Paulfrey v. Blue Chip Stamps

• Decision Date: 27 December 1983
• Citation: 197 Cal.Rptr. 501,150 Cal.App.3d 187
• Court: California Court of Appeals Court of Appeals
• Parties: Annette PAULFREY, Plaintiff and Respondent, v. BLUE CHIP STAMPS, Aetna Insurance Company, and Does 1 through 100, inclusive, Defendants and Appellants. Civ. 67241.

Page 501

197 Cal.Rptr. 501

150 Cal.App.3d 187

Annette PAULFREY, Plaintiff and Respondent, v. BLUE CHIP STAMPS, Aetna Insurance Company, and Does 1 through 100, inclusive, Defendants and Appellants.

Civ. 67241.

Court of Appeal, Second District, Division 3, California.

Dec. 27, 1983.

Hearing Denied March 14, 1984.

Burke, Williams & Sorensen and Richard R. Terzian, Los Angeles, for defendant and appellant Blue Chip Stamps.

Gibson, Dunn & Crutcher and John J. Swenson and Sherrill L. Johnson, Los Angeles, and Kight & Sutton, Inc. and James M. Sutton, Jr., Long Beach, for defendant and appellant Aetna Life Ins. Co.

Stockdale, Peckham, Estes & Werner and David C. Werner, Los Angeles, for plaintiff and respondent.

KLEIN, Presiding Judge.

Defendants and Appellants Aetna Life Insurance Company (Aetna) and Blue Chip Stamps (Blue Chip) appeal from a judgment awarding plaintiff and respondent Annette Paulfrey (Paulfrey) compensatory and punitive damages for bad faith breach of an insurance contract.

The trial court improperly granted Paulfrey's motion for a directed verdict; we therefore reverse the judgment and remand the case for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

The crucial three causes of action on which this case went to trial alleged bad faith breach of an insurance contract. The first cause alleged that Paulfrey filed a claim on Aetna's form through Blue Chip within 90 days after the accident and that representations were made that her bills would be paid. In March 1976, Aetna advised her for the first time that her claim was denied because she failed to file written proof of loss.

The second cause incorporated the first, and added an alternative that even if Paulfrey did not comply with certain requirements of the Aetna policy, those requirements were waived.

The third cause alleged that Paulfrey had properly filed her claim with Aetna through Blue Chip and that Blue Chip negligently misplaced, lost or mismanaged her application for insurance benefits.

The trial was bifurcated, with liability being tried first. At the close of the liability phase, the trial court granted Paulfrey's oral motion for directed verdict on the basis that both Aetna and Blue Chip had violated the insurance contract's implied covenant of good faith and fair dealing by failing to investigate her claim.

The jury returned a verdict against Blue Chip and Aetna jointly for compensatory damages in the amount of $59,160, against Blue Chip for punitive damages in the amount of $58,160 and against Aetna for punitive damages in the amount of $500,000. After Aetna and Blue Chip's motion for a new trial was denied, the instant appeal ensued.

CONTENTIONS

Both Aetna and Blue Chip challenge the propriety of the directed verdict, contending there was substantial evidence sufficient to support a verdict in their favor because there were either major conflicts in the evidence or the evidence was uncontroverted in their favor.

DISCUSSION

1. A breach of the implied covenant of good faith and fair dealing inherent in every insurance contract results in a tort.

(a) The test of a breach is reasonableness of insurer's conduct.

The trial court ruled as a matter of law that Aetna and Blue Chip breached their duty of good faith and fair dealing with Paulfrey by, first, negligently mishandling, misplacing or losing her application for benefits; secondly, by failing to investigate her claim; and, thirdly, by failing to notify Paulfrey of the deficiencies in her claim. The trial court granted Paulfrey's motion for a directed verdict on these bases.

We find that the trial court erred because there were questions of fact for the jury to resolve.

Austero v. National Cas. Co. (1978) 84 Cal.App.3d 1, 26, 148 Cal.Rptr. 653, accepts the premise that a breach of the implied covenant of good faith and fair dealing The implied covenant of good faith and fair dealing requires that each contracting party refrain from doing anything which would injure the right of the other party to receive the benefits of the agreement. (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818, 169 Cal.Rptr. 691, 620 P.2d 141; Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 940, 132 Cal.Rptr. 424, 553 P.2d 584; Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429, 58 Cal.Rptr. 13, 426 P.2d 173.)

present in every insurance policy is a tort, and the court therein goes on to explain the tort of bad faith breach of an insurance contract. The court stated "the substance or gravamen of the wrong ... is an unreasonable refusal to pay benefits due under the terms of the policies .... [and] that the ultimate test of liability in [these] cases is whether the refusal to pay policy benefits was unreasonable." (Id., at pp. 31-32, 148 Cal.Rptr. 653.)

