Billings v. Union Bankers Ins. Co.

• Decision Date: 19 March 1996
• Docket Number: No. 940098,940098
• Citation: 918 P.2d 461
• Parties: Glen A. BILLINGS, as guardian ad litem for Stanley D. Billings, a protected person, Plaintiff, Appellee, and Cross-Appellant, v. UNION BANKERS INSURANCE COMPANY, a Texas corporation, Defendant, Appellant, and Cross-Appellee.
• Court: Utah Supreme Court

Page 461

918 P.2d 461

Glen A. BILLINGS, as guardian ad litem for Stanley D Billings, a protected person, Plaintiff, Appellee and Cross-Appellant, v. UNION BANKERS INSURANCE COMPANY, a Texas corporation Defendant, Appellant, and Cross-Appellee.

No. 940098.

Supreme Court of Utah.

March 19, 1996.

Rehearing Denied July 1, 1996.

L. Rich Humpherys, Mark L. Anderson, Stacy L. Hayden, Salt Lake City, for plaintiff.

Robert S. Campbell, Kevin Egan Anderson, Joann Shields, David W. Slagle, Salt Lake City, for defendant.

ZIMMERMAN, Chief Justice:

Glen A. Billings brought this action on behalf of his son Stanley D. Billings ("Billings") against Union Bankers Insurance Company ("Union Bankers"), alleging that Union Bankers breached both the express terms and the implied covenant of good faith and fair dealing contained in a catastrophic health insurance contract. The case was tried to a jury, which found a breach of both the express and the implied terms of the contract and returned a $1,800,000 verdict in Billings' favor. The district court also awarded Billings "reasonable" attorney fees of $110,651 but refused to hold Union Bankers liable for the substantially higher contingency fee which Billings actually incurred. Union Bankers appeals the jury verdict, and Billings cross-appeals the award of attorney fees. We affirm the verdict but vacate the award of attorney fees and remand for recalculation of Billings' recoverable fees in accordance with his fee agreement.

In June of 1984, Billings entered into a catastrophic health insurance contract with Union Bankers in which Union Bankers agreed to pay certain medical expenses incurred by Billings as a result of injury or sickness. Covered expenses included hospital inpatient services, room, and board; skilled nursing facility services, room, and board; and home health care services. In addition, the policy contained a miscellaneous benefits rider in which Union Bankers agreed to pay, among other things, certain out-of-hospital medical expenses. Throughout the period of the policy, Billings paid the premiums and performed each act required to keep the policy in full force and effect.

On September 22, 1985, Billings was involved in a motorcycle accident in which he sustained serious injuries, including traumatic brain injury. He was hospitalized for several months following the accident, and pursuant to the insurance policy, Union Bankers paid Billings' hospitalization expenses.

In May of 1986, Dr. Goka, Billings' treating physician at Holy Cross Hospital, determined that Billings' recovery would be improved if he were transferred to Tangram Rehabilitation Network in San Marcos, Texas ("Tangram"). Tangram is a transitional treatment center for individuals who are medically stable but who have suffered loss of memory or basic functional skills due to traumatic brain injury. Billings was admitted to Tangram on May 9, 1986. However, Union Bankers denied coverage for Billings' treatment at Tangram, stating that the insurance policy did not cover such treatment. Although his condition was improving, Billings discontinued his treatment at Tangram on November 25, 1986, due to a lack of funds.

Billings commenced this action on May 4, 1988, alleging that Union Bankers breached both the express coverage provision and the implied covenant of good faith and fair dealing contained in the insurance contract. Billings sought reimbursement of the expenses he incurred at Tangram and consequential damages resulting from the premature termination of treatment, which allegedly prevented Billings from ever achieving his full potential for recovery.

On April 10, 1990, Billings moved for partial summary judgment, seeking a ruling that Union Bankers had breached the express coverage provision by refusing to pay for Billings' treatment at Tangram. The trial judge denied Billings' motion "for the reason that differing interpretations of the insurance policy create genuine issues of material fact to be tried." Billings then petitioned this court for interlocutory review. We granted Billings' petition and affirmed the denial of Billings' motion because the "record before us ... fail[ed] to adequately demonstrate the nature of the treatment received at Tangram." Billings v. Union Bankers Ins. Co., 819 P.2d 803, 805 (Utah 1991) ("Billings I "). We remanded, and the case proceeded to trial.

