Tanadgusix Corporation et al v. Arm, Ltd., et al.

WO IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ALASKA
TANADGUSIX CORPORATION, et al., )
)
Plaintiff, )
)
vs. )
)
ARM, LTD., an Illinois corporation, et al., )
) No. 3:18-cv-0219-HRH
Defendants. )
_______________________________________)
O R D E R
Motion to Dismiss;
Motion for Partial Summary Judgment
Defendant Unimerica Insurance Company moves to dismiss the claims plaintiffs have
asserted against it.1 This motion is opposed.2 Also pending in this case is plaintiffs’ motion
for partial summary judgment.3 This motion is opposed.4 Oral argument has been heard on
both motions.
1Docket No. 46.
2Docket No. 54.
3Docket No. 59.
4Docket No. 66.
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Background5
Plaintiffs are Tanadgusix Corporation (“TDX”), Ron Philemonoff, Jeanette Matthews,
Robert Dean Hughes, Benjamin English, Larry Cooper, and John Lyons. The individual
plaintiffs are trustees of the Tanadgusix Corporation Health and Welfare Trust. Defendants
are ARM, Ltd., Hines & Associates, Inc., and Unimerica Insurance Company.
Plaintiffs allege that “TDX and the Trust have established an Employee Health Plan
(‘the Plan’) for employees of TDX and its subsidiaries, and qualifying Directors of TDX.”6
Plaintiffs allege that “on June 1, 2005, Bering Sea Eccotech, Inc., a wholly owned TDX
subsidiary, as original Plan Sponsor, entered into an Administrative Services Agreement with
ARM . . . as Contract Administrator, to provide administrative services to the Plan, including,
but not limited to the processing and payment of benefits in accordance with the Plan.”7
Plaintiffs allege that “[s]ubsequently, TDX took over as Plan Sponsor, and at all times
relevant was the Plan Sponsor.”8
Plaintiffs allege that “in 2014, a dependent (‘Patient’) of an employee of TDX Power,
a TDX subsidiary, was diagnosed with [the] rare disease of paroxysmal nocturnal
5This background is taken from the allegations in plaintiffs’ second amended
complaint and the documents attached to it.
6Second Amended Complaint [etc.] at 3, ¶ 6, Docket No. 43.
7Id. at 3-4, ¶ 11.
8Id. at 4, ¶ 12.
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hemoglobinuria.”9 Plaintiffs allege that it was determined “that it was medically necessary
to treat the Patient with infusions of a drug named Soliris[,]” which was “reputed to be the
most expensive drug in the world.”10 The Patient was treated “at Scott & White Hospital in
Waco, Texas (‘Hospital’), where the Patient’s mother worked.”11
Plaintiffs allege that “[t]he Hospital is a Participating Provider in an Aetna network,
whereby the Hospital, through an agreement with Aetna (‘Hospital Agreement’) allegedly
provides discounted rates for services to patients if they are part of a health plan that can
access these rates through the Aetna network.”12 Plaintiffs allege that “ARM . . . had a
contract with Aetna . . . which allowed it to access this Aetna network for a fee, purportedly
giving TDX Plan members, including the Patient, the opportunity to obtain discounted
rates.”13
Plaintiffs allege that “ARM initially hired or associated with Defendant Hines &
Associates, Inc. (‘Hines’) to review the cost of Soliris and provide medical case management
of the Patient on behalf of ARM and the Trust.”14 Plaintiffs allege that “[t]he Hines case
9Id. at 6, ¶ 23.
10Id. at 6, ¶¶ 24-25.
11Id. at 6, ¶ 26.
12Id. at 6, ¶ 27.
13Id. at 6, ¶ 28.
14Id. at 7, ¶ 31.
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manager claims she contacted the Hospital and obtained a cost quote of $12,200 per 600mg
infusion and $18,200 per 900 mg fusion. . . .”15 Plaintiffs allege that “[t]he Hines employee
failed to document this alleged oral quote, but passed the alleged quote information on to
ARM.”16
Plaintiffs allege, however, that in 2014, the Hospital billed $35,956 for an infusion
and then $51,934, “for which the Hospital expected payment of $21,573.60 and $32,360.40
respectively (60% of amount billed)[.]”17 Plaintiffs allege that rather than paying what the
Hospital was billing, “ARM continued to reprice each Hospital claim and had the Trust pay
a much-reduced amount solely based on an alleged single oral quote from the Hospital to
ARM via Hines, which quote the Hospital denies even providing.”18
Plaintiffs allege that “[i]n February of 2017, three of the Trustees of the Trust, TDX
Power, Inc., . . . along with ARM and the ARM network provider . . . were sued by the
Hospital” in Texas.19 Plaintiffs allege that the Hospital was seeking “$1,765,482.12 for
underpayment of forty-six claims[.]”20
15Id. at 7, ¶ 32.
16Id. at 7, ¶ 33.
17Id. at 7-8, ¶ 35.
18Id. at 10, ¶ 44.
19Id. at 11, ¶ 53.
20Id. at 12, ¶ 55.
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Plaintiffs allege that the Trust first obtained stop-loss insurance from Unimerica in
2016 and that the Trust had a stop-loss insurance policy with Unimerica through the end of
December 2018.21 Although Unimerica was not the Trust’s stop-loss insurer in 2015, the
Unimerica Policy provides “that the Benefit Period was ‘Covered Expenses Incurred from
January 1, 2015 through December 31, 2018. . . .”22 Thus, plaintiffs allege that “Unimerica
agreed to pay claims from 2015 that were submitted to it during the extended Benefit Period
for which TDX paid an increased premium to Unimerica.”23 Plaintiffs allege that the Policy
set a specific deductible for the Patient of $450,000.24
Plaintiffs allege that “[d]uring both 2016 and 2017 the Patient’s medical treatment at
the Hospital exceeded the Patient’s $450,000 deductible under the Unimerica Policy and
ARM submitted the excess Hospital claims to Unimerica, which paid the excess pursuant to
its Policy with TDX.”25
Plaintiffs allege that in November 2017, ARM was terminated as the plan administra-
tor and the Trust “retained Professional Benefit Services, Inc. (‘PBS’) to [a]dminister claims
21Id. at 15, ¶ 65.
22Id. at 16, ¶ 70.
23Id. at 16, ¶ 71.
24Id. at 15, ¶ 66.
25Id. at 16, ¶ 72.
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under the TDX Plan.”26 Plaintiffs allege that starting in November 2017 “and continuing into
2018, PBS utilized a preferred health care provider network that had a contract with the
Hospital, and pursuant to the agreements, the Hospital was paid at the 60% of the Hospital
contract rate for Patient treatment in late 2017 and 2018.”27 Plaintiffs allege that “[a]s a
result, the Hospital ha[d] no underpayment claims for 2018, but the Patient exceeded her
$450,000 deductible . . . and the excess claim was submitted to Unimerica for payment,
which payment Unimerica processed without complaint or modification at the time.”28
Plaintiffs allege that “[o]n August 6, 2018, the Trustees provided Unimerica with a
Scott & White summary sheet of underpayment claims by year.”29 Plaintiffs allege that
according to the summary sheet, “Unimerica would owe at least $1,628,835.92 toward the
unpaid Hospital claims.”30 Specifically, this summary sheet showed that the Hospital
claimed the underpayment for 2015 was $503,489.11; $548,818.61 for 2016; and
$576,528.20” for 2017.31 Plaintiffs allege that “[b]ecause TDX and the Trust believed that
26Id. at 17, ¶ 73.
27Id. at 17, ¶ 74.
28Id. at 17, ¶ 75.
29Id. at 17, ¶ 77.
30Id. at 18, ¶ 79.
31Exhibit D at 1, Second Amended Complaint [etc.], Docket No. 43.
