Nassen v. National States Ins. Co., 91-880
| Decision Date | 23 December 1992 |
| Docket Number | No. 91-880,91-880 |
| Citation | 494 N.W.2d 231 |
| Parties | Ida NASSEN, Appellee, v. NATIONAL STATES INSURANCE COMPANY, Appellant. |
| Court | Iowa Supreme Court |
Mark D. Sherinian and Thomas D. Hanson of Hanson, Bjork & Russell, Des Moines, for appellant.
Barry J. Nadler of Newbrough, Johnston, Brewer, Maddux & Nadler, Ames, for appellee.
Considered by LARSON, P.J., and SCHULTZ, CARTER, LAVORATO, and NEUMAN, JJ.
Defendant, National States Insurance Company (National States), appeals from an adverse judgment in an action alleging that it had acted in bad faith in its denial of a claim by plaintiff, Ida Nassen, under a policy of nursing home insurance. Plaintiff has cross-appealed from the district court's order for a remittitur of $40,000 of the verdict, which included actual damages totaling $123,000 and punitive damages of $500,000. After reviewing the arguments presented by the parties, we affirm the district court's judgment in all respects.
In April of 1988, plaintiff, then eighty-five, purchased a nursing home insurance policy from National States. The policy was sold to her by Kenneth Phillips, an independent insurance agent. Phillips filled out the application form after asking plaintiff about her medical history. She told him that she had been hospitalized for three days for a bowel obstruction in November 1987, but had not needed surgery. Plaintiff's application was sent to National States and approved by its underwriter, Dedra Patton. A policy of nursing home insurance was issued to plaintiff on April 28, 1988.
At the time of plaintiff's three-day hospitalization in November 1987, the admitting physician had noted the possibility of confusion and hypothyroidism on her admission form. She was found to have a low thyroid value and was placed on a "very small dose of thyroid" by her regular physician, Dr. Anderson. His tests did not indicate hypothyroidism, and he noted that the plaintiff was not at all confused while under hospital observation. Dr. Anderson testified at the trial that when dictating his medical notes he noted that both the confusion and hypothyroidism diagnoses were unconfirmed.
Plaintiff was hospitalized for five days in June 1988, with uncontrolled diabetes, mild hypothyroidism, and mild dementia. Upon release from the hospital, she was admitted to a nursing home. Irene Crippen, plaintiff's good friend and attorney in fact, submitted a completed and signed claim for nursing home benefits to National States on plaintiff's behalf on July 6, 1988. During the months of August and September, Crippen called National States a number of times but did not get a response. On October 3, National States sent Crippen a letter asking for another signed claim form. They received the form and a letter from Crippen on October 10. On October 21, National States sent Crippen a letter requesting another signed claim form. By that time, Crippen was liquidating plaintiff's assets to pay for her care at the nursing home.
On November 5, Crippen sent the third signed claim form, requested by National States. On November 8, the insurance company sent another letter to Crippen requesting yet another signed claim form. Crippen responded advising the insurance company that she had already sent three completed and signed claim forms and asked if they were giving her the "runaround."
During the last week of January 1989, Crippen again called National States to inquire about plaintiff's claim. The company returned her call the next week and told her that it was still waiting for a doctor's report. That report was sent to National States and received by it on February 7, 1989.
Crippen ultimately contacted attorney Donald Newbrough on plaintiff's behalf. He wrote to National States in March inquiring if they needed more information. In a letter dated March 15, the head of the nursing home division responded that the company was still waiting for Dr. Anderson's report, which the company had in fact received on February 7.
On April 4, 1989, National States wrote to Newbrough informing him that its investigation revealed that the application for the policy was inaccurate and incomplete. The letter stated specifically that her health history relating to chronic confusion and hypothyroidism were not listed and that, had the company known of these conditions, the policy would not have been issued. One of Newbrough's associates sent a letter to National States advising it that Dr. Anderson had furnished a report to the insurance company indicating that plaintiff did not have chronic confusion or hypothyroidism before the date of her application. National States then returned plaintiff's premium for the policy and purported to rescind the policy retroactive to the date of its issuance.
