Opinion
CIV-93-1934-PHX-ROS
December 30, 1994
ORDER
I. Background
On December 15, 1990, Republic American Life Insurance Company ("Defendant") issued Dana E. Flanagan ("Plaintiff") a health insurance policy. Plaintiff was hospitalized in January of 1993. Plaintiff filed a claim requesting the payment of his medical bills. Defendant, after learning that Plaintiff had failed to include on his application information regarding his drug and alcohol history, offered to pay Plaintiff's claim in exchange for Plaintiff voluntarily cancelling his policy. Plaintiff then brought suit for breach of contract and insurance bad faith. In its amended answer, Defendant seeks to rescind the policy. Defendant has brought a motion for summary judgment on both of Plaintiff's claims. Plaintiff has filed a motion for partial summary judgment on his breach of contract claim. For the following reasons, Plaintiff's motion will be granted and Defendant's motion will be granted with respect to the bad faith and punitive damages issues only.
II. Summary Judgment Standard
In evaluating a summary judgment motion, the inquiry is whether, with respect to any dispositive issue, the pleadings and supporting materials show there is no genuine issue of material fact, and if not, whether viewing the evidence and inferences which may be drawn therefrom in a light most favorable to the non-moving party, the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56; California Architectural Building Products, Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468 (9th Cir. 1987), cert. den., 108 S.Ct. 698 (1988).
The moving party must produce evidence establishing the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 106 S.Ct. 2548, 2553 (1986). The absence of a genuine issue of material fact may be demonstrated by pointing out to the district court that "there is an absence of evidence to support the nonmoving party's case" on issues where the nonmoving party bears the burden of proof. Id. at 2554. Moreover, at the summary judgment stage, the court's function is not to weigh the evidence and determine the truth of the matter, but merely to determine whether there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2511 (1986).
If the non-moving party will bear the burden of proof at trial as to any element essential to its case, that party can withstand a motion for summary judgment only by making a showing sufficient to establish a genuine issue of fact regarding that element and a showing that the dispute properly may be resolved only by the fact-finder because it could reasonably be resolved in favor of either party. Celotex Corp., 106 S.Ct. at 2552-53; Anderson, 106 S.Ct. at 2511. In order to make such a showing, the party opposing the motion must present specific facts in support of its contentions and must support those facts by proper evidentiary material, which when coupled with undisputed background and contextual facts, show that the fact-finder could reasonably find in his favor; the non-moving party cannot merely rest on his pleadings. Fed.R.Civ.P. 56(e). See also T.W. Elec. Service, Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 631 (9th Cir. 1987) (citations omitted).
III. Analysis of Defendant's motion for summary judgment on Plaintiff's breach of contract claim
Defendant has moved for summary judgment on Plaintiff's breach of contract claim on the ground that there was never a valid contract so it cannot be found to be in breach. Defendant contends that there was never a valid contract because Plaintiff being in good health was a condition precedent to the formation of the policy. Defendant points to the following language in the insurance application:
I understand and expressly agree on behalf of myself and any person who shall claim an interest in any policy issued on this application as follows:
(1) The insurance applied for will not be considered in force unless all of the following are met: (a) a policy is issued by the company, (b) it is delivered to the owner during the continued good health of the persons to be covered by such policy, and other conditions remain as described in the application as of the Policy Date, and (c) the full first premium is paid. . . . (emphasis added).
Defendant's Exhibit 1, attached to Defendant's Statement of Facts in Support of Defendant's Motion for Summary Judgment ("DSOF"). In support of its position that the above highlighted clause creates a condition precedent to the formation of the policy, Defendant relies on a number of rather old cases. One case that appears particularly relevant at first glance is Sovereign Camp of the Woodmen of the World v. Daniel, 62 P.2d 1144 (Ariz. 1936). In that case the life insurance application contained a provision stating "I hereby warrant . . . that I am now in sound bodily health." The life insurance contract contained a provision stating "I have read the above certificate and accept the same, and warrant that I am now in good health and have not been sick or injured since the date of my application." In fact, the insured was not in good health. The court explained that "[s]ince his warranty [that he was in good health] was a condition precedent to the taking effect of the policy, if, at the time of its delivery he were not in good health, the minds of the parties did not meet and the contract was never completed, and the policy was void ab initio." Id. at 1146.
