Gahres v. Phico Ins. Co., Civ. A. No. 87-637-A.

• Decision Date: 16 October 1987
• Docket Number: Civ. A. No. 87-637-A.
• Citation: 672 F. Supp. 249
• Parties: Edward GAHRES, M.D., et al., Plaintiffs, v. PHICO INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

672 F. Supp. 249

Edward GAHRES, M.D., et al., Plaintiffs, v. PHICO INSURANCE COMPANY, Defendant.

Civ. A. No. 87-637-A.

United States District Court, E.D. Virginia, Alexandria Division.

October 16, 1987.

John D. Grad, Alexandria, Va., for plaintiffs.

Fred C. Alexander, Jr., E. Duncan Getchell, Jr., McGuire, Woods, Battle & Boothe, Alexandria, Va., for defendant.

MEMORANDUM OPINION

ELLIS, District Judge.

I. INTRODUCTION

In this suit, 140 physicians allege that defendant Phico Insurance Company (PHICO) perpetrated a fraud on the Virginia State Corporation Commission (SCC) to win approval for higher premiums and then breached a contractual or quasi-contractual duty owed to plaintiffs by refusing to renew their medical malpractice insurance. PHICO moves for a judgment on the pleadings pursuant to Rule 12(c), Fed.R.Civ.P. For the reasons stated below, this Court dismisses plaintiffs' Complaint under Rule 12(b)(6), Fed.R.Civ.P., for failure to state a claim upon which relief may be granted.

Plaintiffs are citizens of Virginia, Maryland, or the District of Columbia. Defendant PHICO is a Pennsylvania corporation with its principal place of business in Mechanicsburg, Pennsylvania. Jurisdiction is premised upon 28 U.S.C. § 1332 (diversity), and venue is proper under 28 U.S.C. § 1391.

This Court, in diversity, sits as a state trial court would in entertaining state law claims. Guaranty Trust Co. v. York, 326 U.S. 99, 108, 65 S.Ct. 1464, 1469, 89 L.Ed. 2079 (1945). Thus, for the purposes of this action, the function of the Court is to predict what law "would be applied by the Virginia Supreme Court were this case before it." Nature Conservancy v. Machipongo Club, Inc., 579 F.2d 873, 875 (4th Cir.1978), cert. denied, 439 U.S. 1047, 99 S.Ct. 724, 58 L.Ed.2d 706 (1978).

II. PLAINTIFFS' ALLEGATIONS¹

Plaintiffs are doctors who purchased medical malpractice insurance from PHICO. All plaintiffs practice in groups of nine or fewer physicians.

In April 1986, PHICO, while carrying plaintiffs' policies, applied to the Virginia State Corporation Commission Bureau of Insurance (SCC) for permission to increase its insurance premium rates. Permission was granted on July 1, 1986. Less than a week later, on July 7, 1986, PHICO announced to all doctors practicing in groups of nine or fewer physicians that their medical malpractice insurance would not be renewed effective November 1, 1986.

PHICO, it is alleged, always intended to refuse to renew the policies of all physicians practicing in groups of nine or fewer. Yet when seeking its rate increase, PHICO failed to disclose this to the SCC. Rather, PHICO used the claims data for these small practice groups and plaintiffs' policies as "ammunition" in obtaining its rate increase.² Once it succeeded, PHICO refused to renew these policies. Plaintiffs had no time to locate alternative sources of insurance and were forced to renew with PHICO at substantially higher rates. In addition, plaintiffs paid higher rates for "tail coverage," i.e. coverage for claims made in the future that are based on plaintiffs' treatment during the period of PHICO's original coverage.

Plaintiffs assert three causes of action: (1) PHICO breached an implied contractual duty of good faith and fair dealing in failing to renew plaintiffs' policies after obtaining a rate increase that was based, in part, upon PHICO carrying these policies; (2) PHICO will be unjustly enriched from the rate increase it obtained from the SCC; and (3) PHICO engaged in fraudulent acts against the SCC and plaintiffs.

Plaintiffs claim that if PHICO had disclosed to the SCC that it did not intend to renew plaintiffs' policies, then PHICO would have received a smaller rate increase or no rate increase and plaintiffs' premiums would have been lower. Plaintiffs thus seek compensatory damages in an amount sufficient to put the plaintiffs in the position they would have been but for PHICO's illegal actions. Plaintiffs also seek compensatory damages for harm plaintiffs have suffered as a result of PHICO's misrepresentations³ as well as punitive damages for PHICO's malicious, fraudulent acts.

Before addressing these novel issues, the Court must first dispense with plaintiffs' assertion that PHICO cannot move for a judgment on the pleadings because the pleadings are not yet "closed" as required by Fed.R.Civ.Pro. 12(c). PHICO filed its motion on September 28, 1987. Plaintiffs filed their amended complaint on September 29, 1987. Because PHICO has not yet answered the amended complaint, plaintiffs contend that a judgment on the pleadings is premature.