Following closing arguments, Union Bankers moved for a directed verdict on Billings' claim for breach of the implied covenant of good faith and fair dealing. Union Bankers argued that it could not have breached the implied covenant as a matter of law because its liability under the insurance policy was fairly debatable. The district court denied Union Bankers' motion but instructed the jury that Union Bankers would not be liable for breaching the implied covenant if its liability under the insurance policy was "fairly debatable [and] a reasonable insurance company in similar circumstances [would have] den[ied] the claim." The district court also instructed the jury that if it found Union Bankers to have breached the express coverage provision of the insurance contract, it could award Billings the value of the insurance policy benefits to which he was entitled and if it found Union Bankers to have breached either the express coverage provision or the implied covenant of good faith and fair dealing, it could award Billings consequential damages for emotional suffering and mental anguish, medical expenses, lost income and earning capacity, and the extent to which Billings had been limited in pursuing and enjoying the ordinary affairs of life. Although Billings also sought to recover his attorney's contingency fee as consequential damages, the parties agreed to reserve this issue until after the trial.

Following the trial, the jury returned a special verdict finding that Union Bankers had breached both the implied covenant of good faith and fair dealing and the express coverage provision of the insurance contract. It awarded Billings $1,800,000. The district court subsequently addressed the attorney fee issue and awarded Billings what it determined to be a reasonable attorney fee of $110,651.

On appeal, Union Bankers argues that the district court erred in (i) denying Union Bankers' motion for a directed verdict on Billings' claim for breach of the implied covenant of good faith and fair dealing, and (ii) instructing the jury that it could award damages for mental anguish caused by Union Bankers' breach of the insurance contract's express coverage provision. ¹ Billings cross-appeals the award of attorney fees. We address Union Bankers' arguments first and then consider Billings' cross-appeal.

Union Bankers first argues that the district court should have granted its motion for a directed verdict on Billings' claim for breach of the implied covenant of good faith and fair dealing. Union Bankers contends that under our decision in Beck v. Farmers Insurance Exchange, 701 P.2d 795 (Utah 1985), a first-party insurer may not be held liable for breaching the implied covenant where the basis for the alleged breach is that it wrongfully denied coverage and where the insured's claim was fairly debatable. Union Bankers argues that Billings' claim was fairly debatable as a matter of law and therefore that it could not have breached the implied covenant of good faith and fair dealing. Although we agree that Beck established a "fairly debatable" defense to a claim for breach of the implied covenant of good faith and fair dealing, we do not think that Billings' claim was fairly debatable as a matter of law.

We first state the applicable standard of review. Whether Beck established a fairly debatable defense to a claim for breach of the implied covenant based on an insurer's wrongful denial of coverage is a question of law which we review for correctness. See State v. Montoya, 887 P.2d 857, 858 (Utah 1994) ("[T]he interpretation of the effect of a prior judicial decision ... constitutes a conclusion of law to which we accord no particular deference. Review is for correctness."); see also State v. Pena, 869 P.2d 932, 936 (Utah 1994). Whether an insured's claim is fairly debatable under a given set of facts is also a question of law. See Pena, 869 P.2d at 936 ("[T]he effect of a given set of facts is a question of law."). However, because of the complexity and variety of the facts upon which the fairly debatable determination depends, the legal standard under which this determination is made conveys some discretion to trial judges. See id. at 938-39. Therefore, although we will carefully review a trial court's conclusion that an insured's claim is or is not fairly debatable, we will grant the trial court's conclusion some deference. See id.

Because our decision today turns heavily on our holding in Beck, we examine that case in detail here. Like the instant case, Beck involved an alleged breach of a first-party insurance contract, i.e., "an insurance agreement where the insurer agrees to pay claims submitted to it by the insured for losses suffered by the insured." Beck, 701 P.2d at 798 n. 2. In Beck, we held that the relationship between an insurer and its insured in the first-party context is contractual rather than fiduciary and that "as parties to a contract, the insured and the insurer have parallel obligations to perform the contract in good faith, obligations that inhere in every contractual relationship." Id. at 800-01. We then explained:

[T]he implied obligation of good faith performance contemplates, at the very least, that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim.

Id. at 801.

The first question presented is whether, under Beck, a first-party insurer may be held liable for breaching the implied covenant on the ground that it...