Cary v. United of Omaha Life Ins. Co.

• Decision Date: 21 April 2003
• Docket Number: No. 01SC834., No. 01SC708
• Citation: 68 P.3d 462
• Parties: Thomas A. CARY and Beth Hanna, individually and on behalf of his minor daughter, Dena Cary, Petitioners, v. UNITED OF OMAHA LIFE INSURANCE COMPANY and Mutual of Omaha of Colorado, Inc., d/b/a Antero Health Plans, Respondents.
• Court: Colorado Supreme Court

68 P.3d 462

Thomas A. CARY and Beth Hanna, individually and on behalf of his minor daughter, Dena Cary, Petitioners, v. UNITED OF OMAHA LIFE INSURANCE COMPANY and Mutual of Omaha of Colorado, Inc., d/b/a Antero Health Plans, Respondents.

Nos. 01SC708, 01SC834.

Supreme Court of Colorado, En Banc.

April 21, 2003.

As Modified on Denial of Rehearing May 19, 2003.

Wilcox & Ogden, P.C., Ralph Ogden, Denver, Colorado, Attorneys for Petitioners.

Kutak Rock LLP, Gerard V. Reardon, Melvin B. Sabey, Denver, Colorado, Attorneys for Respondent United of Omaha Life Insurance Company.

Kennedy & Christopher P.C., John R. Mann, Christopher K. Miller, Denver, Colorado, Attorneys for Respondent Mutual of Omaha of Colorado, Inc., d/b/a Antero Health Plans.

Justice HOBBS delivered the Opinion of the Court.

We granted certiorari in this case¹ to review the court of appeals' decision in Cary v. United of Omaha Life Ins. Co., 43 P.3d 655 (Colo.App.2001).² The court of appeals upheld the trial court's ruling on summary judgment. The court of appeals held that third-party insurance administrators hired by a city to run its health insurance program did not owe a duty of good faith and fair dealing to a claimant in the investigation and processing of an insurance claim, because there was no contractual relationship between the administrators and the insurance claimant. Id. at 658.

We disagree with the court of appeals' strict application of a privity of contract analysis to this case. Here, the insurance administrators had primary control over benefit determinations, assumed some of the insurance risk of loss, undertook many of the obligations and risks of an insurer, and had the power, motive, and opportunity to act unscrupulously in the investigation and servicing of the insurance claims. Under such circumstances, we hold that a special relationship existed between the administrators and the insured sufficient to establish in the administrator a duty to act in good faith. In order for Cary to recover for a breach of that duty in tort on remand of this case, he must establish the facts and prove his case that the administrators' conduct was unreasonable and the administrators knew either that their conduct was unreasonable or acted in reckless disregard of whether their conduct was unreasonable.

Accordingly, we reverse the judgment of the court of appeals and reinstate claimant's tort cause of action against the administrators for breach of their duty to act in good faith when investigating and servicing the insurance claims.

We turn first to the evidence the parties put forth, as of the time the trial court entered summary judgment against Cary. For the purpose of reviewing the propriety of the court's summary judgment order, we must resolve all doubts in favor of Cary, the non-moving party. See Smith v. Boyett, 908 P.2d 508, 514 (Colo.1995)

. In addition, Cary is entitled to all favorable inferences that may be drawn from the facts. Id.

I.

The City of Arvada offered its employees, like Thomas Cary, access to its self-funded health insurance program overseen by the Arvada Medical and Disability Program Trust Fund (Trust), but administered by United of Omaha and Mutual of Omaha of Colorado³ (Administrators).

Due to its limited resources, the Trust did not administer the Plan itself. A five-member volunteer board of trustees staffed the trust. It had no support staff, and none of its members had any experience or expertise in handling insurance claims or making coverage decisions. The board therefore did not investigate claims or involve itself in claims handling or processing (other than hearing final appeals). It met only quarterly to consider claims appeals, review contracts with third-party administrators such as United and Omaha, approve contracts for the provision of certain mental health services, and consider funding issues.

