Saltarelli v. Bob Baker Group Medical Trust

Decision Date31 August 1994
Docket NumberNo. 92-56252,92-56252
Citation35 F.3d 382
Parties, 18 Employee Benefits Cas. 1982 Shirley SALTARELLI, individually and as the Administrator of the Estate of Joseph Saltarelli, Plaintiff, v. The BOB BAKER GROUP MEDICAL TRUST; All-American Chevrolet-Geo; Bob Baker Enterprises, Inc., Defendants-cross-claimants-Appellants, v. DAVE HAGEN FACTORS, INC., d/b/a VIP Chevrolet; Downtown/Future Ford Health Protection Plan, Defendants-cross-defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Karl R. Lindegren, Fisher & Phillips, Newport Beach, CA, for defendants-cross-claimants-appellants.

Bruno Wolfenzon, Campell, Rubino, Torres & Wolfenzon, San Diego, CA, for defendants-cross-defendants-appellees.

Appeal from the United States District Court for the Southern District of California.

Before: D.W. NELSON, REINHARDT, and BRUNETTI, Circuit Judges.

BRUNETTI, Circuit Judge:

Bob Baker Group Medical Trust appeals the district court's adverse finding of liability in a medical insurance dispute. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291 and affirm.

I.

Downtown/Future Ford Health Protection Plan ("Future Ford") and Bob Baker Group Medical Trust ("Baker Group") are group health plans for two sets of affiliated auto dealerships. Joseph Saltarelli worked for a Future Ford dealership until January 5, 1990 and received medical coverage through the Future Ford plan. He then left Future Ford and began work at a Baker Group dealership on January 8, 1990. The Baker Group plan had a three-month waiting period before coverage began on April 8. Saltarelli passed a physical exam by Baker Group's chosen doctor on January 3, 1990.

For the interim, Saltarelli elected to continue his Future Ford coverage. Most group health plans are required to provide the opportunity to elect such continuation coverage under the terms of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. Secs. 1001 et seq. (1988), as amended by the Comprehensive Omnibus Budget Reconciliation Act of 1986 ("COBRA"), 29 U.S.C. Secs. 1161-68, 1 and Future Ford was no exception. Saltarelli continued his coverage by paying the full Future Ford premium for the months of January, February, and March. Near the end of March, Saltarelli received the Future Ford Plan's April bill. He paid it, but sent back the invoice with a handwritten notation: "Please send bill for Shirley [Saltarelli's wife] only May 1, 1990. I will be going off COBRA as of that date May 1, 1990." Future Ford accordingly billed Mrs. Saltarelli at the beginning of May, and she paid her premium.

On May 4, 1990, Saltarelli was hospitalized and in succeeding days was diagnosed with stomach cancer. Soon after the diagnosis, Baker Group advised that it would probably not cover his treatments because of the plan's pre-existing condition exclusion. On May 18, 1990, Saltarelli underwent surgery for the cancer. On May 23, 1990, the Saltarellis sent checks to Future Ford in payment of Joseph's May premium and their combined June premium. Mrs. Saltarelli enclosed a letter which stated: "Pursuant to 29 USC Section 1162(c), any payment made for COBRA coverage within 30 days after the date due is considered to be timely." 2

On May 29, 1990, Joseph Saltarelli died. His widow subsequently demanded payment of his medical bills from both plans. Each plan denied any liability. Saltarelli's widow, as his executor, sued them both and they cross-claimed against each other. Baker Group later settled with Mrs. Saltarelli in exchange for an assignment of the estate's claims against Future Ford.

Baker Group claims it is not liable because its coverage, for which Saltarelli became eligible in April 1990, excluded pre-existing conditions such as Saltarelli's subsequently diagnosed cancer. Future Ford claims it is not liable because, although Saltarelli maintained his old coverage through April 1990 under COBRA, he notified Future Ford before May that he would be "going off COBRA"; the plan argues that COBRA's 30-day grace period for premium payments did not apply to Saltarelli's May 23 attempt to pay up because he already had affirmatively terminated his coverage.

The case was submitted to the district court on the agreed facts for a bench trial to determine coverage liability. Adopting findings of fact and conclusions of law prepared by Future Ford, the district court found Future Ford not liable, holding that the Baker Group pre-existing condition exclusion was unenforceable and that Saltarelli's notice had irrevocably terminated his coverage under the Future Ford plan.

