Strawn v. Farmers Ins. Co.

• Decision Date: 20 May 2009
• Docket Number: 990809080.,A131605.
• Citation: 209 P.3d 357,228 Or. App. 454
• Parties: Mark STRAWN, on his own behalf and as representative of a class of similarly situated persons, Plaintiff-Respondent, v. FARMERS INSURANCE COMPANY OF OREGON, an Oregon stock insurance company; Mid-Century Insurance Company, a foreign corporation; and Truck Insurance Exchange, a foreign corporation, Defendants-Appellants, and Farmers Insurance Group Inc., a foreign corporation, Defendant.
• Court: Oregon Court of Appeals

209 P.3d 357

228 Or. App. 454

Mark STRAWN, on his own behalf and as representative of a class of similarly situated persons, Plaintiff-Respondent, v. FARMERS INSURANCE COMPANY OF OREGON, an Oregon stock insurance company; Mid-Century Insurance Company, a foreign corporation; and Truck Insurance Exchange, a foreign corporation, Defendants-Appellants, and Farmers Insurance Group Inc., a foreign corporation, Defendant.

990809080.

A131605.

Court of Appeals of Oregon.

Argued and Submitted July 28, 2008.

Decided May 20, 2009.

James N. Westwood, Portland, argued the cause for appellants. With him on the opening brief were Matthew J. Kalmanson and Stoel Rives LLP, and Michael D. Hoffman, Mark Elgin Olmsted and Hoffman Hart & Wagner LLP. With him on the reply brief were P.K. Runkles-Pearson and Stoel Rives LLP, Michael D. Hoffman and Hoffman Hart & Wagner LLP, and Mark Elgin Olmsted and Mark E. Olmsted, P.C.

Kathryn H. Clarke and Richard S. Yugler, Portland, argued the cause for respondent. With them on the brief were David N. Goulder, Lisa T. Hunt, and Landye Bennett Blumstein LLP.

Before EDMONDS, Presiding Judge, and WOLLHEIM, Judge, and SERCOMBE, Judge.

SERCOMBE, J.

This class action arises out of defendants' claims handling process with respect to the payment of personal injury protection (PIP) benefits to their insureds. In short, defendants Farmers Insurance Company of Oregon, Mid-Century Insurance Company, and Truck Insurance Exchange (collectively, "Farmers") used cost-containment software to evaluate their insureds' medical expenses in relation to other bills for the same procedure in a given region. If Farmers determined that the charge submitted by an insured's provider exceeded a certain percentage of the range of the charges in those other bills, Farmers refused to pay the excess on the ground that it was "unreasonable." Plaintiff is the representative of a class of insureds who alleged that Farmers' review process set an arbitrarily low percentage (initially, 80 percent) that resulted in the denial of claims for reasonable medical expenses, thereby increasing Farmers' profits at the expense of PIP claimants and medical providers.

On behalf of the class, plaintiff brought claims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, and declaratory relief. The first three of those claims were tried to a jury, which found in plaintiffs' favor and awarded $1.5 million in compensatory damages and prejudgment interest, and $8 million in punitive damages on the fraud claim. Based on the jury's answer to a special interrogatory, the court ruled in plaintiffs' favor on the request for declaratory relief. After a post-verdict claims administration process, the court entered judgment for plaintiffs in the amount of $898,323.80 for compensatory damages and prejudgment interest, $8 million in punitive damages, and more than $2.6 million in attorney fees. Farmers appeals that judgment and a supplemental judgment that awarded additional attorney fees. For the reasons that follow, we conclude that the jury's punitive damages award must be reduced but otherwise affirm.

I. BACKGROUND

Because the jury found in favor of plaintiffs, we state the facts in the light most favorable to them. Taylor v. Ramsay-Gerding Construction Co., 345 Or. 403, 406, 196 P.3d 532 (2008). Since the early 1970s, Oregon law has mandated that PIP benefits be included in every motor vehicle policy issued in Oregon that covers private passenger motor vehicles. By statute, PIP benefits consist of payments for "[a]ll reasonable and necessary expenses of medical, hospital, dental, surgical, ambulance and prosthetic services incurred within one year after the date of the person's injury, but not more than $15,000 in the aggregate for all such expenses of the person." ORS 742.524(1)(a). Accordingly, Farmers' motor vehicle policies included provisions that entitled its insureds to PIP benefits for "reasonable and necessary" medical expenses resulting from the use, occupancy, or maintenance of an insured vehicle.

