Ace v. Aetna Life Ins. Co., s. 96-35813

Citation139 F.3d 1241
Decision Date07 May 1998
Docket Number96-36020,Nos. 96-35813,s. 96-35813
Parties98 Cal. Daily Op. Serv. 1798, 98 Cal. Daily Op. Serv. 3432, 98 Daily Journal D.A.R. 2517, 98 Daily Journal D.A.R. 4738 Sherrie ACE, Plaintiff-Appellant-Cross-Appellee, v. AETNA LIFE INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Jeffrey Feldman and Susan Orlansky, Young & Feldman, Anchorage, AK; Richard H. Friedman, Jeffrey K. Rubin, Friedman, Rubin & White, Anchorage, AK, for plaintiff-appellant.

Philip Lacovara, New York, NY, for defendant-appellee.

Appeals from the United States District Court for the District of Alaska John W. Sedwick, District Judge, Presiding. D.C. No. CV-94-00018-JWS.

Before: FLETCHER and O'SCANNLAIN, Circuit Judges, and SCHWARZER, * Senior District Judge.

SCHWARZER, Senior District Judge:

Sherrie Ace ("Ace"), a resident of Alaska, sued Aetna Life Insurance Company ("Aetna") The jury ruled for Ace on her bad faith claim and awarded her $27,009 for the wrongful denial of disability benefits and $100,000 for emotional distress. It also awarded her $16.5 million in punitive damages. The court then granted Aetna's post-trial motion for judgment as a matter of law on punitive damages and for a conditional new trial, 1 but denied its motions for judgment and for a new trial on the bad faith claim. It entered judgment for Ace in the amount of $127,009. Both parties appeal from the adverse rulings on their motions. Aetna also asserts error in the instructions to the jury with respect to emotional distress damages.

in Alaska state court alleging that Aetna acted in bad faith in denying her claim for long-term disability benefits. Aetna removed the case to federal court pursuant to 28 U.S.C. §§ 1332, 1441.

We have jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm in part, reverse in part and remand.

FACTS
A. Sherrie Ace's Accident

Ace was employed by the State of Alaska as a senior loan examiner. As a state employee, Ace participated in an Aetna group insurance plan, which provided both short-term and long-term disability benefits. She selected and paid monthly premiums for the maximum available health and disability coverage.

In December 1986, Ace broke her leg in a sledding accident, which completely shattered her knee. Despite multiple surgeries, the condition of Ace's knee deteriorated and she suffered chronic pain in her leg and in her lower back. On April 30, 1992, Ace's orthopedic surgeon, Dr. McEvoy, performed an osteotomy 2 on Ace's knee. Immediately prior to the osteotomy, Ace applied for and received short-term disability benefits from Aetna.

Dr. McEvoy released Ace on a "trial" basis for half-time, light duty work from August 1, anticipating that she would be able to return to full-time by mid-September. 3 Because her pain had worsened, Ace felt unready to return to work and expressed her concerns to Dr. McEvoy. He suggested that she find another doctor. Ace saw a specialist, Dr. Zorn, who informed her that the osteotomy had failed and that she would need a total knee replacement. That operation would have to wait, however, until April 1993 to permit her knee to heal.

B. Ace's Application for Long-Term Disability Benefits

Ace contacted Aetna and requested a long-term disability benefits application because her short-term disability benefits had expired early in September 1992. Aetna representatives advised her that although her policy required her to be "under the care of a physician," the physician need not be a specialist. Accordingly, Ace had Dr. Kiessling, her long-time family physician, complete Aetna's Attending Physician's Statement ("Statement"). On the form, he diagnosed Ace as suffering from "severe degenerative joint disease," stated that her condition had retrogressed, noted that she experienced "frequent swelling" and "constant pain," and rated her to be between 30-50% and 50-70% physically disabled. 4 Aetna received Ace's application, along with the Statement and Dr. McEvoy's July work release, on October 12, 1992.

On October 20, Aetna returned the Statement to Ace for signature by the physician and asked her to submit a physical capacities evaluation form, which had been prepared by a physical therapist in July. 5 Ace submitted

these forms and queried Aetna several times about the status of her claim, indicating her urgent need.

