HUGHES v. BLUE CROSS OF NORTHERN CALIFORNIA

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Court of Appeal, First District, Division 1, California.

Jurdy HUGHES, Plaintiff and Appellant, v. BLUE CROSS OF NORTHERN CALIFORNIA et al., Defendant and Appellant.

No. A032025.

Decided: March 24, 1988

Arnold R. Levinson, Griffinger, Levinson, Freed & Heinemann, San Francisco, for plaintiff and appellant. Peter W. Davis, Stephen A. McFeely, Jacqueline M. Jauregui, Crosby, Heafey, Roach & May, Oakland, for defendant and appellant.

This appeal arises from an action brought by Sally Hughes (hereafter Mrs. Hughes) and her estranged husband, Jurdy Hughes (hereafter Mr. Hughes), against Blue Cross of California (hereafter Blue Cross) alleging several causes of action arising from the denial of insurance benefits for their son's hospitalization.   Upon petition of Blue Cross, the plaintiffs' right to the disputed benefits was referred to arbitration and the arbitrator ordered payment.   Mrs. Hughes then proceeded to trial to recover damages for Blue Cross's alleged breach of its implied covenant of good faith and fair dealing.   The jury rendered a special verdict awarding her $150,000 in compensatory damages and $700,000 in punitive damages.   Although not covered by the Blue Cross insurance contract, Mr. Hughes also proceeded to trial on theories of breach of the implied covenant of good faith and fair dealing, unfair insurance claims practices, and negligent infliction of emotional distress.   Finding that he had no standing to sue, the trial court directed a verdict against him and later entered a judgment of dismissal.

On September 6, 1981, Patrick Hughes, a young man 21 years old, took an overdose of about 30 aspirins and stabbed himself repeatedly in the abdomen with a screwdriver.   After discovering the boy's condition, his father and mother took him to the emergency ward of St. Luke's hospital.   It was Patrick's first episode of serious mental disorder.   In the first grade and again in the eighth grade, he had briefly undergone psychological counseling after showing signs of nervousness.   Later, he appeared to fare well in his high school years.   Electing to live with his father so that he could attend St. Ignatius Preparatory School, he received good grades and seemed “to fit right in.”   But he had difficulty coping after graduation and dropped out of a junior college.   In recent months, he had been fired from his job and quarreled with his father and his girlfriend.

A psychiatrist, Dr. Hector De Lorente, arranged for Patrick's transfer to the psychiatric ward of Mary's Help Hospital where he remained for about six weeks.   Dr. De Lorente found that Patrick was “extremely anxious” and “overwhelmed by images which had the contents of knives, axes as well as fire.”   He did not respond well to treatment.   After several weeks he confided to Dr. De Lorente a grandiose delusion characteristic of schizophrenia.   In an excited condition, he explained that God's eyes were within him.   If he could witness the sunrise with his girlfriend, there would be less crime and less pressure for people in the world.   On Dr. De Lorente's recommendation, Patrick was taken on October 25th to Belmont Hills Psychiatric Center, an institution providing acute psychiatric care.

At Belmont Hills Patrick was put under the care of Dr. William E. Lofthouse.   He continued to be “withdrawn, behaving inappropriately, was depressed, was talking about subjects like death and dying and violence.”   In time Dr. Lofthouse also learned of his obsessive delusion about saving the world by witnessing the rising sun.   Dr. Lofthouse put him on a “rigorous trial on an antipsychotic medication.”

The “Nursing Referral and Care Plan” at Belmont Hills documents an early and continued concern with planning for Patrick's discharge.   But he did not respond well to the antipsychotic medication.  “Throughout his stay in the hospital he was somewhat isolated, related in a superficial manner, [and] had major difficulties using any individual or group psychotherapy.”   Nevertheless, Dr. Lofthouse was concerned “to avoid institutionalizing him.”   By December his symptoms “were beginning to be less active,” although “his instability was always apparent.”   While recognizing that “he was not well,” Lofthouse arranged for Patrick to be released to his family on December 18th for the Christmas holiday and to enter a half-way house in January.

