Fidelity & Cas. Co. of New York v. Metropolitan Life Ins. Co.

• Decision Date: 31 December 1963
• Citation: 42 Misc.2d 616,248 N.Y.S.2d 559
• Parties: The FIDELITY AND CASUALTY COMPANY OF NEW YORK, Plaintiff, v. METROPOLITAN LIFE INSURANCE COMPANY, Defendant.
• Court: New York Supreme Court

Page 559

248 N.Y.S.2d 559

42 Misc.2d 616

The FIDELITY AND CASUALTY COMPANY OF NEW YORK, Plaintiff, v. METROPOLITAN LIFE INSURANCE COMPANY, Defendant.

Supreme Court, Special and Trial Term, New York County, Part XV.

Dec. 31, 1963.

Hendler & Murray, New York City, (by Jerome Murray, New York City, of counsel), for plaintiff.

Townley, Updike & Carter, New York City (Stuart N. Updike, New York City, of counsel), for defendant.

HARRY B. FRANK, Justice.

This action is brought for the recovery of monies claimed as due under the divisible surplus feature of a group hospital and surgical policy issued by the defendant, Metropolitan Life Insurance Company, a mutual insurance company incorporated under the laws of this state. The unusual fact pattern and the somewhat cryptic pleading of the cause of action on which the case is founded reflect some of the peculiar problems which can stem from the group insurance arrangement.

The policy involved was originally issued by the defendant on June 22, 1951 to Ditto Incorporated, a Delaware corporation with main offices in Chicago, Illinois and provided coverage for specified personal and dependent hospital and surgical benefits. While Ditto, as employer, was named as the policyholder, the policy undertook to insure those of Ditto's employees who met certain eligibility requirements and who enrolled thereunder. Upon becoming insured, the individual employee received a separate certificate which set forth the nature of his coverage and the essential terms of the 'Master Policy' issued to Ditto. Premiums were paid under a 'contributory' plan whereby the individual employee and Ditto equally shared the cost of the particular coverage.

Section 17 of the Master Policy, in compliance with the mandate of Section 216 of the Insurance Law of New York, provided for participation in divisible surplus as follows:

'Participation and Divisible Surplus--This Policy is a participating contract and the Insurance Company shall annually ascertain and apportion any divisible surplus accruing under policies of this class.'

At the time of the issuance of the hospital and surgical policy, a group life insurance policy previously issued by Metropolitan to Ditto had been in effect for some time, and provision was made for combining the financial experience under both policies for purposes of determining any divisible surplus thereunder.

When the hospital and surgical policy first went into effect, it operated under what was known as the 'tabulation system.' Under this system Metropolitan maintained a 'Register' at its office consisting of a file containing the enrollment cards of all Ditto employees who were insured under the policy, upon which were noted all information relevant to the particular individual's coverage. Ditto, who kept a similar set of cards, notified Metropolitan of any changes affecting the various employees and Metropolitan adjusted the Register accordingly. Certificates to new enrollees were issued by Metropolitan upon receipt of the appropriate card from Ditto and such certificates were in turn sent back to Ditto for ultimate delivery to the employee. This method of operation was in accordance with the provisions of section 15 of the policy, as originally issued, which required the Insurance company to keep the Register and to furnish a copy thereof, and copies of all subsequent entries therein, to the Employer. Under the tabulating system, premium billings were prepared monthly by Metropolitan from its cards, and statements thereof were sent to Ditto. These statements contained an IBM listing of every currently insured Employee, with the applicable premium for each, and in Ditto's case such statements included more than a thousand listings each month.

