Middleton v. Russell Group, Ltd.

Decision Date15 April 1997
Docket NumberNo. COA96-355,COA96-355
Citation483 S.E.2d 727,126 N.C.App. 1
PartiesJames A. MIDDLETON, Jr. and Julie T. Middleton, v. THE RUSSELL GROUP, LTD. (formerly Ads, Inc.), Brooke Licensing, and Life Insurance Company of Georgia.
CourtNorth Carolina Court of Appeals

Smith, Follin & James, L.L.P. by J. David James, Greensboro, for plaintiffs.

Floyd Allen and Jacobs, L.L.P. by Jack W. Floyd and Constance Floyd Jacobs, Greensboro, for defendants The Russell Group, Ltd. and Brooke Licensing.

Frazier, Frazier & Mahler, L.L.P. by Harold C. Mahler, Cynthia R. Jarrell, and Torin L. Fury, Greensboro, for defendant Life Insurance Company of Georgia.

WYNN, Judge.

On 27 April 1992, Charlie Russell, owner and president of defendant ADS, Inc. (subsequently changed to "The Russell Group" and hereinafter referred to as "ADS/Russell") hired plaintiff James Allen Middleton, Jr. as an advertising consultant. As part of the employment agreement, ADS/Russell agreed to enroll Middleton and his family in its employee health insurance plan.

Under a contract with defendant Brooke Licensing (a holding company also owned by Charlie Russell), defendant Life of Georgia ("LOG") provided the health insurance coverage for ADS/Russell employees through a "self-accounting" plan of insurance. The plan required Brooke Licensing to act as the policyholder, plan sponsor, and plan administrator. 1 The plan also required the employee to submit medical bills to ADS/Russell which in turn kept the records, determined which employees were eligible for coverage, and forwarded claim forms to LOG for payment. LOG, however, kept no records of covered employees, and acquired knowledge of The record on appeal indicates that ADS/Russell generally paid sixty-five percent of the premium cost for insurance coverage and the employee paid the remaining thirty-five percent via payroll deduction. (Nothing in the plan itself governed whether the employer, the employee, or a combination of both paid the premium.) Each month, ADS/Russell forwarded to Brooke Licensing a lump sum for the premiums and a list of covered employees. Brooke Licensing, in turn, forwarded to LOG one lump sum check without the list of covered employees.

named insured only upon the forwarding of a claim form from ADS/Russell.

In July 1992, Middleton signed a form requesting enrollment for family health insurance coverage and authorizing ADS/Russell to deduct his share of the premiums from his paycheck. No deductions were ever made from Middleton's paycheck for any portion of the health insurance premium, nor did ADS/Russell inform Middleton that he would need to pay for his share of the health insurance premium. Moreover, until Middleton's employment termination in August 1992, ADS/Russell listed him as a covered employee and paid the total family coverage insurance premium for him to Brooke Licensing. Brooke Licensing, in turn, included Middleton in the premium calculations paid to LOG.

Approximately one month after ADS/Russell terminated Middleton's employment, a brick wall fell on his wife, Julie, seriously injuring her. After admitting her for medical treatment, Moses Cone Hospital called LOG to verify health insurance coverage. LOG referred the hospital to ADS/Russell which through Vicki Hill, the ADS/Russell employee in charge of health insurance, informed the hospital that Mrs. Middleton was covered.

Shortly thereafter, Ms. Hill discovered from the company's records that Middleton's share of the premium had never been deducted from his paycheck, nor had he paid his premium share directly to the company. She also learned that the company terminated Middleton's employment on 31 August 1992. To address these concerns, Ms. Hill prepared a letter dated 25 September 1992 notifying Middleton of his right to continuation coverage under the medical insurance plan and attached the appropriate form for him to elect coverage under the federal act entitled the Consolidated Omnibus Reconciliation Act ("COBRA") 2. The letter also informed him that he had not paid his share of the premiums and requested full payment of his past premium share. However, the letter was never mailed to Middleton because Charlie Russell made a determination that if Middleton had not paid his share of the premiums, he never had health insurance coverage and therefore ADS/Russell was not obligated to provide him any COBRA continuation coverage.

