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Volume 26, Number 4 (1996) reprinted by permission University of Memphis Law Review "Bad Faith" in Fact and Fiction: Ruminations on John Grisham's Tale About Insurance Coverages, Punitive Damages, and the Great Benefit Life Insurance Company ALAN I. WIDISS* the treatment. However, in response to many letters from Mrs. Black, Great Benefit has invoked several different grounds as the basis for denying coverage. The frustration and anger of Mrs. Black, who has been watching Donny Ray literally wasting away, is summed up in her statements: "Never missed a premium and never used the damned thing until Donny Ray got sick"1 and "They're a bunch of crooks."2 One of the central plots in the novel focuses on the lawsuit Rudy Baylor initiates on behalf of the Blacks against the Great Benefit Life Insurance Company.3 Mr. Grisham, exercising an author's license to embellish for dramatic effect, depicts conduct by Great Benefit's officers and employees that is more than sufficient to outrage the reader, as well as to satisfy even the most stringent of the standards articulated in judicial precedents for a determination that the fictional insurer acted in bad faith. "Dear Mrs. Black: On seven prior occasions this company has denied your claim in writing. We now deny it for the eighth and final time. You must be stupid, stupid, stupid!"4After several decades of bad faith claims litigation and increasingly comprehensive reviews of claims practices by state regulatory authorities, it is almost inconceivable that any senior employee of an insurer would ever write to a claimant: "You must be stupid, stupid, stupid!" Other actions of Great Benefit's officers and employees also seem to be almost a parody of claims practices. But, though there is a temptation to view the description of the claims practices as a caricature, actions by the fictional insurer's employees are grounded on procedures and coverage limitations that are used by hundreds of insurers. For example, deleting the final sentence of the eighth letter from Great Benefit to Mrs. Black transforms it into reasonable communication5 to a claimant who has repeatedly submitted requests for insurance benefits that the insurer has rejected, even were a court to subsequently determine that the company was not entitled to have denied coverage for the claim. "Dear Mrs. Black: On seven prior occasions this company has denied your claim in writing. We now deny it for the eighth and final time."6Similarly, in one of the prior letters to Mrs. Black, the denial was predicated on a preexisting condition clause in the insurance policy7 --a type of provision which is commonly employed by insurers providing health care or medical expenses insurance policies. Thus, the questions and problems described in this novel--confronted by the Blacks, Great Benefit, the attorneys, and the court--are present in the world we, the readers, actually inhabit. And, the suit on behalf of the Black family raises fundamental questions about the path we--lawyers, judges, and citizens throughout the nation--are traversing in the pursuit of justice through judgments which award millions of dollars in punitive damages8 when the actions of an insurance company are determined to be flagrant acts of bad faith.9 [The insurer] denies coverage on the grounds that Donny's leukemia was a preexisting condition, and therefore not covered. If Donny in fact has had leukemia for less than a year, then he was diagnosed four years after the policy was issued by Great Benefit.10The denial of coverage for the bone marrow transplant premised on a preexisting condition exclusion implicitly raises several significant questions for readers.11 Should insurers providing health care plans be permitted to exclude coverage for preexisting conditions? Why or why not?Distinguishing among applicants for insurance in order to decide whether to provide coverages, as well as the amounts to be charged, is the very essence of insurance underwriting. In general, the discrimination underwriters exercise in making such decisions is both necessary and acceptable.12 When an insurer does not distinguish among applicants for insurance even though there is a discernible factor that differentiates them as insurance risks, a disproportionately high percentage of applications will usually be submitted by individuals who are the less desirable risks.13 This phenomenon is known as "adverse selection," and there are numerous circumstances in which adverse selection may occur.14 Underwriters use information about the risk to be covered in order to evaluate (1) whether to accept an application for insurance, (2) whether to issue an insurance policy for the amount of coverage sought by an applicant, (3) whether to exclude or limit coverage for certain types of risks and losses, and (4) how much to charge for the coverage. For example, when life, accident, health, or disability insurance coverage is to be provided for an individual, in most circumstances underwriters are free to consider many factors--including an individual's age,15 occupation,16 lifestyle,17 and hazardous hobbies18 --in order to make actuarial projections about morbidity19 and mortality.20 Furthermore, underwriters are gener- ally permitted to differentiate individuals on the basis of existing medical conditions.21 Thus, applicants for health care insurance (or life insurance) are usually required to provide information about both current health and "health history" (that is, information about injuries and illnesses) of the individual(s) who will be insured if the application is accepted. Questionnaires, physical examinations, and tests are employed by underwriters to learn about the medical history (including the current health) and to provide a basis for predictions about the future health of indi- viduals. Health/medical care insurance policies commonly contain provisions excluding coverage for preexisting illnesses or conditions. These provisions are fully compatible with a basic tenet of insurance: an element of the unknown and unknowable in regard to whether something deleterious will happen is an essential attribute of all transactions in which an insurer agrees to be obligated to provide payments upon the occurrence of some event.22 Thus, for example, insurance for an individual's home cannot be secured after a fire has started. And, individuals usually cannot buy coverage for health care expenses for