Court Grants Summary Judgment to Stop Loss Carrier and MGU in Disclosure Case
MyHealthGuide Source: Tom Croft, Esq., King & Croft LLP, 5/20/2010, www.StopLossLaw.com
Case: Evangelical Presbyterian Church v. American Fidelity Assurance Company, et al., No. 08-116317, in the Circuit Court of Wayne County, Michigan, 5/14/2010). Court Opinion
Mr. Croft’s Comments: A Michigan trial court entered a 15 page Order granting summary judgment for a stop loss carrier and an MGU but denying summary judgment to the broker in a case involving disclosure issues. Because I represent the carrier and MGU in the case, and it is still ongoing, it would be inappropriate for me to comment further at this time.
MyHealthGuide Newsletter provides the following excerpts from the Court’s Opinion:
Circuit Court Judge Isidore B. Torres presided over the case in Detroit, MI. Parties include include American Fidelity Assurance Company, Excess Reinsurance Underwriters Agency, Inc., and Group Health Managers, Inc.
Pending before the Court were
(1) Group Health Managers, Inc.’s motion for summary disposition pursuant to MCR 2.1 I6(C)(10), and
(2) American Fidelity Assurance Company and Excess Reinsurance Underwriters Agency, Inc.’s motion for summary disposition pursuant to MCR 2,116(C)(10).
The Court, having reviewed the motions for summary disposition, and otherwise being fully advised in the premises, issues the following opinion and order.
Background
Plaintiff is a religious denomination that consists of member churches throughout the country, and is the plan sponsor and plan administrator of a self-insured employee benefit plan that provides medical benefits to employees of its member churches and their dependents. The plan also has a third-party administrator, Highmark Blue Shield (“Highmark”). Plaintiff annually purchased medical excess loss or “stop loss” insurance to provide reimbursement coverage in the event of large claims under its plan. As it had for calendar years 2003, 2004, and 2005, Plaintiff contracted with Defendant American Fidelity Assurance Company (“AFA”), through AFA’s agent and Managing General Underwriter, Defendant Excess Reinsurance Underwriters Agency, Inc. (“XSRE”), for an excess loss policy.
Plaintiff was assisted in the renewal process by Defendant Group Health Managers, Inc. (“GHM”). On November 2, 2005, GHM’s vice president, John Swek, sent an email to Janet Bain, Plaintiff’s benefits administrator. In the email, Swek stated, “Again this year, we will need from you (Highmark) the individual amount and status of all individuals who have had claims paid on their behalf in excess of $50,000. Please see what you can get for us as soon as you can.” On November 22, 2005, Bain informed Swek via email that the church had two people to report: Sarah Sewell and Dr. L. Edward Davis. On November 28, 2005, XSRE submitted a proposal entitled “Renewal Summary” to Plaintiff. The renewal summary contained various terms and conditions, including the requirement that Plaintiff execute a statement entitled “Plan
Sponsor Disclosure Statement and Contract Addenda” (“Disclosure Statement”).
The Disclosure Statement required Plaintiff to identify individuals covered under its plan who fell into one or more of five listed categories, and provide information regarding the diagnosis, prognosis, and claims data for each. The categories included “Covered Persons who incurred charges over 50% of the Specific Deductible [i.e., $50,000] during the 12 months preceding the requested effective date January 1, 2006…” and “Covered Persons who have a known diagnosis which might be expected to lead to a specific reimbursement and Covered Persons who have been diagnosed with any of the conditions listed on the attached page.” The attached page listed several categories of medical conditions, including cancer.
In addition, the Disclosure Statement provided, in relevant part, as follows:
The Plan Sponsor named below warrants the above list is true, complete and accurate, after reasonable inquiry, and that nothing has been omitted…The Plan Sponsor further warrants that in order to complete this Disclosure Statement it has consulted with its TPA, Broker, Human Resources Department, Pre-Certification Vendor, Large Case Management Vendor and Utilization Review Vendor to ensure that the information provided in this Disclosure Statement is accurate and complete. The Plan Sponsor further acknowledges, understands and agrees that this information will be used by a person listed on this form unless specifically agreed to in writing by Excess Re. If claims are submitted for any Covered Persons who meet the criteria as outlined above in numbers 1 through 5 as of the date of this statement, and this Covered Person was not disclosed to Excess Re on this form, then no coverage will be provided for charges incurred by that Covered Person by American Fidelity.
