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Homeland Insurance Company of New York v. Corvel Corp.

Superior Court of Delaware

January 5, 2018

HOMELAND INSURANCE COMPANY OF NEW YORK, Plaintiff,
v.
CORVEL CORPORATION, Defendant. CORVEL CORPORATION, Plaintiff,
v.
HOMELAND INSURANCE COMPANY OF NEW YORK, Defendant.

          Submitted: November 17, 2017

         Upon CorVel Corporation's Motion for Summary Judgment GRANTED IN PART

         Upon Homeland Insurance Company of New York's Motion for Summary Judgment DENIED IN PART

          MEMORANDUM OPINION

          The Honorable Andrea L. Rocanelli

         Before the Court are cross-motions for summary judgment filed by CorVel Corporation ("CorVel") and Homeland Insurance Company of New York ("Homeland"). CorVel contends that Homeland committed bad faith under a Louisiana statute ("Louisiana Bad Faith Statute") by knowingly "misrepresenting pertinent facts or insurance policy provisions relating to any coverages at issue."[1]Homeland challenges both the applicability of the Louisiana Bad Faith Statute and the merits of CorVel's bad faith claim. This is the Court's decision on CorVel and Homeland's cross-motions for summary judgment.

         Factual and Procedural Background

         I. The Parties

         CorVel is a Delaware corporation that owns and operates a Preferred Provider Organization ("PPO") network throughout the United States.[2] CorVel entered into a number of PPO agreements with providers in Louisiana, which has a statute providing certain notice requirements that a PPO must meet when it applies a discount ("Louisiana PPO Statute").[3] If a PPO fails to comply with the Louisiana PPO Statute's notice requirements, it can be subjected to financial consequences.[4]

          Homeland is an insurance company incorporated in New York. Homeland issued a Managed Care Organizations Errors and Omissions Liability Policy to CorVel for a policy period of October 31, 2005 to October 31, 2006 ("Homeland Policy"). The Homeland Policy was subsequently renewed for two continuous policy periods of October 31, 2006 to October 31, 2007 and October 31, 2007 to December 1, 2007. The Homeland Policy was a "claims-made" policy, which provided:

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 either during the Policy Period or in any event within ninety (90) days after the end of the Policy Period…[5]

         II. The Louisiana Arbitration Action

         In December 2006, a Louisiana hospital initiated a class action arbitration ("Louisiana Arbitration Action") against CorVel, alleging that CorVel violated the notice requirements of the Louisiana PPO Statute. On March 28, 2007, CorVel's director of legal services, Sharon O'Connor, called Homeland's claims administrator, Virginia Troy, to notify Homeland of the claim asserted against CorVel in the Louisiana Arbitration Action. On the same day, O'Connor sent Troy documents relating to the Louisiana Arbitration Action, including: (1) a December 4, 2006 letter from counsel for the class notifying CorVel of the class's intention to initiate the Louisiana Arbitration Action; (2) an engagement letter confirming CorVel's engagement of counsel in connection with pending litigation and "related arbitration proceeding;" and (3) a letter from CorVel's counsel to the Case Manager for the American Arbitration Association regarding the pending Louisiana Arbitration Action.[6]

         In December 2010, CorVel sought permission from Homeland to settle the Louisiana Arbitration Action for the policy limits of the Homeland Policy.[7]However, Homeland did not consent to a settlement. Furthermore, Homeland never provided a coverage determination to CorVel.

         III. Homeland's Delaware Declaratory Judgment Action

         Homeland filed a declaratory judgment action in this Court on January 10, 2011 ("Delaware Declaratory Judgment Action") seeking a declaration that there was no coverage for the Louisiana Arbitration Action under the Homeland Policy. Homeland contended that there was no coverage for four reasons: (1) coverage was barred by a prior proceedings exclusion in the Homeland Policy; (2) the claim was first made before the policy period; (3) CorVel failed to report the Louisiana Arbitration Action in compliance with the reporting requirements of the Homeland Policy; and (4) the Louisiana Arbitration Action sought recovery of penalty damages that would not qualify as an insured loss under the Homeland Policy.[8]

         IV. CorVel's Settlement

         On March 24, 2011, CorVel and Homeland[9] were named as defendants in a class action already filed in Louisiana state court alleging the same violations of the Louisiana PPO Statute ("Louisiana Class Action").[10] Shortly thereafter, CorVel notified Homeland that it agreed to settle the Louisiana Arbitration Action and the Louisiana Class Action.[11] On June 23, 2011, CorVel entered into a settlement agreement with the Louisiana Class for $9 million and an assignment of CorVel's insurance claim against Homeland.[12] Thereafter, the Louisiana Class continued to litigate against Homeland[13] in Louisiana ("Louisiana Coverage Action"), and the Delaware Declaratory Judgment Action and the Louisiana Coverage Action continued on parallel tracks.

