Individual Healthcare Specialists, Inc. v. Bluecross Blueshield of Tenn., Inc.
| Decision Date | 18 January 2019 |
| Docket Number | No. M2015-02524-SC-R11-CV,M2015-02524-SC-R11-CV |
| Citation | 566 S.W.3d 671 |
| Parties | INDIVIDUAL HEALTHCARE SPECIALISTS, INC. v. BLUECROSS BLUESHIELD OF TENNESSEE, INC. |
| Court | Tennessee Supreme Court |
E. Todd Presnell, Joel D. Eckert, Edmund S. Sauer, Junaid A. Odubeko, and Jessica Jernigan-Johnson, Nashville, Tennessee, for the defendant/appellant/cross-appellee, BlueCross BlueShield of Tennessee, Inc.
Jay S. Bowen and Will Parsons, Nashville, Tennessee, for the plaintiff/appellee/cross-appellant, Individual Healthcare Specialists, Inc.
Amy J. Farrar, Murfreesboro, Tennessee; and Hyland Hunt and Ruthanne M. Deutsch, Washington, D.C., for the amicus curiae, America’s Health Insurance Plans.
Thomas Anthony Swafford and Rocklan W. King III, Nashville, Tennessee, for the amici curiae, the Nashville Area Chamber of Commerce, the Greater Memphis Chamber, and the Chattanooga Area Chamber of Commerce.
Lynda M. Hill and Katharine B. Fischman, Nashville, Tennessee, for the amicus curiae, the Tennessee Chamber of Commerce & Industry.
George T. Lewis, III, and Nicole D. Berkowitz, Memphis, Tennessee, for the amici curiae, Tennessee Defense Lawyers Association and DRI-The Voice of the Defense Bar.
John F. Kuppens, Chicago, Illinois, for the amicus curiae DRI-The Voice of the Defense Bar.
Professor George W. Kuney, Knoxville, Tennessee, amicus curiae.
Holly Kirby, J., delivered the opinion of the Court, in which Jeffrey S. Bivins, C.J., and Cornelia A. Clark, Sharon G. Lee, and Roger A. Page, JJ., joined.
We granted permission to appeal in this breach-of-contract case to address the use of extrinsic evidence in the interpretation of contracts. Tennessee judges have long used extrinsic evidence of the context and circumstances at the time the parties entered into the contract to facilitate interpretation of contractual terms in accord with the parties' intent. However, the written words are the lodestar of contract interpretation, and Tennessee courts have rejected firmly any notion that courts may disregard the written text and make a new contract for parties under the guise of interpretation. Tennessee has consistently enforced the parol evidence rule to prohibit the use of evidence of pre-contract negotiations in order to vary, contradict, or supplement the contractual terms of a fully integrated agreement. Thus, in interpreting a fully integrated contract, extrinsic evidence may be used to put the written terms of the contract into context, but it may not be used to vary, contradict, or supplement the contractual terms in violation of the parol evidence rule. As applied to this case, we hold that the defendant insurance company did not breach the parties' agreement by modifying renewal commission rates on existing policies, but it did breach the agreement by refusing to pay commissions to the plaintiff agency after their agreement was terminated. In addition, because the indemnity provision in the parties' agreement does not specifically authorize fee shifting in a suit between the two contracting parties, we hold that the plaintiff agency is not entitled to an award of attorney fees. We further conclude that the alleged systemic commission underpayments in this case were not inherently undiscoverable under any definition of that term. Consequently, even if we were to conclude that the discovery rule applies when the contractual breach is "inherently undiscoverable," the plaintiff agency’s claim for any underpayments would not qualify under the facts of this case. The case is remanded for further proceedings consistent with this opinion.
Plaintiff/Appellee Individual HealthCare Specialists, Inc., (IHS) is an insurance agency based in Brentwood, Davidson County, Tennessee. From 1999 to 2012, IHS sold insurance policies for Defendant/Appellant BlueCross BlueShield of Tennessee, Inc. ("BlueCross"), and BlueCross paid IHS commissions on the sales.1 The parties' commission arrangement was governed by a General Agency Agreement. This lawsuit stems from IHS’s claim that BlueCross breached the Agency Agreement and owes IHS substantial damages resulting from that breach.
In 1999, IHS and BlueCross executed their first General Agency Agreement ("1999 Agency Agreement"). In 2009, almost ten years later, the parties renewed their contract by executing a superseding General Agency Agreement ("2009 Agency Agreement"). The two agreements (collectively, the "Agency Agreements") were substantially similar to one another.
