Aetna Life Insurance Co. v. Lavoie

This case is on remand from the Supreme Court of the United States. This is the fourth time it has been before this Court. On June 5, 1986, we ordered this case re-briefed. After careful reconsideration of the record and the arguments of counsel, we uphold the trial judge’s denial of appellant’s (Aetna’s) motion for directed verdict and its post-trial motion for J.N.O.V. The trial court’s denial of appellant’s post-trial motion for a new trial on the ground of excessiveness of the verdict is affirmed on the condition that appellees (the Lavoies) file with this Court, within 21 days, a remit-titur in the sum of $3,000,000.00.

The facts are as follows: In January of 1977, Mrs. Lavoie was examined by her physician, Dr. John B. Douglas, complaining of various ailments. Dr. Douglas recommended that she be admitted to the Mobile Infirmary for evaluation and treatment. Mrs. Lavoie remained hospitalized for 23 days, during which time a battery of tests was performed on her in accordance with Dr. Douglas’s instruction.

After her discharge, the infirmary forwarded certain medical records (including the admitting sheet, the admission history and physical, the doctor’s orders, the discharge summary, and extraneous information such as lab reports, etc.) and a bill for $3,028.25 to Aetna’s local office in Mobile. In April of 1977, Brenda Harris, a claims worker in the local office, sent a letter to Jean Becker, a “senior claims examiner” at Aetna’s home office in Hartford, Connecticut, indicating Harris’s conclusion that the entire period of hospitalization was unnecessary and that “[hjospital records do not indicate anything to the contrary,” despite the fact that all of the hospital records had not been received by Aetna. (The nurses’ notes and patient’s progress notes were not in the Lavoie medical file.) On April 27, 1977, Ms. Becker denied payment of the hospital bill and certain of the diagnostic tests ordered by Dr. Douglas (the EEG, the EKG, and the CAT-scan). The local office refused to pay the entire amount, tendering payment for only $1,579.74. The refusal to pay was made pursuant to the insurance contract, the pertinent parts of which provide:

“ARTICLE II — BENEFITS

“COVERED MEDICAL EXPENSES

“Covered Medical Expenses are the reasonable charges which an employee is required to pay for the following services and supplies received by a covered family member for the necessary treatment of any non-occupational injury or non-occupational disease:

“HOSPITAL EXPENSES: These are the charges made by a hospital, in its own behalf, for (a) Board and room....

“EXCLUSIONS, LIMITATIONS AND PROVISIONS APPLICABLE TO ALL TITLES UNDER ARTICLE II

“No insurance is afforded under any Title of Article II as to charges

“(5) for care, treatment, services or supplies which are not necessary for the treatment of the injury or disease concerned nor to the extent that any charges for care, treatment, services or supplies are unreasonable....”

Although there is no written policy, Aet-na’s witnesses agreed that before a “complicated” medical claim could be denied, a member of Aetna’s medical department must review the file. The medical department included 6 physicians.

Dr. Bernard Swann, a physician employed by Aetna to review claims and a member of the medical department, was assigned the Lavoie file. Although a dispute arose over whether Dr. Swann’s handwritten records reflected that he reviewed the Lavoie file on April 28, 1977, a day after the claim was denied, or whether he reviewed the file on April 25, 1977, Swann acknowledged in his notes that certain important medical records (the nurses’ notes and the patient’s progress notes) were not in the file.

The Lavoie claim was denied on three more occasions: on November 9, 1977, in accordance with the instruction of Tom Hutton, a senior claims examiner in the Hartford, Connecticut, office, to Harris; on December 20, 1977, again on instruction from Hutton to Harris; land finally on July 28, 1978, when R.E. Mann, another senior claims examiner in Hartford, instructed the Mobile office to continue the denial.

