HOMELAND INSURANCE CO., and EXECUTIVE RISK SPECIALTY INS. CO., Plaintiffs,
CORVEL CORPORATION, Defendant.
Submitted: April 15, 2013
Upon Consideration of Executive Risk's Motion for Summary Judgment
Upon Consideration of Homeland Insurance Co.'s Motion for Partial Summary Judgment
James W. Semple, Esquire, and Corrine E. Amato, Esquire, of Morris James LLP, Wilmington, Delaware; of Counsel: Michael J. Rosen, Esquire, and Peter F. Lovato, III, Esquire, of Boundas, Skarzynski, Walsh & Black, LLC, Chicago, Illinois, Attorneys for Homeland Insurance Company
Carmella P. Keener, Esquire, of Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware; of Counsel: Ronald P. Schiller, Esquire, Daniel J. Layden, Esquire, and Phillip E. Wilson, Jr., Esquire, of Hangley, Aronchick, Segal, Pudlin & Schiller, Philadelphia, Pennsylvania, Attorneys for Executive Risk Specialty Insurance Company.
Kevin G. Abrams, Esquire, and John M. Seaman, Esquire, of Abrams & Bayliss LLP, Wilmington, Delaware; of Counsel: Seth D. Lamden, Esquire, of Neal, Gerber & Eisenberg LLP, Chicago, Illinois, Attorneys for Defendant CorVel Corporation
Plaintiff Executive Risk Specialty Insurance Company ("Executive Risk") has moved for summary judgment and plaintiff Homeland Insurance Company of New York ("Homeland") has moved for partial summary judgment on the issue of insurance coverage regarding two Errors and Omissions Insurance Policies issued to defendant CorVel Corporation ("CorVel") covering different time periods. As will be discussed more fully below, the coverage issue stems from two settlement agreements that occurred in Louisiana resulting from violations of, and financial consequences imposed under, a Louisiana Statute known as the Any Willing Provider Act, La. R.S. 40:2203.1. The main issue to be decided by the Court is the meaning of the term "penalty" as set forth in each policy and whether the settlements in Louisiana are covered as "Loss."
The Court finds that as to both Executive Risk's motion and Homeland's motion, a violation of La. R.S. 40:2203.1 constitutes a penalty which is not covered as a "Loss" as set forth under either policy. Accordingly, Executive Risk's motion for summary judgment and Homeland's motion for partial summary judgment are hereby GRANTED.
Factual and Procedural Background
A. Louisiana's Preferred Provider Organizations Act
The coverage dispute in this matter revolves around a Louisiana statute and the insurance contracts, which are closely intertwined. The Court will first address the statute.
A PPO is statutorily defined as a group of medical providers which agree to provide medical services to subscribers of an insurance carrier at reduced rates. PPOs were developed and are used to allow employers and insurance companies to offer health care services at reduced rates through a network of preferred providers. Following the advent of PPO networks, some managed care organizations began taking unfair advantage of health care providers. On occasion, providers learned that they were being reimbursed at reduced rates even though they had never agreed to participate in a PPO network.
The legislature in Louisiana set out to remedy this problem by enacting statutes that allow intermediaries to take advantage of the benefits of PPO networks, while eliminating the unfair practices to healthcare providers. Its response is found in title 40, Chapter 12 of the Louisiana Revised Statutes which regulates the operation of PPO networks in what is known as the "PPO Act" or also the "Any Willing Provider Act." It was enacted in 1984 in an attempt to help reduce health care costs, but also to protect health care providers. It includes notice provisions that only allow reimbursement at the lower negotiated rates if notice is given in either one of two ways. One where a patient presents a benefit card at the time of service that identifies the discount to be taken:
A preferred provider organization's alternative rates of payment shall not be enforceable or binding upon any provider unless such organization is clearly identified on the benefit card issued by the group purchaser or other entity accessing a group purchaser's contractual agreement or agreements and presented to the participating provider when medical care is provided….
Alternatively, in the event that a benefit card is not issued or utilized by a group purchaser, injured employee or other entity, "written notification [to the provider] shall be required of any entity accessing an existing group purchaser's contractual agreement or agreements at least thirty days prior to accessing services through a participating provider under such agreement or agreements."
The statute also provides for financial consequences in the event a PPO fails to comply with these mandatory notice provisions:
Failure to comply with the [notice provisions] of this Section shall subject a group purchaser to damages payable to the provider of double the fair market value of the medical services provided, but in no event less than the greater of fifty dollars per day of noncompliance or two thousand dollars, together with attorney fees to be determined by the court.
