Opinion
CIV. 1999-4058
July 9, 2001.
Timothy W. Bjorkman, Bjorkman Fink PC, Bridgewater, S.D., Attorney for Plaintiff.
Robert A. Lange, Davenport, Evans, Hurwitz Smith, Sioux Falls, S.D., Attorney for Defendant Principal Mutual Life Ins. Co.
MEMORANDUM OPINION AND ORDER GRANTING PRINCIPAL'S MOTION FOR SUMMARY JUDGMENT
[¶ 1] Sarah Fink alleges that Principal Mutual Life Insurance breached its insurance contract, made negligent misrepresentations, and acted in bad faith. Principal argues that Sarah was not covered under the policy at the time her claims arose and moves for summary judgment. The court grants Principal's motion for summary judgment.
FACTS
[¶ 2] Sarah is the daughter of Marvin and Margaret Fink. In 1997, Margaret resigned from her position as the Director of Nursing at Platte Community Hospital and accepted a position with Holden Village, a remote, church retreat located in Washington. Before leaving Platte Community Hospital, Margaret elected to enroll in DAKOTACARE's COBRA plan offered through the hospital. Sarah was covered under this plan because she qualified as a dependent, being under the age of 24 and a full-time student.
[¶ 3] When Margaret began her employment at Holden Village in March of 1997, Brent Wiersma, the business manager of Holden Village, informed her of the employment benefits. Initially, the Finks declined coverage under Holden Village's health insurance plan. They wished to experience Holden Village before making a longer time commitment and did not want to switch insurance companies. After several months, however, the Finks decided to remain for another year. Margaret decided to enroll in the health insurance plan offered by Holden Village through Principal.
[¶ 4] On December 13, 1997, Margaret and Marvin met with Wiersma to discuss enrolling in the plan. Wiersma filled out a portion of the application and indicated that Margaret's employment began on December 13, 1997. Wiersma then gave Margaret the application to complete. The application was completed, signed, and returned to Wiersma on December 23, 1997. Wiersma sent the application to Randy Baukol, the insurance broker, on December 26, 1997.
[¶ 5] On December 27, 1997, Sarah voluntarily admitted herself to McKennan Hospital in Sioux Falls, South Dakota. Sarah was diagnosed with schizo-affective disorder. Due to the remote location of Holden Village and the lack of outside communication, Margaret and Marvin were not aware of Sarah's hospitalization until December 29, 1997, when Marvin called relatives while in town.
[¶ 6] Upon hearing of Sarah's hospitalization, Margaret resigned her position with Holden Village and the Finks returned to South Dakota. Before leaving Holden Village, Margaret attempted to confirm that Sarah was covered under the Principal policy. Wiersma told her to contact Baukol. Margaret alleges that both Wiersma and Baukol told her that the coverage was effective December 13 or 15, 1997.
[¶ 7] On January 23, 1998, McKennan Hospital called Principal to verify Sarah's coverage. Authorization was given for the policy limits. Sarah was released from McKennan on February 4, 1998. In March of 1998, Principal contacted Margaret to determine if Sarah was a student when the policy became effective on January 13, 1998. Upon determining that Sarah was not a student on that date, Principal denied coverage.
STANDARD OF REVIEW
[¶ 8] Under Rule 56(c) of the Federal Rules of Civil Procedure, a movant is entitled to summary judgment if it can show that "there is no genuine issue as to any material fact and that [the movant] is entitled to judgment as a matter of law." Lambert v. City of Dumas, 187 F.3d 931, 934 (8th Cir. 1999). In determining whether summary judgment should issue, the court must view the evidence and inferences reasonably drawn therefrom "in the light most favorable to the nonmoving party." Lambert v. City of Dumas, 187 F.3d 931, 934 (8th Cir. 1999) (citing Enterprise Bank v. Magna Bank of Missouri, 92 F.3d 743, 747 (8th Cir. 1996)). The burden is on the moving party to establish the absence of a genuine issue of material fact and that it is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c); see also Enterprise Bank, 92 F.3d at 747; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 1356-57, 89 L.Ed.2d 538 (1986). "As to materiality . . . [o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). Once this burden has been met, the nonmoving party may not rest on the allegations in the pleadings, but by affidavit or other evidence must set forth specific facts that create a genuine issue for trial. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986).