In about two weeks Patrick suffered a crisis similar to that which had first precipitated his hospitalization.   A day after his admission to a half-way house, he ran away, returned to his mother's home, and took an overdose of four aspirin and seventeen tetracycline.   He was taken again to Mary's Help Hospital on January 6, 1982.   Dr. De Lorente recalls, “He was extremely agitated.   He was extremely frightened.   I think he was in panic.   He had not slept for one or two days.”   After two days he was readmitted to Belmont Hills where Dr. Lofthouse noted that “he had a strong belief of a delusional nature that his soul was going to hell.”

Patrick's second hospitalization at Belmont Hills lasted until February 12, 1982, when he was discharged to his parents with the recommendation that he receive treatment as an outpatient.   During the next four months, he continued to receive psychotherapy once a week but was mute and withdrawn and often refused to take medication.   In an effort to lift his mood of depression, the Belmont Hills clinic administered electroconvulsive therapy on four occasions.   Late in May his condition deteriorated.   He was reluctant to rise from bed in the morning and neglected his personal appearance, refusing to dress, bath, shave, or comb his hair.   Late at night he could be seen staring at religious programs on television, with the volume on high and his face “right in front of [the television].”  His parents appealed to Dr. De Lorente who visited Patrick at home to persuade him to return to the hospital.   After getting no response, Dr. De Lorente suggested the option of calling the police to place him involuntarily in a mental ward.

On the morning of June 11th, Patrick was seen wandering the streets near his home, clad in a bathrobe, with a catatonic demeanor.   That afternoon his father took him to Belmont Hills for a previously scheduled outpatient visit.   Dr. Lofthouse directed that he be placed in a locked ward for 14 days—the period of involuntary confinement permitted under Welfare and Institutions Code section 5254—and observed, “[t]he patient was not talking and seemed extremely frightened and in a trance.”   Patrick vigorously resisted this hospitalization.   Showing uncharacteristic resourcefulness, he succeeded in retaining an attorney and applied for a writ of habeas corpus.   Pleased by this unexpected display of assertiveness, Dr. Lofthouse decided not to contest the writ.   Patrick was discharged on June 23th.

Within three days, Patrick began to talk “about fears of hurting himself” and was again admitted to Mary's Help Hospital for emergency hospitalization.   Dr. De Lorente noted, “[h]e was agitated.   He appeared to be frightened.   He was hallucinating.   He admitted to visual images of knives and axes.”   He had apparently remained insomniac for about two days before hospitalization and continued to be unable to sleep despite extra dosage of hypnotic medicine.   He remained under treatment at Mary's Help until a bed became available at Belmont Hills on July 6th.

After being placed under the 72–hour detention permitted by Welfare and Institutions Code section 5150, Patrick angrily denied the facts of his past psychiatric history and soon managed to escape from the hospital.   Returning home, he had difficulty sleeping and seemed nervous and quite frightened.   On July 13th he was taken for a fifth time to Belmont Hills.   Dr. Lofthouse testified that he clearly needed hospitalization “[b]ecause his behavoir [sic] beyond any doubt indicated that he was incapable of functioning as an outpatient at home.   He just could not cope.   His illness was too active.”   Lofthouse signed the certification required by Welfare and Institutions Code section 5252 to hold Patrick involuntarily for 14 days.   The certification, which was cosigned by Dr. Ronald Hayman, the director of the Belmont Hills center, attested that the patient was “gravely disabled” and in need of “intensive care.”   When Patrick again filed a writ of habeas corpus, Dr. Lofthouse appeared in court in opposition.   He explained, “[h]e wasn't getting help, he was acting bizarrely.   We could rarely get him into what I would consider a stable outpatient condition and I felt that he probably needed much longer period of hospitalization.”   The court denied the writ, and Patrick was transferred on August 15th for long term care at the Institute for Living in Hartford, Connecticut.