a serious disease or illness that has already developed. Preexisting condition provisions are employed by insurers to address the difficulties involved in ascertaining whether a health care plan is being sought by an individual in order to secure insurance for a medical problem that already exists.23 A lawyer reading The Rainmaker--especially one invited to comment about the novel--is frustrated by not having access to more facts about what happened when the medical care insurance policy was sold to the Blacks or the actual provisions in the insurance policy. Virtually nothing is related about the acquisition of the policy from Great Benefit, except that it was sold by a door-to-door solicitor who returned weekly to collect an $18 premium.24 Readers do not know what questions were asked on the application form, whether the Blacks were required to provide additional information (such as medical records) for underwriters to consider, or the coverage provisions in the insurance policy (including the terms in the preexisting condition exclusion). When there is a coverage dispute about the applicability of a preexisting condition exclusion because an illness is alleged to have existed prior to the inception of a medical care coverage, the result generally turns on whether symptoms were manifested prior to the inception of the policy.25 Courts have em- ployed a variety of tests or approaches in assessing whether something has been manifested, such as the following: (1) whether the insured was either aware or, in the exercise of reasonable care, should have become aware, of the condition,In most circumstances, the specific test applied by the court is related to the terms in the exclusion.26 There is nothing in the story related in The Rainmaker that suggests any manifestation of Donny Ray's illness occurred during the period of three to four years that passed after the purchase of the insurance policy before he began to have problems which led to the diagnosis of leukemia. Although the terms of the preexisting condition provision in the Great Benefit policy are not specified in the novel, virtually any test previously used by a court would not result in sustaining Great Benefit's decision to deny the claim of an insured who developed leukemia several years after a medical care insurance policy began to provide coverage. However, those precedents--which are based both on the terms in the applicable exclusion27 and the facts of each case, including the nature of the malady--might not be determinative. If the disease affecting Donny Ray in The Rainmaker had been an ailment that developed over a period of several years before symptoms were manifested, such as AIDS, a distinctly different set of considerations would apply to the coverage question. An HIV infection, which often has a very long latency period before an individual experiences any illnesses, is detectible by a blood test years before an individual becomes symptomatic.28 Were all of the facts about the Blacks and the insurance coverage in Mr. Grisham's novel exactly the same except that Donny Ray had AIDS and medical records showed that he was HIV positive when the Great Benefits policy was issued, the preexisting condition exclusion might preclude coverage. In this ituation, even if there were no manifestation of symptoms and Donny Ray did not need any treatment for the same four or five years, the denial of coverage by Great Benefit might be determined to be justified because the infection either was or could have been diagnosed before the medical care insurance policy went into effect; that is, the medical record of the blood test administered prior to the inception of the coverage would sustain the insurer's assertion that the exclusion applied because it only requires that the condition existed and the medical records indisputably show the infection either was or could have been diagnosed. Moreover, it is more than con- ceivable that courts will affirm actions by insurers which decline coverage for patients who have been insured for several years when the inception date for the coverage is after the HIV infection is known to have occurred.29 References in the novel to the preexisting condition provision appear to describe a clause that applies to any condition that existed, without regard to whether manifestations or diagnosis occurred before the coverage was purchased. Such a provision could state: This insurance policy does not provide benefits for an illness caused by or resulting from any condition that ex- isted, even if not diagnosed or manifested, prior to the effective date of this policy.This type of preexisting condition exclusion might present a court with a difficult assessment regarding its applicability to Donny Ray's leukemia and, possibly, a dispute about whether such a limitation should be enforced. Leukemia, as well as many other forms of cancer, develops over a period of months or years. Thus, if the etiology of leukemia and the extent of the cancer's development at the time when Donny Ray's disease was diagnosed involved a time period which experts agree would mean that the leukemia already existed at the inception of the Great Benefit coverage for the Black family members, technically this type of exclusion would apply. The effect of such an exclusion on an insured's right to coverage is, in my view, an excruciatingly difficult issue to resolve when a condition existed even though there were no symptoms and the con- dition was not diagnosed until after the policy was purchased. Courts frequently hold that freedom of contract means that an unambiguous and comprehensible provision in a contract will be enforced.30 The doctrines of contract law, which are based upon freedom of contract, developed primarily to govern transactions between individuals or entities of relatively comparable status. Insurance policies are frequently highly standardized contract forms and courts have sometimes applied different doctrines for such consumer transactions, rather than allowing the general rules of contract law to defeat coverage claims, when the public interest would be served by sustaining coverage.31 Many courts have included comments in opinions which recognize that the special nature of the insurance business means that these transactions are affected by a public interest and that the public interest should be considered by the courts when resolving a coverage dispute. In the course of the continuing nationwide