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Ledingham v. Blue Cross Plan For Hosp. Care

JUNE 12, 1975.

HAROLD A. LEDINGHAM ET AL., PLAINTIFFS-APPELLEES,

v.

BLUE CROSS PLAN FOR HOSPITAL CARE OF HOSPITAL SERVICE CORPORATION ET AL., DEFENDANTS-APPELLANTS.



APPEAL from the Circuit Court of Madison County; the Hon. HAROLD R. CLARK, Judge, presiding.

MR. JUSTICE EBERSPACHER DELIVERED THE OPINION OF THE COURT:

This is an appeal from a judgment entered on a general jury verdict for the plaintiffs in the amount of $9200 and costs in the circuit court in Madison County, Illinois. Suit was brought in three counts, Count I for wilful and wanton conduct requesting both actual and punitive damages, Count II for negligence requesting compensatory damages, and Count III for breach of contract requesting only compensatory damages. Count II was dismissed by plaintiffs during trial, and the case went to judgment on Counts I and III.

Plaintiffs contracted with Blue Cross Plan for Hospital Care of Hospital Service Corporation and Blue Shield of Illinois Medical Service, a corporation, for coverage. Pursuant to an application made after July 15, 1969, a policy was issued with an effective date of August 1, 1969. No physical examination was required of the insureds. The policy contained an exemption for illnesses that occurred within 270 days before the effective date.

Since 1967 Mrs. Ledingham had adopted a health routine of having a gynecological examination and `Pap Test' each 6 months. She had such test approximately a month before she initiated her search for a health insurer. The results of the test were negative.

However on August 3, 1969, Mrs. Ledingham experienced prolonged and excessive bleeding. After bed rest and medication were prescribed, taken, and failed to produce the cure desired, a diagnostic dilatation and curettage was performed. Her condition stabilized until about September 9, 1969, when she hemorrhaged and was given medication. Her condition again stabilized, and then degenerated again. Finally, on November 25, 1969, a hysterectomy was performed.

Claims for medical and hospital bills, which total $1549.60 were submitted in proper form and in a timely fashion, but the defendants refused payment on the grounds that the condition from which Mrs. Ledingham suffered was excluded under an exclusion in the policy for pre-existing illnesses. No evidence is presented that the defendants' refusal was based on any other reason than a good faith belief that the illness could not have been contracted, and then developed to its severity on August 3, 1969; that is, in 2 days. In the report to the defendants, plaintiffs' doctor stated that he could not be certain whether the condition was pre-existing on August 1, 1969, or not. The defendants did not use harsh or threatening language in their refusal to pay on the policy. There was a dispute over whether the condition was pre-existing on August 1, 1969, based upon a report of December 5, 1969, from Doctor Morrison to the defendants. In that report the doctor, pursuant to their request, discussed the existence of the two conditions prior to August 1, 1969. He stated that the existence was unknown, that is, not established; that symptoms first appeared after August 1, 1969; and that no treatment for such conditions had been furnished during 1 year prior to August 1, 1969. The defendants presented no evidence at trial, although they asserted the affirmative defense of pre-existing condition. No evidence was presented that would tend to establish that, at any time, the defendant companies attempted to use their superior economic position to force any type of settlement. The defendants did not delay the trial of the case.

The issue to be decided in this case is whether punitive damages may properly be awarded in an action brought by a policyholder of a health insurance plan where the insurance company allegedly wrongfully denied benefits to the insured on the basis of a pre-existing illness exclusion in the policy. The insurers' basis for denying benefits was the statement by the doctor of the insured that he could not tell whether the illness existed prior to the date of issuance of the policy.

The insurers' contentions are that this insurance policy is just like every other contract, and that the rule in Illinois is that punitive damages are not properly allowed in a suit on a contract. They argue the trial court erred in allowing punitive damages to be assessed in this case. They rely on several recent Illinois cases.

In Alsip Homebuilders, Inc. v. Shusta, 6 Ill. App.3d 65, 284 N.E.2d 509, a contractor built a home which did not meet the contract specifications. The contractor failed "* * * to construct and complete, in a good substantial and workmanlike manner, a residence, * * *." The builder also forged the signature of the purchaser on a certificate of acceptance to obtain the mortgage money from the lender. The appellate court held that the trial court erred in allowing punitive damages to be assessed.

The appellate court also refused to allow punitive damages in Sears v. Weissman, 6 Ill. App.3d 827, 286 N.E.2d 777, where a corporation sold a bomb shelter to a 75-year-old woman, and then quietly dissolved itself without building the shelter, or in any way meeting its obligation.

