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Kelly v. Provident Life and Accident Insurance Co.

August 12, 2010


The opinion of the court was delivered by: Hayes, Judge


The matter before the Court is Defendant Provident Life and Accident Insurance Company's Motion for Summary Judgment. (Doc. # 106).


Plaintiff initiated this action relating to his own-occupation disability insurance policy with Defendant by filing his complaint on April 19, 2004. (Doc. # 1). Plaintiff alleged three claims: (1) rescission of an August 2001 settlement agreement ending prior litigation between the parties in this district; (2) breach of disability insurance contracts; and (3) breach of the implied covenant of good faith and fair dealing. Id. at ¶¶ 53-75. On August 13, 2004, this Court dismissed Plaintiff's claims with prejudice, holding Plaintiff's breach of contract and bad faith claims were barred by the statute of limitations and that Plaintiff's rescission claim failed to allege sufficient facts to establish undue influence pursuant to Odorizzi v. Bloomfield School Dist., 246 Cal. App. 2d 123, 130 (1966). (Doc. # 21 at 5-8). On October 16, 2007, the United States Court of Appeals for the Ninth Circuit reversed this Court's decision in an unpublished memorandum disposition, holding that the seven factors listed in Odorizzi were not the only factors which could support a claim for rescission based on undue influence under California law. (Doc. # 55 at 5). The Ninth Circuit also held that if Plaintiff could establish that he is entitled to rescission, this Court should equitably toll the statute of limitations on Plaintiff's breach of contract and bad faith claims. Id. at 7-8.

On remand, Defendant filed an answer (Doc. # 59) and the parties proceeded with discovery. The Magistrate Judge bifurcated discovery into two phases. (Doc. # 93, 94). The first phase was limited to discovery on the rescission claim. See id. Pursuant to the Magistrate Judge's orders, if Plaintiff's rescission claim survives summary judgment, the parties will then conduct the second phase discovery on Plaintiff's bad faith and breach of contract claim. Id. On October 8, 2009, the Magistrate Judge ordered Defendant to produce its Rule 30(b)(6) witness most knowledgeable about the underlying litigation for a second deposition because the witness was unprepared to answer questions about the prior litigation and settlement at the first deposition. (Doc. # 102). On November 4, 2009, Defendant objected to the order. (Doc. # 103). On November 30, 2009, Defendant filed its pending Motion for Summary Judgment. (Doc. # 106). On December 3, 2009, Plaintiff filed a Motion to Continue the Motion for Summary Judgment pursuant to Federal Rule of Civil Procedure 56(f). (Doc. # 108). On December 4, 2009, this Court ordered Plaintiff to respond to Defendant's objection to the Magistrate Judge's order. (Doc. # 110). On February 2, 2010, the Court overruled Defendant's objection and granted Plaintiff's Motion to Continue the Motion for Summary Judgment. (Doc. # 122). The Court ordered Defendant to make its Rule 30(b)(6) witness available for deposition before March 8, 2010 and set a briefing schedule for the Motion for Summary Judgment. Id. at 9. On April 20, 2010, Plaintiff filed an Opposition to the Motion for Summary Judgment. (Doc. # 143). Plaintiff also filed the Declaration of Plaintiff's Counsel, Aaron Markowitz, which describes a dispute over bifurcated discovery and states that Plaintiff seeks additional discovery concerning Defendant's adjusting practices because Defendant reversed its earlier position that bad faith was irrelevant to rescission and argued in support of its motion that it did not act in bad faith by terminating Plaintiff's benefits. (Doc. # 143-5). On April 26, 2010, Defendant filed a Reply, objections to some of the evidence Plaintiff submitted with his Opposition, and additional evidence in support of its motion. (Doc. # 153). On April 30, 2010, Plaintiff filed a Supplemental Response to the motion, objections to the evidence Defendant submitted with the Reply, and responses to Defendant's objections. (Doc. # 155). On June 18, 2010, the Court held oral argument. See Doc. # 157.


