Broadnax Mills v. Blue Cross & Blue Shield of Va.

• Decision Date: 21 February 1995
• Docket Number: Civ. No. 3:94CV603.
• Citation: 876 F. Supp. 809
• Parties: BROADNAX MILLS, INC., Plaintiff, v. BLUE CROSS AND BLUE SHIELD OF VIRGINIA, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

876 F. Supp. 809

BROADNAX MILLS, INC., Plaintiff, v. BLUE CROSS AND BLUE SHIELD OF VIRGINIA, Defendant.

Civ. No. 3:94CV603.

United States District Court, E.D. Virginia, Richmond Division.

February 21, 1995.

COPYRIGHT MATERIAL OMITTED

Michael Randolph Shebelskie, Hunton & Williams, Richmond, VA, George H. Gromel, Jr., Edmunds & Williams, Lynchburg, VA, Virginia H. Hackney, Richmond, VA, for plaintiff.

Roscoe Connell Roberts, Blue Cross & Blue Shield of Virginia, Legal Dept., Richmond, VA, Richard C. Titus, Raleigh, NC, John J. Jacobsen, Jr., Charles B. Wolf, Chicago, IL, for defendant.

ORDER

Upon due consideration, for the reasons stated in the accompanying Memorandum this date filed and deeming it just and proper so to do, it is hereby ADJUDGED and ORDERED as follows: (1) Defendant's motion to strike Plaintiff's jury demand be and the same is hereby GRANTED; (2) Defendant's motion to strike Plaintiff's claim for punitive damages be and the same is hereby GRANTED; and (3) Defendant's motions concerning Counts IV and V and VII through XII of the amended complaint be and the same are DENIED as moot.

MEMORANDUM

MERHIGE, District Judge.

This matter is before the Court on Defendant's motion to dismiss the following portions of Plaintiff's amended complaint: (1) six state law claims which this Court has previously held to be preempted by the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. ("ERISA") (Counts VII-XII); (2) Plaintiff's request for a jury trial; (3) Plaintiff's claim for punitive damages; and (4) two counts which were not included in the original complaint and any facts related thereto (Counts IV and V).

I.

In 1978, Plaintiff established a fully insured health benefit plan for its employees. Because Plaintiff was unfamiliar with administering such a plan, it sought advice regarding plan administration and "the availability of, and the need for, insurance to provide ... reasonable protection from liability under the plan." Amended Complaint ¶ 7. Plaintiff engaged Defendant to provide this advice.

The plan was, until August 1, 1989, fully insured by Defendant. On that date, the plan was converted to a self-insured plan upon Plaintiff's enrollment in a modified cost funding ("MCF") program. Under the MCF program, Plaintiff paid premiums into an operating account managed by Defendant in exchange for the provision of various claims services. The monthly payments made by Plaintiff consisted of funds contributed by both Plaintiff and Plaintiff's employees. Receipts and charges (i.e., claim payments and fees) were recorded by Defendant in the operating account. If, at the termination of the contract, the sum of claims paid plus administrative and other fees exceeded the amount of premiums paid, Plaintiff owed such an amount to Defendant, plus interest; in other words, the MCF program provided no automatic protection against excess liability.

In connection with the MCF program, Plaintiff, during the 1991-92 program year, procured from Defendant an excess risk insurance policy with specific stop loss insurance. This policy limited Plaintiff's liability for claims paid in excess of $60,000.00 per year per participant as Plaintiff was reimbursed for claims exceeding such amount. The policy did not, however, provide any limit on Plaintiff's overall liability for operating account deficits. Amended Complaint ¶ 30. Plaintiff contends that Defendant did not advise Plaintiff to procure additional insurance to protect against liability for deficits in the operating account.

Plaintiff followed Defendant's alleged advice to maintain the MCF program with only specific stop loss insurance for at least three consecutive years.¹ In each year, the agreement did not provide for aggregate stop loss insurance. In the 1992-93 program year, an unusually large number of claims were submitted by plan participants. As a result, the operating account showed a deficit of $420,063.87 by the end of the 1993-94 program year. According to Plaintiff, the account would have shown a deficit of only $67,765.64 if Defendant had recommended and provided aggregate stop loss insurance for all program years. Consequently, Plaintiff states that the plan is "entitled to a credit of at least $352,298.23, plus interest." Amend.Comp. ¶ 56.

Plaintiff also alleges that Defendants did not reveal and pass on to Plaintiff the full amount of provider discounts which Defendant had negotiated with various health care providers. Specifically, Plaintiff claims that the reported deficit fails to account for these discounts which allegedly amounted to at least $161,921.27, and potentially up to $231,464.33.² Plaintiff states that this amount represents an "undisclosed fee" which Defendant "retained for its own benefit." Amend. Comp. ¶ 60. In the same vein, Plaintiff charges that Defendant secretly underpaid certain claims, thus "depriving the plan participants and beneficiaries of their full benefits" under the plan. Id. ¶ 40.