As an employee of Ralph K. Davies Medical Center, Sally Hughes and her dependents were covered by group medical insurance offered by Blue Cross of California.   This action concerns the periods of hospitalization at Belmont Hills from October 26 to December 18, 1981, and July 13 to August 15, 1982.   For these periods, Mrs. Hughes submitted claims for hospital expenses totalling $23,698.69.   Blue Cross consented to pay only $6,598.69, disallowing the balance on the ground that the hospitalizations were not medically necessary.   The insurance company denied coverage for the portion of the 1981 hospitalization between November 21st and December 18th, and for all of the period of hospitalization in July–August, 1982.

Blue Cross asserts that there was no substantial evidence to support the jury's verdict.   The contention calls for examination of the record dealing with the processing of the respondent's claims.   In viewing this record, the court must bear in mind the familiar rule of Crawford v. Southern Pacific Co. (1935) 3 Cal.2d 427, 429, 45 P.2d 183:  “[W]hen a verdict is attacked as being unsupported, the power of the appellate court begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradicted, which will support the conclusion reached by the Jury.   When two or more inferences can be reasonably deduced from the facts, the reviewing court is without power to substitute its deductions for those of the trial court.”

Mrs. Hughes submitted her first claim for the October–December hospitalization in November 1981.   After a preliminary clerical screening, the claim was referred to the medical review department of Blue Cross.   This department allows certain claims that fall within very restrictive guidelines.   The remaining claims are referred to a psychiatric consultant.   The function of the medical review department is limited to procuring the necessary records, handling claim correspondence, and implementing the medical consultant's recommendation.

Shortly after receiving her claim, the medical review department sent a form to the Belmont Hills clinic that indicated, by checks in a series of boxes, a request for the following records:  “History and Physical Examination (Complete),” “Physician's Orders,” “Progress Notes,” “Discharge Summary,” “Consultation Reports,” and “Nurses Notes.”   At trial the claim file contained only three categories of records from Belmont Hills:  physician's orders, progress notes, and nurses' notes.   It did not include the discharge summary, a detailed statement by the attending physician of the patient's history, treatment, and diagnosis.   The medical consultant was confident he remembered reading the summary, but the clerk in the medical review department thought that it might not have been obtained.   In any event, it is undisputed that the claim file did not contain the record of the patient's earlier treatment at Mary's Help Hospital or the “Nursing Referral and Care Plan” that documented discharge planning.   Moreover, the file contained no record of a concurrent utilization review program at the Belmont Hills clinic.   Under this program, an independent psychiatric consultant, Dr. Burton White, visited the clinic each week and reviewed the charts of all patients to determine the necessity of continued hospitalization.   Dr. White had consistently approved Patrick's stay at Belmont Hills.

Upon receiving this limited medical record, the Blue Cross consultant, Dr. Ronald Hayman, requested a letter from the utilization review committee at the Belmont Hills clinic explaining the need for “acute level of care” after November 15, 1981.   The medical review department encountered delays in obtaining the requested letter.   Shortly before making the request, Dr. Hayman had himself assumed the position of director of the Belmont Hills clinic.   On his suggestion, the attending physician, Dr. Lofthouse, finally wrote a one-page letter dated May 13, 1982, advising among other things that within two weeks of his discharge Patrick “became progressively more despondent and suicidal” and was again hospitalized.   After the letter was sent, Dr. Hayman notified the medical review department that the case should be sent to another psychiatric consultant.

The case was next reviewed by a registered nurse on the Blue Cross staff who transmitted the file to Dr. Ronald Mintz, a psychiatric consultant in Southern California, with the recommendation that coverage be disapproved after December 1, 1981.   On July 9, 1982, Dr. Mintz jotted the following recommendation on the medical consultant review report:  “By 11/21, following 11 weeks intensive impt. treatment a lower level of care is medically appropriate.   Discharge planning was seriously delayed, and is the reason for the custodial period 11/21—discharge.   Accept 10/26—11/20 and non-cover 11/21—discharge.”