In late November, 2005, GHM’s sole owner, Roy Neal, provided the renewal summary and a blank Disclosure Statement to Plaintiffs Stated Clerk, Professor Michael Glodo, for his review and signature. On December 8, 2005, Glodo executed the renewal summary, and also executed the blank Disclosure Statement. Thereafter, Swek listed Sarah Sewell and L. Edward Davis on the Disclosure Statement, based on information he had received from Bain. On January 13, 2006, XSRE mailed application forms and other materials to Swek to reflect the renewal of the AFA stop loss policy for 2006. Glodo executed the application on January 19, 2006 and returned it to GHM. XSRE issued the policy on February 10, 2006 (effective January 1, 2006).
In early 2007, Plaintiff submitted claims for reimbursement to XSRE for two plan participants, Warner Sells (a/k/a “PM 1″) and Russell Louden (a/k/a “PM2″). AFA denied reimbursement of the claim for Sells and Louden on the grounds that both had previously been diagnosed with cancer, and had received treatment and had claims in excess of $50,000 paid as a result of their diagnoses throughout 2005, but had not been listed on the Disclosure Statement.
In its second amended complaint, Plaintiff alleges claims of negligence, negligent misrepresentation, breach of fiduciary duty, and rescission against GHM; breach of contract, negligent misrepresentation, and rescission against AFA; and breach of contract, negligence, negligent misrepresentation, and rescission against XSRE.
Discussion
Group Health Managers, Inc.’s Motion for Summary Disposition
In its motion for summary disposition, GHM argues that under the circumstances, Plaintiff breached its contract with GHM and caused its own damages by failing to disclose critical information that GHM had to have in order to completely and accurately fill out the Disclosure Form.” More specifically, GHM cites the Restatement of Agency, § 415, for the proposition that “the liability of the agent to the principal may be avoided, terminated, or reduced by a breach of contract by the principal, his contributory fault, or his failure to mitigate damages.” GHM further contends that the conduct of Janet Bain made it impossible for GHM to identify PM1. GHM states that it “should therefore be excused by the unforeseen circumstance that Plaintiff received information and ignored it instead of recognizing its significance and passing it on.”
In response, Plaintiff argues that genuine issues of material fact exist regarding its claims, and that the defense of impossibility of performance applies to breach of contract actions, as opposed to the claims Plaintiff raises against GHM. In addition, Plaintiff contends that it provided GHM with the only information it requested, i.e., the names of “people who have gone over $50,000 in claims as of October 31st.”
For the reasons discussed below, the Court is of the opinion that the defense of comparative fault is applicable to Plaintiff’s negligence claims against GHM, but that genuine issues of material fact exist regarding those claims, and Plaintiff’s claims of breach of fiduciary duty, negligent misrepresentation, and rescission against GHM.
Here, it is undisputed that on November 2, 2005, John Swek sent an email to Janet Bain in which he stated, “Again this year, we will need from you (Highmark) the individual amount and status of all individuals who have had claims paid on their behalf in excess of $50,000.. Please see what you can get for us as soon as you can.” Pl. Brief, Ex. 5. It is also undisputed that on November 22, 2005, Bain informed Swek via email that the church had two people to report: Sarah Sewell and Dr. L. Edward Davis. Thereafter, on December 8, 2005, Michael Glodo executed a blank “Plan Sponsor Disclosure Statement and Contract Addenda” that GHM then filled out, adding the information related to Sarah Sewell’s and Dr. L. Edward Davis’ claims.
There is undisputed evidence before the Court that on November 28, 2005, Bain and Glodo each received a report from Highmark indicating that in the period between January 1, 2005 and October 31, 2005, Sells/PM1 had claims paid totaling $53,808.51. Nevertheless, Plaintiff did not update the information regarding individuals with over $50,000 in claims it had previously provided to Swek. Based on the fact that Plaintiff did not provide updated information to Swek after receiving the Highmark report on November 28, 2005, GHM essentially argues that Plaintiff should be held legally responsible for the incomplete disclosure form. However, there is evidence that GHM undertook some responsibility with respect to the Disclosure Statement. During his deposition, Swek testified that when Glodo executed the blank Disclosure Statement on December 8, 2005, Roy Neal told Giodo that the information for the disclosure form would be checked before the form was completed. Swek Dep., p. 19. Swek further testified that he eventually completed the form with information he received from Janet Bain. Swek Dep., p. 19.
Plaintiff argues that GHM undertook completion of the Disclosure Statement, and therefore owed Plaintiff a duty to ensure that the information it provided was correct and complete. Plaintiff asserts that there is no evidence GHM made any effort to check the information it had received from Bain on November 22, 2005. However, Neal testified during his deposition that after he delivered the Disclosure Statement to Glodo for Glodo’s review and signature, he spoke with John Baird of Highmark, and also spoke with Bain. Neal Dep., pp. 49- 51. Neal also testified that as of the date he provided the Disclosure Statement to Glodo, he was not aware of what information GI-1114 had already collected for completion of the form. Neal Dep., pp. 70-71.
