FCE Benefit Administrators, Inc. v. Indian Harbor Insurance Company

Opinion

1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7 8 FCE BENEFIT ADMINISTRATORS, INC., Case No. 21-cv-00186-CRB

9 Plaintiff, AMENDED ORDER GRANTING 10 v. SUMMARY JUDGMENT TO INDIAN HARBOR AND GRANTING LEAVE TO 11 INDIAN HARBOR INSURANCE FILE AN AMENDED ANSWER AND COMPANY, COUNTERCLAIMS 12 Defendant. 13 Plaintiff FCE Benefit Administrators, Inc. (“FCE”), a corporation providing third party 14 administrator services for employee benefit plans under ERISA, is suing Defendant Indian Harbor 15 Insurance Company (“Indian Harbor”). Indian Harbor issued an Errors and Omissions Policy 16 (“Policy”) to FCE covering damages and defense expenses arising from FCE’s performance of 17 professional services. FCE alleges that Indian Harbor breached the Policy in effect from June 6, 18 2017 to June 6, 2018 in paying out only $3 million. Indian Harbor moves for summary judgment, 19 arguing that the correct liability limit was $3 million. It also moves for leave to file an amended 20 answer and counterclaims sounding in unjust enrichment on the basis that it actually paid out more 21 than $3 million. The Court finds that oral argument is unnecessary. The Court GRANTS 22 summary judgment to Indian Harbor and GRANTS Indian Harbor leave to amend its answer and 23 counterclaims.1 24 25 26 27 I. BACKGROUND 1 A. The Policy Between FCE and Indian Harbor 2 “Subject to all terms and conditions of this policy,” Indian Harbor promised to “pay on 3 [FCE’s] behalf damages and defense expenses arising out of a claim first made against [FCE] 4 during a policy year, and reported to [Indian Harbor] in writing during that policy year, by reason 5 of an actual or alleged act or omission including personal injury, in the performance of 6 professional services.” Policy (dkt. 21-1, Ex. B), Sec. B.2 FCE’s “professional services” that are 7 covered by the Policy are defined in Item 7 as those “[s]olely in the performance of: Third party 8 administration.” 9 The Policy defines “claim” is a “written demand received by [FCE] for money, services, 10 equitable relief or a request to toll or waive any applicable statute of limitations.” Policy (dkt. 21- 11 1, Ex. B), Sec. A.1. The relevant limit of liability depends on when the acts or omissions 12 underlying the claim occurred: 13 E.1.a. For any claim by reason of an actual or alleged act or 14 omission including personal injury in the performance of professional services committed prior to June 6, 2017, the each 15 claim limit of liability is $3,000,000.

16 E.1.b. For any claim based exclusively on acts or omissions including personal injury in the performance of professional services 17 committed on or after June 6, 2017, the each claim limit of liability is $5,000,000. 18 Id., Endors. #002, Sec. E.1. However, “[t]wo or more claims arising out of the same or related 19 facts, circumstances, situations, transactions or events, or arising out of the same or related acts or 20 omissions, will be considered a single claim first made on the earliest of the date that[] the first 21 such claim was made.” Id., Sec. I.3. 22 The Policy explains which expenses and damages exhaust the limits of liability. It 23 provides that “[p]ayment of defense expenses as well as damages reduce and may exhaust the 24 Limits of Liability.” Id., Endors. #002, Sec. E.3. It further states that Indian Harbor’s “obligation 25 to defend and/or pay any damages or defense expenses will cease when the Limit of Liability has 26 been exhausted.” Id., Endors. #003, Sec. D.3. The Policy defines “defense expenses” as 27 1 “reasonable and necessary fees charged and expenses incurred by attorneys designated by [Indian 2 Harbor] to represent” FCE, as well as “all other reasonable and necessary fees, costs and expenses 3 incurred at [Indian Harbor’s] request.” Id., Sec. A.4. 4 B. The Underlying Claim Against FCE 5 On November 29, 2017, Standard Security Life Insurance Company of New York and 6 Madison National Life Insurance Company, Inc. (“Claimants”), insurers licensed to sell health and 7 disability policies, filed a petition for arbitration against FCE. See Arbitration Pet. (dkt. 1-2). 