Security Life Ins. Co. v. Clark
| Decision Date | 02 December 1997 |
| Docket Number | No. A97A1136,A97A1136 |
| Citation | 229 Ga.App. 593,494 S.E.2d 388 |
| Parties | , 97 FCDR 4502 SECURITY LIFE INSURANCE COMPANY v. CLARK et al. |
| Court | Georgia Court of Appeals |
Sutherland, Asbill & Brennan, William D. Barwick, Teresa W. Roseborough, Rowan & Neis, Robert J. Neis, Atlanta, for appellant.
William S. Stone, Kevin R. Dean, Blakely, for appellees.
Beckmann & Pinson, William H. Pinson, Jr., Savannah, Goldner, Sommers, Scrudder & Bass, Henry E. Scrudder, Jr., Atlanta, Morris, Manning & Martin, Lewis E. Hassett, amici curiae.
Security Life Insurance Company (Security) appeals from the $14,476,694.18 judgment 1 1 entered against it on the jury's verdict in Mr. and Mrs. Clark's suit for interference with a property right, fraud, and violation of OCGA § 16-14-1 et seq., Georgia's Racketeer Influenced & Corrupt Organizations (RICO) statute. 2 Judgment was entered only on the RICO claim. The Clarks' claims arose from the February 1994 sale by Fipps, Security's agent, to Mr. Clark 3 of health insurance under the Insight Answer Plan, underwritten by Security, and the subsequent wrongful rescission of that insurance in November 1994.
The following facts were either stipulated to, were not contested, or come from evidence viewed in favor of the Clarks, opponents of Security's motion for directed verdict. Security is a Minnesota corporation which is wholly owned by Security American Financial Enterprises, Inc., a holding company, and Security is authorized to sell insurance in Georgia. Security, in the life and health insurance business over 25 years, is 80 percent owned by its employees, with 130 individuals, including its executives, owning the remaining 20 percent. Congress Life Insurance Company is wholly owned by Security and underwrites only in Alabama, due to the existence of another Alabama company named Security. Security does business in 43 states, including Georgia, and the District of Columbia.
Insurers Administrative Corporation (IAC), an Arizona company, acts as a third-party administrator of insurance policies for various insurers, including Security, with which it entered into an Administrative Agreement in August 1990. Pursuant to that agreement, IAC used an underwriting manual produced by Lincoln National Corporation to process applications for insurance and administer the claims process for Security under the Insight Answer Plan. In addition, IAC was responsible for investigating suspected misstatements on applications for insurance and making recommendations to Security and Hassan, a California attorney used by Security as outside counsel for rescission matters, regarding rescinding insurance based upon alleged material misrepresentations on applications.
In 1992, IAC set up a trust in Mississippi, known as Multiple Unit Security Trust II (MUST II), for the sole purpose of issuing to MUST II Group Policy No. GH840, the Insight Answer Plan underwritten by Security. This policy was submitted to and approved by the Mississippi Insurance Commissioner, although the trust document and name of the administrator were not filed with the Commissioner as required and the cover letter accompanying the policy stated that it provided "employee" major medical benefits, which it did not. TrustMark Bank in Mississippi was the initial trustee, serving from June 15, 1992, until June 15, 1995. After TrustMark raised its charges, SentryCorp., Ltd. of New Jersey became successor trustee, although there was a gap of several months before the appointment was formalized.
The practice of setting up trusts for issuance of policies originated with multiple employer trusts used by small employers to gain the benefits of a larger group for insurance purposes. Multiple Unit Security Trust, set up in Mississippi by IAC in 1990, was such a multiple employer trust. MUST was not marketed in Georgia because, while Georgia allows multiple employer trusts, 4 it would not allow Security to tier rate such a trust.
MUST II was conceived in 1991 as a method by which to "provide major medical insurance for individuals and families, and [was] not employment related." Scott Wood of IAC approached Security with the concept, and the program was developed by IAC along with Insurance Compliance Services (ICS).
ICS was a New Jersey company composed of Ms. Alexander, who had previously worked with Union Fidelity Life Insurance Company as a claims adjuster, and Ms. Massey, a former employee of the Nevada Insurance Division who examined forms for compliance with Nevada requirements. Neither was an attorney. They gave compliance advice to insurance companies, including Security, based on their review of state statutes and regulations. They did not examine court decisions in giving their advice. ICS, which had also advised Security in forming MUST, used the MUST trust agreement and the policy issued to MUST as a guideline in developing Group GH840. They also formed SentryCorp., Ltd. to become the successor trustee to TrustMark Bank for MUST II.