It is quite evident that the tabulation system involved a duplication of effort and imposed extensive clerical burdens upon Metropolitan which were necessarily reflected in its expenses of administering the policy. Since the procedure had been found to be cumbersome in various ways, and since Metropolitan's administrative expenses were related to the actual cost of the insurance, Ditto was amenable to changing to an alternate method of operation known as the 'Simplified Accounting System.' The changeover was accomplished by an amendment of the policy, effective September 16, 1951, whereby the obligation to maintain the Register, under Section 15, fell upon Ditto, rather than Metropolitan, with Metropolitan being given the right to audit the records at regular intervals. The original Register was thereafter transferred to Ditto's office and from that time on any necessary changes in the Register were made by Ditto itself without any notification to Metropolitan. Under the new system Metropolitan had no records at all in its office showing the identity of those Ditto employees who were insured under the policy, nor was there any provision in the amended policy requiring that such information be turned over to it. Indeed, Metropolitan's complete disinvolvement from such details was the very purpose of the changeover. As part of this new procedure, blank certificates were provided and such certificates were issued by Ditto itself directly to new employees who enrolled under the policy. Moreover, Ditto computed and remitted the amounts of the premiums due under the policy by applying the applicable rates to the number of employees shown by its records to be covered. The periodic audits by Metropolitan's employees appear to have been made only for the purpose of checking the accuracy of such premium remittances.

Insofar as claims were concerned, the policy provided that benefits should 'be paid to the Employee as they accrue upon receipt of written proof covering the occurrence, character and extent of the event for which claim is made.' The procedure on filing claims remained the same after the changeover as it was prior thereto. Claim forms were provided by the defendant to the Employer from whom they could be obtained by the individual employees. The form was divided into four sections, one of which was to be filled in by the insured employee making the claim, a second section which was to be completed by the employer attesting to the claimant's employment and coverage under the policy, and the remaining sections were to be completed by the physician and hospital affording the treatment for which the claim was being made. Upon completion of the entire form it was returned to the employer who forwarded it to Metropolitan's office where it was processed. Payment was made by Metropolitan, at the employee's option, either directly to the medical facility involved or by check payable to the insured. In the latter event, the check was sent to Ditto for delivery to the individual employee. The proof indicates that when the claim forms were received by Metropolitan they were examined to ascertain whether each of the pertinent sections was completed, and, where the forms appeared proper and regular on their face, payment was normally issued without any further specific investigation as to the authenticity of the medical proof beyond an occasional check of medical and hospital directories to confirm that the physicians and hospitals involved were duly authorized medical authorities. Only where a particular claims form suggested some irregularity was a more extensive investigation undertaken. The proof indicated that great stress was attached to the employer's information regarding employment and coverage since the company relied thereon.

With this general background, the stage is set for the introduction of the main player of the drama that subsequently unfolded. From 1948 on, Ditto had in its employ one Anna Marie Henning, a clerical employee who worked under the direction and supervision of Mr. Kenneth Hugg, Ditto's Director of Industrial Relations and the person in charge of the employee insurance programs. Miss Henning, as part of her duties, had handled whatever clerical work was necessary in connection with the company's group life insurance program. Her services in that regard were satisfactory, and, accordingly, when the hospital and surgical policy was added she was assigned to handle the necessary details under that policy, as well. Miss Henning and her superior, Mr. Hugg, were the primary Ditto personnel with whom Metropolitan had contact relative to Ditto's insurance programs, and Ditto, in writing, advised Metropolitan of Miss Henning's authority in connection with matters pertaining to the policies. She handled all correspondence with Metropolitan and, in turn, any manuals, information or instructions provided by Metropolitan's agents were directed to her. It was Miss Henning who kept and maintained all the records in Ditto's office pertaining to the policies, both before and after the procedural changeover, and after the change she was the one who issued certificates to new enrollees and who computed the premiums due. She also kept a claims book, for Ditto's convenience, in which a record was kept of all claims filed under the policies.

The Simplified Accounting Procedure held for Miss Henning that same irresistible attraction as the fatal apple in Eden which lured Eve to her downfall. Recognizing that under the new system Metropolitan no longer had access to any records showing the names or certificate numbers of the specific employes enrolled under Ditto's group policy, all such records being safely in Ditto's office under her care, Miss Henning quietly undertook to supplement her income by the filing of fictitious claims. Her modus operandi was ingeniously simple and required no accomplices beyond an assortment of pens which she deftly manipulated with an apparently hitherto dormant creativity. Using a standard claims form, she would complete the employee's portion thereof in a disguised handwriting and using some fictitious name and address that happened to appeal to her, but making certain to insert...