Opinion ID: 2178388
Heading Depth: 1
Heading Rank: 6

Heading: disability insurance contracts are personal contracts involving matters of mental concern and solicitude

Text: A. Case Law There can be no cavil with our conclusion that disability insurance contracts are primarily personal contracts involving matters of mental concern and solicitude. Given the very nature of such contracts, the likelihood of emotional distress resulting from a breach must have been either within the contemplation of the promisor at the time of contract formation or the natural result of breach. Stewart seemingly anticipated this conclusion with respect to disability insurance contracts when it enunciated the following: `While it is true that if the breach causes no actual injury beyond vexation and annoyance, as all breaches of contract do more or less, they are not subjects of compensation, unless to the extent that the contract was specially made to procure exemption from them. To that extent, that is, where a contract is made to secure relief from a particular inconvenience or annoyance, or to confer a particular enjoyment, the breach, so far as it disappoints in respect of that purpose, may give a right to damages appropriate to the objects of the contract.' Stewart, supra, 470-471, quoting 1 Sutherland on Damages (1882 ed), pp 157-158. (Emphasis supplied.) Our finding is likewise supported by analogous authority from this and other jurisdictions in which the propriety of awarding emotional distress under an insurance contract has been sanctioned. In Crisci v Security Ins Co of New Haven, Connecticut, 66 Cal 2d 425, 434; 58 Cal Rptr 13; 426 P2d 173 (1967), the California Supreme Court unanimously upheld an award of emotional distress damages for breach of a liability insurance contract sounding in both contract and tort: [P]laintiff did not seek by the contract involved here to obtain a commercial advantage but to protect herself against the risks of accidental losses, including the mental distress which might follow from the losses. Among the considerations in purchasing liability insurance, as insurers are well aware, is the peace of mind and security it will provide in the event of an accidental loss, and recovery of damages for mental suffering has been permitted for breach of contracts which directly concern the comfort, happiness or personal esteem of one of the parties. ( Chelini v Nieri, 32 Cal 2d 480, 482; 196 P2d 915 [1948].) [16] (Emphasis supplied.) Likewise, in Fletcher v Western National Life Ins Co, 10 Cal App 3d 376, 404; 89 Cal Rptr 78 (1970), the above statement from Crisci was quoted with approval in the context of a disability insurance contract. The Fletcher court elaborated:  These considerations [the insured's peace of mind and security] are particularly cogent in disability insurance. The very risks insured against presuppose that if and when a claim is made, the insured will be disabled and in strait financial circumstances and, therefore, particularly vulnerable to oppressive tactics on the part of an economically powerful entity. (Emphasis supplied.) The Federal Seventh Circuit in Eckenrode v Life of America Ins Co, 470 F2d 1, 5 (CA 7, 1972), extended this line of reasoning in the context of an insurer's refusal to tender life insurance proceeds: [I]t is common knowledge that one of the most frequent considerations in procuring life insurance is to ensure the continued economic and mental welfare of the beneficiaries upon the death of the insured. See Crisci, 66 Cal 2d 425, [434.] The very risks insured against presuppose that upon the death of the insured the beneficiary might be in difficult circumstances and thus particularly susceptible and vulnerable to high pressure tactics by an economically powerful entity. Fletcher, [10 Cal App 3d 376, 404.] In the case before us Insurer's alleged high pressure methods (economic coercion) were aimed at the very thing insured against, and we think that the insurance company was on notice that plaintiff would be particularly vulnerable to mental distress by reason of her financial plight.  (Emphasis supplied.) [17] Although this Court has not until today passed on the question whether a disability insurance agreement is primarily personal or commercial in nature, our decision in Miholevich v Mid-West Mutual Auto Ins Co, 261 Mich 495; 246 NW 202 (1933), recommends our conclusion that such contracts may properly be characterized as involving matters of mental concern and solicitude. In Miholevich, an insurer breached its automobile collision insurance policy by failing to satisfy a judgment rendered against the plaintiff-insured. Plaintiff instituted a contract cause of action claiming damages for the insured's resulting arrest and incarceration. In upholding a judgment for the insured's injuries to feelings, i.e., shame and mortification, this Court unanimously stated: The damages claimed by plaintiff are for a breach of defendant's contract to pay the judgment. In Frederick v Hillebrand, 199 Mich 333, 341, in which damages were claimed for a breach of contract, it was said: `The damage which a party ought to receive in respect to such breach of contract may be said to be such as may fairly and reasonably be considered either as arising naturally โ that is, according to the usual course of things โ from such breach of contract itself or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of a breach of it.' The rule thus stated is in accord with that laid down in the