Plaintiff filed this action alleging breach of contract, insurance bad faith, and fraudulent misrepresentation. The jury found for the plaintiff on all counts. They returned a special verdict awarding damages of $43,800 for breach of contract, $40,000 for bad faith, $40,000 for fraudulent misrepresentation, and $500,000 in punitive damages.
On the punitive damage verdict, the jury found that National States had acted in willful or wanton disregard for plaintiff's rights but that its conduct was not directed specifically at her. This relegated the bulk of that award to the civil reparations fund pursuant to Iowa Code section 668A.1(2)(b) (1991). In response to posttrial motions filed by National States, the district court ultimately ordered a remittitur of the $40,000 verdict on the fraud claim. Plaintiff accepted the remittitur. Other facts that bear on the issues presented will be discussed in our consideration of the legal arguments of the parties.
First among National States' claims of error is a challenge to the opinion testimony of plaintiff's expert witness, Marshall Reavis, indicating that National States was engaging in "cash flow underwriting" and "postclaim underwriting." This witness, who has a Ph.D. in insurance risk management, had reviewed data on National States contained in a nationally recognized insurance industry rating service. 1 Comparisons had been made of National States' premiums and those of other insurance companies selling nursing home policies with allegedly similar coverages. In addition, this witness had studied the company's underwriting and claims management practices as shown in company manuals and memorandums and had reviewed deposition testimony of key National States' employees concerning those practices.
After reviewing all of those materials, Mr. Reavis concluded that the company's practices reflected a broad plan to run large amounts of cash through the company that could be invested and ultimately paid out to the company's principals prior to its collapse from an unreasonably low premium structure. He labeled this practice as "cash flow underwriting." Mr. Reavis expressed the view that the premium charged by National States for its nursing home insurance was less than a third of that charged by other companies for similar coverage.
In reviewing National States' underwriting practices, Mr. Reavis concluded that its quotas for underwriters amounted to reviewing eighty-five applications per day. He concluded that this would necessarily result in the rubber-stamping of policy applications with no serious effort to weed out high-risk applicants. The witness opined that there was virtually no chance the premiums charged by National States would be adequate to cover its claims and administrative costs on the policies sold. This factor, coupled with the company's seemingly deliberate delay in processing claims, led the witness to conclude that the company was applying "postclaim underwriting." He described "postclaim underwriting" as an attempt to rescind policies after claims have been made.
National States' principal objection to this testimony was based on Iowa Rule of Evidence 406, which provides:
Evidence of the habit of a person or of the routine practice of an organization, whether corroborated or not and regardless of the presence of eyewitnesses, is relevant to prove that the conduct of the person or organization on a particular occasion was in conformity with the habit or routine practice.
National States argues that Mr. Reavis failed to consider a sufficient number of claims that it had denied to warrant admission of evidence of routine practice under rule 406.
We do not believe that the admissibility of the challenged evidence is governed by rule 406. That rule relates to evidence of routine practice for purposes of permitting a fact finder to conclude that conduct in a particular instance was in conformity with that practice. Plaintiff did not offer the challenged evidence for this purpose. She offered it, rather, as data upon which this expert witness might formulate his opinions concerning the company's insurance underwriting practices.
Rule 406 does not affect those rules of evidence that govern expert opinion testimony. Iowa Rule of Evidence 702 allows the admission of expert opinions if such opinions will assist the trier of fact in understanding the evidence or in determining certain factual issues. Rule 703 governs the bases upon which an expert opinion may be premised. It provides:
The facts or data in a particular case upon which an expert bases an opinion or inference may be those perceived by or made known to him at or before the trial or hearing. If of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence.
This court has long been committed to a liberal view that allows opinion testimony if it will aid the jury and is based on special training, experience, and knowledge with respect to the issue in question. Cook v. State, 476 N.W.2d 617, 620 (Iowa 199...
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