Plaintiff contends that the cases cited by Defendant are distinguishable because, unlike the insurance contracts in those cases, the insurance contract at issue in this case contains a two-year contestability clause which provides in relevant part:
B. TIME LIMIT ON CERTAIN DEFENSES: . . . (2) No claim for loss incurred commencing after two years from the Effective Date of this policy shall be reduced or denied on the grounds that a disease or physical condition not excluded from coverage by name or specific description effective on the date of loss had existed prior to the Effective Date of coverage of this policy.
Exhibit 2, p. 7, Part 7, paragraph B, attached to Plaintiff's Separate Statement of Facts in Support of Motion for Partial Summary Judgment ("PSOF). Plaintiff argues that even if the "good health" clause of his policy was interpreted as creating a condition precedent to the formation of the contract, the "reasonable expectations doctrine" recognized in such cases as Sparks v. v. Republic National Life Insurance Co., 647 P.2d 1127, 1134-5 (Ariz. 1982) and Darner Motor Sales, Inc. v. Universal Underwriters Insurance Co., 682 P.2d 388 (Ariz. 1984) applies in this situation and precludes Defendant from claiming the policy is invalid based on the "good health" clause more than two years after the effective date of the policy.
An inquiry into whether the reasonable expectations doctrine applies so that the contract is conformed to the "reasonable expectations" of the insured "requires analysis of the format and clarity of the policy, as well as circumstances surrounding its acquisition and issuance." State Farm Mutual Automobile Ins. Co. v. Falness, 872 P.2d 1233 (Ariz. 1994). Defendant contends that Darner and its progeny is inapplicable to the facts of this case because there is no evidence that the agent made any representations to Plaintiff with respect to the good health clause. Defendant is reading Darner too narrowly. Although whether the agent made representations is one factor to consider, as the Ninth Circuit noted inState Farm Mutual Automobile Insurance Company v. Falness, Slip Op. No. 91-15626 (November 2, 1994), the Arizona Court of Appeals in State Farm Mutual Automobile, Ins. Co. v. Dimmer, 773 P.2d 1012, 1017, 1020 (Ariz.App. 1988) recognized "that the reasonable expectations doctrine applied even in the absence of proof of promises or misrepresentations by an insurance agent."
An analysis of the format and clarity of the "good health" provision on which Defendant relies suggests that the reasonable expectations doctrine is applicable in this case. The "good health" provision is located in fine print at the bottom of the second page of the application. This provision is not the model of clarity, as it refers to the insured's "continued good health" and is followed by the phrase "and other conditions remain as described in the application as of the Policy Date." The Court finds that an insured could believe that this clause simply allows the insurance company to void a policy where an insured has had a change in health after the application date but before the effective date of the policy. Furthermore, Plaintiff is correct that even if an insured understood that the "good health" provision made the insured's actual good health on the application date a condition precedent to the formation of the contract, an insured could reasonably expect based on the contestability clause that the insurance company could not, after two years, argue that there was never a contract based on a health condition that existed prior to the application date.
Furthermore, the Court agrees with Plaintiff that this result is mandated even without application of the reasonable expectations doctrine. Defendant is correct that "[i]n determining whether the incontestable clause is applicable to a given situation, a distinction should be noted between matters going to the invalidity of the whole policy on the one hand, and on the other hand provisions relating to excepted risks." National Life Casualty Ins. Co. v. Blankenbiller, 360 P.2d 1030, 1032 (Ariz. 1961), citing Williston, Contracts, Sec. 811, p. 2280. However, the distinction is that "the incontestability clause relates to the validity of the contract."Id. at 1032 (emphasis added). In other words, as explained by Cardozo in an opinion cited by the Arizona Court of Appeals in National Producers Life Insurance Co v. Rogers, 442 P.2d 876, 880 (Ariz.App. 1968):
The provision that a policy shall be incontestable after it has been in force during the lifetime of the insured for a period of two years is not a mandate as to coverage, a definition of the hazards to be borne by the insurer. It means only this, that within the limits of the coverage the policy shall stand, unaffected by any defense that it was invalid in its inception, or thereafter became invalid by reason of a condition broken.Metropolitan Life Ins. Co. v. Conway, 169 N.E. 642 (1930) (emphasis added). No matter how Defendant characterizes its pleadings, what Defendant is claiming is that the policy was invalid in its inception because Plaintiff was not in good health when the contract was allegedly formed. Under the contestability clause, Defendant had two years to make this argument. The argument is untimely now.
