Farr v. Transamerica Occidental Life Ins. Co. of California, s. 1

• Decision Date: 28 December 1984
• Docket Number: Nos. 1,CA-CIV,s. 1
• Citation: 699 P.2d 376,145 Ariz. 1
• Parties: A. D'Wayne FARR and Miriam J. Farr, husband and wife, Plaintiffs-Appellees, Cross Appellants, v. TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY OF CALIFORNIA, a California corporation, formerly Occidental Life Insurance Company of California, Defendant-Appellant, Cross Appellee. A. D'Wayne FARR and Miriam J. Farr, husband and wife, Plaintiff-Appellants, v. GALBRAITH & GREEN, INC., an Arizona corporation, Defendant-Appellee. 6566, 1 6586. . Filed
• Court: Arizona Court of Appeals

Page 376

699 P.2d 376

145 Ariz. 1

A. D'Wayne FARR and Miriam J. Farr, husband and wife, Plaintiffs-Appellees, Cross Appellants, v. TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY OF CALIFORNIA, a California corporation, formerly Occidental Life Insurance Company of California, Defendant-Appellant, Cross Appellee.

A. D'Wayne FARR and Miriam J. Farr, husband and wife, Plaintiff-Appellants, v. GALBRAITH & GREEN, INC., an Arizona corporation, Defendant-Appellee.

Nos. 1 CA-CIV 6566, 1 CA-CIV 6586.

Court of Appeals of Arizona Division 1, Department D.

Filed Dec. 28, 1984.

Reconsideration Denied March 8, 1985.

Review Denied May 7, 1985.

Patten, Montague & Arnett by Wayne C. Arnett, Tempe, for plaintiffs-appellants, plaintiffs-appellees, cross appellants

Evans, Kitchel & Jenckes, P.C. by Amy R. Coy, Phoenix, for defendant-appellant, defendant-appellee, cross appellee.

OPINION

KLEINSCHMIDT, Judge.

A. D'Wayne Farr and Miriam J. Farr sued Occidental Life Insurance Company (Occidental) and its claims administrator, Galbraith & Green, Inc., to recover for an alleged bad faith refusal to pay benefits concededly due under a group health insurance policy.

The jury found for the Farrs and awarded $13,117.20 compensatory damages against both defendants and $50,000 punitive damages against Occidental and $20,000 punitive damages against Galbraith & Green. The trial court granted a judgment notwithstanding the verdict as to Galbraith & Green. The trial court denied the Farrs' request for attorneys' fees. Occidental appealed and the Farrs cross-appealed on the issue of attorneys' fees and appealed the order granting judgment notwithstanding the verdict as to Galbraith & Green.

The case arises out of the birth of the Farrs' sixth child and the company's refusal to pay benefits for complications of childbirth. The Farrs, who had been insured with Occidental for ten years, had never until this incident experienced trouble with the payment of claims, and they were generally satisfied with the company's performance. They made two or three claims per year during that period. The insurance policy in question provided a maximum benefit of $800 for pregnancy. Complications of pregnancy, as opposed to routine expenses of pregnancy which exceeded $800, were covered on the basis of a percentage formula.

During 1978, Mrs. Farr became pregnant and her expected date of delivery was April 22, 1979. In December, 1978, she experienced vaginal bleeding and about a month later she was placed on complete bed rest. The vaginal bleeding continued and on January 28, 1979, she was hospitalized with temperatures ranging from 101 degrees to 102 degrees. She received medication to counteract uterine contractions and two days after admission was discharged with instructions for complete bed rest.

On February 1, 1979, Mrs. Farr was rehospitalized and delivered a premature baby. Following delivery, Mrs. Farr developed chest pains and a high fever. Diagnostic tests were undertaken and Mrs. Farr's hospitalization was prolonged. The claim filed by Mrs. Farr with Galbraith & Green contained bills submitted in January, 1979, for a procedure administered to determine fetal age. It also reflected that in October of 1978 Mrs. Farr had undergone amniocentesis, the insertion of a needle through the abdominal wall to determine the sex of the fetus and whether it has normal chromosomes. The doctor's bill for the delivery reflected that the baby was expected in late April, 1979, but was actually delivered on February 1, 1979. That bill showed that a culture sensitivity test had been conducted in December, 1978, and that Mrs. Farr had been hospitalized for "third trimester bleeding". The claim was signed by the Farrs' doctor and bore a code number which meant that it was for a routine delivery.

The insurer paid a total of $800 following receipt of the doctor's bill. In March, 1979, Galbraith & Green received a claim directly from the hospital in the amount of $2,848.45, which reflected a "diagnosis from records" of "chorioamniotis [inflamation of fetal membranes caused by bacterial infection], front breech, intrauterine gestation, premature, delivered; premature rupture of membranes." The bill was for a six-day hospitalization. The bill also reflected that extensive x-rays, lab work, and diagnostic procedures had been undertaken and that a variety of medications had been prescribed.

