Tynes v. Bankers Life Co.

• Decision Date: 13 January 1987
• Docket Number: No. 85-327,85-327
• Citation: 43 St.Rep. 2243,730 P.2d 1115,224 Mont. 350
• Parties: Kelley W. TYNES and Walter E. Tynes, Plaintiffs and Respondents, v. BANKERS LIFE COMPANY, Defendant and Appellant.
• Court: Montana Supreme Court

Page 1115

730 P.2d 1115

224 Mont. 350

Kelley W. TYNES and Walter E. Tynes, Plaintiffs and Respondents, v. BANKERS LIFE COMPANY, Defendant and Appellant.

No. 85-327.

Supreme Court of Montana.

Submitted Sept. 11, 1986.

Decided Dec. 17, 1986.

Rehearing Denied Jan. 13, 1987.

Jardine, Stephenson, Blewett & Weaver, John Stephenson, Jr. (argued), Great Falls, for defendant and appellant.

Linnell, Newhall & Martin, Norman L. Newhall (argued), Great Falls, for plaintiffs and respondents.

MORRISON, Justice.

Bankers Life Company appeals the verdict entered in the Eighth Judicial District Court, County of Cascade, awarding Kelley and Walter Tynes judgment against Bankers Life. We affirm the jury verdict, but reverse the trial judge's decision to award the Tynes attorneys' fees.

Bankers Life is an insurance company authorized to sell group health insurance in Montana. Walter Tynes was the principal owner and employee of a family-owned plumbing shop in Great Falls. Kelley is his son. Bankers Life issued the plumbing shop group health insurance in June 1974. Kelley was originally covered under the policy as a dependent of Walter. When Kelley became nineteen in November of 1975, he was not a full-time student and no longer eligible for coverage as a dependent. Nevertheless, Walter, allegedly ignorant of Kelley's lack of eligibility, continued paying Kelley's premiums and Bankers Life continued accepting them.

Kelley has always worked at the plumbing shop. Initially, he primarily cleaned and ran errands. As he grew older, Kelley began to help at various job sites. Kelley continued working at the shop after he dropped out of high school. The work was seasonal and Kelley's, as well as the other employee's, hours were flexible.

In the spring of 1977, Kelley began exhibiting abnormal behavior. He was antisocial and lethargic. He worked at the shop only sporadically. In early July 1977, Kelley was diagnosed as suffering from acute schizophrenia and was admitted to a hospital. He escaped, suffered injuries in a car accident and was readmitted.

At this same time, Walter learned that Kelley was no longer eligible for insurance coverage as a dependent. The exact details of this discovery are unclear. The records of LaVerne (Verne) Sebens, the insurance agent who sold Walter Tynes his Bankers Life policy, indicate Sebens made a service call to the plumbing shop on July 11, 1977, and made telephone contact with Walter Tynes' bookkeeper on July 18, 1977. Sebens does not remember much about those calls. Walter testified Sebens suggested he cover Kelley as an employee of the shop. In any event, an enrollment card for Kelley Tynes, employee, dated July 10, 1977, was received July 19, 1977, by Bankers Life's billing department.

Coverage for Kelley's July and August 1977 medical bills was denied in September 1977 because Kelley was an ineligible dependent. Sebens contacted Bankers Life Kelley's July and August bills remained unpaid. Sebens again contacted Bankers Life per letter, advising that Kelley was "carried" as an employee of the plumbing shop "even though he couldn't carry his own workload." Sebens' inquiry was directed to Lil Peterson by memo noting "there is some question as to whether or not these bills are payable. Please make your usual good investigation." Peterson forwarded investigation of the problem to Jan Hatting, a senior claims processor. Hatting, after three months, approved payment of bills totalling more than $3,000 in April of 1978.

with respect to the denial of coverage. Nothing happened at that time. On November 1, 1977, Jo Scholl, a processor in the billing department of Bankers' Life, contacted Walter Tynes about Kelley's attempted transfer to employee status. Per Scholl's telephone memorandum, Walter's response was that Kelley had been attending school and working for Walter sporadically. Scholl agreed to transfer Kelley from eligible dependent to eligible employee starting July 10, 1977.