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Unimerica owed any underpayments to the Hospital, TDX and the Trust requested that
Unimerica attend a mediation of all Parties in the Hospital Litigation. . . .”32
Plaintiffs allege that “[o]n August 31, 2018 the United States Magistrate Judge in the
Hospital Litigation issued a Report and Recommendation to the United States District Judge
in which he found, in part, that ARM . . . had breached” its agreements with plaintiffs “by
processing and repricing the Hospital claims at less than the contractually agreed upon rate
of 60% of the billed charge.”33
Plaintiffs allege that “[t]he mediation of the Hospital Lawsuit took place . . . on
September 19, 2018 without the participation of Unimerica or the Aetna entities.”34 Plaintiffs
allege that “[a]t the mediation TDX and the Trust, along with ARM, reached a tentative
settlement with the Hospital entirely contingent on Unimerica participating in a final
settlement to pay at least $1,500,000 for the underpaid Hospital claims.”35 Plaintiffs allege
that “TDX and the Trust agreed to have the Hospital claims re-adjudicated in accordance
with the Magistrate’s decision and in accordance with the TDX Plan Document and
Unimerica Policy.”36
32Second Amended Complaint [etc.] at 18, ¶ 80, Docket No. 43.
33Id. at 19, ¶ 86.
34Id. at 19, ¶ 88.
35Id. at 19, ¶ 89.
36Id. at 19, ¶ 90.
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Plaintiffs allege that “[i]n addition to the Hospital claims, in 2018 the Patient
underwent surgery at Texas Children’s Hospital, and Texas Children’s Hospital has
submitted claims to be paid under the TDX Plan in an amount in excess of $2,000,000.00.”37
Plaintiffs allege that on November 12, 2018, the “repriced” Hospital claims for the
Patient’s treatment in 2015, 2016, and 2017 were submitted to Unimerica.38 In addition, “the
Hospital claims for 2018 and all of the Children’s Hospital claims” were submitted to
Unimerica “because the Patient had already exceeded the Patient’s Specific Deductible of
$450,000 for 2018.”39
Plaintiffs allege that Unimerica responded to these claims on January 4, 2019.40
Plaintiffs allege that in the January 4, 2019 letter, “Unimerica . . . purported to exercise its
rights under the Policy provision Paragraph titled ‘Misstated Data, Concealment, Fraud’ to
unilaterally, without any prior notice to TDX and the Trust, retroactively change the terms
and conditions of the Policy.”41 In the January 4, 2019 letter, Unimerica stated that in
October 2015, ARM had provided it with “claim data [that] showed that [the Patient] was
37Id. at 20, ¶ 92.
38Id. at 20, ¶ 93.
39Id. at 20-21, ¶ 94.
40Id. at 21, ¶ 96.
41Id. at 21, ¶ 98.
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receiving Soliris once every two weeks at a cost of $24,400 per treatment.”42 Unimerica
stated that “[r]elying on this data, [it] estimated that, as of August 31, 2015, the total year-to-
date spend for [the Patient’s] Soliris treatment was $564,000, totaling approximately
$745,000 per year.”43 Unimerica further stated that its “underwriting team used and relied
on the ARM reports[] to determine whether to quote, issue a policy and to establish
appropriate terms and conditions, in accordance with industry standards.”44 Based on the
alleged misrepresentation about the cost of Soliris treatment, Unimerica changed the
deductible for the Patient for the years 2016-2018 to $1,050,000 and excluded any claims
incurred in 2015.45
Plaintiffs allege that on January 28, 2019, Unimerica provided “an Explanation of
Benefits (‘EOB’) for [the] Patient’s claims that had been submitted on November 12,
2018.”46 Unimerica paid $2,106,362.63 of the claims but denied $2,212,086.67 of the
claims.47
42Exhibit G, Second Amended Complaint [etc.] at 1, Docket No. 43.
43Id.
44Id.
45Id. at 9.
46Second Amended Complaint [etc.] at 21, ¶ 99, Docket No. 43.
47EOB, Exhibit H at 1, Second Amended Complaint [etc.], Docket No. 43.
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In their second amended complaint, plaintiffs assert a breach of contract claim (Count
XII), a bad faith claim (Count XIII), a claim for punitive damages (Count XIV), a UTPA
claim (Count XV), and a claim for declaratory judgment (Count XVI) against Unimerica.
Plaintiffs seek a declaration
that Unimerica: (a) did not have the right to unilaterally modify
and reform the Unimerica Policy; (b) if Unimerica had the right
to unilaterally modify and reform the Unimerica Policy, it did so
in a manner to make the Policy illusory, unenforceable, and non-
binding on TDX and the Trust with respect to the purported
unilateral changes by Unimerica; and (c) TDX and the Trust can
enforce the Unimerica Policy as issued without the Unimerica
changes.[48]
Pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure, Unimerica now moves
to dismiss all of plaintiffs’ claims asserted against it. And, plaintiffs move for summary
judgment on their breach of contract and declaratory judgment claims on the grounds that
Unimerica’s conduct violated AS 21.54.010 and AS 21.51.050.
Discussion
“‘To survive a [Rule 12(b)(6)] motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief that is plausible on its face.’”
Zixiang Li v. Kerry, 710 F.3d 995, 999 (9th Cir. 2013) (quoting Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009)). “A claim is facially plausible ‘when the plaintiff pleads factual content
that allows the court to draw the reasonable inference that the defendant is liable for the
48Second Amended Complaint [etc.] at 60-61, ¶ 239, Docket No. 43.
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misconduct alleged.’” Id. (quoting Iqbal, 556 U.S. at 678). “The plausibility standard
requires more than the sheer possibility or conceivability that a defendant has acted
unlawfully.” Id. “‘Where a complaint pleads facts that are merely consistent with a
defendant’s liability, it stops short of the line between possibility and plausibility of
entitlement to relief.’” Id. (quoting Iqbal, 556 U.S. at 678). “[T]he complaint must provide
‘more than labels and conclusions, and a formulaic recitation of the elements of a cause of
action will not do.’” In re Rigel Pharmaceuticals, Inc. Securities Litig., 697 F.3d 869, 875
(9th Cir. 2012) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). “In
evaluating a Rule 12(b)(6) motion, the court accepts the complaint’s well-pleaded factual
allegations as true and draws all reasonable inferences in the light most favorable to the
plaintiff.” Adams v. U.S. Forest Srvc., 671 F.3d 1138, 1142-43 (9th Cir. 2012). “A
dismissal under rule 12(b)(6) ‘may be based on either a lack of a cognizable legal theory or
the absence of sufficient facts alleged under a cognizable legal theory.’” Kwan v. SanMedica
Int’l, 854 F.3d 1088, 1093 (9th Cir. 2017) (quoting Johnson v. Riverside Healthcare Sys., LP,
534 F3.d 1116, 1121 (9th Cir. 2008)).
Summary judgment is appropriate when there are no genuine issues of material fact
and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). The
initial burden is on the moving party to show that there is an absence of genuine issues of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). If the moving party meets
its initial burden, then the non-moving party must set forth specific facts showing that there
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is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986).
In deciding a motion for summary judgment, the court views the evidence of the non-movant
in the light most favorable to that party, and all justifiable inferences are also to be drawn in
its favor. Id. at 255.
breach of contract and declaratory judgment claims
Plaintiffs’ breach of contract and declaratory judgment claims hinge on the question
of whether Unimerica could retroactively eliminate coverage for the 2015 claims and raise
the deductible for the Patient for 2016-2018. Unimerica argues that these claims are not
plausible because it had the right to retroactively adjust the Policy under the terms of the
Misrepresentation Clause. Unimerica contends that its adjustments to the Policy were
permitted by the unambiguous terms of the Policy and plaintiffs’ reasonable expectations.
Plaintiffs, on the other hand, move for summary judgment on these claims, arguing that
Unimerica’s unilateral adjustment of the terms of the Policy violated AS 21.54.010 and AS
21.51.050.
