Curtis v Hartford

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A Win for Consumers - Daley, DeBofsky & Bryant, together with Bridget O'Ryan, recently won a ruling barring Hartford Life and Accident Insurance Company from enforcing a policy provision that would trigger a deferential court review. In Curtis v. Hartford, 11-cv-2448 (U.S.Dist.Court, N.D.Ill. January 18, 2012), United States Magistrate Judge Jeffrey Gilbert found that the Illinois Insurance Regulation barring discretionary clauses in health and disability insurance policies (50 Ill.Admin.Code Sec. 2001.3) protected an employee of Children's Memorial Hospital in Chicago from having to face a court review of the termination of her disability benefit claim that would give deference to Hartford's determination. Mark DeBofsky's analysis of the ruling follows:

Curtis v. Hartford Life & Acc.Ins.Co., 2012 U.S.Dist.LEXIS 5423 (N.D.Ill. January 18, 2012)(Issue: Standard of Review). In 2004, the National Association of Insurance Commissioners issued a model law banning discretionary clauses in health and disability insurance policies. Since then, various states have adopted the model law including the State of Illinois, which, in 2005, promulgated 50 Ill.Admin.Code § 2001.3. However, the insurance industry has engaged in a cat and mouse game to avoid being subject to the prohibition. The reason is clear - the deferential arbitrary and capricious standard of review is "highly prized" by insurers because it makes benefit denials exceedingly difficult to overturn. Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 384 (U.S. 2002).

The plaintiff, Curtis, was employed by Children's Memorial Hospital in Chicago, Illinois until she became disabled and stopped working in January 2007. Although Curtis initially received disability benefits from Hartford, the insurer terminated the benefit payments in 2010; and after exhausting pre-litigation appeal procedures, Curtis brought suit against Hartford in late 2010 seeking restoration of her benefits. In determining the scope of discovery that would be permitted, the court first needed to determine the applicable standard of judicial review. The plaintiff claimed that despite the inclusion of language in the policy that would ordinarily trigger a deferential standard of review, the Illinois regulation prohibiting discretionary clauses trumped that language and mandated a de novo standard. Hartford contended otherwise, asserting that the policy had been rewritten and was issued to a trust based in Delaware, a state that does not prohibit discretionary clauses in insurance policies. Consequently, Hartford maintained that the arbitrary and capricious standard applied.

The record established the policy in question was originally written in 2004 and issued to Children's Memorial Hospital. The policy was subsequently amended in 2006 and again issued to Children's Memorial Hospital and delivered in Illinois. However, in 2008, Children's Memorial Hospital subscribed to the Healthcare Benefits Alliance Group Insurance Trust; and in 2008, Hartford issued a new policy to the Trust bearing the identical policy number to the policy originally issued to Children's Memorial Hospital. The policy identified Children's Memorial Hospital as a participating employer, but stated on its face that it was delivered to the Trust in Delaware.

The court based its decision on an examination of the February 2010 amended policy identifying the Trust as the policyholder. However, the policy also stated it provides coverage for employees of Children's Memorial Hospital, the participating employer, in Illinois. The Certificate of Insurance also stated, "We [Hartford] have issued the Policy to the Participating Employer [Children's Memorial Hospital]." Although Hartford maintained that statement was a typographical error, the court remarked, "Whether this was a typographical error or a Freudian slip of the tongue, it accurately describes the situation, as a practical matter, in the Court's view." The reason is that regardless of whether the policy was issued or offered in Illinois by Hartford, in the court's view, either road leads to applicability of the Illinois regulation prohibiting discretionary clauses.

The court ruled the insertion of the Trust in 2008 "did not change the fundamental nature or mechanics of the relationship between Children's Memorial Hospital and Hartford as far as the Illinois Regulation is concerned." The court described the Trust as "essentially a passive, pass-through entity" created to facilitate insurance coverage to employees of participating members in the Trust. Furthermore, looking to the language of the trust agreement, title to the policy was legally "vested" in Children's Memorial Hospital as a participating member in the Trust. Since the Trust itself had nothing to do with the insurance but was merely a conduit, leaving the terms of the insurance policy a legal matter between the insurer and the participating employer (Children's Memorial Hospital), the court found that "for all practical purposes, the purchase and issuance of the Policy at issue here continues to be controlled by Children's Memorial Hospital, on the one hand, and Hartford, on the other."