Dr. Mintz was a person of undoubted professional credentials who had 14 years of experience working for Blue Cross.   But in the course of adverse examination under Evidence Code section 776 respondent raised questions about the care and standards that he employed in reviewing claims.   Certain testimony, seized upon in respondent's oral argument, suggested that he devoted an average of only 12 minutes per claim.   He didn't know of the program of concurrent utilization review at the Belmont Hills clinic.   He considered that Dr. Lofthouse's letter contained no helpful information even though it alerted him to the patient's suicide attempt two weeks after the disputed discharge.   Most damaging, Dr. Mintz disclaimed any responsibility to secure all relevant records before making a recommendation.   He testified, “I felt that it was the responsibility of the treating doctor to put any information that he wanted considered in the review of these records into the records.”   Conceding that “the patient is the one that pays” if the records are incomplete, he still affirmed that it was not his practice to contact the utilization review committee of the treating hospital before denying a claim.   If the hospital had additional information pertinent to the claim, it was the hospital's option to submit it to Blue Cross with a request for reconsideration.   He would make no effort to obtain the information.

The jury could reasonably infer that Dr. Mintz employed a standard of medical necessity markedly at variance from that of the psychiatric community in California.   He testified that over the years he recommended disapproval of about 30 percent of the claims he reviewed.   He was unswayed by the fact that his recommendation conflicted with that of other psychiatrists, such as Dr. Lofthouse, Dr. De Lorente, and Dr. Hayman, who were familiar with the case, and evinced little interest in the opinion of Dr. White who reviewed the patient's charts to make the same determination of medical necessity each week of his hospitalization.  “It is not an accounting contest,” he insisted.   In repeated questioning, respondent sought to elicit an admission that Dr. Mintz' definition of medical necessity differed from profession standards.   While conceding that the consensus of the psychiatric community was “one of the things to be considered,” the latter confirmed that he employed independent judgment and once seemed to allow that his standard of medical necessity might be more restrictive than the generally accepted professional standard.   The wording of his recommendation, stating that a “lower level of care is medically appropriate,” appeared to reflect independent opinion at odds with the judgment of the treating physicians.

According to its normal procedures, Blue Cross sent the treating physician, Dr. Lofthouse, a standard form letter notifying him of its intention to deny the claim for hospitalization after November 20th.   The letter stated:  “Based on our review of the medical records we have received to date, it is our determination that it was not medically necessary for this patient to have been hospitalized at the acute level after November 20, 1981.  [¶]  To allow all possible contract coverage, we are asking if you have any further medical information that can be provided regarding this patient's admission.”   The letter did not inform the physician of the medical grounds for the denial or identify the records Blue Cross had reviewed.   Dr. Lofthouse testified that he was “very unclear” how to respond and chose not to answer.   He explained, “I didn't know what to believe, because I had written an initial letter and still I was getting more letters.”   Receiving no response from Dr. Lofthouse, Blue Cross sent a letter dated October 5, 1982, to the patient, Patrick Hughes, denying the claim for hospitalization between November 20th and December 18th.

The processing of respondent's claim for the period of hospitalization of the Belmont Hills clinic from July 13 to August 15, 1982, followed a very similar pattern.   The Blue Cross medical review department evidently conveyed to Dr. Mintz only the physician's orders, progress notes, and nursing notes for the patient's hospitalization during this period.   At trial, the file evidently contained an admission summary dated July 13th but no discharge summary.   Although the progress notes alluded to the patient's involuntary confinement, the file did not include the certification of need for intensive care signed by Dr. Lofthouse and Blue Cross' own consultant, Dr. Hayman.   The testimony of Dr. Mintz contains no indication that he considered—or received—any records pertaining to the patient's earlier hospitalization at Belmont Hills on June 11th and July 6th, the clinic's concurrent utilization review, or the two periods of hospitalization at Mary's Help Hospital.