We begin with the question of whether plaintiff’s breach of contract and declaratory
judgment claims are plausible, which requires the court to construe the Misrepresentation
Clause. “Alaska has adopted the doctrine of reasonable expectations.” West v. Umialik Ins.
Co., 8 P.3d 1135, 1138 (Alaska 2000). “‘The obligations of insurers are generally
determined by the terms of their policies.’” Id. (quoting Bering Strait Sch. Dist. v. RLI Ins.
Co., 873 P.2d 1292, 1294 (Alaska 1994)). “But because insurance policies are contracts of
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adhesion, they are construed according to the principle of ‘reasonable expectations.’” Id.
(quoting Bering Strait Sch. Dist., 873 P.2d at 1294). “Under the reasonable expectations
doctrine, [t]he objectively reasonable expectations of applicants . . . regarding the terms of
insurance contracts will be honored even though painstaking study of the policy provisions
would have negated those expectations.” Id. (citation omitted). “It is a settled principle that
ambiguities in an insurance policy are construed in favor of the insured.” Id. “The court
need not find the policy ambiguous, however, to construe it under the reasonable expecta-
tions doctrine.” Id. “To determine the parties’ reasonable expectations, the court examines
(1) the language of the disputed policy provisions; (2) the language of other provisions in the
same policy; (3) extrinsic evidence; and (4) case law interpreting similar provisions.” Id.
The Misrepresentation Clause provided:
The Company has relied on the information provided by the
Policyholder, the Administrator or any agent of the Policyholder,
in the issuance of this Policy, or for any Subsequent Policy
Period. In the event of a misrepresentation, concealment or
omission of a fact, or a mistake of fact (whether or not a mutual
mistake), any of which materially affect the underwriting,
premium, rating or terms and conditions of this Policy, the
Company may, at its option:
a) increase premium rates, attachment points and/or otherwise
change the terms and conditions of this Policy. Such increase or
change to be effective retroactively to the Effective Date or as
of any premium due date thereafter, or
b) terminate this Policy as of the next premium due date.[49]
49Exhibit C at 9, Second Amended Complaint [etc.], Docket No. 43.
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Unimerica argues that the Misrepresentation Clause unambiguously gave it the right
to change the terms and conditions of the Policy retroactively if there was a material
misstatement of fact. Unimerica argues that this is the only reasonable interpretation of the
Clause, which means that plaintiffs should have reasonably expected that Unimerica would
change the terms of the Policy if it learned that there had been a misrepresentation of material
information. Unimerica argues that plaintiffs have not alleged any facts that suggest that they
understood or expected the Misrepresentation Clause to mean something other than what it
unambiguously provided.
Plaintiffs do not suggest a different interpretation of the Misrepresentation Clause.
Rather, they argue that if the clause is interpreted as Unimerica contends it should be, the
Clause is unenforceable. First, plaintiffs argue that under Unimerica’s interpretation, the
Misrepresentation Clause is a “discretionary clause” and that such clauses are prohibited
under Alaska law. Plaintiffs contend that a “discretionary clause” is one “that purport[s] to
confer discretion upon the insurer in determining the meaning of the terms within the
insurance contract, most importantly for the purpose of determining the insured’s eligibility
for insurance benefits.”50 An example of such a clause is: “‘Insurer has full discretion and
authority to determine the benefits and amount payable as well as to construe and interpret
50Pathak, Discretionary Clause Bans & ERISA Preemption, 56 S.D. L. Rev. 500, 501
(2011).
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all terms and provisions of the plan.’”51 “The proposition set forth in such clauses - that the
insurer’s position about the meaning and applicability of the insurance contract carries more
weight than the insured’s position about those same issues - is contrary to the law in most
states.”52
Plaintiffs argue that Alaska is one of the states that prohibits discretionary clauses.
As proof, plaintiffs cite to the State of Alaska Division of Insurance’s Stop Loss Policy Form
Checklist.53 The Checklist states that a stop-loss policy “may not assert exclusive or
discretionary authority to interpret contractual provisions” and cites to AS 21.36 and AS
21.42.130 as the statutory sources of this prohibition.54 Chapter 36 of Title 21governs trade
practices and fraud in the insurance industry. AS 21.42.130 provides, in relevant part:
The director shall disapprove a form filed under AS 21.42.120
or withdraw a previous approval of the form only if the form
(1) is in any respect in violation of or does not comply with this
title;
51Id. (quoting Standard Ins. Co. v. Morrison, 584 F.3d 837, 839 (9th Cir. 2009)).
52Id.
53Exhibit A at 1, Plaintiffs’ Opposition to Unimerica Insurance Company’s Motion
to Dismiss the Second Amended Complaint, Docket No. 54. This checklist is available
publically online on the State of Alaska commerce department’s website. The court may
consider this exhibit without converting Unimerica’s to dismiss into a motion for summary
judgment because the court may take judicial notice of information publically available on
government websites. Daniels–Hall v. National Educ. Ass’n, 629 F.3d 992, 998–99 (9th Cir.
2010).
54Exhibit A at 1, Plaintiffs’ Opposition to Unimerica Insurance Company’s Motion
to Dismiss the Second Amended Complaint, Docket No. 54.
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(2) contains or incorporates by reference, where incorporation
is permissible, an inconsistent, ambiguous, or misleading clause,
or exception and condition that deceptively affects the risk
purported to be assumed in the general coverage of the con-
tract[.]
Plaintiffs argue that the Misrepresentation Clause is a prohibited discretionary clause
because Unimerica is claiming that the Clause gives it the sole authority to decide that
benefits can be dramatically changed and reduced. Plaintiffs argue that such an interpretation
“deceptively affects the risk purported to be assumed” in the Policy. AS 21.42.130. Thus,
plaintiffs argue that it is at least plausible that the Misrepresentation Clause is a prohibited
discretionary clause and unenforceable. And, if it is plausible that the Clause is unenforce-
able, then plaintiffs argue that their breach of contract and declaratory judgment claims
should not be dismissed.
As Unimerica points out, plaintiffs did not allege this theory in their second amended
complaint, and the “[c]ourt need not . . . consider facts or legal theories alleged for the first
time in a plaintiff’s opposition brief.” Leibert v. Philadelphia Housing Auth., Case No.
10–5412, 2011 WL 940339, at *3 (E.D. Pa. March 14, 2011). But even if the court were to
consider this argument, it fails because the Misrepresentation Clause is not a prohibited
discretionary clause. The Misrepresentation Clause did not give Unimerica the exclusive
right to interpret provisions of the Policy. Rather, it gave Unimerica the authority to adjust
terms of the Policy if the insured misrepresented information that would have materially
affected the underwriting of the policy, the premiums, or the terms and conditions of the
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policy. This is not unfettered discretion as plaintiffs contend nor does Unimerica’s
interpretation of the Misrepresentation Clause leave the insured without a means to challenge
any adjustment Unimerica might make due to material misrepresentations. The Misrepresen-
tation Clause provided that Unimerica could only change the terms and conditions of the
Policy if there were a misrepresentation that “materially affect[ed] the underwriting,
premium, rating or terms and conditions of this Policy[.]”55 The insured could challenge
whether a representation was in fact a misrepresentation and if it were, whether that
misrepresentation was material. As such, Unimerica’s discretion under the Misrepresentation
Clause was not unfettered. The Misrepresentation Clause is not a prohibited discretionary
clause.
Plaintiffs next appear to argue that Unimerica’s interpretation of the Misrepresentation
Clause makes coverage under the Policy illusory. “Illusory promises are those that by their
terms make performance entirely optional with the promisor.” Askinuk Corp. v. Lower
Yukon School Dist., 214 P.3d 259, 267 (Alaska 2009) (citation omitted). To the extent that
plaintiffs are making such an argument, it fails. The Misrepresentation Clause did not make
coverage under the Policy entirely optional for Unimerica. Rather, the Clause permits
Unimerica to adjust the terms of the Policy if there were material misrepresentations.
