Aetna Life Insurance Co. v. Lavoie

475 U.S. 813 (1986)

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Nature of the Case

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Facts

D issued an insurance policy covering Margaret and Roger Lavoie (Ps). P was examined by her physician, Dr. Douglas, because of various ailments. Dr. Douglas recommended that she be admitted to the hospital, where she remained for 23 days for a battery of tests. The hospital forwarded the appropriate forms and medical records along with a bill for $3,028.25 to D. D refused to pay the entire amount, tendering payment for only $1,650.22. The local office also sent a letter to the national office, concluding that the 23-day hospitalization was unnecessary and that '[hospital] records do not indicate anything to the contrary,' even though all the hospital records had not yet been received. The national office told the local office to continue denying the request for full payment but added that 'if they act like they are going to file suit,' the file should be reviewed. Ps sued D seeking both payment of the remainder of their original claim and punitive damages for the tort of bad-faith refusal to pay a valid claim. On remand, the trial court entered judgment for Ps on the unpaid portion of their claim and granted summary judgment for D on the bad-faith claim. The Alabama Supreme Court again reversed, explaining that on that same day it had 'recognized the intentional tort of bad faith in first-party insurance actions.' Ps' bad-faith claim was submitted to a jury. The jury awarded $3.5 million in punitive damages. The trial judge denied D's motion for judgment n.o.v. or, alternatively, for remittitur. The Alabama Supreme Court affirmed the award in a 5-to-4 decision. Although earlier opinions of the court had refused to allow bad-faith suits in such circumstances, partial payment was now deemed not dispositive of the bad-faith issue. The court rejected D's argument that the punitive damages award was so excessive that it must be set aside. D filed a timely application for rehearing. On February 14, 1985, before its application had been acted on, D learned that while the instant action was pending before the Alabama Supreme Court, Justice Embry, one of the five justices joining the per curiam opinion, had filed two actions in the Circuit Court for Jefferson County, Alabama, against insurance companies. Both of these actions alleged bad-faith failure to pay a claim. One suit arose out of Maryland Casualty Company's alleged failure to pay for the loss of a valuable mink coat; the other suit, which Justice Embry brought on behalf of himself and as a representative of a class of all other Alabama state employees insured under a group plan by Blue Cross-Blue Shield of Alabama (including, apparently, all justices of the Alabama Supreme Court), alleged a willful and intentional plan to withhold payment on valid claims. Both suits sought punitive damages. D moved challenging Justice Embry's participation in the court's December 7, 1984, decision and his continued participation in considering D's application for rehearing. D also alleged that all justices on the court should recuse themselves because of their interests as potential class members in Justice Embry's suit against Blue Cross. Those motions were denied. On March 20, 1985, D obtained a copy of the transcript of Justice Embry's deposition, taken on January 10, 1985, in connection with his Blue Cross suit. The deposition revealed that Justice Embry had authored the per curiam opinion in this case over an 8- or 9-month period during which his civil action against Blue Cross was being prosecuted. Justice Embry revealed frustration with insurance companies. D appealed and the Supreme Court granted certiorari. Justice Embry's suit against Blue Cross was settled by stipulation and Justice Embry received $30,000 under the settlement agreement on a basic compensatory claim of unspecified amount; a check for that sum was deposited directly into Justice Embry's personal account.