478 F.3d 908 (8th Cir. 2007), 06-1326, BJC Health System v. Columbia Cas. Co.

Docket Nº:06-1326.
Citation:478 F.3d 908
Party Name:BJC HEALTH SYSTEM, Appellant, v. COLUMBIA CASUALTY COMPANY, Appellee. ATG Assurance Company Limited, Appellant, v. Columbia Casualty Company, doing business as CNA HealthPro, Appellee.
Case Date:February 23, 2007
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit

Page 908

478 F.3d 908 (8th Cir. 2007)




ATG Assurance Company Limited, Appellant,


Columbia Casualty Company, doing business as CNA HealthPro, Appellee.

No. 06-1326.

United States Court of Appeals, Eighth Circuit.

Feb. 23, 2007

Submitted: Sept. 28, 2006.

Page 909

[Copyrighted Material Omitted]

Page 910

John S. Sandberg, Todd C. Stanton, Timothy C. Sansone, Sandberg & Phoenix, St. Louis, MO, for Appellants.

Matthew G. Allison, Baker & McKenzie, Chicago, IL, Scott D. Bjorseth, Hoagland & Fitzgerald, Alton, IL, for Appellee.

Before WOLLMAN, BOWMAN, and BENTON, Circuit Judges.

WOLLMAN, Circuit Judge.

This case is once again before us. See BJC Health Sys. v. Columbia Cas. Co., 348 F.3d 685 (8th Cir.2003) (reversing dismissal for failure to state a claim). The plaintiffs, BJC Health System (BJC) and ATG Assurance Company Limited (ATG), 1 appeal

Page 911

from the district court's grant of a judgment as a matter of law, a motion for partial summary judgment, and a motion to strike ATG's prayer for punitive damages. They also contend that the district court erred in excluding certain evidence. We affirm in part, reverse in part, and remand for further proceedings.


BJC, a network of hospitals, is the sole shareholder of ATG, a captive insurance company that provides insurance for BJC. In September 1998, BJC and defendant-appellee Columbia Casualty Company, doing business as CNA Health Pro (Columbia), entered into a three-year contract, pursuant to which Columbia agreed to provide reinsurance to ATG for a fixed yearly premium.

Under the contract, Columbia agreed to reinsure ATG for individual claims that exceeded $1 million or $3 million, depending on the hospital, and aggregate claims over $22 million. One clause ("the incurred loss condition") provided that continued coverage would be conditioned upon an incurred loss ratio of less than 75%. Although the parties contest how incurred loss should be defined, they apparently agree that incurred loss refers to the costs associated with claims made against the insured party. The incurred loss ratio, in turn, is determined by dividing BJC's incurred losses by the premium paid by BJC. The incurred loss condition is triggered if an incurred loss ratio exceeding 75% occurs with respect to either aggregate claims or with regard to any individual claim.

Columbia provided reinsurance for the first two years of the program. On September 22, 2000, only days before the end of the current policy year, Columbia informed BJC that it had determined that BJC had exceeded the aggregate incurred loss ratio. Columbia also stated that the incurred loss ratio had been exceeded on an individual claim, the "Baby C" claim, as well. BJC had set a claim reserve 2 of below $3 million on the Baby C claim, but Columbia assessed a reserve of $5 million, a sum which would lead to an incurred loss ratio well in excess of the 75% set forth in the contract. Columbia informed BJC that it would not continue with the third year of the program unless the premium was increased to $3.1 million and the aggregate retention level was increased to $31.1 million.

Columbia extended the policy so that BJC could obtain replacement insurance, which BJC acquired from Zurich. There were differences, however, between the policy offered by Zurich and the policy that BJC had with Columbia. As noted earlier, Columbia's coverage commenced at an aggregate loss of $22 million. Zurich, however, only offered coverage starting at an aggregate loss of $25 million. This $3 million gap in coverage means that BJC faces an additional $3 million in potential liability that it would not be facing had Columbia continued with the third year of the program. 3 Although Zurich declined to provide reinsurance starting at $22 million, it stated that if it did offer coverage commencing at that level, the premium for the additional $3 million in coverage would be $1.2 million.

