Woodworker's Supply, Inc. v. Principal Mut. Life Ins. Co., s. 97-2226

• Decision Date: 10 March 1999
• Docket Number: 97-2232,Nos. 97-2226,s. 97-2226
• Parties: Pens. Plan Guide (CCH) P 23951Y, 1999 CJ C.A.R. 1697 WOODWORKER'S SUPPLY, INC., Plaintiff-Appellee/Cross-Appellant, v. PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, Defendant-Appellant/Cross-Appellee,
• Court: U.S. Court of Appeals — Tenth Circuit

Page 985

170 F.3d 985

Pens. Plan Guide (CCH) P 23951Y, 1999 CJ C.A.R. 1697

WOODWORKER'S SUPPLY, INC., Plaintiff-Appellee/Cross-Appellant, v. PRINCIPAL MUTUAL LIFE INSURANCE COMPANY,

Defendant-Appellant/Cross-Appellee,

Nos. 97-2226, 97-2232.

United States Court of Appeals, Tenth Circuit.

March 10, 1999.

Doug K. Butler (Bill E. Davidoff with him on the briefs) of Figari & Davenport, L.L.P., Dallas, Texas, for Defendant-Appellant/Cross-Appellee.

William C. Madison and Gregory D. Steinman of Madison, Harbour, Mroz & Brennan, P.A., Albuquerque, New Mexico, for Plaintiff-Appellee/Cross-Appellant.

Before SEYMOUR, Chief Judge, BALDOCK and BRORBY, Circuit Judges.

SEYMOUR, Chief Judge.

In this diversity action, Woodworker's Supply, Inc. (Woodworker) sued its former insurer, Principal Mutual Life Insurance Company, for unfair trade practices and fraud. The district court held that the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 et seq., bars claims arising after March 1, 1994, the effective date of the parties' agreement, but sent to the jury the claims arising prior to that date. The jury awarded Woodworker $221,000 based on Principal Mutual's violations of the New Mexico Unfair Insurance Practices Act, N.M. STAT. ANN. §§ 59A-16-1 et seq., the New Mexico Unfair Practices Act, N.M. STAT. ANN. §§ 57-12-1 et seq., and fraud in the inducement. Principal Mutual appeals, arguing that (1) ERISA preempts all of Woodworker's claims; (2) Woodworker improperly failed to disclose its damage theory prior to trial; (3) the evidence was insufficient to support the jury's findings of fraud, violations of the New Mexico statutes, and damages; and (4) Principal Mutual is entitled to contract damages resulting from Woodworker's failure to pay certain premiums. Woodworker cross-appeals, claiming that (1) the district court erred by not sending the issue of punitive damages to the jury; and (2) in refusing to award treble damages under the state statutes; (3) we should award Woodworker attorney's fees and costs on appeal; (4) and if we order a new trial, the jury should be permitted to consider conduct occurring after March 1, 1994. We affirm in part and reverse in part.

I.

We review the evidence in the light most favorable to Woodworker because the jury found in its favor. See Webb v. ABF Freight Sys. Inc., 155 F.3d 1230, 1234 n. 1 (10th Cir.1998). "[W]e accept the jury's factual determinations as long as they are reasonably based on some evidence or the inferences that may reasonably be drawn from such evidence." Id. Under this standard of review, the record establishes the following facts.

At the end of 1993, Woodworker, a manufacturer and supplier of woodworking tools and equipment, was shopping for insurance coverage for its employees. It was dissatisfied with its previous insurer, Washington National, for processing claims inefficiently and inaccurately. Woodworker received bids from several insurance companies, including Principal Mutual, through its insurance broker, Nadyne Shimada.

Woodworker had previous experience with different types of insurance contracts. Washington National had provided Woodworker with a contingent premium contract, also known as a retrospective premium agreement. Under such an agreement, the insurer sets two rates, the preliminary premium and the contract premium. During the course of the year, the insured pays the preliminary premium which is the lower of the two rates. At the end of the year, the insurer calculates the claims paid as well as certain other charges. If this calculation is lower than the preliminary premium, the insured pays nothing further. If it is higher, the insured pays the difference but never more than the contract rate. In exchange for this flexibility, the maximum liability is somewhat higher than it would be were only one rate set. Woodworker's experience with this arrangement had been positive. Its claims had been 60-70% of the preliminary premium, and it never had to make an additional payment at the end of the year.

When Ms. Shimada solicited bids for a new insurer on behalf of Woodworker, she looked for a plan structured similarly to Washington National's. Principal Mutual submitted a low bid, so low in fact that Ms. Shimada sent it back for the company to revise its rates upwards. Rates that are too low may harm the insured in several ways. They may indicate insufficient coverage. Or, in a contingent funding agreement, inadequate preliminary premiums may subject the insured to unexpected collections at the end of the year or significant rate increases for the next year.