As described above, there is evidence before the Court that Bain failed to provide GHM with accurate and complete information, but there is also evidence that GHM undertook the collection of the information necessary for the Disclosure Statement. Based on the foregoing, the Court is of the opinion that genuine issues of material fact exist regarding Plaintiff’s negligence claim, including the issue of comparative fault. There are also genuine issues of material fact regarding Plaintiffs negligent misrepresentation, breach of fiduciary duty, and rescission claims, which were not specifically addressed in GHM’s motion for summary disposition.
AFA/XSRE’s Motion for Summary Disposition
Plaintiff alleges that AFA breached the parties’ contract for excess insurance by failing to provide coverage for Sells and Louden, and also alleges counts of negligent misrepresentation and rescission against AFA. With respect to XSRE, Plaintiff alleges claims of breach of contract, negligence, negligent misrepresentation, and rescission.
The Court will first address Plaintiffs breach of contract claims against AFA. Specifically, in its second amended complaint, Plaintiff contends that AFA breached the parties’ contract by failing to provide coverage for Sells and Louden. In its motion for summary disposition, AFA argues that under the terms of the parties’ agreement, as reflected in the insurance policy documents, it was understood that Plaintiffs failure to make required disclosures would preclude reimbursement. In response to AFA’s motion, Plaintiff raises two arguments. First, Plaintiff argues that under the terms of the Disclosure Statement, it was only required to make “reasonable inquiry” to obtain the information requested, and that questions of fact exist regarding whether it made such reasonable inquiry and is therefore entitled to coverage for Sells and Louden. Second, Plaintiff argues that the Disclosure Statement was not incorporated by reference into the policy, and is therefore not a proper basis for denial of coverage. For the reasons discussed below, both of Plaintiffs arguments lack merit.
The primary goal in the construction or interpretation of any contract is to honor the intent of the parties. Rasheed v Chrysler Corp, 445 Mich 109, 127 n 28; 517 NW2d 19 (1994). If the parties’ language is unambiguous, the parties’ intentions must be ascertained from the plain, ordinary meaning of the language itself. See Goriney v Norfolk & W Ry Co, 216 Mich App 535, 540, 541; 549 NW2d 612 (1996).
The Disclosure Statement provided, in relevant part, as follows:
The Plan Sponsor named below warrants the above list is true, complete and accurate, after reasonable inquiry, and that nothing has been omitted…The Plan Sponsor further warrants that in order to complete this Disclosure Statement it has consulted with its TPA, Broker, Human Resources Department, Pre-Certification Vendor, Large Case Management Vendor and Utilization Review Vendor to ensure that the information provided in this Disclosure Statement is accurate and complete. The Plan Sponsor further acknowledges, understands and agrees that this information will be used by a person listed on this form unless specifically agreed to in writing by Excess Re. If claims are submitted for any Covered Persons who meet the criteria as outlined above in numbers 1 through 5 as of the date of this statement, and this Covered Person was not disclosed to Excess Re on this form, then no coverage will be provided for charges incurred by that Covered Person by American Fidelity.
Under Plaintiffs interpretation of the Disclosure Statement, it would be entitled to coverage of omitted individuals as long as the information it provided was based on a reasonable inquiry. However, there is no indication that AFA’s obligation to pay claims was conditioned upon or related in any way to Plaintiffs warranty of “reasonable inquiry” — the Disclosure Statement clearly states that claims are submitted for any Covered Persons who meet the criteria as outlined above in numbers 1 through 5 as of the date of this statement, and this Covered Person was not disclosed to Excess Re on this form, then no coverage will be provided for charges incurred by that Covered Person by American Fidelity.” In other words, based on the plain language of the Disclosure Statement, AFA was not required to provide coverage for a non-disclosed person, regardless of the circumstances behind the omission.
Even assuming the reasonableness of Plaintiff’s inquiry was related to AFA’s obligation to provide coverage, Plaintiff has failed to create a question of fact regarding whether it conducted a reasonable inquiry. Although Plaintiff suggests its reliance on GHM for the information constituted a reasonable inquiry, it is undisputed that Glodo executed the Disclosure Statement in blank, and was therefore unable to make any warranty regarding its contents, or the reasonableness of inquiry into the accuracy of its contents, whatsoever. Moreover, it is undisputed that information regarding Mr. Sells’ claims was in Plaintiff’s possession, but was not included in the Disclosure Statement. There is also evidence before the Court that Highmark, Plaintiff’s TPA, bad information available regarding Louden’s claims in late 2005 and early 2006, and would have provided that information to Plaintiff if Plaintiff had asked for it. Mike Moran Dep., pp. 183-184.