8 Claimants alleged that they had entered into an Administrative Services Agreement with FCE in 9 2011 in which FCE was to act as a third-party administrator providing administrative, sales and 10 marketing services for Claimants’ group insurance plans. See id. at 2-3. FCE agreed to procure 11 and process applications for insurance policies; prepare and issue policies in accordance with 12 Claimants’ underwriting rules and regulations; bill collect and process premium payments and 13 third-party fees; maintain and administer premium and claim accounts; process and pay claims in 14 accordance with Claimants’ review procedures; and prepare, maintain, and provide Claimants with 15 all relevant and appropriate information concerning the business. Id. Claimants alleged that FCE 16 breached the Services Agreement by failing to process healthcare claims in a timely and proper 17 manner, taking excessive and unearned fees, and causing the claimants to incur various penalties, 18 fines, and fees. See id. at 4–7. In May 2015, Claimants canceled their agreement with FCE. See 19 Standard Sec. Life Ins. Co. of New York v. FCE Benefit Administrators, Inc., 967 F.3d 667, 669 20 (7th Cir. 2020). However, FCE continued to provide services through at least June 2018. See 21 Decl. of Steve Porter (dkt. 30) at 3. 22 In 2018, the arbitral panel held that FCE owed Claimants $5,348,352.81, issued another 23 award denying all other relief claimed by the parties, and the two awards were confirmed by a 24 federal district court and judgment entered against FCE. See id. at 669–71. The Seventh Circuit 25 affirmed. Id. at 674–75. 26 FCE tendered the arbitration petition to Indian Harbor in a timely manner on March 20, 27 2018. See Letter to Indian Harbor (dkt. 21-1, Ex. A). Indian Harbor paid $2,348,596.30 to FCE 1 Circuit affirmed the arbitration, Indian Harbor also issued a wire payment to FCE for 2 $1,049,175.65, as indemnity for the judgment. See id. ¶ 12.e. & Ex. G. These sums totaled 3 $397,771.96 more than the $3 million Indian Harbor believed to be its obligation. See id. ¶ 11. 4 This apparently stemmed from Indian Harbor’s failure to report its own payments—a failure 5 Indian Harbor discovered only recently—and it is the main subject of Indian Harbor’s motion for 6 leave to amend its answer and counterclaims. Id.; see Mot. to Amend (dkt. 20). 7 C. This Proceeding 8 On January 8, 2021, FCE filed this action, alleging that Indian Harbor only paid damages 9 and defense expenses up to $3 million when it owed $5 million under the Policy. Compl. (dkt. 1) 10 ¶¶ 14–15. FCE alleged that Indian Harbor had breached the contract and the implied covenant of 11 good faith and fair dealing. FCE requested declaratory relief, indemnity against the underlying 12 arbitral award up to $5 million, attorneys’ fees and costs for both the arbitral suit and this one, 13 punitive damages, and prejudgment interest. See id. at 6. 14 Indian Harbor filed an answer on March 15. See Ans. (dkt. 13). On September 20, Indian 15 Harbor moved for summary judgment and for leave to file an amended answer and counterclaims. 16 See MSJ (dkt. 21); Mot. to Amend. FCE opposed both motions. Opp. to MSJ (dkt. 29); Opp. to 17 Mot. to Amend (dkt. 24). FCE later moved for partial summary judgment on the basis of the same 18 arguments in its opposition to Indian Harbor’s motion. See FCE’s MSJ (dkt. 36). 19 II. LEGAL STANDARD 20 Summary judgment is appropriate “if the movant shows that there is no genuine dispute as 21 to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 22 56(a); see also Celotex Corp. v. Cattrett, 477 U.S. 317, 323 (1986). A genuine issue of fact is one 23 that could reasonably be resolved in favor of either party. A dispute is “material” only if it could 24 affect the outcome of the suit under the governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. 25 242, 248–49 (1986). 