Principal Mutual resubmitted an increased bid and set the preliminary rates 25% below the contract rate. According to Ms. Shimada's analysis, the rates seemed reasonable and she recommended Principal Mutual's plan to Woodworker. Principal Mutual began insuring Woodworker on March 1, 1994, although the parties did not sign the retrospective premium agreement until late July 1994.

Unbeknownst to Woodworker, the underwriter of the plan, Melissa Lorek, had serious doubts about the adequacy of the rates. On February 28, 1994, she e-mailed Laura Bullock, the Principal Mutual sales representative on the Woodworker contract:

We don't feel comfortable with increasing the retro differential past the 20%. We did, originally, look at this as an option. We decided against this because, upon closer examination, the contract rates are already inadequate.... We feel we have already been very aggressive with this case and I don't feel comfortable with getting any more aggressive.

Supp.App. at 64. Ms. Bullock responded the following day, "This is completely unacceptable.... This is a done deal." Id. at 66. Principal Mutual made no further changes to the rates. In a letter discussing contract renewal and rate increases for the following year, Ms. Lorek told Ms. Shimada, "When [Principal Mutual] sold this case last March, [it] knew the rates were inadequate." Id. at 68; see also Aplt.App. at 766. Prior to that, no one from Principal Mutual had told Ms. Shimada that the rates charged to Woodworker were inadequate.

Principal Mutual also failed to fully disclose certain aspects of the method it used to calculate rates, increasing the likelihood that Woodworker would experience large rate increases and charges in excess of the preliminary premiums. For example, Principal Mutual's method for determining reserves to cover "incurred but not reported" expenses deviated from the industry norm and significantly impacted Woodworker's renewal program. Principal Mutual did not disclose this to Woodworker until February 1995. In addition, while the contract mentioned pooling charges, it did not indicate that such charges could equal up to 15% of the contract premium. Even though Woodworker paid $178,000 in premiums in 1994, its claims would have to have been less than $50,000 to avoid an end of the year surcharge. Had Woodworker known this prior to March 1, 1994, it would not have contracted with Principal Mutual.

As would be expected, Principal Mutual's omissions resulted in a significant charge at the end of 1994 as well as a large rate increase for the following year. Severe disagreements ensued between Principal Mutual and Woodworker. Woodworker refused to pay the increase in the rates, as well as the 1994 surcharge. Principal Mutual demanded payments and unilaterally increased the 1995 rates. Finally, Principal Mutual terminated Woodworker's coverage effective midnight, August 31, 1995.

II.

A. ERISA Preemption

The primary legal question in this case is whether, and to what extent, ERISA preempts Woodworker's claims against Principal Mutual. ¹ The trial court originally dismissed as preempted only those claims arising "out of Principal's alleged failure to provide coverage in September 1995," Aplt.App. at 153, but modified its ruling at trial by holding preempted all claims arising after March 1, 1994, the date the insurance plan commenced. We review the trial court's ruling on ERISA preemption de novo as it involves a question of law. See Airparts Co. v. Custom Benefit Services of Austin, 28 F.3d 1062, 1064 (10th Cir.1994).

The plain language of ERISA provides that it shall preempt state laws that "relate to any employment benefit plan," subject to enumerated exceptions. See 29 U.S.C. § 1144(a). The Supreme Court has frequently acknowledged the expansive scope of ERISA preemption, see, e.g., Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138-39, 111 S.Ct. 478, 112 L.Ed.2d 474 (1990); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987); Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 98-99, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983), yet the Court has also noted that this observation provides little aid in actually determining whether ERISA supersedes state law, see, e.g., New York State Conference of Blue Cross & Blue Shield v. Travelers Ins. Co., 514 U.S. 645, 655, 115 S.Ct. 1671, 131 L.Ed.2d 695 (1995); California Div. of Labor Stand. v. Dillingham, 519 U.S. 316, 335-36, 117 S.Ct. 832, 136 L.Ed.2d 791 (1997) (Scalia, J., concurring). As the Court noted in Travelers:

[O]ne might be excused for wondering, at first blush, whether the words of limitation ... do much limiting. If "relate to" were taken to extend to the furthest stretch of its indeterminacy, then for all practical purposes pre-emption would never run its course, for "[r]eally, universally, relations stop nowhere," H. James Roderick Hudson xli (New York ed., World Classic's 1980).... That said, we have to recognize that our prior attempt to construe "relate to" does not give us much help in drawing the line here.

Travelers Ins. Co., 514 U.S. at 655, 115 S.Ct. 1671. The Court then offered another way of analyzing ERISA pre-emption: "We simply must go beyond the unhelpful text and the frustrating difficulty of defining its key term, and look instead to the objectives of ERISA as a guide to the scope...