Insurers Must Avoid the Gastonette; Insurer’s Duty is to the Insured

Insurance policies of all types have contribution or excess clauses. Sometimes the clauses conflict and when two insurers insure the same risk both will claim that the responsibility lies with the other. In Central States, Southeast and Southwest Areas Health and Welfare Fund v. First Agency, Inc. — F.3d —, 2014 WL 2933225 (C.A.6 (Mich.)) Central States and Guarantee Trust both issued insurance coverage for the same claims.

Central States’ contract says that it will pay only if Guarantee Trust does not. Guarantee Trust’s contract insists that it will pay only if Central States does not. The Third Circuit Court of Appeal was called upon to break this “you first” paradox. The paradox has been called a gastonette [which can be defined as a dilatory “dance” in which each of two responsible parties waits until the other party acts – so that the delay seems interminable; esp., a standoff occurring when two courts simultaneously hear related claims arising from the same bases and delay acting while each court waits for the other to act first. The term was coined by Judge Jon O. Newman in In re McLean Industries, Inc., 857 F.2d 88, 90 (2d Cir. 1988), on the model of “After you, my dear Alphonse.” “No, after you, Gaston. Black’s Law Dictionary 795 (10th ed. 2014)].

BACKGROUND

Central States, an employee benefit plan governed by the Employee Retirement Income Security Act (ERISA), provides health insurance for Teamsters and their families. Guarantee Trust, an insurance company, provides sports injury insurance for student athletes. This case involves thirteen high school and college students, all athletes and all children of Teamsters. Each of them holds general health insurance from Central States and sports injury insurance from Guarantee Trust. Each suffered an injury while playing sports (most often football) between 2006 and 2009, after which they sought insurance coverage from both insurance companies. Each time Guarantee Trust refused to pay the athlete’s medical expenses. Each time Central States picked up the bill under protest.

Invoking one of ERISA’s civil enforcement provisions, 29 U.S.C. § 1132(a)(3)(B), Central States sued Guarantee Trust and First Agency (a company that administers Guarantee Trust’s insurance policies).

TRIAL COURT RULING

The district court ruled that, when Central States’ and Guarantee Trust’s coverage of student athletes overlap, Guarantee Trust must pay. It entered a declaratory judgment to that effect, ordered Guarantee Trust to reimburse Central States for the payouts to the thirteen students, and awarded Central States attorneys’ fees.

ANALYSIS

Which company should pay for the students’ medical expenses? Central States’ contract answers the question one way. In a provision captioned “Coordination of Benefits,” the contract lists rules that determine which insurer has “primary responsibility” when plans overlap. Under one of these rules, whichever insurer covers the insured “other than as a Dependent” has primary responsibility. Central States covers the thirteen students as dependents. The students have insurance because they are children of Teamsters. Guarantee Trust, by contrast, covers the thirteen students “other than as … [d]ependent[s].” The students have insurance in their own names. So under Central States’ contract, Guarantee Trust must pay for the students’ medical expenses up to its maximum before Central States will contribute anything.

Guarantee Trust’s contract answers the question another way. The contract contains a blanket coordination-of-benefits rule. If insurance provided by Guarantee Trust overlaps with insurance provided by anyone else, the other insurer always has primary responsibility. So under Guarantee Trust’s contract, Central States must pay for the students’ medical expenses up to its maximum before Guarantee Trust will contribute anything. Therefore, the two insurers dance a gastonette with one insurance company saying: “You first, Central States.” To which the other responded: “After you, Guarantee Trust.”

If an ERISA plan and an insurance policy “contain conflicting coordination of benefits clauses,” as a matter of federal common law “the terms of the ERISA plan, including its [coordination of benefits] clause, must be given full effect.” [Auto Owners Ins. Co. v. Thorn Apple Valley, Inc., 31 F.3d 371, 374 (6th Cir.1994)]. In this case, the terms of the ERISA plan — Central States’ plan — say that Guarantee Trust has primary responsibility for the students’ expenses.

Guarantee Trust’s policy does not provide excess insurance, at least not pure excess insurance. An excess policy has a fixed threshold below which it never applies. If the insured has no other policy, Guarantee Trust’s policy covers all of his losses, however small.

 

ERISA’s byzantine system of employee benefits would not work unless courts respect the written terms of ERISA plans. The importance of enforcing the plan’s terms, its coordination clauses included, does not shrink when the other insurance policy in the picture provides excess coverage in this way.

The next worst thing to having no insurance at all is having two insurance companies cover the same claim. Coverage overlaps often prompt years of fighting about who must pay, a battle that can delay payment to the insured or the hospital. The Third Circuit concluded that it is best to keep rules about coordinating insurance benefits as simple as possible.

Here, in the absence of Central States’ plan, Guarantee Trust’s policy would cover the sports injuries at hand without question. The ERISA plan insists that the policy keep doing in that plan’s presence what it would do in that plan’s absence. The district court got it right when it held that primary responsibility for the sports injuries in this case falls on Guarantee Trust, not Central States.

As for the merits, Central States filed this lawsuit under a provision of ERISA that allows it “to obtain … appropriate equitable relief … to enforce any provisions of this [Act] or the terms of the plan.” [29 U.S.C. § 1132(a)(3)(B).] The judgment directing Guarantee Trust to pay Central States can thus stand only if it provides “equitable relief” as opposed to legal relief. The district court’s money judgment, ordering Guarantee Trust to pay Central States around $112,000, looks by all appearances like an award of money damages. And money damages, the paradigm of legal relief, lie beyond the radius of the statute.

The court ordered Guarantee Trust to pay money, and Guarantee Trust can satisfy that obligation by dipping into any pot it chooses. That means Central States sought legal rather than equitable restitution. The Act says nothing either way about coordinating benefits, and purposes and policies have their place when filling the gap. The Act by contrast says something about what relief a plaintiff can get in lawsuits under the statute: He can get only equitable relief.

Under the Act, the district court in its discretion may allow a reasonable attorney’s fee to either party. The statute gives district courts more leeway to shift fees than the American Rule, the common-law principle that allows fee awards only in rare cases. The district court addressed all of the relevant factors with care. Its conclusion does not amount to an abuse of discretion.

Declaratory relief was affirmed, Guarantee Trust is primarily responsible for the expenses of the injured students and the attorneys fees ordered were also affirmed. The money judgment was reversed because the ERISA plan did not have the right to legal remedies. Both of the dancers lost and in the future Guarantee Trust will be compelled to pay for such injuries as if the Central States ERISA plan did not exist.

ZALMA OPINION

The prudent insurer will never dance the gastonette. When a dispute arises between two insurers, both of whom believe the other is primary and it is excess will create a problem. The two insurers should, rather, enter into a prompt agreement to share in the cost of protecting the insured without waiving the right to dispute who owes what to whom in a separate litigation. Central States, without such an agreement, paid the expenses because Guarantee Trust wrongfully refused. This suit resulted. Had they agreed they could have submitted the dispute to a District Court or an impartial arbitrator who could have decided who was on first and that either Gaston or Alphonse must pay.

This case should never have happened. Central States and Guarantee Trust should have worked together and avoided the litigation. No one wins, and the insured often loses, when insurers dance the gastonette.