Free Transcript - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 00-cv-02098-REB-MJW KELLY FINCHER by her guardian, James Fincher, on behalf of herself and all other persons similarly situated. Plaintiff,

PRUDENTIAL PROPERTY AND CASUALTY INSURANCE COMPANY, 8 Defendant. 9 _______________________________________________________________ 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 PROCEEDINGS RECORDED BY MECHANICAL STENOGRAPHY TRANSCRIPT PRODUCED BY COMPUTER Proceedings before the HONORABLE ROBERT E. BLACKBURN, Judge, United States District Court for the District of Colorado, commencing at 8:35 a.m., on the 4th day of April, 2005, in Courtroom A701, Alfred A. Arraj United States Courthouse, 901 19th Street, Denver, Colorado. APPEARANCES ROBERT CAREY, THE CAREY LAW FIRM, 2301 East Pikes Peak Avenue, Colorado Springs, Colorado 80909, and; Suzanne M. Claar, Official Reporter 901 19th Street Denver, Colorado 80294-3589 (303)825-8874 REPORTER'S TRANSCRIPT TRIAL TO THE COURT - VOLUME I _______________________________________________________________

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APPEARANCES (Continued) L. DANIEL RECTOR, FRANKLIN D. AZAR & ASSOCIATES, 5536 Library Lane, Colorado Springs, Colorado 80918, appearing for plaintiff. CLIFTON J. LATIOLAIS, JR., CAMPBELL, LATIOLAIS & RUEBEL, 825 Logan Street, Denver, Colorado, and; NATHAN L. GARROWAY, 211 North Broadway, #3600, St. Louis, Missouri 63102, appearing for Defendant.

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P R O C E E D I N G S (Proceedings commenced at 8:35 a.m.) THE COURT: Good morning, and thank you. Please be

Indeed we are. We proceed in open court on the record commencing trial

to the court, otherwise known as a bench trial, in our case 00-RB-2098, Kelly Fincher, by her guardian, James Fincher, on behalf of herself and all others similarly situated, plaintiff, v. Prudential Property and Casualty Insurance Company, defendant. Commencing with the plaintiff, may I have the appearances of the parties and their counsel. MR. CAREY: Good morning, your Honor. Good morning. I am Rob Carey

with Dan Rector of the Carey law firm on behalf of Mr. Fincher, his wife, Christine, and Kelly Fincher, who is to the right. THE COURT: Ladies, gentlemen, good morning.

Transitioning to the defendant. MR. LATIOLAIS: Cliff Latiolais. Good morning, your Honor. My name is

With me is my co-counsel Nathan Garroway, and

also present on behalf of the defendant with me is Mr. Eugene Brown. THE COURT: I presume we are prepared to proceed as Very well.

stated and understood by the court.

Opening statements for the plaintiff.

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. CAREY:

OPENING STATEMENT Your Honor, just as a point of order, I

suppose, we intend to present just two witnesses, and then some deposition testimony, which I understand this court is going to read in its own time. So our intent is to be wrapped up with

our case sometime late this afternoon, and then make an offer of proof, just for the court's guidance on the scheduling. THE COURT: MR. CAREY: Thank you. Your Honor, this hearing is designed to

address two things; the affected date of reformation here, which has been mandated, and what does the reform policy has as its terms. This presentation will be succinct, it will be almost uncontroverted in the sense of evidence between these two parties. The bulk of it will come in through the documents. As I stated, we only have two witnesses to call. We

will be calling Mr. Hodges, who is an insurance industry expert, who will testify as to his opinions about the conduct of Prudential in this case, and we will call adversely Mr. Brown of Prudential to discuss and help lay out the picture of what was going on in 1989, and frankly, up until today, and why and how Prudential did what it did in this case. So, first let me start with the effective date of reformation. The Clark case, which is what's going to govern It stated the

this proceeding, laid out a number of factors.

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court should look at all appropriate factors, and then articulated some for the court to use. So I will restate the

first one, and I had also like to also just kind of weave in how it's going to work, and in context how it differs, frankly, from the retroactivity analysis it derived from because I think there is some confusion over that. The first statement is -- the first criterion, rather, is the degree to which reformation from a particular effective date would upset past practices on which the parties may have relied, and whether State Farm anticipated the rule in Brennan. The Clark opinion further articulates some sub points, one of which I think applies to this criterion, and that is whether the insurer relied on the interpretation of the No-Fault Act that was rejected in Brennan. So I would like to make just initially one other point, which is the revision in the Clark criteria from the retroactivity analysis of Martin Marietta or the Chevron Oil case, presumes that reformation is going to happen, and the sole thing it looks at is what is the best date for it to happen. We

are no longer arguing about whether or not it's going to happen, whether it will cost money or whether it's going to change positions, the sole point here is work for that date, given what we are trying to accomplish. So where does that leave us with the facts? start first with the insurance policy in this case. Let's On tab 2,

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which is the insurance policy, was very easy in the Fincher Tenth Circuit opinion to say, well, the court sees that it's $150,000 aggregate cap, and that clearly is in violation of Colorado law so we will send it back to the court with instructions to have mandated reformation from a particular date. But those aren't the only defects in this policy. And

the reason that's important is when we go through the elements, part of what Prudential is saying here is that, well, we handled this by orally representing to people that 200,000 was available, and provided 200,000, should a claim have been made. But if you look at the policy, you will see a couple of other defects. And this is the last two pages, part 7 of tab 2.

And that is the APIP coverage section which starts out with Section A, says medical expenses. And then if you go down into And again

Section B, it talks about the aggregate limitation. it uses medical expenses, which is a bolded term.

