This redacted writing sample written while employed by Early, Maslach, et al., the in-house counsel to Farmers Group, Inc. is a summary report required of the legal department of a major insurance Company to advise the General Counsel of the circumstances of a lawsuit, liability and recommendations for disposition. The legal problem described herein no longer exists as the consequence of a change in legislation and case law since written.
TO: Michael Grinfield, J.D.
Farmers Insurance Group, Inc.
FROM: Dean Blake, J.D.
Early, Maslach, et al.
Wilshire Blvd.
Los Angeles, California
Xxxxxxx v. Xxxx State Life Ins. Co.
Harrison County Circuit Court, West Virginia
Our Docket No. 16-0680
Plaintiff with mortal illness was excluded from coverage during a take-over of a group health plan; attempts were made by a second agent to place the group and the plaintiff on coverage at different times even though the Company would have rejected the entire case to avoid excluding plaintiff if a clear and single submission had been made.
The file contains hospital billings, claim rejection letters, internal departmental notes, a postcard from the father of the claimant, employee note requesting confirmation of coverage, Customer Service letter confirming coverage, letters from the employer, application from, agent letters, a copy of the application's medical questionnaire and the filed complaint.
Complaint consists of claims for unfair claims practices and intentional infliction of emotional distress for failure to timely enroll the dependent, and for denying the payment of benefits for medical expenses incurred, as well as for misrepresenting the takeover provisions of the policy and inducing the employer to change insurance carriers (wrongful interference with contract?).
The allegations are that the Company, through its agent, induced the employer to switch carriers, misrepresent the takeover provisions which limits the preexisting conditions to $1,000 thus limiting the claim; unfairly and the improperly denied the medical claims. Additionally, the facts indicate issues of coverage by estopple, both expressed and implied, as well as waiver, mutual mistake and ostensible agency.
The complaint is simply stated, straightforward and fully states the problems. While not a defect, the employer and the benefits are also appropriate defendants which may be drawn in by cross-complaint or as necessary and indispensable parties.
Facts, absent from the complaint, indicate that there is an issue of mutual mistake wherein the employee thought that the dependent was unintentionally left off the enrollment forms and requested correction of a clerical error both directly and directly to the Company through the agent, and to which the Company complied.
Damages prayed for are for medical expenses incurred - $186,000 punitive damages of $500,000, emotional distress $150,000 plus cost and fees and general damages of $150,000. Total of $986,000 and with our costs - over a million dollars.
Attached to this report is a chronology of events for the reader's convenience.
The facts of this case are involved and rather than confuse the reader, the narration will be segmented into episodes including an explanation of the involvement of the companies record keeping procedures and computer operations.
Employee's Company of Cxxxxxxxxx, W. Va. first obtained a rate quotation from a local Farmer's Agency for group life and health coverage. A rate was calculated, delivered and the group was rejected by the underwriters. It is unknown at this time if information was conveyed to that agent concerning the fact that the Plaintiff, son of an employee was suffering from leukemia and would have been ineligible for coverage in a takeover situation, or coverage would have been limited to $1,000 in benefits for that illness should the sale be made.
Employer was then told by an Agent of [another company] and not our Company agent., that he could obtain a Company quotation at a lower rate. He did so through another Company agency in Cxxxxxxxx, W. Va. Again, it is unknown at this time whether the agent or the Company agent was informed of the dependent child's medical status. A group application was taken, submitted to, and approved by the underwriters. The individual enrollment card for employee was delayed in its submission to the Company. It was claimed that the employee had forgotten the birth date of his children so the form was held until he could be provide that information. It is unknown at this time who physically held the card. The enrollment application was eventually received by the was signed without a request for dependent coverage. The group and the plaintiff employee were approved for coverage effective December 1, 19xx, by the Company's underwriting department on January 4.
The dependent has been previously hospitalized and treated for lymphoma. On February 4, a new hospital bill was generated for medical expenses incurred and on March 19 the Company declined to pay charges because the dependent was not a covered insured.
March 25, the employee requested dependent coverage on a separate individual enrollment form. Because this was a late enrollment, the underwriters requested completion of a medical questionnaire, and he was declined for coverage May 9. The computer shows an absence of an applicant's name to indicate to Company employees that an individual is ineligible or not enrolled, i.e. ineligibility or rejection is not expressly indicated.
Communications were then received from the selling agency to the Customer Claims Service Department of Company that a clerical error was made in not enrolling dependent/plaintiff. That department replied via written memo apologizing for their error, stating that coverage was in effect and presumably having an effective date of May 8. The computer would show plaintiff listed as a dependent with a then current effective date. The Claims Department would then compare the first medical expense date to the enrollment date and decline charges as preexisting conditions.