Both of these cases rely on Ash v. Barrett, 1 Ill. App.3d 414, 274 N.E.2d 149, where the court was dealing with a contract to lease a house. The owner refused to execute the lease, and the lessee sued for compensatory and punitive damages. The court allowed the compensatory damages to stand, but reversed the award of punitive damages. The court said:

"Finally, defendant contends that the award for punitive damages was improper. Plaintiffs amended their complaint several times during the course of trial in an attempt to conform their allegations to the rule applied in some jurisdictions. The rule being that punitive damages are permissible in exceptional cases for a breach of contract when the breach amounts to an independent willful tort. 22 Am.Jur.2d, Damages, Sec. 245. Here, the breach was evidenced by the defendant's refusal of possession knowing that plaintiffs were living in a motel together with defendant's willfully allowing the house to remain vacant. Both events occurred after the breach. This, in our opinion, does not make an unusual case for breach of contract and was properly remedied by compensatory damages.

The rule in Illinois is that in an action for breach of contract there can be no claim for punitive damages. Hayes v. Moynihan, (1869), 52 Ill. 423, 426." 1 Ill. App.3d 414, 418-19.

It is significant that the court in Ash did not find that the rule, applied in some jurisdictions, that punitive damages are permissible in exceptional cases for a breach of contract when the breach amounts to a willful, independent tort, was incorrect or misstated the law. They merely stated that on the facts of the case, the plaintiff had not presented "* * * an unusual case for breach of contract."

The courts have pursued this distinction between tort and contract without disapproving of it in Alsip Homebuilders, Inc. There the court stated:

"It is significant that both counts of the counterclaim in this case were based upon the contract. Although Count II of the counterclaim alleges fraudulent conduct on the part of Alsip, the allegations are not those of a tort action. The theory of recovery in Count II is that punitive damages should be awarded because of the willful and malicious conduct that precipitated the breach of contract alleged in Count I.

The general rule requires that punitive damages cannot be recovered in an action for breach of contract. 11 Williston, Contracts, Sec. 1340 (3d ed. 1968); 5 Corbin, Contracts, Sec. 1077 (1964); McCormick on Damages, Sec. 290 (1935); 70 Harv. L. Rev. 517 (1957); Restatement of Contracts, Sec. 342.

The theory behind this rule rests upon a distinction drawn between compensation and punishment. If the general purpose underlying the law of damages is to promote security and prevent disorder, as Corbin points out, and breaches of contract do not cause as much resentment or other physical or mental discomfort as do wrongs called torts or crimes, then the remedies needed to prevent breaches of contract and satisfy the injured party are not as severe as those needed to punish the tort feasor or criminal. See Corbin, Sec. 1077, supra.

Illinois seems to adopt the general rule, but the authority is not extensive. Hayes v. Moynihan (1869), 52 Ill. 423; Ash v. Barrett (1971), 1 Ill. App.3d 414, 274 N.E.2d 149.

However, a review of the authority in other jurisdictions confirms that the vast majority does not allow punitive damages to be awarded in contract actions. [Citations.]" 6 Ill. App.3d 65, 68-69.

The insurers argue that this is an action upon a contract for insurance and therefore the award of punitive damages was error in view of the above cited authority. Plaintiffs argue that the action was in tort notwithstanding the fact that a breach of an insurance contract was also involved.

• 1 It is clear in Illinois that where both a tort and a contract cause of action arise out of the same fact situation, the plaintiff is free to proceed with the theory of his choice. The presence of the cause of action in contract does not preclude an action based upon the tort. This principle is discussed in Nevin v. Pullman Palace Car Co., 106 Ill. 222, 46 Am.Rep. 688. There the plaintiff, his wife, and his niece were refused the use of a berth in a sleeping car without justification. When the plaintiff left the car to get a breath of fresh air, the door was slammed on him, and his baggage and family were then removed to the coach where they had to spend the night. Plaintiff sued in tort and the railroad argued that plaintiff was limited in his cause of action to a breach of contract of carriage and recovery of the ticket fare. The court said:

"[N]othing is better settled than that in many contracts, especially those which establish peculiar relations between the parties, as, those of confidence and trust, the law silently annexes certain conditions, and imposes mutual obligations and duties, which are not all, in express terms, provided for in the contract, yet, in contemplation of law, they are nevertheless regarded as a part of the contract, and the non-performance of them may, in an action on the contract, be assigned as a breach thereof. But while assumpsit [action on the contract] will certainly lie for a breach of these implied duties, it is equally well settled that case [action on the tort] will lie also. Strictly speaking, these duties arise ex lege out of the relation created by the contract. As familiar illustrations of this class of contracts, which give rise to an almost infinite variety of implied duties and obligations, may be mentioned those between client and attorney, physician and patient, carrier and shipper, and, in short, every species of bailment. In all these and analogous cases it is conceded case is a concurrent remedy with assumpsit for a breach of the implied duties growing out of any of these relations.

Now, when we look at the contract between the plaintiff and defendant, the character of the business of the company, the subject matter of the contract, the relations of the parties with respect to such subject matter, and all the circumstances attending the transaction, can it be doubted * * * that the contract falls within the same class of contracts as those between carrier and passenger, and the like?" 106 Ill. 222, 233.

Our question is whether the relationship of a health insurance insurer and a policy holder gives rise to implied duties, the breach of which would be tortious. If breach of a duty implied by the relationship did occur, and was tortious, the ...


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