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Health Net, Inc v. Rli Insurance Company et al

May 22, 2012

HEALTH NET, INC., PLAINTIFF AND APPELLANT,
v.
RLI INSURANCE COMPANY ET AL., DEFENDANTS AND RESPONDENTS.



(Los Angeles County Super. Ct. No. BC357436) APPEAL from judgments of the Superior Court of Los Angeles County, Carolyn J. Kuhl, Judge. Reversed.

The opinion of the court was delivered by: Croskey, Acting P. J.

CERTIFIED FOR PUBLICATION

In this insurance coverage dispute, Health Net, Inc. (HN-INC) brought suit against four of its insurers (one primary and three excess carriers) seeking a declaratory judgment that the insurers had a duty to defend and indemnify it in over 20 underlying actions. The parties, however, directed their attention to two specific underlying actions, as the amount of indemnity sought in those actions would far exceed the combined policy limits of the defendant insurers. Relying on a policy exclusion for dishonest acts, the trial court granted summary adjudication to the insurers with respect to HN-INC's claim for reimbursement of its defense costs and the costs of settling the specified underlying actions. The parties subsequently settled their dispute regarding the remaining underlying actions, and summary judgment was granted in favor of the carriers. HN-INC appeals.*fn1

On appeal, we first address whether the two underlying actions at issue sought damages covered by HN-INC's insurance policies; we conclude that the great bulk of the claims asserted in the underlying actions were not covered, but there was a potential for coverage for some of them. Second, we turn to the dishonest acts exclusion, and consider whether it bars, as a matter of law, coverage for all of the otherwise covered claims in the underlying actions; we conclude that, while it appears that the dishonest acts exclusion was triggered with respect to the underlying actions, the exclusion bars coverage only for those claims alleging dishonest acts, not the entirety of the underlying actions.*fn2 As some claims for indemnity and defense costs relating to the two underlying actions at issue remain, we reverse the summary judgment.

FACTUAL AND PROCEDURAL BACKGROUND

The resolution of this appeal requires consideration of the allegations of the underlying actions at issue, and the specific relationship between certain claimed dishonest acts and the allegations in those actions. We begin with a detailed discussion of the underlying facts and procedure.

1. Entities and Alleged Practices

We are concerned with HN-INC and various of its subsidiaries, particularly Health Net of the Northeast, Inc. (HN-NE) and Health Net of New Jersey, Inc. (HN-NJ). At times, the record refers to all Health Net entities collectively; when we do so, we will use the abbreviation "HN."

HN is a health insurer.*fn3 It insures individuals through health plans provided by their employers. As all of HN's insurance plans at issue are provided by employers, the plans are subject to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). There is a relevant distinction between HN plans provided for small employers (less than 50 employees), and those provided by large employers (50 or more employees). This is because there is a New Jersey regulation which specifically applies to small employer health plans in New Jersey. (N.J.A.C. § 11:21-7.13 (NJ regulation).) We will refer to plans subject to such NJ regulation as "small NJ plans."

As we will discuss, the underlying actions involve various allegations against HN-INC and its subsidiaries. In order to simplify the discussion, we will identify the different types of allegations made against HN, before identifying which allegations were made in each action.

a. Allegations Relating to Adjustment of Out of Network Claims

Under HN's plans, subscribers and beneficiaries can obtain medical services from health care practitioners within HN's preferred network and from those outside of the network (ONET). The underlying cases are concerned with HN's practices of calculating the amount it will reimburse its subscribers and beneficiaries for ONET medical services. There are, broadly speaking, three categories of alleged wrongdoing with respect to the calculation of ONET reimbursement which are at issue in the underlying actions.

(1) Allegations that the Ingenix Databases are Systematically Flawed

While each HN plan uses somewhat different language, the plans, in general, provide for reimbursement for ONET services at some established percentage of the usual, customary and reasonable charge (UCR) for those services. In determining the UCR for any particular medical procedure, HN uses one or more databases provided by a company called Ingenix. Ingenix is itself owned by another health insurer, and it has been alleged that the Ingenix databases are inherently flawed and impermissibly skewed in favor of lower UCRs.*fn4 For example, it has been alleged that the Ingenix data compilation practices: (1) only include data submitted by insurance companies; (2) exclude higher charges as outliers; (3) fail to take into account the education and experience of the practitioners providing the services; and (4) calculate geographic area by the first three digits of a zip code, rather than properly considering the community in which the service is provided. We refer to such allegations collectively as allegations that the Ingenix databases are systematically flawed.