Generally, the Agency Agreements authorized IHS to solicit applications for BlueCross’s individual hospital, surgical, medical, and supplemental insurance policies.
They contemplated that IHS would use both in-house agents and outside brokers, known as "producing agents" or "subagents," to solicit applications for BlueCross policies. Under the Agency Agreements, IHS was responsible for hiring, supervising, and terminating the subagents. It was also responsible for ensuring that the subagents were in compliance with Tennessee laws and regulations as well as BlueCross’s policies and procedures. The Agency Agreements stated expressly that IHS and its subagents were considered independent contractors of BlueCross, not employees.
BlueCross paid IHS two types of commissions: (1) first-year commissions and (2) renewal commissions. First-year commissions were based on the premiums paid on insurance policies in the year they were sold; renewal commissions were based on the premiums paid for the renewal of existing policies. The specific commission rates payable by BlueCross were set forth in commission schedules attached as addenda to each of the Agency Agreements and incorporated into the agreements by reference. The attached commission schedules stated separate rates for first-year and renewal commissions for specified BlueCross insurance products.2 In the event of a conflict between the commission schedule and the Agency Agreement to which it was attached, the terms of the Agency Agreement would control.
In this lawsuit, IHS claims that BlueCross breached several provisions in the Agency Agreements and also breached a modified commission schedule dated May 1, 2011. The relevant Agency Agreement provisions will be set forth later in this opinion, with the legal analysis related to that provision. Suffice it to say at this juncture that IHS sought damages under Article XII ("the Compensation provision") and attorney fees under Article VI ("the Indemnity provision"). Those claims also implicate Article XIV ("the Termination provision") and Article X ("the Integration clause"). The controversy surrounding BlueCross’s alleged breach of the May 1, 2011 commission schedule requires some preliminary explanation.
As we have stated, each Agency Agreement had an attached commission schedule containing the applicable commission rates for policies sold. Each commission schedule included bolded language at the bottom of the document indicating that the commission schedules were subject to unilateral change by BlueCross with appropriate notification to IHS: "[BlueCross] reserves the right to modify or change the commission and payment schedules with appropriate notification."
On several occasions, BlueCross exercised its right to modify the commission schedules under both Agency Agreements.3 Each modified commission schedule included the same language reserving to BlueCross "the right to modify or change the commission and payment schedules with appropriate notification." They also included the same provision stating that, in the event of a conflict between the commission schedule and the Agency Agreement, "then the terms of the Agency Agreement will control." With the notable exception of the last commission schedule, effective on May 1, 2011 (which is at issue in this lawsuit), each modified commission schedule included the following language: "This Commission Schedule supplements any previous Commission Schedule you may have received; commissions for products previously sold are governed by the Commission Schedule in place at the time the sale was made. " (Emphasis added).
In February 2011, BlueCross notified IHS of a new commission schedule that would become effective on May 1, 2011 (the "May 2011 Schedule"). BlueCross said that the new commission schedule was necessitated by the Affordable Care Act, enacted the previous year in March 2010.4
The May 2011 Schedule significantly reduced commission rates for IHS and its subagents.5 It also omitted the provision in previous schedules stating it would "supplement[ ] any previous Commission Schedule" and instead said it would "replace any previous Commission Schedule." The new schedule also omitted the language in previous schedules stating that "commissions for products previously sold are governed by the Commission Schedule in place at the time the sale was made" and instead said: "Commissions on sold or renewed [BlueCross] products that have effective dates on or after May 1, 2011[,] shall be paid in accordance with the terms and conditions set forth" in the new schedule. In other words, the May 2011 Schedule said its reduced commission rates applied not only to first-year policies but also to renewals of policies sold prior to May 1, 2011.
In roughly the same time frame, BlueCross and IHS discussed the possibility of BlueCross purchasing IHS based on a yet-to-be-determined multiple of IHS’s projected annual commission revenue. These discussions prompted the President of IHS, James Walker, to undertake to project IHS’s annual revenue. In the course of designing a computer model to project the revenue, Mr. Walker began to suspect that IHS was being underpaid by BlueCross. After an internal analysis of IHS records, Mr. Walker concluded that BlueCross had been systemically underpaying commissions owed to IHS since the inception of their contractual relationship in 1999.
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