Court Opinion

ID: 3049939
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:29:11.992487+00
Date Added: 2024-06-11T11:49:22.028402
License: Public Domain

FOR PUBLICATION
 UNITED STATES COURT OF APPEALS
      FOR THE NINTH CIRCUIT

G. CLINTON MERRICK, JR.,              
                Plaintiff-Appellee,
               v.                           No. 05-16380
PAUL REVERE LIFE INSURANCE                   D.C. No.
                                          CV-00-00731-JCM
COMPANY; PROVIDENT LIFE &
ACCIDENT INSURANCE; UNUM
PROVIDENT,
           Defendants-Appellants.
                                      

G. CLINTON MERRICK, JR.,              
                Plaintiff-Appellee,
               v.                           No. 05-17059
PAUL REVERE LIFE INSURANCE                   D.C. No.
                                          CV-00-00731-JCM
COMPANY; PROVIDENT LIFE &
ACCIDENT INSURANCE; UNUM                     OPINION
PROVIDENT,
           Defendants-Appellants.
                                      
       Appeal from the United States District Court
                for the District of Nevada
        James C. Mahan, District Judge, Presiding

                 Argued and Submitted
         May 16, 2007—San Francisco, California

                   Filed August 31, 2007

 Before: Cynthia Holcomb Hall, Diarmuid F. O’Scannlain,
           and Sandra S. Ikuta, Circuit Judges.

                           11109
11110   MERRICK v. PAUL REVERE LIFE INSURANCE CO.
         Opinion by Senior Circuit Judge Hall
11112   MERRICK v. PAUL REVERE LIFE INSURANCE CO.

                      COUNSEL

Evan M. Tager, Mayer, Brown, Rowe & Maw, Washington,
DC, for the defendants-appellants.
          MERRICK v. PAUL REVERE LIFE INSURANCE CO.        11113
Thomas L. Hudson, Osborn Maledon, Phoenix Arizona, for
the plaintiff-appellee.

                            OPINION

HALL, Senior Circuit Judge:

   Defendants Paul Revere Life Insurance Company and
Unum Provident Corporation (collectively “the insurers”)
appeal the district court’s jury verdict awarding $1.65 million
in compensatory and $10 million in punitive damages to
plaintiff G. Clinton Merrick, Jr. for breach of contract and of
the duty of good faith and fair dealing, stemming from the
insurers’ denial of Merrick’s disability insurance claim.
Among other issues, this appeal requires us to examine the
constitutional limits upon the use of evidence of injury
inflicted upon nonparties, as discussed in Philip Morris USA
v. Williams, 127 S. Ct. 1057, 1063 (2007). The district court
had jurisdiction pursuant to 28 U.S.C. § 1332. This court has
jurisdiction pursuant to 28 U.S.C. § 1291. We affirm in part,
reverse in part, and remand for a new trial on punitive dam-
ages due to the district court’s failure to give an adequate lim-
iting jury instruction under Williams.

                       I.   Background

A.   History of Merrick’s Claim

   G. Clinton Merrick, Jr. purchased an “own occupation” dis-
ability policy from defendant Paul Revere Life Insurance
Company in 1989. Under that policy, if Merrick was “unable
to perform the important duties of [his] Occupation” due to
“Injury or Sickness,” he was entitled to a “total disability”
benefit of $12,000 per month for the duration of his disability.
At the time, Merrick was one of three partners at a venture
capital firm, responsible for raising capital, evaluating invest-
11114     MERRICK v. PAUL REVERE LIFE INSURANCE CO.
ment options, and participating as a director in companies in
which the firm invested. Merrick had entered the venture cap-
ital arena following a successful career as a marketing execu-
tive, where his accomplishments included campaigns for
Country Time Lemonade, Crystal Light drink mix, and the
“Kool-Aid Man.”

   In the early 1990s, Merrick began suffering from fatigue,
muscle pain, mental confusion, and other difficulties that
affected his work performance. His attending physician, Dr.
Simon Epstein, referred him to several specialists to identify
the problem. In August 1993, Dr. Stuart Mushlin indicated
that Merrick may be suffering from Chronic Fatigue Syn-
drome (CFS) and found him unable to work. This diagnosis
coincided with his partners’ decision to buy out Merrick’s
interest in the firm due to recent underperformance, which
Merrick attributed to his health problems.