In order for the insurer to fulfill its obligation not to impair the right of the insured to receive the benefits contracted for, the governing standard is that the insurer must give at least as much consideration to the insured's interests as it does to its own. (Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d at pp. 818-819, 169 Cal.Rptr. 691, 620 P.2d 141; Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, 460, 113 Cal.Rptr. 711, 521 P.2d 1103.)

In Austero, the court found that the insurer handled the plaintiff's claim in a reasonable manner. There, the plaintiff filed a disability claim after he had allowed his policy to lapse for nonpayment of premium. Plaintiff claimed he had been totally disabled since September 1973 and that he had ceased practicing law on September 20. However, his attending physician wrote "does not apply" in the sections of the claim form regarding plaintiff's total disability, partial disability and date he would be able to return to work. (Austero v. National Cas. Co., supra, 84 Cal.App.3d at pp. 9-13, 148 Cal.Rptr. 653.)

Despite the fact that plaintiff's policy had lapsed, the insurer sought plaintiff's medical records. The insurer also sought an explanation of the physician's "does not apply" responses but received no reply. The insurer denied plaintiff's claim because his disability occurred after the policy had lapsed. (Id., at pp. 12-13, 148 Cal.Rptr. 653.)

Thereafter, plaintiff's son sent the insurer a letter alleging for the first time that plaintiff's onset of disability had occurred before the lapse of the policy. The insurer reconsidered plaintiff's claim. It directed several requests to various sources for additional information. All the requests made to plaintiff went unanswered. The only medical opinion to the effect that plaintiff was totally disabled prior to the lapse of the policy was found in a second letter from one of plaintiff's treating physicians. However, even this letter demonstrated that the doctor formed his opinion from statements made to him by plaintiff's son. Thus, the insurer reaffirmed its prior decision to reject plaintiff's claim. (Id., at pp. 13-17, 148 Cal.Rptr. 653.)

The Austero court found this evidence so conclusive that it ruled as a matter of law that the insurer's handling of plaintiff's claim was eminently reasonable and that the insurer had taken into account equally and fairly both the interest of the insured and its own. (Id., at pp. 35-36, 148 Cal.Rptr. 653.)

Austero stands in vivid contrast to Silberg wherein the insurer's conduct was egregious. In Silberg, the insurer denied the insured medical benefits until it could determine whether worker's compensation would cover the injury. As a consequence of the denial, the insured went without insurance payments for two years while awaiting the Worker's Compensation Appeals Board's decision, which finally resulted in a compromise and release of the insured's claim. (Silberg v. California Life Ins. Co., supra, 11 Cal.3d at p. 456, 113 Cal.Rptr. 711, 521 P.2d 1103.)

In the interim, the insured was forced to borrow money to pay his hospital bills. Nonetheless, most of his hospital and doctor The Silberg court found this evidence so conclusive that it ruled as a matter of law that the insurer had unreasonably handled the insured's claim. (Id., at p. 462, 113 Cal.Rptr. 711, 521 P.2d 1103.)

bills remained unpaid. The insured was forced to change hospitals as well as doctors in order to obtain continuing medical treatment. He lost his dry cleaning business and had to change residences several times to avoid creditors. The final blow came when his wheelchair was repossessed and he was unable to afford to purchase pain killing medication. (Id., at pp. 457-459, 113 Cal.Rptr. 711, 521 P.2d 1103.)

The facts of Silberg demonstrate that the insurer had not given equal consideration to the insured's claim as it had to its own interests. As the Silberg court pointed out, insured's policy application declared in bold print, " 'Protect Yourself Against the Medical Bills That Can Ruin You.' " Yet, even though insurer knew that the insured earned only a modest income, had incurred substantial medical and hospital bills, had no other hospital or disability insurance and would probably not qualify for worker's compensation benefits, it did not pay his medical bills. Even if the insurer had paid the bills and it were ultimately determined that the insured was entitled to worker's compensation benefits, the insurer could have recovered the payments it made by asserting a lien in the worker's compensation proceeding. (Id., at p. 461, 113 Cal.Rptr. 711, 521 P.2d 1103.)

Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 575, 108 Cal.Rptr. 480, 510 P.2d 1032, presented another purported outlandish fact situation wherein the Supreme Court held that plaintiff had sufficiently stated a cause of action as against a demurrer by alleging that "defendants wilfully and maliciously entered into a scheme to deprive [plaintiff] of the benefits of the fire policies in that they encouraged criminal charges by falsely implying that he had a motive to commit arson, and in that, knowing plaintiff would not...