Cavallo v. Phx. Health Plans, Inc.

81 Arizona Cases Digest 10

518 P.3d 759

Matthew CAVALLO, et al., Plaintiffs/Appellants,

v.PHOENIX HEALTH PLANS, INC., Defendant/Appellee.

No. CV-21-0051-PR

Supreme Court of Arizona.

Filed October 20, 2022

Steven C. Dawson (argued), Anita Rosenthal, Aaron Dawson, Sander Dawson, Dawson & Rosenthal, P.C., Sedona, Attorneys for Matthew and Jocelyn Cavallo

Michael W. Sillyman, Paul S. Gerding, Jr., Jonathan S. Schultz (argued), Jeffrey M. Giancana, Kutak Rock LLP, Scottsdale, Attorneys for Phoenix Health Plans, Inc.

Erin Rose Ronstadt, Ronstadt Law, PLLC, Phoenix, Peter S. Sessions, Kantor & Kantor LLP, Northridge, California, Attorneys for Amicus Curiae United Policyholders

David L. Abney, Ahwatukee Legal Office, P.C., Phoenix, Attorney for Amici Curiae for Arizona Association for Justice and Arizona Trial Lawyers Association

JUSTICE KING authored the Opinion of the Court, in which CHIEF JUSTICE BRUTINEL, VICE CHIEF JUSTICE TIMMER, and JUSTICES BOLICK, LOPEZ, BEENE, and MONTGOMERY joined.

JUSTICE KING, Opinion of the Court:

¶1 This case requires us to evaluate whether the trial court erred in instructing the jury on waiver and mitigation of damages in the trial of a tort claim for first-party insurance bad faith.¹ We hold the waiver instruction was improperly given and we remand for a new trial on that basis. On the issue of mitigation of damages, we hold that a jury instruction based on Restatement (Second) of Torts § 918 (Am. L. Inst. 1979) is appropriate.

I. BACKGROUND

¶2 Matthew Cavallo was diagnosed with multiple sclerosis ("MS"). In 2007, Cavallo began receiving infusions of Tysabri, a medication manufactured by Biogen that helps prevent or reduce the frequency and severity of MS symptoms. Some MS patients who are regularly administered Tysabri have an increased risk of relapse resulting in recurring MS symptoms if they do not receive a dose of Tysabri within ninety days of their last dose. Tysabri may only be administered through Tysabri Outreach: Unified Commitment to Health ("TOUCH") certified clinics. The TOUCH program is a Biogen distribution program that was developed to promote the safety of Tysabri treatments.

¶3 In 2015, Cavallo purchased a health insurance plan (the "Plan") from Phoenix Health Plans ("PHP") with coverage beginning on January 1, 2016. The Plan covered Tysabri, but only if the patient received prior authorization from PHP. The Plan provided no out-of-network benefits, unless a medically necessary treatment was unavailable in network. In December 2015, just before the Plan became effective, Cavallo received an infusion of Tysabri.

¶4 Christina Oth, the MS coordinator for Cavallo's medical provider, testified at trial that she was attempting to schedule Cavallo's next infusion of Tysabri when she learned Chandler Regional Medical Center ("Chandler Regional") was both TOUCH certified and within PHP's network. On February 19, 2016, Oth submitted a prior-authorization request to PHP for Cavallo to receive his next infusion of Tysabri at Chandler Regional. In response, a PHP representative, Fabian Ruiz, incorrectly informed Oth that Chandler Regional was not within the Plan's network and Cavallo did not have out-of-network benefits under the Plan. Oth was then provided a list of PHP's in-network facilities, but those facilities were not certified to provide Tysabri infusions. Thereafter, Oth purportedly cancelled Cavallo's prior-authorization request for the Tysabri infusion.

¶5 Oth pursued a dose of Tysabri for Cavallo through Biogen's free drug program. On February 23, 2016, Biogen approved the free dose of Tysabri for Cavallo, although he would have been responsible for an administration fee of approximately $150.00. Cavallo declined Biogen's offer.

¶6 On March 16, 2016, Cavallo informed PHP that he was experiencing a recurrence of his MS symptoms. PHP began a medical necessity review of Cavallo's requested treatment. PHP concluded it could not determine whether Tysabri was medically necessary for Cavallo and requested a physician review. PHP also ascertained that Chandler Regional was, in fact, in its provider network. PHP's reviewing physician initially determined that the treatment was not medically necessary for Cavallo but later approved it after discussing the treatment with Cavallo's neurologist.

¶7 On March 30, 2016, PHP informed Cavallo that it had approved coverage for him to receive the Tysabri infusion. On April 4, 2016, 117 days after his last infusion, Cavallo received the Tysabri infusion at Chandler Regional. But, by that time, Cavallo had allegedly already experienced a recurrence of his MS symptoms, including loss of fine motor control, weakness in his arm, numbness, and a reduction in mental functioning.

