Kelley v. Sears, Roebuck and Co.

• Decision Date: 04 August 1989
• Docket Number: 87-1387,Nos. 87-1246,s. 87-1246
• Citation: 882 F.2d 453
• Parties: Norman G. KELLEY, Plaintiff-Appellee, Cross-Appellant, v. SEARS, ROEBUCK AND COMPANY; Allstate Life Insurance Company, Defendants-Appellants, Cross-Appellees. & 87-1442.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 453

882 F.2d 453

Norman G. KELLEY, Plaintiff-Appellee, Cross-Appellant, v. SEARS, ROEBUCK AND COMPANY; Allstate Life Insurance Company, Defendants-Appellants, Cross-Appellees.

Nos. 87-1246, 87-1387 & 87-1442.

United States Court of Appeals, Tenth Circuit.

Aug. 4, 1989.

Alfred T. McDonnell, James E. Scarboro, Denver, Colo., James A. Carleo, Colorado Springs, Colo., for plaintiff-appellee/cross-appellant.

Ann Kane Smith, Pasadena, Cal., Arthur L. Klein, Chicago, Ill., Gregory A. Eurich, Peter H. Rudy, Denver, Colo., for defendants-appellants/cross-appellees.

Before BALDOCK, WRIGHT, ^* and BRORBY, Circuit Judges.

Eugene A. WRIGHT, Circuit Judge.

Kelley sued Sears and Allstate for bad faith handling of his Workmen's Compensation and long term disability claims. A jury awarded him $2.17 million in compensatory and punitive damages. We reverse the judgment against Allstate and remand for a new trial against Sears on the amount of compensatory and punitive damages.

I. Background

Sears employed Kelley from 1959-1979. He injured his back in 1970 and applied for Workmen's Compensation benefits. Sears admitted Kelley had sustained 7% permanent, partial disability and paid him a lump sum settlement. In 1974, Kelley re-injured his back, causing an additional 11% disability. Sears paid him another lump sum and closed his claim.

After he accepted the second settlement, Kelley incurred $400 in medical bills and sought to reopen his claim. He filed a petition with the Workmen's Compensation Commission in May 1979. Sears moved to dismiss the petition, asserting it did not meet the Commission's procedural requirements because Kelley failed to show that his condition had deteriorated since the last settlement.

Kelley responded to that motion with a letter. According to Conaway, an experienced compensation lawyer who testified as an expert, Kelley's letter addressed and cured the petition's deficiencies. Kelley attached to it the reports of two physicians, both of whom indicated a serious deterioration in his condition. The letter said that he was too ill to attend the Commission hearing. Conaway testified that under those circumstances, the Commission usually postpones the hearing.

Kelley sent a copy of the letter and reports to the hearing officer. Apparently, it did not reach the officer until November 7, 1979, about two weeks after the hearing at which Kelley's petition was dismissed.

Sears' attorney had a copy of the letter with him at that hearing. He told the hearing officer, "There is a letter of September 12th, 1979, ... a copy of which is in my file, which states Mr. Kelley's physical condition. I don't think it changes anything...." Counsel did not tell the officer the substance of the medical reports and failed to advise him that Kelley was absent because of illness. The hearing officer dismissed the petition when Kelley failed to appear.

After more than three years of hearings, motions, and further medical examinations, the Commission finally awarded Kelley medical expenses in January 1983. Throughout the intervening years, Sears disputed Kelley's level of disability, despite the unanimous findings of at least four physicians that he had sustained total, permanent disability.

In addition to the Workmen's Compensation coverage he had through Sears, Kelley had a separate long term disability ("LTD") policy with Allstate. It has paid him benefits since April 1977. He claims Allstate breached an implied covenant of good faith by miscalculating his monthly benefits, refusing to cash out his policy, and reducing his monthly entitlement to compensate for a previous overpayment.

Kelley sued Sears and Allstate alleging bad faith handling of his two claims and seeking general and punitive damages. He asserted causes of action under Colorado's common law of bad faith insurance practices and Colo.Rev.Stat. Sec. 10-3-1104 (1973). A jury awarded general damages of $420,000 jointly against Sears and Allstate. It assessed punitive damages of $1,250,000 against Sears and $500,000 against Allstate.

The trial judge denied defendants' motions for JNOV, new trial, and remittitur. Kelley moved to amend the judgment to include prejudgment interest from May 30, 1978, the date he claims his cause of action against Allstate accrued. The court awarded interest from May 30, 1984, the date Kelley filed his complaint. He seeks the additional prejudgment interest.

II. Allstate Claims

Kelley bases his cause of action against Allstate on Colorado's common law of bad faith, see Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1273-74 (Colo.1985), and on Colo.Rev.Stat. Sec. 10-3-1104. The statute defines and prohibits unfair or deceptive practices in the insurance industry. See Colo.Rev.Stat. Sec. 10-3-1101 (1973).