Defendant issued Plaintiff two own-occupation disability insurance policies in the early 1980s which provided a combined benefit of $5,500 per month. (Undisputed Fact # 1, Doc. # 143-7).*fn1 At the time he purchased the policies, Plaintiff sold insurance as a General Agent for General American Life Insurance Company. Kelly Decl., Doc. # 143-4 at ¶ 7. Pursuant to the disability policies, Plaintiff could claim total disability if he was unable "to perform the substantial and material duties of his occupation" and was "under the care and attendance of a Physician." Defendant's Ex. A, Doc. # 107-2 at 3; Defendant's Ex. B, Doc. # 107-2 at 18. In May of 1986, Plaintiff began seeing psychologist Russell Gold, Ph.D., who diagnosed Plaintiff with depression, dysthymic disorder, and schizoid personality disorder. (Undisputed Fact # 10, Doc. # 143-7). Dr. Gold attributed Plaintiff's condition to stress from contentious divorce proceedings. Id. Plaintiff filed a claim for complete disability in September of 1986. (Kelly Decl., Doc. # 143-4 at ¶ 17). Defendant accepted the claim and began paying benefits. Id. Plaintiff continued to see Dr. Gold for the thirteen-year period he received disability benefits from Defendant. (Undisputed Fact # 10, Doc. # 143-7).

In addition to paying benefits of $5,500 per month, in 1986 and 1987, Defendant paid Plaintiff's business expenses, such as rent for his office, salaries of employees, utilities, and accounting services. Plaintiff's Ex. 101 at 737-42.

While Plaintiff was on disability benefits, various insurance companies terminated their relationship with Plaintiff as an agent. In February of 1989, General American sent Plaintiff two letters warning him that his production for 1988 was insufficient and that if he failed to produce significantly higher commissions in 1989, his general agency would be terminated. Plaintiff's Exs. 5-6 at 11-12.*fn2 General American again warned Plaintiff that he was in danger of losing his general agency in April of 1990. Plaintiff's Ex. 14 at 30. In April of 1990, Aetna sent Plaintiff a letter terminating Plaintiff's appointment as an agent because Plaintiff had recently done "little or no business activity with the Aetna Life Insurance Company...." In November of 1992, General American "closed [Plaintiff's] General Agent contract... effective November 30, 1992." Plaintiff's Ex. 25 at 184. After Plaintiff's general agency was terminated, he could still write General American policies, but he had to go through the General Agent for his local area. Id. In June of 1993, Jackson National Life informed Plaintiff that it would "be unable to renew [Plaintiff's] contract due to inactivity for the past twelve months." Plaintiff's Ex. 26 at 185. In October of 1994, Blue Shield of California terminated Plaintiff's agency because Plaintiff failed to meet "minimum production requirements." Plaintiff's Ex. 31 at 247.

Over the course of Plaintiff's disability claim, Defendant investigated Plaintiff's medical condition and whether Plaintiff had returned to work on multiple occasions. In February of 1990, Defendant stopped paying Plaintiff benefits for a six month period, stating in a letter to Plaintiff's then attorney Harris Steinberg that Plaintiff failed to file his monthly claim forms. Defendant's Ex. I, Doc. # 107-2 at 64. Defendant stated that it had "recently learned information which, in our opinion, shows that not only is Mr. Kelly not totally disabled but, in fact, doing quite well and working in his occupation as an insurance agent." Id. at 65. Defendant stated it would resume payment of benefits "subject of course, to continued proof of disability." Id. In response, Steinberg sent a letter which stated:

Mr. Kelly is not involved in any current work activities. As you know, Mr. Kelly is the principal in an insurance agency and has kept the agency open for purposes of collecting the renewal commissions which he is entitled to for work done in previous years on behalf of several different insurance companies. Additionally the office is being kept open as a result of lease obligations on which Mr. Kelly has personal liability in addition to servicing the accounts of his prior customers....

Mr. Kelly has not returned to work. He did briefly attempt to resume some of his duties in February of this year, but found himself frustrated, stressed, and unable to resume his previous occupation and duties.... Mr. Kelly has, as a courtesy to existing clients, serviced isolated insurance accounts which required conversions of coverage from the term coverage to whole life coverage at the insured's request or in one or two instances [added] additional coverage [] to existing policies....

Mr. Kelly has advised me that Provident Life recently offered to pay him oneyear's worth of disability benefits (60,000) to resolve his claim. Please be advised that Mr. Kelly formally rejects this offer and wishes his benefits to continue as promised under the policy on a "monthly" basis for the remainder of his disability Lastly, while you pursue your "investigation" of this claim, I must insist that all monthly disability payments be made promptly and that all past monthly disability payments be brought current forthwith.

