Linthicum v. Nationwide Life Ins. Co.

• Decision Date: 23 July 1986
• Docket Number: No. CV,CV
• Citation: 723 P.2d 675,150 Ariz. 326
• Parties: , 55 USLW 2102 Sandra LINTHICUM, widow, surviving wife and Personal Representative of the Estate of Jerry Linthicum, deceased, Plaintiff-Appellee, v. NATIONWIDE LIFE INSURANCE CO., an Ohio corporation, and Dan R. Wagnon and Associates, Inc., an Arizona corporation, Defendants-Appellants. 86-0061-PR.
• Court: Arizona Supreme Court

Page 675

723 P.2d 675

150 Ariz. 326, 55 USLW 2102

Sandra LINTHICUM, widow, surviving wife and Personal Representative of the Estate of Jerry Linthicum, deceased, Plaintiff-Appellee, v. NATIONWIDE LIFE INSURANCE CO., an Ohio corporation, and Dan R. Wagnon and Associates, Inc., an Arizona corporation, Defendants-Appellants.

No. CV 86-0061-PR.

Supreme Court of Arizona In Banc.

July 23, 1986.

Reconsideration Denied Sept. 9, 1986.

Hofmann, Salcito, Stevens & Myers by Robert D. Myers and Leroy W. Hofmann, Phoenix, for plaintiff-appellee.

McCord & Howe by Warren S. McCord, Scottsdale, and Kornblum, Kelly & Herlihy by Guy O. Kornblum and Abigail S. Kelly, San Francisco, Cal., for defendants-appellants.

Streich, Lang, Weeks & Cardon by Louis A. Stahl, William S. Hawgood, II and Susan Gaylord Gale, Phoenix, for amicus curiae American Council of Life Ins. and Health Ins. Assoc. of America.

Langerman, Begam, Lewis and Marks by Amy G. Langerman, Phoenix, for amicus curiae Arizona Trial Lawyers Assoc.

CAMERON, Justice.

This is a petition for review of a decision and opinion of the court of appeals which affirmed a jury award of compensatory damages for bad faith against Nationwide Life Insurance Company, but reversed the award of two million dollars in punitive damages. Linthicum v. Nationwide Life Insurance Company, 150 Ariz. 354, 723 P.2d 703, (App. 1985). We have jurisdiction pursuant to art. 6 § 5(3) of the Arizona Constitution, A.R.S. § 12-120.24 and Rule 23, Ariz.R.Civ.App.P., 17A A.R.S..

We granted oral argument on the petition for review and asked that counsel direct their attention to the following questions:

1. Assuming that indifference to or failure to consider the interests of the insured is sufficient grounds for award of tort damages in a bad faith case, what additional requirement or standard is appropriate to justify an award of punitive damages?

2. Does the evidence in this case meet or fail to meet that standard?

After oral argument we granted the petition for review as to the issue of punitive damages only. We affirm the decision and opinion of the court of appeals as to the other issues considered by that court.

The facts follow. In September 1979, Jerry Linthicum (Jerry) was hospitalized by his family physician, Dr. James Skinner. A tumor on one of his parathyroid glands ¹ was surgically removed by Dr. Robert A. Brock on 28 September 1979. At that time, Jerry's physicians, Dr. Skinner and Dr. Brock, plus the pathologist at Phoenix General Hospital, Dr. Voit, determined based upon tissue samples that it was parathyroid adenoma, ie. a benign tumor. However, as these tumors can be differently interpreted, some representative slides were sent to the Mayo Clinic for verification. A pathologist at the Mayo Clinic, Dr. Edward Soule, also diagnosed it as parathyroid adenoma. The final diagnosis in the summary addendum of Phoenix General Hospital, prepared by Dr. Vericolli, also states parathyroid adenoma.

Following his surgery, Jerry was required to see Dr. Skinner monthly to have his blood tested for any surgery induced hypocalcemia (low blood calcium) or a reoccurrence of his prior symptoms. He also returned to work, gained twenty-five pounds, and resumed his active lifestyle.

Effective 1 April 1980, Sandra Linthicum (Sandra) obtained medical insurance from Nationwide Life Insurance Company (Nationwide) through a group insurance policy issued to her employer, Arizona Optical Company. The policy was also to include coverage for her husband, Jerry, as a dependent. Sandra never received a copy of this policy, but instead was simply added as a certificate-holder of the policy issued to Arizona Optical Company. Both the group policy and the certificate contained the following limitation as to preexisting illness:

Eligible expenses do not include any charges incurred ... (7) for an illness for which the Insured Person received medical care or treatment within the 90 days preceding the effective date of his insurance hereunder.... The term "treatment" includes the taking of any drug prescribed by a physician.