DISCUSSION
A. Choice of Law
[¶ 9] In a diversity case, the federal court is to apply the conflict of laws rules prevailing in the state in which it sits. See Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Brown v. Home Ins. Co., 176 F.3d 1102, 1105 (8th Cir. 1999). Thus, this court will apply South Dakota's conflict of laws rules to determine which state's substantive laws govern Fink's causes of action. South Dakota applies the provisions of the Restatement (Second) of Conflict of Laws to resolve questions about which state's laws govern in a particular fact situation. See Stockmen's Livestock Exchange v. Thompson, 520 N.W.2d 255 (S.D. 1994).
[¶ 10] The first step in deciding a choice of law question is to determine the nature of the causes of action that are involved. See Drinkall v. Used Car Rentals, Inc., 32 F.3d 329, 331 (8th Cir. 1994). The law of the forum state, in this case South Dakota, controls this question. See id. In her complaint, Sarah alleges breach of contract, negligent misrepresentation and insurance bad faith. Under the law of the forum state, the first cause of action sounds in contract. The other causes of action for negligent misrepresentation and first-party insurance bad faith are recognized as tort claims in South Dakota. See Meyer v. Santema, 1997 SD 21, 559 N.W.2d 251; Gilchrist v. Trail King Indus., Inc., 2000 SD 68, 612 N.W.2d 10. Because modern conflict of laws interest analysis shows that the interests of one state having contacts with the cause of action may predominate on one issue while the interests of another may predominate on others, sometimes the laws of different states apply to different parts of the same controversy. Restatement (Second) of Conflict of Laws § 6, cmt. f (1971).
[¶ 11] 1. Breach of Contract
[¶ 12] South Dakota law provides that "[a] contract is to be interpreted according to the law and usage of the place where it is to be performed, or if it does not indicate a place of performance, according to the law and usage of the place where it is made." SDCL 53-1-4. Principal's insurance contract contains no provision for a place of performance or choice of law and thus, the court must determine where the contract was made. See Great West Cas. Co. v. Hovaldt, 1999 SD 150, 603 N.W.2d 198, 201. Unless the parties agree otherwise, the courts generally determine that an insurance contract is "made" at the place where the last act necessary to its completion is accomplished. See id.
[¶ 13] The application was offered, completed, and accepted in Washington. Therefore, the last act necessary to complete the contract took place in Washington, and thus, Washington law applies.
[¶ 14] 2. Negligent Misrepresentation and Bad Faith
[¶ 15] South Dakota applies the "most significant relationship" test to determine which state's law applies to a tort action. See Selle v. Pierce, 494 N.W.2d 634, 635-36 (S.D. 1993). The South Dakota Supreme Court has recognized that in applying the most significant relationship test, courts must consider the following:
(1) The rights and liabilities of the parties with respect to an issue in tort are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the occurrence and the parties under the principles stated in § 6.
(2) Contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:
(a) the place where the injury occurred,
(b) the place where the conduct causing the injury occurred,
(c) the domicile, residence, nationality, place of incorporation and place of business of the parties, and
(d) the place where the relationship, if any, between the parties is centered.
These contacts are to be evaluated according to their relative importance with respect to the particular issue.Id. at 636. Restatement (Second) of Conflict of Laws § 145 (1971). Under § 6, the principles are:
(1) A court, subject to the constitutional restrictions, will follow a statutory directive of its own state on choice of law.
(2) When there is no such directive, the factors relevant to the choice of the applicable rule of law include:
(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.Selle at 636; Restatement (Second), supra, § 6 (1971).
[¶ 16] In this case, South Dakota does not have a statutory directive of its own on choice of law to apply to a negligent misrepresentation or bad faith insurance cause of action. The choice of law factors, therefore, must be considered to determine the state with the most significant relationship.
[¶ 17] These causes of action accrued when Principal refused to pay health insurance benefits to Sarah. At that time, Sarah resided in South Dakota. She was hospitalized in South Dakota. The damages resulting from any negligent misrepresentation or bad faith on the part of Principal occurred in South Dakota. Neither party identified any relevant policies of the forum state or other interested state which have been applied to negligent misrepresentation or bad faith insurance tort actions. After applying the factors set forth in § 6 and § 145 of Restatement (Second) of Conflict of Laws, the court finds that South Dakota has the most significant relationship to the negligent misrepresentation and bad faith insurance claims and will apply South Dakota law to these claims.
