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SCHULIST v. BLUE CROSS OF IOWA

United States District Court, Northern District of Illinois, E.D


December 15, 1982

DANIEL SCHULIST, AUGUST E. LOEFLER, JR., JOHN SNELLGROVE, JOHN DAMAS, GALE T. JAFFKE, JOSEPH B. GROW, JACK L. GABELHAUSEN, SR., JOHAN FABER, JACK LONG, CHARLES N. YOUNG, RICHARD STEFFEY, CARL D. PROHASKA, TOM BAGWELL, STANLEY J. KUCHAY, HARRY FORBER, AND RICHARD J. BLANKENHEIM, AS TRUSTEES OF THE PATTERN MAKERS' HEALTH AND WELFARE TRUST, PLAINTIFFS,
v.
BLUE CROSS OF IOWA AND BLUE SHIELD OF IOWA, IOWA CORPORATIONS, DEFENDANTS.

The opinion of the court was delivered by: Aspen, District Judge:

  MEMORANDUM OPINION AND ORDER

Plaintiffs in the instant case, the Trustees of the Pattern Makers' Health and Welfare Trust ("Trustees"), have sued Blue Cross of Iowa and Blue Shield of Iowa ("Blue Cross and Blue Shield") in a three-count complaint arising out of a Health and Welfare plan ("Plan"). Plaintiffs allege fraud, breach of contract and breach of fiduciary duty under the Employee Retirement Income Security Act ("ERISA") of 1974.*fn1 This matter is presently before the Court on the parties' cross-motions for summary judgment.*fn2 For reasons stated below, (1) defendants' motion for summary judgment is granted as to Counts I and III; (2) plaintiffs' motion for partial summary judgment is denied; and (3) defendants' motion for summary judgment as to Count II is denied, but Count II is remanded to an appropriate state court of Iowa.*fn3

Plaintiffs established a joint labor-management trust for the purpose of providing employee health and welfare benefits through the Plan in 1977. On September 15, 1977, plaintiffs appointed as broker D.J. Cusack, instructing him to solicit bids for providing a health and welfare plan to trust beneficiaries. Defendants, which provide health benefit plans to individual and group subscribers, bid for and received the trust's business. The parties then entered into a Health and Welfare Plan for 1978 and 1979.

Plaintiffs argue in Count I of the complaint that defendants failed to comply with the information reporting and disclosure requirements contained in section 103 of ERISA, 29 U.S.C. § 1023, and several regulations promulgated thereunder, thus breaching fiduciary duties established by that statute. They further assert that defendants breached fiduciary duties under ERISA by failing to return for the benefit of the Plan an alleged surplus of $349,000 in policyholder reserves for 1978 and 1979. Count II alleges fraud on the part of defendants, in that information provided to plaintiffs contained false representations. Count III alleges that the failure to return the aforementioned alleged surplus constituted breach of contract.

In considering these motions, we begin by observing that the party moving for summary judgment has the burden of clearly establishing that no genuine issues of material facts exist, and that he or she is entitled to judgment as a matter of law. Cedillo v. International Association of Bridge & Structural Iron Workers, Local Union No. 1, 603 F.2d 7, 10 (7th Cir. 1979). Doubts as to the existence of material issues of fact must be resolved against the moving party. Moutoux v. Gulling Auto Electric, Inc., 295 F.2d 573, 576 (7th Cir. 1961). Where cross-motions for summary judgment are filed, as in the instant case, the court must rule upon each party's motion individually, based upon affidavits and other proof submitted by the parties. 10 Wright and Miller, Federal Practice and Procedure § 2720 (1973). It is with these standards in mind that we consider the parties' motions.

Count I

Plaintiffs argue that defendants failed to comply with information disclosure and reporting requirements set forth in ERISA.*fn4 As this Court recently observed, "ERISA resulted from concern over the rapid growth in size, scope and number of employee benefit plans, many of which had inadequate safeguards to protect the requisite funds." McDougall v. Donovan, 552 F. Supp. 1206, 1214 (N.D.Ill. 1982). In enacting ERISA, Congress codified its concern that sufficient information regarding plan operations be provided to plan participants and beneficiaries. H.R.Rep. No. 93-533, 93d Cong., 2d Sess. (1974), reprinted in 1974 U.S. Code Cong. & Ad.News 4639. Section 103, for example, requires the administrator of an employee benefit plan to file an annual report concerning the plan with the Secretary of Labor and make it available to plan participants. 29 U.S.C. § 1023. Moreover,

  If some or all of the information necessary to
  enable the administrator to comply with the
  requirements of this subchapter is maintained by
  —

  (A) an insurance carrier or other organization
  which provides some or all of the benefits under
  the plan or holds assets of the plan in a
  separate account . . . such carrier . . .
  shall transmit and certify the accuracy of such
  information to the administrator within 120 days
  after the end of the plan year (or such other date
  as may be prescribed under regulations of the
  Secretary). (Emphasis added).

