McDowell v. Union Mutual Life Insurance Co.

• Decision Date: 19 November 1975
• Docket Number: No. CV 75-1506-F.,CV 75-1506-F.
• Citation: 404 F. Supp. 136
• Parties: Lester Stanley McDOWELL, and Brenda Carol McDowell, Plaintiffs, v. UNION MUTUAL LIFE INSURANCE CO., a corporation, et al., Defendants.
• Court: U.S. District Court — Central District of California

404 F. Supp. 136

Lester Stanley McDOWELL, and Brenda Carol McDowell, Plaintiffs, v. UNION MUTUAL LIFE INSURANCE CO., a corporation, et al., Defendants.

No. CV 75-1506-F.

United States District Court, C. D. California.

November 19, 1975.

COPYRIGHT MATERIAL OMITTED

Daigneault, Abel & Daigneault, Torrance, Cal., for plaintiffs.

Gibson, Dunn & Crutcher, Los Angeles, Cal., for defendant Union Mut. Life Ins. Co.

Adams, Duque & Hazeltine, Los Angeles, Cal., for defendant Crown Life Ins. Co.

MEMORANDUM OPINION

FERGUSON, District Judge.

Plaintiffs Lester and Brenda McDowell have filed a multi-million dollar action against Union Mutual Life Insurance Company and Crown Life Insurance Company claiming inter alia that one or both of these companies have wrongfully deprived them of benefits due under group medical insurance policies.

The relevant facts according to the allegations of the complaint are as follows:

(1) The plaintiff Lester McDowell for a number of years has been, and is, an employee of Texaco, Inc. and also a member of the Oil, Chemical and Atomic Workers International Union, Local 1-128.

(2) In connection with his employment and his union membership, Mr. McDowell and his dependents became entitled to protection under group medical insurance policies.

(3) From October 1, 1967 until June 30,¹ 1971, Mr. McDowell and his dependents were protected under the terms of a policy offered by the Union Mutual Life Insurance Company.

(4) Subsequent to June 30, 1971, Mr. McDowell and his dependents were protected under the terms of two policies offered by the Crown Life Insurance Company — a "Hospital and Surgical Benefit Policy" and a "Major Medical Benefit Policy."

(5) During 1971 and 1972, Mr. McDowell and his wife Brenda McDowell incurred major medical expenses in excess of $29,300.

(6) The complaint alleges that the medical expenses were an insured event within the meaning of the Union Mutual policy; it also alleges that the expenses were an insured event within the meaning of the Crown Life policy. But the complaint does not indicate what event gave rise to the medical expenses.

(7) The McDowells timely filed claims with both companies, and both companies have refused to pay.

(8) Union Mutual (according to the complaint) contends that it is not responsible for the expenses of Mrs. McDowell because she was not disabled prior to the termination of its policy (June 30, 1971) and further contends that expenses arising after the termination date are not covered by the policy.

(9) Crown Life (according to the complaint) contends that it is not responsible for the expenses of Mrs. McDowell because she was already totally disabled on the July 1, 1971 effective date of the Crown Life policies and because the policies did not provide coverage to any dependent who was disabled at the time of the effective date of the policy. The term disabled is defined to include anyone who "by reason of bodily injury, bodily sickness or mental infirmity, is prevented from performing his regular or customary work or duties ... including work or duties of the household or for a nonprofit organization, club or social organization or from attending his school regularly."

(10) The McDowells, believing the insurance companies' activities to be fraudulent, in bad faith, and otherwise outrageous, filed a complaint against Crown Life and Union Mutual in the California Superior Court on or about March 18, 1975.

(11) On May 2, 1975, the defendants, by reason of diversity jurisdiction, removed the case to the federal court. The plaintiffs are citizens of the State of California; Union Mutual is incorporated in the State of Maine where it also maintains its principal place of business; Crown Life is incorporated in the Province of Ontario, Dominion of Canada, where it also maintains its principal place of business.

(12) The complaint contains nine "causes of action" which can be divided into five parts:

(a) Count one pleads for declaratory relief. In essence it asks for a specific declaration as to which of the defendants, if any, must pay benefits for the medical expenses.

(b) Counts two and three charge the companies with breach of contract and demand damages to cover not only the medical expenses, but also to cover damages resulting from the plaintiffs being driven into bankruptcy, including filing fees, legal expenses, and loss of credit reputation.

(c) Counts four and five charge the company with bad faith refusal to pay and apparently asks for the damages set out in counts two and three as well as compensation for the nervous and emotional breakdown of plaintiff Brenda McDowell, together with the legal expenses incurred in attempting to receive the benefits of the insurance policy. Moreover the complaint seeks to recover punitive damages in the sum of $5,000,000.

