Coyne & Delany Co. v. Selman

• Decision Date: 10 March 1995
• Docket Number: Nos. 94-1676,95-1380 and 95-2241,s. 94-1676
• Citation: 98 F.3d 1457
• Parties: , 20 Employee Benefits Cas. 2136, Pens. Plan Guide (CCH) P 23928K COYNE & DELANY COMPANY, Plaintiff-Appellant, v. Joe B. SELMAN, d/b/a Benefits Management; Donald F. Smith & Associates, d/b/a Benefits Consultant Services, Defendants-Appellees. COYNE & DELANY COMPANY, as the successor Plan Administrator of the Coyne & Delany Company Employee Benefit Plan, Plaintiff-Appellant, and Peter G. Delany, as a participant under the Coyne & Delany Company Benefit Plan, Plaintiff, v. Joe B. SELMAN, d/b/a Benefits Management, d/b/a Benefits Management Group; Donald F. Smith & Associates, Trading in Virginia as Donald F. Smith & Associates, Incorporated, d/b/a Benefits Consultant Services, Defendants-Appellees. COYNE & DELANY COMPANY, as the successor Plan Administrator of the Coyne & Delany Company Employee Benefit Plan; Peter G. Delany, as a participant under the Coyne & Delany Company Benefit Plan, Plaintiff-Appellants, v. Joe B. SELMAN, d/b/a Benefits Management, d/b/a Benefits Management Group; Donald F. Smith & Associates, d/b/a Benefits Consultant Services, Trading in Virginia as Donald F. Smith & Associates, Incorporated, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1457

98 F.3d 1457

65 USLW 2300, 20 Employee Benefits Cas. 2136,

Pens. Plan Guide (CCH) P 23928K

COYNE & DELANY COMPANY, Plaintiff-Appellant, v. Joe B. SELMAN, d/b/a Benefits Management; Donald F. Smith &

Associates, d/b/a Benefits Consultant Services,

Defendants-Appellees.

COYNE & DELANY COMPANY, as the successor Plan Administrator

of the Coyne & Delany Company Employee Benefit

Plan, Plaintiff-Appellant,

and

Peter G. Delany, as a participant under the Coyne & Delany

Company Benefit Plan, Plaintiff, v. Joe B. SELMAN, d/b/a Benefits Management, d/b/a Benefits

Management Group; Donald F. Smith & Associates, Trading in

Virginia as Donald F. Smith & Associates, Incorporated,

d/b/a Benefits Consultant Services, Defendants-Appellees.

COYNE & DELANY COMPANY, as the successor Plan Administrator

of the Coyne & Delany Company Employee Benefit Plan; Peter

G. Delany, as a participant under the Coyne & Delany Company

Benefit Plan, Plaintiff-Appellants, v. Joe B. SELMAN, d/b/a Benefits Management, d/b/a Benefits

Management Group; Donald F. Smith & Associates, d/b/a

Benefits Consultant Services, Trading in Virginia as Donald

F. Smith & Associates, Incorporated, Defendants-Appellees.

Nos. 94-1676, 95-1380 and 95-2241.

United States Court of Appeals, Fourth Circuit.

Argued March 10, 1995 in No. 94-1676.

Argued Dec. 8, 1995 in Nos. 95

-1380 and 95-2241.

Decided Oct. 25, 1996.

ARGUED: Peter Booth Vaden, James Nichol Deinlein, Deinlein & Vaden, Charlottesville, VA, for Appellants. Joseph Francis Cunningham, Cunningham & Associates, Alexandria, VA, for Appellee Selman; Calvin Wooding Fowler, Jr., Williams, Mullen, Christian & Dobbins, Richmond, VA, for Appellee Smith & Associates. ON BRIEF: John W. Montgomery, Cunningham & Associates, Alexandria, VA, for Appellee Selman Before MURNAGHAN, WILLIAMS, and MICHAEL, Circuit Judges.

William D. Bayliss, Williams, Mullen, Christian & Dobbins, Richmond, VA, for Appellee Smith & Associates.

No. 94-1676 affirmed in part, reversed in part, and remanded with instructions; Nos. 95-1380 and 95-2241 reversed and remanded with instructions by published opinion. Judge MICHAEL wrote the opinion, in which Judge MURNAGHAN and Judge WILLIAMS joined. Judge WILLIAMS wrote a separate concurring opinion.

OPINION

MICHAEL, Circuit Judge:

In this opinion we decide two related cases. In the first case (Selman I ) plaintiff Coyne & Delany Company (Delany) appeals from a grant of summary judgment in favor of defendants Joe B. Selman, who does business as Benefits Management Group, and Donald F. Smith & Associates, Inc., which does business as Benefits Consultant Services (BCS). ¹ The magistrate judge ² held that Delany lacked standing to assert claims pursuant to the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. § 1001 et seq. (ERISA). The magistrate judge ruled, in the alternative, that Delany's ERISA-based claims failed because the defendants' actions caused no harm. In addition, the magistrate judge held that ERISA preempted Delany's state law claim against the defendants for professional malpractice in effecting insurance. We first hold that Delany, in its capacity as a fiduciary, has standing under ERISA to sue the defendants for ERISA violations. Second, we conclude that the magistrate judge erred in holding that the defendants' actions (as ERISA fiduciaries) did not harm the Plan. Finally, we hold that ERISA does not preempt Delany's garden-variety malpractice claim asserted against the defendants in their (non-fiduciary) capacities as insurance professionals. ³

In the second case (Selman II ) Delany appeals from the magistrate judge's conclusion that Delany's second suit, in which Delany made allegations substantially the same as those in the first suit, was barred by res judicata. Because further proceedings will be necessary in Selman I, there is no final judgment that could bar Selman II. Both cases are remanded for further proceedings, and in the interest of judicial economy our remand is with instructions to consolidate Selman I and Selman II.