Plaintiff's Ex. 18 at 45. Enclosed with the letter, Steinberg sent over a hundred pages of business records showing Plaintiff's transactions during the disability period. Id. at 46-162.

In his declaration, Plaintiff states:

Early in my disability, when I was first contacted by an existing client to make an adjustment to his insurance coverage, I contacted Provident at their local office. I spoke to one of their representatives and explained the situation. I explained that I was out on disability and was collecting benefits on an "own occupation" disability policy. I asked if performing the limited work [of modifying an existing client's coverage, adding coverage, or switching to a new insurance type] would disqualify me for continued benefits. I was told it was not.... I have always been open and honest with Provident about the work I was doing. (Kelly Decl., Doc. # 143-4 at ¶¶ 21-22).

Defendant also contacted Dr. Gold, seeking additional information about Plaintiff's condition. Plaintiff's Ex. 19. In the letter dated October 28, 1990, Defendant revealed it has covertly videotaped Plaintiff's activities "over a period of four (4) separate days between May 23, 1990 and June 28, 1990" and sought Dr. Gold's explanation of "why [Plaintiff's] activities in the videotape make it appear that he leads a normal life and is not disabled." Id. at 163-164.

The letter also requested a list of "objective symptoms" of Plaintiff's psychological conditions. Id. at 163. In a response dated February 6, 1991, Dr. Gold detailed the history of Plaintiff's case, described Plaintiff's difficulties with interacting with other people, particularly face to face, his social isolation, depression, excessive sleeping, abusive family background, and stress from his divorce, and concluded that Plaintiff "cannot perform a significant number of the usual and necessary responsibilities of an insurance agent." Id. at 164-167. As to the videotape, Dr. Gold stated he does not "believe anything in the videotape contradicts the statements made herein." Id. at 168. Dr. Gold notes Plaintiff "has always maintained the capacity to perform errands and menial daily functions in order to live autonomously. Had he ever not been able to function at this minimal level, he would have been hospitalized." Id.

A report sent by the investigator to Defendant in June of 1990 shows that Plaintiff went to his insurance office once during the four days of surveillance. Plaintiff's Ex. 16 at 33-39. It is not clear how long Plaintiff remained in his office, because ten minutes after Plaintiff arrived at his office, Defendant instructed its private investigator "to terminate the investigation at this time since it did appear Mr. Kelly was at work." Id. at 37. Plaintiff was also observed running errands and performing chores during the surveillance period. Id. at 39.

In August 1990, Defendant resumed payments after receiving the letter from Steinberg. Kos*fn3 Decl., Doc. 106-3 at ¶ 13. On December 11, 1990, Dr. Gold submitted a form to Defendant which stated Plaintiff's disability was "permanent and stationary." (Undisputed Fact # 16, Doc. # 143-7). On April 3, 1991, Defendant asked Plaintiff "to submit to an Independent Medical Examination ("IME") by Stephen Stahl, M.D., Ph.D., a psychiatrist who was on the faculty of UCSD Medical School" and sought to send Plaintiff for psychological testing. Kos Decl., Doc. # 106-3 at ¶ 15. Around the same time, Defendant offered to settle the disability claim for $200,000. See Plaintiff's Ex. 21 at 172 (Letter from Defendant to Steinberg dated April 22, 1991). Defendant rejected Plaintiff's counteroffer of $431,000. Id. On June 7, 1991, Steinberg sent a letter to Defendant asserting further examination of Plaintiff would damage his psychological health and was unnecessary. Plaintiff's Ex. 22 at 174. However, Plaintiff did submit to the psychological testing on August 14, 1991, and the results were forwarded to Dr. Stahl on September 11, 1991. Kos Decl., Doc. # 106-3 at ¶ 16; Defendant's Ex. K, Doc. # 107-2 at 76. Dr. Stahl also examined Plaintiff. Defendant's Ex. K, Doc. # 107-2 at 76-77.