Galbraith & Green's claims processor, Rose Marie Robinson, testified that it was her employer's policy to look only to the doctor's diagnosis on the claim form to determine whether or not a claim was to be paid as a complication of pregnancy. Mrs. Robinson recognized that the course of Mrs. Farr's treatment was out of the ordinary in a number of respects for a normal pregnancy. At some point she asked her supervisor whether the case involved complications of pregnancy and was told that it did not.

In late March, 1979, Galbraith & Green informed the plaintiffs by letter that their claim would not be paid. In mid-April Galbraith & Green received a letter from Mrs. Farr, followed later by a new claim form from Mr. Farr in which he set forth some of the complications she had experienced. In response, Galbraith & Green wrote to Mr. Farr as follows:

Before we can consider your wife's claim we need a statement from her doctor stating the complications of pregnancy at the time of delivery. The information we based her claim on does not indicate a complication of pregnancy as defined in your contract.

When we receive more information from her doctor, we will review the claim again and send to Occidental for review.

The author of the letter, Mrs. Robinson, testified that she intended to convey to the Farrs that the Farrs were supposed to procure the information from the doctor and provide it to Galbraith & Green. Mr. Farr testified that he did not think that Mrs. Robinson was trying to trick him with the letter. The Farrs were confused as to who was to supply the additional information. In any event, neither the Farrs nor Galbraith & Green made an effort soon thereafter to obtain additional medical information from the doctor or the hospital and Galbraith & Green did not follow up with Mr. and Mrs. Farr to inquire as to whether the requested information would be forthcoming. Nor did the Farrs make further inquiry to determine whether Galbraith & Green had received the information. Not long after writing the letter, Mrs. Robinson was reassigned to other duties and had no further contact with the claims.

The Occidental Claims Manual provides for a system of follow-up letters to be sent every two weeks while the claim is awaiting additional information. If the information is not received after three requests, a close-out letter is to be sent to the insureds. This procedure was not followed in this case.

A few months after the delivery, Mrs. Farr underwent gynecological surgery. Occidental paid for this as well as for all of the newborn's expenses.

Shortly after receiving the letter in October, the Farrs brought an action alleging that the company was dealing in bad faith and seeking compensatory and punitive damages against both Occidental and Galbraith & Green. After the action was filed, counsel for the defendants requested a medical report from Mrs. Farr's doctor. This was provided and it described the complications of pregnancy Mrs. Farr had undergone. After receiving this letter, Occidental offered to pay Mrs. Farr the full contract benefits, provided that she would dismiss her bad faith action. This was rejected and thereafter Occidental paid the benefits that were due anyway.

SUFFICIENCY OF THE EVIDENCE TO SUBMIT THE CLAIM OF BAD FAITH TO THE JURY

The appellant's first argument is that Occidental's conduct did not amount to a breach of the duty of good faith and fair dealing. Relying on Noble v. National American Life Insurance Co., 128 Ariz. 188, 624 P.2d 866 (1981), Occidental argues that the tort of bad faith is an intentional one. The company says that the evidence here will not support a verdict that it acted intentionally and denied the claim without a basis for doing so. Occidental characterizes what occurred as a misunderstanding as to who was to provide further corroboration for the claim and that the plaintiffs' attorney withheld the doctor's statement from Occidental.

While the tort of bad faith is often referred to as an intentional one, the cause of action is established if the plaintiff demonstrates that the defendant had knowledge of or recklessly disregarded the lack of a reasonable basis for denying the claim. See Noble v. National American Life Insurance Co., supra. The evidence, viewed in the light most favorable to the Farrs, supports the submission of the case to the jury on a theory of reckless disregard of the absence of a reasonable basis for denying the claim.

The appellant's argument that counsel for the Farrs created the bad faith claim by unreasonably refusing to provide them with the doctor's statement concerning the claim has been settled by the jury. It nonetheless deserves comment. To understand the argument, it is necessary to first understand the sequence of events. The birth for which the claim was made occurred in February of 1979, and the claim for $800 was paid on March 22, 1979. Shortly thereafter, the hospital billed Galbraith & Green directly and on April 11, 1979, Mrs. Farr wrote Galbraith & Green a letter explaining that she had encountered complications of pregnancy. In May of 1979, the Farrs first consulted their present counsel, Wayne Arnett, about the refusal of Occidental to pay their claim. The appellant suggests that Arnett had a statement from the attending physician and the hospital records shortly after the Farrs first consulted him. The letter to Arnett from the doctor, however, bears a date of January 21, 1980. In any event, Arnett did not contact Galbraith & Green or Occidental to request payment of the claim and he...