That term is defined earlier in the policy in the regular PIP section to mean medical expenses are those expenses incurred for medical treatment of certain types within five years of the date of the accident. limitation on the APIP. They try to redefine it in one section of paragraph A1. This is again on Bates page 145. limitation. To say without dollar or time That is the improper

But that same language does not accompany the B7

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use in the aggregate limitation. That's one small thing. too, your Honor. But there is one big thing

If you look at the schedule of options, the

chart, that you can select from, 10-4-710(2)(a) requires two options; one is unlimited medical coverage, and the second is unlimited medical coverage with an unlimited wage loss and a specified percentage. If you look at the chart, there is no -- read in context -- there is no option 1 here. The only options are A,

which is 710(2)(a)(II), unlimited medical and unlimited wage loss. Now, the defendant can say, well, okay, look at option 6 and look at option 1. wage loss. But if you look at how this is set up on the APIP endorsement, what you do if you select any of these options, meaning the options on the grid on the left side, options 1 through 9, zero and A, under the replacement provision of A3, it says this; subject to the maximum weekly limit payable for work loss in the options selected from the schedule, and then it goes on to replace the 100/70/60 tier down, step down, of the basic PIP with APIP of 85 percent unlimited time. Well, there is no place to select unlimited medical with the 100/70/60 paradigm. It doesn't exist. The only thing They are unlimited medical with the

you can do is buy unlimited medical with the 85 percent

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unlimited in time. And as Mr. Rector will explain in our case, there are a number of documents that show just this. The premium goes way You are not

up because you are getting unlimited benefits.

buying the slight increase from $400 at 85 percent for 52 weeks, you are buying unlimited in time and at a different percentage. Well, that again is the essence of this case. That is

no different than the aggregate limitation that we are talking about. It's just simply a type of mistake they made that should

not have been made that they were conscious of and they chose to do nothing about. So the issue for the court is to say, what's the best date, if we are trying to not upset past practices, what's the best date, if we are trying to take into consideration whether or not Prudential anticipated the rule of Brennan, and I will address that a little more in detail, but let's start first with, what did they do here? Well, I think it's safe to say that from 1989, clearly until 1994 or '95, and probably until today, Prudential knew it had problems. This is not a Brennan case where the insurer

wasn't really aware of the obligation, and in Brennan they said it lacks some sort of clarity in the statute. There is no This is

appellate guidance, and it's an industry standard form. not that case.

This is a case, as we will go in in numerous detail,

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dozens and dozens, your Honor, of situations where they acknowledged they know what the law is, and that they are acting out of compliance with that law. This is not even Clark. Because in Clark, which we are

counsel on, as the court is, I am sure, aware, in Clark, State Farm understood that it had a problem, and interpreted the CAARA in a specific way, and it adopted that immediately to take care of the problem. It turned out to be wrong, but the point is

Prudential here is simply just doing whatever it wants, knowing that what it's doing is not in compliance with the No-Fault Act. So to give you a brief tour of what types of things we are going to show, I would like to start with tab 56. July 28th, 1989, Prudential memorandum. It's a It

July 28th, 1989.

talks about the changes to the PIP laws and the PIP coverage, and acknowledges that there is an aggregate cap of $200,000. If you look at tab 7, an 11/28, 1989, memorandum, it again talks about how Senate bill 128 says you have to have $200,000, noting that they only have $150,000, and also stating Option A never had rates loaded into the rate file, which is the unlimited-in-time medical and wage loss option, and it's being eliminated. There should be no policy with that option as it Despite acknowledging that the law that

can't be rated.

requires it exists. Tab 9, a January 24th, 1990, memo, from Mr. William Jervis. This one, your Honor, is a very important document

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because not only does it say, you guys understand that you have to have options unlimited in time and amount for meds, meds with wage loss with a $200,000 aggregate cap, but it also says that you must also make this offer available to someone if you haven't already done it at the time of their claim. they present their claim. This is 1990. Prudential is being told by the Market The time

Conduct Examiner, the Department of Insurance, or Division of Insurance, that this is what they must do. Tab 12, an internal e-mail in '91, okay to go ahead and use the $200,000 cap. Tab 14, May 17th, 1991, and again it runs

through exactly what their obligations are, and this goes on and on, Judge. There are literally dozens of documents, there are

scores of advisories telling them what they have to do, and yet where are they doing? Well, tab 22 is a pretty good example of that. are procrastinating. They

Tab 22 is a letter that's referencing

something in 5/17/91, but it states -- and this has to be after 4/10/92 at the earliest, the above plan which is the plan to get their documents into line with the state requirements, was canceled due to House Bill 1175. 1175 changed the law a little bit to change the options. It changed in 1992, July of '92. So from '89 to '92

they still did not get into place the correct documents. If you look at tab 25, and I will just recite it for

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the court, but this is the Bates page 509, which is a certifying use portion, which became effective around the same time, which at this time shows that all Prudential has to do to have its forms out in the marketplace is certify them for use, wait 31 days, and then it can go forward. What did it do? If you look at tab 32, this is

1/11/93, this is eight months after the effective date of House Bill 1175, which are the options that changed and relate to the last memo where they said, let's hold up on our plan because House Bill 1175 is coming into play. Eight months later this

e-mail from Mary Henry states, do you think we should continue to offer extended coverage or discontinue offering the option. They still haven't done anything eight months later. Tab 34. What is this about? Well, let's just go ahead I don't think anyone

and drop the extended coverage 2/12/93. will notice.

This is not about a company that had no guidance.

This

is not about a company that didn't understand its obligation. It's not about a company that was using a standard industry approach. This is about a company that knew its approach was out of line with the state requirements, and for a variety of reasons chose not to fix the problems until much, much later in 1995, after the Fincher accident. So when we talk about how do we fully apply this

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criterion, I think one thing that the court needs to first do is determine what the rule of Brennan is, and I would propose, and this is going to come into play for the second criterion, but I would propose that it's two things, maybe three. One is the

rule of Brennan is clearly the extent of the offer required by 10-4-710 must apply in its scope to pedestrians. That's clear.