During the ninety day period prior to Sandra's insurance becoming effective, Dr. Skinner saw Jerry on 16 January, 25 February and 18 March 1980, for blood tests. The March blood test revealed that his blood pressure and calcium level were both slightly elevated (hypertension and hypercalcemia). Dr. Skinner prescribed a blood pressure medication, Enduronyl Forte. Jerry also received treatment from a Dr. Emerson, during February, for a shoulder injury.

On 12 June 1980, Jerry became ill while playing softball. Dr. Skinner had Jerry admitted to Phoenix General Hospital and later transferred him to the Hospital of the Good Samaritan in Los Angeles, California, under the care of Dr. Leonard Rosoff. At both hospitals, Sandra gave the Nationwide policy number as part of the requested insurance information.

On 11 July 1980, Dr. Rosoff operated on Jerry and discovered extensive metastatic carcinoma (cancer) of the parathyroid glands. Dr. Rosoff removed the entire thyroid gland, including the three remaining parathyroid glands, but he was unable to remove all the cancer as it had spread throughout the neck and into the chest area. Dr. Rosoff and Dr. Roger Terry, a Los Angeles pathologist, examined the records and tissue samples from Jerry's 1979 surgery. They disagreed with the previous diagnosis and concluded that the tumor discovered in 1979 had been malignant and not benign.

The bills from Phoenix General Hospital and the Hospital of the Good Samaritan were submitted to Nationwide. The claim was processed by Ms. Georgia Nihoff, senior claims examiner. Ms. Nihoff testified that she followed Nationwide's normal procedure concerning claims by new insureds and initiated an investigation to determine if the claim was valid or excludable as a preexisting illness. Mr. Richard Schlade, another claims examiner, testified that one of the first bills submitted to Nationwide was from a radiologist and referred to the earlier surgery for parathyroid adenoma. A form letter was sent to Arizona Optical requesting the names and addresses of all doctors that had seen Jerry since 1 January 1980, and further requesting the Linthicums to give authorization for Nationwide to obtain medical information from these doctors. This letter did not state that the medical information sought was part of an investigation concerning whether the claim should be denied as a preexisting illness.

Upon receipt of the authorization and list of doctors, Nationwide sent each physician a "Dear Doctor" letter. These form letters requested information concerning any contact the doctor had with Jerry, either in person or by telephone. The letters also sought: any symptoms Jerry exhibited, diagnosis by the doctor, medications prescribed or services rendered, fees charged and finally any information on treatment rendered by any other doctors.

Dr. Skinner responded to such a letter by stating that he had moved his practice and that all Jerry's medical records were in the possession of his former employer, Dr. Luke. Dr. Luke, however, claimed that he did not have the records. Ms. Nihoff then sent another form letter to Dr. Skinner for "reconsideration". Dr. Skinner again stated that Dr. Luke had the medical records. Dr. Skinner also stated that Jerry's case was "complicated" and that Nationwide should call him if they had any questions. Dr. Luke, in response to a second letter, provided dates, diagnosis, (hyperparathyroidism with hypercalcemia, hypertension), medication and charges for Jerry's monthly office visits during January, February and March 1980. Dr. Luke also indicated that these visits were follow-up care from his 1979 surgery and that Jerry was a patient of Dr. Skinner's during this time, not his.

Dr. Rosoff responded to a similar inquiry from Nationwide. Dr. Rosoff stated that Jerry had parathyroid carcinoma but that his treating physicians did not know this prior to July 1980. He submitted discharge summaries to this effect prepared by himself and Dr. Bruce Larson, an endocrinologist, who also treated Jerry at the Hospital of the Good Samaritan in Los Angeles. At trial, Dr. Skinner testified that, in hindsight, he now believes the tumor removed in 1979 was probably cancerous.

Nationwide also received the admitting records and discharge summaries from Jerry's 1979 surgery at Phoenix General Hospital. These records contained the conclusion that the 1979 parathyroid tumor was benign. However, the confirmation letter from Dr. Soule at the Mayo Clinic concerning the tumor is absent from the Nationwide file.

Ms. Nihoff made the final decision to deny Jerry's claim based upon her determination that he had been receiving treatment for cancer during the ninety day exclusionary period even though the cancer was undiagnosed at that time. Ms. Nihoff testified that the treatment consisted of the office visits and blood tests. She further stated that it was her understanding of Nationwide policy that treatment could include any contact with a doctor, such as visiting his office or talking with him on the telephone.

On 20 October 1980, a denial letter was sent to Arizona Optical. This letter stated that Jerry's claim was denied because he had received treatment "for this illness" within ninety days of the policy's effective date. It further stated that a review of the denial was possible upon request. The denial letter was sent only to Arizona Optical, as the policyholder, even though Nationwide knew that Sandra Linthicum no longer worked there. Sandra did not receive a copy of this letter and states she was not informed of the denial.

Jerry was hospitalized again at Phoenix General Hospital on 28 October 1980. When Sandra gave the admitting personnel her insurance information, she was informed that Jerry's previous hospital bill had not been paid. Upon telephoning Nationwide from the hospital, Sandra states, she was informed by...