San Joaquin Valley Insurance Authority v. Gallagher Benefit Services, Inc.

          ORDER DENYING GALLAGHER BENEFIT SERVICES INC.'S MOTION FOR SUMMARY JUDGMENT OR, ALTERNATIVELY, PARTIAL SUMMARY JUDGMENT (ECF NO. 53)

         Plaintiff San Joaquin Valley Insurance Company (“the SJVIA”), a joint powers authority, filed suit against its former benefits consultant Gallagher Benefit Services, Inc., (“GBS”) on May 11, 2017, in California state court alleging causes of action under California law for (1) professional negligence/malpractice, (2) negligent misrepresentation, (3) breach of written contract, (4) breach of implied covenant of good faith and fair dealing, and (5) violations of California's Unfair Competition Law, Bus. § Prof Code § 17200 et seq. (ECF No. 1-1.) GBS removed the suit to this Court on June 28, 2017. (ECF No. 1.)

         On August 16, 2019, GBS filed the instant motion for summary judgment, or, alternatively, partial summary judgment (“motion”) seeking adjudication of the following issues: (1) whether GBS is entitled to summary judgment due to the SJVIA's failure to adduce evidence of legally cognizable damages; and (2) whether, in the alternative, GBS is entitled to partial summary judgment that amounts of additional premium that the SJVIA could have charged in the past, and any corresponding amount of plan underfunding, do not constitute damages caused by GBS's conduct. (ECF No. 53.) For the following reasons, GBS's motion is DENIED.

         I. FACTUAL BACKGROUND

         Each party filed detailed statements of fact, as well as a response to the other's statement.^[1]The Court has reviewed these statements and determines that the following facts and, where noted, factual disputes, are pertinent to the resolution of this motion.^[2]

         A. The SJVIA

         The SJVIA is a joint powers authority, under Title 1, Division 7, Chapter 5, Article 1 of the California Government Code, made up of public agencies with the desire to join together for the purpose of negotiating, purchasing, and funding health, pharmacy, vision, dental, and life insurance for the employees of its public agencies. The two founding members of the SJVIA are the County of Fresno and the County of Tulare. The SJVIA is governed by a Board of Directors made up of publicly elected representatives from the County of Fresno (four board members) and the County of Tulare (three board members).

         GBS describes the SJVIA as follows: the SJVIA is a self-funded medical arrangement in which the employer, or risk-pool, is liable for all claims payable under the plan. The SJVIA members are responsible for funding the SJVIA's claim expenses and reserves through member-paid premiums. In each year, a self-funded plan like the SJVIA would ideally collect enough premiums to pay its fixed costs and all the claims submitted by its members, while also maintaining a level of reserves for unanticipated expenses or other liabilities, such as already incurred but not yet reported (“IBNR”) claims. As a self-funded plan, the SJVIA bears the risk of its members' claims experience. Indeed, according to GBS, the chief reason the SJVIA exists at all is to reduce costs for its members.

         When the SJVIA was originally formed, Fresno County and Tulare County agreed to share solely fixed costs. At the time of the SJVIA's formation. The SJVIA contemplated the possibility of expanding membership to cover other public agencies, and of changing to a “risk sharing” arrangement covering all costs. In 2012, the SJVIA stopped sharing only fixed costs and moved to a “risk sharing” arrangement covering all costs. In 2012, the SJVIA began to add more government entities into its risk pool as members beyond its two founders, adding 23 new non-founder members as of mid-2016.

         For its part, the SJVIA disputes GBS's characterization of how the self-insured plan works to the extent it conflates the SJVIA and its members. According to the SJVIA, it, and not the members, is liable for the cost of claims that exceed premiums paid. This is so because, pursuant to Government Code section 6507, as a joint powers authority, the SJVIA is a public entity separate from the parties to the joint powers agreement. And pursuant to the joint powers agreement that established the SJVIA (“JPA”), the debts, liabilities, or obligations of the SJVIA are the debt, liabilities, or obligations of the SJVIA alone, and shall not constitute the debt, liabilities, or obligations of the parties to the agreement, i.e., the County of Fresno and the County of Tulare. Moreover, according to the SJVIA, there is nothing in the participation agreements that indicates that the members are liable for the cost of claims that exceed premiums paid.