26 On a summary judgment motion, a defendant “without the ultimate burden of persuasion at 27 trial . . . has both the initial burden of production and the ultimate burden of persuasion.” Nissan 1 Alan Wright, Arthur R. Miller and Mary Kay Kane, Federal Practice and Procedure § 2727 (3d 2 ed.1998)). “In order to carry its burden of production, the moving party must either produce 3 evidence negating an essential element of the nonmoving party’s claim or defense or show that the 4 nonmoving party does not have enough evidence of an essential element to carry its ultimate 5 burden of persuasion at trial.” Id. (citing High Tech Gays v. Defense Indus. Sec. Clearance 6 Office, 895 F.2d 563, 574 (9th Cir. 1990). “In order to carry its ultimate burden of persuasion on 7 the motion, the moving party must persuade the court that there is no genuine issue of material 8 fact.” Id. (internal citation omitted). “If a moving party fails to carry its initial burden of 9 production, the nonmoving party has no obligation to produce anything.” Id. at 1103 (internal 10 citation omitted). If, however, a moving party carries its burden of production, the nonmoving 11 party must produce evidence to support its claim or defense. If the nonmoving party fails to 12 produce enough evidence to create a genuine issue of material fact, the moving party wins the 13 motion for summary judgment. But if the nonmoving party produces enough evidence to create a 14 genuine issue of material fact, the nonmoving party defeats the motion. See id. 15 Under Rule 15(a) of the Federal Rules of Civil Procedure, “[t]he court should freely give 16 leave [to amend a pleading] when justice so requires,” bearing in mind that “the underlying 17 purpose of Rule 15 . . . [is] to facilitate decision on the merits, rather than on the pleadings or 18 technicalities.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc). However, a 19 district court may deny leave to amend a complaint due to “undue delay, bad faith or dilatory 20 motive on the part of the movant, repeated failure to cure deficiencies by amendments previously 21 allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [and] 22 futility of amendment.” Foman v. Davis, 371 U.S. 178, 182 (1962). Of these considerations, 23 “prejudice to the opposing party [ ] carries the greatest weight.” Eminence Capital, LLC v. 24 Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (per curiam). “Absent prejudice, or a strong 25 showing of any of the remaining Foman factors, there exists a presumption under Rule 15(a) in 26 favor of granting leave to amend.” Id. However, a proposed amendment may be denied as futile 27 “if no set of facts can be proved under the amendment to the pleadings that would constitute a 1 1988). 2 III. DISCUSSION 3 A. Motion for Summary Judgment 4 Indian Harbor argues that summary judgment is appropriate because it did not owe more 5 than $3 million under the Policy. The Court finds that the clear text of the Policy confirms that 6 Indian Harbor is correct. The claim is “by reason of” alleged acts and omissions committed prior 7 to June 2017. 8 1. Costs Under the Duty to Defend 9 To the contrary, FCE first argues that Indian Harbor had a duty to defend FCE that was not 10 subject to any of the liability limits in the policy. This argument is wrong. 11 In California, parties may contract for “‘self-consuming’ or ‘burning limits’ [insurance] 12 policies,” under which “the indemnification limit is reduced dollar for dollar by defense costs until 13 zero is reached and the duty to indemnify and the duty to defend are then terminated.” Aerojet- 14 Gen. Corp. v. Transp. Indem. Co., 948 P.2d 909, 932 n.29 (Cal. 1997). 15 This Policy did just that. It provided that “[p]ayment of defense expenses as well as 16 damages reduce and may exhaust the Limits of Liability.” Policy, Endors. #002, Sec. E.3. It 17 further states that Indian Harbor’s “obligation to defend and/or pay any damages or defense 18 expenses will cease when the Limit of Liability has been exhausted.” Id., Endors. #003, Sec. D.3. 19 “Defense expenses” are “reasonable and necessary fees charged and expenses incurred by 20 attorneys designated by [Indian Harbor] to represent [FCE]” and “all other reasonable and 21 necessary fees, costs and expenses incurred at [Indian Harbor’s] request.” Id., Sec. A.4. 