As a result of her extended hospitalization, Mrs. Middleton amassed $356,454.61 in medical bills. (The parties stipulate that the LOG policy would have paid $351,960.28 of this On 19 October 1993, plaintiffs sued ADS/Russell, Brooke Licensing, and LOG asserting claims for: (1) breach of contract; (2) failure to provide benefits under ERISA; (3) injunctive relief to provide COBRA benefits; (4) constructive fraud; (5) negligent misrepresentation; and (6) unfair and deceptive trade practices. Defendants' subsequent attempt to remove this action to federal court was thwarted by the federal district court's remand to our state courts. Thereafter, ADS/Russell and Brooke Licensing answered denying the plaintiffs' allegations, and alternatively cross-claimed against LOG for benefits under the plan. Likewise, LOG denied the allegations of the complaint and cross-claim, and asserted a cross-claim against ADS/Russell and Brooke Licensing for breach of contract.

                total.)   On receiving a letter from the Middletons' attorney demanding coverage for the medical bills, LOG called Vicki Hill at ADS/Russell who responded that neither Middleton nor his dependents were covered because he failed to pay his share of the premiums.  Accordingly, LOG refused to pay Mrs. Middleton's medical bills
                

Before trial, the court granted defendants' motions for summary judgment on all state law claims except negligent misrepresentation. At the close of all evidence, the trial court directed a verdict for LOG on the claim of negligent misrepresentation. As a result, the trial court submitted two issues to the jury which it answered as follows:

1. Was the Middleton family covered, on September 22, 1992, by a policy of health insurance issued by [LOG] to Brooke Licensing covering ADS/Russell employees?

Answer: No

2. Was the Middleton family eligible for COBRA coverage?

Answer: Yes

(The trial court also submitted a third question regarding the claim of negligent misrepresentation against ADS/Russell and Brooke Licensing, but instructed the jury not to answer it if they answered "yes" to either of the first two questions.)

In accordance with the jury's verdict, the trial court entered an order and judgment holding that ADS/Russell and Brooke Licensing failed to comply with their legal obligation to inform Middleton of his right to continued health insurance coverage under COBRA. The Court also held that although LOG had no obligation to give Middleton COBRA notice, and was not a co-fiduciary with regard to giving notice, the insurer was still responsible for paying Mrs. Middleton's medical bills under COBRA. From this judgment, all parties appeal.

__________

LOG'S APPEAL

On appeal, LOG contends that the trial court erred by: (I) holding LOG liable for the Middletons' medical expenses where Brooke Licensing, the plan administrator, failed to give plaintiffs notice of their rights under COBRA, and plaintiffs neither made an election nor paid a premium for COBRA coverage; (II) awarding attorneys' fees to plaintiffs; (III) enhancing plaintiffs' attorneys' fees by a factor of 1.5; and (IV) failing to grant judgment for LOG on its cross-claim against the other defendants. We affirm the trial court's decision to hold LOG liable for plaintiffs' medical bills and award attorneys' fees, but reverse its decision to enhance the attorneys' fees by a factor of 1.5, and remand LOG's cross-claim for further consideration.

I.

LOG first argues that the trial court erred by finding it liable for plaintiffs' medical bills where Brooke Licensing, the plan administrator, failed to give Middleton notice of his rights under COBRA, and Middleton never made an election nor paid a premium for COBRA coverage. We disagree.

It is well-settled that the period of time that a qualified beneficiary has to elect continuation coverage is tolled until he or she has received notice of the right to purchase said coverage:

[T]hat the election period must begin on or before the day when the qualified beneficiary would lose coverage and must not end before the date that is 60 days after the later of (1) the day when qualified beneficiary would lose coverage or (2) the day when the qualified beneficiary is sent ERISA: A Comprehensive Guide 362 (Martin Wald and David E. Kenty eds., 1991) (emphasis added). See also Communications Workers of America, Dist. One v. NYNEX Corp., 898 F.2d 887, 888-89 (2d Cir.1990); Ward v. Bethenergy Mines, Inc., 851 F.Supp. 235, 239 (S.D.W.Va.1994); Hubicki v. Amtrak Nat'l Passenger R.R. Co., 808 F.Supp. 192, 196 (E.D.N.Y.1992). For example, in Ward v. Bethenergy Mines, the plaintiff should have been notified of his COBRA conversion rights as early as February 1990; however, he was not notified of such until April 1991. The district court stated that the plaintiff "then timely elected to receive such coverage," thereby implying that the election period was tolled for over a year until he received proper notice. 851 F.Supp. at 239.

notice of the right to elect coverage. Thus if a plan administrator fails to advise the qualified beneficiary of his or her rights, the qualified beneficiary may have the right to elect coverage until such time as notice is received.

In the instant case, the insurance policy issued by LOG recognizes that the election period is tolled until a qualified beneficiary receives notice of his right to COBRA coverage:

Insurance may be continued temporarily as follows: ...

2. If an employee's insurance terminates due to:

(i) termination of his employment; ...

he has the right to request temporary...

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