debate on reforming health care in the United States, numerous proposals have been advanced that would forbid or restrict the use of preexisting condition provisions in health/medical care insurance policies.32 There is, in my view, a compelling case for such a prohibition in a legislatively mandated health care plan designed to ensure the delivery of medical care to everyone, even though it would either increase the premiums paid by other insureds or reduce the financial returns for investors in insurance companies which seek to produce profits for the stockholders.33 However, so long as such coverage limitations in medical/health care insurance policies are not subject to statutory restrictions, the use of preexisting condition provisions is not prohibited or restricted and, therefore, insurers should be permitted to predicate rejections of claims in accordance with the terms of such coverage limitations. al designed to ensure that employees in the claims department confer with individuals in other departments in the course of processing a claim are not unreasonable. The provisions in Great Benefit Life Insurance Company's claims manuals described in The Rainmaker--directing employees in each of the insurer's departments "to deny the claim pending further review" and instructing that the file be sent to the other department--produced an arrangement that could have ensured communications between departments. However, as the story develops, readers learn that something quite different was intended. In a conversation that occurs when Rudy Baylor is seeking information about Great Benefit's claim practices from another lawyer, Cooper Jackson (who previously sued Great Benefits on behalf of a client when the insurer denied coverage for surgery needed to correct a sinus condition "on the grounds that the lady had failed to disclose on her application the fact that she'd had an ovarian cyst removed five years before she bought the policy"34) tells Rudy Baylor: "Here's their scheme," he says, touching a box as if great mysteries are constrained therein. "The claim comes in and is assigned to a handler, just a low-level paper pusher. . . . The handler then orders the medical records for the past five years. The medicals are then reviewed. . . . The claims handler then sends the file over to underwriting, and underwriting sends a memo back to claims which says something like 'Don't pay this claim until you hear from us.' . . ."The approach to claims handling described by Mr. Grisham's fictional Cooper Jackson--"The manuals, when read together, direct each department to deny the claim, pending further review, of course, then send the file to the other departments with instructions not to pay until further notice"36 --might have been conceived by another novelist, Joseph Heller. For readers familiar with Yossarian's frustration with "Catch 22," the description by Cooper Jackson about the effect of the directives in Great Benefit's manuals seems all too familiar.37 Cooper Jackson believed that Great Benefit had decided not to pay any claims: "The average claim is ten thousand dollars. Five thousand times ten thousand is fifty million bucks. And let's say they spend ten million, just figure from the air, to settle the few lawsuits that pop up. They clear forty million with their little plot, then maybe the next year they start paying the legitimate claims again. Skip a year, go back to the denial routine."38If the analysis advanced by Cooper Jackson were correct, it would be clear that the executives of Great Benefit had contrived an outrageous plan to defraud its insureds. As the story develops in the novel, "evidence" about the procedures at the Great Benefit Life Insurance Company, which supports the bad faith claim in the suit by the Blacks, is compelling even though it does not confirm a practice, postulated by Cooper Jackson, of not paying any claims. During the trial, several elements in Cooper Jackson's assertions about Great Benefit's scheme are described in the testimony of a former employee, Jackie Lemancyzk. Ms. Lemancyzk, who says that she was fired just before she was scheduled to be deposed by Rudy Baylor and that she was paid "ten thousand dollars in cash to keep quiet,"39 testifies: "Yes. It was our policy to deny every claim initially, then review the smaller ones that appeared to be legitimate. We eventually paid some of those, but the big claims were never paid unless a lawyer got involved."Ms. Lemancyzk explained that some claims were paid. "It was commonly believed that no more than one out of twenty-five would talk to a lawyer. That's the only reason they started this experiment. They knew they could get by with it. They sell these policies to people who are not that educated, and they count on their ignorance to accept the denials."According to this testimony, when an insured sought assistance from an attorney, relatively small claims were then paid immediately by Great Benefit. Ms. Lemancyzk also thought larger claims "were almost always paid," and this seems to have been what occurred in the settlement of the suit in which the client represented by Cooper Jackson not only secured the insurance benefits but received an additional $ 200,000 to assure a confidential settlement.42 Mr. Grisham teases readers in regard to what actually were the claims practices of Great Benefit Life Insurance Company in 1991. In the novel, the trial judge granted a request that information about the claims experience of Great Benefit be provided to the plaintiffs and imposed sanctions because the information was not delivered prior to the beginning of the trial.43 When the material is delivered, Rudy Baylor is handed "a neat stack of documents an inch thick," and he finds that "it's in Greek and almost impossible to decode."44 After spending a half-hour looking at the "printout," he returns to the courtroom to question Everett Lufkin, the company's Vice President of Claims. Baylor asks the Claims Vice President: "What percentage of the claims would ultimately be denied?"45 Mr. Lufkin responds: "Around ten percent of all claims are denied. . . ."46 In the afternoon of the same day the printout was delivered, when Wilfred Keeley, the CEO of Great Benefit, is testifying, Rudy Baylor hands him the printout of the claims information and asks several questions: "Do you recognize that printout, Mr. Keeley? It's the one your company gave me this morning." "So the information is right there?"Readers