Moreover, given that Unimerica paid more than $2,000,000 of the claim TDX submitted in
November 2018, any allegation that coverage under the Policy was illusory is not plausible.
55Exhibit C at 9, Second Amended Complaint [etc.], Docket No. 43.
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Plaintiffs next argue that Unimerica’s interpretation of the Misrepresentation Clause
renders the Clause unconscionable because it allowed Unimerica to unilaterally change the
terms of the Policy. As one court has noted, “even when unilateral modification rights are
explicitly granted in a contract, those clauses are often found invalid as . . . unconscionable.”
Board of Trustees, Sheet Metal Workers’ Nat’l Pension Fund v. Four-C-Aire, Inc., Case No.
1:16-cv-1613, 2017 WL 1479425, at *9 (E.D. Va. April 21, 2017), reversed on other
grounds, 929 F.3d 135 (4th Cir. 2019). The Four-C-Aire court cited to Ingle v. Circuit City
Stores, Inc., 328 F.3d 1165 (9th Cir. 2003). There, the Ninth Circuit considered the
enforceability of an arbitration agreement that employees of Circuit City were required to
sign as a prerequisite to employment. Id. at 1170-71. Applying California law, the Ninth
Circuit found the arbitration agreement unconscionable both procedurally and substantively.
Under California law, “[s]ubstantive unconscionability centers on the terms of the agreement
and whether those terms are so one-sided as to shock the conscience.” Id. at 1172 (citation
omitted). Of import here, the Ninth Circuit found “the provision affording Circuit City the
unilateral power to terminate or modify the contract” to be “substantively unconscionable.”
Id. at 1179.
Plaintiffs acknowledge that the Alaska Supreme Court has never addressed the precise
issue of whether a clause with language identical or similar to that of the Misrepresentation
Clause would be unconscionable. However, plaintiffs contend that the Alaska Supreme
Court touched on this issue in Gibson v. Nye Frontier Ford, Inc., 205 P.3d 1091 (Alaska
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2009). There, Gibson argued that the arbitration agreement in his employment contract was
unconscionable, in part, because “it [was] subject to unilateral change by the employer[.]”
Id. at 1093. The court found that the arbitration agreement was not subject to unilateral
change by Nye, but in doing so observed “the prevalence of the view that arbitration clauses
that may be changed unilaterally are unconscionable[.]” Id. at 1097. Thus, plaintiffs insist
that if faced with this issue, the Alaska Supreme Court would find the Misrepresentation
Clause unconscionable.
“If the state’s highest court has not decided an issue, it is the responsibility of the
federal courts sitting in diversity to predict ‘how the state high court would resolve it.’”
Albano v. Shea Homes Ltd. Partnership, 634 F.3d 524, 530 (9th Cir. 2011) (quoting Air–Sea
Forwarders, Inc. v. Air Asia Co., 880 F.2d 176, 186 (9th Cir. 1989)). “Under Alaska law a
contract term may be unconscionable ‘where . . . circumstances indicate a vast disparity of
bargaining power coupled with terms unreasonably favorable to the stronger party.’” Nye
Frontier Ford, 205 P.3d at 1096 (quoting Municipality of Anchorage v. Locker, 723 P.2d
1261, 1265–66 (Alaska 1986)). Although there is often a vast disparity in bargaining power
between the insured and the insurer, that is not the case here. TDX is a sophisticated
corporate entity with options other than purchasing stop-loss insurance from Unimerica.
Moreover, as discussed above, the Misrepresentation Clause did not allow Unimerica to
unilaterally change the terms of the Policy for any reason whatsoever. Rather, the Clause
allowed Unimerica to change the terms of the Policy if there were misrepresentations made
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by the insured, or someone acting on behalf of the insured, that “materially affect[ed] the
underwriting, premium, rating or terms and conditions of this Policy[.]”56 This is consistent
with Alaska law. AS 21.42.110 governs representations in insurance applications and
provides in relevant part, that
[m]isrepresentations, omissions, concealment of facts, and
incorrect statements may not prevent a recovery under the policy
or contract unless either
(1) fraudulent;
(2) material either to the acceptance of the risk, or to the hazard
assumed by the insurer; or
(3) the insurer in good faith would either not have issued the
policy or contract, or would not have issued a policy or contract
in as large an amount, or at the same premium or rate, or would
not have provided coverage with respect to the hazard resulting
in the loss, if the true facts had been made known to the insurer
as required either by the application for the policy or contract or
otherwise.
Thus, this court predicts that the Alaska Supreme Court would not find the Misrepresentation
Clause unreasonable or unconscionable.
But even if the Misrepresentation Clause is interpreted as Unimerica suggests,
plaintiffs argue that their breach of contract and declaratory judgment claims should not be
dismissed because it is plausible that there was no misrepresentation about the price of Soliris
This argument fails. In their opposition to the motion to dismiss, plaintiffs take issue with
56Exhibit C at 9, Second Amended Complaint [etc.], Docket No. 43.
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Unimerica’s contention that they have admitted that ARM provided false information to
Unimerica about what the Hospital was charging for Soliris. Rather, plaintiffs contend that
they have alleged that there was a dispute as to the pricing of Soliris and that Unimerica
claims that it was provided certain information by ARM about the cost of Soliris during the
underwriting process.
However, in their second amended complaint, plaintiffs allege that “Hines and ARM
knew” that the case management reports “were being sent to TDX, the Trust and [the] stop-
loss carriers,”57 that the August 2015 Hines Report stated that “health plan allowing amount
quoted to case manager” for Soliris,58 that “prior to the issuance of the Unimerica Policy,
Unimerica knew that the basis for payment to the Hospital for Eculizumab [another name for
Soliris] at the time of underwriting, and for the future, would be the amount the plan was
allowing based on an ‘amount quoted to the case manager,’ and not based on any network
contracted rate[,]”59 and that ARM withheld “relevant information about the repricing of
Soliris” from the stop-loss carriers.60 Although, “generally, the question of whether an
applicant’s statements were false or misleading is a jury question[,] . . . when an applicant
admits that a statement is false, . . . courts can decide this question as a matter of law.”
57Second Amended Complaint [etc.] at 10, ¶ 47, Docket No. 43.
58Id. at 47, ¶ 191.
59Id. at 48, ¶ 192.
60Id. at 30, ¶ 127(c).
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Bennett v. Hedglin, 995 P.2d 668, 671 (Alaska 2000). By their allegations in the second
amended complaint, plaintiffs have admitted that Unimerica was given false information
about the cost of Soliris, or in other words, that there was a misrepresentation about the price
of Soliris.
But plaintiffs argue that even if there were a misrepresentation about the price of
Soliris, which there was, it is plausible that this misrepresentation did not “materially affect
the underwriting, premium, rating or terms and conditions of” the Policy.61 At oral argument,
plaintiff’s counsel argued that there is a question of fact as to whether the price of Soliris was
material given all the other information that Unimerica had about the Patient when it first
underwrote the Policy in 2015.62 Plaintiffs have alleged that the claims data that Unimerica
received in 2015 included an August 2015 report prepared by Hines.63 That report included
detailed information about the nature of the Patient’s condition, her current course of
treatment, and her anticipated future needs, which included ongoing Soliris treatment.64
Given all the information that Unimerica had about the Patient, plaintiffs argue that it is at
least plausible that the information about the price of Soliris was not material.
61Exhibit C at 9, Second Amended Complaint [etc.], Docket No. 43.
62Transcript of Oral Argument [etc.] at 24:7-22, Docket No. 76.
63Second Amended Complaint [etc.] at 47, ¶ 190, Docket No. 43.
64Exhibit K, Second Amended Complaint [etc.], Docket No. 43.
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Unimerica, however, argues that plaintiffs have admitted that the information
regarding the cost of Soliris was material. In its reply brief, Unimerica sets out a list of
eleven allegations made in plaintiffs’ second amended complaint65 and argues that these
allegations established that Unimerica had properly invoked the Misrepresentation Clause.