         V. Conflict Between Delaware and Louisiana on Penalty Issue

         On June 13, 2013, the Delaware Superior Court granted partial summary judgment to Homeland in the Delaware Declaratory Judgment Action, concluding that the damages available under the Louisiana PPO Statute were an uninsurable penalty rather than a covered loss.[14] However, seven weeks later, the Louisiana trial court reached the opposite conclusion in the Louisiana Coverage Action. The Louisiana trial court granted partial summary judgment to the Louisiana Class, holding that the damages available under the Louisiana PPO Statute were covered damages, not uninsurable penalties.[15] As a result, on April 2, 2015, the Delaware Supreme Court reversed the Delaware Superior Court's order and deferred to Louisiana's interpretation of its own statute as a matter of comity.[16]

         VI. CorVel's Bad Faith Action

         On May 8, 2015, CorVel commenced its own action in this Court, alleging breach of contract for Homeland's refusal to provide indemnification and defense pursuant to the terms of the Homeland Policy. CorVel subsequently amended its complaint to add a claim for violation of Homeland's duty of good faith and fair dealing. The Court consolidated the Delaware Declaratory Judgment Action and CorVel's action on July 7, 2015 ("Delaware Consolidated Action").

         VII. Louisiana Finds Coverage

         On January 21, 2016, the Louisiana trial court granted summary judgment to the Louisiana Class in the Louisiana Coverage Action, finding that there was coverage under the Homeland Policy for the claims made under the Louisiana PPO Statute.[17] The Louisiana trial court first found that the Louisiana Arbitration Action was made and reported during the policy period of the Homeland policy.[18] The court then considered Homeland's argument that there was no coverage because the claims in the Louisiana Arbitration Action were related to prior claims made before the policy period of the Homeland Policy.[19] The Louisiana trial court rejected Homeland's argument because, even though the claims were factually similar, the previously filed claims could not possibly have been covered claims under Homeland's policy.[20] As a result, the Louisiana trial court entered judgment in favor of the plaintiff class on February 5, 2016 for $10 million plus interest.[21]

         Homeland appealed to the Louisiana Court of Appeal for the Third Circuit, and this Court stayed the Delaware Consolidated Action pending the outcome of the appeal in Louisiana.[22] On December 29, 2016, the Louisiana Court of Appeal affirmed the Louisiana trial court's decision finding coverage.[23] Homeland filed an Application for a Writ of Certiorari with the Louisiana Supreme Court, which was denied on April 13, 2017.[24] On April 21, 2017, Homeland paid the class $12, 439, 383.56 to satisfy the judgment and the interest owed.[25]

         VIII. Status of Delaware Consolidated Action

         On July 6, 2017, this Court held an office conference to clarify the status of the Delaware Consolidated Action in light of the coverage ruling from Louisiana. The parties agreed that the Louisiana coverage ruling rendered Homeland's coverage claims moot in the Delaware Consolidated Action. The Court subsequently issued an Order lifting the stay and providing that "the claim of bad faith is the only remaining claim to be resolved in this action."[26]

         Pursuant to the Court's Order, the parties engaged in extensive briefing on the bad faith claim. CorVel moves for summary judgment, contending that Homeland committed bad faith under the Louisiana Bad Faith Statute. Homeland also moves for summary judgment, contending that the Louisiana Bad Faith Statute does not apply, and challenging the merits of CorVel's bad faith claim. This is the Court's decision on CorVel and Homeland's cross-motions for summary judgment in the Delaware Consolidated Action.

         Standard of Review

         The Court may grant summary judgment only where the moving party can "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."[27] The moving party bears the initial burden of proof and, once that is met, the burden shifts to the non-moving party to show that a material issue of fact exists.[28] At the motion for summary judgment phase, the Court must view the facts "in the light most favorable to the non-moving party."[29] Where the parties have filed cross-motions for summary judgment and both argue that there are no existing issues of material fact, the Court shall treat the motions as a stipulation for decision on the merits based on the record submitted with the motions.[30]

         Choice of Law Analysis

         CorVel brought its bad faith claim solely under the Louisiana Bad Faith Statute.[31] Therefore, before evaluating the merits of CorVel's bad faith claim, the Court must first determine if Louisiana law applies.

         I. The Parties' Positions on Choice of Law

         Before conducting the choice of law analysis, the Court notes that both Homeland and CorVel argue that choice of law has already been decided in this case, but reach opposite conclusions. Therefore, the Court will first address the parties' positions on choice of law.

