Van Enterprises, Inc. v. Avemco Ins. Co.

Decision Date16 October 2002
Docket NumberCivil Action No. 01-2481-KHV.
Citation231 F.Supp.2d 1071
PartiesVAN ENTERPRISES, INC., Plaintiff, v. AVEMCO INSURANCE COMPANY and HCC Benefits Corporation, Defendants.
CourtU.S. District Court — District of Kansas

William M. Modrcin, Dennis L. Davis, R. Dennis Wright, Claire Renee Mattan, Stinson, Morrison, Hecker, LLP, Kansas City, MO, for Plaintiff.

Daniel F. Church, Byron A. Bowles, McAnany, Van Cleave & Phillips, P.A., Roeland Park, KS, Carl A. Gallagher, Patrice M. Brown, McAnany, Van Cleave & Phillips, P.A., Kansas City, KS, for Defendant.

MEMORANDUM AND ORDER

VRATIL, District Judge.

Van Enterprises, Inc. (Van) filed suit against AVEMCO Insurance Company (AVEMCO) and HCC Benefits Corporation (HCCB)1 for breach of contract under a stop loss and excess loss insurance policy issued by AVEMCO. This matter is before the Court on Defendant AVEMCO's Motion For Summary Judgment (Doc. # 35) and Plaintiff's Motion For Summary Judgment (Doc. #37), both filed June 21, 2002. For reasons stated below, both motions are overruled.

Summary Judgment Standards

Summary Judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. See Fed.R.Civ.P. 56(c); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Vitkus v. Beatrice Co., 11 F.3d 1535, 1538-39 (10th Cir.1993). A factual dispute is "material" only if it "might affect the outcome of the suit under the governing law." Anderson, 477 U.S. at 248, 106 S.Ct. 2505. A "genuine" factual dispute requires more than a mere scintilla of evidence. Id. at 252, 106 S.Ct. 2505.

The moving party bears the initial burden of showing the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Hicks v. City of Watonga, 942 F.2d 737, 743 (10th Cir.1991). Once the moving party meets its burden, the burden shifts to the non-moving party to demonstrate that genuine issues remain for trial "as to those dispositive matters for which it carries the burden of proof." Applied Genetics Int'l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir.1990); see also Matsushita Elec. Indus., Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 891 (10th Cir.1991). The non-moving party may not rest on its pleadings but must set forth specific facts. Applied Genetics, 912 F.2d at 1241.

"[W]e must view the record in a light most favorable to the parties opposing the motion for summary judgment." Deepwater Invs., Ltd. v. Jackson Hole Ski Corp., 938 F.2d 1105, 1110 (10th Cir.1991). Summary judgment may be granted if the non-moving party's evidence is merely colorable or is not significantly probative. Anderson, 477 U.S. at 250-51, 106 S.Ct. 2505. "In a response to a motion for summary judgment, a party cannot rely on ignorance of facts, on speculation, or on suspicion, and may not escape summary judgment in the mere hope that something will turn up at trial." Conaway v. Smith, 853 F.2d 789, 794 (10th Cir.1988). Essentially, the inquiry is "whether the evidence presents a sufficient disagreement to require submission to the jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson, 477 U.S. at 251-52, 106 S.Ct. 2505.

Factual Background

For purposes of the cross motions for summary judgment, the following facts are uncontroverted, deemed admitted or, where disputed, each party's factual contention is stated.

Van is a Kansas corporation involved primarily in the automobile business. To maintain health and certain other benefits for its employees, Van established a self-funded insurance plan, the Van Enterprises Employee Benefit Trust Health Care Plan (the "Plan"), which is subject to the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq.2 The Plan is a substitute for health insurance purchased from an insurance carrier. Van's individual automobile dealerships pay premiums into the Plan on behalf of employees or at some dealerships, employees do so for themselves and their dependents. Premiums paid into the Plan are also intended to cover the cost of reinsurance. Van considered employees who enrolled in the Plan to be insureds.