         The SJVIA also disputes GBS's characterization of the goals of the plan, i.e, collecting premiums from its members no greater than the amount necessary to pay fixed expenses and member claims for the applicable period plan year with sufficient reserves set aside for the potential of unexpectedly high future expenses.

         B. GBS as Benefits Consultant for the SJVIA

         GBS provided benefits consulting services to the SJVIA from January 1, 2010, through December 31, 2016. GBS's contractual requirements included, but were not limited to, strategic planning, financial monitoring and reporting, and developing initial renewal rates using actuarial models and performing the required actuarial valuations. Each year, the SJVIA Board was presented with GBS's premium rate recommendations.

         From at least 2010 until 2013, the SJVIA's premiums placed it in a positive net position, in which it was able to cover its expenses and claims experience, as well as having excess funds for reserves.^[3]

         At the end of Plan Year 2012, the SJVIA's total reserves were $11, 198, 875. According to GBS, for plan year 2013, GBS advised the SJVIA that it had the option to buy down its premium rates by using some of the funds the SJVIA collected above what was needed to pay for its liabilities and claims, and the SJVIA took that option, using $2, 948, 235 in reserves to buy down rates. According to the SJVIA, however, this $2, 948, 235 amount represented all-not some-of its reserves.

         At the end of plan year 2013, the SJVIA's total reserves were $10, 764, 377. According to GBS, for plan year 2014, GBS advised the SJVIA that it had the option to buy down its premium rates by using some of the funds SJVIA had collected above what was needed to pay for its liabilities and claims, and the SJVIA took that option, using $2, 609, 713 in reserves to buy down rates. Again, according to the SJVIA, the $2, 609, 713 amount actually represented all reserves above what was needed to pay liabilities and claims, as well as an amount the SJVIA needed to pay their IBNR.

         At the end of plan year 2014, the SJVIA's total reserves were $8, 244, 080. The parties dispute whether the SJVIA could have raised rates to build additional reserves from 2012 to 2014 without some members seeking coverage elsewhere.

         According to GBS, for plan year 2015, GBS advised the SJVIA that it had the option to buy down its premium rates by using some of the funds the SJVIA had collected above what was needed to pay for its liabilities and claims, and the SJVIA took that option, using $5, 366, 484 in reserves to buy down the rates. Again, according to the SJVIA, the $5, 366, 484 amount represented all reserves above what was needed to pay liabilities and claims, as well as an amount the SJVIA needed to pay their IBNR. As a result of the buy down for renewal year 2015, premium rates increased less than 1.2% instead of 7.3%.

         C. The SJVIA's funding crisis and the potential for migration

         In plan year 2015, the SJVIA's claims experience exceeded GBS's projections. The parties dispute the cause for the underfunding. The SJVIA maintains that GBS caused the underfunding through its negligent recommendations and advice, while the SJVIA appears to blame SJVIA's unanticipated high claim experience in 2015. The increased expenses in 2015 resulted in the SJVIA using reserves to pay a portion of the claims expenses, above and beyond the funds already used to buy down 2015 premiums.

         According to GBS, for plan year 2016, it presented multiple options to the SJVIA Board, some of which included use of plan reserves to reduce premiums and some which did not. The SJVIA does not dispute this but states that the options proffered by GBS involving use of plan reserves to reduce premiums envisioned the use of all plan reserves above what was needed to pay liabilities and claims-not just some of them.

         The SJVIA Board decided to follow one of GBS's proposals that used a buy down to adopt a modest premium increase for 2016. While the SJVIA disputes that it, as an entity separate from its members, received any benefit from the rate buy downs in 2013, 2014, 2015, and 2016, there is no dispute that had the SJVIA not bought down rates in Plan Years 2013, 2014, 2015, and 2016, its premium rates for members would have been higher by an amount corresponding to the buy downs.

         Employees of some SJVIA members were able to select, instead of the SJVIA self-funded plan, an option offered by Kaiser Permanente (“Kaiser”) through their SJVIA-member employer. The parties dispute whether the Kaiser plan had a lower premium rate than that offered by the SJVIA's self-insured plan.

         In 2014, the SJVIA entered into negotiations with Kaiser to adjust rates so as to keep the SJVIA self-funded option competitive with the Kaiser option from a rate perspective. The SJVIA disputes that it directed GBS towards a strategy of setting the rates below actuarially sound levels in order to compete with the Kaiser plan. Kaiser migration took place in 2015, ...