Finally, in addition to the terms of the Disclosure Statement, the parties were also bound by the terms of the policy, which contained the following Non-Disclosed Losses provision:
If YOU fail to disclose any required health information on. .a Covered Person when YOU make application for this Policy…then…We will not reimburse YOU for any Plan Benefits Paid related to the illness or condition that was required to be disclosed…
AFAASRE’s Brief, Ex. 2, Policy, p. 8.
Notably, the Non-Disclosed Losses provision does not provide an exception in those eases where a plan sponsor failed to disclose, but made a reasonable inquiry.
Plaintiff argues that the Disclosure Statement was not incorporated by reference into the policy, and is therefore not a proper basis for denial of coverage.
In the present case, the Disclosure Statement was entitled “Plan Sponsor Disclosure Statement and Contract Addenda,” and it referenced the parties’ insurance contract. Specifically, the Disclosure Statement stated, “The Plan Sponsor acknowledges that if subsequent information becomes known which if known prior to issuance of this Contract would have affected the rates, deductibles, terms or conditions for coverage hereunder, American Fidelity has the right to revise the rates, deductibles, terms or conditions as of the effective date” (emphasis added). Based on the foregoing, the Court is of the opinion that the Disclosure Statement was part of the parties’ contract, such that Plaintiffs failure to disclose the information requested was a proper basis for denial of coverage.
The Court will next address Plaintiffs breach of contract claim against XSRE, in which Plaintiff alleges that XSRE materially breached the terms of the parties’ contract by failing to obtain insurance that would cover Sells and Louden. Plaintiff contends that the renewal summary provided by XSRE constituted a contract between the parties. In its motion for summary disposition, XSRE denies that the renewal quote constituted a contract. For the reasons discussed below, the Court agrees with XSRE.
The renewal summary was executed by Glodo on December 8, 2005. It identifies AFA as the “Proposed Reinsurer” and Plaintiff as the “Proposed Insured.” In its response to XSRE’s motion for summary disposition, Plaintiff argues that because the summary was on a form provided by XSRE, signed by Glodo, and included a statement that the offer “assumes commissions of 15%,” it amounted to a contract between XSRE and Plaintiff. However, as XSRE points out in its reply brief, XSRE’s role as agent for AFA was fully disclosed in the communication of the offer, which clearly identified AFA as the “Proposed Reinsurer.” Thus, XSRE, as AFA’s fully disclosed agent, is not liable on AFA’s contract. See Detroit Pure Milk Co v Patterson, 138 Mich App 475, 478; 360 NW2d 221 (1984).
In its negligence claim against XSRE and negligent misrepresentation and rescission claims against both AFA and XSRE, Plaintiff argues that GHM was acting as AFA’s and XSRE’s agent when it committed negligent acts, and that AFA and XSRE are vicariously liable for GI-IM’s acts. The crux of Plaintiffs argument is that “it is undisputed that GHM…was not appointed by AFA to sell its insurance in Michigan. As such, GHM was acting as AFA’s and MRE’s general agent, not as an independent agent. Given this, AFA and XSRE are vicariously liable for GHM’s misconduct.” In support of its position, Plaintiff cites MCL 500.1208a. MCL 500.1208a(1) provides, “An insurance producer shall not act as an agent of an insurer unless the insurance producer becomes an appointed agent of that insurer. An insurance producer who is not acting as an agent of an insurer is not required to become appointed.” Plaintiff asserts that “an insurance agent is a common-law general agent of the insurer unless the insurer appoints it as required by MCL 500.1208a, thus making it an independent agent.” For the reasons discussed below, Plaintiffs argument lacks merit.
First, Plaintiff does not dispute that Roy Neal, an agent appointed by AFA to sell stop loss insurance in Michigan, and not GHM, is identified as the agent of record in the stop loss policy application, and executed the policy in his individual capacity. But even assuming Neal was acting for GHM when he executed the application, Plaintiffs theory that GHM was the general agent of AFA and XSRE fails.
An agent’s authority may be actual or apparent. Auto-Owners Ins Co v Michigan Mut Ins Co, 223 Mich App 205, 216; 565 NW2d 907 (1997).
Actual authority may be either express or implied. Implied authority is the authority that an agent believes the agent possesses. Apparent authority arises where the acts and appearances lead a third person reasonably to believe that an agency relationship exists. However, apparent authority must be traceable to the principal and cannot be established only by the acts and conduct of the agent.
