Question #1 When Bill Was Diagnosed with a Potentially Fatal Tumor in His Jaw, He Assumed His Health Insurance Would Cover the Bulk of His Treatment Costs

Remedies I and II Final Exam 2006-2007 Ventura Prof. Daniel D. Laufenberg

Question #1 When Bill was diagnosed with a potentially fatal tumor in his jaw, he assumed his health insurance would cover the bulk of his treatment costs. Instead, almost two years later, he faced more than $60,000 in medical bills and fears the loss of his home.

Shortly after Bill’s medical bills hit $20,000, Big Green Insurance Co. canceled his coverage retroactively, refusing to pay for treatment, including surgery Big Green had authorized in advance. Big Green Insurance Co. accused Bill of failing to disclose a pre- existing bump on his chin in his health insurance application. Bill stated that when he applied for coverage he was unaware of a tumor.

Bill was self employed and had purchased an individual health insurance policy from Big Green Insurance Co., not group or employer-sponsored coverage. To obtain individual policies, applicants must fill out a health history questionnaire. Bill filled out the application honestly, was accepted for coverage and paid premiums for two months before being diagnosed with the jaw tumor.

In Bill’s case, as in many other cases according to employees of Big Green Insurance Co., Big Green didn’t look at the member’s medical history until after the expensive claim. Big Green then scrutinized both medical records looking for something that had not been disclosed and seized on discrepancies they found to justify revocation of the policy, even if the inconsistencies were inadvertent or irrelevant to the claim.

Bill also alleged that the policy application health history questionnaire was intentionally vague and confusing to trap applicants into making mistakes that could later be used as excuses to cancel coverage. State law allows policy cancellation only for intentional omissions or misstatements.

Bill sued Big Green. Big Green is also a defendant in many other lawsuits accusing it of systematically- and illegally- canceling coverage retroactively for people who need expensive care.

1. Discuss any and all causes of action and remedies Bill should assert against Big Green Insurance Co. Discuss any possible defenses Big Green might be able to raise.

2. Discuss all considerations governing allowance of certain legal relief for bad faith upon appellate review.

3. Discuss who would decide legal and equitable remedies and the standard upon review.

Remedies I and II Final Exam 2006-2007 Ventura Prof. Daniel D. Laufenberg

Question #2

Mark, a famous impressionist painter, died testate, that is, with a will. Pursuant to the will, there were three executors, whom were friends and business colleagues of Mark’s. Mark’s will was admitted to probate court and letters testamentary were eventually issued to the three executors.

The principal assets of Mark’s estate consisted of 500 paintings of tremendous value. Within a month of the issuance of the letters of testamentary, all but 100 of the paintings were disposed of by the three executors. 400 of the 500 paintings were sold to related corporations of the three executors in two contracts at below market price. 300 of those 400 paintings were then sold by the related corporations to unrelated corporations at adequate prices.

Kate, the decedent’s daughter and the person entitled to her father’s estate, instituted suit to (1) remove the three executors, (2) enjoin the corporations from disposing of the paintings, (3) rescind the contracts between the three executors and corporations, (4) for return of the paintings still in the possession of the related corporations and (5) for damages.

1.) What are Kate’s rights and remedies, if any? Discuss.

2.) If legal relief is awarded, how would such relief be measured? If equitable relief is granted, how would such equitable relief be enforced? If an injunction is wrongfully issued, does it need to be obeyed and do the defendants have any redress available?

3.) Discuss any defenses the unrelated corporations would assert if Kate sought the return of the 300 paintings sold at an adequate price to the unrelated corporations. Remedies I and II Final Exam 2006-2007, Ventura Issue Sheet Professor Daniel D. Laufenberg Page References to Laufenberg on Remedies © 1998

Question #1

Equitable Remedies vs. Remedies at Law, p.1 Equitable remedy such as possible injunction against Big Green Insurance Co.’s unfair business practices, decided by the judge who has reasonable discretion in granting equitable relief. The standard upon review: abuse of discretion.

The remedy at law, such as money damages for breach of contract, is ordinary and substitutional. An equitable remedy such as injunction is extraordinary and seeks specific relief.

