Morgan v. American Fam. Life Assur. Co. of Columbus

• Decision Date: 16 March 1983
• Docket Number: Civ. A. No. 82-0282-R,82-0799-R.
• Citation: 559 F. Supp. 477
• Parties: Donald R. MORGAN, Plaintiff, v. AMERICAN FAMILY LIFE ASSURANCE COMPANY OF COLUMBUS, Defendant. Agnes MORGAN, Plaintiff, v. AMERICAN FAMILY LIFE ASSURANCE COMPANY OF COLUMBUS, Defendant.
• Court: U.S. District Court — Western District of Virginia

559 F. Supp. 477

Donald R. MORGAN, Plaintiff, v. AMERICAN FAMILY LIFE ASSURANCE COMPANY OF COLUMBUS, Defendant.

Agnes MORGAN, Plaintiff, v. AMERICAN FAMILY LIFE ASSURANCE COMPANY OF COLUMBUS, Defendant.

Civ. A. Nos. 82-0282-R, 82-0799-R.

United States District Court, W.D. Virginia, Roanoke Division.

March 16, 1983.

COPYRIGHT MATERIAL OMITTED

Dennis P. Brumberg, Gordon H. Shapiro, Lutins, Shapiro, Albert & Kurtin, Roanoke, Va., for plaintiffs.

William R. Rakes, Karen McCutcheon, Gentry, Locke, Rakes & Moore, Roanoke, Va., for defendant.

MEMORANDUM OPINION and ORDER

TURK, Chief Judge.

Plaintiffs Donald R. Morgan (Mr. Morgan) and Agnes Morgan (Mrs. Morgan), citizens of Virginia, have brought these actions under the court's diversity jurisdiction, see 28 U.S.C. § 1332, seeking compensatory and punitive damages from defendant American Family Life Assurance Company of Columbus (AFLA), a Georgia corporation. Mr. Morgan's complaint contains three counts: Count I alleges breach of insurance contract; Count II alleges bad faith failure to pay insurance benefits resulting in mental and emotional distress; and Count III alleges violation of the Virginia Unfair Trade Practices Act. See Va.Code § 38.1-49 et seq. (1981 Repl.Vol.). Mrs. Morgan alleges bad faith failure to pay insurance benefits resulting in mental and emotional distress. These actions are now before the court on defendant's motions to dismiss for failure to state a claim, or alternatively, for summary judgment, as to Mrs. Morgan's complaint and Counts II and III of Mr. Morgan's complaint. For the purpose of ruling on defendant's motions, the court consolidates these actions because they involve a common question of law. See Fed.R.Civ.P. 42(a). For the reasons set forth below, the court denies the motions to dismiss Mrs. Morgan's complaint and Counts II and III of Mr. Morgan's complaint.

I. FACTUAL BACKGROUND

On August 15, 1973, AFLA issued cancer insurance policy number R-918300 to Mr. Morgan. The policy provided for the payment of certain hospital and medical benefits for cancer to Mr. Morgan and his family in the event that one of them contracted cancer. While the policy was in effect, the plaintiffs' son, a covered dependent, contracted leukemia.

Plaintiffs subsequently incurred certain charges for treatment of their son's leukemia. Specifically, Mr. Morgan has submitted claims totaling $99,091 which he alleges were usual and customary charges for blood and plasma for their son's treatment. Plaintiffs contend that these claims are covered under paragraph 8 of the cancer insurance policy which provides:

BLOOD AND PLASMA BENEFIT: The Company will pay the usual and customary charges for blood and blood plasma not to exceed a lifetime maximum of THREE HUNDRED ($300.00) DOLLARS for all cancers except leukemia, in which case the Company will pay the usual and customary charges for such products.

AFLA's position is that although paragraph 8 does apply to charges for blood itself, it does not cover charges for administrative, processing, servicing, or similar fees even though such fees may be covered under other provisions of the policy. Thus, this lawsuit initially arose out of the parties' inability to determine which, if any, of the hospital's total charges were for blood itself, and which were for processing fees.

On May 3, 1982, Mr. Morgan filed Civil Action No. 82-0282 alleging breach of contract by AFLA in failing to make payments under paragraph 8 of the insurance policy and seeking approximately $99,091 in compensatory damages.

Mrs. Morgan subsequently filed Civil Action No. 82-0799 alleging that AFLA issued the cancer insurance policy in bad faith and with no intention of performing the promises contained therein. She further alleged that AFLA's dispute of and failure to pay her husband's claim of $99,091 evidenced bad faith and willful, malicious, and reckless disregard of her rights which resulted in her mental and emotional distress. As relief, she seeks $100,000 compensatory damages for her mental and emotional distress and $1,000,000 punitive damages in addition to her attorney's fees pursuant to Va.Code § 38.1-32.1 (1982 Supp.).

