Higgins v. Blue Cross of Western Iowa and South Dakota, 66272

• Decision Date: 19 May 1982
• Docket Number: No. 66272,66272
• Parties: Shirley HIGGINS, Appellee, v. BLUE CROSS OF WESTERN IOWA AND SOUTH DAKOTA and Blue Shield of Iowa, Appellants.
• Court: Iowa Supreme Court

Page 232

319 N.W.2d 232

Shirley HIGGINS, Appellee, v. BLUE CROSS OF WESTERN IOWA AND SOUTH DAKOTA and Blue Shield of Iowa, Appellants.

No. 66272.

Supreme Court of Iowa.

May 19, 1982.

Dewie J. Gaul of Jacobs, Gaul, Nymann & Green, Sioux City, and L. Call Dickinson, Jr., and Craig F. Graziano of Dickinson, Throckmorton, Parker, Mannheimer & Raife, Des Moines, for appellants.

J. Michael Dull and Robert J. Dull of Dull Law Firm, LeMars, for appellee.

Considered by REYNOLDSON, C. J., and UHLENHOPP, McCORMICK, ALLBEE, and McGIVERIN, JJ.

ALLBEE, Justice.

This lawsuit arises from defendants' rescission of plaintiff's insurance contract for hospital and medical services. A jury awarded plaintiff actual damages of $27,143.90 on her contract claim and punitive damages of $200,000 on the theory that defendants committed a tort by denying contract benefits in bad faith. Defendants challenge both awards on this appeal, and we reverse.

The following facts are largely undisputed. In January 1978, plaintiff completed an application form for Blue Cross/Blue Shield coverage. The form contained an inquiry as to whether plaintiff had any "eye or ear abnormality or disease," which plaintiff answered "no." The form also asked if plaintiff had "had any medical advice or treatment or departure from good health not mentioned above." Here, plaintiff noted only that she had had surgery for diverticulum, a problem involving her urinary tract. Next on the form appeared a statement whereby the applicant certified "that the information, statements and answers as herein recorded are full, true and correct to the best of my knowledge and belief, and that no information required to be given therein, either expressly or by implication, has been knowingly withheld." It was further declared that untrue statements or omissions of requested information would bar all rights to recovery and would make the contract subject to cancellation from its effective date. After plaintiff completed and signed the application, it was submitted to defendants. Subject to a rider excluding diverticulum, a contract was issued effective February 1, 1978. Plaintiff then cancelled her previous health care coverage.

Several months later, plaintiff was examined by Dr. Daryl Doorenbos, who advised her that her blood pressure was elevated and referred her to Dr. Walter Eckman for further examination. On Dr. Eckman's advice, plaintiff was admitted to a hospital for tests on October 4, 1978. A claim with regard to that hospitalization was submitted to defendant Blue Cross. In connection with that claim, Blue Cross received certain hospital records, including a patient history which stated in part: "Basically over the past few years she's had a number of transient ischemic episodes affecting the left eye and also a few recently affecting the right side of her body, also affecting her speech in the past year." This history had been dictated by Dr. Eckman upon plaintiff's admission to the hospital.

Trial testimony established that ischemic episodes may consist of brief periods of fading vision, dizziness or numbness, brought on by a vascular disorder which results in an inadequate blood supply to the brain. Due to the severe complications, including stroke, to which ischemic episodes can lead, defendants have an underwriting guideline that coverage should not be extended to persons who have had such episodes. There was uncontradicted testimony that no contract would have been issued to plaintiff if her application had mentioned the problems reported in Dr. Eckman's history. Because her application did not refer to those episodes, Blue Cross determined that there was a potential underwriting problem with regard to plaintiff's claim and that further investigation was in order.

A letter, which incorrectly stated that plaintiff wished to "obtain" Blue Cross coverage, was initially sent to Dr. Doorenbos on November 8. It requested, inter alia, details of "ischemia of the eye or any other part of the body over the past 10 years with any residuals." Dr. Doorenbos's response to that particular inquiry was: "Refer to Dr. Eckman." A similar letter was therefore sent to Dr. Eckman on November 14. Dr. Eckman's response, dated January 12, 1979, stated in pertinent part: "According to her history she has had episodes of partial blindness, recurring episodes of slight dizziness and some difficulty with speech. She has had brief episodes of visual disturbances going back over ten years."

