Massachusetts Federal Court Tosses Out Suit By Broker Against Stop Loss Carrier Alleging Loss of Business Due to Claims Practices (Cook & Co., et al v. Matrix Risk Mgmt. Svcs., LLC, et al., No.09cv10976, in the United States District Court for the District of Massachusetts, Jan. 24, 2011)

This is the first case in the stop loss arena I have seen where a broker that allegedly lost clients due to the alleged slow pay/no pay claims practices of a carrier sued the carrier and the MGU for damages.  This one did not survive the summary judgment stage, however, which may indicate that the general viability of such claims is subject to serious question.

Oversimplifying the facts for purposes of clarity, several municipal governments in Massachusetts and Rhode Island operated self-insured healthcare plans with Cook Agency as the broker of record for their stop loss insurance.  The stop loss policies were issued through Matrix, the MGU for Companion Life, which had an exclusive arrangement with Cook for the marketing of Companion’s stop loss policies in Massachusetts and Rhode Island. 

Allegedly beginning in July 2007, the insured municipalities stopped receiving timely payment from Companion for stop loss claims.  Some took their business elsewhere, allegedly costing Cook $750,000 in “supposed lost revenue from contracts not renewed andnew business never won.” 

Cook brought suit against the MGU and the carrier on a variety of theories, all of which were ultimately rejected by the Court.  The most interesting of these theories for our purposes was Cook’s breach of the stop loss contract theory.  Essentially, Cook argued that Companion breached the stop loss contracts with the municipalities by failing to timely pay claims.  Importantly, the insured municipalities were absent from the case: only Cook was claiming the policies had been breached.

First, Cook argued that it was entitled to enforce the stop loss contracts because, as broker of record, it signed them.  The Court was unimpressed with this novel argument, noting that Companion owed no duty of performance to Cook under the policies—only to the insured (and absent) municipalities.  “The fact that Cook Agency brokered a contract and signed the agreement suggests only that Companion and the Municipalities abided by the laws of Massachusetts” requiring that insurance policies be signed by a licensed individual. The Court further noted that Companion did not pay the broker for its services but that the Municipalities presumably did so.  The Court granted defendants summary judgment on this “broker may enforce the stop loss contract” theory.

Second, Cook attempted a third-party beneficiary argument.  Under the common law, a person not party to a contract can, under limited circumstances, nevertheless enforce that contract in court.  However, it must be shown that the two contracting parties clearly intended that their performance benefit the third party—merely deriving a benefit from the contract does not qualify one as a third party beneficiary entitled to enforce it.  The Court noted that Cook presented no evidence that either Companion or the municipalities intended to benefit Cook by their stop loss contract, and held that Cook was merely an “incidental beneficiary”—as opposed to an intended beneficiary.  Therefore, Cook had no legal way to recover for what it alleged was Companion’s breach of the contract.

Readers interested in the more nuanced and complex factual relationships between the MGU and the Cook entities should consult the Court’s opinion for details.  But for now, anyway, stop loss carriers can take comfort in the notion that they do not owe performance under their policies to the broker, only to their insureds.

Read the Court's Opinion Here