never learn whether either Mr. Lufkin's statement--that "around 10 percent of all claims are denied"--or the figure "9,100" is correct. Perhaps the fact that the defense counsel for Great Benefit doesn't address how many claims were rejected in 1991 validates the implication embodied in Rudy Baylor's question: "Does the figure of 9,100 sound correct" for the number of claims denied by Great Benefit during 1991? One more witness testifies about the matter. Payton Reisky, the Executive Director of the National Insurance Alliance, is asked about the denial of claims by Great Benefit. Again, the protagonist describes Reisky's responses for readers: Great Benefit certainly had a high rate of denials in 1991, but there could be reasons for this. It's not unheard of in the industry. And you can't always trust the numbers. In fact, if you look at the past ten years, Great Benefit's average denial rate is slightly under twelve percent, which is certainly within the industry average. Numbers follow more numbers, and we're quickly confused, which is precisely what Drummond wants.Reisky's response that for the "past ten" years Great Benefit's average denial rate is "slightly under twelve percent" obfuscated the point by never focusing on 1991. Ultimately, the case is submitted to the jury on the basis of Ms. Lemancyzk's testimony, the innuendos embodied in the questions by Rudy Baylor that were never answered, and statements in the portions of a Great Benefit's claims manual that Cooper Jackson provided Rudy Baylor which were used very effectively in the examination of Mr. Lufkin, the Claims Vice President. Mr. Lufkin's responses are described for the reader by the protagonist. Paragraph three directs the claims handler to immediately deny every claim within three days of receiving it. No exceptions. Every claim. Paragraph four allows for the subsequent review of some claims, and prescribes the paperwork necessary to indicate that a claim might be inexpensive, very valid and therefore payable. Paragraph five tells the handler to send all claims with a potential value in excess of five thousand dollars to underwriting, with a letter of denial to the insured, subject to review by underwriting, of course.49Judicial decisions and legislative requirements clearly establish that insurers are obligated to avoid both irresponsible decisions not to pay claims and unwarranted delays in the payment of benefits provided by coverages such as health or medical payments insurance. Unless an insurer has good reasons for withholding the payment of insurance benefits, the insurer's conduct in doing so is likely to be viewed by a court as a breach of contract and, if sufficiently arbitrary or capricious, may warrant allowing a recovery by the claimant beyond the insurance benefits and interest thereon.50 Instructions directing employees of an insurer "to immediately deny every claim within three days of receiving it" would justify the harshest of sanctions by regulatory authorities51 or courts considering suits by aggrieved insureds. Moreover, judges have also concluded that employees of insurers are required to exercise the utmost good faith. For example, in the words of the New Jersey Supreme Court, "insurance policies are contracts of the utmost good faith and must be administered and performed as such by the insurer."54 Several factors differentiate many insurance transactions, especially those involving individual consumers, from other contracts, so that it is not surprising that courts have held that utmost good faith is required when claims are submitted to insurers. For example, many courts have included comments in opinions stating that insurance transactions are affected by a public interest and that the public interest should be considered by the courts when resolving a coverage dispute. Moreover, when an insurance company uses a standardized contract, which is developed by a large business firm such as an insurance company and used in substantially every transaction, it places an individual at a distinct disadvantage. Imposing the obligation of utmost good faith is deemed appropriate because of the superior position occupied by insurers.55 Advertising--by individual insurance companies and by the industry collectively--creates expectations56 that insureds will be treated fairly and justly by officers, employees, and agents of insurers. You're in good hands with Allstate.Some insurance companies even select names--such as Aid Insurance, American Family, Equitable, Guardian, Safeco, Secura--to conveying a sense that customers can and should trust their insurers. Accordingly, it is not surprising that when there are coverage disputes, judges often decide that insureds are entitled to "be worry free," to depend on the coverage provided by insurance companies,58 and to rely on the utmost honesty and forthrightness of persons processing claims.59 When insurers do not deal fairly with insureds in regard to the settlement of claims, the failure to fulfill this obligation often warrants the recovery of consequential damages, as well as the insurance coverage. Furthermore, courts in many states have concluded that not only is it a breach of contract when an insurer does not act fairly and in good faith, but the insurer also may be held liable for a tort of bad faith, which, in at least some circumstances, warrants an award of punitive damages.60 The transformation of a breach of contract into a tort of bad faith rests, at least in part, on recognition of the fact that remedies for breach of contract do not afford adequate protection for insureds when insurers wrongfully deny claims or adopt dilatory practices in response to claims.61 "It became a very different situation. If the claim was under five thousand dollars and legitimate, we paid it immediately with a letter of apology. Just a corporate mix- up, you know, that type of letter. Or maybe our computers were to blame. I've sent a hundred such letters. If the claim was over five thousand dollars, then the file left my hands and went to a supervisor. I think they were almost always paid. If the lawyer had filed suit or was on the verge of filing, the company would negotiate a confidential settlement."62Apparently, for individuals submitting claims to Great Benefit during 1991, lawyers were the difference between repeated denials of claims and payments, including the possibility of "a confidential settlement" that might amount to an additional several