Doug v. Mutual Assurance Administrators, Inc.

Decision Date21 January 2003
Docket NumberNo. 97,696,97,696
Citation2003 OK 2
PartiesDOUG AND SHANNON WATHOR, individually and as parents of, NICHOLAS WATHOR, a minor child, individually and on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. MUTUAL ASSURANCE ADMINISTRATORS, INC., a domestic corporation, Defendant-Appellee.
CourtOklahoma Supreme Court


¶ 0 A third party administrator for a self-funded health insurance program denied an insured's claim for emergency medical treatment and a tonsillectomy. The insured sued the administrator for breach of contract and for breach of the tort duty of good faith and fair dealing. The administrator defended on the ground that both claims must fail because it was not in privity of contract with the insured. The trial court agreed and entered judgment for the administrator. The Court of Civil Appeals affirmed. We granted certiorari and affirm.


Steven S. Mansell, Mark A. Engel, Steven S. Ashmore, Oklahoma City, Oklahoma, for Plaintiffs/Appellants.

Elaine R. Turner, Susanna G. Voegeli, Oklahoma City, Oklahoma, and Ronald A. White, Tulsa, Oklahoma, for Defendant/Appellee.


¶ 1 Oklahoma County offered its employees, like plaintiff Doug Wathor, access to its self-funded health insurance program called the Oklahoma County Health and Dental Plan (Plan). Oklahoma County hired defendant Mutual Assurance Administrators, Inc. (MAA) as its third party administrator (TPA).1 MAA's Administrative Service Contract (Contract) with Oklahoma County obligated MAA to provide the ministerial and clerical services required by the Plan in connection with its operation. Under the Contract, MAA initially determines whether any particular claim for benefits qualifies for payment under the Plan. The Oklahoma County Budget Board (Oklahoma County) handles all appeals of denied claims and has final authority to approve or deny claims. The Contract provides for MAA to be compensated by a flat fee based solely on the number of participants in the Plan on the first day of any given month. MAA assumes no risk for any claims filed under the Plan.

¶ 2 Mr. and Mrs. Wathor (Wathors), individually and as parents of Nicholas, filed a petition alleging that MAA is an insurer who breached its contract with them and acted in bad faith when it violated Oklahoma's portability statute, 26 O.S. 2001 § 4509.2, which prohibits insurers from excluding pre-existing conditions from coverage if the insured had been covered under a previous plan.

¶ 3 The Wathors filed a motion for partial summary judgment on the issue of whether they could be denied coverage on the basis of a pre-existing condition. MAA filed a response and its own motion for summary judgment. In its motion, MAA asserted, among other things, that because it is a TPA, not an insurer, both of the Wathors' claims fail as a matter of law. The trial court agreed. It denied the Wathors' motion and granted MAA's motion. The Court of Civil Appeals affirmed. We granted certiorari to determine, among other issues, the first impression issue whether a third party administrator who is not an insurer may be subject to suit based on its alleged bad faith actions in administering an insurance plan.


¶ 4 Summary judgment is appropriate only where there are no material facts in dispute and the moving party is entitled to judgment as a matter of law. Oliver v. Farmers Ins. Group of Cos., 1997 OK 71, 941 P.2d 985. As this decision involves purely legal determinations, our standard of review of a trial court's grant of summary judgment is de novo. Kirkpatrick v. Chrysler Corp., 1996 OK 136, 920 P.2d 122. We review all inferences and conclusions to be drawn from underlying facts contained in evidentiary materials in a light most favorable to the party opposing the motion. Oliver, supra. If the uncontroverted facts support legitimate inferences favoring well-pleaded theory of the party against whom the judgment is sought or if the judgment is contrary to substantive law, the judgment will be reversed. Hargrave v. Canadian Valley Elect. Co-op., 1990 OK 43, 792 P.2d 50.


¶ 5 The Wathors contend the trial court erred in concluding they could not maintain a tort action against a third party administrator for breach of an insurer's duty of good faith. Every contract in Oklahoma contains an implied duty of good faith and fair dealing. Doyle v. Kelly, 1990 OK 119, 801 P.2d 717, 718. In ordinary commercial contracts, a breach of that duty merely results in damages for breach of contract, not independent tort liability. Christian v. American Home Assur. Co., 1977 OK 141, 577 P.2d 899.

