DiPascal v. New York Life Ins. Co., 83-3598

• Citation: 749 F.2d 255
• Decision Date: 02 January 1985
• Docket Number: No. 83-3598,83-3598
• Parties: Guy D. DiPASCAL and/or Barbara C. DiPascal, Individually and On Behalf of Their Daughter Gina DiPascal, Plaintiffs-Appellees Cross-Appellants, v. NEW YORK LIFE INSURANCE COMPANY, Defendant-Appellant Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 255

749 F.2d 255

Guy D. DiPASCAL and/or Barbara C. DiPascal, Individually and On Behalf of Their Daughter Gina DiPascal Plaintiffs-Appellees Cross-Appellants, v. NEW YORK LIFE INSURANCE COMPANY, Defendant-Appellant Cross-Appellee.

No. 83-3598.

United States Court of Appeals Fifth Circuit.

Jan. 2, 1985.

Virginia N. Roddy, Eugene R. Preaus, New Orleans, La., for defendant-appellant cross-appellee.

Patrick D. Breeden, New Orleans, La., for plaintiffs-appellees cross-appellants.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before RUBIN, POLITZ and GARWOOD, Circuit Judges.

ALVIN B. RUBIN, Circuit Judge:

This claim for benefits under a group major medical insurance policy ought to be a simple case, the resolution of which could readily be found in the provisions of the policy or, if the policy provisions are not in compliance with the Louisiana Insurance Code, then in the statute. The facts are indeed undisputed. Barbara DiPascal is an employee of the Jefferson Parish School Board. She and her dependent daughter, Gina, were covered by a group major medical policy issued by New York Life Insurance Company, the terms of which limited benefits for mental or nervous disorders to a $25,000 lifetime maximum, but afforded greater benefits for other major illnesses. The Louisiana Supreme Court had, however, previously decided that the insurer who issued such a policy was required by the Louisiana Insurance Code to offer optional coverage for mental disability under the same circumstances and conditions as for other illnesses. Gina was hospitalized for mental illness. After her hospitalization commenced, the group policy was amended and renewed. In connection with the issuance of the amended policy, New York Life in October 1981 sent a letter to the School Board offering coverage for mental disorders on the same terms as for other illnesses, for a 5% increase in rates. The School Board in writing refused the offer of commensurate coverage for mental disorders. The amended policy, effective November 1, 1981, like the first policy, contained a $25,000 limit on mental disability coverage. The expenses of Gina's illness continued through the term of the amended and renewed policy.

Mr. and Mrs. DiPascal contend that the insurance company is liable for all of their daughter's expenses whether incurred during the term of the earlier policy or that of the later amendment. New York Life asserts that its liability under the first policy is limited to $25,000 for mental disability expenses, and that the amendment likewise limits mental disability coverage to a $25,000 lifetime maximum.

The result we think a Louisiana court would reach, based on Louisiana judicial interpretations of the state Insurance Code, and the one we are Erie -bound to follow in this diversity case, was reached by the district court. The policy initially issued must be read to cover all of the expenses arising from Gina's mental disability, commensurably with coverage for other illnesses, beginning while the policy was in effect, including those incurred during the term of the amendment. Accordingly, we affirm the district court's judgment in this respect. Because the insurer nonetheless had reasonable grounds to refuse to pay the DiPascals' claim, we also affirm the judgment denying them penalties and attorney's fees.

I.

The School Board requested a bid from New York Life on a major medical expense group insurance contract, to become effective October 1, 1980. The coverage was to replace a policy issued by Occidental Life Insurance Company which limited mental health coverage to $25,000, but which extended greater coverage for other major illnesses. The School Board's bid solicitation simply incorporated many of the terms of the previous Occidental Life policy, including the $25,000 limit on mental health coverage. New York Life's bid response and policy, which were accepted, provided, "When Major Medical Benefits become payable, there is no limit on the amount of such benefits payable for each covered person for all charges he incurs during his lifetime, except that the following maximums apply to certain specified charges.... The maximum amount of Major Medical Benefits payable for all covered charges incurred during a covered person's entire lifetime for medical care due to nervous or mental disorders, regardless of whether Major Medical Insurance has been continuous or interrupted, is $25,000." The certificates of insurance issued to employees of the School Board who elected coverage also contained that limitation.