Page 912

BJC filed suit, alleging breach of contract, and sought compensatory damages for the cost of the Zurich replacement policy as well as compensation for the additional risk exposure BJC had to assume with the Zurich replacement policy. BJC claimed that this latter amount was $1.2 million--the price Zurich would have charged for meeting the $3 million coverage gap. BJC also sought punitive damages, which were based on Columbia's allegedly fraudulent conduct.

Much of this case revolves around the actuarial work Columbia presented to BJC to justify Columbia's determination that the incurred loss ratio had exceeded 75%. On October 10, 2000, the parties met in Chicago to discuss their differences. At this meeting, Columbia distributed an actuarial analysis that concluded that the incurred loss ratio had been exceeded. That report was time-stamped at 10:23 that morning. This analysis contained errors that were not present in an earlier version of the report that had been printed at 8:33 that morning, but which had not been distributed. The errors in the distributed version contributed to a higher incurred loss ratio. On October 19, in response to unrelated concerns voiced by BJC, 4 Columbia distributed a third version of the report that addressed BJC's concerns but also corrected the incorrect figures from the second version. This third version, however, contained a new error: one of the figures was about $2.4 million too high, an error which, as described below, may have resulted in the calculation of an incurred loss ratio in excess of 75%.

John Pierce, a witness for BJC, reviewed all three versions of the actuarial report and testified that Columbia did not provide any explanation regarding the manner in which Columbia converted accident year data to report year data. An accident year to report year conversion was necessary because, while BJC's loss data was compiled on an accident year basis, the reinsurance policy was priced on a report year basis. In his report, Pierce remarked that this conversion was "the critical final step" in the analysis and that it was "unreasonable" to make this conversion without an explanation as to how it was performed. Pierce also noted that without knowing how Columbia had made the transition from accident year to report year figures, it was difficult to estimate the impact that the new error in the third version of the actuarial report might have had. He did, however, attempt to calculate the effect and estimated that if this error was corrected the incurred loss ratio would fall below 75%. Pierce also testified that Columbia unreasonably selected the same average experience ratio--an important figure--in all three versions of the actuarial analysis, despite the fact that the underlying data in these versions was different. He stated that the average experience ratio had a significant effect on the accident year figures, but could not state with exactitude how it might affect the report year data because Columbia did not explain the accident year to report year conversion.

Columbia's actuaries either did not know or could not remember how the accident year to report year conversion was done, and Columbia was unable to produce the computer models it used to conduct its 1999 and 2000 actuarial analyses of the BJC account. There was also evidence that Columbia's actuaries recommended a premium of nearly $13.5 million for the third policy year, a substantial increase that could only be justified by a dramatic change in BJC's losses or a by significant change in the assumptions Columbia used in assessing the BJC account. Columbia's actuaries did not know whether BJC had

Page 913

experienced a serious change in losses between 1998 and 2000 and did not know whether there was a significant change in Columbia's methodologies. BJC presented testimony that there were no significant changes in BJC losses.

BJC also presented testimony pertaining to the Baby C claim. Angela Standish, BJC's director of claims and litigation, testified that there was "absolutely" no reason why a reserve above BJC's $3 million self-insured retention had to be set and that Columbia's reserve of $5 million was neither proper nor reasonable. She also outlined various considerations that she said would tend to lessen BJC's potential losses on the claim. She also stated that Columbia had never expressed concerns about her reserving practices. BJC also presented testimony that after a claims audit in August 2000, the "general consensus" was that "things were fine."

The district court granted Columbia's pre-trial motion for partial summary judgment on the issue of compensatory damages (as it pertained to the $1.2 million price quoted by Zurich), as well as Columbia's motion to strike BJC's prayer for punitive damages. The district court also granted Columbia's motion to exclude evidence pertaining to Columbia's financial and human resources practices and goals. This evidence included testimony suggesting that Columbia sought to shed or increase premiums for medical malpractice insurance clients. Following the presentation of BJC's case, the district court granted Columbia's motion for judgment as a matter of law.


In granting a judgment as a matter of law against BJC, the district court concluded that, under the contract, Columbia had the right to determine incurred loss and that BJC had offered no evidence that Columbia's incurred loss determination was made in bad faith.

We turn first to BJC's claim that judgment as a matter of law against BJC was improper because the incurred loss condition is a condition subsequent. BJC contends that because the incurred loss condition is a condition subsequent, it was Columbia--not BJC--that bore the burden of presenting...

To continue reading