Plaintiff also argues that Defendant waived its right to rescind the policy based on its "good health condition precedent" defense because it continues to this day to accept Plaintiff's premiums. A party to a voidable contract must act promptly to either seek avoidance of the contract through recision or to affirm the contract. Yank v. Juhrend, 729 P.2d 941 (Ariz.App. 1986). In McCollum v. Continental Casualty, 728 P.2d 1242 (Ariz.App. 1986), the insurance company learned of facts justifying the denial of coverage yet retained and continued to accept premiums from the insured. The court explained that "when an insurer has knowledge of facts allegedly justifying a denial of coverage or the forfeiture of a policy previously issued, an unequivocal act that recognizes the continued existence of the policy or an act wholly inconsistent with a prior denial of coverage constitutes a waiver." Id. at 1245. The court went on to explain that the defendant's retention of the plaintiff's premiums "was such an act." Id.
Although Defendant contends that it did not have facts justifying a denial of coverage based on a "good health condition precedent" defense until April of 1994, at which time it tendered the premiums to Plaintiff, the fact remains that Defendant has continued to this day to accept Plaintiff's premiums. Defendant has failed to distinguishMcCollum. Consequently, the Court finds that by continuing to accept Plaintiff's premiums even after it had knowledge allegedly justifying a denial of coverage based on Plaintiff's health prior to the issuance of the policy, Defendant has waived its right to deny the existence of the contract.
Finally, the Court finds specious Defendant's argument that this is an affirmative defense that is waived because it was not specifically pled pursuant to Rule 8(c), Federal Rules of Civil Procedure. Defendant never filed a counterclaim; therefore, Plaintiff was never required to file an answer and Rule 8(c) does not apply.
Accordingly, Defendant is not entitled to summary judgment on Plaintiff's breach of contract claim because it has waived its good health condition precedent defense (1) by waiting more than two years from the effective date of the policy to raise it and (2) by continuing to accept Plaintiff's premiums even after it allegedly had grounds for denying the validity of the policy.
IV. Is Plaintiff entitled to summary judgment on his breach of contract claim?
In order to show that he is entitled to summary judgment on his breach of contract claim, Plaintiff must show that there are no material issues of fact and that Defendant breached the policy as a matter of law. See California Architectural Building Products, Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468 (9th Cir. 1987), cert. den., 484 U.S. 1006, 108 S.Ct. 698 (1988). The parties appear to agree that unless Defendant has a legal defense justifying its refusal to pay Plaintiff's claim, it breached the contract. Plaintiff argues that Defendant cannot substantiate its fraudulent misrepresentation and failure of condition precedent defenses, and even if it can, it has waived its contract defenses. A. Defendant's condition precedent fail as a matter of law.
Plaintiff also raises for the first time in his reply the argument that because knowledge acquired by an agent in the course of his employment is imputed to the principal and because Sim Miller, Defendant's agent, knew of Plaintiff's prior substance abuse, Defendant cannot now claim that Plaintiff fraudulently withheld that information. This argument was not timely raised and, therefore, will not be considered by the Court. Even if the Court were to consider this argument, as Plaintiff acknowledges, an agent's knowledge is only imputed to the principal in the absence of fraud and collusion between the insured and the agent. The Court finds that there is sufficient evidence of collusion between Plaintiff and Sim Miller to create a genuine issue of material fact precluding summary judgment on this ground.
For the reasons outlined in Section III, the Court agrees that Defendant's "good health condition precedent" defense must fail.
B. Is there evidence to support Defendant's fraudulent misrepresentation defense?
Defendant contends that it is excused from paying benefits under the policy because Plaintiff fraudulently misrepresented information on his application. Defendant relies on the contestability clause, which provides in relevant part that:
TIME LIMIT ON CERTAIN DEFENSES: (1) after two years from the date of this policy no misstatements, except fraudulent misstatements, made by the applicant in the application for such policy, shall be used to void the policy or to deny a claim for loss incurred after the expiration of such two-year period. . . .
Exhibit 2, p. 7, part 7, attached to PSOF. Defendant admits that in order to show that Plaintiff made a fraudulent misrepresentation, it must present proof of Plaintiff's intent to defraud. DSOF, paragraph 49.