¶ 6 Insurance contracts, however, are not ordinary commercial contracts. Id. A "special relationship" exists between an insurer and its insured stemming from the quasi-public nature of insurance, the unequal bargaining power between the insurer and insured, and the potential for an insurer to unscrupulously exert that power at a time when the insured is particularly vulnerable. Id. at 902-04. The special relationship creates a nondelegable duty of good faith and fair dealing on the part of the insurer. Id. An insurer's breach of this duty gives rise to a separate cause of action sounding in tort. Id. at 904.

¶ 7 The duty of good faith and fair dealing applies to activities after the establishment of the insurer-insured relationship, and includes the claims handling process. Kincade v. Group Health Services of Oklahoma, Inc., 1997 OK 88, 945 P.2d 485, 489 n.18. The duty is nondelegable so that insurers cannot escape it by delegating tasks to third parties. Barnes v. Oklahoma Farm Bureau Mut. Ins. Co., 2000 OK 55, ¶9 n.5, 11 P.3d 162, 167 n.5.2

¶ 8 Normally, only the insurer owes the duty of good faith and fair dealing to its insured. Agents of the insurer — even agents whose acts may have been material to a breach of the duty — do not normally owe the insured a duty of good faith since agents are not parties to the insurance contract. Timmons v. Royal Globe Ins. Co., 1982 OK 97, 653 P.2d 907, 912-13 (rejecting an attempt to hold an insurance agent liable for breach of the duty of good faith by the insurance company).3

¶ 9 In the typical case the insured is adequately protected by the nondelegable duty that the law imposes on the insurer. However, the imposition of a nondelegable duty on the insurer does not necessarily preclude an action by an insured against a plan administrator for breach of an insurer's duty of good faith. In Wolf v. Prudential Ins. Co. of America, 50 F.3d 793 (10th Cir. 1995), the Tenth Circuit Court of Appeals considered the issue of whether an insured under a self-funded health benefits plan could sue the plan administrator for its own bad faith refusal to pay for treatment.

¶ 10 In Wolf, the plan administrator had primary control over benefit determinations (including some intermediate appeals). As payment for administering the plan, the plan administrator received a percentage of the premiums paid for participant coverage. The plan administrator's percentage increased as losses decreased. In addition, if losses increased to a certain level, the plan administrator had to share the risk with the board; if losses got even higher, the plan administrator had to underwrite the entire risk.

¶ 11 In determining whether the plan administrator owed the insured a duty of good faith, the Tenth Circuit refused to decide the issue by simply concluding the plan administrator was a stranger to the insurance contract. Rather, the court emphasized that the analysis should focus on the factual question whether the plan administrator acted sufficiently like an insurer such that there was a "special relationship" between the plan administrator and the insured that would give rise to the duty of good faith. Id. at 797. The Tenth Circuit predicted the Oklahoma Supreme Court would impose a duty of good faith on an entity in the position of the plan administrator in Wolf, for the same reasons we imposed that duty on "true" insurers in Christian. Wolf, 50 F.3d at 798.

¶ 12 We agree with the analysis of the Tenth Circuit under the facts presented in Wolf. In a situation where a plan administrator performs many of the tasks of an insurance company, has a compensation package that is contingent on the approval or denial of claims, and bears some of the financial risk of loss for the claims, the administrator has a duty of good faith and fair dealing to the insured.

¶ 13 Applying this analysis to the facts of this case, we observe the following. Like the plan administrator in Wolf, MAA unquestionably performed some of the tasks of an insurance company in its claims handling process. However, in contrast to the facts in Wolf, MAA's compensation package was not tied to the approval or denial of claims but was instead a flat fee based on the number of participants in the Plan. Likewise, MAA did not share the risk of loss with the Plan if losses increased to a certain level, and did not underwrite the entire risk if losses got even higher. In other words, under the facts presented in this case, MAA had neither the power, the motive, nor the opportunity to act unscrupulously. See Christian, 577 P.2d at 902. Accordingly, we affirm the trial court's judgment in favor of MAA on the Wathors' bad faith claim.4


¶ 14 The Wathors also contend the trial court erred in dismissing their claim for breach of contract against MAA. While the Wathors are strangers to the Administrative Service Contract between Oklahoma County and MAA, it is well settled that third party beneficiaries of a contract may maintain an action on the contract. Keel v. Titan Constr. Corp., 1981 OK 148, 639 P.2d 1228; 15 O.S. 2001 § 29; see also 15 O.S. 2001 § 29 ("A contract, made expressly for the benefit of a third person, may be enforced...

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