English case of Hadley v Baxendale, 9 Exch 341; 156 Eng Rep 145; 23 LJ Exch 179; 18 Jur 358; 5 Eng Rul Cas 502, and has been followed quite generally by all the courts in this country. (See citations in footnote in 8 RCL, pp 455 et seq.) Let us apply it to the facts in this case. The plaintiff was a man without means. He owned an automobile, and was aware of the fact that a judgment might at some time be recovered against him for his negligence in driving it. It must be presumed that he knew that, if he did not pay such judgment, a body execution might issue against him. To protect himself from this liability he sought and secured the policy in question. The defendant must also be presumed to have known that, in case of plaintiff's default in payment, his arrest might follow. Must it not then be reasonably supposed that the liability to arrest to which plaintiff was exposed was in the contemplation of these parties at the time the contract was entered into? While there are many cases in which this rule of law has been so applied, we find none involving the question here presented. The wilful neglect of the defendant to pay the judgment was not due to an oversight on its part. It resulted in the imprisonment of plaintiff, with the shame and mortification as well as loss of time incident thereto. A reasonable interpretation of the contract and the application of the law thereto justified the award of damages by the trial court. No claim is made that it is excessive. 261 Mich 498-499. [18] Furthermore, various panels of our Court of Appeals have concluded that insurance contracts involve matters of mental concern and solicitude. In McCune v Grimaldi Buick-Opel, Inc, 45 Mich App 472; 206 NW2d 742 (1973), plaintiff brought a contract action against his employer for failure to make timely premium payments on plaintiff's health insurance. As a result of this breach, plaintiff's coverage was terminated while his wife was hospitalized. The parties stipulated that plaintiff incurred damages for harassment and humiliation in the amount of $29,333.33. Reversing the trial court's ruling of no cause of action for defendant, LEVIN, P.J., with V.J. BRENNAN and VAN VALKENBURG, JJ., upheld plaintiff's claim of damages for mental anguish, humiliation, embarrassment, and harassment by medical creditors which occurred as a result of defendant's breach of contract to pay health insurance premiums. Beyond the parties' stipulation to such damages, the panel squarely rested its holding on the mental concern and solicitude principle enunciated in Stewart, stating: We hold that this case is the type of contract case in which damages for mental anguish may be recovered. It does not deal with trade and commerce, but with hospital and medical insurance, the provision of which is certainly a matter of `mental concern and solicitude' on the part of most family heads. McCune, supra, 478. In Palmer v Pacific Indemnity Co, 74 Mich App 259; 254 NW2d 52 (1977), it had been determined at trial that defendant-professional malpractice insurer had breached the contract's duty-to-defend clause by failing to appeal a malpractice judgment against the plaintiff-insured which exceeded the policy's limits. The trial court refused to allow the jury to consider the insured's claim for emotional distress damages arising from defendant's contract breach. The Court of Appeals ruled that emotional distress damages may be recovered in a contract action for breach of a malpractice insurance contract. In reversing the lower court's ruling and remanding the issue of emotional distress damages for the jury's consideration, the panel, again relying on Stewart, stated: The mental anguish associated with the case at bar is not as extreme as that in Miholevich v Mid-West Mutual Auto Ins Co, 261 Mich 495; 246 NW 202 (1933), but is similar. In Frishett v State Farm Mutual Automobile Ins Co, 3 Mich App 688; 143 NW2d 612 (1966), this Court held that the insurance company was liable for damages associated due to mental anguish for among other things, unjustly withholding benefits. Damages for mental suffering were allowed in McCune v Grimaldi Buick-Opel, Inc, 45 Mich App 472; 206 NW2d 742 (1973), where an employee sued his employer for the employer's failure to maintain a health and medical insurance policy. Such insurance was characterized as a `matter of mental concern and solicitude'. Id., p 478. In the case at bar, the mental distress of failing to appeal a severe malpractice judgment considerably in excess of the policy limits would be considered foreseeable and would be a proper matter for the jury to consider.  74 Mich App 266. [19] (Emphasis supplied.) Although Judge CAMPBELL did not directly characterize the professional malpractice policy as one involving matters of mental concern and solicitude, it is clear from that panel's reliance on Stewart and McCune that such denomination was implicit. Likewise, in Seaton v State Farm Life Ins Co, 75 Mich App 252; 254 NW2d 858 (1977), the panel ruled that the lower court should have instructed the jury on mental anguish damages in an action occasioned by a life insurer's refusal to pay benefits on the death of plaintiff's husband: We believe such an instruction proper where the suit involves a personal life insurance contract which entails matters of mental concern and solicitude. Palmer v Pacific Indemnity Co, 74 Mich App 259; 254 NW2d 52 (1977); McCune v Grimaldi Buick-Opel, Inc, 45 Mich App 472, 478; 206 NW2d 742 (1973). 