Dr. Stahl's report concluded Plaintiff was suffering from dysthymia, or low-grade depression, as well as "mixed personality disorder with schizoidal and passive aggressive features" at the time of the examination and that Plaintiff had previously experienced a major depressive episode brought on by his divorce which was then in remission. Id. Dr. Stahl concluded Plaintiff was temporarily totally disabled at the very least from November of 1990 until the time of my final evaluation on September 25, 1991. Dating the exact onset of his temporary total disability is difficult because of the impossibility of getting reliable information from Mr. Kelly. In the absence of better information, I would tend to rely on Dr. Gold's assessment and date the onset of total disability to be 1986, when Mr. Kelly stopped working. Dating the recovery of total disability with return to the baseline state of partial long standing disability is clearer. Mr. Kelly was already recovering notably from his major depression at the time of his first interview with me in May, 1991, but was still temporarily totally disabled. By the time of his final interview, Mr. Kelly was no longer totally disabled.

Mr. Kelly is currently able to perform the substantial and material duties of his usual occupation. However, he has no interest in doing so. In fact, hearing this opinion that he is able to work again will undoubtedly anger Mr. Kelly and could precipitate various hostile acts towards various parties including himself.

Mr. Kelly has made vague references to shooting himself if he does not get his own way, which is to continue totally disabled indefinitely. Such implicit threats, however, do not change the objective assessment of temporary total disability, which are from 1986 to September 1991.

Id. at 76-78.

Despite this finding, Defendant continued to pay benefits. Kos. Decl. Doc. # 106-3 at ¶ 17. Kos states in his declaration that this was because Defendant learned that "Dr. Stahl had once been investigated... for an alleged impropriety in connection with a professional publication, Provident chose to forego any action based on Dr. Stahl's IME report. Again, given the potential for questions regarding Dr. Stahl's credibility, Provident chose to give Kelly the benefit of the doubt." Id.

In February of 1995, Provident informed Plaintiff that it had "recently completed a comprehensive review of your claim and have determined that it will only be necessary for you and your Attending Physician to complete an 'Insured's Supplementary Statement of Claim' form 4 times per year." Plaintiff's Ex. 36 at 280. In 1997, however, "Provident... began another investigation." Kelly Decl., Doc. # 143-4 at ¶ 40. Kos states the investigation revealed Kelly was still licensed to sell insurance and that he had income "for all but two years during the period from 1986 to 1996." Kos Decl., Doc. # 106-3 at ¶ 20-21. In May of 1997, Defendant also had a second IME with Dr. Alan S. Bergsma, M.D., a psychiatrist and additional psychological testing. Id. at 22; Defendant's Ex. P, Doc. # 107-2 at 103.

In his report dated May 27, 1997, Dr. Bergsma concluded that Plaintiff was suffering from Dysthymic disorder and a "mixed character disorder with schizoid features." Defendant's Ex. P, Doc. # 107-2 at 118. Dr. Bergsma concluded that Plaintiff had previously suffered from a major depressive episode from 1986 through 1991 which was in remission at the time of the examination. Id. Dr. Bergsma states that the "diagnosis of personality disorder refers to a chronic pattern of behaviors which interfere with his ability to function socially and interpersonally [which] also affect his occupational behavior." Id. Dr. Bergsma concluded that Plaintiff's mood disorder does not intrude into his life any more than it did when he was employed as an insurance salesman. Similarly, his personality disorder with all of its difficulties is a baseline pattern of functioning which has been present throughout his adult lifetime. There is no more reason to believe that it now would preclude him from functioning in his occupation of insurance salesman than it did in the past....

Returning to work as an insurance person would be difficult for Mr. Kelly now, just as it was in the past. He was always more task than people-oriented. His disability benefits enable him to avoid interpersonal stresses to a large degree.

Id. at 118-120. The report does not state the standard Dr. Bergsma used for determining whether Plaintiff was totally disabled. Id. Defendant continued to pay benefits after receiving this report. See Defendant's Ex. X, Doc. # 107-3 at 82.