         A. Homeland's Position that Delaware Law Controls

         Homeland argues that Delaware law controls the bad faith claim for two reasons. First, Homeland argues that Delaware law controls because, during the appeal of the penalty issue before the Delaware Supreme Court, CorVel conceded that Delaware law applied to the construction of the insurance policy.[32] The Court rejects this argument. The Supreme Court's opinion dealt solely with the limited question of whether the damages available under the Louisiana PPO Statute were an uninsurable penalty or a covered loss.[33] To that end, the Supreme Court noted that "the parties may have agreed for purposes of this appeal that Delaware law applies to the construction of the policy."[34] Any concession CorVel made regarding choice of law was limited to the context and subject matter of the Supreme Court's narrow review, and does not control choice of law for the bad faith claim.

         Second, Homeland argues that Delaware law controls based on the Delaware Supreme Court's decision in Certain Underwriters at Lloyds, London v. Chemtura Corporation.[35] Chemtura dealt with which state's law should apply to the interpretation of an insurance policy that covered risks nationwide.[36] The Superior Court used the Second Restatement's "most significant relationship" framework for its choice of law analysis and concluded that the "site-of-the-risk" should determine which state's law applies.[37] In other words, where an insurance policy insures against risks nationwide, the Superior Court held that the "underlying contract law of the states where the [] claims arose would govern on a claim-by-claim basis."[38]The Delaware Supreme Court reversed, holding that the courts should use the "most significant relationship" framework to find one consistent body of law that will apply no matter where the claim arises so that the policies will not be "read in fundamentally different ways in different cases, based on the happenstance of where … potential liability results in litigation."[39]

         Homeland relies on Chemtura to argue that Louisiana law should not apply to the interpretation of the insurance contract simply because the underlying claim arose in Louisiana. Rather, according to Homeland, the Court should apply a consistent body of law, Delaware law, no matter where the claim arises.[40] However, Homeland's reliance on Chemtura is misplaced. In Chemtura, the insured sought coverage for similar claims arising in multiple states.[41] In the underlying litigation of this case, CorVel sought coverage for one claim brought solely in Louisiana for violation of a Louisiana statute that does not apply outside of Louisiana. In addition, while Chemtura was a coverage dispute, this is a bad faith claim after coverage has already been determined. Therefore, Chemtura does not require that this Court must apply Delaware law to the bad faith claim.

         B. CorVel's Position that Louisiana Law is the Law of the Case

         CorVel relies on Premier Parks, Inc. v. TIG Insurance Company[42] to argue that Louisiana law is the law of the case, and should therefore be applied to the bad faith claim. In Premier Parks, the parties cross-moved for summary judgment in a declaratory judgment action on a coverage issue.[43] During an earlier phase of the litigation, the Superior Court had determined that Oklahoma law applied to the interpretation of the insurance contract.[44] Therefore, the Court recognized that its prior holding was "the law of the case" and continued to apply Oklahoma law to the insurance policy.[45]

         Relying on Premier Parks, CorVel argues that the Delaware Supreme Court, this Court, and the Louisiana courts have already applied Louisiana substantive law to the coverage claims, so Louisiana law is the law of the case. However, unlike in Premier Parks, no court has yet made a choice of law determination for either the coverage dispute or the bad faith claim.[46] In addition, choice of law determinations on the coverage issues would not necessarily control which state's law applies to the bad faith claim. Therefore, it remains necessary for this Court to conduct a choice of law analysis to determine which state's law applies to the bad faith claim.

         II. Delaware's Choice of Law Rules

         Because Delaware is the forum, the Court will apply Delaware's choice of law standards to determine which state's law applies to the bad faith claim.[47] In both contract and tort disputes, Delaware courts determine which state's law has the "most significant relationship" to the dispute pursuant to the Second Restatement's choice of law framework.[48] However, the Court considers different factors depending on whether the dispute sounds in contract or tort.[49] Delaware courts typically ground a bad faith cause of action in contract.[50] Therefore, the Court will apply the Second Restatement's choice of law framework for contract disputes.

         There are three components to the Second Restatement's "most significant relationship" analysis for choice of law in contract disputes: "(i) determining if the parties made an effective choice of law through their contract; (ii) if not, determining if there is an actual conflict between the laws of the different states each party urges should apply; and (iii) if so, analyzing which state has the most significant relationship."[51]

         When determining the "most significant relationship" in a contract dispute, the Second Restatement lists five factors for the Court to consider ("Contract Factors").[52] The Contract Factors are:

(a)the place of contracting,
(b)the place of negotiation of the contract,
(c)the place of performance,
(d)the location of the subject matter of the contract, and
(e)the domicil, residence, nationality, place of incorporation and place of business of the parties.[53]

         The Contract Factors are meant "to be evaluated according to their relative importance with respect to the particular issue."[54]

