Consider the Risks: An Insurance Law Blog
In the 2004 CADSI case, followed by the 2005 Zurich case, two separate federal appeals courts held that where a stop loss policy incorporated a benefit Plan Document by reference, the stop loss insurer’s inquiry into the propriety of the claim for purposes of determining its obligations under the stop loss coverage was limited to the question of whether the Plan Administrator had abused its discretion. [1] Plan Administrators’ discretion can be extremely broad and stop loss insurers undoubtedly viewed the rulings as both startling and chilling. The obvious question in the wake of CADSI and Zurich was whether and how a viable challenge to coverage could be mounted under similar circumstances. That question was addressed this year in the case of AG Equipment Company v AIG Life [2] , which was tried to a conclusion in the US District Court for the Northern District of Oklahoma.
AG Equipment Company (“AG”) purchased stop loss coverage from AIG for its self-funded Plan covering its full-time employees. The stop loss policy was effective May 1, 2003 through April 30, 2004, and it was renewed in May 2004, May 2005 and May 2006. Under the Plan, “[a]n employee [was] considered to be full-time if he or she normally work[ed] at least 30 hours per week and [was] on the regular payroll of the employer.” AG was the Plan Administrator.
During the May 2006-7 Plan Year, AG made a substantial claim under the stop loss related to expenses incurred on behalf of the ex-wife of the owner of AG, who was on the payroll as a salaried employee. Shortly thereafter, an AG employee informed the TPA that the ex-wife did not work as a full-time employee of AG and he provided written documents to support his allegation. AIG investigated the allegation and requested that AG provide testimony and documentation to support AG’s claim. It refused and litigation followed.
Both parties filed claims and counterclaims, including a bad faith claim by AG against AIG. Following discovery, the parties filed summary judgment motions on their claims. Shortly before trial, the Court granted summary judgment to AIG, denying AG’s bad faith claim, but ruled that the remaining issues were appropriate for trial. Following a full trial, the jury returned a defense verdict in favor of AIG, finding not only that AIG was not required to reimburse AG for medical expenses because the employee did not satisfy the Plan’s full-time employee requirement, but also that AG had committed a fraud entitling AIG to a reimbursement of almost $280,000 in previously paid funds for the ex-wife’s treatment. The jury also awarded AIG damages on its own breach of contract counterclaim, awarding actual and compensatory damages of just under $160,000 to AIG.
The Oklahoma Court’s rulings on the pre-trial summary judgment motions are a good indication of both the reach and the limits of the Zurich rule. [3] At summary judgment AIG had argued that its case was distinguishable from Zurich in two ways. First, it argued that “[t]he AIG… Policy… beginning in the 2005-2006 Policy year specifically reserved to AIG… ‘the right to interpret the terms and condition [sic] of the Plan as it applies to the Policy.’” The new policy wording quoted by AIG appears to have been an express effort to limit the complete deference conferred to the Plan Administrator’s decisions under the CADSI and Zurich cases. Second, it argued that “The AG… Plan Administrator… made no reasoned determination with regard to the Plan’s language and the Policy,” going on to relate various shifting and inconsistent arguments regarding its interpretation of the 30-hour per week requirement for full-time employment.
The Court did not comment on the first argument regarding the revised wording and instead, acknowledged that the Zurich rule was applicable and that the Plan Administrator had been granted maximum discretion under the Plan Document. Nonetheless, the Court went on to hold that “there [was] nothing in the record to suggest that the Plan language was interpreted and a determination was made with respect to [the ex-wife’s] employment and eligibility.” As the Court went on to note:
In short, there is no indication that AG ever exercised its discretion to interpret the Plan language. While Zurich is directly on point, without more evidence, this Court cannot rely on Zurich to grant summary judgment. Accordingly, AG is not entitled to summary judgment on the grounds that AIG’s failure to defer to AG’s interpretation of the Plan constituted a breach of contract.”
In applying the rule from Zurich, the AG v AIG Court has helped define the limits of the rule. The evidence at trial showed that the determination that the ex-wife was “full-time” and thus covered under the Plan was by edict of the company owner, not by application of standard Plan processes and procedures. Under those circumstances, the legal rule found in Zurich granting deference to the Plan Administrator’s decisions simply did not apply. It should be noted that in this case the evidence showing the AG owner’s manipulation of his ex-wife’s employment status was fairly extreme, but the case was not without risks or exposure to AIG. The practical lesson here is that although insurers are often loath to bring cases to trial based upon the concern that juries are biased against them, juries are not stupid; they can follow a complex case and don’t like fraud.
[1] Computer Aided Design Systems, Inc. v. SAFECO Life Ins. Co., 358 F.3d 1011 (8th Cir. 2004), affirming, 235 F.Supp. 2d 1052 (S.D. Iowa. 2002); and Zurich North America v. Matrix Service, Inc., 426 F.3d 1281 (10th Cir. 2005).
[2] AG Equipment Company v AIG Life Insurance Company Inc., Case No. 07-CV-0556-CVE-PJC, USDC for the Northern District of Oklahoma (January 28, 2009).
[3] Oklahoma is located in the 10th Circuit and thus the Federal District Court was bound by the Zurich decision.