But the second part of that rule is also that if you are going to provide relief in a situation where the rule of law has already determined to be retroactive, the point of Brennan is to say if it's an unwitting, an unsuspecting insurer, then we might go ahead and give some relief if it's equitable. The point of Brennan is not to give blanket immunity. It's clearly in the case -- in fact, in the Clark case it quotes the Brennan court that says, because Farmers Alliance failed to anticipate the result in Brennan, we therefore will not make them pay anything other than the benefits. Because they failed to anticipate. That element,

Judge, does not apply at any time in this case because they acknowledged in 1989 they knew what the law was, they knew they weren't in compliance with it, and they still proceeded to sell their policies with detective forms. They never relied on any case law. case law in this case. There was ample

You have the Thompson case, which is

right on point in this case in 1996, the Brennan case in 1998, the McMichael case, which is a UM case, but nonetheless talks

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about what happens if you don't make a statutory offer that's required in 1995. You have the Passamano case, which is the authority that the Thompson case relied on in 1994. There is ample

authority here to guide them, and I think, your Honor, the documents which Mr. Rector will guide you through will show you that they understood that. That they understood what their

obligations were, they just chose not to do it. The second part of the -- what is the rule of Brennan relates to this, Judge. exclusion in this case. Prudential doesn't have a pedestrian Prudential has a failure to offer

unlimited-in-time-and-amount wage loss and medical benefits. That's a Thompson case. Now, to the extent that Brennan relied on Thompson, I think that's the appropriate reference point because you can't say, well, we didn't have a pedestrian exclusion, so therefore we met the rule of Brennan, because that -- those are apples and oranges. And in context here I think the appropriate thing for the court to refer to here, does it further retard the rule in Thompson because if you are looking solely at Brennan, then the only relevant aspects of the Brennan opinion that applies is part relating to, let's not penalize an unsuspecting insured, and I think you will hear from our expert witness that it's entirely possible that almost even today an insurance company

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might not know what the obligations are under this, if it's a small carrier without a legal staff, selling minimal policies, they still might not today know what the obligations are. doesn't apply to Prudential. From 1994 to '98, Judge, you will see documents that show what some of their problems were in this area. And the That

point is not to say they have got other defects that we are intending to prosecute. The point is they are saying from 1994 to 1998 they were intensely involved in fixing these problems. intensely involved in what 10-4-710 required. They were

So if the job of

the court is to weigh what's the most effective date from the date of the issuance of the policy in April of '94 to today, it's entirely relevant to look at a company that was routinely working on 10-4-710 issues, and was consequently well aware of what that statute required. Because if you can't say it was -- it should have known in '94 when it concedes it knew what the law was, that might help the court say, well, look, you are still looking at it for four more years, I can't give you the entire time, so we are going to present evidence of Prudential dwelling on these issues for over ten years. The outline that I have just talked about will be confirmed by numerous Prudential employees, and then Mr. Hodges will talk about what Prudential should have done and how it

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should have conducted itself, and he will tell you that their litany of excuses of why they didn't get this handled are nothing more than the garden variety bad-faith case. This has nothing to do with not understanding pedestrians should have been included in the scope of an APIP offer. They knew that. They understood that. They had their

policy from inception get that right.

The only time they

deviated from that was when they glommed onto State Farm's argument relating to pedestrians and retroactivity for purposes of its case and a defense. But the conduct that we are talking

about is what every bad-faith case in the state of Colorado is about. The second element, how reformation from a particular effective date would further retard the ruling in Brennan. Again, very briefly, your Honor, I think there is only three ways to look at how this element applies. Either you do it

literally and say, how does it apply Brennan in the sense of pedestrians must be included in the scope. favors any particular date. case. I don't think it

Because that's not an issue in this

Or you interpret Brennan, the rule of Brennan, to be, is

it an unsuspecting insurer here that just didn't know what to do and was trying its hardest to do the right thing. I think on the facts that they can't make that case. On the facts it will be a very cognizant insurer, and the most appropriate date would be the date that the policy issued or the

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date of the accident. Thirdly, what I mentioned about the Thompson decision. If you are trying to say, is there a rule here that we should be enforcing, it comes from the Thompson case. know that was out there in 1996. But as I mentioned, the other case law, the plain language of the statute, Judge, is not susceptible to an interpretation that $150,000 cap is appropriate. happen. It just can't At the latest they

That is not the type of mistake that the rule of

Brennan or the rule of Thompson was designed to accommodate. I think we have to appreciate that we have already prevailed on the issue that this wasn't a new rule of law. That's an important point because, as the Colorado Supreme Court has stated, just because you have a custom and a tradition, even if it's in good faith, that's not enough to avoid the strictures of the law. This is a special circumstance, and if you interpret it to say, well, let's look at Thompson in no way has this defendant done anything that would let you say that there is a good reason, they have a good reason and a good excuse for why they are not complying with the plain language of the law that allows for a $200,000 cap. And we have distinct sectors we need to be concerned with here, Judge, 1994 to 1998, 1998 to 2000, when the lawsuit was filed. What's their explanation between '98 and 2000 when

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all the case law was decided of why they didn't go talk to Kelly Fincher and people like Kelly Fincher and say, yeah, we understand you are entitled to benefits. what did they do in that time frame? From 2000 to 2001,

They had a complaint

telling them exactly what we are here today to figure out, and they did nothing on it. Nothing. Is that something that was a The facts will say no.

consequence of Brennan and Thompson? It's indifference.