The Court finds that in order to be entitled to rescind on this ground, Defendant must prove Plaintiff's intent to defraud by clear and convincing evidence. Defendant contends that although Plaintiff has cited cases stating that fraud must be proved by clear and convincing evidence, Plaintiff has failed to cite a case for the proposition that a fraudulent misrepresentation to an insurance company on an application must be proved by clear and convincing evidence. Defendant cites Godwin v. Farmers Ins. Co. of America, 631 P.2d 571, 574 (Ariz.App. 1981) for the proposition that "[i]n Arizona, even a defense of arson need only be established by a preponderance of the evidence." Defendant's Response to Plaintiff's Motion for Partial Summary Judgment, p. 2. However, in Godwin the court emphasized that in Arizona the exception to the rule that the burden of proof in civil cases is satisfied by the preponderance of evidence is that fraud must be proven by clear and convincing evidence. Although Plaintiff has not cited a case suggesting that fraud with respect to an insurance application must be proved by a preponderance of the evidence, Defendant has failed to show that the general rule (that fraud must be proved by clear and convincing evidence) does not apply in the insurance arena. Thus, the Court will follow the general rule that fraud must be shown by clear and convincing evidence.
Plaintiff argues that there is no evidence that he intended to defraud Defendant and, therefore, Defendant cannot successfully maintain this defense. The Court disagrees. First, Plaintiff admitted in his deposition that he failed to include his drug and alcohol treatment on earlier applications for insurance from Farmers New World Life Insurance Company and Liberty Life, which suggests that Plaintiff's failure to disclose this information on Defendant's application was not a mistake. Exhibit 30, p. 63-64, 113-114, 116-118, 133-135, attached to DSOF. The Court notes that there is some discrepancy as to whether Plaintiff is the one who filled out the Farmer's application; however, Plaintiff has failed to present any evidence suggesting that he did not fill out the Liberty Life application himself. Second, Plaintiff has provided several different versions of the events surrounding the completion of Defendant's insurance application. For example, Plaintiff, when confronted on May 19, 1993, with his failure to reveal that he had been treated for drug and alcohol abuse at Cottonwood de Tucson, told Mr. Nichols that the application was filled out by the insurance agent, Sim Miller. Exhibit 8, Bates 0175, attached to Plaintiff's Supplemental Memorandum on the Pending Motions for Summary Judgment. Plaintiff did not state at that time that he was unaware of the drug abuse and alcohol abuse question or that Sim Miller told him that he need not reveal his drug and alcohol history. The Court finds that it is reasonable to expect that if Plaintiff was unaware of the drug and alcohol abuse inquiry or had been told by his agent Sim Miller that he was not required to reveal such history, he would have immediately informed Mr. Nichols during the interview. It was not until June 10, 1993, that Plaintiff first stated that Sim Miller told him that he did not need to reveal his alcohol and drug treatment because it had occurred nearly five years ago. After some discussion with Mr. Nichols, Plaintiff realized that his drug and alcohol treatment had occurred three years and not five years previous. Then in his deposition of March of 1994, Plaintiff stated that he did not remember what Sim Miller told him and that he was simply "speculating" when he told Mr. Nichols what Sim Miller had said to him. Id. at 377-379. This most recent change in Plaintiff's story is particularly significant given the fact it occurred after Sim Miller testified during his deposition that he did not remember telling Plaintiff that he need not reveal his drug and alcohol history. Exhibit 36, p. 38, attached to DSOF. Moreover, the Court notes that although Plaintiff in his deposition retracted his previous explanation, he failed to present any alternate explanation for his failure to disclose his substance abuse history.
The Court finds that this evidence is admissible to prove Plaintiff's intent to defraud pursuant to Rule 404(b), Federal Rules of Evidence.
Plaintiff relies on the deposition testimony of John D. Smith, an insurance agent for Farmers, who testified as follows:
Q. Is it fair to say that you have no recollection of asking any of the health questions on Dana Flanagan's application for insurance with Farmers New World Life at the time that you took the application?
* * *
[Mr. Smith] A. That's correct, I have no recollection.
Q. Is it your recollection that Dana was one of the first 12 applications that you took as a Farmer's agent?
* * *
A. Yes.
Q. Is it true that in the first group of the 12 applications that you took as a Farmer's agent that on some of those applications you had the applicant sign a blank application and then you later filled out the health questions without knowing what the facts were and submitted it to the company?
* * *
A. . . . [A]s far as the health questions, that's true.
Q. And do you believe that is probably what you did in Dana's case?
* * *
A. I believe it's probable.
Exhibit A, p. 78-79, attached to Plaintiff's Reply in Support of his Motion for Partial Summary Judgment.
On June 10, 1993, Plaintiff and Mr. Nichols had the following conversation:
[Plaintiff]: Yeah, and, you know, uh, the funny thing, there's also a, uh, thing here where the agent that, he had filled out the paperwork, and he had asked me these questions and, see, I met him at an AA meeting.
