am convinced that the panel's reasoning and result are fundamentally in error. Mississippi's bad faith refusal tort, a creature designed by the state supreme court, not the legislature, to punish and deter insurance companies when they fail to pay certain claims, mocks our notions of fundamental fairness embodied in the Due Process Clause of the fourteenth amendment. First, neither Reserve Life nor most of the dozens of other insurers who have been attacked by this new Mississippi tort have had adequate notice of the conduct that could result in punitive damage awards. Second, despite the panel's incantation of Mississippi's "well established standards," the fact finder possesses unbridled discretion to punish, and punishment is meted out among defendants in radically varying amounts.

Yet another factor counsels rehearing en banc. A majority of the Supreme Court have questioned the constitutional propriety of punitive damage awards run amok. ² As lower court judges, we should debate this issue for the benefit of the higher Court and the public. ³

Lacking the opportunity for that debate, but in hope of spurring it on, I shall shadow-box the panel opinion.

I. Mississippi Law

Commencing with Standard Life Ins. Co. v. Veal, 354 So.2d 239, 248 (Miss.1977) the Mississippi Supreme Court entered the vanguard of state courts that began to create torts from what were previously breach of contract actions against insurance companies for failure to pay a claim. The state supreme court has articulated the basis for imposing punitive damages as a two-step process: first, was there a legitimate and arguable reason for the insurance company to deny coverage; second, if no such reason appears, was the denial motivated by malice or recklessness. Eichenseer, 881 F.2d at 1360. If the jury finds the requisite state of mind, they are entitled to award punitive damages based upon multiple factors:

(1) Such amount as is necessary for the punishment of the wrongdoing of the defendant and deterring defendant from similar conduct in the future;

(2) such amount as is reasonably necessary to make an example of the defendant so that others may be deterred from the commission of similar offenses; and

(3) the pecuniary ability or financial worth of the defendant.

Bankers Life & Cas. Co. v. Crenshaw, 483 So.2d 254, 278 (Miss.1985) (citations omitted). It has been correctly observed that the standards for insurance practice effectively mandated by the Mississippi Supreme Court are evolving on a case-by-case basis. Eichenseer v. Reserve Life Ins. Co., 682 F.Supp. 1355, 1366 (N.D.Miss.1988).

The long march of the Mississippi Supreme Court toward "equitable" insurance claim handling practices is not without significance for this case. Surprisingly, however, this sequence of decisions is completely overlooked by our court's opinion. Prior to the handling of Eichenseer's claim, no Mississippi case had held that either failure to obtain "all relevant medical records" or egregious delay in processing a claim could fall within the purview of a bad faith refusal tort. The Mississippi cases before 1983 dealt with entirely different fact patterns: Veal, 354 So.2d at 247-48 (punitive damages for insurance company's failure to honor credit insurance claim clearly within terms of policy); Travelers Indemnity Co. v. Wetherbee, 368 So.2d 829, 834-35 (Miss.1979) (payment withheld on homeowners' policy in violation of its terms after arson investigation had terminated favorably for insureds); Reserve Life Ins. v. McGee, 444 So.2d 803, 805-06, 811 (Miss.1983) (post-claims underwriting, i.e. rescission of a medical policy, after insured made a covered claim, for a material misstatement of facts in the policy application when the insured provided sufficient information about past medical treatment that the company could have investigated before issuance of a policy). See also Richards v. Allstate Ins. Co., 693 F.2d 502 (5th Cir.1982) (company misled automobile policyholders to believe there was an exclusion to policy coverage, even though Mississippi law did not recognize such exclusion); Freeland & Freeland, Bad Faith Litigation: A Practical Analysis, 53 Miss.L.J. 237, 276 (1983) ("The lack of clarity in the case law has made it exceedingly difficult for either plaintiffs or defendants to evaluate the merits of a bad faith claim.").

Not until after Eichenseer's claim was denied by Reserve did the Mississippi Supreme Court begin to "punitize" in certain cases an insurer's failure to obtain "all relevant medical records", Crenshaw, 483 So.2d at 270, 272; and its failure to consult with a medical expert prior to denying a claim, Life Ins. Co. v. Allen, 518 So.2d 1189, 1193 (Miss.1987). Even then, the court's pronouncements have not been uniform. In Blue Cross & Blue Shield v. Campbell, 466 So.2d 833, 840-41 (Miss.1984), predating Crenshaw, the court found as a matter of law that an insurance company could rely on ambiguous hospital records alone in denying a claim based on a pre-existing condition clause of the policy. Later Mississippi cases have continued to elaborate, ex post facto, upon acceptable claims handling policies. ⁴ Indeed, but for the rulings that already exist regarding the bad faith refusal tort, Mississippi's Supreme Court has eschewed a definition of actionable conduct in favor of mere description of the justices' goal:

We are of the opinion the term "legitimate or arguable reason," although spawning much comment in our cases and in briefs and arguments of counsel, is nothing more than an expression indicating the act or acts of the alleged tortfeasor do not rise to the heightened level of an independent tort. Additionally, the very term expresses the holding of this Court establishing a distinction between ordinary torts, the product of forgetfulness, oversight, or the like; and heightened torts, which are the product of gross, callous or wanton conduct, or, if intentional, are accompanied by fraud or deceit.

State Farm Fire & Casualty Co. v. Simpson, 477 So.2d 242, 250 (Miss.1985) (citation omitted). This non-rule of law may be likened to the legislative preamble of a statute: while it expresses the legislature's intent, it does not define the conduct to be regulated, as do the substantive provisions of an enactment. Yet, the Mississippi Supreme Court has repeatedly authorized punishment for failure to abide by its intentions.

Mississippi courts all but refuse to interfere with the amounts of punitive damages assessed by the fact finder. As the majority opinion put it in Bankers Life v. Crenshaw, an award equal to less than 1% of the company's net worth does not shock the judicial conscience. See Bankers Life & Cas. Co., 483 So.2d at 277-79.

II. Mississippi Law Applied to this Case

Reserve Life took three and a half years to pay Eichenseer's claim for medical expenses incurred from her hysterectomy. The company at all times based its denial of the claim on a pre-existing condition exclusion. This was supported by a statement of Eichenseer's treating physician in the hospital admitting records, that the patient's "pain ha[d] been present in the lower abdomen in period for the last 2-3 years." The same doctor's discharge summary, however, diagnosed acute pelvic inflammatory disease--a condition that would have had to arise suddenly--as well as pre-existing inflammation, cysts and endometriosis. The company's adjuster did not consult with medical experts before denying the claim. Moreover, the company fumbled and mismanaged its claims handling throughout Eichenseer's attempts to seek a non-judicial adjustment. After she filed suit, the company decided to pay her $6,000 plus claim, although it later produced expert testimony corroborating its evaluation that she underwent surgery for a pre-existing condition.

The trial court, having analyzed Mississippi bad faith refusal law in detail, found this case governed by the rule that a company must make a reasonable effort to obtain "all available medical information." 682 F.Supp. at 1366. The court recognized that this rule derived from two cases decided after Eichenseer's claim was handled. See Allen, 518 So.2d at 1193; Crenshaw, 483 So.2d at 270, 272...