   Merrick first alerted Paul Revere to his disability on May
31, 1994, stating that he was “suffering from a disabling con-
dition” but was not yet filing a claim. Merrick then met with
additional specialists and underwent a battery of specialized
tests at the Mayo Clinic, some of which showed normal
results and some of which indicated abnormalities. Dr.
Michael Silber, summarizing the Mayo Clinic results, diag-
nosed Merrick as suffering from CFS and Lyme Disease, and
advised that he “restart work at a much lower stress level than
previously.” By this time Merrick was under the regular care
of Dr. Alan Rapaport rather than Dr. Epstein; both Epstein
and Rapaport concurred with the CFS diagnosis and found
Merrick unable to work.

   Following the Mayo Clinic’s confirmation of the CFS diag-
nosis, Merrick filed a formal claim with Paul Revere. Paul
Revere’s in-house physician reviewed Merrick’s documenta-
tion, questioned the diagnosis but ultimately agreed that the
records supported a finding of “significant impairment.”
           MERRICK v. PAUL REVERE LIFE INSURANCE CO.                11115
Therefore Paul Revere began paying out Merrick’s claim as
of December 1994, when his benefits began to accrue.

   Merrick tried to start a new venture capital firm in late
1994, but his illness prevented him from getting beyond the
initial stages. Merrick’s other insurer, Northwestern Mutual,
notified Paul Revere in June 1995 that Merrick was seeking
to enter a new business venture. That August, a Paul Revere
field representative offered to settle Merrick’s claim for an
amount equal to four months of disability benefits, citing the
“return to work and recovery” provision of his claim. Merrick
declined, whereupon the representative left him with a check
for one month of benefits. Merrick returned this check
because he believed an endorsement provision on the check
would have settled his claim upon cashing.

   Paul Revere then arranged for Dr. James Donaldson to per-
form an Independent Medical Examination in December
1995. Dr. Donaldson’s report was inconclusive: based on his
tests, he concluded that Merrick “does not have either an
active neurological problem or active Lyme disease” but did
note his chronic fatigue, attributing it to depression. He also
found that Merrick “deserves aggressive treatment, both phar-
macotherapy and psychotherapy, by a seasoned psychiatrist.”
Paul Revere’s claim file shows that the company interpreted
Donaldson’s report as supporting “significant impairment,”
and as implying that Merrick could not return to work.1 Dr.
Rapaport, Merrick’s treating physician, disputed Dr. Donald-
son’s conclusions and reiterated his CFS diagnosis.

   Paul Revere conducted an intensive review of Merrick’s
claim file, which concluded that “there does not appear to be
any neuropsychologically-based disability.” The field repre-
  1
    Dr. Donaldson’s report did not explicitly state whether he thought Mer-
rick could return to work. Paul Revere’s internal examiner recommended
that the company ask Donaldson to clarify his findings in this regard, but
apparently this follow-up never happened.
11116     MERRICK v. PAUL REVERE LIFE INSURANCE CO.
sentative again offered a compromise settlement, which Merr-
ick refused. On December 9, 1996, Paul Revere denied
Merrick’s claim on the ground that the internal review
showed “no objective medical documentation which supports
an inability to perform the duties of your occupation as a ven-
ture capitalist.” After Merrick protested, Paul Revere agreed
to pay two additional months of benefits while Merrick pro-
vided the company with objective medical evidence. But the
company’s medical consultants rejected the two follow-up
reports Merrick offered to document his illness, so Paul
Revere continued to deny Merrick’s claim. Merrick filed suit
against Paul Revere and its parent corporation, Unum Provi-
dent, in April 2000, claiming breach of contract and of the
duty of good faith and fair dealing.

B.   Pretrial Motion in Limine

   Merrick sought production of all documents added to Paul
Revere’s claim file after Merrick brought suit. The insurers
resisted this request, citing among other reasons attorney-
client privilege. After Merrick brought a motion to compel
production, the magistrate judge warned the insurers that fail-
ure to produce a privilege log would waive privilege and
instructed the insurers not to invoke the privilege unless the
claim file actually included privileged material. Paul Revere
then reiterated its privilege objection in a supplemental
response to Merrick’s document request, without producing a
privilege log, and attested that “[n]otwithstanding and subject
to these objections,” it had produced all responsive docu-
ments.