Right to Trial by Jury, p.2 The 7th Amendment to the U.S. Constitution provides: “In suits at common law… the right of trial by jury shall be preserved, and no fact tried by a jury shall otherwise be re-examined in any court of the U.S. than according to the rules of common law.”

The right to jury trial in state courts is normally preserved by state constitutional and/or state statute as in CA. However, if a timely demand for jury trial is not made, it is generally waived. Each party must also post jury fees on time.

Causes of Action/Remedies In this case, there are causes of action for 1) breach of contract, 2) breach of the covenant of good faith and fair dealing (bad faith/fraud) and 3) violation of statutory prohibitions against unfair business/claims practices. Remedies including legal remedies of money damages- both compensatory damages and punitive damages for which a jury trial is available to decide said damages. See Brandt v. Superior Court, 37 Cal.3d 813 (1985), p. 157. Attorneys damages are also available as a result of the tort and bad faith/fraud.

Class Action, Consolidation, pp. 37-38 Possible class action available to prevent future unfair business/ claims practices involving common questions of law/fact.

Possible defenses Big Green might raise: Big Green might claim that they rescind/ cancel individual health insurance policies based only on misrepresentations discovered in an application. Health plans such as Big Green says such cancellations are necessary to guard against people lying on applications. The companies rely on the information contained in the application to decide who gets coverage and at what price.

Question #1 Big Green, like other insurers, contends that it is allowed to drop policy holders regardless of whether medical history omissions are intentional. Big Green, like the entire health insurance industry, says the power to revoke policies is necessary to combat fraud and hold down costs.

Big Green also might argue to a judge to seal documents, including employee depositions, on the basis that they include proprietary information about the way it conducts business.

Damages for Breach of Contract and Damages for Tortious Conduct, pp. 99-124 Measure of Damages; Contract Hadley vs. Baxendale 1) Reasonably arising naturally from breach or 2) Reasonably in contemplation of both parties at time contract made as result of probable breach.

Forseeability Forseeable Bill would lose his house if unable to pay the $60,000 in medical bills. Inability to pay medical bills is the number 1 reason for foreclosure of homes.

Expectation Interest The expectation on the part of Bill was that Big Green, his fiduciary insurance co., would pay off his medical bills according to the contract.

Reasonable Certainty Bill will be able to prove his $60,000 medical damages with reasonable certainty.

Emotional Distress Since the breach of contract is also an independent tort of bad faith insurance, emotional distress damages are also called for.

Damages for tortious conduct, p. 114-126 Two (2) principal purposes: 1) Compensate injured victim and 2) Deter wrongful conduct.

Injury to the Person, pp. 118-122 Compensatory Special Damages Medical Expenses

Question #1 Loss of Earnings General Damages Pain and Suffering Loss of Consortium, pp. 124-126

Punitive Damages (Exemplary Damages), pp. 130-136 Two (2) principal purposes: (1) Punish wrongdoer/ tortfeasor and (2) Deter wrongful conduct

Punitive damages recoverable when defendant guilty of oppression, fraud, malice, reckless disregard for rights/ safety of others including in this case for bad faith insurance/ fraud, an independent tort cause of action from the breach of contract action.

Considerations Governing Allowance of Punitive Awards: 1) Degree of reprehensibility of conduct; 2) Reasonable Relationship or Ratio between the harm or potential harm suffered by plaintiff (compensatory damages) and punitive damages award. 3) Difference between punitive damages award and civil penalties imposed in comparable cases.

Punitive damages limited by Due Process Clause of the 14th Amendment which prohibits a State from imposing a “grossly excessive” punishment on a tortfeasor.

Appellate review “de novo” is constitutionally necessary in order for punitive damages to be properly awardable per Due Process Clause of the 14th Amendment.

Attorney’s Fees, pp. 154-165 General “American Rule”: Prevailing party can not recover attorney’s fees except by statute, contract or judicial doctrine such as in this case when the defendant has “acted in bad faith, vexatiously, wantonly or for oppressive reasons.”

It is not necessary that attorney’s fees have any reasonable ratio/relationship to compensatory damages. Compare punitive damages.