Chavers v. National Sec. Fire & Casualty Co., 405 So.2d 1 (Ala.1981), promulgated the test for bad faith refusal to honor claims with an insurance company. Justice Beatty, in Gulf Atlantic Life Ins. Co. v. Barnes, 405 So.2d 916 (Ala.1981), summarized and explained the two tiers of the bad faith tort. The first tier of the Chavers test establishes that the tort arises when there “exists ‘[1] no lawful basis for the refusal coupled with [2] actual knowledge of that fact’ ”. The second tier of the test is an elaboration on the first. If the plaintiff cannot prove actual knowledge, the second tier offers plaintiff the alternative of proving that the insurer intentionally failed to determine whether there was an arguable reason for denying the claim. If the jury finds an intentional failure on the part of the insurer to determine whether there was any lawful basis for the refusal of the claim, it may use that fact, in finding “actual knowledge.”

“The relevant question before the trier of fact would be whether a claim was properly investigated and whether the results of the investigation were subjected to a cognitive evaluation and review. Implicit in that test is the conclusion that the knowledge or reckless disregard of the lack of a legitimate or reasonable basis may be inferred and imputed to an insurance company when there is a reckless indifference to facts or to proof submitted by the insured ... [T]he insurer’s knowledge of the non-existence of any debatable reasons for refusal would be a question for the finder of fact, i.e., the jury.” 405 So.2d 916, 924.

Clearly, it was Aetna’s responsibility to marshal all of the medical facts with regard to Mrs. Lavoie’s claim before its refusal to pay. The items which were absent from the file, the progress notes and the nurses’ notes, were conceded by Aet-na’s own witnesses to be of critical importance in the review of any medical file where the reasonable necessity of hospitalization is in issue. Dr. Swann testified, “[N]ormally you’d like to see particularly that a nurses’ notes [are] included in the record,” and “Over a year later ... more information was sent and also a letter from Dr. Douglas concerning the admission ... but the critical thing [that] came was the nurses’ notes.”

Dr. Roy Mason Arnold, M.D., one of Aet-na’s expert witnesses, confirmed the importance of these documents:

“Q. Would you agree that if Aetna Insurance Company had these medical reports in their file that they should have been shown to the physician who was reviewing them, i.e., Dr. Swann?”

“A. Yes, sir, I agree with that.”

“[T]he decision of the insurance company to deny a claim under an insurance policy must be judged by what was before it at the time the decision was made.” Insurance Company of North America v. Citizensbank of Thomasville, 491 So.2d 880, 883 (Ala.1986), citing Federated Guaranty Life Ins. Co. v. Wilkins, 435 So.2d 10 (Ala.1983). Considering the fact that the decision to deny was made without the benefit of “critical” sections of the medical file, the jury could find that the claim was not “properly investigated,” and that there was a “reckless indifference to facts or to proof.” Even Dr. Arnold, Aet-na’s own witness, after a review of all the records, would have approved payment for some time in the hospital:

“A. In my opinion, based on my review of the entire medical record, I probably would have certified somewhere between three and five days of inpatient care.

“Q. Even you would have agreed to pay for the EKG, wouldn’t you, Doctor? [One of the medical tests for which the claim for payment was denied.]

“A. Yes, sir.”

Another aspect of the case is the insureds’ contention that Dr. Swann did not examine the medical records until one day after the first refusal to pay. Because of the foregoing discussion of the inadequacy-of-the-investigation issue, the controversy surrounding the date of Dr. Swann’s recommendation to refuse payment need not be addressed here.

The question of whether the bad faith is to be tested at the time of the first denial, or at the time of subsequent denials, is of no consequence in this case, because the deficiency in the medical records continued through the first three successive denials. Once the bad faith has occurred, once the duty to use good faith in considering insurance claims has been breached, the insurance company cannot later seek to justify its denial by gathering information which it should have had in the first place. “[A]n insured purchases insurance and not an unjustified court battle when he enters into the insurance contract.” Gulf Atlantic Life Insurance Co. v. Barnes, 405 So.2d 916, 925 (Ala.1981). Thus, the jury could have found that Aetna exhibited reckless indifference to the facts or to the proof submitted by the Lavoies on their claim, thereby satisfying the “actual knowledge” element of the test — and it is evident, from their verdict, that they did. Facts certainly exist which support the jury’s conclusion.