hundred thousand dollars (as it did for the client of Cooper Jackson63). The reprehensible acts, which deprived Donny Ray Black of a bone marrow transplant, created a basis for the bad faith claim asserted in the lawsuit, as well as for the aspirations of fame and fortune from the very first case his young protagonist litigates. Rudy Baylor was a more than competent attorney in the trial described by Mr. Grisham, albeit with some substantial assistance from the trial court judge. However, by the time the lawsuit reaches the courtroom, Donny Ray Black has already died, and his mother declares, when asked by Great Benefit's counsel what she would do with money awarded by the jury, that any recovery from the insurer will be donated to the American Leukemia Society.64 Thus, when the jury renders a judgment for the plaintiffs, including $50 million in punitive damages, Rudy Baylor is the only one who is personally interested in recovering a substantial sum from the insurer. The triumph is fleeting as the protagonist--and the reader--learns that the once prosperous Great Benefit may be bankrupt. At 5 p.m. Tuesday, lawyers for Great Benefit file for protection under the bankruptcy code in federal court in Cleveland. . . . There's a flicker of hope. Just last week Great Benefit's balance sheet looked stout enough to convince a jury it had fifty million bucks to spare. . . . Surely there's some truth in this. . . .Rudy Baylor's statement is poignant. Surely there must be "a spare million" for the lawyer. There is more than a little irony in that Rudy Baylor's opportunity for a huge fee developed from an interview with Mrs. Black as part of the course on Legal Problems of the Elderly in which Professor Smoot's lectures included "constant exhortations to forsake money and work for free."66 Rudy Baylor's aspirations were based on a contingency fee arrangement with the Blacks. Contingency fees facilitate litigations on behalf of individuals who cannot afford to pay the costs entailed in retaining attorneys for litigation of a claim. And the prospect of huge awards of punitive damages--to be shared by the attorneys--undoubtedly affords remedies for individuals "with no money to fight" decisions by insurers.67 However, such arrangements encourage lawyers to seek punitive damages even when the insurers appear to have done nothing worse than to carefully investigate the claims before payment was made or to raise appropriate issues about whether the coverage applied.68 It is an egregious wrong when an insurer irresponsibly or arbitrarily denies a valid claim. However, allegations of bad faith and unfair dealing coupled with demands for millions of dollars in punitive damages whenever an insurer does not im- mediately pay an insurance claim69 are not warranted and do not serve the interests of either the individual claimant70 or the public. Moreover, it is a flagrant departure from standards of professional responsibility for an attorney to make a claim of bad faith a "stock" pleading which is included whenever a coverage dispute arises without regard to whether there is a rational basis for such a claim. imposition of punitive damages and policyholders who subsequently will not be provided with insurance benefits they would have been entitled to receive.72 Thus, Mr. Grisham's tale ends where the travails of hundreds of others would begin. Courts and legislatures need to chart a careful course in weighing the legitimate and significant interest in the maintenance of a financially stable insurance industry against the goal of discouraging what has too often been clearly shown to be the wanton, callous, and even malicious or willfully unconscionable claims practices.73 Multimillion dollar awards have seemed essential in order to capture the attention of executives in corporate enterprises that have adopted detestable practices. However, huge amounts of punitive damages--in one case over $75,000,00074 --endanger the financial stability of individual insurance companies and the insurance industry (as a result of insolvency plans in many states requiring other insurers to contribute funds when there is an insolvency). Although corporations are often treated as if the "artificial person"--"created . . . under the authority of the laws of a state"75 --actually committed wrongful acts, a corporate entity's policies can only be conceived in the minds of its officers or directors and can only be executed through its employees or agents. Punitive damage judgments imposed on a corporation may not directly affect the individuals responsible for formulating a scheme such as that devised by executives at Great Benefit, and I believe another approach should be considered. Rather than focusing on reducing the net wealth or reserves of an insurance company, courts could impose sanctions on executives who devise or approve the type of outrageous scheme described by Mr. Grisham. Penalizing the executives of insurance companies would not jeopardize the interests of innocent employees and policyholders. To the extent that it would not be possible to preclude reimbursement, incarceration may be necessary in order to exact a penalty that will actually affect individuals.76 The prospects of personal liability or imprisonment might even produce more acts of the utmost good faith by the directors and executives who direct the acts of employees of insurers throughout the nation.77 Some ideas set forth in this article have been considered in other materials Professor Widiss has authored or co-authored. See ROBERT E. KEETON & ALAN I. WIDISS, INSURANCE LAW: A GUIDE TO FUNDAMENTAL PRINCIPLES, LEGAL DOCTRINES AND COMMERCIAL PRACTICES (1988); Alan I. Widiss, Obligating Insurers to Inform Insureds About the Existence of Rights and Duties Regarding Coverage for Losses, 1 CONN. INS. L.J. 67 (1995); Alan I. Widiss, To Insure or Not to Insure Persons Infected with the Virus that Causes AIDS, 77 IOWA L. REV. 1617 (1993). Author's note: I am particularly indebted to Ms. Angie Brock for the secretarial assistance that brought this Article to completion during a hectic period of several weeks in April of 1996, during which there were many, many drafts. The text has also benefited from the editorial suggestions of Ellen Widiss and Deborah Widiss. 1. JOHN GRISHAM, THE RAINMAKER 15 (1995). 