Although Hartford maintained the policy was offered to the Trust, not Children's Memorial Hospital, the court disagreed, finding Hartford's argument disregarded the relationship between the Trust, Hartford and the participating employer. Since the Trust had no power itself to enter into a contract with Hartford and also had no authority to accept a policy from Hartford unless directed to do so by Children's Memorial Hospital, the reality is that "the entity insured under the Policy as the Participating Employer, not the Trust." The contracting decision, according to the court, was between the insurer and the employer; thus, the policy was offered to Children's Memorial Hospital. The court concluded on that point that any other reading would "elevate[ ] form over substance." Since the regulation applies to a policy, contract or agreement "offered . . . in this State by a health carrier to provide, deliver, arrange for, pay for or reimburse any of the costs of health care services or of a disability" (50 Ill. Admin. Code § 2001.3 (2010)), the court found the regulation "encompass[es] both direct and indirect arrangements that cover payment for health care services or for disability benefits, including the relationship between Hartford and Children's Memorial Hospital here through the vehicle of the Trust."

Hartford's argument that the policy was delivered in Delaware was also determined by the court to have elevated form over substance. Because "all power of acceptance and direction" with respect to the policy was vested in Children's Memorial Hospital, and because that entity is located only in Illinois, the court deemed it "sophistic to say that Hartford offered the February 2010 Amended Policy to anyone other than Children's Memorial Hospital in Illinois based on the statement on the face of the policy that it was 'delivered' to the Trust in Delaware.' The court characterized its conclusions as "common sense" and found no inconsistency in saying "that the Policy was 'delivered' to the Trust in Delaware and also 'offered' to Children's Memorial Hospital in Illinois within the meaning of the Illinois Regulation." The court refused to find the Trust a sham; instead, the court looked at the nature of the Trust and the relationship of the parties.

The court next found that the choice of law provision in the February 2010 amended policy was void as against Illinois public policy. Although the policy issued to the Trust stated it would governed by Delaware law, the court applied Hofeld v. Nationwide Life Ins. Co., 322 N.E.2d 454 (1975), which instructed that the choice of law in an insurance policy should be followed only "so long as the particular statutory provision to be applied does not conflict with the public policy of this State and so long as the certificate received by the insured does not contain conflicting provisions." 322 N.E.2d at 460. Although Hofeld and another ruling applying that case, Mayoff v. Hartford Life and Acc. Ins. Co., 1990 WL 141422 (N.D. Ill. Sept. 21, 1990), found no conflict between the designated choice of law forum and Illinois law, here there is a conflict because the designated forum's law is "contrary to the Illinois Regulation at issue here and the public policy of Illinois." Accordingly, the court invalidated the choice of law designation.

Finally, the court rejected Hartford's argument that the Illinois regulation was preempted by ERISA. The court pointed out that three courts of appeals rejected such challenges to other states' adoption of the NAIC regulation: Standard Ins. Co. v. Morrison, 584 F.3d 837 (9th Cir. 2009); American Council of Life Insurers v. Ross, 558 F.3d 600 (6th Cir. 2009); Hancock v. Metropolitan Life Ins. Co., 590 F.3d 1141 (10th Cir. 2009). In addition, other courts within the Northern District of Illinois have rejected such a challenge: Haines v. Reliance Standard Life Ins., 09 C 7648 (N.D. Ill. Sept. 9, 2009); Ball v. Standard Life Ins. Co., 2011 WL 759952, at * 4-7 (N.D. Ill. Feb. 23, 2011). Accordingly, the court ruled that the de novo standard is applicable.

Discussion: This case is a significant win for consumers. Absent any federal law barring discretionary clauses, the adoption of the NAIC initiative by the states is the only means of evening the playing field so that benefit claimants receive equal consideration in court when adjudicating benefit disputes. But those protections are meaningless if insurers can proffer an artifice such as the Trust agreement used by Harford in this case to simply evade a state requirement exempted from ERISA preemption pursuant to ERISA's savings clause. 29 U.S.C. § 1144(b)(2)(B). This ruling, which was meticulously researched and detailed to address every nuance, will stand as a roadblock against insurers' efforts to infringe on the protection of consumers.