Williams v. Nat'l Union Fire Ins. Co. of Pittsburgh

94 F.Supp.3d 719

Ralph WILLIAMS, Plaintiff

v.NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, American International Group, Inc. d/b/a AIG Insurance Trust, for the Account of HealthExtras, HealthExtras, Inc., Catalyst Health Solutions, Inc., Catamaran Health Solutions, LLC, HealthExtras, LLC, Alliant Insurance Services, Inc., Alliant Services Houston, Inc., and Virginia Surety Company, Inc., Defendants.

Civil Action No. 6:14–cv–00870–BHH.

United States District Court, D. South Carolina, Greenville Division.

Signed March 31, 2015.

William E. Hopkins, Jr., Hopkins Law Firm, Pawleys Island, SC, Aaron Craig Hemmings, Hemmings and Stevens, Raleigh, NC, Joseph H. Aughtman, Aughtman Law Firm, Montgomery, AL, Kenneth Jay Grunfeld, Golomb and Honik PC, Philadelphia, PA, for Plaintiff.

Peter Harris Dworjanyn, R. Scott Wallinger, Jr., Collins and Lacy, Benjamin Rush Smith, III, Sarah B. Nielsen, Nelson Mullins Riley and Scarborough, Felicia Sampson Preston, James Lynn Werner, Parker Poe Adams and Bernstein, Columbia, SC, Theodore R. Scarborough, Christopher M. Assise, Sidley Austin, Paul L. Langer, Quarles and Brady, Chicago, IL, Patrick J. Murphy, Quarles and Brady, Milwaukee, WI, John P. Riordan, Kurt Matthew Rozelsky, Smith Moore Leatherwood, Greenville, SC, Daly de Temchine, Epstein Becker and Green, Washington, DC, Maxine H. Neuhauser, Epstein Becker and Green, Newark, NJ, Melanie L. Black Dubis, Parker Poe Adams and Bernstein, Raleigh, NC, Phoebe Norton Coddington, Winston and Strawn, Charlotte, NC, Harvey Kurzweil, John M. Aerni, Kelly A. Librera, Winston and Strawn, New York, NY, Neil R. Marder, Winston and Strawn, Los Angeles, CA, for Defendants.

Opinion and Order

BRUCE HOWE HENDRICKS, District Judge.

This matter is before the Court on the defendants' motions to dismiss (ECF Nos. 66, 67, 68, 69) and motion to stay the action pending a ruling on the motions to dismiss (ECF No. 73). For the reasons set forth below, the motions are denied.

BACKGROUND

The following facts are drawn from the plaintiff's amended class action complaint (the “complaint”), which is the operative complaint in this action. This case involves allegations that the defendants engaged in the fraudulent advertising, marketing, and sale of “group” disability insurance (“the Policy”) to South Carolina residents who were not members of any group for which such an insurance product was authorized, and thus the policies were illegal. The plaintiff, Ralph Williams (“the plaintiff” or “Williams”), purchased one of the policies. Williams never made a claim against the policy and is seeking to represent a class of purchasers in a similar position. Indeed, the proposed class specifically excludes any policy holder who actually made a claim against the Policy. The plaintiff further alleges that the defendants knew that the products they were selling were illegal and that the coverage promised by the policies was illusory because there was no intention to pay claims under that purported coverage. The plaintiff also claims that the premium for the disability insurance coverage was unilaterally increased on at least two occasions without the required regulatory approval.

The Alleged Scheme

The plaintiff claims that the defendants sent advertising materials to people through a partnership with major credit card companies and banks. The defendants' advertisements featured the late Superman actor, Christopher Reeves, who became a quadriplegic after falling from a horse in 1995. The plaintiff alleges that his acceptance letter included a photograph of Christopher Reeve and a message purportedly from him that stated “[b]ecause lives can change in an instant, as mine did, you should have the additional security for yourself and your family that HealthExtras can provide.”