2. Id. at 17. Mrs. Black adds: "They think we're just simple, ignorant trash with no money to fight 'em." Id. 3. With scenarios about the law and lawyers being the focus of so many novels and television scripts, with multimillion dollar judgments for punitive damages being awarded against some insurance companies, and with numerous stories in the nation's media about the reforms needed to assure access to health care, it was probably inevitable that there would be a fictional depiction of the effects of an insurance company's decision not to provide coverage for a potentially lifesaving therapy. 4. GRISHAM, supra note 1, at 16. 5. The insurer's decision still may not be a correct response to the Black's claim that the "medical care" insurance policy provided coverage for the bone marrow transplant. 6. GRISHAM, supra note 1, at 16. 7. See infra part I. Of the several coverage questions depicted in The Rainmaker, the preexisting condition issue is the most well developed by Mr. Grisham. And, in the late spring of 1996, discussions about such exclusions occupied center-stage in Congressional debates. 8. See infra parts IV-V. 9. See infra part III. 10. GRISHAM, supra note 1, at 16. 11. Other grounds for the insurer's decision are subsequently recounted as the story is developed in The Rainmaker. 12. Underwriting classifications are generally lawful so long as the distinctions are predicated on statistically significant actuarial data. 13. See, e.g., JAMES L. ATHEARN, RISK AND INSURANCE (1977); HERBERT DENENBERG ET AL., RISK AND INSURANCE 191-92 (1964). 14. See ROBERT E. KEETON & ALAN I. WIDISS, INSURANCE LAW §sections 2.3(c)(3) (life insurance binding receipts), 2.6(b) (group insurance), 8.6(c)(8) (life insurance for war risks, insurance for nuclear energy risks, and flood insurance) (1988). 15. Cf. NAIC, Medical/Lifestyle Questions and Underwriting Guidelines, 2 NAIC MODEL REG. SERV., July 1989, at 60-61. 16. Id. 17. Insurers are also permitted to specify exclusions so that no coverage is provided when an occurrence results from specified aspects of an insured's lifestyle. For example, some insurance policies do not provide coverage if a loss results from an individual's use of drugs or alcohol. See also Karen A. Clifford & Russel P. Iuculano, AIDS and Insurance: The Rationale for AlDS-Related Testing, 100 HARV. L. REV. 1806, 1808 (1987) (discussing the use of tobacco by an insured); cf. SOCIETY OF ACTUARIES, HEALTH INSURANCE PROVIDED THROUGH INDIVIDUAL POLICIES 58 (Edwin L. Bartleson, principal contributor, 1963). 18. For example, an insurer may either reject an application for coverage or include an exclusion for individuals who engage in various hazardous activities such as hang gliding, rock climbing, skydiving, or stock car racing. 19. "Morbidity" data refers to the incidence and severity of sicknesses or accidents among persons in a class or group. See JAMES L. ATHEARN, RISK AND INSURANCE 98 (1977). 20. "Mortality" refers to the length of time a person of any given age is predicted to live based on data compiled about a population. See BLACK'S LAW DICTIONARY 1009 (6th ed. 1990) ("A means of ascertaining the probable number of years any person of a given age and of ordinary health will live."). Mortality data is usually set forth in "actuarial tables showing the percentage of persons who die at any given age, compiled from statistics on selected population groups or former policy holders." RANDOM HOUSE DICTIONARY OF THE ENGLISH LANGUAGE 1252 (2d ed. unabridged 1987). 21. See S.S. HUEBNER & KENNETH BLACK, SELECTION, CLASSIFICATION, AND TREATMENT OF LIFE AND HEALTH INSURANCE RISKS IN LIFE INSURANCE (10th ed. 1982); see also HEALTH INSURANCE ASSOCIATION OF AMERICA, PRINCIPLES OF INDIVIDUAL HEALTH INSURANCE 119-44 (1974); R. MEHR ET AL., PRINCIPLES OF INSURANCE 657-59 (8th ed. 1985); EMMETT J. VAUGHN, FUNDAMENTALS OF RISK AND INSURANCE 96-98 (3d ed. 1982); C. WILL, LIFE COMPANY UNDERWRITING 6-19 (1974). 22. A prediction concerning potential loss, partly reasoned from things known and partly predicated on guesswork, is generally understood as the "risk" that is the basis of the computation of a premium which an insured pays to the insurer. 23. Consider Professor Jerry's comment in this collection of essays: "Preexisting condition clauses combat the fraud and concealment that would occur in the absence of such clauses." Robert H. Jerry, II, Health Insurance Coverage for High-Cost Health Care: Reflections on The Rainmaker, 26 U. MEM. L. REV. 1347, 1365 (1996). 24. Compare the description of "industrial" life insurance policies in KEETON & WIDISS, supra note 14, section 1.5(c)(2). Although "industrial" life insurance provides death benefits that usually are about what is needed for burial expenses, the marketing techniques and collection of weekly premium payments by the agent for the medical care policy described in The Rainmaker are quite similar to those used by insurers providing "industrial" life insurance. 25. In most circumstances, a preexisting condition provision excludes coverage for a sickness or illness which has manifested symptoms for which the individual sought medical care or symptoms that would have provided a basis for a diagnosis by a medical expert prior to the issuance of the policy. See generally John C. Williams, Annotation, Construction and Application of Provisions in Health or Hospitalization Policy Excluding or Postponing Coverage of Illnesses Originating Prior to Issuance of Policy or Within Stated Time, 94 A.L.R.3d 990 (1979). Also see Crossley v. State Farm Mutual Auto. Ins. Co., 415 S.E.2d 393 (S.C. 1992), which concluded that an insurer had a reasonable basis to contest coverage for medical benefits when an insured was diagnosed as suffering from coronary artery disease and angina the day after he completed the insurance application, and therefore, the insurer did not act in bad faith. In some instances, courts have sustained an insured's right to coverage when symptoms, manifested prior to the issuance of the policy, were not sufficient to permit a diagnosis of the condition. See, e.g., World Ins. Co. of Omaha, Neb. v. Pipes, 255 F.2d 464 (5th Cir. 1958) (applying Louisiana law). 26. Preexisting condition provisions are phrased in a variety of ways. The limitations in the following provision are representative of the type of provisions which commonly are included in such exclusions: This insurance policy does not provide benefits for any condition (illness, disease, injury, etc.) that either (a) within the 24 month period prior to the effective date of the coverage, was treated or diagnosed by a physician or (b) within 12 months prior to the effective date of coverage, produced symptoms that would have caused an ordinarily prudent person to seek a diagnosis or treatment.27. Consider the limitations in the exclusion set forth in supra note 26. 