From the remand back from the Tenth Circuit, from the order in Clark, post-Clark, post-Fincher, what have they done? Nothing. Until four or five days ago, and this will be an

exhibit that was added, I think it's Exhibit 98, they tendered a check to Kelly Fincher, four or five days ago, for the balance of her funds due of the $200,000 cap and the cap is already paid. They tendered a check. Now, there is nothing that has happened since the date the Fincher opinion issued in the Tenth Circuit and four days ago. And this is important in setting the effective date of

reformation. If you pick the date of the hearing today, their lack of an excuse of why that wasn't paid the day the mandate came down, they will be immunized from any claim against them for that 18-month delay. Again, the No-Fault Act favors prompt and expeditious payment. The Unfair Practices Act prohibits making someone

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litigate to get their benefits, and yet every issue they could possibly come up with was resolved the date the Fincher Tenth Circuit opinion issued, and just up until a week ago she had not been paid or offered any money. Similarly, on the hardship issue, this one, your Honor, I believe there is a fundamental disconnect between the parties. I don't think it's appropriate to take a hardship analysis as Prudential does and look at it class wide and compare it with Kelly Fincher. I don't think that's the intent of the element,

and I don't think it could in any way be argued that it somehow serves equity. here today. And so we are not a class action as we stand

The appropriate analysis is, what's the hardship to

Kelly Fincher for processing -- for not being paid, and what's the hardship on the defendant for processing this claim. She is a known claimant, she has got an active file, they have known about it for five years, and the hardship to them is paying a claim that they have a legal obligation to pay. That's the entire hardship. The hardship to Kelly Fincher, again, she will get paid, based on the court's mandated reformation, and based on the terms the court finds exist, but she will get a reformation, let's put it that way. And so that's not part of really the analysis. The

analysis is which date causes more of a hardship or less of a hardship. If it's a date other than the date of this hearing,

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she will be deprived of all of those laws that protect her, all of those laws that insure and guarantee prompt and expeditious payment and good faith and fidelity by the insurer. And Mr. Hodges will tell you the hardship to the defendant is simply this; it will be exposed to laws that will require the plaintiff to prove either unreasonable conduct or willful and wanton conduct before the plaintiff can recover. There is no picking a date, such as the date of issuance of the policy does not automatically cause them any hardship. simply opens up an option for the plaintiff to pursue. But if you wanted to go into, well, let's compare the aggregate harm here, and let's take into account their arguments that this is going to be time-consuming and costly to go root out these files. They kept away the aggregate class, and that It

won't again, it's never a hardship to pay that which you owe under a contract and for which you received premiums. case law to that effect. The issue is, is it a hardship to them other than doing, because that's been mandated, and the answer clearly is no. That's the only hardship. It's not a hardship to do that There is

which the law requires you. In 19 -- to put it in perspective, in 199 -- I guess 4 -- well, let me put it in different context. Within a month

of the accident in May of 1994, Prudential was aware that Kelly Fincher had exhausted her rehab and medical benefits.

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Dramatically exhausted. They were aware that she was entitled to PIP. were aware they had problems with their offer. They

They never

invoked the defense of, well, it's not retroactive because Brennan hadn't even issued. statute. Look at Passamano. All you had to do was look at the And yet they did nothing. They

have never gone and looked for anyone to pay these benefits to, Judge. These are form documents. So the defects we talked about when I started this opening, those defects apply and exist as to all insureds that bought basic PIP, and yet they have not paid one person. They

have not paid one person one penny of money on APIP for a person that bought basic PIP, and is now entitled to enhanced PIP. one. In fact, they have never looked for anyone. So when No

you are looking at hardship, and the rule in Clark said, well, did they even consider, can they notify third parties. consider the effect on claims processing? No. Did they

What they have done is come up with arguments why it's not a good idea. They haven't actually notified anyone or even

tried to notify anyone, because clearly there is a large group of people that could be notified. Whether or not you could find

all the files, doesn't mean you don't have to prosecute some of the files or process them. If the date of the hearing is also selected as the

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effective date of reformation, this plaintiff will have been deprived of her ability to pursue the 1989 to 1994 defective claims issue, the disregard of the case law that came out from '94 to '98, not acting on what it obviously knew was a problem post-Brennan. Not acting on something that was obviously a And not paying her after

problem when the complaint was filed. the Fincher decision.

So the proper application based on the

facts we are going to produce would be that it's the date of issuance of the policy, April 1994. This defendant could have found Kelly Fincher, knew she was out there. She found them, and yet they have chosen not to

do anything for her. The last issue for -- in terms of this hearing is whether a cap exists in this policy. And the defendant will

have you believe -- you will see their chart which says there is ample precedent here from the Clark decision to impose a cap. Well, that's not just not correct. happened in Clark. And the starting point for this court's analysis should be the Peterson decision, the Tenth Circuit's decision which recently came down, which was supplemented, which says -- it analyzes the Clark and Fincher decisions and how caps work. this is what it says. The terms of the reformation are you will read into the policy the coverage is required to be offered under And That's just not what

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10-4-710(2)(a), period. are read in.

Those are unlimited benefits.

Those

Then it says, you do not add any terms that don't exist. There is no $200,000 cap in this policy. There never

was, and unlike Clark, which had a $200,000 cap in its policy, but which didn't apply or line up with the options selected by the policyholder in that case, the court said, well it's in there, I am going to apply it. to this defendant. But also I think the analysis needs to consider Colorado law, and there are two cases that are right on point on this, Thompson and Brennan. And in Thompson they said, you That argument is not available

didn't have a cap in there, we are not going to read one in for you. That's what this defendant is asking you to do. Their

chart is nothing other than we saying, we really wanted one, we intended to have one, and it lists everything it did trying to get a cap either after the fact or in its own mind. one in the policy. That's what matters. Didn't put

In Brennan, conversely, there was a cap in the policy because the named insured had bought APIP, and most insurers bring the $200,000 cap into the policy through the endorsement. When you buy APIP, the $200,000 cap comes in. If you don't buy

APIP, the basic PIP policy does not contain one. And they say, well, you don't need one because PIP is

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self-limiting, and that's just not true.