Plaintiffs' assertion is technically correct; a 12(c) motion is inappropriate at this stage of the proceeding. However, as it is empowered to, this Court chooses to treat PHICO's 12(c) motion as a 12(b)(6) motion. See 5 Wright & Miller, Federal Practice and Procedure § 1369 (1969). Also, plaintiffs ultimately consented to allow PHICO's 12(c) motion to be heard as a 12(b)(6) motion.

III. ANALYSIS

A. Subject Matter Jurisdiction

A threshold, dispositive issue is whether the Virginia Constitution ousts this Court of any jurisdiction over plaintiffs' claims. It does. Article IX, Section 4 grants the Supreme Court of Virginia exclusive jurisdiction over appeals seeking review or reversal of SCC orders such as the rate increase approval at issue here. It states, in pertinent part, that:

Any party aggrieved by any final finding, order or judgment of the Commission shall have, by right, an appeal to the Supreme Court. ... All appeals from the Commission shall be to the Supreme Court only.

No other court of the Commonwealth shall have jurisdiction to review, reverse, correct, or annul any action of the Commission....

Va. Const. art. IX, § 4. In order to award plaintiffs the relief they seek, this Court would necessarily be required to review an SCC order and hold that such an order was incorrect. Any damages would be tantamount to a rollback of an SCC approved rate. This the Court cannot do because of the jurisdictional restraints placed upon it by the Virginia Constitution.

This holding finds support in the Virginia Supreme Court case of Little Bay Corp. v. VEPCO, 216 Va. 406, 219 S.E.2d 677 (1975). There, plaintiff Little Bay brought an action against VEPCO in a state circuit court for breach of contract, asserting that VEPCO owed certain promotional allowances to Little Bay for its installation of electric heat in dwellings it constructed.⁴ Subsequent to the contract the SCC held these allowances unlawful and enjoined them. VEPCO therefore filed a "Plea to Jurisdiction," claiming that only the Virginia Supreme Court had jurisdiction to reverse an order of the SCC pursuant to Article IX, § 4 of the Virginia Constitution. 219 S.E.2d at 678. The trial court sustained VEPCO's jurisdictional plea.

On appeal, Little Bay contended that Article IX, § 4 applied only where an SCC action was challenged directly. Since Little Bay, as it viewed matters, sought to reverse an SCC order collaterally, in a breach of contract action, the constitutional limitation did not apply. The Virginia Supreme Court disagreed with Little Bay's analysis, stating that the prohibition of Article IX, § 4

applies whether the SCC action is attacked directly or collaterally. If, in either case, the challenge requires review leading to reversal, correction, or annulment of SCC action, the constitutional section, in no uncertain terms, forecloses jurisdiction to any Virginia court save the Virginia Supreme Court.

219 S.E.2d at 679.

Little Bay is dispositive. Here, as there, plaintiffs seek, in effect, a reversal, correction, or annulment of an SCC order. Indeed, plaintiffs' claims are premised upon the allegation that the rate increased granted by the SCC was improper and fradulently obtained. In order to award plaintiffs the relief they seek, this Court would necessarily be required to review an SCC order and hold that such an order was improvidently issued.⁵

Under Virginia Code § 38.2-1906(B), PHICO must charge the rates set by the SCC.⁶ For this Court to award plaintiffs any relief, it must, in effect, rule that PHICO cannot charge the rates set by the SCC. Such a ruling would conflict with the mandate of section 1906(B) and would amount to a judicial rollback of PHICO's rates. Only the SCC or the Virginia Supreme Court is empowered to take such action.

Nor is it of any consequence that plaintiffs have fashioned their claims to resemble a common law breach of contract action. A wolf in sheep's clothing remains a wolf; an attack on the SCC order, even if dressed up as a contract claim, remains an attack on an SCC order. As stated in Little Bay,

neither is the result different because the challenge to SCC action arises in the prosecution of a common law contract claim. If, to grant relief upon such a claim, a trial court would be required to review and reverse, correct or annul any action of the SCC, Article IX, § 4 would oust the court of jurisdiction.

219 S.E.2d at 679. It follows, therefore, that plaintiffs here cannot avoid the effect of Article IX, § 4 of the Virginia Constitution by fashioning, however ingeniously, a novel cause of action for breach of an implied contractual duty of good faith. This Court cannot, by any means, judicially reinstate PHICO's former rates. In sum, Little Bay controls and Article IX, § 4 ousts this Court of jurisdiction.⁷

Quite apart from this issue, PHICO also attacks the sufficiency of plaintiffs' three causes of action. In the interests of good judicial husbandry, these arguments are now addressed in the event another court concludes this Court has erred on the jurisdictional issue.

B. Breach of Contract Claim

Plaintiffs assert that PHICO's fraud on the SCC constitutes a breach of its contractual duty to plaintiffs of good faith and fair dealing. According to plaintiffs, this duty included an obligation to inform the SCC that PHICO intended to refuse to renew plaintiffs' policies....