II.
A. Standard of Review

In reviewing a bench trial, this court shall not set aside the district court's findings of fact, whether based on oral or documentary evidence, unless they are clearly erroneous. Fed.R.Civ.P. 52(a). The clear error standard applies to those findings of fact the district court adopts from proposed findings submitted by the parties. See Anderson v. Bessemer, 470 U.S. 564, 571-73, 105 S.Ct. 1504, 1510-11, 84 L.Ed.2d 518 (1985); Barnett v. Sea Land Service, Inc., 875 F.2d 741, 745 (9th Cir.1989). Clear error review also applies to the results of "essentially factual" inquiries applying the law to the facts. See United States v. Martinez-Gonzalez 962 F.2d 874, 878 (9th Cir.1992) (as amended). The district court's conclusions of law are reviewed de novo. Brooker v. Desert Hospital Corp., 947 F.2d 412, 415 (9th Cir.1991).

B. Baker Group's Pre-Existing Condition Exclusion

The Baker Group Summary Plan Description, which was provided to participants such as Saltarelli, covers 43 pages in single-spaced typescript. The preamble states that "[t]he Plan is subject to all terms, provisions and conditions recited on the following pages."

Among the Baker Group plan provisions is an exclusion for "pre-existing conditions." However, an insured reading the table of contents of the plan summary would find no heading for this critically important item. The only arguably relevant heading apparent from the table of contents, "Eligibility Rules: Employee Eligibility and Effective Date," contains no reference to it at all. The "Medical Care Benefits" chapter in the body of the document does reveal a subsection entitled "Exclusions and Limitations," but the pre-existing conditions exclusion receives no mention here either.

Instead, the exclusion can be found only in the midst of the "Definitions" chapter. 3 Even then, it requires a coordinated reading of three separate definitions: those for "Pre-Existing Condition," "Illness," and "Injury." 4 The district court found as matters of fact that:

11. The Baker Group Plan's purported exclusion for pre-existing conditions is not conspicuous enough to attract the attention of a reasonable layman.

12. The Baker Group Plan's purported exclusion for pre-existing conditions is not clear or plain, inter alia, because it includes the term "illness", and [states that illness "must be medically diagnosed and receive treatment from a physician."] ...

16. As a reasonable layman, Mr. Saltarelli could not be expected to look under the medical definitions of The Baker Group Plan, for an exclusion for pre-existing conditions.

The court did not clearly err in making these findings; indeed, we emphatically agree with them. Baker Group chose to bury one of the plan's most significant provisions amidst definitions, rather than forthrightly stating the pre-existing conditions exclusion in the operative clauses of the plan description.

C. The Reasonable Expectations of the Insured

From these findings, the district court drew the legal conclusion that the Baker Group Plan exclusion was unenforceable. It cited no authority for this proposition.

Baker Group argues that Future Ford, the drafter of the court's conclusions, improperly imported state law authority here because ERISA preempts almost all state law which might otherwise bear upon interpretation of COBRA coverage. FMC Corp. v. Holliday, 498 U.S. 52, 56-58, 111 S.Ct. 403, 406-08, 112 L.Ed.2d 356 (1990); Kanne v. Connecticut General Life Ins. Co., 867 F.2d 489, 494 (9th Cir.1988), cert. denied, 492 U.S. 906, 109 S.Ct. 3216, 106 L.Ed.2d 566 (1989). Baker Plan correctly notes that Future Ford cited only California state law in arguing to the district court that the lack of a clear, plain, and conspicuous discussion of the exclusion rendered it unenforceable.

However, ERISA preemption does not mean that general principles of state law are irrelevant to interpretation of ERISA-governed insurance contracts. On the contrary, "[t]he courts are directed to formulate a nationally uniform federal common law to supplement the explicit provisions and general policies set out in ERISA, referring to and guided by principles of state law when appropriate, but governed by the federal policies at issue." Menhorn v. Firestone Tire & Rubber Co., 738 F.2d 1496, 1500 (9th Cir.1984); see also Evans v. Safeco Life Ins. Co., 916 F.2d 1437, 1439 (9th Cir.1990) ("interpretation of ERISA insurance policies is governed by a uniform federal common law"); Kunin v. Benefit Trust Life Ins. Co., 910 F.2d 534, 540 (9th Cir.) (state-law principle of contra proferentum applies to the federal courts' interpretation of ERISA insurance contracts), cert. denied, 498 U.S. 1013, 111 S.Ct. 581, 112 L.Ed.2d 587 (1990).

In finding that the lack of a clear, plain and conspicuous statement of the exclusion rendered it unenforceable, the district court was applying the strong modern trend in insurance contract interpretation--the "reasonable expectations" doctrine. This doctrine, which grew out of the law of adhesion contracts and construction of ambiguities in insurance policies, has been formulated as follows:

In general, courts will protect the reasonable expectations of applicants, insureds, and intended beneficiaries regarding the coverage afforded by insurance carriers even though a careful examination of the policy...

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