I.

A.

We turn first to the facts, which we construe in the light most favorable to Delany, the non-moving party below. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

Plaintiff Delany, a New York corporation, is a manufacturing company with 75 employees. Most of the employees make toilet flush valves at Delany's factory and principal place of business located in Albemarle County, Virginia. The small company has been in business for many years. It follows an unbending policy of never laying off a sick employee, and it has always provided its employees and retirees with health insurance coverage. Prior to April 1, 1991, Delany had a group health insurance policy for its employees with Blue Cross/Blue Shield of Virginia (Blue Cross).

Defendant Selman operates a sole proprietorship called Benefits Management Group. Selman specializes in designing and administering group health insurance plans. He holds himself out to the public as a professional with expert knowledge on group health insurance matters.

Defendant BCS is an incorporated insurance consulting and design group. It also functions as a third-party administrator or as a contract supervisor for ERISA plans. Like Selman, BCS holds itself out to the public as a professional organization with expert knowledge on group health insurance matters.

In late 1990 Selman and BCS offered to create for Delany a selfinsured employee health benefit plan. Delany, however, was not interested in cancelling its existing Blue Cross policy without a commitment from the defendants that they could design a nearly identical replacement plan at less cost to Delany. The defendants represented that the plan they could create would cost Delany less than its present insurance with Blue Cross and still provide all of Delany's employees with coverage. To that end, on February 26, 1991, Selman and BCS submitted a formal proposal (the Proposal) to Delany.

The Proposal's introduction explained that the defendants' selffunded health care plans could "reduce corporate expense without compromising the level of employee benefits." It then assured Delany that self-funding "does not place the employer in a position of assuming unlimited liability." Because, "[t]hrough the judicious use of 'Stop-Loss Excess ' insurance, a cap is placed on the total amount of claims to be self-insured during a policy year and for a single catastrophic event." The section entitled "HOW THE SELF-FUNDED PLAN OPERATES" provided greater detail. With respect to the issue of "PLAN DESIGN," the Proposal explained that the defendants could closely replicate Delany's existing program of health care benefits. The Proposal also asserted that the Plan could "easily be adapted" to Delany's specific needs. With respect to "FUNDING," the Proposal "GUARANTEED " Delany that the premiums it paid to a special account would represent its "MAXIMUM LIABILITY." With respect to "STOP-LOSS EXCESS INSURANCE," the Proposal claimed that excess liability insurance allowed "even small employers to safely adopt self-funded plans." Finally, the section on "MEDICAL COVERAGE" explained that "Pre-Existing Conditions will be applied on a No Loss/No Gain basis for those enrolled on the original effective date of the self-funded plan."

On April 5, 1991, in response to the Proposal and the defendants' assurances that Delany could save $6,000 per month on its insurance costs, Delany accepted the defendants' offer to design a self-funded insurance plan with a reinsurance stop-loss feature. Under the contemplated Plan, coverage for Delany's employees was to continue on a "No Loss/No Gain" basis. In insurance parlance "No Loss/No Gain" typically means that a replacement group insurance policy will not impose waiting periods or exclude individuals from coverage who were covered under the policy being replaced. The No Loss/No Gain conversion was theoretically possible because of the reinsurance feature. The reinsurance was designed to guarantee that Delany's financial exposure did not exceed the predictable amount of $10,000 on any one medical claim.

Delany also hired the defendants to work for the Plan. Specifically, in the Plan itself Delany designated Selman as Plan Administrator and BCS as Plan Supervisor. Delany, however, retained the power to amend the Plan at any time.

Under the new Plan Delany paid monthly premiums of approximately $22,000. The premiums consisted of (1) payment to Selman for serving as Plan Administrator, (2) payment to BCS for serving as Plan Supervisor, (3) payment to the reinsurer for covering employee medical claims above $10,000, and (4) payment to a fund for employee medical claims below the $10,000 reinsurance threshold.

At the time of conversion to the new Plan in April 1991, Herman Tyree (Tyree or the elder Tyree), a 15-year veteran at Delany's factory, was on sick leave from work. Tyree had major heart surgery in early February 1991 and was recuperating at home. His coverage under the Blue Cross policy continued when he went on sick leave.

As early as April 8, 1991, Delany had fully apprised Selman and Selman's agent, Alan Archer, about Tyree's medical condition. This information was passed to Selman and Archer by Peter Delany, Vice President in Charge of Personnel and Insurance, and Tyree's son, Roger Tyree, a maintenance man at the factory. Alan Archer's handwritten notes from a meeting with Roger Tyree and Peter Delany on April 8, 1991, said the following: "Tyree heart cond. out indefinitely--no phone # available [address omitted] son is Roger Tyree at Coyne & Delany." Archer faxed this information to Selman.

In response to the information from Archer, Selman drafted a letter to be sent to the elder Tyree. The letter, dated April 15, 1991, and signed by Delany's President, A. Graham Delany, informed Tyree that the Company would be changing its group health insurer,...