Dr. Mintz arrived at a recommendation based on the records he received without requesting additional documentation or making further inquiries.   In a report dated September 14, 1982, he concluded, “[t]his appears to be a custodial stay for the purpose of disposition planning․  Noncover.”

Before denying the claim, Blue Cross sent the attending physician, Dr. Lofthouse, the same form letter informing him of its determination that the hospitalization was not medically necessary.   The letter again did not disclose the medical grounds for the determination or the records on which it had been based.   Dr. Lofthouse complained, “[t]here was the sense of frustration of how to respond to the letters.   I didn't know quite what did they want.”   Again, he failed to reply.   On November 10, 1982, Blue Cross sent the patient a letter denying the claim for his hospitalization.

The covenant of good faith and fair dealing implied in all contracts requires each contracting party to refrain from doing anything to impair “ ‘the right of the other to receive the benefits of the agreement.’ ”  (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 940, 132 Cal.Rptr. 424, 553 P.2d 584.)   As applied to insurance contracts, it does not merely “connote the absence ․ of positive misconduct of a malicious or immoral nature․”  (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 922, fn. 5, 148 Cal.Rptr. 389, 582 P.2d 980.);   it demands that the insurer act reasonably.  (Id. at p. 925, 148 Cal.Rptr. 389, 582 P.2d 980.)   As stated in Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573, 108 Cal.Rptr. 480, 510 P.2d 1032, the covenant entails “a duty not to withhold unreasonably payments due under a policy.”   The record here contains much conflicting testimony as to the merits of the insured's claim.   Viewing the entire record in a light most favorable to the judgment, this court may find ample evidence to support a finding that the insurer acted unreasonably in denying benefits.  (See Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910, 921, 148 Cal.Rptr. 389, 582 P.2d 980.)

The presence of good faith implies “ ‘consistency with the justified expectations of the other party.’ ”  (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d at p. 922, fn. 5, 148 Cal.Rptr. 389, 582 P.2d 980.)   As observed in Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819, 169 Cal.Rptr. 691, 620 P.2d 141, “[t]he insured in a contract like the one before us does not seek to obtain a commercial advantage by purchasing the policy—rather, he seeks protection against calamity․  The purchase of such insurance provides peace of mind and security․”  In a medical insurance policy, the insured's expectation of security is relevant to the interpretation of medical necessity.   The issue is framed by Sarchett v. Blue Shield of California (1987) 43 Cal.3d 1, 233 Cal.Rptr. 76, 729 P.2d 267, where the court considered whether the duty of good faith requires an insurer to defer to the judgment of the treating physician on the issue of medical necessity.   It refused to adopt this extreme position, holding that “ ‘medical necessity’ or similar policy language is an objective standard to be applied by the trier of fact, ․” (Id. at p. 9, 233 Cal.Rptr. 76, 729 P.2d 267.)   But the court emphasized that the “ ‘reasonable expectation of the insured’ ” requires that the policy language be construed liberally “so that uncertainties about the reasonableness of treatment will be resolved in favor of coverage.”  (Id. at p. 10, 233 Cal.Rptr. 76, 729 P.2d 267.)   The court emphasized “that, with doubts respecting coverage resolved in favor of the subscriber, there will be few cases in which the physician's judgment is so plainly unreasonable, or contrary to good medical practice, that coverage will be refused.”  (Id. at p. 13, 233 Cal.Rptr. 76, 729 P.2d 267.)

 If the insurer employs a standard of medical necessity significantly at variance with the medical standards of the community, the insured will accept the advice of his treating physician at a risk of incurring liability not likely foreseen at the time of entering the insurance contract.   Such a restricted definition of medical necessity, frustrating the justified expectations of the insured, is inconsistent with the liberal construction of policy language required by the duty of good faith.   It is true that the practice of retroactive review, which the Sarchett decision sanctions, will inevitably introduce a degree of uncertainty as to insurance coverage.   But good faith demands a construction of medical necessity consistent with community medical standards that will minimize the patient's uncertainty of coverage in accepting his physician's recommended treatment.   Here, the jury could reasonably infer from the testimony of Dr. Mintz that Blue Cross employed a standard of medical necessity sufficiently at variance with community standards to constitute bad faith.