Id. (internal citations omitted).
“[A]n insurance agent typically acts on behalf of the parties to facilitate the sale and execution of [an insurance] policy.” Genesee Foods Services, Inc v Meadowhrook, Inc, 279 Mich App 649, 654; 760 NW2d 259 (2008). An independent insurance agent is one who represents multiple insurers. See Mayer v Auto-Owners Ins Co, 127 Mich App 23; 338 NW2d 407 (1983). “When an insurance policy is facilitated by an independent insurance agent or broker, the independent insurance agent or broker is considered an agent of the insured rather than an agent of the insurer.”‘ Genesee Foods Services, supra, quoting West American Ins Co v Meridian Mut Ins Co, 230 Mich App 305, 310; 583 NW2d 548 (1998).
In Genesee Foods Services, supra, the Court stated that when the independent insurance agency assisted the insureds to find an insurer that could provide them with the most comprehensive coverage and to ensure that the insurance contract properly addressed their needs, the independent insurance agency’s primary fiduciary duty of loyalty rested with insureds. Id. Therefore, the Court concluded that the independent insurance agency was the agent of the insureds, not the insurer. Id at 656-657.
It is undisputed that GHM represented multiple insurance carriers and stop loss carriers at the time Plaintiff’s claims arose. Neal Dep., pp. 9-10, 12, 16. Therefore, GHM was an independent agent. Based on the agency principles discussed herein, the Court concludes that GHM was acting as Plaintiff’s agent in procuring the stop loss insurance, and was not acting as the agent of AFA and/or XSRE.
Finally, the Court will address Plaintiff’s claims for rescission. As stated by the Michigan Supreme Court in Wall v Zynda, 283 Mich 260, 264; 278 NW 66 (1938):
“To rescind a contract is not merely to terminate it, but to abrogate and undo it from the beginning; that is, not merely to release the parties from further obligation to each other in respect to the subject of the contract, but to annul the contract and restore the parties to the relative positions which they would have occupied if no such contract had ever been made. Rescission necessarily involves a repudiation of the contract and a refusal of the moving party to be further bound by it. But this by itself would constitute no more than a breach of the contract or a refusal of performance, while the idea of rescission involves the additional and distinguishing element of a restoration of the status quo.’ 1 Black on Rescission and Cancellation (2d ed), § 1.”
Rescission may be granted where there is a material breach of contract affecting a
substantial or essential part of the contract. Onnicorn of Michigan v Giannetti Inv Co, 221 Mich App 341; 561 NW2d 138 (1997). In determining whether a breach is material, the court should consider whether the nonbreaching party obtained the benefit it reasonably expected to receive. Holtzlander v Brownell, 182 Mich App 716, 722; 453 NW2d 295 (1990). The Court may also consider the extent to which the injured party may be adequately compensated for damages for lack of complete performance, the extent to which the breaching party has partly performed, the comparative hardship on the breaching party in terminating the contract, the willfulness of the breaching party’s conduct, and the greater or lesser uncertainty that the party failing to perform will perform the remainder of the contract.
In the present case, Plaintiff received the coverage it applied for. It seeks rescission based on the denial of two specific claims, but has failed to demonstrate that the denial of claims related to Sells and Louden constituted a material breach of contract that would warrant rescission.
Conclusion
For the reasons stated herein, IT IS HEREBY ORDERED that GHM’s motion for summary disposition is DENIED. IT IS FURTHER ORDERED that AFA’s and XSRE’s motion for summary disposition is GRANTED. Finally, IT IS HEREBY ORDERED that a settlement conference in this matter will be held on June 15, 2010 at 9:30 a.m. Trial counsel, litigants/parties, and claims representatives MUST ATTEND the settlement conference.
About Tom Croft, Esq. and King & Croft LLP
Tom Croft is an attorney with the firm of King & Croft LLP, Atlanta, Georgia. He has a national practice, consulting with and representing stop-loss carriers, MGUs, and other entities in matters arising in the self-funded employee benefit plan industry. Tom is a magna cum laude graduate of Duke University (1976) and an honors graduate of Duke University School of Law (Order of the Coif, 1979), where he served as Associate Dean and Senior Lecturer. He is a regular contributor to The Self-Insurer Magazine’s “From The Bench” column. Tom is licensed in Missouri (1979), Texas (1985) and Georgia (1992); he associates with local counsel in other jurisdictions when appropriate. Contact Tom at 404-577-8400, tac@king-croft.com and visit www.StopLossLaw.com and www.king-croft.com.
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