Phillips v. Aetna Life Ins. Co.

• Decision Date: 08 June 1979
• Docket Number: Civ. A. No. 77-75.
• Court: U.S. District Court — District of Vermont
• Parties: Stephen J. PHILLIPS and Elizabeth Phillips, Plaintiffs, v. AETNA LIFE INSURANCE COMPANY, Defendant.

473 F. Supp. 984

Stephen J. PHILLIPS and Elizabeth Phillips, Plaintiffs, v. AETNA LIFE INSURANCE COMPANY, Defendant.

Civ. A. No. 77-75.

United States District Court, D. Vermont.

June 8, 1979.

Robert E. Manchester, Lisman & Lisman, Burlington, Vt., for plaintiffs.

Richard H. Wadhams, Jr., Pierson, Affolter & Wadhams, Burlington, Vt., for defendant.

MEMORANDUM OF DECISION

HOLDEN, Chief Judge.

This action is based on both tort and contract. It was brought by Stephen J. Phillips against the Aetna Life Insurance Company. Phillips is a resident of Whitehall, New York. Aetna has its principal place of business in Hartford, Connecticut, but conducts a regular course of business within the State of Vermont. As part of its Vermont business Aetna issued a policy to John G. Hadeka, d/b/a Hadeka Slate Products, of Poultney, Vermont, to provide group health and disability insurance coverage to the company's employees. Until January of 1975, when cancer of the bladder forced him to discontinue work, Phillips was an employee at Hadeka Slate Products and was covered by the Aetna health and disability policies. Invoking this court's diversity jurisdiction, the plaintiff's complaint demanded compensatory and punitive damages for the defendant's alleged bad faith refusal to honor the explicit provisions of the policy.

After a four day trial, a jury awarded the plaintiff $43,735.14: $15,635.14 in reimbursement for disability and medical bills; $8,100 in compensatory damages; and $20,000 in punitive damages.

The defendant filed a timely motion for judgment notwithstanding the verdict or, in the alternative, a new trial. A hearing was held on the motion, with decision reserved by the court. As grounds for the motion the defendant argues that as a matter of law the complaint failed to state a claim for punitive damages or for consequential damages.¹ It is contended that the court erred in instructing the jury as to the definition of bad faith; and that the evidence was insufficient as a matter of law and that the verdict was against the weight of the evidence as to the bad faith on the part of the defendant and cannot sustain the plaintiff's claim for consequential and punitive damages. For the reasons stated below, the court denies the defendant's motion.

The crux of this case is the "extended benefits" clause in Article II of Aetna's group health insurance contract with Hadeka. The defendant does not dispute that Article II provides that if an employee is totally disabled at the time that the employer's policy expires or is not renewed, the employee is entitled to medical benefits during the period of disability, until twelve months have elapsed or another insurance carrier assumes coverage. The defendant, through its attorney and its employees, admits that the plaintiff was totally disabled in October of 1975, when Hadeka cancelled the group policy with Aetna. It is also undisputed that Aetna should have paid, but did not pay $14,326.06 in medical payments that became due as a result of Phillips' severe illness during the subsequent twelve-month period. Aetna also concedes that it mistakenly refused to pay $1,309.08 in disability payments.

The plaintiff alleges that Aetna's refusal to honor his claims was motivated by bad faith and that this renders Aetna liable to him for consequential and punitive damages. The defendant contests both awards as a matter of fact and of law.

The Evidence

It is not disputed that Phillips worked at the Hadeka slate quarry for over twenty years, eight to ten hours a day. The work was hard manual labor. Phillips was never injured and never sick until the onset of a disease diagnosed as cancer of the bladder. Hadeka described the plaintiff as "the best employee I ever had."

The plaintiff first consulted a physician in reference to his bladder during the summer of 1975. Aetna paid medical claims submitted for services rendered in June, July, August, September and November of 1975 and in January of 1976.

John Hadeka testified that during the fall of 1975 he decided to change his employees' group coverage to another insurance carrier. He wrote to Aetna on October 17, 1975, to cancel the policy as of November 1, 1975. Aetna continued to bill Hadeka, however, and wrote him in December, January and February, urging continued payment of premiums. In June of 1976 Hadeka did submit an additional premium payment to Aetna, which Aetna accepted.