 Equally relevant to the present case, the Supreme Court has held “that an insurer may breach the covenant of good faith and fair dealing when it fails to properly investigate its insured's claim.”  (Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 817, 169 Cal.Rptr. 691, 620 P.2d 141.)   In reviewing the medical necessity of hospitalization, this duty of investigation surely entails an obligation to make reasonable efforts to obtain all medical records relevant to the hospitalization.   The record discloses a failure of the appellant's staff to forward all significant documents to the medical consultant, Dr. Mintz, who in turn exhibited an apparent lack of concern for securing complete documentation.   It might be argued that these failures can be ascribed to the fallibility inherent in all organizations, falling short of actual bad faith.   But the two Blue Cross letters to the treating physician plainly bring its conduct within the sphere of bad faith.   By not identifying the records on which the consultant's recommendation was based, the letters tended to assure that the staff's earlier failure to secure all relevant records would go undetected.   And by omitting any explanation of the medical grounds for the intended denial of coverage, the letters placed an undue burden of inquiry on the insured's physician.   The Blue Cross witnesses, in fact, defended the letters on the ground that the physician was free to write or call the medical review department to gain more information.   The covenant of good faith and fair dealing, however, places the burden on the insurer to seek information relevant to the claim.   This requires that the necessary letters to a treating physician be drafted in a manner calculated to elicit an informed response.

Former Civil Code section 3294, subdivision (a) authorizes punitive damages where “the defendant has been guilty of oppression, fraud, or malice, ․”  Each of these terms is defined in subdivision (c).   As fraud is not at issue here, only the definitions of malice and oppression are pertinent:  “(1) ‘Malice’ means conduct which is intended by the defendant to cause injury to the plaintiff or conduct which is carried on by the defendant with a conscious disregard of the rights or safety of others.  (2) ‘Oppression’ means subjecting a person to cruel and unjust hardship in conscious disregard of that person's rights.”   Under these statutory definitions, punitive damages thus may be predicated either on an intent to harm or a conscious disregard of another's rights.  (Colonial Life & Accident Ins. Co. v. Superior Court (1982) 31 Cal.3d 785, 792, 183 Cal.Rptr. 810, 647 P.2d 86.)   Since there is no evidence here of an intent to harm, the issue narrows the question whether there is substantial evidence that Blue Cross acted “in conscious disregard” of the insured's rights.

 Punitive damages are appropriate only in cases of egregiously tortious conduct.  “The mere carelessness or ignorance of the defendant does not justify the imposition of punitive damages.   Unhappily, as a society, we must tolerate without added retribution these all too common lapses in ourselves.   Punitive damages are proper only when the tortious conduct rises to levels of extreme indifference to the plaintiff's rights, a level which decent citizens should not have to tolerate.”  (Flyer's Body Shop Profit Sharing Plan v. Ticor Title Ins. Co. (1986) 185 Cal.App.3d 1149, 1154, 230 Cal.Rptr. 276.)   But the award of punitive damages finds a justification where it serves to deter socially unacceptable corporate policies.   In Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 820, 169 Cal.Rptr. 691, 620 P.2d 141, the court observed, “[i]n the present context, the principal purpose of section 3294 is to deter acts deemed socially unacceptable and, consequently, to discourage the perpetuation of objectionable corporate policies.  [Citation.]  Traditional arguments challenging the validity of exemplary damages lose force when a punitive award is based on this justification.”   Thus, in Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910, 923, 148 Cal.Rptr. 389, 582 P.2d 980, a judgment of punitive damages was upheld where evidence indicated that an insurer's actions “were all part of a conscious course of conduct, firmly grounded in established company policy, ․”  (Fn. deleted.)