And Thompson puts the

lie to that because Thompson shows, and they should have known this in 1996, if you don't put a $200,000 cap in a basic policy, which is what Thompson was, you will owe unlimited benefits. So very simply there is no cap in this policy. This

court is not empowered to make as a term of the reformation that a cap is included, because it's not included in the coverages that are required to be offered. And 710 does a very good job of dichotomizing what is required to be offered from the cap. And the cap is a contract It's a contract

provision permitted, it's not required. provision.

The offer requirement is a pre-contractual obligation. They are totally and wholly unrelated. And so I think if you

would look at Thompson, Brennan, and the recent Peterson decision, you can come to no other conclusion but that there is no cap in this policy. The cap is the defect in this policy. So the only way

it gets into this policy is to be created out of whole cloth and read in, and I don't believe that is appropriate, and I think when the court gets the facts, it will agree. So with that, I will conclude my opening and ask that this court at the end of this hearing establish the effective date of reformation as the date of issuance of the policy. THE COURT: Counsel, thank you.

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Very well.

Opening statement for the defendant. Thank you, your Honor.

MR. LATIOLAIS: THE COURT:

You are welcome. OPENING STATEMENT

MR. LATIOLAIS: Mr. Fincher.

May it please the court, counsel,

Your Honor, I think it's fair to say we are here on a rather unique and unusual procedural posture, and I sense from plaintiff's counsel's opening statement we have disagreements not only over the legal standards that apply but the factual issues as well. And with advance apologies, your Honor, for perhaps expanding the scope of the traditional opening statement and discussing the legal arguments, let me simply submit that I believe the Tenth Circuit has set forth some very specific standards which we are to follow in this case in determining those issues of reformation. Your Honor, excuse me, in Clark and in Fincher, the Tenth Circuit said, there are essentially three factors that we must utilize, the court in particular, to determine two things; both the date of reformation and the scope of reformation. And those factors, although there may be some disagreement about the degree of applicability in this case because of its factual distinctions are nevertheless very strong.

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They are, first, the degree to which the date of reformation would affect the past practices of the parties upon which they relied. The second, of course, has to do with how the date of reformation will -- excuse me, your Honor, let me quote that directly. I don't want to misstate it -- how the date of

reformation would further or retard the purpose, the purpose, of the rule in Brennan, and then finally, of course, is that degree of injustice or hardship that a particular reformation date will have on the parties. I would like to first focus on the second issue that the Tenth Circuit addressed, that being how the reformation date would further or retard the purpose of the rule in Brennan. And

I suggest, your Honor, that these analyses go both to the date of reformation and the scope of reformation. In other words,

what the policy will be deemed to provide for this particular plaintiff. Now, Mr. Carey suggested a moment ago that this is entirely dependent on how we, the court and the parties, interpret what that rule of Brennan is. And Mr. Carey, as I

recall, suggested that one of those interpretations, other than the obvious, of course, that pedestrians are entitled to benefits, is that whether or not the insurance company was really aware of what it needed to do, or whether it caught the insurance company unexpectedly.

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And again, the court is fully aware of this, but in Brennan the insurance company there had not included pedestrians as a category of beneficiary of extended PIP benefits. That's significantly different than the Prudential policy, as the evidence will show, your Honor, in which Prudential always included pedestrians, and in fact, all other categories of eligible injured persons as beneficiaries of those extended benefit policies. And, your Honor, I think really when we explore what the Tenth Circuit told us to do, and that is to see if the date of reformation or how the date of reformation either retards or furthers the purpose of the rule in Brennan. I think we have to

look at Brennan itself and what it truly stands for. Mr. Carey discussed a number of distinctions in the case law, and I submit to the court that Prudential sees the case law a little differently. Thompson case. On one hand, we have the

The Thompson case is at one extreme of the Thompson offered absolutely no

spectrum for two simple reasons.

extended benefits whatsoever, and it offered absolutely no cap on any extended benefits, no cap, no benefits. Brennan and Clark, I will set aside Clark for the moment, your Honor, Brennan, which is the other dispositive case in Colorado law, is very clear. In that case there was a cap, None

but there was absolutely no coverage for pedestrians. whatsoever.

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When I say that, your Honor, of course I mean no extended benefit coverage for pedestrians. was provided. That's the middle ground. The basic coverage

Now, on the other end of the spectrum is Prudential's factual situation because Prudential not only had a cap, albeit 150 instead of 200, which is what brings us here today, but it had always given coverage to pedestrians for extended benefits. Thompson, no cap, no coverage, Brennan, cap, but no coverage. Fincher or the Prudential policy, cap and coverage. Now, if what we endeavor to do is determine what the purpose of the rule in Brennan was, I submit, your Honor, that Prudential's position is a more appropriate analysis than that of the plaintiff. And that is because in Brennan, what the

court attempted to do was reconcile the problems with the policy, and even though the policy provided no coverage whatsoever for the pedestrian, the court borrowed from the extended benefits cap that didn't apply to pedestrians, the 200 limitation, and placed it on a coverage that never existed. The equities, if nothing else, your Honor, really suggest that, even more so, that $200,000 cap should be applied in the Prudential policy, and I will address that issue slightly more in just a moment. The final case that counsel referenced was the Peterson case, and without acknowledging or disagreeing its applicability here because of the body of Colorado law we have, I think what's

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significant about the Peterson case is about the court's focus on the intent of the parties, and that factor as well, I believe the evidence will demonstrate, mitigates in favor of Prudential, both in terms of a contemporaneous reformation date and a policy limitation of the $200,000 cap. The second issue which the Tenth Circuit has required us to review is the degree to which a particular reformation date would upset the past practices of the parties upon which they relied. Now, Mr. Carey suggested, your Honor, that the only past practices upon which Prudential relied were its own policies and procedures. mechanisms. In other words, its internal