[Nichols]: Okay. Okay.
[Plaintiff] : I met your agent at an AA meeting and he came over and he wanted to sell me some, uh, hospitalization. He said this is fine, and, and, I believe at the time we discussed that, uh, and he says, well, was that over five years ago? And I said well, it's about four years and seven months ago. And, uh, he said, well that's, that's pretty close. We'll just go with it like this.
* * *
[Nichols] : But it wasn't even close to that period of time, I don't know where they got that information, because, the information we got, that was, wasn't very long before you took the policy.
[Plaintiff] : Um, no, it was four years later. I had the policy for three years and I've been sober six and a half years with, with no relapse.
* * *
[Plaintiff] : I think my sobriety date is, uh, January 25 of 19, uh, 87, and the policy was taken out in 1990.
[Nichols] : Right, the policy was taken out in ten ten of '90.
* * *
[Nichols]: And they had in here '87
* * *
[Nichols] : When, was when you was [sic] in, uh, Cottonwood. That Cottonwood, uh de Tucson, or whatever it is.
[Plaintiff] : Yeah, right.
[Nichols] : But that was, they said two one of '87. So that would have been, you know, two years. Three years at the most.
[Plaintiff] Three years, yeah.
Exhibit 32, attached to DSOF.
Mr. Miller testified as follows:
Q. Now, do you recall specifically telling Mr. Flanagan that you had been clean and sober for so many years that this question doesn't need to be answered "Yes"?
A. I don't recall that at all, and I don't recall any specific information. The only thing I can help you with is what my probable mind set would have been at the time.
* * *
Q. So you remember at the time you didn't think it was a problem. The next question is, though, do you remember any discussion with Mr. Flanagan about it?
A. I don't remember any specific discussion.
* * *
Q. You never told Mr. Flanagan, did you, that you had the authority to waive a complete answer to the question or pass on insurability or to make or alter the contract or waive any of the Company's other rights or requirements?
A. No.
Exhibit 36, p. 38-39, 41, attached to Defendant's Statement of Facts in Support of Defendant's Motion for Summary Judgment.
In conclusion, the Court finds that Defendant has presented sufficient evidence from which a jury could find that Plaintiff did make a fraudulent misstatement on his application. Ordinarily, such a showing would dictate the denial of Plaintiff's motion for summary judgment on this claim. However, for the reasons set forth in Section III, the Court agrees that Defendant has waived this defense by continuing to accept Plaintiff's premiums. Consequently, Plaintiff's Motion for Partial Summary Judgment will be granted.
V. Is Defendant entitled to Summary Judgment on Plaintiff's bad faith claim?
In his Complaint, Plaintiff alleges that Defendant engaged in bad faith by "refusing to pay the claims submitted" and by "accusing Plaintiff of fraud in order to avoid the policy." In his Response to Defendant's Motion for Summary Judgment Plaintiff elaborates on these allegations and submits that Defendant acted in bad faith by failing to conduct an adequate investigation, by ignoring repeated "warnings" from the Arizona Department of Insurance, by putting economic pressure on Plaintiff to surrender the policy and by discriminating against Plaintiff because he has AIDS.
In Noble v. National Life Ins. Co., 624 P.2d 866, 868 (Ariz. 1981), the Arizona Supreme Court explained that although an insurance company can challenge claims that are "fairly debatable, " it breaches its duty of good faith to its insured when it "intentionally denies or fails to process or pay a claim without a reasonable basis." In Rawlings v. Apodaca, 726 P.2d 565 (Ariz. 1986), the Arizona Supreme Court "further refined its law on the subject" of bad faith, Lange v. Penn Mutual Life Insurance Company, 843 F.2d 1175 (9th Cir. 1988), when it explained that in order for an insurer to be liable for bad faith tort damages, it need only have acted intentionally without a founded belief that its conduct was permitted under the terms of the policy. The Rawlings court explained that a "founded belief is absent when the insurer either knows that its position is groundless or when it fails to undertake an investigation adequate to determine whether its position is tenable." Rawlings, 726 P.2d at 576.
