Keokuk Area Hosp., Inc. v. Two Rivers Ins. Co., Case No. 3:16–CV–00066–SMR–SBJ

• Decision Date: 07 January 2017
• Docket Number: Case No. 3:16–CV–00066–SMR–SBJ
• Citation: 228 F.Supp.3d 892
• Parties: KEOKUK AREA HOSPITAL, INC., Plaintiff, v. TWO RIVERS INSURANCE COMPANY, d/b/a Employee Benefit Systems, Inc., Defendant.
• Court: U.S. District Court — Southern District of Iowa

228 F.Supp.3d 892

KEOKUK AREA HOSPITAL, INC., Plaintiff,

v.TWO RIVERS INSURANCE COMPANY, d/b/a Employee Benefit Systems, Inc., Defendant.

Case No. 3:16–CV–00066–SMR–SBJ

United States District Court, S.D. Iowa, Davenport Division.

Signed January 7, 2017

Bruce C. McDonald, McDonald Law Office, Keokuk, IA, Anthony L. Vitullo, Jon D. Azano, Fee, Smtih, Sharp & Vitullo LLP, Dallas, TX, for Plaintiff.

Matthew P. Pappas, Pappas O'Connor, PC, Rock Island, IL, Brian J. Riordan, Joshua M. Wolkomir, Clausen Miller PC, Chicago, IL, for Defendant.

ORDER ON MOTION TO DISMISS

STEPHANIE M. ROSE, JUDGE UNITED STATES DISTRICT COURT

This is a dispute between a hospital and an insurance company. Plaintiff Keokuk Area Hospital, Inc. ("Hospital"), hired Defendant Two Rivers Insurance Company ("Insurance Company") to administer a health benefits plan for the Hospital's employees. The Hospital now alleges that the Insurance Company failed to properly administer the plan because it was negligent and breached its fiduciary duties. The Insurance Company responded with a Motion to Dismiss. For the reasons set forth below, the Motion to Dismiss, [ECF No. 19], is GRANTED in part and the Hospital is GRANTED leave to amend the Second Amended Complaint accordingly.

I. BACKGROUND¹

Plaintiff Keokuk Area Hospital, Inc., is a non-profit Iowa hospital that employs approximately 350 doctors, nurses, and medical staff. Second Amended Complaint ("SAC") ¶ 7. From 2002 to 2010, the Hospital provided its employees with health care benefits through the Organized Delivery System ("ODS") established by the Iowa Department of Public Health. Id. ¶ 8. Defendant Two Rivers Insurance Company d/b/a Employee Benefit Systems, Inc., was the Hospital's health care plan administrator and the ODS plan held a surplus of approximately $1.2 million toward the end of 2010. Id.

In 2010, the Insurance Company, still the Hospital's plan administrator, advised the Hospital to change to a benefit plan offered through the Insurance Company. Id. ¶ 9. The Hospital agreed and hired the Insurance Company as a sponsor and administrator of its Keokuk Health Systems Health, Dental, Life and Disability Plan ("the Plan"). Id. The Hospital paid the Insurance Company $50,000 per month for its services. Id.

Several acts of the Insurance Company, as an administrator of the Plan, are central to this case. First, the Insurance Company failed to make an actuarially-determined analysis of an appropriate reserve fund needed to start the Plan. Id. ¶ 10. Instead, the Plan contained a self-funded arrangement with no funding available to pay future estimated claims for benefits. Id. Second, the Insurance Company did not negotiate appropriate provider contracts, including failing to secure individualized discounts from local medical providers. Id. ¶ 11. Instead, the Insurance Company relied on a national discount provider that did not separately seek rate reductions for the medical providers that the Hospital's employees typically use. Id. This forced the Hospital to pay substantially more for its employees' medical benefits than was customary in the industry, i.e., in excess of 90% of the costs to some outside providers when industry custom was 50% to 60% on average. Id. Third, the Insurance Company created a system that comingled participant contributions with the Hospital's accounts and did not contain the necessary financial and accounting controls. Id. ¶ 12. Fourth, the Insurance Company did not provide legally required disclosures to plan participants and failed to file appropriate documents with the Internal Revenue Service. Id. ¶ 14.

These actions resulted in an investigation by the United States Department of Labor and significant financial damage. Id. ¶¶ 13, 14. The Plan was already running a $420,540 deficit by the end of 2010 and a $1,336,019 deficit by the end of 2012. Id. ¶ 13. By the end of 2011, the Plan was "upside down" in the amount of $1,401,597 and the unpaid health claims reached $1.8 million by February 2013. Id. During this downward spiral, the Insurance Company accessed the Hospital's bank accounts to ensure that it was compensated for its own work. Id.