          In addition, the Court should conduct its analysis "in light of the Second Restatement's general considerations found in § 6 that 'underlie all rules of choice of law and are used in evaluating the significance of a relationship, with respect to the particular issue, to potentially interested states, the transaction and the parties.'"[55]The general considerations of choice of law listed in the Second Restatement are:

(a)the needs of the interstate and international systems,
(b)the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d)the protection of justified expectations,
(e)the basic policies underlying the particular field of law,
(f)certainty, predictability and uniformity of result, and
(g)ease in the determination and application of the law to be applied.[56]

         III. Choice of Law Determination in this Case

         The Court will apply the three steps to determining choice of law in a contract dispute to determine which state's law applies to the bad faith claim.[57] First, Homeland and CorVel did not make a choice of law determination in the insurance contract. Therefore, the contract provisions do not dictate choice of law for the bad faith claim.

         Second, the Court must determine if there is an actual conflict between the laws of Delaware and Louisiana, which Homeland and CorVel respectively argue apply to the bad faith claim. In Delaware, the standard for bad faith is generally dictated by case law.[58] The Delaware Supreme Court has held that an insured has a cause of action for bad faith when "an insurer refuses to honor its obligations and clearly lacks reasonable justification for doing so."[59] By contrast, Louisiana bad faith claims are controlled by the Louisiana Bad Faith Statute.[60] The Louisiana Bad Faith Statute expressly defines conduct constituting bad faith, and such conduct does not typically require a "reasonable justification" element.[61] In addition, the Louisiana Bad Faith Statute provides for a mandatory award of damages and a discretionary penalty for bad faith conduct.[62] Therefore, the Court finds that there is an actual conflict between the bad faith law in Delaware and Louisiana. As a result, the Court must determine which state's law has the "most significant relationship" to the bad faith claim by analyzing the Contract Factors and the general choice of law principles contained in the Second Restatement.[63]

         It is unclear where the underlying insurance contract was entered into or negotiated.[64] The contract at issue was a Managed Care Organizations Errors and Omissions Liability Policy issued by Homeland to CorVel to insure against risks CorVel faced while operating its PPO network. To that end, the location of the subject matter of the contract would theoretically be wherever a potential claim against CorVel could arise.[65] Similarly, because the nature of the insurance contract was to insure against nationwide risks, it is not clear that the parties contemplated a singular "place of performance" in the contract.[66] With respect to the parties' locations, CorVel is incorporated in Delaware and has its principal place of business in California. Homeland is incorporated in New York and, at the time of filing its Delaware Declaratory Judgment Action, had its principal place of business in Massachusetts.[67] Thus, where there is no obvious location of the subject matter of the contract or place of performance, and where the parties do not share any important locations in common, the Court finds that the Contract Factors do not suggest which state has the "most significant relationship" to the bad faith claim.

         Therefore, to determine which state has the "most significant relationship" to the bad faith claim, the Court turns to the general choice of law principles contained in the Second Restatement.[68] Of these, the Court finds that it is particularly relevant to consider the policies and interests of the states whose law is argued to apply.[69] To this end, the Court notes that Louisiana has a particular interest in the application of Louisiana law to this bad faith claim. The underlying coverage claim was brought in Louisiana by a Louisiana hospital for a violation of a Louisiana statute that does not apply outside Louisiana. Thus, without Louisiana law, the underlying coverage claim giving rise to this bad faith claim would not have existed. Louisiana has an interest in ensuring that insurers faced with coverage claims in Louisiana follow its laws, or face the consequences associated with not doing so.[70]

         This view is consistent with the Delaware Supreme Court's opinion addressing the penalty issue. There, the Court observed that there was "very little connection to the State of Delaware" because the "only nexus with the State of Delaware is CorVel's situs of incorporation."[71] By contrast, the Court stated that the "connection this litigation has with the State of Louisiana is much stronger" because the litigation began with a Louisiana hospital alleging a violation of a Louisiana law.[72] Therefore, after considering the Contract Factors and the general principles underlying choice of law determinations from the Second Restatement, the Court finds that Louisiana has the "most significant relationship" to the bad faith claim and will apply the Louisiana Bad Faith Statute.

         Discussion

         The Louisiana Bad Faith Statute provides in relevant part:

A. An insurer, including but not limited to a foreign line and surplus line insurer, owes to his insured a duty of good faith and fair dealing. The insurer has an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims with the insured or the claimant, or both. Any insurer who breaches these duties shall be liable for any damages sustained as a result of the breach.
B. Any one of the following acts, if knowingly committed or performed by an insurer, constitutes a breach of the insurer's duties imposed in Subsection A of this Section:
(1) Misrepresenting pertinent facts or insurance policy provisions relating to any ...

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