 In the case at bar, there was evidence that the denial of respondent's claim was not simply the unfortunate result of poor judgment but the product of the fragmentary medical records, a cursory review of the records, the consultant's disclaimer of any obligation to investigate, the use of a standard of medical necessity at variance with community standards, and the uninformative follow-up letters sent to the treating physicians.   The jury could reasonably infer that these practices, particularly the reliance on a restrictive standard of medical necessity and the unhelpful letter to the treating physician, were all rooted in established company practice.   The evidence hence was sufficient to support a finding that the review process operated in conscious disregard of the insured's rights.

 Blue Cross objects to the definition of “medical necessity” incorporated in the order compelling arbitration, and contends that the court erred in failing to refer to arbitration the question whether the insured was suffering from an “acute phase” of mental illness within the meaning of the insurance contract.   However, we need not consider the merits of these issues since the order was not appealable.  (9 Witkin, Cal.Procedure (3d ed. 1985) Appeal, § 71, p. 95.)   An appeal may be taken only from a judgment confirming an arbitration award or from an order refusing to enter such a judgment.   (Code Civ.Proc. § 1294.)   In the present case, no judicial proceedings followed the arbitration award.   Blue Cross willingly paid the disputed benefits, and the respondents did not seek to enter a judgment.   The question subject to arbitration—the amount of benefits due under the policy—did not enter into the trial resulting in the judgment.

 Finally, we reject Blue Cross' claim that the trial court erred in instructing the jury that the insurer's duty to process claims fairly and in good faith was a non-delegable duty.   The instruction properly states the holding of Garner v. American Mut. Liability Ins. Co. (1973) 31 Cal.App.3d 843, 107 Cal.Rptr. 604, with which we agree.

 On April 7, 1987, after the opening briefs had been filed in this appeal, the United States Supreme Court rendered its decision in Pilot Life Ins. Co. v. Dedeaux (1987) 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 holding that common law causes of action such as that brought here are preempted by the Employee Retirement Income Security Act of 1974 (ERISA).   Relying on Pilot Life, Blue Cross raised the issue of federal preemption for the first time in its reply brief.   Considering the importance of the decision, this court gave the parties leave to brief the issue.   But a closer examination of the question makes clear that the Pilot Life decision should not affect this appeal.

The issue of federal preemption presents a mixed question of law and fact.   Federal law will apply only if a suit arising from the denial of insurance benefits affects an employee welfare benefit plan within the meaning of 29 U.S.C. section 1002, subsection (1).   The scope of this statutory definition has been the subject of recent litigation.  (Gilbert v. Burlington Industries, Inc. (2d Cir.1985) 765 F.2d 320, 325, summarily affd. (1986) 474 U.S. 978, 106 S.Ct. 378, 88 L.Ed.2d 332;  Donovan v. Dillingham (11th Cir.1982) 688 F.2d 1367, 1371;  Taggart Corp. v. Life & Health Benefits Admin. (5th Cir.1980) 617 F.2d 1208, 1211, cert. den. sub nom.;  Taggart Corp. et al. v. Efros et al. (1981) 450 U.S. 1030, 101 S.Ct. 1739, 68 L.Ed.2d 225.)   Most recently, the Supreme Court has adopted an interpretation focusing on the administrative aspects of a plan that lends support for a narrow interpretation of the term.  (Fort Halifax Packing Co. v. Coyne (1987) 482 U.S. 1, 107 S.Ct. 2211, 96 L.Ed.2d 1.)

The record in the present case contains no admissions or stipulations with regard to the existence of a welfare benefit plan.   The complaint alleges that Mrs. Hughes was insured pursuant to a policy issued to her “as an employee of the Ralph K. Davies Medical Center.”   But it does not allege the existence of a plan, an essential requirement for the application of federal law.   While the master agreement between Blue Cross and her employer does in fact suggest the existence of a welfare benefit plan, this court is not empowered to make findings of fact in cases where a jury trial is a matter of right.   (Cal.Const., art. VI, § 43/434;  Code Civ.Proc. § 909.)   In the absence of an adjudication that the action affects a welfare benefit plan, this court has no factual basis to apply federal law.  (Thorman v. Intl. Alliance etc. Employees (1958) 49 Cal.2d 629, 320 P.2d 494.)