Defendant argues that Lasma Corporation v. Monarch Insurance Company of Ohio, 764 P.2d 1118 (Ariz. 1988), is particularly instructive on the issue of whether a bad faith claim should be decided by a jury. InLasma, the Arizona Supreme Court found that the trial court erred in sending the bad faith claim to the jury. After deciding that the insurance company was justified in denying the claim if the policy holder had knowledge that the insured horse was not in good health on the effective date of the policy, the court found that there was evidence tending to show that the policy holder did have such knowledge at the time the policy was issued. The court concluded that because there was evidence tending to show the policy holder's knowledge, the court concluded that the claim was fairly debatable and therefore the plaintiff's bad faith claim should not have gone to the jury. The Court recognizes the parallels between Lasma and this case.
Plaintiff attempts to distinguish Lasma on the grounds that there is a material issue of fact as to whether Defendant conducted an adequate investigation and had in it possession at the time it made the decision to deny the claim actual evidence suggesting an intent to defraud. The Court finds that, as a matter of law, Defendant's investigation was adequate. After Plaintiff told Mr. Nichols that Sim Miller had informed him that he need not reveal his substance abuse history, Defendant spent the next several months trying to locate Mr. Miller. As detailed in Denise Walraed's affidavit, she first attempted to contact Sim Miller by letter. Exhibit 32, attached to DSOF. When that letter was returned, Ms. Walraed attempted to find Sim Miller's address from the Arizona Department of Life Insurance's Licensing Divisions for Life and Disability Business, but they were unable to help her. Id. Michael Miller, the Special Deputy Receiver Defendant then obtained a telephone number for Sim Miller. Exhibit 27, attached to DSOF. Michael Miller left several messages on Sim Miller's answering machine, but the messages were never returned. Id. Finally, in December, Plaintiff's counsel notified Defendant's counsel that he knew where Sim Miller was; however, it was not until January 11, 1994, that Plaintiff's counsel disclosed that Sim Miller was in the Maricopa County Jail. Exhibit 35, attached to DSOF. Defendant met with Mr. Miller on January 19, 1994, and his deposition was taken on February 18, 1994. During this time, Defendant also made an attempt to locate Plaintiff's applications with other insurance companies in order to verify his story that he had disclosed his substance abuse history to other insurance companies. Walraed affidavit, Exhibit 32, attached to DSOF.
In his Response to Defendant's Motion for Summary Judgment, Plaintiff argues that "Republic made no attempt to locate the agent who wrote the application, Sim Miller, until June of 1993, only after its unsuccessful oppressive attempt in May to pressure Dana into giving up the policy without a fight." Response, p. 14. What Plaintiff neglects to mention is that Defendant did not have any reason to contact Sim Miller until June 10, 1993, when Plaintiff told Mr. Nichols that Sim Miller informed him he did not need to reveal his substance abuse history. Exhibit 32, attached to DSOF.
Plaintiff's counsel's failure to promptly furnish this information to defense counsel is of considerable concern to the Court. There is presently insufficient information in the record to determine whether sanctions pursuant to the applicable Federal Rules of Civil Procedure are appropriate.
Moreover, even if Defendant's investigation could be deemed inadequate, the deficiency in Plaintiff's argument is that "[a]n insurance company's failure to adequately investigate only becomes material when a further investigation would have disclosed relevant facts" tending to support a finding of coverage. Aetna Casualty and Surety Company v. Superior Court, 778 P.2d 1333 (Ariz.App. 1989). Assuming for argument's sake that Defendant did deny Plaintiff's claim as early as May of 1993, as Plaintiff contends, the fact of the matter is that further investigation only revealed evidence that supported Defendant's position.
On May 20, 1993, Defendant sent Plaintiff a letter stating that Defendant would pay Plaintiff's current medical bills in exchange for Plaintiff voluntarily canceling his policy. Exhibit 29, attached to DSOF in Support of MSJ.
See discussion of the evidence of fraud which emerged in both Plaintiff's and Sim Miller's depositions, pages 11-15, supra.
Plaintiff also contends that Defendant is liable for bad faith because in May of 1993 it put "economic pressure" on Plaintiff to surrender his policy in exchange for the payment of his hospital bills. The Court finds that, as a matter of law, Defendant could not be found liable for bad faith arising out of its offer to Plaintiff because it had a reasonable basis for believing the policy could be rescinded. As discussed supra, at the time that Defendant offered to pay Plaintiff's present medical bills in exchange for Plaintiff's agreement to voluntarily cancel the policy, Defendant had knowledge that Plaintiff had answered "no" to the question on the insurance application asking if Plaintiff had ever had a disorder involving alcohol or chemical abuse when in actuality he had been treated for one month at Cottonwood de Tucson for alcohol and drug problems. Defendant also knew that Plaintiff had failed to disclose this treatment during a phone interview in which he was asked if he had ever been hospitalized. During the telephone conversation on May 19, 1993, Plaintiff neither denied that he had lied on the application nor contended that a mistake had been made, but merely stated that he had answered all the questions that had been asked of him. Importantly, Plaintiff did not at that time state that Sim Miller informed him he did not need to reveal this information. In fact, he did not give any explanation for his failure to include this information. The Court finds as a matter of law the evidence presented does not create a material issue of fact that the Defendant "coerced" Plaintiff. Defendant cannot be held liable for engaging in efforts to settle a matter where it had a reasonable basis for believing that the policy could be rescinded.