The Hospital then took two actions. First, the Hospital hired "an independent health care turnaround firm" to address the financial damage and to perform an independent investigation. Id. ¶ 15. The investigation determined that the Plan was unsustainable and created financial harm to the Hospital and its finances. Id. Second, the Hospital hired an independent auditor to determine the scope of the financial damage. Id. The audit revealed that the Plan was unsuccessful, the Insurance Company lacked the general and business knowledge necessary to sponsor a self-funded group health plan, and the Insurance Company failed to produce stop loss reinsurance policies despite requests to do so. Id. ¶¶ 15, 16.

The Hospital now brings suit against the Insurance Company alleging common law negligence and breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1104. Id. ¶¶ 17–25. The Hospital lists eleven failures by the Insurance Company that allegedly amount to negligence.² Id. ¶ 18. It also lists seven alleged breaches of the Insurance Company's fiduciary duties to the Plan and its participants.³ Id. ¶¶ 22, 23. The Hospital seeks to recover compensatory damages, punitive damages, attorney's fees, and costs of suit. Id. ¶¶ 25, 26.

The Insurance Company filed a Motion to Dismiss the Hospital's Second Amended Complaint. [ECF No. 19]. It argues that the Hospital fails to state a claim on which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6). Id. at 1.

II. STANDARD OF REVIEW

Rule 12(b)(6) permits a motion to dismiss for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). To meet this standard, and thus survive a motion to dismiss under Rule 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Braden v. Wal–Mart Stores, Inc. , 588 F.3d 585, 594 (8th Cir. 2009) (quoting Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ). A claim is plausible on its face "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937. Although the plausibility standard "is not akin to a ‘probability requirement,’ " it demands "more than a sheer possibility that a defendant has acted unlawfully." Id. (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "The facts alleged in the complaint ‘must be enough to raise a right to relief above the speculative level.’ " Clemons v. Crawford , 585 F.3d 1119, 1124 (8th Cir. 2009) (quoting Drobnak v. Andersen Corp. , 561 F.3d 778, 783 (8th Cir. 2009) ). All reasonable inferences must be drawn in the plaintiff's favor. Crooks v. Lynch , 557 F.3d 846, 848 (8th Cir. 2009).

III. ANALYSIS

The Insurance Company makes three arguments in its Motion to Dismiss. First, it argues that ERISA preempts the negligence claim and, even if it does not, the economic loss rule bars it. [ECF No. 19 at 2]. Second, it argues that the breach of fiduciary duty claim fails because the Hospital, suing in its individual capacity, does not have standing. Id. Finally, it argues that the Hospital's request for compensatory damages, punitive damages, and jury trial should be stricken because such requests are not available under ERISA. Id.

A. Negligence Claim

As explained below, ERISA preempts the Hospital's negligence claim. The Court therefore does not address the Insurance Company's secondary argument against the negligence claim based on the economic loss rule.

1. ERISA Preemption

ERISA preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" subject to ERISA. 29 U.S.C. § 1144(a). Thus, the "key to determining whether a state law is preempted is whether the state law in question ‘relates to’ an ERISA plan." Kuhl v. Lincoln Nat'l Health Plan of Kansas City, Inc. , 999 F.2d 298, 302 (8th Cir. 1993). This phrase is "construed extremely broadly." Id. at 301. "A law [clearly] ‘relates to’ an employee benefit plan, in the normal sense of the phrase, if it has a connection with or reference to such a plan." Id. at 302 (quoting Shaw v. Delta Air Lines, Inc. , 463 U.S. 85, 96–97, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983) ). And the law can be preempted "even though the state law was not designed to affect benefit plans and its effect on such plans is only incidental." Id. "Along these lines, [the Eighth Circuit Court of Appeals] ha[s] held that claims of misconduct against the administrator of an employer's health plan fall comfortably within ERISA's broad preemption provision." Shea v. Esensten , 107 F.3d 625, 627 (8th Cir. 1997) ; see also Ibson v. United Healthcare Servs., Inc. , 776 F.3d 941, 945 (8th Cir. 2014) (noting that a claim that merely could have been brought under ERISA was preempted by ERISA).

For example, in Kuhl , plaintiffs brought, among other claims, a medical malpractice negligence claim against an administrator of an ERISA health insurance plan. 999 F.2d at 300. The district court held that ERISA preempted the negligence claim because it dealt with the administration of the plan. Id. at 301. The Eighth Circuit affirmed. Id. at 302. It also reasoned that the claim arose from the administration of benefits, which ERISA governs, and that "characterizing the same administrative decisions as ‘malpractice’ does not change the fact that plaintiffs' claims are based on the contention that [the administrator] improperly processed Kuhl's claim for medical benefits." Id. at 302, 303. As a result...