   In the meantime, Merrick discovered that when he filed this
suit, counsel for the insurers assumed active management of
the Merrick claim file. As a result, he became concerned that
the insurers were using the attorney-client privilege to shield
otherwise responsive documents from discovery, by claiming
they were privileged communications between the insurers
and counsel rather than routine documents related to claims
             MERRICK v. PAUL REVERE LIFE INSURANCE CO.    11117
adjustment. Merrick sought another hearing before the magis-
trate judge, who granted Merrick’s motion to compel, held all
privileges waived and ordered the insurers to produce all
responsive documents. The insurers produced no additional
documents in response; indeed, Unum Provident reiterated its
privilege claim in a later discovery response.

    Merrick then brought a motion in limine to suppress all
documents in his claim file acquired after litigation com-
menced, on the ground that the insurers were picking and
choosing which documents would be produced in discovery.
In response, the insurers stated that no documents had been
withheld on the basis of privilege, although at the hearing
counsel for the insurers suggested in passing that such privi-
leged documents existed. Merrick found this representation
incredible, given that the insurers had collected over 3,000
pages of documents following the filing of the suit yet pro-
duced only three short memos analyzing that material. Merr-
ick insisted before the district judge that the insurers were
hiding evidence and demanded production of all “post-
litigation notes” and other documents reflecting the “thought
processes” underlying management of Merrick’s claim. The
district court judge granted the motion in limine, and at trial
suppressed much of this documentation on the ground that
defendants were picking and choosing which documents to
produce. After the court granted the motion in limine, the
insurers submitted a declaration stating that they did not with-
hold any documents on the basis of privilege.

C.   Trial

   At trial, Merrick argued that the denial of his claim was
part of a larger scheme to “scrub” the company’s liability for
expensive and noncancellable “own occupation” disability
policies. Merrick relied largely upon the testimony of Stephen
Prater, an insurance industry expert, who testified regarding
Unum Provident’s allegedly aggressive and unethical claim-
closing practices. These practices included pressuring claim-
11118     MERRICK v. PAUL REVERE LIFE INSURANCE CO.
ants to settle for a fraction of total benefits, insisting upon
“objective medical evidence” of a disability even when the
policy did not require such evidence, building a stable of
biased Independent Medical Examiners who would support
claim denials, and holding regular “round table” meetings
with lawyers, doctors, and claims handlers designed to “tri-
age” the most expensive claims. Merrick introduced a sub-
stantial number of internal Unum Provident memos showing
the evolution of this scheme during the early 1990s, and
Prater testified regarding the tremendous financial gains
Unum Provident posted by adopting these “best practices.”

   Unum Provident announced a merger with Paul Revere,
Merrick’s insurer, in April 1996. Prater testified that in the
months leading up to the merger, Unum Provident began
importing its “best practices” procedures to the Paul Revere
organization, including training its claims representatives in
“objectification” and “round tabling” Paul Revere claims.
Prater testified that Paul Revere representatives received this
training shortly before the company began re-evaluating Mer-
rick’s claim (which it had initially paid out). Prater testified
that the company’s handling of Merrick’s claim was consis-
tent with many of Unum Provident’s improper practices,
including attempting to settle for a fraction of the total amount
(and threatening to sue for reimbursement if Merrick refused
to settle), insisting upon “objective medical evidence” and
seeking to get Merrick’s claim off the books before the end
of the fiscal year. Merrick also argued that the explanations
Paul Revere gave Merrick for denying his claim were incon-
sistent with the company’s internal documentation, which
largely supported the conclusion that Merrick suffered “sig-
nificant impairment.”

   The jury returned a verdict for Merrick, awarding him
$1,147,355 in unpaid benefits and $500,000 for mental and
emotional distress, to be paid by the insurers jointly and sev-
erally. It also imposed $2,000,000 in punitive damages on
Paul Revere and $8,000,000 on Unum Provident. The insures
          MERRICK v. PAUL REVERE LIFE INSURANCE CO.         11119
brought a renewed motion for judgment as a matter of law
pursuant to Rule 50(b) of the Federal Rules of Civil Procedure
and a motion for a new trial under Rule 59. The judge denied
these motions and awarded Merrick $500,000 in attorney’s
fees. The insurers timely appealed.

                        II.   Discussion

  The insurers appeal several decisions made by the court
below. We address each argument in turn.

