## Facts

- Richard Howard Kelly purchased two “own-occupation” disability income policies providing benefits if he was unable to perform the substantial and material duties of his occupation and was under a physician’s care.
- In May 1986, Kelly began treatment with a psychologist, submitted a total-disability claim, and Provident Life & Accident Insurance Company paid benefits for about 13 years.
- During the benefit period, Provident suspected Kelly was working while receiving benefits; a company representative reported those suspicions to law enforcement.
- Provident later acknowledged that Kelly had previously disclosed some ongoing work and had provided business records reflecting that activity.
- On August 18, 1999, Provident concluded Kelly was not disabled and terminated benefits.
- In November 2000, Provident sued Kelly for fraud relating to the disability claim; the case was paused for settlement discussions.
- In April 2001, Kelly learned a default judgment had been entered against him in the fraud case; he claimed this triggered severe emotional distress, heavy drinking, and suicidal thoughts.
- Kelly settled by giving up claims to past and future disability benefits in exchange for dismissal of the fraud action and related relief.
- Kelly later sued seeking rescission of the settlement agreement and damages for breach of contract and insurance bad faith, asserting he lacked the mental and emotional capacity to handle the litigation and was subjected to undue influence.
- Kelly offered expert evidence that he suffered from Avoidant Personality Disorder and was unusually susceptible to pressure, including pressure associated with the default judgment and Provident’s conduct.

## Issues

1. Whether there was a genuine dispute of material fact that Provident procured the settlement agreement through undue influence, supporting rescission under California law.
2. Whether, if rescission remained viable, there were triable issues on Kelly’s breach-of-contract and bad-faith claims based on Provident’s termination of benefits and related conduct.
3. Whether the existence of triable issues on rescission prevented summary judgment based on limitations, given potential equitable tolling if rescission were proved.

## Decision

- The court denied Provident’s motion for summary judgment.
- The court found triable issues as to whether Provident took unfair advantage of Kelly’s asserted mental vulnerability and distress in obtaining the settlement.
- The court found triable issues as to whether Provident acted in bad faith in investigating the claim, terminating benefits, and using litigation-related conduct that could be viewed as unfair pressure.
- Because rescission remained for the factfinder, the court declined to dispose of the contract and bad-faith claims on statute-of-limitations grounds at summary judgment.

## Legal Principles

- Under California law, a settlement may be rescinded for undue influence when a party takes unfair advantage of another’s weakness of mind or distress; the inquiry is based on the totality of the circumstances and is not limited to a fixed checklist of factors.
- Undue influence is typically a fact-intensive question; credible evidence of mental vulnerability and coercive or overbearing pressure can create a triable issue precluding summary judgment.
- An insurer’s duty of good faith and fair dealing requires fair, thorough, and balanced claim handling; evidence of a result-oriented investigation or conduct aimed at creating settlement leverage can support a bad-faith claim.
- When rescission of a settlement is potentially available based on undue influence, related contract and bad-faith claims may remain viable pending factual resolution, including possible equitable tolling tied to the settlement’s validity.

## Conclusion

The court allowed the case to proceed because a reasonable jury could find that Provident used unfair pressure against a psychologically vulnerable insured to secure a settlement relinquishing benefits and could also find that Provident’s investigation, termination, and related litigation conduct breached its duties under California insurance law.


Kelly v. Provident Life & Accident Ins. Co., 734 F. Supp. 2d 1085 (S.D. Cal. 2010)