B. The Parties
CorVel, a Delaware Corporation with its principle place of business in California, owns and operates a Preferred Provider Organization ("PPO") network throughout the United States. As part of the national network, CorVel had PPO agreements with medical service providers in Louisiana, including Lake Charles Memorial Hospital ("LCMH"). In 1996, CorVel entered into a PPO agreement with LCMH. The PPO agreement provided that LCMH and its medical staff became a PPO in the CorVel network of Payors. Under that agreement, LCMH agreed to discount rates regarding certain medical services performed. The agreement additionally contained a clause providing that disputes under the agreement must be submitted to arbitration. Additionally, CorVel contracted with workers' compensation payors, such as employers, who utilized CorVel's discounted PPO rates when paying for workers' compensation medical services.
Plaintiff Homeland is a New York corporation with its principal place of business in Massachusetts. Plaintiff Executive Risk is a Connecticut corporation with its principal place of business in New Jersey. Both companies issued Managed Care Organization Errors & Omissions ("E&O") Policies to CorVel. Homeland moved for declaratory judgment in this Court asserting that it was not liable regarding a settlement agreement entered into by CorVel in Louisiana. Executive Risk moved to intervene, also seeking a declaration that the settlement in Louisiana was not a covered Loss under its insurance policy.
C. Louisiana Actions against CorVel
In 2004 and early 2005, LCMH filed several claims against CorVel with the Louisiana Department of Labor – Department of Workers' Compensation. These Claims were brought because CorVel had allegedly been taking an improper discount – paying only the discounted PPO agreement rate – for services provided to workers' compensation patients. The Claims alleged that the resulting payments were below the rates set forth in the Louisiana Fee Schedule for workers' compensation-related services in violation of Louisiana law. LCMH sought to recover the amount of the discount and statutory fees and penalties since the services provided to workers' compensation patients were not included in the PPO agreement.
On July 19, 2005, CorVel filed a lawsuit against LCMH in Louisiana federal district court entitled CorVel Corporation v. Southwest Louisiana Hospital Association d/b/a Lake Charles Memorial Hospital, No. CV05-1330 (Trimble, J.), requesting a declaration directing LCMH to bring all of its underpayment claims in an arbitration proceeding pursuant to the 1996 PPO agreement. On November 6, 2006, the Louisiana District Court entered an order compelling arbitration and staying further proceedings pending the arbitration.
Then, on December 22, 2006, LCMH instituted a putative class arbitration against CorVel with the American Arbitration Association entitled SWLA Hospital Assoc. d/b/a Lake Charles Memorial Hospital v. CorVel ("LCMH Arbitration"). LCMH, on behalf of a class of medical providers, sued CorVel based on a violation of La. R.S. 40:2203.1(B). LCMH claimed CorVel had unlawfully discounted medical bills for workers' compensation patients and the discounts pursuant to the PPO agreement were invalid because of lack of notice. LCMH sought statutory penalties from Homeland.
A few years later, on September 30, 2009, on behalf of a putative class of medical service providers, a physician practice brought suit in the 27th Judicial District Court for the Parish of St. Landry. In that case, entitled George Raymond Williams, M.D. v. SIF Consultants of Louisiana, Inc., No. 09-C05244-C (St. Landry Parish, La.) (the "Williams Litigation"), the plaintiffs sought relief regarding alleged violations of La. R.S. 40:2203.1(B) for the application of PPO discounts for workers' compensation services without the proper notification. CorVel was not an original party to this suit, but was pled in as a defendant on March 21, 2011. Essentially, the LCMH Arbitration and Williams Litigation sought the same statutory relief from CorVel for the same type of violations of La. R.S. 40:2203.1(B) on behalf of the same group of medical providers.
On September 24, 2010, Homeland's claims manager received a letter from CorVel's counsel stating that an arbitration panel determined that LCMH's December 22, 2006 arbitration demand could proceed as a class action arbitration and the claim was covered under CorVel's insurance policy with Homeland. The claims manager for Homeland responded to CorVel's letter indicating it reserved all rights pending a full investigation. CorVel's counsel subsequently adhered to the position stated in his September 24, 2010 letter that Homeland owed defense and indemnity obligations under the policy for the arbitration proceeding.