Answers to the medical questions were received April 30, and reviewed by the Underwriting Department May 10, approving coverage for the dependents, but expressly excluding coverage for the plaintiff. The memorandum does not so state, but the examiner probably saw that plaintiff was listed as covered on the computer when she tried to enter the other dependents names.
The employee sent a postcard requesting dependent coverage thus alerting the Company to the exclusion of all his dependents and that he was told by the Company that coverage would be placed in effect for the plaintiff (as his dependent).
June 4, a certificate of coverage booklet was mailed to the insured. It is unknown at this time if any special efforts were made on the certificate to specify who was and who was not covered under the plan or if it showed a fewer number of dependents covered than was requested in the postcard.
June 7, a request for change form adding dependents was received and dated; and attached thereto was the signed request dated March 26. This is either evidence of the agency's error in failing to submit the change request form signed March 26, by the insured employee, or an attempt to backdate the request. Apparently, this form, in combination with the prior telephone request for coverage, was received by Customer Claims Services and a confirmatory letter was sent out stating coverage was effective May 10. Simultaneously the Underwriting Department declined an appeal to cover the plaintiff and is shown on a written internal memorandum.
In the meantime, other parties have confirmed that the Underwriters intended to decline coverage and entered on to the computer a termination date for the plaintiff of May 10. Paradoxically, the effective and termination dates shown on the computer then read as having the same date which employees are instructed to interpret as "excluded from coverage".
In summary, there are at least two conflicting stories coming from the agency force:
(1) the plaintiff was shown as not enrolled because of a clerical error and
(2) was a late enrollee. There were at lest two lines of communication inside the insurance Company which were not in communication with each other:
(a) The Underwriting Department was trying to specifically decline a single proposed dependent late enrollee for medical reasons and
(b) the Claims Customer Service Department was trying to reasoned to a complaint from an insured (coming to both directly from the insured and from the agency) that a dependent has not been enrolled due to a clerical error.
The compound errors of several individuals probably resulted in the computer showing, for a period of time, that the plaintiff was covered and direct communications were made confirming coverage. At all times the Claims Department declined coverage and continued to do so in response to each hospital bill submitted.
The legal issued presented are:
A. liability of the employer for failure to acquire insurance as agent of his employee (Boseman);
B. agency or ostensible agency of Agent H;
C. acquiescence or waiver by the Company in permitting Agent L to act as agent;
D. coverage by estopple;
E. fraud and conspiracy by the employer and Agent H against the Company and the first Agent;
mutual mistake;
F. mutual mistake and apparent authority;
G. There may be a cause of action against the software supplier for the computer program design flaw which created the paradox whereby the plaintiff appeared as a covered dependent.
The facts need to be clarified in order to determine which legal issues are present and controlling. Answers to the following questions would clarify the roles and hence possible liabilities of the various parties:
1. Who physically held on to the employee enrollment card prior to submission to the Company? At whose request was it held, if any? What was the status of the person who requested that the card not be submitted to the Company in a timely fashion - soliciting agent? Ostensible agent? The employee? The employer?
2. Did the Company have prior knowledge of Agent H's activities? Had it previously acquiesced in under-the-table agency dealings?
3. Did the employer or employee withhold information from Agent H regarding plaintiff's medical condition?
4. Who solicited Agent H's services? How does West Virginia law characterize a dual agent for the purposes of group insurance?
5. Are there any outstanding letters or correspondence from the Customer Service Dept. to the hospital or insured plaintiff confirming coverage other than those found in the file? Does the solicitation by the insured and the agency to the Customer Service Dept. constitute a legally excusable clerical error based upon mutual mistake?
6. Will the employer's knowledge of the transfer of coverage limitations during the first solicitation be imputed to the second solicitation? To what extent does the employer's knowledge of the underwriter's rejection from coverage of the group place the employer on notice? To what extent did the employer participate in the fraud or conspiracy against the Company?
Once the first scenario is clarified to highlight the legal significance of certain actions and inactions, it will be possible to evaluate the Company's position in light of West Virginia and case law.
West Virginia Code Sec.33-2-23 provides: "Any person who shall solicit within this state an application for insurance shall, in any controversy between the insured or his beneficiary and the insurer issuing any policy upon such application, be regarded as the agent of such insurer and not the agent of the insured."