While certainly that is true, there are two

significant outside factors upon which Prudential relied when it was trying to address the new legislation in 1990 that for the first time required the $200,000 cap on the policy. And they are very simply this. First, Prudential

relied on the Division of Insurance requirement that new policy forms could not be implemented until the accompanying rates for those new coverages had been approved. Now, your Honor, this is going to be an abbreviated hearing because, as I believe as the brief shows, Prudential is no longer in business. deposed many years ago. submitted as evidence. Some employees of Prudential were Their deposition testimony will be

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We only have one live witness who will be talking about the Prudential files, and we have an expert. But those

depositions clearly indicate that that was the requirement imposed on the carriers by the Division of Insurance at that point in time. The fact that Prudential could not utilize those forms until it received the accompanying rate approvals legally prevented it from utilizing a form which contained a new cap. will discuss that more in a moment as well, your Honor. The second factor which I think is very significant here is that, notwithstanding Mr. Carey's interpretation of Colorado's no-fault law, as it developed from 1990 to 1998, there should be no dispute that it was not until July of 1992 that there was any written requirement for disclosure of available benefits. And that will be borne out by two evidentiary items, your Honor. First, the statute itself, and I am referring I

specifically to Colorado revised statute 10-4-706, subsection (4)(a), that's the provision which requires policies -- I am sorry -- which requires a disclosure of the coverages that are afforded under policies. That was not even in effect, your

Honor, at the time that the Bekeshka policy was issued in mid-April of 1992. We will also see through a Department of Insurance bulletin 694, it's listed as an exhibit, although it's disputed,

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that the law at that time indicated from the Division of Insurance that even as of May, 1992, again a month after Prudential issued its policy, the only written requirement for disclosure of extended benefits to applicants for insurance policies was a single sentence that said something to the effect, I can't quote it exactly, your Honor, but additional benefits are available. The reason that's significant is -- well, let me back up a step, your Honor. Because Prudential finds itself in a Originally this case went

rather awkward procedural position.

up to the Tenth Circuit on a legal issue, whether the holding in Brennan should be retroactive. timely, and so on. In the context of the Tenth Circuit overturning that decision, it also determined that Prudential's policy must be reformed as a matter of law because the offer was insufficient. Unfortunately, there was no briefing, no factual development of a significant issue, that which I have just described about the oral offer. And so Prudential is now in the If not, this case was not filed

position of being before this court, where the policy will be reformed, only the date and scope is at issue. But significantly, one of the factors which needs to be addressed is whether or not Prudential was entitled to rely on the state of the law at that time, which did not require a written offer of extended benefits.

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Now, we will see that the policy and the application contained a description, and there is some dispute about what coverages are afforded, but the fact of the matter is, if the law did not require disclosure of those coverages, including a disclosure of the $200,000 aggregate limit in writing, then Prudential should have been entitled to rely on a practice of orally discussing these coverages with prospective customers. The reason that becomes important, your Honor, is because the state of the law at the time did not require Prudential to do anything but that. You will see as the evidence comes in that they actually offered more coverages than were required, and in fact did some things that were in excess of or over and above the requirements of the statute. But in terms of reliance on

past -- in terms of its past practices on which it relied, that was a significant event. With regard to the hardship issue, your Honor, counsel makes a very good point in that if what we are really trying to do here is to determine the relative degree of hardship or injustice, even, as between the two parties in this case, based solely on this claim, then perhaps Prudential's evidence, which has previously been disclosed to the court, which demonstrates the difficulty of going back in time to address multiple claims for past benefits, may be comparing apples and oranges. We know from at least the one case, which has preceded

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before us, that Chief Judge Babcock felt that that was an appropriate analysis because the plaintiff is not an individual plaintiff, the plaintiff is a class representative for a putative class, and the court's ruling with respect to the date of reformation is necessarily going to impact that. Indeed, your Honor, the Brennan case itself, which the issue of retroactivity and so on, which was the issue before the Tenth Circuit initially, applied that policy to that particular individual making a claim. Now, if that analysis, that is the date of reformation now goes all the way back to 1992, that is going to have a significant impact on Prudential's claims-handling practices because of the scope of the claims that will then be required to review. And although at face value it makes perfect sense to say, it's not fair to talk about Prudential and other claimants if we can only talk about this particular claimant in this case, nevertheless I think we have to understand in principle or in spirit, rather, what the Tenth Circuit was trying to do. And I

think that's fully consistent with what the Tenth Circuit was arguing because this was brought in the context of a class case. With respect to the issue of harm, your Honor, I would simply point out that I believe the evidence will demonstrate that under either scenario, the harm to Ms. Fincher is negligible if non-existent.

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I know that Mr. Carey advised the court a moment ago that the harm to her is not being able to recover for Prudential's willful and wanton failure to pay benefits when due, and I am putting those words into his mouth, your Honor, because that's the statutory requirement under the PIP statute, for its failure to properly take care of its own client, to discharge its fiduciary obligations to its insured, and so on. Well, I submit to the court that that factual analysis is appropriate in the next hearing, the merits hearing. That is

a harm to the plaintiff, which in reality is windfall, because that is not an actual harm to her in determining the date of reformation or the scope of reformation. That's an

extra-contractual claim which is, first, not properly part of this hearing, and second, it's an element of damages that's not relevant to the issues on reformation. More significantly, your Honor, if the issue of extra-contractual damages is made an issue in this case, it really distorts the purpose of the Tenth Circuit's ruling, and really changes this reformation hearing into a merits hearing. In fact, Ms. Fincher, if I can disregard any extra-contractual damages, which she is certainly entitled to assert, and which she may prove at a later hearing may have existed, in terms of the actual economic harm to her at this point in time, it's non-existent. Prudential paid the full hundred thousand dollars,