But none of the allegations say anything about whether Unimerica relied on the information
about the pricing of Soliris in underwriting the Policy or in setting the terms and conditions
of the Policy. Plaintiffs do allege that Unimerica was not provided “relevant” information
about the pricing of Soliris,66 but “relevant” does not necessarily mean the same thing as
“material.”
At oral argument, counsel for Unimerica suggested that there really could be no
question that misrepresentation about the pricing of Soliris was material, given that the
difference involved thousands of dollars each year.67 But there are allegations in plaintiffs’
second amended complaint that make it at least plausible that the misrepresentation about the
pricing of Soliris did not “materially affect the underwriting, premium, rating or terms and
conditions of” the Policy.68 Plaintiffs have alleged that “[i]n November 2017 the Trust
terminated ARM as the Administrator of the Trust and retained Professional Benefit
65Defendant Unimerica Insurance Company’s Reply [etc.] at 4-5, Docket No. 57.
66Second Amended Complaint [etc.] at 28, ¶ 122c, Docket No. 43.
67Transcript of Oral Argument [etc.] at 12:5-13, Docket No. 76.
68Exhibit C at 9, Second Amended Complaint [etc.], Docket No. 43.
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Services, Inc. (‘PBS’) to [a]dminister claims under the TDX Plan.”69 Plaintiffs further allege
that
[s]tarting with Hospital claims for the Patient[’s] treatment
submitted by the Hospital for payment in November 2017, and
continuing into 2018, PBS utilized a preferred health care
provider network that had a contract with the Hospital, and
pursuant to the agreements, the Hospital was paid at the 60% of
the Hospital contract rate for Patient treatment in late 2017 and
2018.[70]
Although plaintiffs do not allege exactly what this 60% rate was, it is reasonable to infer that
it was the same or similar to the $32,360.40 per Soliris infusion that the Hospital maintained
was the correct rate.71 Plaintiffs allege that the Policy “was renewed again for the year 2018
. . . with a specific deductible for the Patient of $450,000 for the year.”72 It is reasonable to
infer from these allegations that Unimerica knew before it renewed the Policy in 2018 the
correct pricing for Soliris and that despite this knowledge, Unimerica did not change the
deductible amount for the Patient. And it is reasonable to infer that if Unimerica did not
change the deductible for the Patient despite knowing the correct pricing for Soliris, then the
misinformation about that pricing in 2015 would not have “materially affect[ed] the
69Second Amended Complaint [etc.] at 17, ¶ 73, Docket No. 43.
70Id. at 17, ¶ 74.
71Id. at 8, ¶ 35.
72Id. at 16, ¶ 62.
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underwriting, premium, rating or terms and conditions of” the Policy.73 If the misrepresenta-
tion about the pricing of Soliris was not material, then Unimerica did not properly invoke the
Misrepresentation Clause. And, if Unimerica did not properly invoke the Misrepresentation
Clause, then plaintiffs’ breach of contract and declaratory judgment claims are plausible and
are not subject to a Rule 12(b)(6) dismissal.74
We turn then to plaintiffs’ motion for partial summary judgment. Plaintiffs first argue
that Unimerica’s unilateral adjustment of the terms of the Policy violated AS 21.54.010,
which applies to “group health insurance.” While there is no dispute that stop-loss insurance
is “health insurance” as that term is defined under Alaska law, the parties do disagree as to
whether the stop-loss insurance provided by the Policy was “group health insurance.”
73Exhibit C at 9, Second Amended Complaint [etc.], Docket No. 43.
74Plaintiffs also argued that their breach of contract and declaratory judgment claims
were plausible because Unimerica’s “claim of misrepresentation” is barred by the two-year
statute of limitations found in AS 09.10.070. Even if Unimerica’s misrepresentation defense
is subject to a two-year statute of limitations, Unimerica timely raised the defense. The
earliest Unimerica could be deemed to have been aware of the alleged misrepresentations
would have been when the Hospital filed suit in February 2017. If, as plaintiffs contend,
Unimerica first raised its misrepresentation claim in January 2019, then it did so within the
requisite two years. Plaintiffs also argue that laches could apply here if the court viewed
Unimerica’s unilateral change to the Policy as a reformation of the Policy. Although
“[e]quitable claims for rescission or reformation of a contract may be barred by the doctrine
of laches[,]” Moffitt v. Moffitt, 341 P.3d 1102, 1105 (Alaska 2014), laches has no
application here because Unimerica is not seeking to reform the Policy but rather it is asking
the court to interpret a provision of the Policy.
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AS 21.54.060(a)(1) provides that “group health insurance” is
that form of health insurance covering groups of persons as
defined below, with or without one or more members of their
families or one or more of their dependents, or covering one or
more members of the families or one or more dependents of the
groups of persons and issued on the following basis:
(1) under a policy issued to an employer or trustees of a fund
established by an employer, who shall be considered the
policyholder, insuring employees of the employer for the benefit
of persons other than the employer[.]
Plaintiffs argue that the insurance provided in the Policy falls within this definition.
Plaintiffs point out that the Policy provided that the insurance contract “consist[ed] of this
Policy, Schedule of Benefits, application, approved amendments or endorsements, and a copy
of the Plan Document, which is on file with the Company.”75 Because the TDX Plan is
incorporated into the Policy, plaintiffs argue that the Policy protects a specific group of
people, namely employees and dependents of TDX and its subsidiaries. Plaintiffs also point
out that the Policy refers to deductibles as “per Covered person” and structures its rates based
on the number of covered persons in a family.76 Plaintiffs also point out that the Policy
defines “Covered Expense” as “medical or other expenses under the Plan to which this Policy
75Exhibit C at 8, Second Amended Complaint [etc.], Docket No. 43.
76Id. at 2-3.
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applies[.]”77 Plaintiffs argue that thus the premiums “mirror those of a group health
insurance plan” as does the payment of benefits.78
Plaintiffs also point out that Unimerica itself has referred to the Policy as a “group
policy” in various amendments and endorsements to the Policy.79 And, plaintiffs point out
that in October 12, 2015, Sheila Whatley, an “Associate Director of Underwriting at Optum,
Inc.[,] which is a parent corporation of” Unimerica,80 stated that “[i]f the application and non-
refundable fee are not received” from TDX for the stop-loss insurance “by October 16, the
reports provided will need to be updated, re-submitted and the group will need to be
reviewed for the possibility of re-underwriting.”81 Plaintiffs also point to Unimerica’s
proposal which was sent to TDX, in which Unimerica stated: “The Rate Cap will not apply
if the Company determines there is a material change to the Policyholder’s Plan, the terms
or the conditions of the Stop Loss Policy, or the nature or composition of the group to whom
the coverage is offered.”82 Plaintiffs argue that all of this is further proof that Unimerica
considered the stop-loss insurance “group health insurance.”
77Id. at 4.
78Motion for Partial Summary Judgment at 17, Docket No. 59.
79Exhibit B at 4, 7, 10, Notice of Filing Exhibits, Docket No. 63.
80Declaration of Sheila C. Whatley at 2, ¶ 1, Docket No. 67.
81Exhibit D at 2, Whatley Declaration, Docket No. 67.
82Id. at 3.
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Plaintiffs argue that other courts have held that stop-loss insurance is group health
insurance and they cite to Texas Department of Insurance v. American National Insurance
Company, 410 S.W.3d 843 (Tex. 2012). There, the Texas Supreme Court held that stop-loss
insurance is not “reinsurance” but rather is “direct insurance in the nature of health insurance
because the stop-loss policies are purchased by the plans ultimately to cover claims
associated with their health-care expenses.” Id. at 855. But, plaintiffs’ reliance on Texas
Department of Insurance is misplaced as the question before the court was whether stop-loss
insurance was reinsurance, not whether it was group health insurance.