22 FCE acknowledges that “defense expenses” may “reduce and exhaust the limits of 23 liability.” Compl. ¶ 13. It nonetheless argues that “legal fees and costs incurred pursuant to 24 [Indian Harbor’s] duty to defend” are not “defense expenses.” See Opp. at 6. This argument 25 makes little sense: “costs incurred pursuant to the duty to defend” surely are “defense expenses.” 26 FCE emphasizes that the Policy states that “[t]he company will have the right and duty to defend 27 all covered claims brought in the United States.” Policy, Endors. #003, Sec. D.1. But this 1 limitless liability for “duty to defend costs” outside of the “defense expenses” repeatedly discussed 2 in the Policy. Alternatively, FCE argues that defense expenses only come under the limit of 3 liability where they are incurred “by attorneys designated by” Indian Harbor, and that where 4 Indian Harbor neglected to designate an attorney, the Policy’s limits impose no limit whatsoever. 5 See id., Sec. A.4. This illogical interpretation suggests that Indian Harbor carefully cabined its 6 own liability only when it picked the attorney, but subjected itself to limitless liability beyond the 7 scope of the contract when it let FCE pick the attorney. This makes little sense in the context of 8 the contract as a whole, which repeatedly states that the “obligation to defend and/or pay any 9 damages or defense expenses will cease when the Limit of Liability has been exhausted.” Id., 10 Endors. #003, Sec. D.3; see also Sec. B (noting that the coverage is “[s]ubject to all terms and 11 conditions of this policy”). 12 Because costs incurred under the duty to defend are “defense expenses” under the Policy, 13 they are subject to the limits to liability. 14 2. The Timing and Number of Claims 15 FCE also makes two arguments as to the timing and number of claims to suggest that this 16 lawsuit does not stem from just one claim subject to the $3 million per-claim limit. First, it argues 17 that, because some of the events giving rise to this suit occurred after June 6, 2017, it is subject to 18 the $5 million per-claim liability limit in Endorsement #002. Opp. at 8-10; see Policy, Endors. 19 #002, Sec. E.1.b. Second, it argues that the arbitration claim consisted of multiple separate claims 20 with separate per-claim liability limits. Opp. (dkt. 29) at 16-22. FCE is incorrect on both counts. 21 As noted above, the Policy defines a “claim” as a “written demand received by the Insured 22 for money.” Policy, Sec. A.1. The each-claim limit of liability is $3 million “[f]or any claim by 23 reason of an actual or alleged act or omission . . . in the performance of professional services 24 committed prior to June 6, 2017.” Id., Endors. #002, Sec. E.1.a. The each-claim limit of liability 25 is $5 million “[f]or any claim based exclusively on acts or omissions . . . in the performance of 26 professional services committed on or after June 6, 2017.” Id., Endors. #002, Sec. E.1.b. It 27 further provides that “[t]wo or more claims arising out of the same or related facts, circumstances, 1 considered a single claim first made on the earliest of the date that[] the first such claim was 2 made.” Id., Sec. I.3. 3 If the arbitration consists of one claim under the Policy, then it is undoubtedly a claim “by 4 reason of an actual or alleged act or omission . . . prior to June 6, 2017.” Id., Endors. #002, Sec. 5 E.1.a. Unlike Section E.1.b, which covers a claim “based exclusively” on alleged acts or 6 omissions on or after June 6, 2017, Section E.1.a broadly covers any claim “by reason of” alleged 7 acts or omissions before June 6, 2017. Even assuming that the petition concerned alleged acts or 8 omissions on or after June 6, 2017, it also was “by reason of” its acts or omissions pursuant to 9 FCE’s contract with the Claimants prior to that date. Standard Sec., 967 F.3d at 669; Policy, 10 Endors. #002, Sec. E.1.a. Section E.1.a applies. 