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actually a little bit more, your Honor, because it paid -- and Mr. Brown will testify to this -- some essential services benefits that technically were not required by statute. But following the exhaustion of that basic policy, Mr. Fincher's policy kicked in and covered all of the additional medical expenses and other expenses that were incurred by Ms. Fincher, and in fact, you will hear from the evidence that Mr. Fincher agreed that he didn't have to pay any expenses out of pocket. Now, so Prudential's position is clear. That is not a

justification for any bad faith or willful and wanton conduct that was on the part of Prudential, but that's a separate issue. That's an issue to be resolved in a separate case. If we are talking here about the harm to the parties, there really essentially was no harm because Ms. Fincher received all of the benefits that she would have received, even had the Prudential policy been reformed to the $200,000 figure back in 1992. Basically we are substituting a different

insurance company, but she still received all those benefits. And in fact, your Honor, the only other issue has to do with wage loss. And as I think the evidence will show, no wage

loss claim has been made, because as a minor at the time of the accident, I believe even the PIP application indicates there is no wage loss claim. Now, that claim may have arisen a few years ago when

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Ms. Fincher started to work when she turned 18 or 19, but again, your Honor, as a justification for going back and reforming the policy as to the date far back into the past, simply doesn't carry any relationship to the harm to the parties, as the Tenth Circuit has advised us to address. Your Honor, I will not detail at this point the various harms to defendant. I will simply suggest that the evidence

will show that, in addition to the normal difficulties of going back some ten to fifteen years in the past to try and adjust claims which had not been adjusted at that time, Prudential has some unique difficulties because, as we indicated, it is no longer in business, is no longer in business, has not been for the last year and a half. It has no employees at this point.

It doesn't have the employees or capabilities to be able to adjust those claims. Again, your Honor, that's not a justification. order requires them to do so, they will have to do it. If the The

point the evidence demonstrates is that this presents a little bit of additional hardship because the Prudential Property and Casualty Insurance Company, which was sold, no longer exists. Its parent company will have to hire new employees, train those employees, instruct them on how to utilize the old computer system, review the claim files, contact all these people, including their named insureds, their physicians, all the medical care providers, employers in the case that

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Prudential lost income, to determine what exactly those losses were, and of course, your Honor, this assumes, which Mr. Carey's argument begs the question concerning, that there will be a significant number of people who will actually be entitled to the extended benefits claims -- or benefits. I am sorry.

Now, obviously that's an issue we will address in the class certification hearing, which is yet down the road. But

the process that Prudential will have to go through in order to identify potential claimants within the class, of course, and identify claimants who have a potential for recovering extended benefits, that is those benefits over and above the basic that they received, will be very difficult. Your Honor, the last point I would like to make concerns the factual record that the court will have before it. The parties have been able to stipulate to the vast majority of documents, most of which came from Prudential's product development file, and as the evidence will demonstrate, unfortunately we don't have a complete record, but we at least have some documents that give us an indication of some of the things that occurred. Now, Prudential's position is that when all of their activities and all of their efforts are viewed fairly, a pattern is clearly evident that demonstrates Prudential not only was aware of the change in law, not one in 1990, but another one in 1992, and made not only a reasonable but a very good-faith

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effort to try to comply with those changes involved. The reason that Prudential had those difficulties are several fold, but not the least of which was the inability to use its policy form absent rate approval. Mr. Brown will testify, as did the witnesses whose deposition testimony will be presented to the court, that filings with the Division of Insurance required filings of the forms that were actually being used and disseminated to the policyholders, rules which were actually a framework of a greater series of rules that apply to all these different policies, and also rates, which as the court will be aware, is a regulatory function of the Division of Insurance. Now, there did come a time in July of 1992 when the Division of Insurance enacted a new regulation, again part of the evidence, that said after that date, insurance companies did not need to seek approval of their forms, they would simply certify that the forms were correct, and then they could use those forms after a period of 31 days. Significantly, and as evidenced by those same documents, that did not alter the insurance company's requirement to obtain both rule and rate approvals as well. I think the evidence will demonstrate, your Honor, that Prudential was really faced with kind of a Hobson's choice. It

knew that the law had changed to mandate $200,000 in extended benefit coverage, capped at that amount, and it filed its forms

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and its rules and its rates in time to meet that deadline. They were rejected, for reasons which the court will hear about, but it could not implement that new form either before '92 or after '92 until the rates were approved. And so it had another choice. How do we insure that

this $200,000 cap is included in the policies as is required by law, even though the Division of Insurance won't let us use the specific policy form. I am going to address that in one minute.

Before I do, let me suggest this, your Honor. I am sorry. back to it. I lost my train of thought. I will come

The reason that the policy should be reformed

contemporaneously with the court's order and to the aggregate limit of $200,000 is because what Prudential did during this time was an attempt to reconcile its inability to use forms with the state of the law. follows: benefits. policies. That attempt is demonstrated by the evidence which shows recognition of the $200,000 cap, implementation of the $200,000 cap, and while it was awaiting DOI approval of the form, which included the $200,000 cap. It advised its agents to And in doing so, what it did is as

Prudential always used an aggregate cap on extended And its intent was to use an aggregate limit on its

convey to applicants that the law had a $200,000 cap for extended benefit policies. In practice, your Honor, Prudential applied the

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$200,000 cap to all claims that were made under policies in which the named insured had selected extended coverages. There are other factors as well which we will address in due time, your Honor. Counsel suggests that there were other deficiencies in Prudential's policies, and I will say that this is the first time this issue has arisen. The complaint is very clear that the criticism was the cap, the aggregate limit of 150 instead of 200,000. They have

retained an expert, who did not address that in any respect in his report, but perhaps more importantly, your Honor, I think as the evidence comes in, we will have an opportunity to see what the law actually required during this period of time. And

regardless of whether those opinions are permitted from an evidentiary standpoint, it is clear that Colorado law at the time that the Fincher policy was issued and applied for, that is late April 1992, many of the legal requirements that Mr. Carey referred to simply were not in effect. Now, Prudential's position, your Honor, is simply this. Its policy forms were not compliant, and Prudential acknowledges that. In fact, your Honor, we are not here to address whether

the policy form was really compliant or not because the Tenth Circuit has already told us that the policy must be reformed because it was non-compliant. The issues again are the date of

reformation and to what the policy will be reformed.