Although Unimerica has referred to the Policy as a group policy, that does not mean
that the stop-loss insurance provided in the Policy is group health insurance as that term is
defined under Alaska law. See Western Enterprises, Inc. v. Arctic Office Machines, Inc.,
667 P.2d 1232, 1234 (Alaska 1983) (“the labels used by a party to characterize its transaction
are not determinative; it is the substance of the transaction and the intent of the parties that
controls”). Under Alaska law, stop-loss insurance is defined as “insurance purchased by a
self-insured employer to cover benefits the employer incurs in excess of a preset limit.” AS
21.12.050(c). But, group health insurance “insur[es] employees of the employer. . . .” AS
21.54.060(a)(1). In short, group health insurance is purchased by employers who offer fully-
funded health plans and a policy for group health insurance directly insures the employees.
Stop-loss insurance, on the other hand, is purchased by employers who self-fund their health
plans and a policy for stop-loss insurance insures the employer. TDX is the only
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policyholder under the Policy and “Covered Persons” are persons covered by the TDX health
plan, not persons covered by the Policy. The Policy itself made this clear by providing that
[t]he Company will have neither the right nor the obligation
under this Policy to directly pay any Covered Person or provider
of professional or medical services. The Company’s sole
liability is to the Policyholder, subject to the terms and condi-
tions of this Policy. Nothing in this Policy shall be construed to
permit a Covered Person to have a direct right of action against
the Company.[83]
In another provision, the Policy stated that “[t]he parties to this Policy are the Policyholder
and the Company. The Company’s sole liability under this Policy is to the Policyholder.
This Policy does not create any right or legal relation between the Company and a Covered
Person under the Plan.”84 Plainly, the Policy covered TDX, not its employees and their
dependents, which means that the stop-loss insurance provided by the Policy is not group
health insurance. Other courts have similarly held. In Associated Industries of Missouri
v. Angoff, 937 S.W.2d 277, 283 (Mo. Ct. App. 1996), the court explained,
[b]y definition, group health insurance does not provide benefits
to the employer, and no policy of group health insurance is
permitted to pay any benefit directly to the employer. Stop-loss
insurance, on the other hand, does benefit the employer. It is
issued to an employer or the trustees of a self-funded plan to
protect the employer or trust from unusual or catastrophic losses.
It provides no direct benefits whatsoever for any employee or
their dependents.
83Exhibit C at 9, Second Amended Complaint [etc.], Docket No. 43.
84Id.
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In Cuttle By and Through Stickney v. Federal Employees Metal Trades Council, 623 F. Supp.
1154, 1157 (D.C. Me. 1985), the court found that “[s]top-loss insurance is not group health
insurance providing insurance to individuals through a sponsor group. Rather, it is insurance
obtained to protect self-insurers from risks beyond those upon which the premiums are
based.” And, in American Medical Security, Inc. v. Bartlett, 915 F. Supp. 740, 746 (D. Md.
1996), the court, in rejecting an argument that a self-funded ERISA health plan was subject
to indirect state insurance regulation to the same extent that a fully-insured ERISA plan was,
explained that
[t]here is a distinction between a group health insurance policy
purchased by a fully insured plan, whereby the participants
receive benefit payments directly from the insurer, and a
stop-loss insurance policy purchased by a self-funded or
self-insured plan, whereby the plan itself receives the benefit
payments. The purpose of stop-loss insurance is to protect the
plan from catastrophic losses and not to provide health and
accident insurance directly to employees.
Because the Policy does not provide group health insurance, AS 21.54.010 has no
application here. Plaintiffs are not entitled to summary judgment that Unimerica violated AS
21.54.010.
Secondly, in the alternative, plaintiffs argue that they are entitled to summary
judgment on their breach of contract and declaratory judgment claims because Unimerica’s
unilateral adjustment of the terms of the Policy violated AS 21.51.050. AS 21.51.050(A)
provides that in health insurance policies,
[t]here shall be a provision as follows:
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“Time Limit on Certain Defenses: (1) After three years from the
date of issue of this policy no misstatements, except fraudulent
misstatements, made by the applicant in the application for the
policy shall be used to void the policy or to deny a claim for loss
incurred or disability (as defined in the policy) commencing
after the expiration of the three-year period.”
(A) The foregoing policy provision shall not be so
construed as to affect any legal requirement for avoid-
ance of a policy or denial of a claim during the initial
three-year period, or to limit the application of AS
21.51.170 - 21.51.210 in the event of misstatement with
respect to age or occupation or other insurance.
(B) A policy that the insured has the right to continue in
force subject to its terms by the timely payment of
premium (i) until at least age 50 or (ii) in the case of a
policy issued after age 44, for at least five years from its
date of issue, may contain in lieu of the foregoing the
following provision (from which the clause in parenthe-
ses may be omitted at the insurer’s option) under the
caption “Incontestable”:
“After this policy has been in force for a period of three years
during the lifetime of the insured (excluding any period which
the insured is disabled), it shall become incontestable as to the
statements contained in the application.”
As an initial matter, Unimerica argues that AS 21.51.050 does not apply to stop-loss
insurance policies, even though there is no dispute that stop-loss insurance is “health
insurance.” Chapter 51 of Title 21 applies to “health insurance policies” and AS 21.51.020
sets out the scope and format required for a “health insurance policy.” Specifically, AS
21.51.020(3) provides that
[a] policy of health insurance . . . must insure only one person,
except that a policy may insure, originally or by subsequent
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amendment, upon the application of an adult member of a
family, who shall be considered the policyholder, any two or
more eligible members of that family, including husband, wife,
dependent children, or any children under a specified age, which
may not exceed 25 years, and any other person dependent on the
policyholder[.]
Unimerica argues that the use of the word “person” indicates that a “health insurance policy”
must be issued to an individual human being, not to an entity such as TDX or the Trust.
Unimerica argues that the references in the statute to an insured’s “age”, “occupation”, and
“lifetime” support this interpretation of the statute because an employer, such as TDX, which
would purchase stop-loss insurance, does not have an age, occupation, or lifetime as those
terms are generally understood.
There appears to be no Alaska case law in the insurance context defining “person” to
include entities such as TDX or the Trust. But, other Alaska statutes have such a broad
definition of “person.” See, e.g., AS 46.03.900(18) (defining “person as “any individual,
public or private corporation, political subdivision, government agency, municipality,
industry, copartnership, association, firm, trust, estate, or any other entity whatsoever”).
There is no reason to believe that the Alaska legislature did not intend “person” to have an
equally broad meaning for purposes of AS 21.51.050. Because the Alaska legislature
specifically included stop-loss insurance in the definition of “health insurance,” it follows
that the intent was to have such insurance be subject to regulation. There are only two
choices under the insurance code, Chapter 54 which applies to group health insurance
policies or Chapter 51 which applies to individual health insurance policies. As discussed
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above, the Policy is not a group heath insurance policy. Therefore, the Policy must be
governed by Chapter 51. In order for the Policy to fall under AS 21.51.020, “person” must
be given a broad meaning, and not be limited to “individual live beings,” as Unimerica’s
counsel suggested at oral argument.85 The court concludes that for purposes of AS 21.51.020
“person” includes a corporation or a trust and thus AS 21.51.050 applies to the Policy.
If AS 21.51.050 applies here, which it does, then plaintiffs contend that AS 21.51.050
sets out two possible incontestability clauses that can be included in health insurance
policies, each of which are set out in quotation marks in the statute. In their motion for
partial summary judgment, plaintiffs contend that they are “relying on the first section of AS
21.51.050[,]”86 although in their opposition to Unimerica’s motion to dismiss, they relied on
the second section. Plaintiffs apparently realized their mistake in doing so, noting that the
second section “appears to have been misplaced in the Alaska statute and literally would
apply only to life insurance policies which are excluded from” Chapter 21.87
The question here then is what does the following provision in AS 21.51.050 mean:
“Time Limit on Certain Defenses: (1) After three years from the
date of issue of this policy no misstatements, except fraudulent
misstatements, made by the applicant in the application for the
policy shall be used to void the policy or to deny a claim for loss
85Transcript of Oral Argument [etc.] at 16:2-19, Docket No. 76.