Under Pilot Life, moreover, federal preemption is a matter of choice of law, not affecting subject matter jurisdiction, that may be waived if not raised in a timely manner.   Section 502 of ERISA (29 U.S.C. § 1132.) provides that “[s]tate courts of competent jurisdiction and district courts of the United States shall have concurrent jurisdiction of actions under subsection (a)(1)(B) of this section.”   Subsection (a)(1)(B) provides:  “A civil action may be brought—(1) by a participant or beneficiary— ․ (B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan;  ․”   Under this subsection, an action concerning denial of a claim under an employee group medical insurance policy plainly falls within the concurrent jurisdiction of the federal courts.   A companion case to Pilot Life removes any doubt on the question.

In Metropolitan Life Ins. Co. v. Taylor (1987) 481 U.S. 58, 107 S.Ct. 1542, 95 L.Ed.2d 55, the plaintiff had sued in state court for the denial of disability benefits under an employee group insurance policy, alleging causes of action for breach of contract, retaliatory discharge, and wrongful termination of benefits.   Relying chiefly on the analogy between the Labor Management Relations Act (29 U.S.C. § 141 et seq.) and ERISA (29 U.S.C. § 1001 et seq.), the Court held that the plaintiff's action was removable to federal courts.   The holding necessarily implies that the state court had subject matter jurisdiction over the action.   Federal removal jurisdiction is derivative;  only cases properly within the jurisdiction of state court are subject to removal.   As explained in Lambert Co. v. Balt. & Ohio R.R. Co. (1922) 258 U.S. 377, 382, 42 S.Ct. 349, 351, 66 L.Ed. 671, “[t]he jurisdiction of the federal court on removal is, in a limited sense, a derivative jurisdiction.   If the state court lacks jurisdiction of the subject-matter or of the parties, the federal court acquires none, although it might in a like suit originally brought there have had jurisdiction.”  (See also Wamp v. Chattanooga Housing Authority, etc. (1975) 527 F.2d 595, 597.)   If a defendant does not exercise his right of removal to federal court, the state court properly retains jurisdiction.  (Avco Corp. v. Aero Lodge 735 (1968) 390 U.S. 557, 88 S.Ct. 1235, 20 L.Ed.2d 126.)

 Where state courts have concurrent jurisdiction to entertain a federal cause of action, federal preemption is an affirmative defense that may be waived.  Metropolitan Life Ins. Co. v. Taylor, supra, 481 U.S. 58, ––––, 107 S.Ct. 1542, 1546, 95 L.Ed.2d 55 acknowledged, “Federal pre-emption is ordinarily a federal defense to the plaintiff's suit.”   Under federal law, the failure to raise the defense of federal preemption represents an independent and adequate state ground supporting a judgment.  (Intern. Longshoremen's Ass'n. AFL–CIO v. Davis (1986) 476 U.S. 380, 106 S.Ct. 1904, 90 L.Ed.2d 389.)   Similarly, it is elementary under California law that an affirmative defense “must be pled and proven or is deemed waived.”  (McMahan's of Santa Monica v. City of Santa Monica (1983) 146 Cal.App.3d 683, 689, 194 Cal.Rptr. 582.)   Having failed to raise the defense of federal preemption in pleading or at trial, Blue Cross has conclusively waived the issue on appeal.

CROSS APPEAL OF JURDY HUGHES **

The judgment is affirmed.

FOOTNOTES

FOOTNOTE.   See footnote *, ante.

NEWSOM, Associate Justice.

RACANELLI, P.J., and ELKINGTON, J., concur.

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