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I believe that the evidence in total will demonstrate that Prudential is entitled to a contemporaneous reformation date, and that the policy should be reformed both from a legal analysis standpoint and a factual analysis standpoint under the terms and requirements set forth by the Tenth Circuit of a limitation of $200,000, the statutorily-authorized aggregate limit on policies of this type. That's all I have. THE COURT: Very well. its first witness. MR. RECTOR: We will call Mike Hodges to the stand, Thank you, your Honor.

Thank you, counsel. To the evidence. The plaintiff may call

THE COURT:

Mr. Hodges, good morning.

If you will And if

please make your way forward to be sworn by the court. you will raise a hand to be sworn by the court. THE WITNESS: Thank you.

(Michael Hodges was sworn.) THE WITNESS: THE COURT: witness stand. Just one moment, Mr. Rector. Thank you. I do. Please be seated in that

Thank you.

Mr. Hodges, you will have to use that microphone in front of you, please. By its peculiar design, it only works if

you will leave a speaking distance of some six to eight inches,

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please.

Thank you. Mr. Rector. DIRECT EXAMINATION

BY MR. RECTOR: Q A Q Good morning, Mr. Hodges. Good morning, sir. I believe you have already stated your name for the record.

Is that correct? A Q I have. And in order that we might either not be distracted or

satisfied curiosity, you appear to be slightly disabled at this moment; is that correct? A Q A Q A Q A little bit of surgery last Thursday, yes. You are certainly able to testify today? Absolutely. Mr. Hodges, what is your occupation? I am an attorney. And as part of the pretrial endorsement in this case, and

actually as part of the stipulation, we have two binders in front of the witnesses. Now the larger binder are the stipulated exhibits, rather, and the smaller one are those that are not necessarily stipulated. With that in mind, would you look at Exhibit 55 in the larger binder, please. Is that a document that's familiar to

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Michael Hodges - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you? A Q A Q Yes, it is. That's my curriculum vitae.

Is that up to date and accurate? Yes. It appears to be, yes. Then I would like to focus briefly upon your

All right.

background, understanding that in this court those are received into evidence. Could you just tell us a little bit briefly about your employment background as it relates to the insurance industry? A Certainly. In 1968 I went to work for Allstate Insurance During that

Company.

I worked for Allstate for fourteen years.

period of time, I started out in just general claim adjusting, primarily personal injury claims, uninsured motorist claims, medical payment claims, that sort of thing. I was then elevated to supervision and various levels of management. state of Utah. I was promoted to District Claim Manager in the That was after I went to night law school at Graduated. Passed the bar.

Denver University.

Allstate then transferred me to Utah where I was a District Claim Manager. In the capacity of District Claim

Manager, I oversaw the entire claim-handling process for the state of Utah. Also very importantly in that position was to be liaison with the Insurance Commissioner's Office and liaison with various other departments within the insurance company, and

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Michael Hodges - Direct also to share and be part of what we refer to as claim manager counsels, and that was to deal with other claim management people from other companies to compare notes, to go over anything from personnel policy to claim handling, basic procedures, to changes in legislation, changes in case law, those sorts of things. I was then promoted. years. I was in that position for three

And then I was promoted to same title, District Claim

Manager, but a promotion to northern California, where again it was the same responsibilities but a much, much larger office. lot more personnel involved. But the same sort of A

responsibilities as I just explained. I was then promoted to a Division Claim Manager's position. That was a position where I had three district claim

managers reporting to me at the regional office, and at the same time, I also directly supervised house counsel operation in San Francisco of thirteen attorneys. I finished off my career at Allstate getting into what was called Career Development Management. That was integrating

curriculum from the Insurance Institute of America, and through the Insurance Education Association, for the education from basic claim handling, all the way up through claim management, and preparing people to present materials and preparing people to do presentations, in addition to doing the presentations myself for a good three or four years, and then I left the

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Michael Hodges - Direct company in 1982. Q In the course of that work experience, did you become

familiar with what you refer to as industry standards? A Q I believe I did, yes. And were those industry standards I guess ones that would

apply state-wide? A Q A Q Certainly. Now, you did go to law school and graduated when? In 1972. And at that point would you describe the nature of your

practice from then until now? A I worked for Allstate in management positions after passing When I left the company in 1982, I went

the bar in Colorado.

into business with a person actually I had met in Colorado but who was out in California. He and his stepfather ran group health spas, and they needed somebody to administrate, to run the company, to take care of the insurance needs, and watched their back sides while they were getting the spas up and running and that sort of thing. I did that for two years. They sold out, and I thought that was a good opportunity to go back to Colorado and go into practice with a couple of fellows who I was in Allstate with, and they had come to law school, passed the bar, and gone out into practice together.

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Michael Hodges - Direct So in 1984 I came back home and joined them in the practice of law, and have been in the practice of law ever since 1984. Primarily -- started out as a general practice, and seems like it evolved primarily into plaintiff's personal injury practice, and it also, because of my insurance background, evolved into quite a lot of insurance consulting, expert witness work, that sort of thing. Q A Q A Now, are you a member of some professional organizations? I am. Where are those? The Colorado Bar Association, of course. The Association of

Trial Lawyers of America, the Colorado Trial Lawyers Association, of which I am immediate past president. Q And I think you said you have been doing a degree of Is

analysis in an expert capacity as part of your practice. that correc