On March 24, 2011, CorVel, Homeland, and Executive Risk were made parties to the Williams Litigation. The Williams Litigation alleged the same claims against CorVel as the arbitration proceeding. Homeland and Executive Risk were named, as they had issued insurance policies to CorVel and therefore, could be sued directly by the plaintiff class under La. R.S. 22:1269.
On July 23, 2011, CorVel entered into a settlement with the plaintiffs in the Williams Litigation that would resolve it, the LCMH Arbitration, and other actions before Louisiana's Office of Workers' Compensation. Specifically, the settlement agreement required CorVel to pay $9 million for a resolution of all the actions and CorVel purported to assign its rights to any insurance coverage applicable to these actions. The settlement released the statutory penalty claims under La. R.S. 40:2203.1(G), in addition to individual claims for underpayment of benefits.
On November 4, 2011, the Williams Court approved the settlement proposal and entered a final judgment order dismissing CorVel from the case. The agreement required a court-appointed Special Master to distribute settlement funds based on a designated allocation model. According to that model, funds would be distributed in the following four parts: (1) each claimant would receive a "base amount" of $100; (2) claimants would receive a sum based on the number of bills that each provider submitted to CorVel; (3) claimants would receive a sum based the amount of discounts taken after the bills were submitted to CorVel; and (4) claimants would receive a sum based on the total number of workers' compensation claims each provider filed claiming an improper discount.
Homeland and Executive Risk remain parties to the Williams Litigation and the putative class of medical service providers continue to pursue direct action claims against the carriers in Louisiana. The court deferred considering the carriers' arguments for dismissing, or staying the claims against Homeland and Executive risk until after a class certification hearing. The hearing occurred and the court certified the class. Executive Risk and Homeland filed an appeal of the order certifying the class which was heard on September 25, 2012. The Court has not been made aware of the results of the appeal.
D. Complaint for Declaratory Judgment filed in this Court
CorVel has demanded that Executive Risk provide coverage for the Williams Litigation and LCMH Arbitration under Executive Risk's E&O Policy effective October 31, 2004 – October 31, 2005. Additionally, CorVel has demanded that Homeland provide coverage for the Williams Litigation and LCMH Arbitration under Homeland's E&O Policy first effective October 31, 2005 – October 31, 2006 with subsequent renewals thereafter.
As a result of CorVel's demands, on January 10, 2011, Homeland filed this declaratory judgment action against CorVel seeking a declaratory judgment that the LCMH Arbitration was not an insurable Loss under its policy. Then, as stated above, on March 24, 2011, Executive Risk and Homeland were pleaded into the Williams Litigation in Louisiana. Subsequently Executive Risk moved to intervene in this Court on November 9, 2011, also seeking a declaration that the Executive Risk Policy did not cover the Williams Litigation or the LCMH Arbitration settlement. This Court granted the motion to intervene on December 6, 2011. CorVel filed a motion to dismiss claiming that Homeland's declaratory judgment complaint was not ripe for adjudication, which this Court denied on December 14, 2011.
E. Executive Risk's & CorVel's E&O Policies
Executive Risk issued an E&O Liability Policy to CorVel beginning on October 31, 1999, and renewing annually until the final policy period from October 31, 2004 to October 31, 2005. The Policy relevant to the issue before the Court is the 2004 to 2005
Policy, which has indemnity limits of $10 million. The provisions necessary for the determination of this issue are as follows:
The insuring Agreement of the Executive Risk Policy provides:
The Underwriter will pay on behalf of the Insured any Loss which the Insured is legally obligated to pay as a result of any Claim that is first made against the Insured during the Policy Period and reported to the Underwriter during the Policy Period or within ninety (90) days after the end of the Policy Period . . . .
The policy defines Loss as:
Defense Expenses and any monetary amount which an Insured is legally obligated to pay as a result of a Claim. Loss shall include . . . any fines assessed, penalties imposed, or punitive, exemplary or multiplied damages awarded in Claims for Antitrust Activity, but only if . . . insurable under applicable law. This paragraph shall be construed under the applicable law most favorable to the insurability of such fines, penalties and punitive, exemplary or multiplied damages. Loss shall not include:
(1)except as expressly set forth above, fines, penalties, taxes or multiplied damages;
(2)fees, amounts, benefits or coverage owed under any contract, health care plan or trust, insurance or workers' compensation policy or plan or program of self-insurance;
(3)non-monetary relief or redress in any form, including without limitation the cost of complying with any injunctive, declaratory or administrative relief; or
(4)matters which are uninsurable under applicable law.
Endorsement 5 changed the Policy to include "punitive or exemplary damages under applicable ...