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IN THE SUPREME COURT OF THE STATE OF HAWAI'I
Electronically Filed ---o0o-- Supreme Court SCCQ-11-0000329 ELIZABETH MILLER and MARTIN KAHAE, as Co-Personal
28-DEC-2011 Representatives of the Estate of Penelope (Penny) 09:32 Spiller,
AM Deceased, and as Party-Plaintiffs for Penelope (Penny) Spiller,
Plaintiffs,
vs.
HARTFORD LIFE INSURANCE COMPANY, a Connecticut Domestic
For-Profit Corporation and MEDAMERICA INSURANCE COMPANY,
a Pennsylvania Domestic For-Profit Corporation,
Defendants.
NO. SCCQ-11-0000329
CERTIFIED QUESTION FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAI'I
(CIV. NO. 09-00381)
DECEMBER 28, 2011
RECKTENWALD, C.J., NAKAYAMA, ACOBA, DUFFY, AND MCKENNA, JJ.
OPINION OF THE COURT BY DUFFY, J.
The United States District Court for the District of
Hawai'i (District Court) certified the following questions of law to this court:

1. If an insurer commits bad faith, must an insured prove
she suffered substantial economic or physical loss
caused by the bad faith to recover emotional distress
damages caused by the bad faith?
If an insured must suffer substantial economic or physical loss to qualify for emotional distress damages caused by insurer bad faith, what does Hawai 'i law require as to how that loss must be proven? If a plaintiff must prove substantial economic or physical
loss, must any emotional distress damages bear a reasonable
relationship to that loss?


2.

3.

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Upon review of the Certified Questions, this court determined that "the First Question -- and only that question -- is amenable to answer by this court pursuant to Hawai'i Rules of Appellate Procedure (HRAP) Rule 13, which requires that the question be `determinative of the cause.'" at 1. Order on Certified Questions

We now modify the question presented to (1) limit its

applicability to first-party insurance contracts, and (2) delete "substantial" from "substantial economic or physical loss." question now reads as follows:
If a first-party insurer commits bad faith, must an insured
prove the insured suffered economic or physical loss caused
by the bad faith in order to recover emotional distress
damages caused by the bad faith?


The

Based on the analysis below, we hold that if a first-
party insurer commits bad faith, an insured need not prove the
insured suffered economic or physical loss caused by the bad
faith in order to recover emotional distress damages caused by
the bad faith.
I. A. Factual Background
This lawsuit arises from an insurance contract between
Plaintiff Penelope (Penny) Spiller ("Ms. Spiller")1
and

1
Ms. Spiller was the original Plaintiff in this action, filed July
9, 2009. She lost her battle with cancer on September 10, 2010. On
December 21, 2010, Elizabeth Miller and Martin Kahae were substituted as the
"Co-Personal Representatives of the Estate of Penelope (Penny) Spiller,
Deceased, and as Party-Plaintiffs for Penelope (Penny) Spiller." Although two
continue...
2


BACKGROUND


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Defendants Hartford Life Insurance Company ("Hartford") and
MedAmerica Insurance Company ("MedAmerica").
1. Ms. Spiller's Long-Term Care Policy and Her Cancer
Diagnosis
In 2001, Ms. Spiller, a State of Hawai'i employee on the island of Moloka<i, purchased a Hartford long-term care insurance policy ("Policy") through the Hawai'i Public Employees Health Fund.2 Ms. Spiller's Policy with Hartford became

effective on February 1, 2001, when she was fifty-seven years old. On October 1, 2001, Hartford and MedAmerica
(collectively "Defendants") entered into an Indemnity and
Assumption Reinsurance Agreement ("Reinsurance Agreement")
through which Hartford "transferred certain policy liabilities
and administrative functions for its long-term care policies to
MedAmerica." The Reinsurance Agreement provided that if certain


policyholders did not agree to the novation by MedAmerica, they
would be designated a "non-consenting policyholder." On the


"assumption effective date," MedAmerica, as the "assumption
reinsurer," accepted all of Hartford's policy liabilities except


...continue
Plaintiffs now exist in this case, this opinion will refer to Ms. Spiller as
the sole Plaintiff.

