Cook v. Medical Savings Ins. Co., 072208 FED10, 06-6233

Docket Nº:06-6233
Party Name:JOHN COOK, Plaintiff-Appellee, v. MEDICAL SAVINGS INSURANCE COMPANY, an Indiana Corporation, Defendant-Appellant.
Case Date:July 22, 2008
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit

JOHN COOK, Plaintiff-Appellee,


MEDICAL SAVINGS INSURANCE COMPANY, an Indiana Corporation, Defendant-Appellant.

No. 06-6233

United States Court of Appeals, Tenth Circuit

July 22, 2008

D.C. No. CV-05-289-C W.D. Okla.

Before HARTZ, GORSUCH, Circuit Judges, and BRIMMER, District Judge.[*]


Neil M. Gorsuch Circuit Judge

After a five day trial in this diversity action, a jury found that Medical Savings Insurance Company ("MSIC") misrepresented the scope and nature of its insurance coverage, committing fraud against its insured, John Cook. In doing so, the jury awarded Mr. Cook $550,000 in compensatory damages and $550,000 in punitive damages. After trial, MSIC moved for judgment as a matter of law and a new trial or remittitur. The district court denied each of these motions and MSIC appealed. We now affirm.


Viewing the facts in the light most favorable to the jury's verdict, as we must, they indicate that, based on a referral from his accountant, Mr. Cook spoke with Troy Russell, an authorized insurance agent for MSIC, in the fall of 2003 about purchasing an MSIC health insurance policy. According to Mr. Cook, Mr. Russell represented that an MSIC policy would have a $5,000 deductible, which could be funded using a tax-advantaged health savings account, and that MSIC would pay 100 percent of medical expenses above the deductible amount, up to $1,000,000. Mr. Russell echoed and clarified this point, testifying at trial that he represented the policy would cover 100 percent of "reasonable and customary charges" above the deductible amount, up to $1,000,000. The insurance policy itself (which Mr. Cook received but apparently did not read) confirmed this coverage and defined "reasonable and customary charge" as the most common charge for particular services or supplies - defined as an amount equal or in excess of that charged by two-thirds of the providers in the area - so long as those charges could be considered reasonable. The policy then listed seven factors MSIC was permitted to consider in determining the reasonableness of a charge, including the skill and time required to perform the procedure, the severity of the condition being treated, the amount charged for similar services or supplies in the locality and in other parts of the country, and the cost to the provider, among other things.

Unknown to Mr. Cook and undisclosed in the MSIC policy, MSIC actually enforced a different rule. Starting in 2001, MSIC decided that, for hospital bills over $3,000, it would pay only the reimbursement rate paid by Medicare for the procedure in question plus 26 percent - and would do so even though MSIC usually had no guarantee hospitals would accept that amount as payment in full. As a result, MSIC paid an average of only 30 to 40 percent of billed charges. MSIC did not publicly disclose its internal Medicare plus 26 percent reimbursement rule until December 2003, about two months after Mr. Cook purchased the policy, and then did so only in response to prodding from the Oklahoma Department of Insurance, which had received complaints about MSIC and forced MSIC to remove the "reasonable and customary charge" language from its policy. Even then, however, in its disclosure letter to its policyholders, MSIC indicated that it would pay Medicare plus 26 percent only for claims incurred before January 1, 2004, and that claims incurred after that date would be paid in accordance with a new set of procedures outlined in an enclosed endorsement. The endorsement replaced the "reasonable and customary charge" language of the MSIC policy sold to Mr. Cook with a new term - "reimbursable charge" - but then proceeded to define that term in much the same way as "reasonable and customary charge," albeit with some modifications. The new definition explained that reimbursable charges could be less than the fees actually charged and that any excess would be the policyholder's responsibility. It also added two new factors to the list that MSIC could consider when determining whether a charge was reimbursable: billed charges and "Medicare diagnostic or procedure codes, and reimbursement rates, with appropriate markups to reflect national average payment or reimbursement rates." Aplt. App. at 83. Mr. Cook testified he never saw the December 2003 letter and endorsement.

In August 2004, Mr. Cook was diagnosed with prostate cancer, for which he underwent surgery in September. He incurred a bill of $19,531.45 for the surgery, but MSIC agreed to pay only $6,970.50. That number represented the applicable Medicare charge plus 26 percent, with a 25 percent penalty deduction because Mr. Cook did not "pre-certify" the surgery with MSIC. According to evidence at trial, even though services were incurred in 2004 and thus purportedly subject to MSIC's new "reimbursable charge" endorsement formula, MSIC did not consider the most common charge for the services billed to Mr. Cook or any other factors listed in its reimbursable charge endorsement; instead, it simply applied its longstanding Medicare plus 26 percent rule. When MSIC sent the hospital a check for $6,970.50 as payment in full, the hospital rejected the payment and billed Mr. Cook for the full amount.