Gates v. West Virginia, 107 W.Va. 331, 148, S.E. 197 (1929) held that one receiving the applications, collecting premiums, and delivering policies with the authority to adjust small losses is considered an agent of the insurer. Retained outside counsel suggests this case is applicable, however, Shepardization indicates that this case had not been cited since 1929 in West Virginia, was cited in Texas in 1936 and again by the Indiana Supreme Court regarding a West Virginia insured in 1939. Furthermore, this agent had no authority to adjust small losses nor would he deliver a policy nor collect anything other than the first month's premium. The case is of questionable value against the Company.
Maynard v. National Fire Insurance Company of Hartford, 147 W.Va. 539, 129 S.E. 2d 443 (1963) stated that an agent of a limited authority, such as a mere soliciting agent, lacks the power to waive policy requirements for coverage, and generally a waiver of any policy conditions by the soliciting agent is not binding unless the waiver is subsequently ratified by the insurer.
The Supreme Court of West Virginia has recently stated that, in general, when an agent in negotiating a contract exceeds the power vested in him by the principal, he becomes personally bound on the contract, Warden v. Bank of Mingo, 341 S.E.2d 679.
The holding in Boseman v. Conn. General Life Insurance Co., 301 U.S. 196, 81 L.Ed. 1036 (1937) stands for the proposition found in head note 4 as follows:
West Virginian has in effect adopted Boseman in the case of South Branch Valley National Bank v. Williams v. Metropolitan Life Ins. Co., 151 W.Va. 775, 155 S.E. 2d 845 (1967) paraphrasing as follows:
If our investigations reveal that the employer had knowledge as to why his first application was rejected and this notice can be imputed to his second application, and he withheld information for the enrollment card or orchestrated the events, then the ruling in South Branch Valley applies. However, this assumes that Agent H was acting in the capacity of a broker rather than that of an agent. Should Agent H have participated with the employer in a civil conspiracy to defraud the Company, he may be personally liable under the ruling in Warden. Discussions with Mr. D in Marketing at our subsidiary Company indicate that the Company may have acquiesced in Agent H's involvement with the first Insurance Agency in Cxxxxxxxxx, W. Va. such that other events would indicate that he Company had ratified the acts of Agent H, either individually or in combination with the employer as a matter of standard business practice. In this eventuality, the Company may be held liable. Liability in this example will be as a consequence of the application of W. Va. Code Sec. 33-2-23, assuming there is sufficient evidence that the application was indeed insured.
The sales presentation was made by Mr. James X of the first Insurance Company (our Company's agency) and Agent H to the second agency's financial officer. This would give the appearance of Agent H being legitimate agents of the Company creating a theory of ostensible agency. Adding to this idea, the original employer application for insurance shows on the lower left-hand corner a notation regarding agency compensation which lists two parties, each to receive 50% of the commissions. Only one of those listed is an approved insurance Company agent.
The second and distinct line of theory of liability is based upon coverage by estopple. This theory is subject to the general contract laws of the state of W. Va. regarding the incorrect statements of both the father and the agency that Plaintiff's omission from the enrollment is a clerical error, to which the Company mistakenly responded by enrolling the plaintiff and confirming coverage in writing. Discussion with the insurance Company divisional president indicates that these actions somehow constitutes a violation of standard Company enrollment procedures. It is entirely possible that the Company had and possibly still has two copies of an enrollment form for the plaintiff's family, one with and one without plaintiff as an applicant. This would tend to suggest that the employee has a cause of action against his employer or agent H, depending upon the circumstances of their submission.
It will be necessary to interview and eventually depose all the parties involved in order to more precisely determine the agency relationships and liabilities. Upon the completion of this investigation, it may be found that the Company has a cause of action against the employer for conspiracy and fraud as well as rescission of the insurance coverage. There may be a possible action for indemnity against some of the agents. I have begun to interview Company personnel.
Exposure probable. This plaintiff can present a very strong case for ostensible agency, ratification and acquiescence in the actions of Agent H as well as a very persuasive argument for coverage by estopple.
The Company's defense may be based on Boseman and its W. Va. progeny, if applicable. The counter-argument to coverage by estopple is a weak mutual mistake argument. Other defenses include comparative bad faith, fraud and conspiracy and material misrepresentation in the application. These defenses, though plausible, will not play well on a jury given the condition of the plaintiff.
It will be necessary to do a great deal of investigation, depositions and interrogatories before making a final recommendation.
[signed]
Dean Blake
DMB:dp
cc: file, Peterson
dictated April 7, 19xx.
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