2


1

Ms. Spiller retired in May 2005.
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those of non-consenting policyholders.

In this respect,
As to these non-


MedAmerica became an "assumption reinsurer."

consenting policyholders, MedAmerica became the "indemnity
reinsurer" and a co-insurer with Hartford. Ultimately, Hartford


retained responsibility for certain obligations to non-consenting
policyholders.
The Reinsurance Agreement also transferred all
administrative functions, even those of non-consenting
policyholders, from Hartford to MedAmerica. For example,


MedAmerica became responsible for "receiving, processing,
investigating, evaluating[] and paying claims filed by
policyholders[,]" including non-consenting policyholders.
Additionally, the Reinsurance Agreement allowed MedAmerica to use
Hartford's "names, logos, trade names, trademarks[] and service
marks for the purposes of performing the administrative
services." As a result, "as to non-consenting policyholders,


MedAmerica became Hartford['s] . . . managing agent."
The Hawai'i Public Employees Health Fund did not consent to the novation between MedAmerica and Hartford and policyholders such as Ms. Spiller became non-consenting policyholders. The District Court explains:

[t]he parties dispute the scope of the transfer of obligations,
and contest the precise meaning of certain terms of the
Reinsurance Agreement. . . . Regardless, it appears undisputed
that Hartford Life still has responsibility -- whether as a
reinsurer, coinsurer, or as an indemnitor -- for fulfilling actual
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policy obligations (payment of benefits) owed to non-consenting
policyholders such as [Ms.] Spiller.


On January 6, 2007, Ms. Spiller "suffered a grand mal
seizure and was diagnosed with lung cancer that had metastasized
to her brain[,]" at the age of sixty-three. In May 2007,


Ms. Spiller applied for long-term care benefits under her Policy.
Defendants found Ms. Spiller eligible for benefits, and paid her
caregiver (her companion Martin Kahae) for services beginning in
October 2007. Defendants provided coverage for Ms. Spiller for


almost a year, then terminated her benefits on August 25, 2008.
Nearly five months later, on January 23, 2009, Defendants
reinstated her benefits retroactively. This litigation arises


from the circumstances and reasons surrounding Ms. Spiller's
benefits termination and subsequent reinstatement.
2. Ms. Spiller's Claim for Benefits Under Her Long-Term
Care Policy
According to the terms of Ms. Spiller's Policy,
policyholders are eligible for benefits when classified as
"chronically ill." "Chronically ill" is defined in the Policy as


being certified by a "licensed health care practitioner" within
the year prior to applying for benefits as:

a) being unable to perform (without Hands-on Assistance
from another individual) at least two Activities of Daily Living


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[(ADLs)]3 for a period of at least 90 days due to a loss of
functional capacity; or
b) requiring Substantial Supervision4 to Protect Yourself
from threats to health and safety due to a Severe Cognitive
5
Impairment .


The Policy requires a policyholder to establish a "Severe
Cognitive Impairment" by:

(1) incorrectly answer[ing] four or more questions on the "Short
Portable Mental Status Questionnaire," (2) achiev[ing] a score of
23 or lower on the Folstein Mini-Mental Status Exam ("Folstein"),


3 The Policy defines "Activities of Daily Living" as consisting of
the following "self-care functions":


Bathing: Washing Yourself by sponge bath; or [sic] in
either a tub or shower, including the task of getting into
or out of the tub or shower.
Dressing: Putting on and taking off all items of clothing
and any necessary braces, fasteners or artificial limbs.
Toileting: Getting to and from the toilet, getting on and
off the toilet[] and performing associated personal hygiene.
Transferring: wheelchair.
Moving into or out of a bed, chair or


Continence: The ability to maintain control of bowel and
bladder function; or, when unable to maintain control of
bowel or bladder function, the ability to perform associated
personal hygiene (including caring for catheter or colostomy
bag).
Eating: Feeding Yourself by getting food into Your body
from a receptacle (such as a plate, cup or table) or by a
feeding tube or intravenously.