Allstate asserts correctly that the Employee Retirement Income Security Act preempts Kelley's suit. ¹ ERISA's provisions preempt all state laws that "relate to" any employee benefit plan. 29 U.S.C. Sec. 1144(a) (1982). Kelley's long term disability policy is such a plan. See Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549, 1553, 95 L.Ed.2d 39 (1987) ("[A] state law 'relate[s] to' a benefit plan 'in the normal sense of the phrase, if it has a connection with or reference to such a plan.' ") (quoting Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 739, 105 S.Ct. 2380, 2389, 85 L.Ed.2d 728 (1985)); Straub v. Western Union Tel. Co., 851 F.2d 1262, 1264 (10th Cir.1988).

The "saving clause" found in 29 U.S.C. Sec. 1144(b)(2)(A) saves from preemption only those causes of action under state law that "regulate" insurance. In making this determination, the court first considers a "common sense view" of the language of the saving clause. See Pilot Life, 107 S.Ct. at 1553. Second, it determines whether the cause of action falls under the "business of insurance," applying three criteria:

(1) whether the state law has the effect of transferring or spreading a policyholder's risk;

(2) whether the state law is an integral part of the policy relationship between the insurer and the insured; and

(3) whether the state law is limited to entities within the insurance industry.

Id. 107 S.Ct. at 1553-54. Pilot Life held that ERISA's saving clause did not preserve actions under Mississippi's bad faith insurance law. Id. at 1558. The Court found that the law failed to satisfy the tests above and conflicted with ERISA's exclusive civil enforcement scheme. Id.

Kelley contends without merit that Colorado's bad faith insurance law "regulates" insurance and falls within the saving clause. A Colorado federal district court held recently that the law under which Kelley seeks relief is "very similar in substance" to the Mississippi law at issue in Pilot Life. See Denette v. Life of Indiana Ins. Co., 693 F.Supp. 959, 966 (D.Colo.1988). Denette decided the saving clause did not preserve a bad faith claim based on Colo.Rev.Stat. Sec. 10-3-1104, the very statute under which Kelley seeks relief.

The court treated the statute under the approach articulated in Pilot Life and concluded that although it applied only to the insurance industry, it failed to satisfy two of the three criteria above. Id. Section 10-3-1104 does not spread policyholder risk; rather, it prevents and remedies unfairness in the insurance industry. Id. It is not integral to the insurance relationship, since it does not control the substantive terms of the insurance contract itself. ² Id.; see Pilot Life, 107 S.Ct. at 1555 ("[T]he common law of bad faith does not define the terms of the relationship between the insurer and the insured....").

We agree with the Denette court's analysis of Sec. 10-3-1104 and its application of Pilot Life. We also conclude for similar reasons that Colorado's common law of bad faith does not regulate insurance. It neither spreads policyholder risk nor controls the substantive terms of the insurance contract. See Pilot Life, 107 S.Ct. at 1554-55. Although associated with the insurance industry, this law developed from the general principles of tort and contract law. See id. at 1555. Finally, Colorado's common law of bad faith conflicts with ERISA's civil enforcement remedies. See id. at 1556-57 ("The deliberate care with which ERISA's civil enforcement remedies were drafted and the balancing of policies embodied in its choice of remedies argue strongly for the conclusion that ERISA's civil enforcement remedies were intended to be exclusive."); Denette, 693 F.Supp. at 966 n. 2. Because ERISA preempts Kelley's cause of action against Allstate, we reverse the judgment against it of both compensatory and punitive damages.

III. Sears Claims

A. Sufficiency of the Evidence

Kelley also sues Sears under Colorado's bad faith insurance law. Sears claims he failed to establish a prima facie case of bad faith and that the trial judge erred in denying its motions for directed verdict and JNOV.

Kelley counters that Sears' objections to his petition's inadequacies were hypertechnical and that most Workmen's Compensation insurers would have paid the $400 in medical bills without requiring a formal reopening. He asserts that Sears had uncontroverted evidence, including the report of a physician it selected, that his disability was severe and his condition deteriorating.

A directed verdict is appropriate only if the proof weighs so overwhelmingly in favor of the movant as to permit no other rational conclusion. E.g., Koch v. City of Hutchinson, 814 F.2d 1489, 1495 (10th Cir.1987), cert. denied, --- U.S. ----, 109 S.Ct. 262, 102 L.Ed.2d 250 (1988). We must give the opposing party the "benefit of all inferences which the evidence fairly supports, even though contrary inferences might reasonably be drawn." E.g., Martin v. Unit Rig & Equip. Co., 715 F.2d 1434, 1438 (10th Cir.1983).

Colorado law governs the substantive elements of proof in an action for bad faith insurance dealings. See id. To establish a prima facie case, Kelley must prove (1) that...