From February 29, 1976, to March 9, 1976, the plaintiff was treated at the Rutland Hospital. The hospital sent its bill for services rendered, totaling $1,373.30, directly to Aetna, following the usual practice under the group insurance contract. On April 19, 1976, Aetna sent to the hospital a printed form on which the following handwritten message was inscribed: "This individual no longer has coverage with us—new carrier unknown." On May 5, 1976, the hospital forwarded this reply to Phillips. This was the only indication Phillips ever received to the effect that his medical bills would not be paid by Aetna.

Phillips received this notice from the hospital on May 6 or May 7, 1976. On May 7 or May 8 he began to experience severe pain and bleeding. Despite the severe pain, Phillips deferred readmission to the hospital because he understood that Aetna would not pay his bills and he did not have the money to pay the February and March bills. Phillips testified that he had never in his life been so deeply in debt, and that at the time he had hoped the pain and bleeding would cease if he waited long enough. The pain worsened to the point where he could neither sit nor lie down. Finally, on May 10, 1976, his wife persuaded him that his worsening condition compelled hospitalization. She called for an ambulance and Mr. Phillips was taken by the rescue squad, under emergency conditions, to the Rutland Hospital. The severe pain required Phillips to be transported in a standing position during the entire 25 mile drive to the hospital.

According to the testimony of Aetna's employees, at or about the time Aetna notified the Rutland Hospital that there was no coverage, and before Phillips was readmitted to the hospital, Aetna's medical claims department began to suspect that the plaintiff's benefits should not have been terminated and perhaps he was entitled to have his claims paid under the extended benefits clause. Aetna's employees stated, however, that no one informed Phillips of this possibility and no one took the trouble to reexamine the insurance contract to confirm that this was in fact the case.

Although Aetna's standard practice is to pay all medical claims within ten days of their receipt, the company manual, provided to its employees handling health claims, prescribed in May of 1976:

WITHHOLDING CLAIM PAYMENTS— Occasionally, request may be made by the Group Manager, Group Representative or the Field Controller's Department to withhold claim benefit payments because the policyholder is delinquent in payment of his premium. The purpose of such requests is to put pressure on the policyholder to remit his overdue premium.²

Aetna employees responsible for handling Mr. Phillips' medical claim were aware in April of 1976 that he was suffering from a severe cancer.

After the May hospitalization, Phillips was hospitalized in June and again in July, at which time his bladder was removed. By August of 1976 Phillips owed over $12,000 in medical bills, was totally disabled from employment, had no earned income, and had no means of paying his medical bills.

Phillips had saved several thousand dollars in a savings account for the use of his nine-year old adopted son. In order to feed himself, his wife and son, Phillips used up the entire account in early 1976 and then was forced to rely upon assistance from his relatives. He became eligible for Social Security payments in June of 1976. The evidence is not in contradiction that the plaintiff could have avoided much of this hardship if he had received the disability payments that Aetna now admits should have been paid as of the onset of his disability.

The evidence also reveals that Phillips never called or wrote to Aetna after he received Aetna's notice of April 19, 1976 from the Rutland Hospital. Phillips did ask his employer's bookkeeper to investigate the denial of coverage and he did attempt to contact the local insurance agent who had sold the Aetna policy to Hadeka. The Hadeka bookkeeper took no action and the insurance agent was not in his office on the day Phillips called.

Aetna made no effort to directly inform Phillips of its decision not to pay his disability or medical claims. Except for the Rutland Hospital's forwarding of the April 19, 1976, letter to the hospital from Aetna, Phillips never received any notification that his claims had been denied.

Discussion

Aetna admits liability for $14,326.06 in medical bills and $1,309.08 in disability payments, but disclaims any liability for consequential and punitive damages. The court has found no decision by the courts of Vermont on the particular question of the award of consequential or punitive damages against an insurer, and counsel have referred to none. Thus the court is called upon to predict how the Vermont Supreme Court would decide the question if and when confronted with the problem. Deveny v. Rheem Mfg. Co., 319 F.2d 124 (2d Cir. 1963).

In Vermont, as in most common law jurisdictions, the general rule of damages in contract actions is that the aggrieved party is entitled to receive only the benefit of the bargain.

Plaintiff's recovery of damages is limited to the damage which fairly and reasonably may be considered as arising naturally from the breach of contract itself, and such as may be reasonably supposed to have been in the contemplation of the parties at the time the contract is made.

Berlin Development Corporation v. Vermont Structural Steel Co., 127 Vt. 367, 370, 250 A.2d 189, 192 (1968); Sullivan, Punitive Damages in the Law of...