After receiving Dr. Eckman's response, Blue Cross concluded, with the advice of counsel, that plaintiff's contract should be rescinded because of failure to disclose on her application the apparently longstanding visual problems she had subsequently reported to Dr. Eckman. By letter dated February 7, Blue Cross refunded all premiums paid by plaintiff and informed her that her membership was being voided and that no claim liability would be assumed. Plaintiff had not been previously notified that her claim was being investigated.

A series of correspondence ensued between Blue Cross and plaintiff's attorney, during the course of which the attorney was advised that Blue Cross "would be glad to review any new information you have which is different than that on which we made our determination." Plaintiff's attorney forwarded to Blue Cross the following:

(1) A letter from Dr. H. L. Vander Stoep, plaintiff's family doctor through April 1977, stating that plaintiff had been treated in March 1977 for diverticulum of the urethra; that there were "no complications and no problems related to her vascular system"; that there was "nothing in her medical records" to confirm a "pre-existing condition"; and that "everyone in her age group has a varying degree of atherosclerosis."

(2) A letter from Dr. Dwayne E. Howard, a urologist, stating that his records on plaintiff showed no history of hypertension and that her blood pressure was not, in his opinion, significantly high at the time she was examined in 1977.

(3) A letter from Dr. Doorenbos containing a statement that when plaintiff was seen in 1977 for a bladder problem, "no indication of hypertension or vascular disease was discussed, nor was it apparent," and that there was no indication in his records that plaintiff was aware of a hypertension problem prior to September 1978.

Blue Cross responded to plaintiff's attorney, indicating that the company did not believe the doctors' letters had contradicted the information upon which the decision to rescind had been based and that the company would not change its position unless Dr. Eckman furnished "supported" information different from that contained in his record.

On April 19, 1979, plaintiff filed this suit, alleging that defendants had willfully and knowingly "repudiated" her insurance contract, and in doing so had acted "maliciously and with wanton disregard" for plaintiff's rights.

One day after the lawsuit was filed, Dr. Eckman wrote a letter to defendant Blue Shield. He noted that two years previously, plaintiff had had a problem with the vision in her left eye while she was in Colorado, and that a doctor who saw her there told her she might have a local problem in the eye. That doctor, he said, had advised plaintiff to have check-ups for glaucoma, but had not mentioned any possibility of cerebrovascular disease or suggested further evaluation. Dr. Eckman's letter further stated his opinions that plaintiff "was not aware of her problem or of its significance as of January 1978" and that defendants had "made a very poor decision" in rescinding plaintiff's contract. Enclosed with the letter was an outpatient report, partially set out in the margin, ¹ which he had dictated on September 28, 1978. Blue Cross reviewed this letter and report with a view toward reconsidering its decision, but declined to change its position because the company concluded that the outpatient report reinforced the original decision. ²

I. Punitive damages.

Punitive damages may not be recovered for a mere breach of contract; it is only when the breach also constitutes an independent tort, or other illegal or wrongful act, that punitive damages become a possibility. Pogge v. Fullerton Lumber Co., 277 N.W.2d 916, 920 (Iowa 1979). Accordingly, defendants' first contention on appeal is that there was insufficient evidence of any tort for the punitive damage issue to be submitted to the jury. Defendants preserved error on this issue by way of motions for a directed verdict, for judgment notwithstanding the verdict and for a new trial.

We have recognized two torts which may be proved in connection with the breach of an insurance contract. The first, not applicable here, involves breach of a liability insurer's duty to act in good faith in representing an insured against a third party claim. Kooyman v. Farm Bureau Mutual Insurance Co., 315 N.W.2d 30, 33-34 (Iowa 1982); Koppie v. Allied Mutual Insurance Co., 210 N.W.2d 844, 846-48 (Iowa 1973). ³ The second is the tort of intentional infliction of emotional distress, which may arise from an insurer's conduct in handling the claim of an insured. Amsden v. Grinnell Mutual Reinsurance Co., 203 N.W.2d 252, 253-55 (Iowa 1972). In the present case, trial court ruled that there was insufficient evidence of emotional distress and withdrew that issue from the jury's consideration. Plaintiff does not challenge that ruling.

The tort theory under which trial court did submit the issue of punitive damages to the jury was that of an insurer's bad faith refusal to pay a valid first-party claim. This tort has not been recognized in Iowa, although it was discussed recently in M-Z Enterprises v. Hawkeye-Security Insurance Co., 318 N.W.2d 408, 414 (Iowa 1982). The opinion in that case noted that other jurisdictions are divided on the question of whether such a tort should be recognized. This court, however, found it unnecessary to decide that question:

The facts in this case do not require us...