[¶ 18] B. Causes of Action
[¶ 19] 1. Breach of Contract
[¶ 20] Principal contends that the insurance policy was not effective at the time that Sarah was admitted to the hospital, and that it did not become effective until January 13, 1998, at the earliest. The group benefit booklet indicates that applicants who request insurance more than 31 days after the date they are eligible may be required to provide proof of health. Principal argues that Margaret's coverage was not immediate because it takes time to request and process the proof of health. Because Sarah withdrew from school before the policy became effective, she would not have qualified for coverage as a dependent.
[¶ 21] Margaret contends that she became eligible for insurance benefits on December 13, 1997, and not at the time she commenced her employment because she was a temporary employee and coverage was not available to temporary employees under the policy. She claims she was a temporary employee because she was uncertain as to whether she would remain as an employee of Holden for more than one year. The policy and group benefit booklet do not define "temporary" employee. It is a general principle of contract construction that "[t]he policy must be given a practical and reasonable interpretation that fulfills the intent of the parties, that is, a construction such as would be given by the average person purchasing insurance." McMahan Baker, Inc. v. Continental Cas. Co., 843 P.2d 1133, 1136 (Wash. 1993).
[¶ 22] "Temporary," as defined by Merriam-Webster's Collegiate Dictionary, means "lasting for a limited time." Temporary employees include employees hired through a temporary agency or hired for a limited duration. See, e.g., Radiology Assocs., P.A. v. Aetna Cas. Sur. Co., 613 S.W.2d 106 (Ark. 1981) (employee hired through temporary agency to cover duties of permanent employee while on maternity leave was temporary employee); Virgil v. Digital Equipment Corp., 122 N.M. 417, 925 P.2d 883 (1996) (workers placed with employer by personnel agency are considered temporary employees); Hittel v. WOTCO, Inc., 996 P.2d 673 (Wyo. 2000) (worker placed with employer by independent contractor is temporary employee). Margaret was not an employee hired through a temporary agency, a seasonal employee or an employee hired for a limited duration to meet the needs of the employer.
[¶ 23] In March of 1997, when Margaret was initially hired, Wiersma considered Margaret a temporary employee. After a few months, however, Margaret committed to a one-year term and in Wiersma's opinion, Margaret became a permanent, full-time employee. Thus, by the summer of 1997, Margaret was not a temporary employee. Because Margaret was eligible for coverage under Holden Village's policy with Principal more than 31 days prior to her request for coverage, Principal had the option to request proof of good health and the insurance did not go into force until the proof was approved by Principal.
[¶ 24] Moreover, Sarah did not qualify as a dependent at the time the policy took effect. Under the policy, a dependent is defined as "unmarried natural or adopted children 19 years but less than 24 years of age, if supported by you, a Full-Time Student, as defined, not in the Armed Forces and not insured as Members. . . ." On January 5, 1998, Sarah officially withdrew from school, thus ceasing to be a full-time student as required for eligibility. As a result, Sarah no longer met the requirements of dependent status and therefore, was not eligible for coverage under the policy.
[¶ 25] Sarah argues that Principal is estopped from denying coverage because the employer and the insurance broker, acting as agents for Principal, allegedly assured the Finks that coverage under the Principal policy began December 13, 1997. Sarah first contends that the employer, acting through business manager Wiersma, was an agent of Principal. In determining whether an employer/policyholder is an agent of the insurer, the Court of Appeals of Washington has applied a "division of functions" analysis. See McCann v. Washington Public Power Supply System, 60 Wn. App. 353, 361, 803 P.2d 334, 338 (1991). Under this analysis, "when the plan is exclusively administered by the insurer, as a matter of law no agency relationship exists between the insurer and employer. But if the employer performs all of the administration of the policy, an agency relationship exists between the insurer and the employer, as a matter of law." Id. at 338-39.
[¶ 26] Wiersma gave the employees the applications and booklets. After the employee completed the application, Wiersma sent it to the broker. The record does not indicate that Wiersma was required to perform any other tasks in the administration of the group insurance policy, such as maintaining records of all insured employees and dependents, adding or deleting dependents, reporting details of coverage, or issuing certificates of insurance. Thus, as a matter of law, Wiersma was not acting as an agent of the insurer.
[¶ 27] Fink also contends that Randy Baukol, the insurance broker who handled Holden's account, was an agent of Principal. Baukol sold insurance for over twenty companies at the time Margaret applied for coverage. He had been appointed by Principal to sell their insurance products. He handled Holden's policy and was the person to whom Wiersma sent Margaret's application.
