National Plan Administrators Inc. v. National Health Insurance Co.

Click here for the full text of this decision FACTS:Clyde Sommerlatte owned CRS Marketing Agency, an insurance agency focusing on supplemental insurance products purchased through payroll deductions from public sector employees. The company earns commissions on the polices it sells. CRS, in turn, owned National Plan Administrators (NPA), a third-party administrator that provides marketing and administrative services to CRS and other insurance carriers. The two companies shared office space, employees and accounting systems. The close relationship between the two companies was especially beneficial in dealing with public school districts because CRS could develop a computer program for handling the remittance of premiums that would work for all school districts. During the 1980s and 1990s, in response to legislation allowing for cafeteria plans in health insurance policies, CRS developed a series of supplemental health insurance products, described as “Cancer and Dread Disease Policies” that were underwritten by American Heritage Life Insurance Co. In 1995, Sommerlatte began negotiating with National Health Insurance Co. (NHIC) to move some of CRS’ “book of business” on the dread disease policies from American Heritage to NHIC, with NPA acting as the third-part administrator. In its role as third-party administrator, NPA would hold proprietary information belonging to NHIC. The parties eventually signed two agreements that created a profit-sharing arrangement between NPA and NHIC. In an addendum, Sommerlatte personally promised to indemnify NHIC from any liability it might incur from American Heritage as a result of the sale of its cancer policies. After the agreement went into effect, NHIC policies increased from around 1,000 in December 1995 to almost 7,000 in December 1997. Nonetheless, NHIC’s rating among independent insurers began slipping, and there was word that it might fall further. By 1996, Sommerlatte, was already in negotiations with Hartford Life Insurance Co. for that company to underwrite cancer and dread disease policies. The talks went on with Hartford for two years, but NHIC was never notified or included. In 1998, Sommerlatte, in his capacity as president of NPA, signed a contract with Hartford to provide third-party administrator services for that company in connection with cancer and dread-disease policies. Simultaneously, Sommerlatte, as president of CRS, entered into separate marketing and agent compensation agreements with Hartford. In June 1999, NPA requested its profit share from NHIC through the end of 1998. NHIC disputed NPA’s estimates of profits, stated that there was very little profit on the NPA policies, and told NPA it was exiting this line of the insurance business. NHIC offered to help NPA find an acceptable buyer for its insurance policies, but said it would give NPA 90 days to find its own buyer. NHIC ignored Sommerlatte’s requests for more information on profit estimations. NPA approached Hartford about buying the NHIC book of business. Hartford offered to buy only part of the book, that part dealing with employees who could be classified as “actively at work.” In response, Sommerlatte gave Hartford a list of employer accounts then held with NHIC, the amount of premiums each paid and the identity of the local servicing agent. Though Sommerlatte expressed reservations about leaving the remaining customers with NHIC, he still pursued discussions with Hartford for the limited buy-out. To bolster his talks with Hartford, Sommerlatte wrote to NHIC on NPA letterhead again asking for additional information, and notifying NHIC of the difficulties he faced finding a buyer for NHIC’s entire book with NPA. From the information NHIC sent, an NPA agent, Ruth Roy, sent Hartford the last names, with first initials, of the insureds on NHIC’s policies. It is disputed whether Roy did this on her own or at the direction of Sommerlatte. Hartford made a formal offer to accept NHIC’s policies for active-at-work employees. Accordingly, NPA notified the local agents of the change, and authorized those agents to present all qualifying NHIC insurers to Hartford. CRS offered its agents an additional 10 percent commission on policies they successfully rolled over to Hartford. NHIC was not aware of any of these proposals or notifications. One hundred twenty of 150 employers accepted Hartford’s offer. Consequently, NHIC lost most of its active-at-work policies, and its active policies in its book dropped in one month from just over 6,000 to around 1,500 and continued to decline through December 2002. NHIC sued NPA for breach of contract and of fiduciary duty. It also sought a declaration of its rights and responsibilities for policies that had been assigned to Hartford. It sound exemplary damages and attorneys fees. NHIC eventually added more claims against NPA, and also added claims against CRS and Hartford. A jury found NPA breached its contract with NHIC, and breached its fiduciary duty to the company. The jury found that NPA misappropriated NHIC’s trade secrets, that the breach of fiduciary duty resulted from fraud and malice, and that NPA and CRS acted as a single business entity. The trial court entered a $744,937 judgment against NPA, jointly and severally. It also awarded pre-judgment interest of more than $264,000, and imposed a $100,000 exemplary damages award against CRS and NPA, jointly and severally. HOLDING:Affirmed. NPA raises several issues related to the jury’s finding of a breach of fiduciary duty. For starters, NPA argues that it owed only a statutory duty to hold NHIC in trust, but did not owe the company a general fiduciary duty. The court notes that a fiduciary duty can be found where there is an agency relationship. Third-party administrators are