Unpublished Disposition, 868 F.2d 1273 (9th Cir. 1985)

MEMORANDUM^* 

Frances Owens' son, Peter Owens, was employed in California by Ford Aerospace & Communications Corporation (FACC), a subsidiary of Ford Motor Company. As an employee of FACC, Peter Owens was automatically covered by group life insurance under Hancock's group basic plan. As a salaried employee he was also eligible to purchase supplemental life insurance under an Optional Life Insurance Plan (OLIP) underwritten by Hancock. Peter Owens declined the OLIP when he first went to work for FACC in 1979, and also during a subsequent "open enrollment" period in 1980. Peter Owens indicated his initial decision on the enrollment form by checking a box stating "I do not want insurance" which included the proviso that if he should later decide to enroll in the OLIP he "may be required to provide evidence of insurability satisfactory to the insurance company" before he could become insured.

On March 23, 1982, Peter Owens enrolled for $90,000 in the OLIP coverage by completing an "Optional Life Insurance Application" form and submitting it to the benefits representative at FACC. FACC was the administrative agent of OLIP for Hancock and handled the enrollment process.

Hancock conceded at trial that the FACC benefits representative erred in processing Peter Owens' application by enrolling him in the OLIP effective April 1, 1982 and by sending the form directly to the FACC Payroll Department (which began deducting the premium for this plan from his salary). According to Hancock, the correct procedure would have been for the FACC benefits representative to first send Peter Owens' application to Hancock so that Hancock (a) could request a Statement of Health from him, and (b) could consider Owens' application before enrolling him.

Peter Owens died on November 14, 1982, and a claim for death benefits payable to his mother, Frances Owens, was submitted to Hancock on November 22, 1982. On December 1, 1982, Hancock paid $49,896, the basic group life insurance benefit due under the group policy. On February 8, 1983, however, Hancock declined to pay the $90,000 OLIP benefit on the ground that Peter Owens had been improperly enrolled in the plan by FACC without Hancock first passing on his insurability.

Frances Owens filed suit against Hancock in California state court on November 9, 1983, claiming bad faith breach of insurance contract, negligence, and breach of contract, and seeking declaratory relief.

On April 9, 1984, Hancock tendered payment of the OLIP proceed with accrued interest. Owens then amended her complaint to assert claims for violation of California Insurance Code Sec. 790.03(h), which proscribes various unfair claims settlement practices. After removal to federal court, on November 12, 1985, the district court (a) granted Hancock's motion for summary judgment on the breach of contract claim because no further damages were recoverable under that theory, and (b) denied Hancock's motion on all other claims, rejecting the argument that Michigan law applied, and precluded recovery for bad faith claims.

Prior to trial, the district court granted Hancock leave to assert a preemption defense under ERISA, 29 U.S.C. § 1144(a), but then granted Owens' motion to strike the defense. The court also denied Hancock's motion for partial summary judgment on the issue of punitive damages. After a jury trial in October 1986, at which the court declined to give instructions on punitive damages, the jury returned a verdict for Owens with no damage award, but with an award of attorney fees of $19,680.82. After denial of her motion for a new trial, Owens timely appealed and Hancock timely cross-appealed. We have jurisdiction under 28 U.S.C. § 1291. We deferred submission on this case pending the decision in Kanne v. Connecticut General Life Ins. Co., 859 F.2d 96 (9th Cir. 1988).

In Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987), the Supreme Court held that state common law causes of action arising from the improper processing of a claim are preempted by ERISA. Furthermore, in Kanne, we specifically held that ERISA preempts California Insurance Code Sec. 790.03(h), the statute upon which Owens relies.

Since we decided in Kanne that ERISA does preempt Sec. 790.03(h), the next question is whether the insurance policy in the instant case is an employee benefit plan for purposes of ERISA. Whether an insurance policy constitutes an employee benefit plan for purposes of ERISA is a question of fact. Credit Managers Ass'n v. Kennesaw Life & Accident Ins. Co., 809 F.2d 617, 625 (9th Cir. 1987). Because Pilot Life and Kanne were decided after judgment was entered in the instant case,¹  the district court did not make any findings of fact on this question. Since there is a factual dispute over issues like whether OLIP is actually a rider to the group policy, whether FACC intended to create an ERISA plan, and whether FACC assumed more of a responsibility than mere advertisement of OLIP, we remand to the district court for further consideration.

Choice of law is a legal question reviewable de novo. Pereira v. Utah Transport. Inc., 764 F.2d 686, 689 (9th Cir. 1985), cert. dismissed, 475 U.S. 1040 (1986). A federal district court sitting in diversity jurisdiction must apply the choice of law rules of the state in which it sits. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941); Strassberg v. New England Mutual Life Ins. Co., 575 F.2d 1262, 1263 (9th Cir. 1978). California uses a "governmental interest analysis" to determine which state's law should apply. Offshore Rental Co. v. Continental Oil Co., 22 Cal. 3d 157, 148 Cal. Rptr. 867, 583 P.2d 721 (1978).

The Ninth Circuit has indicated there is a three step analysis to determine the correct law to apply: (1) the court must examine the substantive law of the two jurisdictions to determine if the laws differ; (2) if the laws differ, the court must determine whether both jurisdictions have an interest in having their laws applied, thus creating a "true conflict"; and (3) if there is a "true conflict" the court must apply the law of the jurisdiction whose interest would be more impaired if its law were not applied. Liew v. Official Receivier and Liquidator, 685 F.2d 1192, 1196 (9th Cir. 1982).

There is no question that the laws of California and Michigan differ. For example, California law allows extra-contractual recovery for attorney's fees, mental or emotional distress, and punitive damages under common law, as well as for statutory violations. On the other hand, Michigan law does not permit punitive damages, and permits only limited recovery for unfair claims practices. The district court found that both states have an interest in having their respective laws applied, but that the interest of California in deterrence predominates. We agree with this analysis.

The refusal to instruct on punitive damages is reviewed de novo because it is tantamount to granting a directed verdict on that issue. See Othman v. Globe Indemnity Co., 759 F.2d 1458, 1463 (9th Cir. 1985).

California Civil Code Sec. 3294 authorizes punitive damages when a defendant intends to cause injury to the plaintiff or when the conduct is carried on "with a conscious disregard of the rights or safety of others." Because there was insufficient evidence on this issue, punitive damages were correctly refused.

Because we are remanding this case for further consideration of the important question of whether the insurance policy is an employee benefit plan, the district court may reconsider the question of attorney's fees when making its final judgment.

Evidentiary rulings are reviewed for an abuse of discretion and will not be reversed absent some prejudice. Kisor v. Johns-Manville Corp., 783 F.2d 1337, 1340 (9th Cir. 1986). There was no prejudice to Owens from the district court's refusal to admit a copy of the decision in John Hancock Mutual life Ins. Co. of Boston, Mass. v. Dorman, 108 F.2d 220 (9th Cir. 1939), especially since counsel was permitted to argue the rule of the case to the jury.

This case is REMANDED to the district court for further proceedings not inconsistent with this decision.