Exhibit 3, attached to DSOF in Support of MSJ.
The relevant portions of that conversation are as follows:
[Mr. Nichols]: . . . Uh, Let me, if I may, explain the situation we're in here. Um, when you took out your policy with us in, uh, October of '90, on the application there was no medical history. When they called you back on the application verification, you mentioned the, uh, appendectomy and the tonsillectomy and, uh, the thing about your leg, which is a darn shame,
[Plaintiff]: Uh huh
[Mr. Nichols]: But there was nothing mentioned about this thirty days that you spent in that Cottonwood de Tucson.
[Plaintiff]: Oh, um, did you ever ask about it?
[Mr. Nichols]: Well, yes sire, that's right on the application. It says have you ever, I don't like to get into this because this is very personal, but, it, says that, right on the application it says . . .
[Plaintiff]: I'm having a real hard time hearing you, can you speak louder?
[Mr. Nichols]: Yes sir. It says, uh, right on the application tit says "have you ever, um, uh, had any mental or nervous disorders, depression, anxiety, alcohol or chemical abuse"
[Plaintiff]: Okay, that, see that was filled out by the, uh, adjustor, or the, the sales person.
[Mr. Nichols]: The agent.
[Plaintiff]: Yeah.
[Mr. Nichols]: Yeah, but he asked you those questions, didn't he?
[Plaintiff]: Ummmm, In answered everything that he asked me.
Exhibit 28, attached to DSOF in Support of MSJ.
Although the Court notes that Defendant's agents did have conversations with agents of the Arizona Department of Insurance wherein Defendant's agents indicated that they needed to engage in further investigation in order to prove Plaintiff's fraudulent intent, these conversations were appropriate and occurred after Plaintiff changed his story and stated that his insurance agent had told him that information regarding his substance abuse history need not be revealed. See Exhibit 4, attached to Plaintiff's Separate Statement of Facts in Support of Response to Defendant's Motion for Summary Judgment.
Plaintiff also contends that Defendant's statement that it would be best for Plaintiff to accept its offer to pay his medical bills in exchange for his cancellation of the policy constitutes bad faith. First, this was raised for the first time in Plaintiff's Supplemental pleading filed on December 16, 1994. As already explained, the Court finds that Defendant was within its rights to discuss the possibility of settlement because it had a reason to believe that Plaintiff made fraudulent misrepresentations on his application. Plaintiff has failed to present any evidence establishing that accepting the offer was not in his best interest under the circumstances. Consequently, the Court finds that Defendant did not "take advantage of the unequal positions in order to become a second source of injury to the insured" and, thus, did not engage in bad faith. Rawlings, 726 P.2d at 573.
For example, Mr. Nichols told Plaintiff that if he did not cancel the policy and Defendant was forced to rescind, he would probably not qualify for Medicaid and probably would not be able to get insurance anywhere else. Exhibit 28, attached to DSOF in Support of MSJ. Plaintiff was told that if he cancelled the policy himself there was a good chance that he would qualify for Medicaid. Plaintiff has failed to present any evidence suggesting these statements were false or that Defendant had reason to believe that they were false.
The plaintiffs in Rawlings were injured because they were hampered from pursuing their claim against the individuals who caused their loss because they had not hired an investigator based on their belief that they would have access to the insurance company' report, which it refused to share.
Furthermore, the Court finds that as a matter of law, Defendant did not engage in bad faith by amending its answer to allege fraud on Plaintiff's part. At the time of the amendment, abundant evidence had been accumulated to support a finding that Plaintiff intended to defraud Defendant by failing to provide information regarding his substance abuse history on his insurance application at the time the complaint was amended. Plaintiff admitted in his deposition that he failed to disclose his substance abuse history on applications for insurance with Farmers New World Life Insurance Company and Liberty Life. Exhibit 30, p. 63-64, 113-114, 116-118, 133-135, attached to DSOF. Also, although on June 10, 1993, Plaintiff informed Mr. Nichols that Sim Miller told him that he did not have to put his treatment history down because it had been almost five years since he had been treated, Sim Miller stated in his deposition that he did not remember telling Plaintiff this, and Plaintiff himself admitted that he did not remember Sim Miller telling him this. Id. at 377-379; Exhibit 36, p. 38, attached to DSOF.