In July of 1997, Defendant sent a field investigator, Lorenz E. Blochl, to Plaintiff's residence. See Defendant's Ex. R, Doc. # 107-3 at 1; Kelly Decl., Doc. # 143-4 at ¶ 40. Plaintiff refused to allow the investigator into his house and gave very short answers to questions. Id. The investigator's report commented on Blochl's estimate of the price of Plaintiff's home ($600,000-$700,000), the landscaping, pool, and the make of a car in Plaintiff's garage (a Mercedes). Defendant's Ex. R, Doc. # 107-3 at 2.*fn4 The report also noted that assets, including the house, cars, and Wobegone Enterprises, a company Plaintiff founded, were held in Plaintiff's wife Anna's name, not his own name. Id. Blochl interviewed Plaintiff's ex-wife Wanda, who stated Plaintiff threatened to go on disability if she filed for divorce, that Plaintiff abused her, that Plaintiff went to Europe with another woman while on disability, and that Plaintiff faked his depression. Defendant's Ex. T, Doc. # 107-3, 8-9.

Defendant also obtained business records from Plaintiff's former employer, General American Life Insurance Company, which had allowed him to continue writing policies after terminating his general agency in 1992. Defendant's Ex. U, Doc. # 107-3 at 10-11. The records provided by General American showed total commissions by Plaintiff's company, Kelly Insurance Services, which changed its name to Wobegone Enterprises in 1997, ranging from approximately $88,000 to $185,000 per year from 1991 through 1998. Id. at 159. Kos states these records "confirmed for the first time that Kelly was working, and receiving income from activities other than mere 'renewals' and 'sporadic courtesy services' during the entire period of his claimed disability." Kos Decl. Doc. # 106-3 at ¶ 31. The records do not state how many transactions Kelly performed in these years or how these sales compare to other agents. A letter from General American in 1994 informs Plaintiff that as of October, Plaintiff had only met 2.8% of his yearly sales goals. Plaintiff's Ex. 32 at 248; Kelly Decl., Doc. # 143-4 at ¶ 38. Plaintiff states that over the course of the thirteen year period he received benefits, he sold 54 policies to 19 clients, "all but two [of whom] were clients that I had prior to going on disability." Kelly Decl., Doc. # 143-4 at ¶ 48. Plaintiff states "more than three-quarters of the first year commission income that I earned between 1991 and 1998 came from only one client, which was a client I had before my disability." Id. After Plaintiff's general agency with General American was terminated in 1992 because of poor sales performance, he was assigned to the general agent for his geographical area, Thomas Gore. Kelly Decl., Doc. # 143-4 at ¶ 37. All of Plaintiff's work after 1992 went through Gore's office. Id. Defendant also sent an inquiry to Gore, who stated in response that although he had a business relationship with Plaintiff for "7-8 years," he had "never met [Plaintiff] personally. We've only spoken by phone." Plaintiff's Ex. 71 at 399. Gore stated Plaintiff was generating "3-5 policy sales [per year]. Virtually all are repeat sales to existing customers." Id. at 400. Gore stated he spoke to Plaintiff "[p]erhaps 10-12 times per year." Id. Defendant received that letter on February 4, 1999. Id.

In early 1999, Defendant also contacted other insurance companies which had relationships with Plaintiff prior to his disability claim. CPIC Life Insurance Company responded to Defendant's inquiries by stating Plaintiff and Wobegone Enterprises were on "Inactive Status," and that Plaintiff had not submitted any new business or earned any commissions since 1991. Plaintiff's Ex. 70 at 381-82. Safeco Life Insurance Company informed Defendant that Plaintiff and Wobegone were on inactive status and that Plaintiff's agency had been cancelled in April of 1993. Id. at 383. In response to a similar inquiry, Executive Life Insurance informed Defendant that it had no record on file of Plaintiff and did not do any business with him. Id. at 385. Guarantee Life Insurance also could not find any record of Plaintiff as an agent and stated that although Wobegone was an agent, "we also have no indication (on our records) that Wobegone Enterprises continues to be active with us." Id. at 388-89. Massachusetts Casualty informed Defendant that Plaintiff had been on inactive status since January of 1985 and that it had never done business with Wobegone. Id. at 390. Chubb Sovereign Life Insurance stated it had terminated Plaintiff as an agent in 1995 and had not done business with Wobegone. Id. at 391.

Defendant did not contact Plaintiff's wife to determine her involvement in Wobegone Enterprises. In a declaration, Plaintiff's wife Anna Kelly states:

Shortly after we were married [in 1991], Richard gave me his company.... Since 1991, Richard's association with [the company] has been very limited due to Richard's disability.... Prior to me obtaining my insurance license [in 2001], Richard maintained his license so that we could sell insurance ...

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