(d) Counts six and seven allege intentional infliction of emotional distress and seek to recover the same damages set out in causes of action four and five.

(e) Counts eight and nine claim that the companies fraudulently represented, at the time of subscription to their respective policies, that employees and dependents would be treated fairly; that these representations were false; and that the defendants knew them to be false at the time they were made. Thus compensatory damages for medical and legal expenses are sought together with punitive damages.

With the exception of some nonmeritorious pleading arguments,² neither defendant questions the propriety of the claim for declaratory relief. Rather the defendants' motions center on claims two through nine.

I. Claims Two and Three.

Essentially the defendants argue that the "extra contractual" damages (i. e., any damages beyond the benefits due under the insurance policies with interest) sought in claims two and three are barred by the independent operation of three California statutes: Cal.Civ. § 3302; Cal.Civ.P. § 1021; Cal.Ins. § 10111.

A. Cal.Civ. § 3302.

California Civil Code § 3302 provides that, "The detriment caused by the breach of an obligation to pay money only, is deemed to be the amount due by the terms of the obligation, with interest thereon." The defendants urge that this section prohibits the recovery of extra-contractual damages in this case by the terms of the statute and that such damages are allowable only on a showing of bad faith made in the context of a tort claim or on a showing of outrageous conduct made in the context of a claim of intentional infliction of emotional distress. A similar claim was recently rejected by the California Supreme Court in Johansen v. California State Auto Association, Inter-Insurance Bureau, 15 Cal.3d 9, 123 Cal.Rptr. 288, 538 P.2d 744 (1975). The court there reaffirmed that

"an insurer who fails to accept a reasonable settlement offer within policy limits because it believes the policy does not provide coverage assumes the risk that it will be held liable for all damages resulting from such refusal, including damages in excess of applicable policy limits."

Id. at 12, 123 Cal.Rptr. at 290, 538 P.2d at 746, citing Comunale v. Traders & General Insurance Co., 50 Cal.2d 654, 328 P.2d 198 (1958). The Court held this risk assumption to be applicable even if the insurer entertained a bona fide belief that the policy did not provide coverage: "An insurer's `good faith,' though erroneous, belief in non-coverage affords no defense to liability flowing from the insurer's refusal to accept a reasonable settlement offer." 15 Cal.2d at 16, 123 Cal.Rptr. at 292, 538 P.2d at 748, citing Crisci v. Security Insurance Co., 66 Cal.2d 425, 429, 58 Cal.Rptr. 13, 426 P.2d 173 (1967).

It, of course, is arguable that Johansen is distinguishable. Johansen involved liability insurance in which the insurance company is called upon to attend to the claims of third parties against the insured. Since this case involves medical insurance, it does not involve a third party claim against the insured. Rather it involves the claim of the insured against the company. It can be argued that an insurance company's duty to settle (to pay money to a third party) in order to protect its insured from even greater liability is greater than its duty to timely pay money to its insured directly in order to prevent financial hardship and anguish to the insured. The difficulty with this position is that there is not a paragraph, a line, or even a hint in Johansen suggesting that the conception of an insurer's duty of good faith and fair dealing would be altered in contexts not involving liability insurance. Indeed in Gruenberg v. Aetna Insurance Co., 9 Cal.3d 566, 573, 108 Cal.Rptr. 480, 485, 510 P.2d 1032, 1037 (1973), the court flatly refused to draw any such distinction, ruling instead that the duty respecting the handling of third party claims against an insured and the duty respecting the handling of claims of an insured against the company "are merely two different aspects of the same duty."

Thus the insurer is free to withhold payments under an insurance policy, but if that withholding is wrongful, the insurer bears the burden of the foreseeable damages caused by its actions. This seems particularly appropriate in view of the special nature of insurance contracts. An insured does not contract

"`... to obtain a commercial advantage but to protect himself against the risks of accidental losses, including the mental distress which might follow from the losses. Among the considerations in purchasing .. insurance, as insurers are well aware, is the peace of mind and security it will provide . . ..'" Fletcher v. Western National Life Insurance Co., 10 Cal.App.3d 376, 404, 89 Cal. Rptr. 78, 95 (1970) (disability insurance), quoting Crisci v. Security Insurance Co., supra, at 434, 58 Cal.Rptr. 13, 426 P.2d 173.

The lesson of the line of cases from Comunale to Johansen is that insurance companies that erroneously withhold payments from their insureds, and deprive them of the security they bargained...