A.   Motion for New Trial

   In their opening brief, the insurers argue that they are enti-
tled to judgment as a matter of law on the issues of bad faith
and punitive damages. Merrick responds, correctly, that the
insurers did not include these claims in their Rule 50 motion
below, meaning the issue is not properly before us now. Des-
rosiers v. Flight Int’l, Inc., 156 F.3d 952, 957 (9th Cir. 1998).
In their reply brief, the insurers concede the point and ask the
court to construe their argument as an appeal of their Rule 59
request for a new trial, which did raise these arguments.

   Generally, issues raised for the first time in a reply brief are
considered waived. Eberle v. City of Anaheim, 901 F.2d 814,
818 (9th Cir. 1990). Here, however, we exercise our discre-
tion to consider the insurers’ claim because the appellee has
not been misled and the issue has been fully explored. See
Ellingson v. Burlington N., Inc., 653 F.2d 1327, 1332 (9th
Cir. 1981). The insurers’ Rule 59 argument is identical to
their Rule 50 argument, to which Merrick has responded. We
note, however, the differing standard of review. Whereas a
properly presented Rule 50 question is reviewed de novo, we
give “great deference” to the trial court’s denial of a motion
for a new trial, and will reverse “for a clear abuse of discre-
tion only where there is an absolute absence of evidence to
support the jury’s verdict.” Desrosiers, 156 F.3d at 957
11120     MERRICK v. PAUL REVERE LIFE INSURANCE CO.
(emphasis in original) (quoting Pulla v. Amoco Oil Co., 72
F.3d 648, 656-57 (8th Cir. 1995) (White, J.)).

   [1] Given this deferential standard of review, we find the
evidence more than sufficient to support the jury’s bad faith
verdict. Under Nevada law, “[b]ad faith is established where
the insurer acts unreasonably and with knowledge that there
is no reasonable basis for its conduct.” Albert H. Wohlers &
Co. v. Bartgis, 969 P.2d 949, 956 (Nev. 1998) (citation omit-
ted). Viewing the evidence in Merrick’s favor, Bains LLC v.
Arco Prods. Co., 405 F.3d 764, 774 (9th Cir. 2005), the jury
could have found that the insurers conducted a biased investi-
gation of Merrick’s claim as part of an improper company-
wide initiative to target and terminate expensive “own occu-
pation” policies. It also could have found that the insurers
misrepresented the terms of the policy by requiring Merrick
to present “objective medical evidence” of his disability. The
Nevada Supreme Court recognizes biased investigations and
misrepresentation of policy terms as evidence of bad faith.
See Powers v. U.S.A.A., 962 P.2d 596, 604 (Nev. 1998);
Albert H. Wohlers & Co. v. Bartgis, 969 P.2d 949, 956 (Nev.
1998). We have previously found that these defendants’
improper claim-scrubbing supports a finding of bad faith
claim denial in a case decided under California law, which
like Nevada anchors bad faith liability in the reasonableness
of the insurer’s action. See Hangarter v. Provident Life and
Accident Ins. Co., 373 F.3d 998, 1010-11 (9th Cir. 2004).

   [2] Similarly, there was substantial evidence before the jury
that the insurers should be liable for punitive damages. Under
Nevada law, a plaintiff may secure punitive damages upon
showing “by clear and convincing evidence” that the defen-
dant is “guilty of oppression, fraud, or malice, express or
implied.” Nev. Rev. Stat. 42.005. Here, the jury could have
concluded that by subjecting Merrick’s claim to improper
claim-scrubbing procedures, the insurers “undertook an inten-
tional course of conduct designed to ensure the denial” of the
claim. See Powers, 962 P.2d at 604-05. Both the Nevada
            MERRICK v. PAUL REVERE LIFE INSURANCE CO.                11121
Supreme Court and the Ninth Circuit have held that such con-
duct could constitute “fraud and malice.” Id. at 605; see also
Hangarter, 373 F.3d at 1012-13 (California law).2

   [3] Because we cannot say that there was a “complete
absence of evidence” to support the jury’s verdicts, we affirm
the district court’s denial of the insurers’ Rule 59 motion.