Under ordinary circumstances, we would remand this cause to the trial court for reconsideration of the excessiveness-of-the-verdict issue pursuant to Hammond v. City of Gadsden, 493 So.2d 1374 (Ala.1986). Because of the long history of this case, and other extraordinary attending circumstances, however, we feel constrained to forgo the Hammond remand procedure and determine the issue of damages without further delay. After careful and thoughtful consideration, taking into account the gravity of the wrong, the nature and extent of the injury inflicted upon the insureds, and, upon making a comparative analysis with other awards allowed in similar cases, we hold that the trial court’s order denying the insurer’s motion for a new trial should be affirmed on the condition that the insureds file with this Court within twenty-one days a remittitur of damages in the sum of $3,000,000; otherwise, the judgment will be reversed and this cause remanded for a new trial.

AFFIRMED CONDITIONALLY.

JONES, ALMON and ADAMS, JJ., concur.

MADDOX, HOUSTON, and STEAGALL, JJ., concur specially.

SHORES and BEATTY, JJ., dissent.

TORBERT, C.J., recuses.

. On September 29, 1978, insureds (the Lavoies) brought an action against insurer alleging breach of contract and outrageous conduct. The trial court dismissed for failure to state a claim. On appeal, this Court reversed and remanded because it had "not foreclosed the possibility of recovery in tort for the bad faith refusal of an insurer to pay legitimate benefits due under an insurance policy.” Lavoie v. Aetna Life & Casualty Co., 374 So.2d 310, 312 (Ala.1979). On remand, the trial court granted insurer’s motion for summary judgment on the bad faith claim, and judgment was entered for the insureds on the two statements of the claim based upon contract. This Court again reversed and remanded to the trial court, because, on the same day, we recognized the intentional tort of bad faith in Chavers v. National Security Fire & Casualty Co., 405 So.2d 1 (Ala.1981). Lavoie v. Aetna Life & Casualty Co., 405 So.2d 17, 18 (Ala.1981). On remand, appellees’ bad faith claim was submitted to a jury. The jury awarded $3.5 million in punitive damages and $1,650.22 on the contract claim. The trial judge denied appellant’s motion for judgment n.o.v. or, alternatively, for a new trial. This Court affirmed. Aetna Life Insurance Co. v. Lavoie, 470 So.2d 1060 (Ala.1984). The insurer appealed to the United States Supreme Court. That Court vacated the decision and remanded to this Court because of its failure to order the recusal of one of the Justices participating in consideration of the case. Aetna Life Insurance Co. v. Lavoie, — U.S. —, 106 S.Ct. 1580, 89 L.Ed.2d 823 (1986).

. Mrs. Lavoie was insured as a dependent under a group policy of health and medical insurance issued by the appellant, Aetna Life Insurance Company.

.This denial occurred after Dr. Douglas wrote a letter to Thomas J. Stein, the Lavoies’ attorney at the time, which detailed Mrs. Lavoie’s medical problems and his reasons for admitting her for diagnostic tests and treatment. The letter was forwarded to Aetna. Upon receipt of the November 4, 1977, letter from Dr. Douglas, Brenda Harris called Tom Hutton. She noted on the letter Hutton's instruction to “maintain denial — if they act like they are going to file suit send back to him." No one from Aetna’s medical department was consulted. The nurses’ notes and patient's progress notes were not in the Lavoie file.

. This denial was made after consultation only with Hutton, even though Harris stated she had “again checked with our Medical Department on this matter.” Again, the progress notes and the nurses’ notes had not been obtained for the file.

. While the nurses' notes and progress notes had finally been included for consideration in the Lavoie file, the two letters from Dr. Douglas were not in the file reviewed by Dr. Swann.