Claims and Bad Faith Law Blog

Focus on Fiduciary Duty: .......

                        Let Those Who Have Eyes to See, Let Them See.

     A recent newspaper report is based mostly on an interview with an academic who, some two decades past, furnished a theoretical basis for large compensation for CEOs.   He now has a book soon to be published, which may be one occasion for the interview.  In the interview, he is presented as not approving the status quo.

    In particular, this person singles out "compensation committees" of corporations responsible for obtaining corporate CEOs and providing them with compensation.   There is a "hidden scandal," he is quoted as saying, in which compensation committees sign contracts with CEOs which so favor the CEOs that they cannot be fired even for, shall we say, lack of positive corporate results.  This "hidden scandal" involves breach of fiduciary duty by those compensation committees, in his opinion quoted in the newspaper report.  See Louis Uchitelle, "Revising a Boardroom Legacy/An Early Advocate of Paying Chiefs Well Now Wants Them to Prove They Earned It" Page C1, Col. 2 (New York Times Nat'l Ed., Friday, September 28, 2007).

     Fiduciary duties appear in many relationships, too many to account for in one small space such as this post.  There are chapters of books in which fiduciary duties are analyzed and outlined, but there are few books devoted to that subject alone.  See generally and for example Dennis J. Wall, "Litigation  and Prevention of Insurer Bad Faith" Chapters 3 & §§ 3.26-3.30  (Thomson-West Publishing  Co.  Second Ed., 2007 Supplement).

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Other Kinds of "Bad Faith": "Case-Terminating Sanctions".

       A "terminating sanction," meaning a default judgment entered against a Defendant or an order of dismissal of a Plaintiff’s lawsuit, also involves a kind of Bad Faith. Such a step "is very severe.... Only ‘willfulness, bad faith, and fault’ justify terminating sanctions.” Connecticut General Life Insurance Co. v. New Images of Beverly Hills, link here to the officially posted version of this Opinion:  Ninth Circuit Link   (9th Cir. Case No. 04-55859 Opinion Filed March 30, 2007). The Federal appellate court affirmed the entry of terminating sanctions in this case, in pertinent part as follows:

The record in this case, as we have discussed, amply supports sanctions. In deciding whether to impose case-dispositive sanctions, the most critical factor is not merely delay or docket management concerns, but truth.

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Bad Faith and Punitive Damages.

     The most recent reported decision on the assessment of Punitive Damages in a case of Insurer Bad Faith was reported yesterday, as this is posted: 
Merrick v. Paul Revere Life Insurance Co. (9th Cir. Case Nos. 05-16380, 05-17059, Opinion Filed Friday, August 31, 2007).  There was a major assessment of Punitive Damages in that case, which the Ninth Circuit totally vacated, remanding "for a new trial on punitive liability."   Slipsheet Opinion above at 11129-30.

     The Merrick case involved a jury verdict and a judgment awarding $1,650,000.00 in compensatory damages, and assessing two separate amounts of punitive damages totaling $10,000,000.00 against Paul Revere ($2,000,000.00) and against Unum Provident ($8,000,000.00) which merged with Paul Revere.  Id. at 11113.   The Federal District Judge thereafter denied the Defendant Insurance Companies' post-Trial motions and awarded the Plaintiff attorney's fees in the amount of $500,000.00.  Id. at 11119.

     The Plaintiff was the Policyholder of a disability policy purchased from Paul Revere.  Paul Revere initially made disability payments under the  insurance policy.  After Unum Provident merged with Paul Revere, the disability payments ceased and the Policyholder's disability claim was denied.  The Policyholder filed suit in Nevada for breach of contract and of the duty of Good Faith and Fair Dealing.  Id.  at 11113-11116.

     The proof of Coverage Denial, Bad Faith, and Punitive Damages all rested on a theory of the case that the Insurance Company Defendants pursued a scheme to "scrub" themselves and their liability for expensive disability policies like the one at issue in this case.  "Merrick [the Policyholder] relied largely upon the testimony of ... an insurance industry expert, who testified regarding Unum Provident's allegedly aggressive and unethical claim-closing practices."   Id. at p. 11117.    Under Nevada law regarding Punitive Damages in particular, the standard of proof is clear and convincing evidence.  The burden of proof is to show that Punitive Damages should be assessed because the Defendant engaged in oppression, fraud, or malice.  Id. at 11120.  The Ninth Circuit wrote:  "Here, the jury could have concluded that by subjecting Merrick's claim to improper claim-scrubbing procedures, the insurers 'undertook an intentional course of conduct designed to ensure the denial' of the claim."  Id. at 11120.

     The Plaintiff's-Policyholder's proof in the Merrick case was based upon "a decade of allegedly improper claims handling practices at Provident."  Id. at 11123.  In essence, that was enough to prove Bad Faith and to sustain an award of compensatory damages in the District of Nevada and in the Ninth Circuit.  It was not enough in the eyes of the Ninth Circuit to sustain the assessment of Punitive Damages in the Merrick case, however.

     The assessment of Punitive Damages in the Merrick case ran afoul of the recent United States Supreme Court decision in Philip Morris USA v. Williams, 127 S. Ct. 1057 (2007).  One of the holdings in the Williams case was that Punitive Damages are unconstitutionally assessed if there is no proof and no limitation on jury consideration of harm to parties.  Williams, 127 S. Ct. at 1063.  The claim in Merrick was based upon the alleged bad conduct of bad people or at any rate of bad companies, and the Ninth Circuit was not able to hold that there was sufficient proof or a limitation on jury consideration of harm to Merrick, the Plaintiff and the Policyholder in that particular case.  "We therefore conclude that the district court erred in failing to instruct the jury that it could not punish the defendants for conduct that harmed only nonparties."  Id. at 11128.

     In sum, the Williams decision of the Supreme Court has the effect of separating the proof of Bad Faith from the proof that is required by the United States Constitution for the assessment of Punitive Damages.  They are governed by separate standards, and clear and convincing proof is not enough to support an assessment of Punitive Damages after Williams and Merrick, even where a violation of Good Faith and Fair Dealing may be proven.
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