4
The Policy defines "Substantial Supervision" as "continual
supervision (which may include cueing by verbal prompting, gestures or other
demonstrations) by another person that is necessary to protect You from
threats to Your heath or safety (such as may result from wandering)."
5


The Policy defines "Severe Cognitive Impairment" as "a loss or
deterioration in intellectual capacity that requires Substantial Supervision
and is comparable to (and includes) Alzheimer's disease and similar forms of
irreversible dementia and is measured by clinical evidence and standardized
tests that reliably measure impairment[.]"
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or (3) "[e]xhibit[ing] specific behavioral problems requiring
daily supervision, including but not limited to: wandering,
abusive or assaultive behavior, poor judgement [sic] or
uncooperativeness which poses a danger to them or others, extreme
bizarre personal hygiene habits."


In May 2007, after Ms. Spiller applied for long-term
care benefits, MedAmerica's "third party vender" hired registered
nurse Michael Kahalekulu ("Mr. Kahalekulu") to perform a Benefit
Determination Assessment ("BDA") on Ms. Spiller, as required by
her Policy. Through the BDA, Mr. Kahalekulu concluded that Ms.
She was also


Spiller needed supervision because of her seizures. unable to perform two ADLs.

Hence, claims handler Annette LaFica


("Ms. LaFica") approved Ms. Spiller's benefits by letter (on
Hartford stationery) on October 17, 2007. At this time,


Defendants recommended that Ms. Spiller have 24-hour supervision.
Defendants contend that in October 2007, Defendants
gave Ms. Spiller only "conditional approval" that was subject to
reassessment.6 Moreover, Defendants claim Ms. Spiller originally


failed to demonstrate that she was sufficiently impaired (through
either ADLs or cognitively) to qualify for benefits under her
Policy in May 2007. In fact, they maintain that Ms. Spiller


understood her benefits were "conditional" when Defendants


6
The time between Ms. Spiller's application and approval
encompassed a 90-day "elimination" or "deductible" period.
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approved them in October 2007.7
Mr. Kahalekulu performed a second BDA for Ms. Spiller
on December 21, 2007. The second BDA indicated that she required


assistance with at least three ADLs, specifically bathing,
transferring and dressing. Also, Ms. Spiller had a Folstein


score of nineteen, which indicated she had "Severe Cognitive
Impairment," and qualified for continued long-term care benefits.
Accordingly, Defendants extended Ms. Spiller's benefits through
June 30, 2008.


The District Court cites part of a "lengthy Call Notes Report"
dated October 18, 2007, by Ms. LaFica:
Spoke with daughter, Jessie[,] yesterday and advised her
that we were able to approve [Ms. Spiller] for benefits with
an incur date of 5/21/07. . . . We have ample documentation
that [Ms. Spiller] is a very ill person. [Diagnosis] is
[cancer] of the lung with [metastasis] to the brain. the
brain lesions are causing seizure activity. The seizures
leave [Ms. Spiller] [in]capacitated for days and at those
times she is an almost total assist with all ADL's. Based
on the BDA she did not meet triggers. I requested records
from 2 of her treating physicians. Dr. Dan, as he is called
by the family, (they describe him as a "surfing doctor[]")
keeps very sketchy records. After 4 attempts to secure his
office notes I still don't have the official record. [Ms.
Spiller] lives on a remote Hawaiian island and doesn't seek
tx after seizures. Tx after seizures would be pretty much
comfort measure and logistically . . . doesn't make any
sense . . . . I suggested that we deny/appeal/re-assess. Her
EP [elimination period] is calendar day and she did not want to
deny because the time toward EP would be lost. Again requested
records from Dr. Dan which did not shed any light on seizure
frequency. I have had increased contact with daughter over the
past 2-3 weeks. She reports on multiple occassions [sic] that
[Ms. Spiller] is having seizures. [Ms. Spiller] can't get out of
bed, transfer, toilet, bath or dress with increasing frequency.
Dr. Dan did send a letter stating that [Ms. Spiller] was having
hallucinations and required 24 hour supervision. . . . Approved
[Ms. Spiller] for benefits. I am reassessing at this time. [Ms.
Spiller] and family are aware.
8