Kelley's condition deteriorated. Walter contacted the Constance Bultman Wilson Center in Minnesota about admitting Kelley to the facility. Wilson Center had several prerequisites for admission, including verification of 100% financial coverage of the expenses incurred during treatment. At Walter's request, Wilson Center contacted Bankers Life about coverage of Kelley while at the Center. Wilson Center received a letter from Bankers Life stating Kelley was an insured and setting forth his maximum coverage. The letter stated in pertinent part:

In reviewing the insured's claim we find that patient Kelley Tynes is also our insured. The insurance policy provides for $75 a day room and board benefits payable for 365 days. Hospital miscellaneous expense benefits are payable at 100 percent after a $25 hospital miscellaneous deductible. The remaining charges not covered under the basic benefits are payable under major medical at 80 percent of the first $2000 and 100 percent of the balance after the satisfaction of a $100 major medical deductible. All outpatient services are payable under major medical at 50 percent. The insured's policy allows for a major medical maximum of $250,000 per lifetime.

However, this is not a guarantee of benefits, the insured must meet the requirements of his policy before benefits will be payable on his claim ...

This letter, coupled with Walter's guaranty that he would pay all remaining bills, resulted in the Wilson Center agreeing in August of 1978 to accept Kelley. Kelley repeatedly refused to go to Wilson Center, but was finally admitted on January 1, 1979.

Meanwhile, Walter's bookkeeper had major surgery in October of 1978. The plumbing shop's books fell behind. The November and December 1978 premiums due Bankers Life were not paid. On January 1, 1979, while Walter was at the Wilson Center admitting Kelley, the policy was terminated for nonpayment of premium. Walter, upon learning of the termination, sent Bankers Life a check for the delinquent premium payments and requested reinstatement on January 5, 1979.

Testimony at trial established that Bankers Life considers four criteria when determining whether to reinstate: 1) bad claims (claims exceeding premiums); 2) history of late payments; 3) "non-sufficient funds" checks; and 4) administrative problems. The plumbing shop's claims had recently exceeded its premiums. However, evidence was presented that this was not unusual for small businesses when one or more employees have major problems. Documentation on the plumbing shop's file indicated a history of late payments. Upon closer examination, however, it was determined that Bankers Life erroneously issued the late payment notices. Reinstatement was denied anyway.

Walter next contacted the Montana Insurance Commissioner's Office. Robert Abbott reviewed the policy, noting an Extended Benefits Provision for coverage of Upon notification of denial of coverage, Kelley was removed from Wilson Center. Kelley's reaction was devastating to both himself and his family. He became withdrawn and then violent. He was unable to work or to function. People were afraid of him. Testimony at trial established that Kelley should have remained at Wilson for 18 to 24 months in order to achieve optimum recovery.

certain charges incurred after the date of termination. Coverage required that the insured be totally disabled at the time of termination and that the insured be admitted to a hospital for treatment of the disability within 90 days of termination. Abbott contacted Bankers Life regarding the application of this provision to Kelley Tynes. An investigation was commenced by Bankers Life with Verne Sebens as the investigator. After nine months, Walter Tynes was sent a letter September 13, 1979, denying coverage of Kelley because he was not an eligible employee. Nothing was resolved with respect to the Extended Coverage Provision. Evidence was submitted at trial that a similar investigation by a professional investigator could have been completed in two weeks.

In 1981, Tynes' counsel demanded that Bankers Life review their denial of benefits to Kelley. Senior personnel conducted a review of the previous investigations and affirmed the decision.

Thereafter, Kelley filed a complaint December 21, 1981, against Bankers Life seeking damages for failure to pay policy benefits (breach of contract). The complaint also alleged that Bankers Life's actions in failing to pay were oppressive, fraudulent and malicious and entitled insured to exemplary damages. An amended complaint was filed May 29, 1984, adding Walter as a plaintiff and denominating three specific counts: breach of contract; tortious breach of the implied covenant of good faith and fair dealing; and tortious violation of Montana's Insurance Code.

In its answer, Bankers Life denied Kelley was entitled to benefits and claimed the new counts were barred by various statutes of limitations. The defenses were raised by motions for summary judgment and directed verdict. The motions were denied.

Following trial in March 1985, the jury returned a special verdict awarding plaintiffs $49,167.09 on the contract claim, $100,000 for Walter's emotional distress, $100,000 for Kelley's general damages and emotional distress, and $200,000 in punitive damages. Thereafter, plaintiffs filed a motion requesting over $30,000 in attorneys' fees and costs. The motion was granted.

Numerous important issues are raised by Bankers Life on appeal:

1. Should Walter and Kelley Tynes' claims have been dismissed as barred by applicable statutes of limitations?

2. Is Walter Tynes barred from any action on the contract since he is neither a party to the contract nor an intended third-party beneficiary?

3. Was Verne Sebens the agent of Bankers Life for all purposes?

4. Is the evidence sufficient to establish Bankers Life's obligation to provide coverage?

5. Did the trial judge err in refusing to rule as a matter of law that Bankers Life did not act in "bad faith?"

6....