Court Sets Aside Ruling, Citing Conflict of Judge

In an unusual action, the Supreme Court on Tuesday set aside a ruling upholding a $5-million “bad faith” damage award against an insurance company because a judge who played a key role in the decision had a personal stake in the outcome.

By a vote of 8 to 0, the court held that a former Alabama Supreme Court justice who wrote the opinion affirming the award--the largest in that state’s history--should have disqualified himself from the case.

While the dispute was awaiting a decision by the state high court, Justice T. Eric Embry himself had filed similar lawsuits against two other firms, seeking punitive awards on the grounds they acted in “bad faith” in refusing to pay his insurance claims. In one instance, the judge eventually received a $30,000 settlement.

Enhanced His Own Case

The opinion Embry wrote for the Alabama court in its 5-4 ruling against the company had the “clear and immediate effect” of enhancing the legal status and settlement value of his own case, Chief Justice Warren E. Burger wrote for the high court.

Burger said that, while the justices were not finding that Embry was actually biased, he did have a “direct, personal, substantial and pecuniary” interest in the case, violating the insurance company’s constitutional right to due process of law.

“The Due Process Clause may sometimes bar (participation) by judges who . . . would do their very best to weigh the scales of justice equally between contending parties,” Burger wrote. “But to perform its high function in the best way, justice must satisfy the appearance of justice.”

Set ‘Outer Boundaries’

The court said that its ruling marked only the constitutional “outer boundaries” for judicial disqualification--and that Congress and the states remained free to impose “more rigorous standards” than the justices were imposing.

The case before the court arose from a suit brought by Margaret and Roger Lavoie of Mobile, Ala., accusing Aetna Insurance Co. of refusing to pay them about half of a $3,028.25 claim they submitted to cover her hospital bills. Aetna said Mrs. Lavoie should have been treated as an outpatient at less cost.

A jury, finding that the company had acted in “bad faith,” awarded the Lavoies $3.5 million in punitive damages. In December, 1984, the Alabama Supreme Court upheld the award, finding that Aetna must pay the damages--plus a $350,000 penalty for its unsuccessful appeal and more than $1 million in accumulated interest.

Company Learns of Suits

Aetna later learned that Embry had filed two “bad-faith” suits of his own while the Lavoie case was pending--one for the alleged failure of one firm to pay for the theft of a valuable mink coat, the other for alleged failure of another firm to pay valid medical claims. The first case was settled before the Lavoie case was decided, the second afterwards, with Embry receiving a $30,000 payment.

Aetna sought a rehearing but it was denied--and the company appealed the case (Aetna vs. Lavoie, 84-1601) to the Supreme Court.

The high court’s decision, with Justice John Paul Stevens not participating, requires the Alabama court to reconsider its ruling. Justice Embry, who retired from the court last fall for health reasons, said Tuesday that he would not comment. Earlier, in an interview with The Times, he denied any impropriety in the case. “My conscience is clear,” he said.