Klosterman v. Western General Management, Inc.

• Decision Date: 12 August 1994
• Docket Number: No. 93-2623,93-2623
• Citation: 32 F.3d 1119
• Parties: 18 Employee Benefits Cas. 1850 Edward A. KLOSTERMAN and Debbie A. Klosterman, Plaintiffs-Appellants, v. WESTERN GENERAL MANAGEMENT, INC., a Delaware Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1119

32 F.3d 1119

18 Employee Benefits Cas. 1850

Edward A. KLOSTERMAN and Debbie A. Klosterman, Plaintiffs-Appellants, v. WESTERN GENERAL MANAGEMENT, INC., a Delaware Corporation Defendant-Appellee.

No. 93-2623.

United States Court of Appeals Seventh Circuit.

Argued April 12, 1994.

Decided Aug. 12, 1994.

John Doyle, Nancy Ginsberg Ross (argued), Christine M. Drylie, McDermott, Will & Emery, Chicago, IL, for Edward and Debbie Klosterman.

Thomas H. Fegan, William G. Beatty, Marilyn McCabe Reidy (argued), Johnson & Bell, Kenneth M. Brown, Neal, Gerber & Eisenberg, Chicago, IL, for Western General Management, Inc.

Before WOOD, Jr., COFFEY, and KANNE, Circuit Judges.

HARLINGTON WOOD, Jr., Circuit Judge.

Edward and Debbie Klosterman ("appellants") appeal a district court order entering summary judgment against them on each count of their complaint against Western General Management, Inc. In their complaint, brought pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"), the appellants sought recovery for medical expenses incurred during the treatment of their son Brent, who suffered, and eventually died from leukemia.

I.

Against a backdrop of national concern and debate over the state of health care insurance in our country comes this latest tale of a family who learned that, when they needed it most, the health insurance plan they paid for and depended upon ceased to exist, without notice or warning. In November of 1989 Edward Klosterman began working for the Prairie Maize Company. At that time he and his eligible dependents began participating in the Prairie Maize Employee Health Benefit Plan ("the plan"). The plan was partially self-funded with Guarantee Mutual Life Insurance Company ("Guarantee Mutual") being the excess carrier. The plan listed Sharon Baldinger, Prairie Maize Human Resource Manager, as the plan administrator. The role of Western General in the development and operation of the plan is the central issue in this appeal.

Western General's primary business is that of a claims administration company. In fact the plan involved here listed it as the "Third Party Administrator" for the plan. In 1988 Don Fallon, an insurance broker, began working as a business developer for Western General. Shortly thereafter he acquired Prairie Maize as a prospective client. After reviewing the quotes and information that Fallon provided regarding partially self-funded plans, Prairie Maize agreed to develop the plan with Guarantee Mutual as the excess carrier. Prairie Maize also signed a service agreement with Western General for claims administration services. Western General was to process claims "in accordance with the claims procedures and standards established by [Prairie Maize]." Western General prepared a computer program, incorporating the parameters and guidelines of the plan, to assist it in making initial claims and coverage determinations. It also referred to other documents, not provided by Prairie Maize, when making those initial determinations.

While the plan was in the formative stages, Western General assisted Prairie Maize in completing the Summary Plan Description ("SPD"), a document that describes the parameters of the plan and benefit information. ERISA requires that the plan administrator include certain information in the SPD and provide the SPD to all participants. Western General obtained a boilerplate form SPD from Guarantee Mutual. Prairie Maize then indicated what specific terms it wanted included or changed in that form. After making those changes Western General submitted the SPD to Prairie Maize for its review and approval, then released the printed SPD.

In August of 1990, after working for Prairie Maize and participating in the plan for nearly one year, Ed Klosterman lost his job. At that time he elected to continue his health insurance as provided under the plan. The SPD stated that he could continue his coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). The SPD further provided that if the COBRA coverage terminated the participant had the right to convert to an individual policy. This conversion coverage would become effective on the day after COBRA coverage terminated, provided that the participant sent in an application for conversion and a premium payment. Nothing in the SPD indicated that this apparently unconditional right to convert would terminate if the underlying plan terminated or if Prairie Maize went out of business.