Section 103(e) goes on to declare that:

    (e) If some or all of the benefits under the
  plan are purchased from and guaranteed by an
  insurance company, insurance service, or other
  similar organization, a report under this section
  shall include a statement from such insurance
  company, service, or other similar organization
  covering the plan year and enumerating —

      (1) the premium rate or subscription charge
    and the total premium or subscription charges
    paid to each such carrier, insurance service or
    other similar organization and the approximate
    number of persons covered by each class of such
    benefits; and

      (2) the total amount of premiums received,
    the approximate number of persons covered by
    each class of benefits, and the total claims
    paid by such company, service, or other
    organization; dividends or retroactive rate
    adjustments, commissions, and administrative
    service or other fees or other specific
    acquisition costs paid by such company, service,
    or other organization; any amounts held to
    provide benefits after retirement; the remainder
    of such premiums; and the names and addresses of
    the brokers, agents, or other persons to whom
    commissions or fees were paid, the amount paid to
    each, and for what purpose. (Emphasis added)

It is thus apparent that defendants' failure to certify information on the Schedule A forms violated § 103 of ERISA; the failure to indicate the payment of commissions to Mr. Cusack in initial Schedule A forms also violated that section. Plaintiffs further argue that these omissions violated guidelines in ERISA governing the conduct of plan fiduciaries. Section 404 of ERISA sets forth the general standards of fiduciary duty.*fn5 But before deciding whether defendants deciding whether Blue Cross and Blue Shield violated these fiduciary standards, we must determine whether they are, under ERISA, fiduciaries of the Plan in the instant case.

Insofar as a person exercises discretionary authority or control concerning the management or administration of a plan, he or she is a fiduciary under ERISA.*fn6 In fact, Blue Cross and Blue Shield admit that they acted in a fiduciary capacity in the processing of health benefit claims. Memorandum in Support of Cross-Motion for Summary Judgment at 16. Although some courts have held that insurance companies are not necessarily fiduciaries solely by virtue of providing contractual benefits, Austin v. General American Life Insurance Co., 498 F. Supp. 844, 845, 846 (N.D.Ala. 1980); cf. Cate v. Blue Cross & Blue Shield of Alabama, 434 F. Supp. 1187, 1190 (E.D. Tenn. 1977), we believe, as did the court in Eversole v. Metropolitan Life Insurance Co., 500 F. Supp. 1162 (D.C.Cal. 1980), that an insurance company with the authority to grant or deny claims is a fiduciary under ERISA. Since defendants had such authority, they are fiduciaries under ERISA.

But an analysis of the general standard of fiduciary duty under § 404 of ERISA, see note 4 infra, does not persuade us that Blue Cross and Blue Shield's failure to comply with § 103 of ERISA amounts to a breach of their fiduciary duties under § 404. Blue Cross and Blue Shield eventually did provide plaintiffs with the name of the broker and the amount of commissions paid to him, albeit after initially submitting inconsistent Schedule A forms. While the forms were not certified, in violation of § 103, this lack of certification, in our opinion, does not rise to a violation of § 404; we cannot help but note that the information required was provided.*fn7

Count I goes on to assert that Blue Cross and Blue Shield's failure to return an alleged policyholder reserve surplus for 1978 and 1979 constituted a breach of fiduciary duties under ERISA. According to plaintiffs, the 1978 premium rate led to a premium surplus of $317,000, and the 1979 premium rate led to yet another surplus of approximately $32,000. By failing to return this surplus to the Plan or use it to provide future benefits to the participants, the Trustees argue that Blue Cross and Blue Shield (1) breached § 404(a) of ERISA. See note 4, supra; and (2) violated § 406 and § 408 of the statute. We will consider each of these arguments in turn.

Although Blue Cross and Blue Shield are fiduciaries under ERISA in that they exercised discretionary authority and control concerning management of the Plan, the retention of premiums paid under the terms of the Health and Welfare Plan does not constitute a violation of Blue Cross and Blue Shield's fiduciary duty to act "solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries; and defraying reasonable expenses of administrating the plan." 29 U.S.C. § 1104(a). While we are mindful that ERISA is a comprehensive statutory scheme to protect participants and beneficiaries of employee benefit plans, the retention of premiums paid under a freely negotiated insurance contract does not constitute a violation of Blue Cross and Blue Shield's fiduciary duties under ERISA. The Trustees have cited no judicial authority or legislative history to the contrary.

The plaintiff Trustees, however, go on to assert that the retention of the premium surplus violated § 408 of ERISA because it was not "reasonable compensation" for the services Blue Cross rendered to the Plan. The Trustees correctly observe that § 406 of the statute supplements the fiduciary obligations set forth in § 404. Section 406 prohibits fiduciaries from causing the Plan to engage in certain specified transactions.*fn8 Plaintiffs then point to § 408(b), which provides for certain exemptions from the provisions of § 406,*fn9 and argue that § 408 prohibits compensation for services which is not reasonable. This argument, however, misapprehends the nature of the statute.

