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Indiana Funeral Directors Insurance Trust v. Benefit Actuaries

June 24, 2008


Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 97 C 1248-John Paul Godich, Magistrate Judge.

The opinion of the court was delivered by: Evans, Circuit Judge.


Before FLAUM, MANION, and EVANS, Circuit Judges.

Hoping to ensure affordable and comprehensive health insurance for their employees, a group of independent funeral directors who own small mortuaries in Indiana got together and created the Indiana Funeral Directors Insurance Trust. The Trust, formed in 1972, in turn administered a multiple insurance employer welfare arrangement (known as a MEWA) to provide health benefits to the employees. Five trustees administered the Trust, and they hired Benefit Actuaries-which despite its name does not employ any actuaries-to serve as the Trust's third-party administrator, insurance broker, and advisor.

Things were hunky-dory for awhile, but eventually there came a time when the Trust experienced an unexpected spike in claims and ran out of funds to pay them all. In 1997,*fn1 the Trust sued Benefit Actuaries, claiming that it violated its fiduciary duty under the Employee Retirement Income Security Act of 1972 (ERISA) and that it breached its common-law duties to the Trust by providing it with bad advice and failing to recommend measures that would have staved off insolvency. Magistrate Judge John P. Godich, hearing the case with the consent of the parties, granted summary judgment in favor of Benefit Actuaries on some of the Trust's claims and, after a bench trial, found in favor of Benefit Actuaries on the rest.

The Trust's financial woes can be traced back to 1984, when it decided to self-insure (or self-fund) its health plan. The self-insured plan operated by charging premiums to member funeral directors and using those premiums to cover participant employees' claims. The Trust also could require the funeral directors to make additional payments, known as assessments, if it found itself underfunded. By contrast, a fully funded health insurance plan is purchased from an insurance provider, which in turn shoulders the responsibility of paying participants' claims.

Among the risks that self-funded plans bear is the possibility that claims will outstrip premiums, resulting in an inability to pay them all. A trust administering a self-funded plan protects against an unexpected rise in the number and amount of claims by putting aside funds in reserve to be used when premiums are insufficient to cover claims. Additionally, two types of insurance coverage further limit this risk to self-funded plans.

First, to protect against large individual claims, a trust can purchase specific stop loss coverage, which reimburses the trust for any amount that it pays a participant over a deductible, known as the attachment point. Thus, if the attachment point (or deductible) is $50,000 and a participant incurs $75,000 in covered expenses, the specific stop loss insurance policy would reimburse the trust for the last $25,000 paid to the participant. If a trust has a specific stop loss policy, its risk is limited to the deductible multiplied by the number of participants. The lower the deductible, the higher the premiums the trust must pay for coverage. Since a trust would pass this cost on to its members, a low specific stop loss deductible would have the obvious effect of increasing members' premiums.

Second, a trust can purchase aggregate stop loss coverage, which caps the total amount, over all claims, a trust is responsible for paying out. Once a trust's claims exceed the attachment point (or deductible), the aggregate stop loss coverage kicks in and reimburses the trust for claims amounts above the deductible. For example, if a trust had a $1 million deductible but owed $1.2 million in claims reimbursements to participants, the aggregate stop loss coverage would cover the last $200,000. Like specific stop loss coverage, the lower the aggregate stop loss coverage deductible, the greater the cost of the premiums to purchase the policy.

Benefit Actuaries advised the trustees on how to operate the Trust and manage its risks. In its role as third-party administrator it handled adjustment and payment of claims. It also served as the Trust's insurance broker, procuring the Trust's insurance coverage. Further, it was the Trust's advisor, compiling detailed reports in which it analyzed claims, projected the amount of future claims, and made recommendations as to what premiums to charge, what level of insurance to secure, and how much to keep in reserve. It met yearly with the trustees to report on the status of the Trust and to make recommendations about setting premiums and procuring insurance.

Although Benefit Actuaries set a target reserve level, the Trust did not stick to this goal as a matter of practice. Instead, it kept reserves on a more haphazard basis. If it had a good year, when claims were low, it would hold the excess premiums in reserve; however, if claims were high, it drew down its reserves. But the Trust did maintain specific stop loss coverage. Originally, the deductible was $40,000, but after consultation with Benefit Actuaries the Trust agreed to a higher deductible of $50,000 in 1994 and of $60,000 in 1995. The Trust did not purchase aggregate stop loss coverage.

In the 1990s the Trust began experiencing financial problems. By 1994 it did not have enough funds to pay all of the participants' claims. To meet this problem, Benefit Actuaries advised the trustees to reduce benefits, raise premiums, and make assessments on the funeral directors. The trustees followed this advice, and the Trust stayed afloat. Soon afterward, Benefit Actuaries told the trustees that the Trust's financial problems and changes in the law would make it difficult for the Trust to continue to operate a self-funded plan, and it suggested that they consider switching to a fully insured plan through Blue Cross Blue Shield. The trustees rejected this advice because Blue Cross Blue Shield would have raised premiums by 50 percent and could not guarantee that it would insure all employees.

So there were hints that the Trust's financial situation was precarious, but the fatal blows were dealt in 1996 and 1997 when an unexpected and unprecedented number of large claims were made against the Trust. In an effort to save the Trust from insolvency, Benefit Actuaries recommended that the Trust raise premiums in the fall of 1996. The trustees agreed and raised the premiums by 21 percent. Again Benefit Actuaries suggested that the trustees look for a fully insured plan. In February 1997 Benefit Actuaries received a quote from Trustmark Insurance Corporation, but because Trustmark would have charged higher premiums than the funeral directors were paying, the trustees again rejected the advice that it switch to a fully insured plan.

In April 1997 the trustees fired Benefit Actuaries. The next day, Jay Matthew, the president of Benefit Actuaries, wrote to one of the trustees warning that, despite the premium increase, the Trust remained underfunded. Matthew advised that, to maintain an adequate level of reserves, the trustees would have to increase premiums by an additional 41 percent and ...

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