Insurers must defend health plan administrator against beneficiaries’ class action suits

A group of professional liability insurers had an obligation to defend a managed care company in litigation stemming from the insured’s handling of out-of-network health care claims, a California appellate court ruled. The underlying complaints included claims asserting breaches of fiduciary duty, which presented the possibility that the insured would be held liable for extracontractual monetary damages under ERISA’s “appropriate equitable relief” provision. According to the court, this was sufficient to trigger the insurers’ duty to defend.

The insured, Health Net, Inc., administered employer-sponsored health plans governed by ERISA. In the case at bar, Health Net sought coverage from its primary and excess professional liability insurers for three class action suits brought by plan members alleging that the company violated ERISA by: (1) using an “inherently flawed” Ingenix database to miscalculate the usual, customary, and reasonable charge (UCR) for out-of-network services and pay lower benefit reimbursements; (2) failing to make required disclosures; (3) failing to provide full and fair reviews of adverse benefit determinations; and (4) breaching its fiduciary duties.

All of the underlying plaintiffs sought recovery of plan benefits under ERISA Sec. 502(a)(1)(B) as well as equitable relief under ERISA Sec. 502(a)(3). One of the suits also asserted that Health Net committed mail fraud in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO).

Extracontractual monetary relief. In a previous decision, the court held that claims for unpaid benefits were not covered under Health Net’s professional liability policies because the company was contractually obligated to pay benefits to its participants, and the performance of a contractual obligation was not a loss resulting from a covered “Wrongful Act” (defined in the policies as “any actual or alleged breach of duty, … misleading statement or omission … committed solely in the conduct of [Health Net’s] Professional Services[.]”).

In the same decision, however, the court also found that “extracontractual” damages—i.e., damages resulting from a Wrongful Act, as opposed to Health Net’s contractual obligations—would potentially be covered, and claims affording potential recovery of those damages would be subject to the insurers’ duty to defend.

In the instant case, the court noted that the U.S. Supreme Court and several federal appellate courts have allowed plaintiffs to pursue make-whole monetary relief under ERISA’s “equitable relief” provision based on the plan administrator’s alleged breach of fiduciary duty and the beneficiary’s alleged detrimental reliance. In other words, the plaintiffs in those cases were permitted to pursue damages because of a “Wrongful Act” (as defined in the policies at issue) even though they were not actually entitled to the benefits under their respective ERISA plans. According to the state appeals court, these were “extracontractual” damages that were recoverable as a matter of law under ERISA Sec. 502(a)(3).

Duty to defend. In this case, although the underlying plaintiffs sought recovery of unpaid plan benefits under ERISA Sec. 502(a)(1)(B), the facts alleged regarding Health Net’s purported breaches of fiduciary duty (e.g., that Health Net unjustly enriched itself through reimbursement practices that fell below the fiduciary standard of care) presented the possibility that the company would be held liable for extracontractual monetary damages under ERISA Sec. 502(a)(3) in the event the claims for plan benefits failed. In the court’s view, this was sufficient to trigger the insurers’ duty to defend or reimburse defense costs under the policies.

RICO claim. With respect to the underlying RICO claim, the court reasoned that because RICO liability for mail fraud can be predicated upon facts establishing that the defendant made misleading statements with reckless, but not necessarily willful, disregard for the truth, the allegations that Health Net acted intentionally did not conclusively negate the potential for coverage under the policies. Indeed, the underlying plaintiffs alleged that Health Net should be held liable for mail fraud under RICO because it “knew or should have known that the Ingenix data was flawed or invalid.”

Accordingly, the insurers failed to establish that coverage for the RICO claim was absolutely barred under either: (1) the policy’s exclusion for claims “arising out of any Wrongful Act committed with the knowledge that it was a Wrongful Act”; or (2) the insurance code section providing that an insurer “is not liable for a loss caused by the willful act of the insured.”

Excess insurers. Finally, the court determined that Health Net could not maintain its breach of contract claim against the excess insurers. The primary insurer had not paid out its policy limits, and the excess policies were not triggered until the underlying policy had been exhausted by way of actual payment.

SOURCE: Health Net, Inc. v. American International Specialty Lines Insurance Co., (Cal. App.), No. B262716, October 6, 2016.

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