75 Mich App 260. The thrust and import of the above Michigan cases were accurately summarized by the Court of Appeals panel below as follows: The majority of the cases have dealt with awarding damages for mental anguish in breach of contract actions based on insurance policies. These cases all trace their roots to Justice SMITH'S opinion in Stewart v Rudner, supra , where he stated that such damages were awardable for a breach of contract where the contract involved `matters of mental concern and solicitude'. The contract involved in Stewart was unique. At that time, it is doubtful that any type of insurance contract would have qualified for the exception discussed by Justice SMITH. One of the remarkable things about the recent decisions of this Court has been the ease with which a variety of insurance policies have been accepted as contracts involving mental concern and solicitude. That phrase now encompasses health insurance ( McCune v Grimaldi Buick, supra ), fire and casualty insurance ( Krajenke v Preferred Mutual Ins Co, [68 Mich App 211; 242 NW2d 70 (1976)], professional malpractice insurance (Palmer v Pacific Indemnity Ins Co, supra), and life insurance ( Seaton v State Farm Life Ins Co, supra ). No Michigan court has considered whether disability insurance should be placed in the same classification.    Given the clear consensus of this Court established by those four decisions, we must    hold that disability insurance contracts are also concerned with matters of mental concern and solicitude. Kewin, supra, 648-649. [20] B. Analysis 1. Plaintiff's Disability Insurance Contract Involved Matters of Mental Concern and Solicitude: Emotional Distress Damage Was Within the Parties' Contemplation at the Time of Contract Formation We, too, find that disability insurance contracts are primarily personal in nature [21] and that simple breach of such contracts will give rise to a contract cause of action for emotional distress damages. Our decision, it should be emphasized, does not hinge on a mere assignment of the term primarily commercial or primarily personal contract. To so proceed would obviously exalt form over substance. Rather, our characterization of plaintiff's disability contract as primarily personal merely provides a shorthand means to express our finding that disability insurance contracts are of such a nature that emotional distress may naturally arise from their breach or may have been within the contemplation of a reasonable disability insurer at the time such contract was forged. Admittedly, disability contracts, much like other insurance contracts, involve a pecuniary element inasmuch as they are agreements to pay a sum of money upon the occurrence of a specified event. It is also true, however, that such contracts have as their central purpose certain highly personal ends, including: the elimination or minimization of financial hardship when a disability occurs, the protection of material security from the harsh consequences of disability, and the provision of emotional security through the insured's anticipation that he or she will be insulated from such financial disaster as well as the peace of mind the policy will provide when paid in the event of disability. Also, as in most insurance situations, it is elemental that an insured is basically contracting for both financial and emotional security in the event of loss. The primacy of emotional security is especially striking in the case of disability insurance contracts since the very risks insured against presuppose that if and when a claim is made, the insured will be disabled and in strait financial circumstances and, therefore, particularly vulnerable   . Fletcher, supra, 404. [P]laintiff did not seek by the contract involved here to obtain a commercial advantage but to protect herself against the risks of accidental losses, including the mental distress which might follow from the losses. Among the considerations in purchasing liability insurance, as insurers are well aware, is the peace of mind and security it will provide in the event of an accidental loss   . Crisci, supra, 434. Indeed, as implicitly recognized by the Stewart Court, a disability insurance contract is one made to secure relief from a particular inconvenience or annoyance, or to confer a particular enjoyment the breach of which, so far as it disappoints in respect of that purpose, may give a right to damages appropriate to the objects of the contract including those to remedy the insured's resultant emotional distress. Stewart, supra, 470-471. To paraphrase Stewart, a disability insurance contract is not primarily concerned with trade and commerce but with the peace of mind and security it will provide in the event of disability, not with profit but with the protection of policyholders against strait financial circumstances, not with pecuniary aggrandizement but with exemption from the inconvenience and annoyance of curtailed income. The allowance of emotional distress damage will work no hardship on the insurer since, by the very nature of the risks insured against, a disability insurer must be presumed to have contemplated that emotional distress would accrue as a consequence of breach. Stated in terms of Hadley's objective standard, at the time of contract formation a hypothetical reasonable person in the position of the defaulting disability insurer, with the insurer's knowledge of the circumstances surrounding the disability insurance transaction, could reasonably have been