Next, Plaintiff charges that Defendant failed to explain that, under the MCF program, Plaintiff was liable for all claims "incurred, but not reported" ("IBNR") prior to the termination of the MCF program, and that Defendant failed to advise Plaintiff that terminal liability limit insurance was available (not to mention required by state law) to protect Plaintiff against potential "excessive liability." Amend.Comp. ¶ 67. While Defendant eventually agreed to provide an additional stop-loss policy, Plaintiff alleges that such coverage was "inferior" to a terminal liability limit policy, and that the plan will thus be responsible for higher IBNR costs than it would have been had Defendant provided proper advice. Id. ¶ 73.

Finally, Plaintiff raises allegations related Defendant's handling of two plan participants' claims. Plaintiff first charges Defendant with improperly delaying the payment of participant Andrea Talley's 1992-93 claims until the 1993-94 program year. According to Plaintiff, the result was that such claims were not covered by Talley's 1992-93 stop loss limit. Moreover, Plaintiff also allegedly lost the benefit of Talley's 1992-93 stop loss limit when Defendant reported that certain claims were paid in 1993-94 when such claims were actually paid in the 1992-93 year. Plaintiff asserts that the plan was consequently charged approximately $33,000 for these errors. Plaintiff next asserts that Defendant incorrectly stated that a former employee, Delores Edmonds, was eligible for coverage under the plan when, in fact, she had declined COBRA protection. On Defendant's allegedly erroneous advice, Plaintiff re-enrolled Edmonds. Plaintiff, upon learning that Edmonds was not eligible, directed Defendant not to pay her claims. Defendant purportedly disregarded this instruction and subsequently charged the operating account $39,000.

Plaintiff originally filed a six count motion for judgment in the Circuit Court of Mecklenberg County on August 1, 1994. The motion for judgment contained state law causes of action including breach of contract, negligence, breach of fiduciary duty, promissory estoppel, negligent misrepresentation and constructive fraud. Defendant filed an answer denying liability and a counterclaim requesting that the Court enjoin Plaintiff to pay the deficit amount.³

The motion for judgment nowhere mentioned ERISA. Defendant filed a notice of removal on August 18, 1994, basing removal on federal question jurisdiction assertedly created by ERISA. Plaintiff moved to remand the matter to state court on September 19, 1994. This Court denied the remand motion on November 8, 1994, on the basis that Plaintiff's claims were preempted by ERISA. Broadnax Mills, Inc. v. Blue Cross and Blue Shield of Virginia, 867 F.Supp. 398, 405 (E.D.Va.1994). The Court, however, provided, Plaintiff with the opportunity to amend the complaint to state a claim for relief under ERISA.

Plaintiff's amended complaint contains twelve counts. Counts I-III and VI constitute claims for relief under ERISA and relate to the factual allegations in the original complaint. Specifically, Plaintiff claims that Defendant breached its ERISA fiduciary duties, see 29 U.S.C. §§ 1104, 1106 & 1109, engaged in prohibited transactions, id. § 1106, failed to comply with reporting requirements, id. § 1023, and improperly underpaid claims. Counts IV and V and the related factual allegations are new ERISA claims concerning additional losses resulting from Defendant's alleged improper handling of two plan participants' claims. Counts VII-XII reallege the state law claims which this Court determined to be preempted by ERISA. The prayer for relief requests that the Court declare that Defendant violated various ERISA provisions, enjoin Defendant to render an accounting for the losses incurred by Plaintiff, provide restitution in the amount of over $600,000.00, and award costs and punitive damages in excess of $350,000.00. Finally, the amended complaint requests a jury trial or, in the alternate, an advisory jury.

II.

A. State law claims

Defendant first moves to dismiss the six state law claims which were the only claims for relief in the original complaint. On Plaintiff's motion to remand, however, this Court held that the claims were preempted by ERISA. Broadnax Mills, Inc., 867 F.Supp. at 405. Defendant argues that the same claims in the amended complaint are controlled by this Court's Order denying the remand motion and should be dismissed.

The Court need not address this issue. Plaintiff concedes that this Court's prior Order controls and further states that "this Court can enter an Order dismissing Counts VII through XII of the First Amended Complaint on the ground that they are preempted by ERISA." Plaintiff's Mem. at 2. Plaintiff states that it included the state law claims in the amended complaint in order to preserve its objection to the remand ruling for appeal.

B. Counts IV and V

The Court need not decide whether or not to...