Shortly thereafter, Mr. Morgan filed an amended complaint wherein, in addition to his original contract claim, he alleged that AFLA issued the policy in bad faith with no intention to perform thereunder and that he suffered mental and emotional distress due to AFLA's bad faith and malicious refusal to pay the entire amount of his contract claim. He further alleged that AFLA's actions were in violation of Virginia's Unfair Trade Practices Act. See Va. Code § 38.1-49 et seq. (1981 Repl.Vol.). Like his wife, Mr. Morgan seeks $100,000 compensatory damages, $1,000,000 punitive damages, and his attorney's fees.

AFLA then filed motions to dismiss or, alternatively, for summary judgment, as to Mrs. Morgan's complaint and Counts II and III of Mr. Morgan's amended complaint. The parties have submitted briefs in support of their respective positions and argument was heard in chambers on January 7, 1983. Having considered all the materials submitted herein, defendant's motions are now ready for disposition.

II. LEGAL ANALYSIS

AFLA has moved to dismiss Mrs. Morgan's complaint and Count II of Mr. Morgan's amended complaint on the grounds that Virginia law does not recognize a cause of action under any theory of law such as would allow a party to a contract or a third-party beneficiary to a contract to recover compensatory or punitive damages for the intentional infliction of emotional distress resulting from the breach of that contract. Plaintiffs oppose the motions to dismiss with the argument that Virginia does recognize the tort of intentional infliction of emotional distress and that their theory of recovery is merely a logical extension of that tort to conduct which also constitutes a breach of contract.

When ruling on a motion to dismiss for failure to state a claim upon which relief can be granted, the court must take all allegations in the complaint as admitted, and the pleading should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101, 2 L.Ed.2d 80 (1957); Tahir Erk v. Glenn L. Martin Co., 116 F.2d 865, 870 (4th Cir.1941). In addition, the motions in these diversity actions must be decided by applying the law of the forum. See Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1937).

The Supreme Court of Virginia has not, however, addressed the question whether an insurer's alleged bad faith failure to pay insurance benefits can be the basis of an action which entitles an insured or third-party beneficiary to recover compensatory damages for emotional distress and punitive damages. Accordingly, the court must attempt to predict how the state supreme court would resolve this question of first impression in Virginia. GAF Corp. v. County School Board of Washington County, Virginia, 629 F.2d 981 (4th Cir.1980); Harris v. Aluminum Company of America, 550 F.Supp. 1024, 1026 (W.D.Va.1982).

Damages for emotional distress are generally not recoverable in Virginia "unless they result directly from tortiously caused physical injury." Naccash v. Burger, 223 Va. 406, 416, 290 S.E.2d 825, 830 (1982). Virginia does recognize the tort of intentional infliction of emotional distress as an exception to this general rule, however. Id.; Womack v. Eldridge, 215 Va. 338, 342, 210 S.E.2d 145, 148 (1974). In addition, Virginia follows the rule that punitive damages are not recoverable for breach of contract unless the conduct constituting the breach amounts to "criminal indifference" or "an independent willful tort, due to malicious, wanton or oppressive behavior by the breaching party." Matney v. First Protection Life Ins. Co., 73 F.R.D. 696, 697 (W.D.Va.1977); Wright v. Everett, 197 Va. 608, 616, 90 S.E.2d 855, 860 (1956); see generally Restatement (Second) of Contracts § 355 (1981).

Despite plaintiffs' failure to specifically allege intentional infliction of emotional distress, their counsel argues in opposition to defendant's motions that plaintiffs are indeed relying on that tort theory. AFLA counters this by asserting that Virginia does not recognize an independent tort cause of action for intentional infliction of emotional distress by breach of contract. This assertion is without merit. Virginia need not recognize an independent tort cause of action for infliction of emotional distress by breach of contract because the conduct constituting the breach of contract may also amount to an independent tort. Thus, the relevant inquiry is whether the allegations in the complaints are sufficient to state a cause of action for intentional infliction of emotional distress under Virginia law.

Although the Supreme Court of Virginia has never decided the issue, some courts have held that an insured may bring a tort action for intentional infliction of emotional distress arising out of an insurer's bad faith refusal to pay insurance benefits. See Green v. State Farm Fire and Cas. Co., 667 F.2d 22 (9th Cir.1982) (Oregon law); Eckenrode v. Life of America Ins. Co., 470 F.2d 1 (7th Cir.1972) (Illinois law); Fletcher v. Western Nat. Life Ins. Co., 10 Cal.App.3d 376, 89 Cal.Rptr. 78 (1970); see also Hixon v. State Compensation Fund, 115 Ariz. 392, 565 P.2d 898 (Ariz.Ct.App.1977) (by implication from court's ruling that allegations of issuance of defective notice of claim status terminating benefits to worker did not amount to outrageous conduct required to state a claim for intentional infliction of emotional distress); Manolis v. International Life Ins. Co., 83 A.D.2d 784, 443 N.Y.S.2d 461 (N.Y.App.Div.1981) (by implication from court's ruling that allegations of disability insurer's termination of payments after receiving report from its own physician that insured...