(2) Allegations that HN Uses Outdated Databases

Ingenix updates its databases every six months. At some point, two or more HN entities, including HN-NE and HN-NJ, chose to not use the updated Ingenix databases in their calculation of UCR. Indeed, HN-NE and HN-NJ continued to use a 1998 Ingenix database well into 2000. Thereafter, they briefly used an updated database, only to "rollback" their ONET reimbursement rates to those supported by the 1998 database in the summer of 2001.*fn5 This violated New Jersey law, at least with respect to small NJ plans, as the NJ regulation mandated that small NJ plans use the current Ingenix database. We refer to allegations that HN entities used the 1998 database beyond 1998 as allegations related to the use of an outdated database.

(3) Allegations of Non-Ingenix Adjustment Misconduct

There is a third set of allegations of alleged adjustment misconduct at issue in this case. It is alleged that HN's reimbursement practices for ONET claims were improper in ways unrelated to the use of the Ingenix databases. For example, it is alleged that HN improperly reduced reimbursement for a second procedure carried out on the same day as an initial procedure, even if the two were unrelated. It is also alleged that HN improperly reduced reimbursement for assistant surgeons, and under-reimbursed for mental health services and emergency room services. We refer to such allegations collectively as allegations of non-Ingenix adjustment misconduct.

b. Allegations Relating to ERISA Obligations

ERISA imposes several obligations on employee benefit plans. There are three types of ERISA obligations at issue in the underlying actions.

(1) Obligation to Provide a Full and Fair Review

ERISA mandates that every plan shall provide adequate written notice to any participant or beneficiary whose claim for benefits has been denied, setting forth the specific reasons for the denial. (29 U.S.C. § 1133(1).) The plan shall also afford a reasonable opportunity for "a full and fair review" to any participant whose claim for benefits has been denied. (29 U.S.C. § 1133(2).) We refer to these obligations collectively as the obligation to provide a full and fair review.

(2) Obligation to Make Disclosures

ERISA requires that a "summary plan description" of an employee benefit plan be furnished to participants and beneficiaries; the summary plan description is required, by statute, to include certain specific information regarding the participants' rights and obligations under the plan. (29 U.S.C. § 1022.) We refer to this and similar obligations collectively as the obligation to make disclosures.

(3) Fiduciary Duties

ERISA requires every employee benefit plan to designate one or more named fiduciaries to control and manage the plan. (29 U.S.C. § 1102(a)(1).) The fiduciaries are required to discharge their duties "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." (29 U.S.C. § 1104(a)(1)(B).) ERISA also indicates that a fiduciary shall discharge its duties with respect to the plan solely in the interest of the participants and beneficiaries and "in accordance with the documents and instruments governing the plan . . . . "*fn6 (29 U.S.C. § 1104(a)(1)(D).) We discuss these obligations collectively as fiduciary duties.

2. The Underlying Proceedings

The two underlying actions, coverage for which is at issue in this case, are referred to as the Wachtel action and the McCoy action. Simultaneous to the proceedings in these actions, and quite relevant to them, is an investigation by the New Jersey Department of Banking and Insurance (NJ-DOBI) into HN-NJ's use of outdated data, which resulted in two consent orders. Although it did not occur first in time, we begin our discussion of the underlying proceedings with the NJ-DOBI investigation.

a. The NJ-DOBI Investigation

In 2002, the NJ-DOBI first learned of HN-NJ's use of an outdated database.*fn7 When the NJ-DOBI confronted HN-NJ with the NJ regulation, HN-NJ ceased using the out-of-date database and promised to reprocess all affected claims. HN-NJ informed the NJ-DOBI that it had used the outdated database from July 1, 2001 (i.e., when it chose to do the "rollback") and therefore reprocessed only claims based on services rendered after that date. It did not disclose to the NJ-DOBI that it had used an outdated database in 1999 and 2000, as well. HN-NJ entered into a consent order with the NJ-DOBI agreeing to make the necessary repayments relating to claims from July 2001 onward, and to pay a $60,000 fine.

As the Wachtel and McCoy actions proceeded in the United States District Court for the District of New Jersey, HN engaged in certain discovery abuses apparently calculated to avoid revealing that the NJ-DOBI consent order rested upon misinformation regarding the scope of HN's wrongdoing. HN would be sanctioned for these discovery abuses.

In 2005, the NJ-DOBI finally learned of the full scope of HN-NJ's use of outdated data. This led to an examination of HN-NJ, in which NJ-DOBI investigators discovered problems relating to the use of outdated databases dating back to 1995. Investigators discovered $14.4 million in underpayments; full restitution would require an additional payment of $11.6 million in interest. In a consent order dated August 26, 2008, HN-NJ agreed to make full restitution - both to small NJ plan ...


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