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Mr. Kahalekulu performed a third BDA for Ms. Spiller on
July 28, 2008. Ms. Spiller argues that this BDA indicated she


required assistance with two ADLs, specifically, bathing and
dressing. Also according to the third BDA, Ms. Spiller's


Folstein score increased to twenty-five, though she claims she
still required supervision due to her cognitive impairments.
After Ms. Spiller's third BDA, Defendants terminated
her benefits. Barbara Mottern ("Ms. Mottern"),


Hartford/MedAmerica's new contact (i.e., replacing Ms. LaFica who
previously handled Ms. Spiller's claim), telephoned Ms. Spiller
and informed her that Hartford/MedAmerica was terminating her
long-term care benefits on August 25, 2008. Mottern explained


that Ms. Spiller was no longer classified as "cognitively
impaired" or incapable of performing two ADLs as required by the
Policy. Report":

Insured no longer meets cog. trigger -- in fact did very well on
testing. Needs assist[ance] with Bathing, Dressing for sleeves
but lives in tropical climate on island of Maui [sic] Discovered
caregiver is sig. other -- who resides with insured. Falls under
exclusion of "if no charge would be made in the absence of
insurance. . . ." Will approve thru September 6, 2008 due to lack
of tim[e]liness on our part.


On August 22, 2008, Ms. Mottern recorded in her "NotePad


Defendants terminated Ms. Spiller's benefits as of September 2,
2008 ("an August 25, 2008 entry reads `Error in above notepad
dated 8/22/2008: Approval to 8/31/2008, denied assessment

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#4.'").

Defendants' September 19, 2008 letter (on Hartford


stationery) confirmed Ms. Spiller's benefit termination.
Defendants maintain that the July 28, 2008 BDA rendered
Ms. Spiller ineligible for benefits. Specifically, they contend


that Ms. Spiller required help with only one ADL, bathing.
Defendants argue it was reasonable to surmise that Ms. Spiller
failed to meet the ADL for dressing because the July 28, 2008 BDA
was inconsistent with her prior ADLs for dressing. Particularly,


the July 28, 2008 BDA contained inconsistencies regarding the
frequency she needed help dressing (i.e., "daily," "when needed,"
"at times"). More notably, Defendants cite to Mr. Kahalekulu's


statements that Ms. Spiller needed assistance with dressing "with
sleeves on tops," and that she "at times has difficulty putting
on pull-over tops and needs assistance from [Mr. Kahae]."
Moreover, Defendants contend that because Ms. Spiller's
Folstein score exceeded the eligibility threshold of twenty-
three, the BDA's conclusion that Ms. Spiller needed help dressing
because of "confusion" is irrelevant. Also, Defendants stress


they were waiting, "after several requests," for Ms. Spiller's
medical records from her treating physician, Dr. McGuire,8
and
maintain that no other medical record explains the frequency or


8


Dr. McGuire is known by the family as "Dr. Dan."
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severity of her seizures.9

Also, Defendants emphasize that


because Mr. Kahalekulu was a "third party vender," they were
entitled to conduct their own assessment of Ms. Spiller in order
to confirm her eligibility.
The District Court explains that Ms. Mottern "appears
to have taken issue with benefits being paid to [Mr.] Kahae,
[Ms.] Spiller's live-in companion." Ms. Mottern recorded that