B.    Motion in Limine

   [4] The insurers also challenge the district court’s order
suppressing certain evidence placed in the claim file after liti-
gation commenced. The district court granted this motion
upon finding that the insurers withheld evidence that they
were ordered to produce regarding their post-litigation treat-
ment of Merrick’s claim. The insurers argue that the court
erred in finding that they had withheld any evidence. “Courts
need not tolerate flagrant abuses of the discovery process”
and have “inherent power” to exclude evidence as a sanction
for such abuses. Campbell Indus. v. M/V Gemini, 619 F.2d 24,
27 (9th Cir. 1980). We review the imposition of discovery
sanctions for abuse of discretion and the underlying factual
determinations for clear error. Valley Eng’rs Inc. v. Elec.
Eng’g Co., 158 F.3d 1051, 1052 (9th Cir. 1998).
  2
    The insurers argue that Merrick offered insufficient evidence linking
Unum Provident’s illicit practices to Paul Revere’s handling of this claim,
because Paul Revere denied the claim before the merger was completed.
Merrick showed that Unum Provident engaged in claim-scrubbing prior to
the merger, and that Paul Revere began importing Unum Provident’s “best
practices” in claim management before the merger was completed. He also
showed that his claim, which Paul Revere initially granted, was re-
evaluated and ultimately denied shortly after this transition period began.
Prater testified that Paul Revere’s behavior, such as pressuring the claim-
ant to settle before year’s end and relying upon a lack of objective medical
evidence to terminate an expensive claim, was consistent with Unum
Provident’s tactics. Therefore we cannot say that there was an “absence of
evidence” supporting Merrick’s claim that Paul Revere adopted Unum
Provident’s illicit behavior before the merger was finalized and applied it
in this case.
11122      MERRICK v. PAUL REVERE LIFE INSURANCE CO.
   Based upon the record, we cannot conclude that the district
court’s finding that the insurers withheld evidence is clearly
erroneous. The insurers’ pretrial behavior gives rise to such an
inference. The insurers invoked the privilege in response to a
specific document production request, and continued to do so
even after the magistrate judge instructed them not to invoke
the privilege unless the privilege was actually shielding docu-
ments. Their responses expressly objected on the basis of
privilege and attested that “subject to these objections,” their
production was complete.3 Only after the magistrate ordered
the privileges waived (in response to Merrick’s assertion that
defendants were withholding evidence), and Merrick brought
his motion in limine, did the insurers state unequivocally that
no documents were withheld on the basis of privilege.4 Even
then, counsel’s statement at the hearing could be understood
as admitting the existence of withheld documents.

   In addition, the existence of withheld documents may be
inferred from the paucity of material actually produced.
Although the insurers received over 3000 pages of documents
pertaining to Merrick’s claim after litigation began, it pro-
duced only three short memos analyzing this material, none
  3
     As noted above, Unum Provident continued to use this language even
after the magistrate judge ordered all privileges waived.
   4
     Defendants claim they offered an unequivocal denial prior to the mag-
istrate’s ruling. The record does not support this assertion. The insurers’
opposition to the motion to compel states that they “are not in possession
of any additional documents responsive to these requests” as of May 31,
2001, but this statement is followed on the next page by a reiteration of
the privilege with respect to this specific document request. We also note
that subsequent events cast doubt upon the truth of that denial: following
the hearing on the motion to compel, defendants produced a February 2,
2001 e-mail from Dr. Cusher to Dave Layden, the in-house counsel man-
aging the Merrick file and a report from Dr. Cusher dated May 5, 2001.
The dates on those documents strongly suggest that they were in the insur-
ers’ possession, but not disclosed, on May 31, 2001.
           MERRICK v. PAUL REVERE LIFE INSURANCE CO.                11123
of which was generated by the attorneys who were actively
managing the case file after Merrick filed his complaint.5

   [5] Against these facts, the defendants offer only their
sworn statement that documents were not withheld. While
proving a negative is difficult, the defendants’ pre-trial con-
duct and the dearth of documents actually produced support
an inference that the defendants withheld documents in viola-
tion of the magistrate’s order. Given the district court’s supe-
rior position to adjudge the insurers’ culpability, we conclude
that the district court did not clearly err in so finding, and did
not abuse its discretion in granting Merrick’s motion in
limine.