Gallagher Benefits Administrators, Inc. and Gallagher Benefit Services, Inc. (collectively "Gallagher") acted as the agent for Van. AVEMCO is a Maryland property and casualty carrier which sells, among other things, stop loss and excess loss insurance products. HCCB acted as the agent for AVEMCO. Van, through its agent Gallagher, purchased a stop loss and excess loss insurance policy from AVEMCO, through its agent HCCB, for calendar year 2000. Stop loss and excess loss health insurance policies provide reimbursement to the employer for eligible health care expenses in excess of a certain specification (or attachment point). A self insurer can obtain stop loss or excess loss coverage at varying levels based on the premium amount it wants to pay. For the policy at issue, the stop loss and excess loss coverage specification (or attachment point) was $125,000 per employee. In other words, AVEMCO agreed to reimburse Van, as the Plan Sponsor, for the medical expenses of each employee in excess of $125,000. AVEMCO did not have an obligation to reimburse individual employees directly. Representatives of Van, Gallagher and HCCB repeatedly referred to the Policy as one of reinsurance.

Prior to January 1, 2000, plaintiff's stop loss and excess loss carrier was Employer's Reinsurance Corporation. Beginning in September 1999, however, Gallagher began shopping for a new carrier. HCCB sent Gallagher a proposal and after Gallagher submitted additional information concerning the Plan, including up-dated large claim notifications, HCCB provided a more detailed quote. The terms and conditions of the quote were subject to review and approval by HCCB of Van's final "Plan Document."

On or about January 4, 2000, Gallagher advised HCCB that its quote had been approved and that the stop loss and excess loss policy would be purchased through HCCB. On or about January 7, 2000, HCCB sent Gallagher a transmittal letter with a number of enclosures to be executed by Van. Among the enclosures was a blank Disclosure Statement form, and partially completed Application and Schedule of Insurance forms. Following its normal business practices, before sending the forms to Gallagher, HCCB completed all of the items on the Application and Schedule of Insurance forms with the exception of Question 11 on the Application, which asks:

11. Have you read, fully understood, and completed to the best of your knowledge the attached Disclosure Statement?

[] Yes [] No

With regard to the completion of Question 11, HCCB gave Gallagher the following bold admonition in the January 7th transmittal letter:

On the enclosed Application, please pay particular attention to Item Number 11. This must be completed, otherwise the Application will not be accepted.

On the Disclosure Statement, in response to the question to identify "shock losses — potential catastrophic claims, any on-going and/or claims exceeding 50% of specific deductible," Gallagher responded "please see attached individual excess claims and large claim notifications." The attached documents included information for individual excess claims and large claim notifications for calendar year 1999. The information in and attached to the Disclosure Statement was written or provided by Gallagher as agent for Van. The first paragraph of the Disclosure Statement reads:

To the best of our knowledge, the Plan Sponsor [Van] and our Agent, the Claim Administrator, have done a diligent review and have listed below all details of Shock Losses during the past twelve (12) months, as well as any on-going or potential claims. Please pen the word "NONE" if do not have any Shock Losses, COBRA's or Disabled lives.

In the insurance industry, a shock loss or shock information is commonly known as a claim that exceeds or has the potential to exceed the group's specification (attachment point). A shock loss would include a claim that has already gone over one-half of the group's specification, i.e. if the group's specification is a $125,000 deductible, it is a shock loss if claims exceed $62,500. Shock losses also include claims that have the potential to go over one-half of the $125,000 deductible.

Megan Elliott was the dependent child of one of Van's employees, Christopher Elliott, an insured under the Plan. Megan was first diagnosed with spinal muscle atrophy in October of 1999, and Mr. Elliott and his family first became insured on December 1, 1999. Spinal muscle atrophy is the wasting of skeletal muscle due to progressive degeneration of anterior horn cells in the spinal cord and motor nuclei in the brain stem. Type 1 spinal muscle atrophy is usually fatal by age 4. Type 2 spinal muscle atrophy may also be fatal in early life; if it is not fatal, the child will nonetheless have permanent progressive weakness. In either case, Gallagher would initiate the large case management process because of the potential medical expenses.

On or about December 29, 1999, Med Trac notified Amy Frazier, a registered nurse for Gallagher, that Megan suffered from spinal muscle atrophy and had been hospitalized with pneumothorax since December 9, 1999. On December 29, 1999, Frazier called Linda Wisdom, the claims manager for Van's Plan, and left a voice mail message asking permission to open large case management to see if Gallagher could develop a plan to prevent Megan's re-hospitalization. Later that same day, Frazier spoke with Wisdom about Megan's...

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