86Plaintiffs’ First Motion for Partial Summary Judgment [etc.] at 23, n.67, Docket No.
59.
87Id.
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incurred or disability (as defined in the policy) commencing
after the expiration of the three-year period.”
“Statutory interpretation in Alaska begins with the plain meaning of the statute’s text.” Ward
v. State, Dep’t of Public Safety, 288 P.3d 94, 98 (Alaska 2012). “But the plain meaning of
a statute does not always control its interpretation; legislative history can sometimes alter a
statute’s literal terms.” Id. (citation omitted). “When statutory language is ambiguous, [the
court] look[s] to the purpose of the legislation and the legislative history for indications of
legislative intent.” Municipality of Anchorage v. Adamson, 301 P.3d 569, 576–77 (Alaska
2013). If the legislative history is not helpful, then the court “adopt[s] a rule of law that is
most persuasive in light of precedent, reason, and policy.” State v. Public Safety Employees
Ass’n, 93 P.3d 409, 416 (Alaska 2004) (citation omitted).
Plaintiffs argue that the incontestability clause in the first section of AS 21.51.050
means that an insurer is barred from denying a claim after three years from the effective date
of the policy. Plaintiffs argue that the opening portion of the clause, “[a]fter three years from
the date of issue of this policy no misstatements, except fraudulent misstatements, made by
the applicant in the application for the policy shall be used to[,]” establishes a three-year time
limit in which an insurer can void a policy or deny a claim based on misstatements. And
plaintiffs argue that last portion of the clause, “commencing after the expiration of the three-
year period[,]” modifies only the word “disability.” Thus, plaintiffs argue that the
incontestability clause means that after three years from the effective date of the policy, an
insurer is barred from using misstatements (except fraudulent ones) to
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1) void the policy
or
2) to deny a claim for:
(a) loss incurred or
(b) disability . . . commencing after the expiration
of the three-year period.[88]
Plaintiffs argue that such an interpretation is consistent with subsection (A) of AS 21.51.050,
which provides, in relevant part, that “[t]he foregoing policy provision shall not be so
construed as to affect any legal requirement for avoidance of a policy or denial of a claim
during the initial three-year period[.]” Plaintiffs argue that subsection (A) clarifies that the
three-year period is the period during which claims can be denied.
Plaintiffs argue that their interpretation of AS 21.51.050 is consistent with how other
courts have construed identical or similar incontestability clauses. In Johnson v. Metropoli-
tan Life Insurance Co., 251 A.2d 257, 264 (N.J. 1969), the New Jersey Supreme Court
considered an incontestability clause in a health and accident policy that read:
“Time Limit on Certain Defenses: (a) After two years from the
date of policy no misstatements, except fraudulent misstate-
ments, made by the applicant in the application for this Policy
shall be used to void this Policy or to deny a claim for loss
incurred or disability (as defined in this Policy) commencing
after the expiration of such two year period.”
The court interpreted the statute to mean “that after two years the policy may not be voided
for a misstatement in the application unless the misstatement is ‘fraudulent’. . . .” Id. at 266.
88Plaintiffs’ First Motion for Partial Summary Judgment [etc.] at 24, Docket No. 59.
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In Galanty v. Paul Revere Life Insurance Company, 1 P.3d 658, 660 (Cal. 2000), the
California Supreme Court “consider[ed] the effect of a standard incontestability clause that
the Insurance Code requires policies of disability insurance to include.” “Section 10350.2
offers a choice of two forms, labeled A and B, to insurers writing noncancellable policies of
disability insurance[.]” Id. at 667. Form A provides:
“After two years from the date of issue of this policy no
misstatements, except fraudulent misstatements, made by the
applicant in the application for such policy shall be used to void
the policy or to deny a claim for loss incurred or disability (as
defined in the policy) commencing after the expiration of such
two-year period.”
Id. The court observed that “Form A . . . offers insurers greater protection against fraud by
insureds than the incontestability clause required in life insurance policies” because “[t]he
latter does not permit the insurer, in most cases, to challenge the policy or its own liability
on account of fraudulent statements by the insured in the application for insurance after the
period of contestability has run.” Id. The court then proceeded to discuss Form B which was
the form included in the Paul Revere policy in question. Id. Form B provided: “‘After this
policy has been in force for a period of two years during the lifetime of the insured
(excluding any period during which the insured is disabled), it shall become incontestable
as to the statements contained in the application.’” Id. But, because the instant case does not
involve an incontestability clause similar to that in Form B, Galanty has little application
here.
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In Sutton v. American Health & Life Insurance Company, 683 F.2d 92, 93 (4th Cir.
1982), American had cancelled Sutton’s disability insurance policy based on alleged
misrepresentations made in her application. Virginia state law required insurance policies
to have the following incontestability clause:
After two years from the date of issue of this policy, no mis-
statements, except fraudulent misstatements, made by the
applicant in the application for such policy shall be used to void
the policy or to deny a claim for loss incurred or disability (as
defined in the policy) commencing after the expiration of such
two-year period.
Id. at 94. The court interpreted this clause to mean that “American could only void the policy
after the two-year period had elapsed if any misstatements in the application were
fraudulent.” Id. at 95. The court rejected American’s argument “that the two-year limitation
should not be applied because the disability arose before the policy had been in effect two
years and that it therefore had a right to deny the claim because of material misrepresenta-
tions.” Id. The court explained that American’s argument failed “because American can
only deny the claim by rescinding the contract” and “[w]hen a claim is denied because of
misrepresentations in the application for insurance the thesis can only be that the insurer has
rescinded the contract on that account[.]” Id. (citation omitted). The court observed that the
“purpose of a clause placing a time limit on challenges to the insurance application is to give
security to the policyholder, and sensibly that purpose is achieved by measuring the period
of contest from the date of the issuance of the policy rather than from the date when a
disability happens to occur.” Id. at 95-96 (citation omitted).
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Plaintiffs argue that if their interpretation of AS 21.51.050 is correct, then Unimerica’s
conduct violated the statute because Unimerica denied the Patient’s claims more than three
years after the effective date of the Policy. The Policy became effective on January 1, 2016
and Unimerica denied the Patient’s claims on January 28, 2019.
AS 21.51.050 is not ambiguous. The most common sense reading of the statute is that
“after the expiration of the three-year period” applies to both “loss incurred” and “disability
commencing”, in large part because there is no punctuation between “loss incurred” and
“disability commencing.” The court concludes that the statute provides that an insurer cannot
rely on a non-fraudulent statement to deny a claim for losses incurred after the expiration of
the three-year period or deny a claim for a disability which commenced after the expiration
of the three-year period. Or, to put it another way, the insurer can rely on non-fraudulent
misstatements to deny a claim for losses incurred prior to the expiration of the three-year
period.
This interpretation is consistent with the way other courts have construed similar
incontestability clauses. In Commercial Insurance Company of Newark, New Jersey v.
Krain, 843 F. Supp. 404, 405 (N.D. Ill. 1994), Commercial had issued a major medical policy
and a disability policy to Krain. Commercial sought to rescind the policies based on
misrepresentations Krain allegedly made in his applications. Id. at 405-06. One policy
provided that
[a]fter two years from the effective date of a person’s insurance,
no statements, unless fraudulent, made by such person may be
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used to void the insurance or deny a claim for loss incurred or
disability which begins after the end of such two year period.
Id. at 406. The other policy provided that
[i]f You made a misstatement on the application for this Policy,
We may not use it to void this Policy or to deny a claim for loss
incurred or disability that starts after 2 years from the effective
date. But if the misstatement was fraudulent there is no time
limit.