The original marketing flyers offered a One Million Dollar ($1,000,000.00) disability insurance product, called “HealthExtras,” “for as little as Nine Dollars and Ninety–Five cents ($9.25)¹ per month or Fourteen Dollars and Fifty cents ($14.50) per month depending on whether the individual added his or her spouse.” (Compl. ¶ 44(d).) The plaintiff claims that, in reality, the insurance he was sold was effectively worthless because of a series of harsh and confusing exclusions that conflicted with what was represented in the marketing materials. For example, although marketing materials contained claims such as,

“This program provides valuable protection in the event you become permanently totally disabled due to an accident” and

“You're covered with a $1,000,000 tax-free cash payment if you are permanently disabled as a result of an accident”

(Compl. ¶ 106), benefits would only be provided if the insured suffered a very limited number of catastrophic injuries. These limited injuries included,

a. loss of both hands or feet; or

b. loss of one hand and one foot; or

c. loss of speech or hearing in both ears; or

d. Hemiplegia; or

e. Paraplegia ; or

f. Quadriplegia ;

(Compl. ¶ 106.) The definitions provided,

Loss of a hand or foot means complete severance through or above the wrist or ankle joint. Loss of hearing in both ears means total and irrevocable loss of the entire ability to hear in both ears. Loss of speech means total and irrecoverable loss of the entire ability to speak.

Hemiplegia means the complete and irreversible paralysis of the upper and lower Limbs of the same side of the body. Limb(s) means entire arm or entire leg. Paraplegia means the complete and irreversible paralysis of both lower Limbs. Quadriplegia means the complete and irreversible paralysis of both upper and lower Limbs.

(Id. ) The term “loss” was defined to mean:

Loss of:	Percentage
	Sight of Both Eyes	100%
	One Hand & Sight of One Eye	100%
	One Foot & Sight of One Eye	100%
	One Hand or One Foot	50%
	Sight of One Eye	50%
	Hearing in One Ear	25%
	Thumb & Index Finger of Same Hand	25%

Loss of a hand or foot means complete severance through or above the wrist or ankle joint. Loss of sight of an eye means total and irrecoverable loss of the entire sight in that eye. Loss of thumb and index finger means complete severance through or above the metacarpophalangeal joint of both digits.

(Compl. ¶ 110.)

According to the plaintiff, these policy provisions contradicted South Carolina insurance regulations that require that “total disability” be defined no more restrictively “than the inability of the insured to engage in his own occupation during the first year of disability or for the length of the benefit period if less than one year. After the first year of disability, total disability may be defined as the complete inability of the insured to engage in any employment or occupation for which the insured is qualified.” (Compl. ¶ 111.) The plaintiff cites cases from other jurisdictions suggesting that even where policy holders actually suffered one of the rare injuries covered under the policy, the policy holders had to sue to get the Defendants to actually pay benefits.

Additionally, the plaintiff claims that a shockingly small percentage of the fees were actually used to provide insurance coverage. The complaint alleges that when monthly premiums for the One Million Dollar HealthExtras disability benefit were $15.95 per month, only $2.24 of that amount was paid to National Union, the purported underwriter of the disability policy. In other words, less than 15% of the premium paid by members for disability coverage actually went to an insurance company.

On top of these significant allegations, the plaintiff alleges that the defendants facilitated the sale of these questionable policies by fraudulently circumventing a provision of South Carolina law intended to prevent such abuse. According to the plaintiff, South Carolina law requires blanket group disability insurance to be marketed and sold to an employer or to a group that has been organized and is maintained in good faith for purposes other than that of obtaining insurance. The purpose of the rule is to allow the group, as the entity with the insurable interest in its members, to scrutinize the terms of coverage and price of coverage to ensure its members are receiving a good insurance product for a fair price. The plaintiff alleges that in order to get around this limitation, the defendants designated their policy holders as members of a fictitious group and placed them into a “trust” created by the defendants. As the complaint alleges:

In an extraordinary display of self-dealing, the Defendants created a Trust, which the Defendants own and control, which is called the “AIG Group Insurance Trust, for the Account of HealthExtras.” This is a fictitious, illegal and sham Trust that is alter-ego of the Defendants, with premiums collected for the benefit of them rather than a valid group of persons. There is no constitution or bylaws and the HealthExtras members have no voting privileges or representation on any boards or committees. This Trust was created for the sole purpose of selling the HealthExtras disability insurance to consumers with no supervision or oversight.

(Compl. ¶ 82.) Furthermore, because the insurance was a “group policy,” the “group” formed by the Catamaran Defendants was the actual holder of the policy and those who purchased coverage were not given a copy of the master policy. The complaint alleges:

The “Description of Coverage” further indicated that it was a “brief description of coverage available under policy series C11695DBG” and that “[i]f any conflict should arise between the contents of this Description of Coverage and the Master Policy SRG 9540519 or if any point is not covered herein, the terms and conditions of the Master Policy will govern in all cases.”

...

Upon information and belief, Master Policy SRG 9540519 concealed from victims of the HealthExtras Scheme that the disability insurance policy they purchased is virtually worthless with no real value to consumers, but the consumer could not readily determine this fact because the Defendants created a sham trust and issued the policy to

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