By contrast, United, whom the Trust hired to administer the Plan, exercised near-complete control over the administration of the Plan. United's contract with the Trust obligated it to: provide claim handling facilities; furnish claim handling personnel; establish claim handling procedures, including claim files and systems; verify claimant eligibility for the Plan; receive all claim forms and related materials from Plan members; process submitted claims; send "explanation of benefits" letters to claimants when it acts on a claim; prepare claim payments; provide actuarial services to the Trust to project estimated Plan benefit costs; provide underwriting services whereby it analyzes Plan benefits and makes recommendations to the Trust about modifying the benefits; print and pay the cost of all Plan claim forms and benefit checks; develop and print Plan benefit booklets and identification cards; evaluate the health histories of "late" applicants and determine whether they should have Plan coverage; provide a toll-free number for Plan claimants; and periodically audit the claims processing system to determine the quality of claim administration. United even established an appellate procedure for denials of coverage (though the Trust was the entity of last resort for appeals).⁴

At the same time United agreed to administer the Plan, it entered into a reinsurance agreement with the Trust. Pursuant to this agreement, United agreed to reimburse the Trust for payments in excess of $75,000, but less than $1 million, for any one Arvada employee. It also agreed to reimburse the Trust for aggregate claims in excess of a certain dollar amount.

The claims dispute in this case began when Thomas Cary and Beth Hanna's (Cary's) fifteen-year-old daughter, a beneficiary of the Plan, shot herself in an unsuccessful suicide attempt. Her injuries required extensive treatment, hospitalization, and multiple surgeries. Cary applied for benefits from the Plan but the Administrators denied his claim, citing the Plan's exclusion of self-inflicted injuries as justification.

Cary responded to the denial by suing the City, the Trust, and the Administrators, seeking a declaration that the Plan covered his daughter's injuries, as well as damages for breach of his insurance contract and bad faith failure to provide insurance benefits. The trial court granted partial summary judgment for Cary, finding that the self-inflicted injury exclusion of the contract is ambiguous and resolving the ambiguity in favor of coverage.⁵ However, the trial court on summary judgment also dismissed Cary's claims against the Administrators for bad faith failure to provide insurance benefits, because Cary was not in contractual privity with the Administrators and no statute or regulation imposed an obligation to act in good faith on the Administrators in favor of Cary or his daughter.

Following the trial court's rulings, Cary settled with the City and the Trust for $800,000, and neither of those entities is involved with this appeal. Cary appealed the dismissal of his bad faith claim. The court of appeals affirmed the district court's judgment, holding that City's independent claims administrators owe no duty of good faith and fair dealing to parties, like Cary, who are not in contractual privity with the claims administrators.

II.

We disagree with the court of appeals' strict application of a privity of contract analysis to this case. Here, the insurance administrators had primary control over benefit determinations, assumed some of the insurance risk of loss, undertook many of the obligations and risks of an insurer, and had the power, motive, and opportunity to act unscrupulously in the investigation and servicing of the insurance claims. Under such circumstances, we hold that a special relationship existed between the Administrators and the insured sufficient to establish in the Administrators a duty to act in good faith. In order for Cary to recover for a breach of that duty in tort on remand of this case, he must establish the facts and prove that the Administrators' conduct was unreasonable and the Administrators either knew their conduct was unreasonable or acted in reckless disregard of whether their conduct was unreasonable.

A. Standard of Review

The trial court and court of appeals held that a third-party insurance claims administrator does not have a duty of good faith and fair dealing in the investigation and processing of the insured's claim, unless there is a contractual relationship between the insured and the administrator.

The existence and scope of a tort duty is a matter of law. E.g. HealthONE v. Rodriguez, 50 P.3d 879, 888 (Colo.2002)

. Whether defendant owes a duty to plaintiff under tort law involves a number of factors.⁶ No single factor controls; "the question of whether a duty should be imposed in a particular case is essentially one of fairness under contemporary standards—whether reasonable people would recognize a duty and agree that it exists." Id. (quoting Greenberg v. Perkins, 845 P.2d 530, 536 (Colo.1993)). The determination that a duty does or does not exist is "an expression of the sum total of those considerations of policy which lead the law to say that the plaintiff is [or is not] entitled to protection." W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 53, at 359 (5th ed.1984). We review, de novo, lower court determinations that a duty does or does not exist. E.g. Ryder v. Mitchell, 54 P.3d 885, 889 (Colo.2002)(reviewing, de novo, the question of whether the defendant owes a duty to the plaintiff).

The trial court granted summary judgment against Cary. But, summary judgment is appropriate only if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. HealthONE, 50 P.3d at 887. The non-moving party is entitled to the benefit of all favorable inferences that may be reasonably drawn from the undisputed facts, and all doubts must be resolved against the moving party. Id. A court must consider "the pleadings, depositions, answers...