Id. The court found that this “language clearly applies to situations in which the loss or
disability occurs more than two years after the effective date” and that “Commercial may use
any misstatements on the application to void the policy or deny a claim for loss incurred or
disability that starts less than two years after the effective date.” Id.
In Russell v. Royal Maccabees Life Insurance Company, 974 P.2d 443, 445 (Ariz. Ct.
App. 1998), the court interpreted an incontestability statute that read:
Time limit on certain defenses: (a) After two years from the date
of issue of this policy no misstatements, except fraudulent
misstatements, made by the applicant in the application for such
policy shall be used to void the policy or to deny a claim for loss
incurred or disability (as defined in the policy) commencing
after the expiration of such two year period.
The court found this language “plain and unambiguous” and that it meant that “an insurer can
only void an insurance policy or deny a claim for loss incurred or disability originating two
years from the date of issuance of the policy if the insurer proves that the applicant made a
fraudulent misstatement in the application for the insurance policy.” Id. at 445-46.
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In Legel v. American Community Mutual Insurance Company, 506 N.W.2d 530, 531
(Mich. Ct. App. 1993), the insurance policy contained the following clause:
After two years from the Policy Date of this policy no misstate-
ments, except fraudulent misstatements, made by the applicant
in the original application for this policy shall be used to void
the policy or deny a claim for loss incurred by or on behalf of
any Family Member insured on the Policy Date commencing
after the expiration of such two year period.
The plaintiffs argued that this language meant that the policy “could not be canceled for
misstatements after two years from the effective date of the policy.” Id. The court disagreed
and held that “[b]ecause the claim [in question] occurred within two years of the effective
date of the policy, defendant could properly cancel plaintiffs’ policy” based on non-
fraudulent misrepresentations made in the application. Id. at 532.
As construed by the court, AS 21.51.050 does not prohibit an insurer from relying on
non-fraudulent misstatements to deny a claim for losses incurred prior to the expiration of
the three-year period. Here, Unimerica denied claims, based on the misrepresentation about
the pricing of Soliris, for losses that were incurred prior to the expiration of the three-year
period. While the question remains as to whether Unimerica properly denied those claims,
there is no question that if it did, it did not violate AS 21.51.050 in the process. Thus,
plaintiffs are not entitled to summary judgment that Unimerica’s conduct violated AS
21.51.050.
In sum, plaintiffs’ breach of contract and declaratory judgment claims are plausible.
It is plausible that the misrepresentation about Soliris did not “materially affect the
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underwriting, premium, rating or terms and conditions” of the Policy.89 But, plaintiffs are
not entitled to summary judgment on these claims because AS 21.54.010 does not apply to
the Policy and because if Unimerica properly invoked the Misrepresentation Clause, which
is a material fact in dispute, it did not violate AS 21.51.050 in the process.
bad faith claim
“Under Alaska’s contract law, ‘the covenant of good faith and fair dealing . . . is
implied in all contracts.’” Lockwood v. Geico General Ins. Co., 323 P.3d 691, 697 (Alaska
2014) (quoting State Farm Mut. Auto. Ins. Co. v. Weiford, 831 P.2d 1264, 1266 (Alaska
1992)). “Although” the Alaska Supreme Court has “declined to define the elements of the
tort of bad faith in an insurance contract,” the insured must at least “show that the insurer’s
actions were objectively unreasonable under the circumstances.” Id.
Unimerica argues that plaintiffs’ bad faith claim should be dismissed because
plaintiffs will never be able to show that Unimerica’s actions were objectively unreasonable.
Unimerica contends that it reasonably relied on the Misrepresentation Clause, which it insists
makes plaintiffs’ bad faith claim implausible. Unimerica argues that allegations of bad faith
claims handling are irrelevant in the face of an explicit policy provision on which the insurer
relied.
Plaintiffs argue, however, that they have alleged that Unimerica’s conduct was not
objectively reasonable. They point out that they have alleged that Unimerica “deliberately,
89Exhibit C at 9, Second Amended Complaint [etc.], Docket No. 43.
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and without any reasonable basis, reset[] the Patient’s laser from $450,000 to $1,050,000 for
each of the years 2016, 2017, and 2018 to deliberately make the revised laser high enough
in order to avoid any liability on the Patient’s claims[.]”90 Plaintiffs argue that this is
sufficient to make their bad faith plausible.
Plaintiffs cite to Seymour Tubing, Inc. v. TIG Insurance Company, Case No.
IP020509CBS, 2004 WL 2272160 (S.D. Ind. Sept. 24, 2004), in support. There, the court
rejected TIG’s contention that because it had reserved the right to modify the stop-loss
policy, “TIG’s refusal to reimburse claims for AB, which totaled less than the modified laser,
cannot constitute bad faith.” Id. at *10. The court found that Seymour Tubing’s bad faith
claim was based on more than “a dispute over the propriety of TIG’s decision not to
reimburse Seymour Tubing for AB’s medical claims.” Id. The court found that a reasonable
jury could conclude that “TIG waited to send written notification of the laser on AB until it
had enough information to set a laser sufficiently high to avoid liability for her claims[.]”
Id.
Here, as in Seymour Tubing, plaintiffs’ bad faith claim is based on more than just an
allegation that Unimerica’s reliance on the Misrepresentation Clause to deny the November
2018 claim was unreasonable.91 In particular, plaintiffs have alleged that Unimerica delayed
re-setting the Patient’s laser until after the Patient died, effectively precluding plaintiffs from
90Second Amended Complaint [etc.] at 54, ¶ 221(e), Docket No. 43.
91Id. at 53-54, ¶ 221.
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switching to another stop-loss carrier.92 Plaintiffs’ bad faith claim is plausible and is not
subject to a Rule 12(b)(6) dismissal.
punitive damages claim
In Alaska, punitive damages are only available for “conduct [that] could fairly be
categorized as ‘outrageous, such as acts done with malice or bad motives or reckless
indifference to the interests of another.’” Weiford, 831 P.2d at 1266 (quoting State Farm Fire
& Casualty Co. v. Nicholson, 777 P.2d 1152, 1158 (Alaska 1989)). Unimerica argues that
plaintiffs have not alleged that it acted with malice or reckless indifference, that all plaintiffs
have alleged is that Unimerica adjusted the terms of the Policy after it learned of the
misrepresentations made by ARM and that it denied the claims plaintiffs submitted in 2018
based on the new policy terms. And even if it is plausible that Unimerica acted in bad faith,
Unimerica reminds plaintiffs that “an allegation that [the insurer] violated the implied
covenant of good faith and fair dealing is not sufficient to support a claim for punitive
damages.” Great Divide Ins. Co. v. Carpenter ex rel. Reed, 79 P.3d 599, 612 (Alaska 2003).
Unimerica argues that all plaintiffs have alleged is that Unimerica intentionally denied the
Hospital claims, which is not sufficient to make their punitive damages claim plausible.
While it does not strike the court that this is punitive damages case, at the motion to
dismiss stage, the court only considers whether a claim is plausible. If plaintiffs were to
92Id.
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prevail on their bad faith claim, it may be plausible that a fact finder would conclude that
Unimerica acted with reckless indifference.
UTPA claim
Plaintiffs concede that the UTPA does not apply to Unimerica’s actions and that their
UTPA claim should be dismissed.93
Conclusion
Unimerica’s motion to dismiss is granted in part and denied in part. It is granted as
to plaintiffs’ UTPA claim. It is otherwise denied. Plaintiffs are not given leave to amend as
to their UTPA claim as amendment would be futile.
Plaintiffs’ motion for partial summary judgment is denied.
DATED at Anchorage, Alaska, this 19th day of December, 2019.
/s/ H. Russel Holland
United States District Judge
93Plaintiffs’ Opposition to Unimerica Insurance Company’s Motion to Dismiss the
Second Amended Complaint at 36, Docket No. 54.
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