I think when Hurley had his balcony accident which we don't see, I think it is what caused the death of Libby's husband David, he may have been one of the casualties on that balcony. An unnatural death like that could wind someone up in a mental institute if it was a loved one, she could have been on that balcony too possibly and survived.

No I also believe Hurley can see dead people. He seems to have direct physical contact with them such as Charlie (gives Hurley a slap to prove he's really there) and plays chess with Mr Eko.

Which concludes that Dave, Hurley's imaginary friend is not imaginary but is Libby's dead Husband's ghost of David.

So if Hurley killed Dave or David in the balcony accident, that could be why Dave seems to bully Hurley a lot, making him eat a lot and get into trouble trying to escape the institute, to get him back for getting him killed, which would explain why Dave tries getting Hurley to kill himself by jumping off a cliff.

Sorry that took forever to explain, that's why I think Hurley and Libby were in the same mental institute.

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In another episode, we also see that Locke's mother is crazy, and the sign on the building behind her shows that she was in the same psych ward as Hurley and Libby.

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