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Guest Article

Trust Cannot Force Stop-Loss Insurer to Pay Claims When It Did Not Provide Data Under Contract Terms


Summary: The New York state supreme court dismissed a trust's lawsuit against a stop-loss insurer for not paying claims because the trust's negligence in providing essential documents was a catalyst behind the stop-loss insurer's refusal to pay claims.

A trust cannot use legal proceedings to force a stop-loss insurer to pay claims when its contract with that insurer specified that the trust must provide certain documentation beforehand -- which the trust never did, according to the supreme court of New York. Furthermore, while the trust argued that its plan administrator/agent was responsible for providing that documentation, the court indicated that the contract delegates that responsibility to the trust or the plan administrator. Therefore, the court dismissed the trust's claims. The case is Oil Heat Institute of Long Island Insurance Trust v. Gerber Life Insurance Co., 735 N.Y.S.2d 79 (S. Ct. N.Y., Dec. 18, 2001).

Facts of the Case

The Oil Heat Institute of Long Island, Inc., established a trust -- the Oil Heat Institute of Long Island Insurance Trust (OHI) -- when it began self-funding its group health plan. Island Group Administration, Inc. (IGA) submitted cost projections and a proposal to administer the fund, which included the cost of a stop-loss insurance policy with Gerber Life Insurance Co. After OHI accepted the proposal, IGA set up the plan and Gerber issued the stop-loss policy. IGA was the plan administrator and agent and RMTS Associates, LLP was the policy broker.

The policy's contract term ran from July 1, 1998, to June 30, 1999. Under the policy, the trust was reimbursed the amount of eligible benefits paid during the contract year that exceeded the aggregate attachment point, which was based upon the size of the eligible work force per month multiplied by $273.49 (125 percent of the expected benefit rate of $218.79).

Because the size of OHI's workforce changed, the attachment point could not be determined until after June 30, 1999, the end of the contract term. The policy also provided that:

The Contract Holder [OHI] or Plan Administrator [IGA] must give the Company [Gerber] a statement within two weeks after the end of each calendar month. It must show all Eligible Benefits paid to or on behalf of all Covered Persons during the month. It must be in the format outlined in Part V. If at the end of the Contract Year the aggregate Eligible Benefits exceeds the Attachment Point, the Company will within a reasonable time after receipt of documented evidence of the Contract Holder's payment reimburse the Contract Holder for the Covered Percent of such Eligible Benefits in excess of the Attachment Point. (Emphasis added)

The policy also provided that once each calendar month ended, IGA had two weeks to give Gerber a written statement explaining the eligible benefits processed by IGA, the amounts of denied eligible benefits, amounts not paid due to any deductible and other pertinent information.

When its contractual term expired, OHI sued Gerber in state court, alleging that it refused to pay $88,460 in stop-loss claims. Furthermore, OHI argued that Gerber and RMTS refused to issue a letter to its lender stating that claims exceeding the attachment point will be reimbursed as per the policy terms. OHI said that Gerber would not issue the letter until it conducted an audit, which it refused to do until "the end of the year when all the claims are paid." Therefore, OHI asked the court to force Gerber to issue the letter.

A lower court refused Gerber's motion to dismiss the claim, finding that the policy specified that OHI would pay claims and then be reimbursed by Gerber, and the attachment point could not be calculated until June 30, 1999, when the policy term expired and when OHI sued. However, the court found that questions existed on whether: (1) OHI actually paid the disputed amount; and (2) Gerber acted in good faith when it refused to issue the lender letter.

Court Criticizes OHI's Argument

Upon appeal, the state supreme court noted that the policy clearly said that Gerber would reimburse OHI "within a reasonable time after receipt of documented evidence" of OHI's payment. This documentation was not provided, yet the court noted that OHI gave "meritless" arguments that: (1) no documentation was required; (2) the lawsuit represented that documentation; and (2) IGA may have submitted it without OHI's knowledge. The court noted that recognizing the "feebleness" of its argument, OHI admitted it was unsure what Gerber owed because IGA allegedly had the documentation but had not provided it. Furthermore, the court indicated that the "real motivating factor" behind OHI's lawsuit, as noted by OHI, was that "only way" the documents could be "assembled in light of Gerber's list of requirements" was to sue to legally authorize their disclosure.

Well-established case law provides that a party claiming ignorance of critical facts must prove such ignorance was unavoidable and that it attempted to discover those facts, the court stated. The court found that OHI did not meet that standard because no evidence existed that it tried to get the documentation, particularly since it filed a lawsuit on the same day that the policy ended. In addition, the court indicated that the only evidence offered that OHI paid $88,460 in reimbursable stop-loss claims was an affidavit by OHI's vice president. However, that affidavit had no details on how the amount was calculated and paid. The court also noted that in a separate but related lawsuit against Gerber, the vice president attested that Gerber owed $171,704, again without any documentation.

Furthermore, although the policy required OHI to provide monthly statements, Gerber stated that it had not received any statements or any other information that could help it calculate payments. While OHI countered that IGA was responsible for submitting that information, the court pointed out that one part of the policy clearly gives that responsibility to either OHI or IGA. While other part of the policy does make IGA the responsible party, the court indicated "it must be borne in mind that IGA is OHI's agent."

The court then rejected OHI's argument regarding the lender letter, noting that no evidence existed that OHI requested the letter, Gerber was obligated to provide it or that Gerber's alleged refusal to provide it contributed to a credit rejection by a bank. In addition, OHI made the request four days before the policy expired, making it impossible for Gerber to provide certification because it could not calculate the attachment point until the policy actually expired. Accordingly, the court reversed the lower court's decision and dismissed OHI's claims.

Implications

This case underscores the need for plan sponsors to: (1) read and conform to the provisions in stop-loss agreements; (2) expect and get clarification and explanation of policy terms from brokers; and (3) monitor the services provided by third parties.

From the facts, it appears that Oil Heat had just begun self-funding and was not fully aware of the ramifications of self-funding or the functions to be performed.

In addition to understanding self-funding's ramifications and the policy terms, the case infers that a plan sponsor should consider other options. For example, there is no discussion of whether this plan also had specific stop-loss provisions, which might have helped with Oil Heat's inferred cash flow problems.

Excerpted from the March 2002 supplement to Employer's Guide to Self-Insuring Health Benefits, © Thompson Publishing Group, Inc., 2002. All rights reserved.

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