28. See sources cited in Alan I. Widiss, To Insure or Not to Insure Persons Infect- ed with the Virus that Causes AIDS, 77 IOWA L. REV. 1617, 1633-35 (1993). 29. Id. at 1714-19. 30. See generally KEETON & WIDISS, supra note 14, section 6.3(c). 31. See generally KEETON & WIDISS, supra note 14, at ch. 6 (Rights at Variance with Insurance Policy Provisions). See also Freidrich Kessler, Contracts of Adhesion--Some Thoughts About Freedom of Contract, 43 COLUM. L. REV. 629, 629-42 (1943). 32. See also Jerry, supra note 23, at 1365-66 ("Because the preexisting condition clause, and the gap in coverage it creates, is unlikely to disappear given the normal operation of ordinary market forces, governmental regulation of the clause is appropriate--specifically, regulation that would prohibit such clauses in health insurance policies, except for persons who are acquiring health insurance for the first time."). 33. Many group insurance plans providing health care coverage do not include preexisting condition exclusions. For example, several years ago the coverage limitation in the University of Iowa plan for the faculty and professional staff was eliminated. 34. GRISHAM, supra note 1, at 313. 35. Id. at 314-15. 36. Id. at 315 (emphasis added). 37. In Catch 22, Joseph Heller wrote: "Catch-22," Doc Daneeka answered patiently, when Hungry Joe had flown Yossarian back to Pianosa, "says you've always got to do what your commanding officer tells you to."JOSEPH HELLER, CATCH 22, at 58 (1955). 38. GRISHAM, supra note 1, at 316. 39. Id. at 359. 40. Id. at 361 (emphasis added). 41. Id. at 362 (emphasis added). In the course of consulting about coverage dis- putes during the past thirty years, more than once I have encountered patterns which suggest the claims practices depicted by Ms. Lemancyzk as being employed by the fictional Great Benefit Life Insurance Company may actually have been used by a claims department. "Fact" may, indeed, be more outrageous than "fiction." 42. GRISHAM, supra note 1, at 313. 43. Id. at 353. 44. Id. at 355. 45. Id. at 357. 46. Id. 47. Id. at 367-68 (emphasis added). 48. Id. at 377 (emphasis added). 49. Id. at 351 (emphasis added). 50. See the judicial decisions and commentaries cited in the following sections. 51. See KEETON & WIDISS, supra note 14, section 7.7 (Statutory Penalties for Nonpayment and Late Payment of Insurance Claims). 52. See RESTATEMENT (SECOND) OF CONTRACTS §205 (1981); 5 WILLISTON ON CONTRACTS §670, at 159 (3d Jaeger ed. 1961). See generally STEPHEN S. ASHLEY, BAD FAITH ACTIONS: LIABILITY AND DAMAGES (1984-1990) (1991 Supp.); WILLIAM M. SHERNOFF ET AL., INSURANCE BAD FAITH LITIGATION (1984); KEETON & WIDISS, supra note 14, sections 6.2, 7.8, 7.9; ROBERT H. JERRY, II, UNDERSTANDING INSURANCE LAW §25G (1987); Symposium on the Law of Bad Faith in Contract and Insurance, 72 TEX. L. REV. 1203 (1994). The special public interest in insurance contracts helps explain why "good faith" has come to mean something different in this context than in contract law generally. Two colleagues--Professors Steven J. Burton and Eric G. Andersen--have concluded that in several respects judges have deported from the "mainstream approach" when questions of good faith and bad faith are considered "in the area of insurance contracts." STEVEN J. BURTON & ERIC G. ANDERSEN, CONTRACTUAL GOOD FAITH 392 (1995). 53. Cf. Lawton v. Great Southwest Fire Ins. Co., 392 A.2d 576, 580 (N.H. 1978); deMarlor v. Foley Carter Ins. Co., 386 So. 2d 22, 24 (Fla. Dist. Ct. App. 1980). See also KEETON & WIDISS, supra note 14, sections 7.8, 7.9 (liabilities of insurer for emotional distress and economic losses beyond the contractual coverage, including attorney fees, for either "bad faith" or violation of the implied covenant of good faith and fair dealing). Nevertheless, when the facts indicate that the insurer's liability is "fairly debatable," courts have frequently concluded that the insurer does not commit a breach of the duty by not paying the insurance benefits and is not liable for either compensatory or punitive damages. Cf. Ledingham v. Blue Cross Plan for Hospital Care, 330 N.E.2d 540 (Ill. App. Ct. 1975), rev'd on other grounds, 356 N.E.2d 75 (Ill. 1976) (although the insurer was not entitled to deny coverage on the ground that the insured's illness was a preexisting condition, an award of punitive damages was not justified because the insurer's denial was made in good faith.). 54. Bowler v. Fidelity & Casualty Co. of N.Y., 250 A.2d 580, 587-88 (N.J. 1969). In Bowler, the court concluded that "good faith 'demands that the insurer deal with laymen as laymen and not as experts in the subtleties of law and underwriting.' In all insurance contracts, particularly where the language expressing the extent of the coverage may be deceptive to the ordinary layman, there is an implied covenant of good faith and fair dealing that the insurer will not do anything to injure the right of its policyholder to receive the benefits of his contract." Id. at 587-88 (citations omitted). 55. Cf. Dunford v. United of Omaha, 506 P.2d 1355, 1357 (Idaho 1973); Toevs v. Western Farm Bureau Life Ins. Co., 483 P.2d 682 (Idaho 1971); see also Kessler, supra note 31, at 629-42. 56. Courts throughout the country have also concluded it is appropriate to protect the "reasonable expectations" of policyholders. See KEETON & WIDISS, supra note 14, section 6.3 (Reasonable Expectations); JERRY, supra note 52, section 25D (The Doctrine of Reasonable Expectations); KEN ABRAHAM, DISTRIBUTING RISK: INSURANCE, LEGAL THEORY, AND PUBLIC POLICY (1986) (Judge-Made Law and Judge-Made Insurance). The doctrine of protecting reasonable expectations of insureds can appropriately be stated in the following way: In general, courts will protect the reasonable expectations of applicants and insureds regarding the coverage afforded by insurance contracts even though a careful examination of the policy provisions indicates that such expectations are contrary to the unambiguously expressed intention of the insurer.KEETON & WIDISS, supra note 14, section 6.3 (Honoring Reasonable Expectations). 57. The slogans and statements appeared in the Yellow Pages for Iowa City and the City of New York. Similar statements can be found in the Yellow Pages for cities throughout the United States, as well as on television and in the print media. 