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Richard Howard Kelly v. Provident Life and Accident Insurance Company Et Als

July 8, 2011

RICHARD HOWARD KELLY,
PLAINTIFF,
v.
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY ET ALS.,
DEFENDANTS.



The opinion of the court was delivered by: Hon. Anthony J. BattagliaU.S. District Judge

ORDER DENYING DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT [Doc. No. 178.]

Before the Court is Defendant Provident Life and Accident Insurance Company's ("Defendant" or "Provident") motion for partial summary judgment. (Dkt. No. 178.) Provident seeks summary judgment on the issues of the breach of the covenant of good faith and fair dealing (also characterized as insurance bad faith)*fn1 and punitive damages. Plaintiff Richard Kelly ("Plaintiff") filed an opposition on June 7, 2011, and Defendant filed a reply on June 21, 2011. After a review of the motion papers, supporting documents, and the applicable law, the Court DENIES Defendant's motion for partial summary judgment.

Background

Plaintiff, having purchased two disability income policies from Provident, filed a complaint alleging 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. (Dkt. No. 1.) Plaintiff also seeks punitive damages.

(Id.) On August 13, 2004, District Judge William Q. Hayes granted Defendant's motion to dismiss and dismissed Plaintiff's complaint 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 Sch. Dist., 246 Cal. App. 2d 123, 130 (1966). (Dkt. No. 21.) On October 16, 2007, the Court of Appeals for the Ninth Circuit reversed the Court's decision in an unpublished memorandum disposition, holding that the seven factors listed in Odorizzi were not the only factors which could support a claim for rescission based on undue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. (Dkt. No. 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 and the parties proceeded with discovery. The Magistrate Judge birfurcated discovery into two phases. (Dkt. Nos. 70, 88, 93.) The first phase was limited to discovery on the rescission claim. (See id.) If Plaintiff's rescission claim survived summary judgment, the parties would then conduct the second phase of discovery on Plaintiff's breach of contract and bad faith claims. (Id.)

On November 30, 2009, Defendants filed a motion for summary judgment on the rescission claim. (Dkt. No. 106.) On August 12, 2010, District Judge Hayes issued an Order denying Defendant's motion for summary judgment. (Dkt. No. 106.) Discovery proceeded as to the second phase. On March 10, 2011, the case was transferred to the undersigned judge. (Dkt. No. 173.) On April 25, 2011, Defendant filed a motion for partial summary judgment as to the claims for breach of the implied covenant of good faith and fair dealing, and punitive damages. (Dkt. No. 178.) Plaintiff filed an opposition on June 7, 2011. (Dkt. Nos. 186-90.) Defendant filed a reply on June 21, 2011. (Dkt. No. 198.)

Factual Background*fn2

Defendant issued Plaintiff two "own-occupation" disability insurance policies in the early 1980s which provided a combined benefit of $5,500 per month. At the time he purchased the policies, Plaintiff sold insurance as a General Agent for General American Life Insurance Company. 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." In May of 1986, Plaintiff began seeing psychologist Russell Gold, Ph.D., who diagnosed Plaintiff with depression, dysthymic disorder, and schizoid personality disorder. Dr. Gold attributed Plaintiff's condition to stress from contentious divorce proceedings. Plaintiff filed a claim for complete disability in September of 1986. Defendant accepted the claim and began paying benefits. Plaintiff continued to see Dr. Gold for the thirteen-year period he received disability benefits from Defendant. 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.

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. General American again warned Plaintiff that he was in danger of losing his general agency in April of 1990. 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." 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. 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." In October of 1994, Blue Shield of California terminated Plaintiff's agency because Plaintiff failed to meet "minimum production requirements."

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 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." Defendant stated it would resume payment of benefits "subject of course, to continued proof of disability." 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 one-year'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.

Enclosed with the letter, Steinberg sent over a hundred pages of business records showing Plaintiff's transactions during the disability period.

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.

Defendant also contacted Dr. Gold, seeking additional information about Plaintiff's condition. 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." The letter also requested a list of "objective symptoms" of Plaintiff's psychological conditions. 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." As to the videotape, Dr. Gold stated he does not "believe anything in the videotape ...


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