C.    Punitive Damages Jury Instruction

   Merrick’s bad faith and punitive damages claims turned
upon linking Paul Revere’s handling of Merrick’s claim to a
decade of allegedly improper claims handling practices at
Provident. Prater testified regarding Provident’s practices in
substantial detail. Concerned that the jury would punish them
for Provident’s history of improper behavior, the insurers
requested the following instruction, which the district court
denied:

      In deciding whether or in what amount to award
      punitive damages, you may consider only the spe-
      cific conduct by Defendants that injured Plaintiff.
      You may not punish Defendants for conduct or prac-
      tices that did not affect Plaintiff, even if you believe
      that such conduct or practices were wrongful or
      deserving of punishment. The law provides other
      means to punish wrongdoing unrelated to Plaintiff.
  5
   One was an e-mail from Dr. Cusher to in-house counsel and therefore
could have been considered privileged, as defendants noted in their disclo-
sure.
11124     MERRICK v. PAUL REVERE LIFE INSURANCE CO.
The insurers claim that this denial abridged their Due Process
rights by exposing them to unconstitutionally excessive puni-
tive liability.

   Initially, Merrick asserts that the insurers have waived the
jury instruction issue. Voohries-Larson v. Cessna Aircraft
Co., 241 F.3d 707, 713 (9th Cir. 2001). We disagree.
Although the Ninth Circuit is “the strictest enforcer of Rule
51,” the record here shows that the insurers “objected at the
time of trial on grounds that were sufficiently precise to alert
the district court” to the specific nature of the defect. Id. at
713-14 (citation omitted). The insurers explicitly objected to
the court’s punitive damages instructions without “some lim-
iting . . . instructions relative to the Campbell decision [State
Farm v. Campbell, 538 U.S. 408 (2003)] in terms of what the
jury can look at and not look at,” and set forth five specific
limiting instructions on those points. This objection is suffi-
ciently precise to “bring into focus the precise nature of the
alleged error” as being inconsistent with Campbell. Voorhies-
Larson, 241 F.3d at 714.

   [6] The Due Process Clause “forbids a State to use a puni-
tive damages award to punish a defendant for injury that it
inflicts upon nonparties.” Philip Morris USA v. Williams, 127
S. Ct. 1057, 1063 (2007). As the Supreme Court has recently
explained, such punishment runs afoul of the maxim that a
state must afford a defendant an opportunity to present every
available defense. Id. (citing Lindsey v. Normer, 405 U.S. 56,
66 (1972)). A defendant “threatened with punishment for
injuring a nonparty victim” may be unable to present defenses
applicable to the nonparty victim, if those defenses do not
also coincide with those relevant to the plaintiff’s claim. Id.
In addition, punishment for nonparty injury adds “a near stan-
dardless dimension to the punitive damages equation,” as jury
speculation regarding the number of nonparties injured and
the extent of their injuries magnifies traditional due process
concerns regarding the arbitrariness, uncertainty, and lack of
notice afflicting a punitive award.
           MERRICK v. PAUL REVERE LIFE INSURANCE CO.               11125
   [7] Williams clarified that a plaintiff may offer evidence of
“harm to other victims” to show the reprehensibility of a
defendant’s conduct in this case. Id. at 1063-64. “Evidence of
actual harm to nonparties can help to show that the conduct
that harmed the plaintiff also posed a substantial risk of harm
to the general public, and so was particularly reprehensible.”
Williams, 127 S. Ct at 1064. But “a jury may not go further
than this and use a punitive damages verdict to punish a
defendant directly on account of harms it is alleged to have
visited on nonparties.” Id. (emphasis added). Where there is
a “significant” risk that the jury might do so—a risk gener-
ated, for example, by “the sort of evidence that was intro-
duced at trial or the kinds of argument the plaintiff made to
the jury”—a court, upon request, must “provide some form of
protection” to assure that juries “are not asking the wrong
question.” Id. at 1064, 1065.