58. For example, the Arizona Supreme Court observed: "We hold, therefore, that one of the benefits that flow from the insurance contract is the insured's expectation that his insurance company will not wrongfully deprive him of the very security for which he bargained or expose him to the catastrophe from which he sought protection." Rawlings v. Apodaca, 726 P.2d 565, 571 (Ariz. 1986) (emphasis added). 59. Moreover, I also believe that the trust that insurers seek to engender among purchasers creates a relationship in which individuals can reasonably expect that when insurers are notified of an occurrence, the company will respond by clearly explaining what the insured needs to do in order to secure the payment of benefits and by paying the applicable insurance benefits or by explaining why insurance benefits will not be paid. If an insurer avoids paying insurance benefits by not providing relevant information to an insured, the company may fail to live up to the reasonable expectations that have been created in regard to the trust which they have sought to have reposed in them by consumers. See Alan I. Widiss, Obligating Insurers to Inform Insureds About the Existence of Rights and Duties Regarding Coverage for Losses, 1 CONN. INS. L.J. 67 (1995). 60. Caveat: Courts in several states have declined to recognize either a contractual claim or a tort of "bad faith" in regard to the conduct of an insurer in response to a first-party insurance claim. And, in some states, the courts have concluded that state legislation on unfair trade practices or claims settlement constitutes the exclusive remedy for bad faith conduct by an insurer in regard to the rejection or delay in the payment of an insurance claim--that is, the statutes preempt a court from recognizing a common law action and remedy. 61. The conceptualization of the theoretical foundation for liability claims for breach of such a duty has varied from state to state. The theoretical basis for claims against first-party insurers predicated on an insurer's violation of the implied-in-law duty of good faith and fair dealing can be related to an action sounding in either tort or contract. Judicial decisions sustaining recoveries by claimants over the past two decades include suits that have predicated on theories that the insurer committed (1) a breach of contract, (2) an intentional act, (3) a negligent tort, or (4) a wrong supporting a hybrid action that asserts breach of a contractual duty giving rise to tort liability which entitles an insured to both compensatory and punitive (exemplary) damages. See KEETON & WIDISS, supra note 14, section 7.9(b). 62. GRISHAM, supra note 1, at 362 (emphasis added). 63. Id. at 313. 64. Id. at 342 ("I don't want a dime of your stinking money."). 65. Id. at 425 (emphasis added). 66. Id. at 4. 67. Id. at 18 ("They think we're just simple, ignorant trash with no money to fight them."). 68. In far too many of the instances in which appellate courts have been asked to review allegations that an insurer inappropriately rejected an insurance claim and that the insurer's conduct constituted a failure to deal in good faith, the assertion of bad faith appears to have been made on the basis of the proverbial "wing and a prayer" because nothing appears in the court's description of the facts which would support such an award. 69. Cf. Roger C. Henderson, The Tort of Bad Faith in First-Part Insurance Transactions After Two Decades, 37 ARIZ. L. REV. 1153, 1182 (1995) ("There is no doubt that the tort of bad faith has had and will continue to have a terrific impact upon first-party insurers. In practically every lawsuit that is filed against an insurer providing first-party benefits there is a count seeking consequential and punitive damages."). 70. Some attorneys use the assertion of the bad faith claim to either enhance or create leverage for the settlement of the compensatory claim. As Professor Ken Abraham has observed, [e]ven a relatively low probability that a bad faith claim will be successful cannot be ignored, because the potential award to the successful claimant may be enormous. Consequently, the expected value of the entire claim becomes much less certain, and risk aversion on the part of the insurer may disproportionately increase the settlement value of the policyholder's claim.Kenneth S. Abraham, The Natural History of the Insurer's Liability for Bad Faith, 72 TEX. L. REV. 1295, 1314 (1994). 71. In the novel, Mr. Grisham suggests that Great Benefit's assets have been hidden through clandestine transfers of substantial funds from Great Benefit to a parent company, PinnConn. The bulk of PinnConn's stock is controlled by a group of American pirates operating in Singapore. . . .GRISHAM, supra note 1, at 426. However, it is important to realize that insurance companies do become insolvent without resources being skimmed by the manipulations of scoundrels in control of parent companies. 72. In the novel, according to the testimony of Ms. Lemancyzk, the experiment in denying all claims only occurred during 1991. 73. However, each year millions of insurance claims are processed expeditiously, and insurance benefits are promptly disbursed by insurers. 74. Cf. Fox v. Health Net, No. 219692 (Riverside County, California Superior Court, Dec. 23, 1993). The insurer deemed a bone marrow transplant "experimental" and refused to authorize the procedure. Following the insured's death, a jury awarded the insured's survivors $12,320,000 in compensatory damages and $ 77,000,000 in punitive damages. See 1993's Largest Verdicts, NAT'L L.J., Jan. 17, 1994, at S6. 75. BLACK'S LAW DICTIONARY 340 (6th ed. 1990). 76. If the type of scheme depicted by Mr. Grisham in The Rainmaker does not involve violations of existing criminal laws, legislatures should consider provisions that would result in significant penalties, including incarceration, for such conduct. 77. Attributing responsibility for acts of bad faith to a corporation, in effect, avoids requiring proof of who was actually responsible for actions that adversely affected a claimant. To the extent that requiring such proof is deemed too great a burden to allocate to aggrieved individuals, I would rather see vicarious liability for "bad faith" imposed on animate individuals, such as a vice-president for claims, rather than an inanimate, artificial person. |
