Court Enters Judgment for Stop Loss Carrier Based On Pleadings Alone  (Federal Warehouse Co. v. Nationwide Life Ins. Co, No. 2:08-cv-275, in the United States District Court for the Southern District of Ohio, Eastern Division May 24, 2010).

Sometimes these stop loss cases are just plain easy.  Consider, for example, Federal Warehouse Co. v. Nationwide Life Ins. Co, No. 2:08-cv-275, in the United States District Court for the Southern District of Ohio, Eastern Division (May 24, 2010), where the nub of the dispute came down to whether the group had “Paid” a large claim within the Benefit period of the Policy or not.  Here are the operative facts, as taken from the Court’s opinion:

·         Federal  Warehouse (“Federal”) had a stop loss contract with Nationwide, issued through its MGU, with an incurred window of July 1, 2005 – June 30, 2007 and a Paid window of July 1, 2006 – June 30, 2007 (sounds like a 12 month run-in and no run-out to me), providing for both specific and aggregate coverage.

·         A Covered Person under Federal’s Plan had been hospitalized several weeks at St. Louis University Hospital, and was not expected to survive much longer.  Federal had decided to change stop loss carriers, and was aware that the claims for this person would not be covered under the new policy to become effective July 1, 2007 (whether the claims for this individual had been lasered by the new carrier or whether Federal did not purchase run-in coverage is not clear). 

·         To protect itself against a loss of stop loss coverage for the individual’s claims, Federal sought and obtained an interim bill from the hospital on June 28, 2007 in the amount of $498,742.71, and actually transferred funds in that amount to the Plan account.  HCH, Federal’s TPA, instructed its third party claims processing service to process a check for the full amount owed to St. Louis University Hospital, which it did on June 29, 2007—one full day before the expiration of the Benefit Period.  The problem was that the checks were not mailed out until six days later, on July 5, 2007. (The Court’s opinion does not elaborate as to how or why this happened).

After the specific claim and the portion of the aggregate claim relating to this patient were denied as not having been paid within the terms of the stop loss contract, Federal filed suit in federal court against the stop loss carrier for breach of contract and for vexatious refusal to pay, alleging an entitlement to attorneys’ fees, costs and punitive damages.  It also sued the MGU on the theory that it tortiously interfered with Federal’s rights under the stop loss policy as a part of a “vendetta” against the TPA’s clients. 

The stop loss carrier and MGU filed Answers to Federal’s Complaint, denying the material allegations thereof, and then moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c).  Procedurally, such a motion is close kin of a motion to dismiss for failure to state a claim upon which relief can be granted under Federal Rule 12(b)(6).  Essentially, it asks the Court to indulge the Plaintiff by accepting the truthfulness of all the factual matters alleged in the Complaint for purposes of deciding the motion only, and then rule that, even if everything Plaintiff claims is true is true, the Plaintiff still loses.  As we have characterized these kinds of motions before, they are essentially “So what?” motions, designed to bring an end to the litigation even before any discovery is done.

Federal argued that the various provisions of the stop loss policy were ambiguous, and must be construed to find coverage.  At least as described by the Court in the opinion, none of these arguments were remotely compelling in my view. To the contrary, the policy provisions regarding payment are, to my eye (and, apparently, the Court’s) quite clear:

Pay, Paid, Payment means actually funded by means of drafts, checks or electronic fund transfers that are Issued by the Policyholder, received by the payee and Honored.  When the preceding requirements are met, the date of payment is the date the draft, check or electronic fund transfer is Issued, provided it is delivered and Honored within 30 days of the issued date.  In the event the draft, check or electronic fund transfer is not Honored within 30 days of issue, the date of payment becomes the date the draft, check or electronic fund transfer is Honored.

Issued means the date: (1) the Policyholder directly tenders payment by mailing (or other method of delivery) to the payee a draft, check, or electronic fund transfer, and (2) the account upon which the draft, check, or electronic fund transfer is drawn contains, and continues to contain, sufficient funds to permit the check or draft to be Honored.

Thus, “payment” occurs on the date a check is mailed or otherwise delivered, except in the case where the account on which it is drawn is under-funded or where the check does not clear for more than 30 days after issuance.  In the latter two cases, the “paid” date is later than the mailing/delivery date.  Put most simply, under no circumstances is an item “paid” before it is mailed or otherwise delivered to the payee.

Beyond its ambiguity arguments, Federal contended that the carrier had reimbursed it for stop loss claims where the claims were incurred just prior to the end of the contract period but checks were not mailed until shortly after it expired.  The Court rejected this argument on two bases:  first, that the stop loss contract language was unambiguous, such that under Illinois law a prior departure was irrelevant; and second, that the stop loss policy had a clear non-waiver clause, to wit:

Waiver:  Failure of the Company to insist upon the Policyholder’s strict compliance with any requirement or condition of this Contract at any time or under any circumstance shall not constitute a waiver of such requirements or condition by the Company at any time under the same or different circumstances.

In simpler terms, the clause means “Just because we didn’t enforce this before doesn’t mean we can’t enforce it now.”  While many policies I have seen have a similar provision, some don’t.  This case illustrates how it can be helpful to include such a paragraph in the policy form.

Finally, Federal attempted to invoke the “clerical error” provision in the policy, which also contained an unfortunate reference to “inadvertent delay,” arguing that it somehow excused a failure to pay claims within the parameters of the stop loss contract.  The Court rejected this claim as well, noting “the Court questions how the delay in placing the checks in the mail could possibly be considered ‘inadvertent.’ HCH and Federal were fully aware that unless the Loss was “Paid” within the Benefit Period, the Loss would not be eligible for reimbursement.” 

Having concluded that the Plaintiff’s Complaint deserved a “So What?” response, the Court dismissed all claims against both the carrier and the MGU.

This kind of outcome demonstrates the value in not simply paying every claim that comes in the door for fear of incurring legal fees.  In many cases, the legal system can and will reach the right result, and in especially clear cases, this can occur relatively early in the litigation process, as it did here.

Read the Court’s Opinion Here