United States District Court, E.D. California
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, ...