Before 1998, Farmers processed requests for PIP benefits by having its claims adjusters review each medical bill to determine whether the bill was reasonable—that is, whether it was both "usual and customary." In 1997, however, Farmers decided to change that process. In an effort to recover losses and regenerate its surplus after the 1994 Northridge, California earthquake, Farmers instituted its "Bring Back a Billion" campaign. Farmers' corporate headquarters in Los Angeles alerted its regional offices of the "increasing importance" of generating money without raising premiums. In June 1997, Farmers instructed its Portland office to reduce payment of PIP benefits to realize "PIP dollar savings * * *[,] an untouched area."

In an effort to reduce PIP payments, the Oregon PIP claims manager, Heatherington, contracted with Medical Management Online (MMO), a bill review vendor. MMO, in turn, licensed a "cost containment software program" from Medata, a company that manages a database of roughly 100 million medical expenses. The software sorts those medical expenses by Current Procedural Terminology (CPT) codes, geographic region, and price. CPT codes, which are created by the American Medical Association, are used by medical providers to bill insurers.¹ Geographic regions in the database are defined according to "PSRO" areas, which are socio-demographic regions established by the federal government in 1980 for workers' compensation purposes.² For Oregon, the federal government identified two PSRO areas: (1) the Portland-metro area and (2) the rest of the state.

The software allowed MMO's clients (mostly insurance companies and state agencies) to determine whether a bill from a medical provider was more expensive than a given percentage of the range of charges in other bills for the same CPT code in the provider's designated geographic area. Clients were able to select any percentile that they wished, and MMO then evaluated the bills that it received from the client to determine whether the bills exceeded that percentile. If a bill exceeded the preselected percentile, MMO generated an Explanation of Benefits (EOB) form that reduced payment with reference to "reason code" "RC40."³ The EOB explained the code as follows:

"RC40: This procedure was reduced because the charges exceeded an amount that would appear reasonable when the charges are compared to the charges of other providers within the same geographic area."

The software was promoted as reducing medical provider payments by 26 percent.

Beginning in January 1998, Farmers implemented its new PIP handling process through MMO-a process that, in Heatherington's words, represented "a significant change in the way we handle our bills." Farmers selected the eightieth percentile as the cutoff point for "reasonable" expenses. That is, Farmers determined that any bills that exceeded the eightieth percentile in the MMO database would be deemed to exceed the "reasonable" charge and would be "reduced" to that eightieth percentile. The program worked as follows: After Farmers' insureds were treated for their injuries, their medical providers sent their bills directly to Farmers. Farmers then forwarded the bills to MMO, and MMO entered the bills into its database. If the bill was more than the charge that was at the eightieth percentile of the charges for that same CPT code in the designated region, MMO documented that fact on an EOB form with an RC40 code.

Although Farmers contended at trial (and still contends⁴) that the EOB form constituted only a "recommendation" from MMO as to reasonableness, claims adjusters were expected to follow the recommendation. The adjusters were downgraded if they departed from MMO's recommendations and were rewarded when they followed them. Thus, the "recommendation" was, as a practical matter, the final determination of reasonableness.

Between January 26, 1998 and July 21, 1999 (the class period), Farmers reduced more than 60,000 individual bills by a total of approximately $750,000. The majority of the individual reductions were small: 90 percent were for $25 or less; more than one quarter were for $3 or less. Although Farmers offered medical providers an opportunity to justify the charges that exceeded the established percentile, it was generally not cost-effective for medical providers to pursue those avenues. The medical providers who took advantage of the opportunity to justify their charges rarely secured any additional payment from Farmers. When the providers were unable to secure full payment from Farmers, the insureds became responsible for the unpaid amounts.

As previously noted, Farmers selected the eightieth percentile as the cutoff point for payment of "reasonable" charges. That cutoff point, though profitable for Farmers, also yielded an increase in customer complaints. The complaints were particularly problematic for Heatherington and Reinhardt, a regional claims manager, because customer service satisfaction was one of the components for measuring their performance and compensation. Together, Heatherington and Reinhardt decided that the percentile should be raised to see whether customer relations would improve, and, on May 21, 1999, Farmers raised the cutoff point to the ninetieth percentile. Three weeks before this class action case was filed, Farmers increased the cap to the ninety-ninth percentile. Reinhart reported to corporate headquarters that this was the right tack to take "while the litigation is pending."

Plaintiff Strawn initiated this class action against Farmers in August 1999. In May 2000, the trial court issued an order that granted plaintiffs' motion for class certification, and the case was tried as a class action in November 2003 on plaintiffs' third amended complaint. That complaint alleged four claims for relief: (1) breach of contract; (2) breach of an implied covenant of good...