   [8] In this case, the evidence that was introduced at trial
created a significant risk that the jury would punish the defen-
dants for Provident’s history of improper behavior and the
damages this behavior caused to victims other than Merrick.
Prater testified at length regarding Provident’s practices based
on his analysis of “over a hundred thousand” internal Provi-
dent documents written throughout the 1990s, many of which
were entered into evidence. Prater and the memos describe
Provident’s decade-long scheme in great detail, highlighting
unethical behavior by Provident that was unrelated to Paul
Revere’s handling of Merrick’s claim.6 For example, Provi-
dent held round-table discussions to terminate expensive poli-
cies, destroyed all records of the meetings and labeled them
as “legal” solely to shield them by privilege. But Merrick
offered no evidence that his claim was improperly “round-
tabled.” Prater also explained that Provident cultivated biased
  6
    As noted above, Merrick showed that Paul Revere’s handling of his
claim displayed some of Provident’s allegedly unethical practices, such as
pressuring claimants to settle and insisting upon objective medical evi-
dence of a claim.
11126       MERRICK v. PAUL REVERE LIFE INSURANCE CO.
independent medical examiners to support termination deci-
sions, although Merrick seemingly did not allege that Dr.
Donaldson’s examination of him was biased. In his closing
argument, Merrick’s attorney repeatedly referenced Provi-
dent’s pattern of allegedly unethical behavior, including prac-
tices not alleged to have occurred in Merrick’s case. He also
asked, in the context of punitive damages, “[h]ow do you pun-
ish a corporation that’s making on the order of $132 million
a quarter in terminations? That’s what you have to decide.”
We conclude that the evidence offered here creates a “signifi-
cant risk” that the jury would assess punitive damages to pun-
ish this pattern of unethical behavior rather than the conduct
that affected Merrick specifically.7

   [9] Merrick argues that, taken as a whole, the instructions
adopted by the court adequately protected the insurers’ due
process rights. We disagree. The punitive damages instruction
stated that “[y]ou may in your discretion award such damages,
if, but only if, you find by a clear & convincing evidence that
said defendant was guilty of oppression fraud or malice in the
conduct upon which you base your finding of liability.” The
verdict form further asked whether the insurer “act[ed] with
oppression, fraud, or mailice [sic], express or implied, in its
dealings with plaintiff such to justify an award of punitive
damages.” At most, these instructions address liability for
punitive damages but do not prevent the jury from setting an
amount of damages that includes direct punishment for harm
to others. Williams states clearly that “a jury may not . . . use
a punitive damages verdict to punish a defendant directly on
account of harms it is alleged to have visited on nonparties.”
Id. at 1064. A jury instruction, like that presented here, that
allows (or does not preclude) direct punishment for nonparty
  7
    As the insurers note, the fact that the jury assessed $2 million in puni-
tive damages against Paul Revere and $8 million against Unum/Provident
—which did not handle Merrick’s claim but was the primary focus of Prat-
er’s testimony—suggests that the jury did assess damages to punish Provi-
dent’s conduct against nonparties.
          MERRICK v. PAUL REVERE LIFE INSURANCE CO.        11127
harm runs afoul of this prohibition and invites precisely the
improper jury speculation—as to, for example, the number of
nonparty victims or the extent of their injury—that Williams
sought to avoid. Id. at 1063; see also Campbell, 538 U.S. at
423 (“Due process does not permit courts, in the calculation
of punitive damages, to adjudicate the merits of other parties’
hypothetical claims against a defendant.”).

   [10] More important, the instructions given did not provide
the jury with clear direction regarding the proper and
improper uses of Merrick’s “bad company” evidence. As
noted above, the jury was permitted to consider this evidence
when determining the reprehensibility of the insurers’ actions
toward Merrick, but it could not directly punish the defen-
dants for harm to victims other than Merrick. When evidence
is admissible for a limited purpose, the opponent is entitled to
a limiting instruction admonishing the jury not to use the evi-
dence for a forbidden purpose. Fed. R. Evid. 105; see
Borunda v. Richmond, 885 F.2d 1384, 1388 (9th Cir. 1988).
No such instruction issued here. In light of Williams’ state-
ment that it is “constitutionally important for a court to pro-
vide assurance that the jury will ask the right question, not the
wrong one,” 127 S. Ct. at 1064 (emphasis added), we con-
clude that the instruction issued in this case was inadequate.

   Merrick also argues that the court properly denied the pro-
posed instruction because the insurers’ instruction was mis-
leading. Mitchell v. Keith, 752 F.2d 385, 388 (9th Cir. 1985).
Merrick is correct that the first sentence of the proposed
instruction is misleading because it fails to indicate that the
jury may consider harm to others as part of its reprehensibility
analysis. Williams, 127 S. Ct. at 1063-64. But the fact that the
proposed instruction was misleading does not alone permit the
district judge to summarily refuse to give any instruction on
the topic. In Mitchell, the primary case upon which Merrick
relies, the court affirmed the district court’s denial because the
proposed instruction was misleading and the existing instruc-
tion adequately addressed the movant’s concern. Mitchell,
11128     MERRICK v. PAUL REVERE LIFE INSURANCE CO.
752 F.2d at 389. Where a proposed instruction is supported by
law and not adequately covered by other instructions, the
court should give a non-misleading instruction that captures
the substance of the proposed instruction. See Ragsdell v.
Southern Pac. Transp. Co., 688 F.2d 1281, 1283 (9th Cir.
1982).