The Louisiana Insurance Code, Sec. 213.2A, ¹ provided in part:

Every insurer authorized to issue policies of health and accident insurance in this state shall offer to all prospective group ... policyholders at their option a provision in the insurer's health and accident insurance policies which shall state that benefits shall be payable for services rendered for the treatment of mental and/or nervous disorders, under the same circumstances, conditions, limitations, and exclusions as benefits are paid under those policies for all other diagnoses, illnesses or accidents....

Louisiana courts had originally interpreted this statute as inapplicable to group major medical expense or hospitalization insurance because such insurance was not considered "health and accident insurance." ² The Louisiana Supreme Court thereafter decided, in Rudloff v. Louisiana Health Services & Indemnity Co., ³ that hospitalization and major medical insurance was "health and accident" insurance. Accordingly, the court held that the Louisiana Insurance Code required major-medical expense insurers to offer the same optional coverage for the treatment of mental disorders as they offered for the treatment of other major illnesses. If such an offer had not been made, the policy was to be read as if the mandated offer of commensurate mental health coverage had been made and accepted. Hence, the Rudloff policy was reformed to provide the coverage that had not been offered.

The Rudloff policy specifically precluded benefits for mental illness, whereas the policy in this case limits such coverage to $25,000. There is no significant distinction between a policy that precludes mental health benefits and one that limits mental health benefits: each is equally contrary to the statute, as interpreted in Rudloff, if the insurer fails to offer the commensurate coverage option in the policy.

The New York Life policy was issued after Rudloff was decided, and that case therefore compels us to reform the policy to provide the same coverage for mental disorders as it provided for other illnesses. Gina DiPascal was hospitalized for treatment of a mental disorder in March 1981 and her mother submitted claims for her expenses to New York Life. By August 20, 1981, New York Life had paid Mrs. DiPascal $25,000. It then informed the DiPascals that it had paid its maximum. Later, however, after Mrs. DiPascal had employed counsel, New York Life agreed to pay for all expenses incurred through the term of the first policy, ending September 30, 1981, and thus paid the additional sum of $24,558.65.

New York Life contends that, in offering the initial coverage in October, 1980, it was merely responding to the specifications the School Board had included in its invitation to bidders, and that its liability was limited to $25,000; it voluntarily paid more than was required. The facts on which the argument is premised are correctly stated, but in rejecting the conclusion sought to be drawn, the district court found that the intent of the Louisiana legislature, as interpreted in Rudloff, was to promote the availability of coverage for mental disorders by ensuring that the insured understands he has the option of purchasing mental disorder coverage under the same conditions as other coverages. Group policies are often obtained by solicitations for bids. The legislature must have been aware of this, yet the statute makes no exception for bid solicitations from potential insureds, even those that specify limited mental disorder coverage. That the insurance was solicited, by bid or otherwise, did not relieve the insurer of its duty to offer optional mental disorder coverage identical to other-illness coverage. Rudloff requires that the policy initially issued be read as if such an offer had been made and accepted. New York Life was therefore obligated to pay at least the expenses incurred during the term of the first judicially reformed policy.

The more difficult issue presented, however, is whether the DiPascals are entitled to commensurate coverage for expenses incurred after the policy was amended in October, 1981. That amended policy contains a $25,000 lifetime limit on mental disorder coverage, but it was written only after commensurate coverage had been offered to and declined by the School Board. New York Life contends that its offer of commensurate mental health coverage satisfied its obligation under the Insurance Code, and that the School Board's rejection of commensurate coverage under the amended policy ended any further obligation to pay for Gina's additional medical expenses. It cites provisions of the policy stating that major medical benefits are payable only as specific expenses accrue. New York Life argues that, under the policy as initially issued, the DiPascals' rights to benefits vested only as specific charges were incurred. Because it has in fact paid for all expenses that were incurred during the term of the policy as initially issued, it contends that the DiPascals have no vested right to benefits for expenses incurred after the effective date of the October 1981 amended policy, even though these post-amendment expenses resulted from a disability commencing during the term of the first judicially reformed policy.

The Louisiana Supreme Court recently decided, in Cataldie v. Louisiana Health Service and Indemnity Co., ⁴...