¶8 Cavallo sued PHP for insurance bad faith. During trial, Cavallo argued: (1) PHP unreasonably and intentionally denied and delayed his claim for Tysabri from February to late March 2016, even after learning he had experienced a recurrence of his MS symptoms; (2) pursuant to its policies, PHP purposefully trained its employees to tell providers and insureds that health plans like Cavallo's did not permit out-of-network benefits, and did not educate employees on the medical necessity exception; (3) PHP designed an overly complex system for processing claims and trained employees to require an insured to identify an in-network facility before it would review a claim; and (4) PHP incentivized its employees to reduce costs by delaying and denying claims. Cavallo alleged PHP undertook these efforts to avoid paying for covered out-of-network services.

¶9 PHP countered that it handled Cavallo's claim reasonably, given the information available to it. In particular, PHP argued: (1) Ruiz made a good faith mistake regarding Chandler Regional's network status; (2) Cavallo relieved PHP of its obligations pertaining to Cavallo's initial request for coverage in February 2016 when Oth purportedly cancelled that prior-authorization request; and (3) Oth then failed to sufficiently communicate with PHP regarding Cavallo's claim. PHP also argued Cavallo failed to mitigate his damages by declining to accept the dose of Tysabri offered by Biogen.

¶10 PHP asked the trial court to instruct the jury on (1) waiver, in the form of a contract waiver instruction; and (2) mitigation of damages. Cavallo opposed the instructions. Cavallo argued waiver is a contract defense that does not apply to an insurance bad faith claim, and a waiver instruction would confuse the jury into thinking Cavallo had waived the implied duty of good faith and fair dealing. Cavallo further claimed a mitigation instruction was improper because the mitigation doctrine does not require a party to waive a right, and if Cavallo had accepted the free Tysabri dose, he would have waived his right to receive reimbursement from PHP by failing to obtain prior authorization.

¶11 The trial court granted PHP's request for both jury instructions. It gave the Revised Arizona Jury Instructions’ ("RAJI") contract waiver instruction:

A party to a contract may waive the other party's duty to perform. "Performance" refers to what a party agreed to do as his part of the contract. Waiver is either the express, voluntary, and intentional relinquishment of a known right, or it is conduct that is inconsistent with an intent to assert the right. By accepting performance known to be deficient, a party has waived the right to reject the contract on the basis of that performance. If Mr. Cavallo has waived a promised performance, then [PHP] is no longer bound to perform on that promise and Mr. Cavallo is not entitled to damages for that particular non-performance. [PHP] has the burden of proving waiver.

See Rev. Ariz. Jury Instr. (Civ.) Contract 13, at 16 (7th ed. 2021). The trial court also instructed the jury on mitigation of damages:

[PHP] claims that Mr. Cavallo did not make reasonable efforts to prevent or reduce damages. Mr. Cavallo may not recover for any damages that could have been avoided without undue risk, burden or humiliation. [PHP] must prove: A. Mr. Cavallo did not make reasonable efforts to prevent or reduce damages; B. If Mr. Cavallo had acted reasonably, Mr. Cavallo could have prevented or reduced damages; and C. The amount of plaintiff's damages that could have been prevented or reduced through reasonable efforts.

¶12 The jury returned a verdict in favor of PHP. Cavallo moved for a new trial, arguing the trial court prejudicially erred by instructing the jury on waiver and mitigation of damages. The court denied the motion. As to the waiver instruction, the court explained that "any contractual provision can be waived" and it was "up to the jury to decide" if Cavallo had waived any of the Plan's provisions. Further, PHP was not "arguing that [Cavallo] waived the covenant of good faith and fair dealing entirely and that PHP owed no duty of good faith and fair dealing at all." Moreover, the mitigation instruction was appropriate because "[a]ny contracting party has a duty to mitigate damages by avoiding consequences of known breaches." And Cavallo was not prejudiced because "[t]he failure to mitigate instruction dealt ONLY with damages," which "only came into play if the defendants were found liable." Because the jury rendered a defense verdict, "[t]he jury never reached the issue of damages and thus never considered mitigation per the instructions."

¶13 The court of appeals affirmed. Cavallo v. Phx. Health Plans, Inc. , 250 Ariz. 525, 537 ¶ 45, 482 P.3d 404, 416 (App. 2021). The court concluded "the superior court did not abuse its discretion by giving the waiver instruction in this case because it was not contrary to the law applicable to an insurance bad-faith claim and did not mislead the jury." Id. at 532 ¶ 23, 482 P.3d at 411. The court further explained it "need not address whether the mitigation instruction was contrary to the law because even assuming it was erroneous, it caused [Cavallo] no prejudice," as the jury returned a defense verdict...