Bulletin 88-E-1 was issued by Georgia's Insurance Commissioner October 6, 1988, and stated that "[i]t is the position of the Georgia Department of Insurance that it has extraterritorial jurisdiction over all group health policies that are issued to trusts situated outside the State of Georgia covering insureds within the State of Georgia, unless said plans are subject to the exclusive jurisdiction of the federal government." The Bulletin apparently was premised on the Commissioner's Directive 88-EX-1, dated April 29, 1988, and titled "Insured Trusts Marketed As Employee Health Benefit Plans," which required insurers to file certain information with the Georgia Department of Insurance for "all group health plan business written on a trust...." Representatives of Security had previously complied with Georgia's claimed extraterritorial jurisdiction for another insurance product offered in Georgia where the policy was issued to an out-of-state multiple employer trust.
It was the contention of ICS that, because certificates for Group GH840 were being sold to individuals and not to "employer groups" and because MUST II was a Mississippi "one life discretionary group" formed solely for the purpose of allowing otherwise unconnected individuals to purchase insurance at a group rate, which is allowed in Mississippi, Bulletin 88-EX-1 did not apply and Georgia did not have extraterritorial jurisdiction over the trust and policy.
Security intended to avoid compliance with Georgia laws and regulations which would have required it to provide Georgia's "mandated benefits" to certificate holders, since such benefits are generally "producer driven" and tend to raise rates charged insureds. Also, the program was designed in an effort not to be covered by small group laws regulating rates and benefits. Georgia defines small groups as groups of 50 or fewer. From 1992 to 1996, there were from 7,000 to 30,000 certificate holders, not counting dependents, insured under Insight Answer. Mississippi provides fewer mandated benefits, and the only requirement is that they be offered to the policyholder. ICS sent the Mississippi trustee the offer form and directed him to reject the offer of Mississippi mandated benefits, which he did.
John Fipps, a Conyers resident, was licensed to sell health and life insurance in Georgia in 1990 and was authorized to transact business for 10 to 14 insurance companies in Georgia. He was not, however, specifically appointed by Security to sell its products in Georgia until March 1994. Although the Request for Agent Certificate of Authority filed by Security with the Georgia Insurance Department stated that it had made a diligent inquiry regarding Fipps' qualifications, "including a character report by an agency not affiliated with this company," no such inquiry had been made. Security checked only to determine that Fipps was licensed in Georgia.
Fipps worked with Gregory Rosenthal, 5 who had been appointed by Security to represent it in Georgia in January 1993. Rosenthal and Fipps became aware of the Insight Answer product in January 1994 and, although Fipps never saw the Group GH840 policy, he was provided with marketing materials on it.
In early February 1994, Fipps contacted Clark's son, Ricky, after Ricky had responded to an ad in a magazine for an insurance product for Sepulveda, an insurance agency. Fipps got the referral, contacted Ricky Clark, and presented different proposals to him, including the Insight Answer Plan. On February 11, 1994, Fipps was introduced by Ricky to his father, Mr. Clark, at the elder Clark's store in Damascus, Georgia. Fipps asked Mr. Clark about his health insurance, and Clark informed him he had had coverage with National Health for years. Fipps told Clark about Insight Answer, including the fact that Clark's deductible would be $1,000 instead of National Health's $2,500 and Insight Answer's lifetime coverage was $2,000,000.
Clark decided to apply for the coverage and "Mr. Fipps read the application to me and I answered the questions for him." In the section of the application headed "Medical Questions," the form stated that "[f]ailure to divulge complete facts can be cause for rescission of your coverage." Clark answered affirmatively Questions 1 and 2 dealing with treatment within the last year by any health care provider for any medical condition and treatment within the last five years for any heart condition. Although Clark told Fipps he had had five heart bypasses within the past five years, Fipps told him only the last year's information was required, despite the specific five-year language, and "arteriosclerosis" was the only heart condition circled in response to the second question. Mr. and Mrs. Clark signed the application after it had been filled out by Fipps. Mr. Clark stated that he did not read over the application carefully before he signed it, 6 but Questions 1 and 2 were marked "ye...
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