The prohibitions in § 406 reflect Congress' desire to prevent transactions which might lead to a loss of plan assets or insider abuse, Marshall v. Kelly, 465 F. Supp. 341, 354 (W.D.Okla. 1979), and were designed to avoid placing trustees of a pension plan into positions which create conflicts of interest and prevent them from acting exclusively for the benefit of a plan's participants and beneficiaries. N.L.R.B. v. Amax Coal Co., a Division of Amax, Inc., 453 U.S. 322, 101 S.Ct. 2789, 2796, 69 L.Ed.2d 672 (1981). While Blue Cross and Blue Shield are fiduciaries with respect to the Plan, they are not trustees, and they have not caused the Plan to engage in a transaction which constitutes a furnishing of services between the Plan and a party in interest. 29 U.S.C. § 1106. It is therefore apparent that by their very language, §§ 406 and 408 are inapposite to the instant situation. Accordingly, Blue Cross and Blue Shield's motion for summary judgment as to Count I is granted.

Count III

The Trustees assert that the failure of Blue Cross and Blue Shield to return the $349,000 in alleged surplus premiums, or apply them for future benefits, amounts to a breach of contract. In support of this assertion, they argue that the contract's silence concerning the return of any premium surplus or other financial arrangements constitutes an ambiguity. Therefore, plaintiffs would have this Court apply traditional contract law principles and (1) examine the intention of the parties in order to interpret the contract, and (2) construe the contract against the insurer and find that Blue Cross and Blue Shield have breached the contract. In response, defendants deny that there are ambiguities in the contract and maintain that they are not guilty of any breach.

Both parties agree that this Court must apply Iowa law in construing the contract, since the contract was executed in that state, and the trust is situated there. The construction of contracts, including insurance policies, is a matter of law. Iowa-Des Moines National Bank v. Insurance Company of North America, 459 F.2d 650, 653 (8th Cir. 1972); Farm Bureau Mutual Insurance Co. v. Sandbulte, 302 N.W.2d 104, 107 (Iowa 1981). If an insurance contract is ambiguous and susceptible to different interpretations, it must be construed to effectuate the intent of the parties, Indemnity Insurance Co. v. Pioneer Valley Savings Bank, 343 F.2d 634, 646 (8th Cir. 1965); parol evidence may be admitted to ascertain the meaning of such a contract, Randolph v. Fireman's Fund Insurance Co., 255 Iowa 943, 124 N.W.2d 528, 529 (1963). In construing an insurance contract, a court shall adopt the construction which is most favorable to the insured, and against the insurer, Benzer v. Iowa Mutual Tornado Assurance Assn., 216 N.W.2d 385, 388 (Iowa 1974). But if a contract is not ambiguous, there is no need to resort to the aforementioned rules of construction, Northwestern States Portland Cement Co. v. Hartford Fire Insurance Co., 360 F.2d 531, 534-35 (8th Cir. 1966); Bosch v. Garcia, 286 N.W.2d 26, 28 (Iowa 1979). In such a situation, it is not the role of a court to make a new contract for the parties by construction of clear and unambiguous terms in a written contract. Kolls v. Aetna Casualty and Surety Co., 378 F. Supp. 392, 398 (S.D.Iowa 1974), aff'd, 503 F.2d 569 (8th Cir. 1974); State Farm Auto Insurance Co. v. Malcolm, 259 N.W.2d 833, 835 (Iowa 1977).

In the instant case, we are unable to find any ambiguities in the contract which would necessitate an analysis of the parties' intentions.*fn10 The silence of the contract with regard to any premium surplus does not constitute an ambiguity, but rather, indicates that the parties agreed to no refunds. We decline to rewrite the contract to include a provision for a refund of any premium surplus; the parties themselves have done so for the year 1980, Exhibit 15 to defendants' Memorandum in Support of Summary Judgment. We therefore grant Blue Cross and Blue Shield's motion for summary judgment as to Count III.

Count II

The Trustees in Count II of their complaint charge that by providing contradictory information on Schedule A forms concerning commissions and policy reserves, Blue Cross and Blue Shield are guilty of fraud. The Trustees do not seek summary judgment on this Count; Blue Cross and Blue Shield, in support of their motion, state only that construction of the contract in their favor would dispose of Count II because there can be no common law fraud if they were entitled to retain the alleged premium surplus. This statement alone does not meet Blue Cross and Blue Shield's burden of showing that there are no genuine issues of material fact as to this issue, entitling them to judgment as a matter of law. Cedillo v. International Association of Bridge & Structural Iron Workers, Local Union No. 1, 603 F.2d 7, 10 (7th Cir. 1979). Accordingly, Blue Cross and Blue Shield's motion for summary judgment on Count II is denied.

Conclusion

Accordingly, Blue Cross and Blue Shield's motion for summary judgment is granted as to Counts I and III, but denied as to Count II. The Trustees' motion for summary judgment is denied. Count II is remanded to the Iowa District Court in and for Polk County. It is so ordered.


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