[¶ 28] "Generally, an insurance broker is the agent of the insured." Prosser Comm'n Co., Inc. v. Guaranty Nat'l Ins. Co., 700 P.2d 1188, 1192 (Wash.Ct.App. 1985) (citing McCann v. Reeder, 34 P.2d 461 (1934)). The Washington Court of Appeals, however, has determined that "[w]hether the broker is also the agent of the insurer is a question of fact and depends upon what he is doing and for whom when liability arises." Id. "[T]here must be some evidence or fact from which a fair inference of authorization by the insurer may be deduced in order to make the broker the agent of the insurance company." Id.
[¶ 29] Baukol handled the Holden account, but did not hold himself out as an agent of Principal. There is no evidence that the insurer authorized Baukol's actions. The court finds there is no evidence to infer that Principal authorized Baukol to make coverage representations on its behalf and therefore, Baukol was not an agent of Principal.
[¶ 30] Sarah also contends that Principal is prohibited by the Health Insurance Portability Accountability Act (HIPAA) from denying her coverage due to the fact that she was hospitalized at the time the policy became effective. HIPAA, however, does not create a private right of action. HIPAA sets forth a mechanism by which the Secretary of Health and Human Services may enforce its provisions, but does not provide a private right of action. See Means v. Independent Life Accident Ins. Co., 963 F. Supp. 1131 (M.D.Ala. 1997). See also Wright v. Combined Ins. Co. of America, 959 F. Supp. 356 (N.D.Miss. 1997); Marsh v. Omaha Printing Co., 80 F. Supp.2d 1043 (D.Neb. 1999); H.R. Conf. Rep. No. 104-736, at 198-99 (1996). Summary judgment on the HIPAA cause of action is granted.
[¶ 31] 2. Negligent Misrepresentation
[¶ 32] Sarah alleges that Principal negligently misrepresented to McKennan Hospital that she was covered under the policy effective January 13, 1997. To prove a claim of negligent misrepresentation, Sarah must show: "knowledge, or its equivalent, that the information is desired for a serious purpose; that he to whom it is given intends to rely and act upon it; that, if false or erroneous, he will . . . be injured in person or property. Finally, the relationship of the parties, arising out of contract or otherwise, must be such that in morals and good conscience the one has the right to rely upon the other for information and the other giving the information owes a duty to give it with care." Swanson v. Sioux Valley Empire Elect. Ass'n, 535 N.W.2d 755, 757 (S.D. 1995) (quoting Aesoph v. Kusser, 498 N.W.2d 654, 656 (S.D. 1993) (emphasis in original)).
[¶ 33] Though Sarah may be able to meet some of the required elements for this claim, she is unable to prove the final element — the right to rely on the information. Sarah was not covered under the policy at the time the representations were made. Principal was relying on the information given by Margaret when the representations of coverage were made. Margaret was aware of that Sarah was covered under the policy only if Sarah was a full-time student. Margaret failed to inform Principal of Sarah's change of status. Margaret, therefore, cannot in "good conscience" rely on the representations made by Principal. Summary judgment on this issue is granted.
[¶ 34] 3. Bad Faith
[¶ 35] Sarah has also alleged that Principal acted in bad faith when it denied her claims.
"[F]or proof of bad faith, there must be an absence of a reasonable basis for denial of policy benefits and the knowledge or reckless disregard [of the lack] of a reasonable basis for denial. . . ." Walz v. Fireman's Fund Ins. Co., 1996 SD 135, 556 N.W.2d 68, 70 (quoting Champion v. United States Fidelity Guar. Co., 399 N.W.2d 320, 324 (S.D. 1987)). "An insurance company may, however, challenge claims which are fairly debatable and will be found liable only where it has intentionally denied (or failed to process or pay) a claim without a reasonable basis." Stene v. State Farm Mut. Auto. Ins. Co., 1998 SD 95, 583 N.W.2d 399, 403 (citing Walz, 1996 SD 135, 556 N.W.2d at 70).
[¶ 36] Sarah was not eligible for coverage under the policy as a dependent because she was not a full-time student. As a result, a reasonable basis for denying the claims existed and summary judgment on this issue is granted.
[¶ 37] Accordingly, it is hereby
[¶ 38] ORDERED that Principal's motion for summary judgment (Docket 83) is granted.