MSIC informed Mr. Cook that, if he chose to dispute his bill with the hospital, MSIC would pay his attorneys fees. Instead, Mr. Cook brought this suit against MSIC. He alleged that MSIC committed fraud when it sold him the insurance policy and breached its duty of good faith and fair dealing by refusing to pay his hospital bill; he sought both compensatory and punitive damages. The district court denied summary judgment for MSIC and partial summary judgment for Mr. Cook and the case proceeded to trial, where a jury found in favor of MSIC on the good faith claim and in favor of Mr. Cook on the fraud claim, ultimately awarding Mr. Cook $550,000 in compensatory damages and $550,000 in punitive damages. The district court denied MSIC's various post-trial motions and MSIC timely appealed. We address first MSIC's arguments with respect to liability and then its contentions on damages.


MSIC argues that, notwithstanding the jury's verdict, the evidence presented by Mr. Cook was insufficient to prove it committed fraud as a matter of law. We review a district court's denial of a motion for judgment as a matter of law de novo. See Williams v. W.D. Sports, N.M., Inc., 497 F.3d 1079, 1086 (10th Cir. 2007). In doing so we will "not weigh the evidence, pass on the credibility of the witnesses, or substitute our conclusions for those of the jury," but will instead "view the evidence and any inferences to be drawn therefrom most favorably to the non-moving party." Id. (internal quotation omitted). We may enter judgment as a matter of law "only if the evidence points but one way and is susceptible to no reasonable inference supporting the party opposing the motion," such that "there is no legally sufficient evidentiary basis with respect to a claim or defense under the controlling law." Id. (internal quotation omitted).

Before us, MSIC does not object to the district court's legal instructions to the jury, but instead confines itself to arguing that Mr. Cook's proof failed as a matter of law to establish intentional or reckless conduct by MSIC, justifiable reliance by Mr. Cook, or any injury to him. We consider each of MSIC's liability arguments in turn.

1. MSIC argues that Mr. Cook failed to prove the requisite mens rea for fraud as a matter of law because he did not present evidence that Mr. Russell, MSIC's insurance agent, intentionally or recklessly misrepresented the policy to Mr. Cook. This contention, however, simply misconceives the nature of Mr. Cook's suit. Mr. Cook did not sue Mr. Russell or allege that Mr. Russell intentionally misled him. Rather, his theory at trial was that, while Mr. Russell may have been "honorable," as Mr. Cook himself testified, MSIC withheld full information about the company's policies from its own sales agents. Aplt. App. at 406. That is, in Mr. Cook's theory of the case, MSIC misled even Mr. Russell, by failing to disclose to him its true Medicare plus 26 rule for reimbursements.

MSIC offers no reason why the jury could not have found that this is exactly what occurred. Indeed, Mr. Russell and another MSIC agent testified that they had believed the "100 percent of reasonable and customary" provision in MSIC's policies meant that MSIC would generally base its reimbursement decision on what health care providers in the area were charging. See Aplt. App. at 440-441; Aple. App. at 362. A reasonable jury could conclude that neither knew MSIC was, instead, simply enforcing a Medicare plus 26 percent rule. See Aple. App. at 361; Aplt. App. at 439-42. In fact, when the other agent discovered the Medicare plus 26 percent formula after MSIC reduced payment on a client's bill, he was so surprised and troubled that he took the "unusual" step of notifying his other clients and advising them to change insurers. Aple. App. at 368, 361-68.

2. Next, MSIC argues that Mr. Cook did not demonstrate that he reasonably relied on MSIC's misrepresentation. This argument has two prongs: Did Mr. Cook present evidence of actual reliance? And was his reliance reasonable?

On the first of these questions, MSIC argues that Mr. Cook did not actually rely on Mr. Russell's representations about its reimbursement policy by pointing to testimony indicating that Mr. Cook sought insurance advice from his accountant and that he did not find Mr. Russell to be a very strong salesman. But the record is replete with evidence from Mr. Cook that, although he consulted his accountant, he did in fact rely on Mr. Russell's representations about the policy's terms in deciding to purchase it and would not have purchased the MSIC policy had he known the truth. See Aplt. App. at 372-77, 363-64. The jury was free to credit this testimony and find it...

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