11 If the arbitration consists of multiple claims, the same result obtains. Multiple claims may 12 exist within a single action, so in theory, a claim “based exclusively on” acts or omissions on or 13 after June 6, 2017 could be a separate claim from the one “by reason of” acts or omissions before 14 June 6, 2017. But the “multiple claims” provision requires construing multiple claims arising out 15 of “related facts, circumstances, situations, transactions or events” as “a single claim.” See Policy, 16 Sec. I.3. FCE’s alleged acts and omissions in its performance of professional services on or after 17 June 6, 2017 “relate[]” to its alleged acts and omissions under its Contract with Claimants that 18 occurred before that date. Under California law, the term “related” in insurance policies takes a 19 broad meaning. See Bay Cities Paving & Grading, Inc. v. Lawyers’ Mut. Ins. Co., 855 P.2d 1263, 20 1274 (Cal. 1993) (holding that the word “‘related’ . . . encompasses both logical and causal 21 connections”). Thus, even if the action included additional separate claims consisting 22 “exclusively” of acts or omissions on or after June 6, 2017, they would relate back to the first one. 23 Because there is one claim “by reason of” acts or omissions prior to June 6, 2017, and/or 24 because any later claims arise out of “related facts,” the Policy’s clear language dictates that there 25 is one claim that is subject to the $3 million per-claim limit. Id., Endors. #002, Sec. E.1.a. 26 3. Potentiality of Coverage 27 FCE also argues that where there is a “potentiality” that Indian Harbor is required to 1 fails. Under California law, insurers have a duty to defend “mixed claims,” where “some of the 2 claims are at least potentially covered and the others are not.” Buss v. Superior Ct., 939 P.2d 766, 3 774–75 (Cal. 1997). But, as noted above, the language of the Policy is unambiguous here: there is 4 no potentiality of coverage beyond $3 million.3 5 For these reasons, the Court grants summary judgment to Indian Harbor and denies 6 summary judgment to FCE. 7 B. Motion to File an Amended Answer and Counterclaims 8 Indian Harbor also seeks leave to amend its answer and counterclaims, which it filed in 9 March 2021. See Mot. to Amend (dkt. 20). Having recently discovered an apparent overpayment 10 of $397,771.96 beyond $3 million, Indian Harbor intends to file two counterclaims: 11 reimbursement under the Policy and unjust enrichment. See Amended Ans. (dkt. 20-1, ex A, 12 Attach. 2). In its opposition, FCE does not argue that it would be prejudiced by amendment. See 13 Opp. to Mot. to Amend (dkt. 24). It argues only that the proposed amendment would be futile and 14 “clearly subject to dismissal.” Id. at 1. 15 “Absent prejudice, or a strong showing of any of the remaining Foman factors, there exists 16 a presumption under Rule 15(a) in favor of granting leave to amend.” Eminence Capital, 316 F.3d 17 at 1052. FCE argues that Indian Harbor’s first proposed counterclaim for reimbursement under 18 the Policy might be insufficient as a matter of law under Buss, 939 P.2d 766. However, FCE does 19 not argue that Indian Harbor’s second counterclaim for unjust enrichment would be insufficient. 20 The Court easily concludes that FCE has not shown that “no set of facts can be proved under the 21 amendment to the pleadings that would constitute a valid and sufficient claim or defense.” Miller, 22 845 F.2d at 214. Leave to amend is therefore appropriate. 23 IV. CONCLUSION 24 For the foregoing reasons, the Court GRANTS summary judgment to Indian Harbor and 25 DENIES partial summary judgment to FCE. The Court also GRANTS Indian Harbor leave to file 26 3 Further, Buss and its progeny appear beside the point. Those cases involved insurers that refused 27 to defend or limited their defense because they believed some of the acts or omissions were not 1 its amended answer and counterclaims within 21 days of this order.* 2 IT ISSO ORDERED. 3 Dated: November 19, 2021 Zz y= CHARLES R. BREYER 4 United States District Judge 5 6 7 8 9 10 11 a 12

Oo Z 18 19 20 21 22 23 24 25 26 27 28 * The Court notes that Indian Harbor already filed its amended pleading. See Amended Ans. (dkt. 42). It need not do so again.