among the regulated agents covered by Insurance Code Arts. 21.01-.15-5, the court finds, even though it is not defined as a licensed agent. There are several statutory duties the third-party administrator owes to the insurer under these code sections. In addition, the two agreements NHIC and NPA signed contemplated that NPA would carry out certain administrative functions for NHIC, and also authorized NPA to solicit possible insureds on behalf of NHIC, as well as service and investigate claims. With these agreements in mind, as well as the code, the court concludes that NPA owed a general fiduciary duty to NHIC. The court next examines the jury charge on fiduciary duty. NPA argues that the trial court erred by submitting a question that placed the burden on NPA to show its compliance with its duty to NHIC. In this case, where the alleged breach of fiduciary duty occurred when NPA revealed NHIC’s confidential policy information to Hartford and then moved certain NHIC policies to Hartford. When there is a questionable transaction of this nature, which ultimately benefited NPA, the pattern jury instructions suggest that the burden is on the actor to prove why the transaction was actually in compliance with its duty. The court points out that the question submitted to the jury actually placed the burden on NHIC, so the error, if any, was prejudicial only to NHIC, who prevailed. The court then addresses NPA’s argument that it was error to award damages on the breach of fiduciary claim since the parties’ relationship was governed by contract. Breach of fiduciary duty is a tort, the court points out, and NHIC claimed that NPA and CRS were unjustly enriched because of the breach. All of the alleged breaches arose from NPA’s duties of loyalty, fidelity and honesty that arose from its fiduciary role as NHIC’s agent. The claims are not governed by the contract in this case, such as the duties to market and administer NHIC’s policies. The claims are not for the loss of premiums from the lost book of business. Thus, these breaches rightly sound in tort as a breach of fiduciary duty. Also related to the fiduciary duty finding, the court determines that jury instruction on the proper measure of damages was correct. The trial court asked the jury to consider the value of the remainder of the book business that NHIC was able to negotiate on its own. The jury then had to consider the amount of past and future losses on the policies that remained with NHIC after the breach. These amounts measured net losses. The jury was also to consider the profits that the entire book of business would have generated but for the breach. Reading the question as a whole and considering the jury’s answers, which valued the losses on the remaining policies at $724,937 and valued the profit on the entire book of business at zero dollars, the trial court divided the elements of the damages in a way to determine an actual amount of loss that resulted from the breach. In essence, the jury decided that NHIC incurred a loss on the portion of the book of business it retained but that the book of business, as a whole, would have generated zero profit had it all been kept as one unit. Together, these amounts would result in a determination of damages actually suffered total profit on the book of business offset by the total loss on the remaining policies. The court also finds the amount of damages arrived at by the jury was not randomly generated or “pulled out of a hat.” The jury was not told to choose between a precisely calculated damages amount or no damages. The court finds the evidence sufficient to support a finding of causation of damages. Though it was the customers who eventually made the choice to roll over their business from NHIC to Hartford, without the negotiations between Sommerlatte and Hartford, those customers would not have moved their accounts at all, nor would the NPA agents have actively promoted Hartford as an alternative to NHIC. Although NHIC’s book of business was not increasing in volume when it decided to exit the market, evidence in the record establishes that at that time Sommerlatte was actively pursuing a business relationship with Hartford concerning the same types of policies it was offering from NHIC. NPA next argues that there is no evidence, or insufficient evidence, to support the jury’s finding that the harm caused by NPA’s conduct resulted from malice. Noting that malice has both a subjective and objective element, the court observes that after receiving notice from NHIC that it was exiting the line of business, Sommerlatte began negotiations with Hartford, despite knowing that Hartford would buy only a portion of NHIC’s accounts. Sommerlatte did so without notification or agreement from NHIC. The court turns next to address issues raised by CRS. First, CRS argues that the judgment against it was wrong because there was no basis by which to pierce the corporate veil to impose liability on it for the actions of NPA. CRS also argues there was no basis on which to impose punitive damages. As to piercing the corporate veil, the court finds ample evidence that CRS and NPA acted as a single business enterprise. Though CRS and NPA operated under two separate insurance licenses and did not share bank accounts or submit common annual financial statements to the department of insurance, Sommerlatte also owned NPA and CRS, and CRS owned NPA. While most companies of this kind of relationship would keep administrative and marketing services distinct and separate, Sommerlatte offered the relationship between CRS and NPA up as a reason to contract with NPA. The court finds other evidence from corporate structure to the way in which Sommerlatte conducted business with NHIC and Hartford to support its conclusion. OPINION:Law, C.J.; Law, C.J., Patterson and Puryear, JJ.