Furthermore, the insurance application stated that "the agent does not have authority to waive a complete answer as to any question in this application, pass on insurability, make or alter any contract, or waive any of the Company's other rights or requirements." Exhibit 1, Agreement Section (2), attached to DSOF. The application also provided that oral statements between the insured and the agent "are not binding on the Company." Id. Section (3). In the Confirmation of Understanding it further provided that Plaintiff understood "that the agent does not have any authority — apparent or implied — to (1) waive a complete answer as to any question in the application; (2) pass on the insurability, make or alter any contract or; (3) waive any of the Company's other rights or requirements." Exhibit 2, attached to DSOF. Additionally, it is significant that in an oral interview of Plaintiff which occurred subsequent to his completion and signing of the application the insurance agent reiterated that the agent had no authority to waive questions in the application. Exhibit 3, p. 5, attached to DSOF. Based on Plaintiff's acknowledgement that he had read the provisions in the application, as evidenced by his signatures, Defendant could reasonably surmise that Plaintiff's failure to reveal his substance abuse history was not the result of a mistake or miscommunication between Sim Miller and Plaintiff but rather was the result of a deliberate decision on Plaintiff's part.
Plaintiff also contends that Defendant engaged in bad faith by ignoring repeated "warnings" from the Arizona Department of Insurance that it needed to establish intent to defraud before denying Plaintiff's claim and canceling his policy. A review of the record reveals that the Arizona Department of Insurance merely made it clear to Defendant that it needed to establish intent to defraud before it denied Plaintiff's claim and rescinded his policy. Defendant acknowledged that it needed to prove intent, and indicated that it was engaged in investigation to determine Plaintiff's intent, which it did. Again, this evidence does not create a material issue of fact of whether Defendant engaged in bad faith conduct. The Court finds that in Arizona an insurer may continue investigating a possible grounds for denying a policy despite concerns voiced by the Arizona Department of Insurance without engaging in insurance bad faith.
Finally, Plaintiff contends that Defendant acted in bad faith by discriminating against Plaintiff because he has AIDS. Having reviewed the extensive record presently before the Court, the Court finds that the only evidence that could possibly support a finding that Defendant discriminated against him because he has AIDS is a memorandum from Denise Walraed to Tom Connors of NRG, in which Ms. Walraed stated that Plaintiff "had been diagnosed with AIDS and therefore, has the potential to incur a great deal of charges for future treatments." Taken in context, however, this statement does not support a finding that Defendant was discriminating against Plaintiff. Rather, Ms. Walraed's statement was a suggestion that NRG, Defendant's reinsurer, had an incentive to help Defendant determine whether Plaintiff had defrauded it, because it too could be liable for an expensive claim if the policy remained in effect. The Court finds that as a matter of law the evidence presently before the Court does not create a material issue of fact that Defendant discriminated against Plaintiff because he has AIDS.
Finally, because Defendant is entitled to summary judgment on Defendant's bad faith claim, the only claim for which punitive damages could be awarded, Defendant's motion for summary judgment on Plaintiff's punitive damages claim will also be granted.
Accordingly,
IT IS ORDERED granting Plaintiff's Motion for Partial Summary Judgment (doc. # 74).
FURTHER ORDERED granting Defendant's Motion for Summary Judgment (doc. #58) with respect to Plaintiff's bad faith claim and claim for punitive damages and denying Defendant's motion with respect to Plaintiff's breach of contract claim. The Clerk shall enter judgment in favor of Defendant on the bad faith and punitive damages claims.
FURTHER ORDERED denying as moot Defendant's Motion to Bifurcate (doc. #55) and Motion for Separate Trial (doc. #56).
FURTHER ORDERED denying as moot Plaintiff's Motion to Exclude Testimony (doc. #60) and Motions in Limine (docs. #60, 62, 63, 64, 65, 66, 67).
FURTHER ORDERED that the trial scheduled for February 7, 1995, will be held for the sole purpose of determining the damages for Plaintiff's breach of contract claim.