Ed Klosterman paid his premiums for the COBRA coverage for the months of September, October and November. On November 8, 1990, the Klosterman's son Brent was admitted into Children's Memorial Hospital. Debbie Klosterman called Western General to determine if Brent's hospital care would be covered. Western General informed her that her son was completely covered and no pre-certification was necessary. Brent was diagnosed with chronic myelogenous leukemia. Four days later, before Brent was discharged from the hospital, the Klostermans learned that they no longer had COBRA insurance coverage. When Debbie Klosterman contacted Prairie Maize she learned the reason they had no coverage. Prairie Maize had gone out of business and terminated all of its insurance retroactive to October 31, 1990. Although Prairie Maize did not notify Western General of this in writing until sometime after November 7, a memorandum circulated at Western General indicated that officials there were aware of the insurance termination as early as November 5, three days prior to the time Debbie Klosterman was assured that her son's treatment would be covered.

Debbie Klosterman then requested to convert to an individual policy. Jean Horner, at Western General, told her that she was unfamiliar with the procedures for conversion but would look into it. She later sent Mrs. Klosterman the requisite forms for conversion that she had received from Guarantee Mutual. The Klostermans completed the forms and paid the premium. Nevertheless, Guarantee Mutual, the company through which the conversion coverage would be offered, denied the Klostermans' application. Brent Klosterman later died as a result of the leukemia. Having been denied insurance coverage the Klostermans suffered not only the personal loss of their son but also a catastrophic financial burden in the form of unpaid medical bills.

II.

The appellants brought a three-count complaint against Western General pursuant to ERISA. In Count I they allege that Western General violated ERISA's disclosure requirements by failing to include in the SPD the fact that conversion coverage would not be available if the underlying plan terminated. 29 U.S.C. Sec. 1022(b). In Count II they allege that Western General is equitably estopped from denying coverage because the Klostermans relied upon the representations in the SPD and also directly from Western General employees, that conversion coverage was available. Finally they allege in Count III that Western General has breached its fiduciary duties under ERISA. The district court granted summary judgment in favor of Western General on all counts. We review that grant de novo. PPG Indus. v. Russell, 887 F.2d 820, 823 (7th Cir.1989).

A. Disclosure Violations

ERISA does indeed impose a requirement that the SPD describe the "circumstances which may result in disqualification, ineligibility, or denial or loss of benefits." 29 U.S.C. Sec. 1022(b). Furthermore the SPD must be "sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan." Id. In this case the appellants argue that the SPD was incomplete and inaccurate. The SPD stated that when a participant's continuation coverage under COBRA expires that participant

may obtain medical care conversion [coverage].... A person's benefits under the medical care conversion coverage will be effective [the day after continuation coverage terminates], provided that [the insurance company receives the application and the first premium payment]. The insurance company governs the form of coverage, the benefits and amounts.

The SPD does not mention that if the underlying plan terminates, the right to conversion coverage terminates as well. We need not decide whether this alleged omission renders the SPD inaccurate or otherwise in violation of the statute; we may assume that it does. Nevertheless, Western General, the only defendant, cannot be held liable for any inaccuracies in the SPD. Congress has explicitly provided that the responsibility for complying with these statutory requirements falls on the plan administrator. 29 U.S.C. Sec. 1021(a), (b). The case law also confirms that any cause of action for violations of these disclosure requirements is proper only against the plan administrator, the party responsible under the statute. See Moran v. Aetna Life Ins. Co., 872 F.2d 296, 298-99 (9th Cir.1989); Davis v. Liberty Mut. Ins. Co., 871 F.2d 1134, 1138 (D.C.Cir.1989); Bass v. Prudential Ins. Co. of Am., 764 F.Supp. 1436 (D.Kan.1991). ERISA makes clear that the plan administrator is the "person specifically so designated by the terms of the instrument under which the plan is operated...." 29 U.S.C. Sec. 1002(16)(A). In this case that person was Sharon Baldinger of Prairie Maize, not Western General.

B. Breach of Fiduciary Duties

Next the Klostermans argue that Western General is liable because they breached fiduciary duties by: 1) failing to inform the participants of all circumstances which could result in loss of coverage; and 2) failing to inform the participants of the plan termination effective October 31, 1990 and the resultant loss of coverage. A claim for a breach of fiduciary duties under ERISA is only valid against a "fiduciary." 29 U.S.C. Secs. 1105(a), 1109(a). A fiduciary of a plan is defined as anyone who "exercises any discretionary authority or discretionary control respecting management of such...