C. Aetna's First Denial

On November 17, Aetna denied Ace's claim. In the denial letter, Stephen Elliott ("Elliott"), Aetna's account specialist, informed Ace that

[i]n order to be eligible for Long-term Disability Benefits, you must be totally disabled to the extent that you are unable to work at any gainful occupation due to bodily injury or illness.

He noted that according to the Statement-the most current medical evidence on file-Ace was capable of continuing her employment as a loan examiner because she could perform clerical, sedentary work. Therefore, he wrote, "we cannot consider you as being totally disabled from performing the duties of any gainful occupation as required by the policy," and denied her request for benefits.

Neither Elliott nor any other Aetna employee investigated Ace's claim other than to review the material sent by Ace. Elliott did have the material reviewed by Dr. John Galvin, an Aetna medical consultant, who reported that Ace had not established that she had a long-term disability. But Elliott did not contact Ace's medical care providers or obtain additional medical records, though Ace had signed a release. In determining the physical nature of Ace's occupation, Elliott relied entirely on Aetna's Physical Demands Analysis worksheet, ignored the more complete description that was attached, 6 and did not contact Ace or her supervisor to discuss her job's physical requirements.

The "unable to work at any gainful employment" phrase in Elliott's letter is drawn from Aetna's policy. In his deposition, Elliott testified he understood Aetna's policy to require Ace to be "totally disabled from any gainful employment" and "unable to do ... any work," though he added that he would have denied her application even if he believed that Ace could only have worked half-time. Elliott's supervisor, Bryan Southall ("Southall"), testified, however, that he knew Aetna could not apply the "unable to work at any gainful employment" language literally, and that Aetna did not apply it literally in Ace's case. 7 Both he and Elliott testified Aetna applied a "reasonableness" test in evaluating disability. 8 Aetna conceded at trial, however, that no one from Aetna ever told Ace that the policy was not being interpreted and applied literally. 9 Ace testified she had called Aetna several times, but no one would clarify the term "disabled" or suggest specific documents she should send. Based on what she had been told in the letter, she would have to be totally disabled to be eligible for benefits; she knew that her condition was not that bad but also that it did not permit her to perform her job.

D. Ace's Request for Reconsideration

Ace responded to Aetna's denial by writing a short letter requesting reconsideration. 10 She enclosed a longer letter from Dr. Kiessling, dated November 30, explaining why Ace should be considered totally disabled. Dr. Kiessling's letter noted that Ace's condition had worsened since his earlier Statement, that she now needed "nearly continuous[ ] traction" to obtain any pain relief, that she

had received epidural injections for her back pain, that she could not sit for prolonged periods of time, and that she was unable to perform clerical work. He reclassified her as a "Class V disability," which Aetna's form describes as "severe functional capacity; incapable of minimal (sedentary) activity."

E. Aetna's Response to the Request for Reconsideration

On December 11, Elliott responded to Ace's request. His letter stated that the information submitted by Ace had been reviewed by Aetna's medical consultant who had advised that "there is no objective medical evidence ... to support your contention that you are unable to work at any gainful occupation." It reiterated that to receive benefits "you must be totally disabled ... from working at any gainful occupation." The letter advised Ace that for Aetna to review her file, Ace would have to have her physicians "furnish ... objective medical evidence to support [her] contention [of total disability]." Aetna's policy neither contains nor defines the term "objective medical evidence," and it did not inform Ace what would qualify as objective medical evidence; its claim handling guidelines, moreover, instruct analysts to consider subjective complaints of pain even in the absence of objective medical findings. 11

Southall testified that he was uncertain whether Ace's documents contained objective medical evidence and that he would not be surprised if a claimant did not know whether a physician's letter constituted objective or subjective evidence. He stated that what he wanted to see was Dr. Kiessling's chart notes, reports of examinations, and x-rays, but he never asked Ace or Dr. Kiessling to supply these materials.

Aetna's medical consultant, Dr. Galvin, again reviewed Ace's file and concluded there was no medical evidence to support Dr. Kiessling's opinion that Ace was in the Class V disability category. At trial, however, he conceded that Dr. Kiessling's letter contained objective medical evidence and that he was unable to ascertain from Ace's file whether she was disabled.

F. Ace's Response to Aetna's Second Response

Although Aetna's December 11 letter did not state that the claim had again been denied, it was the functional equivalent of a denial. When Ace received this letter, she had been without income since her short-term disability benefits expired in September and had begun to sell her personal property. She...

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