   [11] We therefore conclude that the district court erred in
failing to instruct the jury that it could not punish the defen-
dants for conduct that harmed only nonparties. Williams sug-
gests in passing that a panel may remedy this error either by
granting a new trial or reducing the amount of punitive dam-
ages. Williams, 127 S. Ct. at 1065. While remittitur may rem-
edy a jury award deemed unconstitutionally excessive, see
Planned Parenthood of Columbia/Willamette Inc. v. Am.
Coalition of Life Activists, 422 F.3d 949, 963 (9th Cir. 2005),
it seems less appropriate where the constitutional error stems
from misguidance regarding the way the jury may use evi-
dence in setting an amount. We therefore vacate the punitive
damages verdict and remand the case for a new trial on puni-
tive damages. Larez v. Holcomb, 16 F.3d 1513, 1520 (9th Cir.
1994). In light of this holding, we decline to reach the insur-
ers’ challenge that the punitive award was unconstitutionally
excessive. See Williams, 127 S. Ct. at 1065.

D.   Attorney’s Fees

   [12] Merrick sought attorney’s fees under Nevada Revised
Statute § 18.010(2)(b), which permits a fee award only where
the opposing party maintained the suit “without reasonable
ground or to harass the prevailing party.” At the post-trial
hearing, the district court explicitly found that the evidence
was such that “the case could have gone either way.” But it
nonetheless reluctantly awarded Merrick fees based upon its
reading of Farmers Home Mutual Insurance Co. v. Fiscus,
725 P.2d 234 (Nev. 1986). In Fiscus, the Nevada Supreme
Court affirmed the district court’s award of attorney’s fees in
a bad faith insurance case. The district court here interpreted
          MERRICK v. PAUL REVERE LIFE INSURANCE CO.        11129
Fiscus as creating a categorical rule that “a finding of bad
faith against the insurance company was at least tantamount
to finding that [insurer’s] defense was maintained without rea-
sonable ground.” The trial judge stated clearly that “[w]ithout
the Fiscus case, I don’t think I would award attorneys’ fees
in this case.”

   The district court misread Fiscus, although its mistake was
understandable. The trial court in Fiscus granted attorney’s
fees on the ground that where the bad faith ruling is based on
an insurance company’s unreasonable interpretation of a pol-
icy, then a defense based on the same unreasonable interpreta-
tion constitutes an unreasonable ground for maintaining the
suit. Fiscus, 725 P.2d at 235-37. But the Nevada Supreme
Court explicitly found that, in light of the district court’s fac-
tual findings regarding the extent of Farmers’ bad faith, it was
“unnecessary” to address this legal conclusion. Id. at 237 n.3.
Fiscus therefore declined to create a categorical rule. We note
that four months after Fiscus was decided, the same court in
another bad faith insurance case reviewed the trial court’s bad
faith and attorney fee findings separately; if Fiscus had indeed
created a categorical rule there would have been no need to
separate the analysis. See Am. Excess Ins. Co. v. MGM Grand
Hotels, Inc., 729 P.2d 1352 (Nev. 1986). Moreover, even if
Fiscus purported to create a categorical rule, it could not have,
as Nevada law prohibits courts from expanding or altering
legislative rules for fee-shifting. See First Interstate Bank v.
Green, 694 P.2d 496, 498 (Nev. 1986).

   [13] The district court’s award was therefore based upon a
misreading of Fiscus. The court explained that absent the
Fiscus decision it would not have awarded fees, and Merrick
seemingly does not challenge the court’s finding that this case
“could have gone either way.” We therefore reverse the dis-
trict court’s attorney fee award.

                       III.   Conclusion

   We affirm the district court’s denial of the insurers’ motion
for a new trial and its grant of Merrick’s motion in limine. We
11130    MERRICK v. PAUL REVERE LIFE INSURANCE CO.
vacate the punitive damages verdict and remand for a new
trial on punitive liability. We also reverse the attorney fee
award. Each party shall bear its own costs on appeal.

  AFFIRMED in part; REVERSED in part; VACATED in
part, and REMANDED.