Question #2

The remedy at law, such as money damages for breach of contract, is ordinary and substitutional. An equitable remedy such as injunction is extraordinary and seeks specific relief.

Powers of Courts of Equity, pp. 3-9 Enforcement of Equitable Decrees such as an Injunction 1) Notice 2) Persons Bound by the Decree 3) Duty to Obey: Collateral Bar Rule- Defendants must obey injunction, even if wrongfully issued. Redress available is to appeal or to make a motion to dissolve or modify injunction. 4) Contempt a. Civil contempt is remedial and coercive for the benefit of plaintiff- contemnor holds keys to own cell. b. Criminal contempt is solely punitive in character to vindicate authority of court.

Injunctions, pp. 22-34 Requirements for an Injunction: 1) Inadequate remedy at law 2) Irreparable injury 3) Balance the hardships/benefits to the plaintiff and defendant 4) Effect on Public Interest and 5) If an interlocutory or intermediate injunction (Temporary Restraining Order or Preliminary Injunction), determine whether the plaintiff is likely to succeed on the merits at trial.

Question #2

Mandatory Injunctions vs. Prohibitory Injunctions: Mandatory Injunctions change the status quo, Prohibitory Injunctions preserve the status quo. Mandatory Injunctions, since they change the status quo, are stayed upon appeal. (See In Re O’Connell, 75 Cal. App. 292 (1925), p.32. Prohibitory Injunctions, since they do not change the status quo, are not stayed upon appeal.

Further Redress available to defendants Fed. Rule Civil Proc 65(c) states that: “No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.”

It is not sufficient reason for denying costs or damages on an injunction bond that the suit was brought in good faith. A defendant is unable to obtain damages in excess of the bond unless the plaintiff was acting in bad faith. A defendant dissatisfied with the amount of the bond can, on appeal from the preliminary injunction, ask the court of appeals to increase the bond. See Coyne-Delaney Co. v Capital Development Board, 717 F. 2d 385 (1983), p.25.

Fraud/ Rescission, pp. 70-74 Fraud is undue advantage by some act or omission which is in bad faith and without conscience. Fraud raised affirmatively: 1) at law as a ground for action of bad faith or deceit, or 2) in equity for rescinding contract.

Damages for Breach of Contract and Damages for Tortious Conduct, pp. 99-122 Measure of Damages: Contract Hadley v. Baxendale: 1) Reasonably arising naturally from breach or 2) Reasonably in contemplation of both parties at time contract made as probable result of breach.

Forseeability Expectation Interest Reasonable Certainty Reliance Interest

Damages for Tortious Conduct, pp. 114-118 Two (2) principal purposes:

Question #2 1) Compensate injured victim and 2) Deter wrongful conduct.

Injury to property See Matter of Rothko’s Estate, 43 N.Y. 2d 305 (1977), p. 115

General Rule: Beneficiaries not entitled to appreciation damages at time of decree if: 1) trustee had no duty to retain property and 2) breach of trust only for selling property at inadequate price.

If trustee sells for inadequate price and no duty to retain property, then trustee liable for difference between amount should have received and amount did receive but not for any subsequent rise in value of property sold.

Exception and trustee liable for appreciation damages: 1) trustee had duty to retain property or 2) breach of trust consists of serious conflict of interest, as in this case.

Punitive damages (Exemplary Damages), pp. 130-136 Two (2) principal purposes: 1) Punish wrongdoer/ tortfeasor and 2) Deter wrongful conduct.

Punitive damages recoverable when defendants guilty of oppression, fraud, malice, conflict of interest such as in this case.

Attorney’s Fees, pp. 154-165 General “American Rule”: Prevailing party cannot recover attorney’s fees except by statute, contract or judicial doctrine such as in this case when the defendant has “acted in bad faith, vexatiously, wantonly or for oppressive reasons.”

It is not necessary that attorney’s fees have any reasonable ratio/relationship to compensatory damages. Compare punitive damages.

Possible affirmative defense the unrelated corporations could assert if Kate sought the return of the 300 paintings sold at an adequate price: bona fide (“good faith”) purchaser for fair market value without notice.