Mr. Kahae10 "falls under exclusion of `if no charge would be made
in the absence of insurance.'" Here, Ms. Mottern referred to the


The District Court notes that on August 26, 2008, the day after
Ms. Mottern telephoned Ms. Spiller and terminated her benefits, Dr. McGuire
called Ms. Mottern and "wanted to know if there was anything he could do to
change [their] minds." Ms. Mottern was "apparently not impressed with Dr.
McGuire" (who Ms. LaFica described in her notes as a "surfing doctor").
Ms. Mottern documented:
I asked him what kind of Dr. he was, a general practitioner? . . .
He said yes, a general practitioner. I then asked, "a PCP?"
[primary care physician] He said yes, a "PCP[.]" Throughout the
conversation he spoke very slowly, in short sentences, often
repeating what I said as a question.
Ms. Mottern further recorded:
I told him if he wanted to send us copies of his medical
documentation concerning Penelope, we would be happy to review and
consider the information. "Send . . . the . . . documentation . .
." was his answer. I [reiterated] we would like to review her
records for the past two years, . . . was it lots of pages? He
stated ". . . lots . . . of . . . pages. . . ." His voice
drifted off.
MedAmerica received copies of Dr. McGuire's medical records on Ms. Spiller on
October 28, 2008. Defendants maintain that these records still lacked any
indication of Ms. Spiller's frequency or severity of seizures, whether she
needed help with ADLs or whether she was cognitively impaired.


9

As mentioned earlier, Mr. Kahae was appointed as a co-Personal
Representative of Ms. Spiller's estate upon her death.
11


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Policy exclusion for "any expenses incurred . . . for which no
charge is normally made in the absence of insurance." Even so,


Defendants previously approved Ms. Spiller's benefits with
knowledge that she received care from a private caregiver (i.e.,
Mr. Kahae) under an "Alternative Care Benefit" provision which
allowed benefits "for providers, treatments[] or services
otherwise specified in the Policy" if "cost effective,"
"appropriate" and "consistent with general standards of care."
In other words, "Defendants apparently knew of, and approved,
[Ms.] Spiller's situation with [Mr.] Kahae."
Ms. Mottern raised this issue with Ms. Spiller in their
August 25, 2008 telephone conversation. However, Defendants do


not assert that this was a basis for terminating Ms. Spiller's
benefits. Nevertheless, some evidence in the record suggests


that Ms. Spiller believed that her Policy exclusion was a basis
for her benefit termination.11
Additionally, Ms. Mottern questioned whether Mr.
Kahalekulu was biased in his assessment because he became friends


Ms. Spiller wrote an email stating in relevant part "Med America
[sic] says that my evaluation said that I am better and that [Mr. Kahae]
should work for free[.]" Ms. Mottern documented a conversation with Ms.
Spiller's attorney friend that "insured told him we won't let her use her
boyfriend to care for her . . . . Did state that is not an issue at this
time[.]"
12


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with Ms. Spiller.12

When Ms. Spiller spoke with Ms. Mottern


regarding her benefits termination in September 2008, Ms. Mottern
wanted to schedule another BDA. Ms. Spiller requested that Mr.


Kahalekulu conduct the assessment, but Ms. Mottern denied her
request.
Ms. Mottern's September 19, 2008 letter to Ms. Spiller
approved Ms. Spiller's request to appeal her benefit termination.
Ms. Mottern then scheduled another BDA.
3. Events Following Ms. Spiller's Termination of Benefits
Post-cancellation, Ms. Spiller "repeatedly sought
reinstatement of benefits." The relationship between Ms. Spiller


and Ms. Mottern became increasingly hostile as Ms. Spiller worked
toward her reinstatement. The District Court cites several areas


in the record demonstrating the animosity between Ms. Spiller and
Ms. Mottern:

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