expected to foresee or should have foreseen the disabled insured's emotional distress necessarily or reasonably resulting from the insurer's breach, had the insurer directed its attention to consideration of the matter. Again quoting Stewart, supra, 471: In such cases the parties may reasonably be said to have contracted with reference to the payment of damages therefor in [the] event of breach. Far from being outside the contemplation of the parties they are an integral and inseparable part of it. In arriving at our conclusion that the payment of such damages must have been contemplated by the insurer, we are reminded of the following passage from Corbin: It is not required that the defendant should have so expressed himself, either in making an offer or in accepting the plaintiff's offer, as to lead the plaintiff reasonably to believe that he was contracting to make such recompense or to assume the risk of some particular kind or amount of injury in case of breach.    It is not necessary that the parties should have given the matter a moment's thought or should have expressed themselves on the subject. If there are special circumstances, it is not even necessary that the defendant should have known them; it is enough that a reasonable man in his position would have known them.    His risk is one that is determined by the courts; and it is not dependent upon an expression of his assent regarding it. 5 Corbin, Contracts, ง 1010, p 79. We conclude from our assessment of the risks insured against by disability contracts that the insurer contemplated liability for emotional distress damage in the event of non-payment. This holding is merely a logical consequence of this Court's ruling in Miholevich, supra, and Stewart as well as the Court of Appeals rulings in McCune, supra, Palmer, supra, and Seaton, supra . 2. Plaintiff's Disability Contract Had Been Breached by the Insured's Failure to Pay Disability Benefits There is no dispute that the insurer breached its contract by failing to tender disability benefits. Consistent with the lower court's instruction, moreover, the jury must have found that plaintiff had suffered such distress as a result of the defendant's knowing, reckless, bad-faith conduct. The trial court's instruction was more stringent than necessary since we are of the opinion that proof of any nature of breach will be sufficient to support a claim of emotional distress damage. It is hornbook law that when a promisor fails in any respect to carry out an existing duty calling for a present, immediate performance under a contract, he is guilty of a breach of contract which furnishes a basis for a cause of action of some sort. Murray on Contracts (2d rev ed, Indianapolis: Bobbs-Merrill, 1974), ง 206, p 417. There is no necessity for requiring more culpable conduct in insurance contract breaches than that required for breach of other contracts. Stewart recognized this principle sub silentio in requiring only a simple, innocent breach to support an emotional distress award. See McCune, supra (simple failure to remit premium payments); Palmer, supra (simple failure to defend); Seaton, supra (simple failure to remit life insurance proceeds). While some jurisdictions have required a showing of bad faith to support an award of distress damages for breach of contract, [22] we do not feel compelled to adopt such a qualification since we rest our decision entirely on contract principles. Emotional distress may be legitimately occasioned whether the breach is simple, negligent, aggravated, or otherwise. To deny recovery for contemplated emotional distress due to breach of a primarily personal contract because the defaulting promisor did not act in bad faith would directly contravene time-honored notions of contract law and frustrate the very goal of Stewart and its progeny. [23] Even a simple refusal to pay is a denial of an insured's basis of the bargain, i.e., the insured's peace of mind that provision has been made for the unsettling exigencies of disability. What injures the policyholder is not the insurer's intention to harm but, rather, the insurer's failure to tender benefits determined to be due and the resulting emotional distress. 3. Breach of the Disability Insurance Contract Caused Plaintiff's Emotional Distress In considering the court's instruction regarding whether plaintiff's emotional distress was the result of defendant's knowing, reckless, bad faith conduct, the jury had the following evidence of misconduct. The insurer was accused of continuing its surreptitious investigation of Mr. Kewin after medical reports had firmly established the serious nature of Mr. Kewin's injury. The insurer also allegedly concealed a significant medical report from Mr. Kewin while negotiating a settlement of Mr. Kewin's claim on May 2, 1973. Further, the insurer reportedly disputed Mr. Kewin's claim on the untenable ground that he was unemployed at the time of the accident, although a company attorney had advised that such allegation was without foundation. Finally, the insurer repeatedly failed to make timely payment of Mr. Kewin's benefits despite the fact that it should have been well aware of his disability and the emotional and financial difficulties which this entailed. The following testimony by Mr. Kewin as to his emotional distress was quoted in the facts, supra, ending:  Q.    [W]hat effect, if any, did all of this conduct that you claim the defendant engaged in, what effect did that have on you personally,   ?