New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

Eliot Spitzer
Governor

Eric Dinallo
Superintendent

The Office of General Counsel issued the following opinion on September 17, 2007 representing the position of the New York State Insurance Department.

Re: Reformation of Stop-Loss Insurance Policy

Question Presented:

May an insurer that had issued a stop-loss policy1 to a self-funded union welfare fund avoid paying claims by asserting, after the expiration of the policy period, that it had miscalculated the point at which it becomes obligated to pay claims (i.e. the attachment point)?

Conclusion:

Based on the facts presented, no. Because the insurer was in full possession of the data by which the attachment point was calculated and did not share its calculations with the insured, the insurer’s actions were in the estimation of the New York State Insurance Department unreasonable, and the claim in question should be paid.

Facts:

The basic facts are undisputed. Prior to February 1, 2005, the Union Local (“Local”) provided benefits to its members through a contract with a New York health maintenance organization with a certificate of authority from the Commissioner of Health. Some time prior to October 24, 2004, the Local determined that it might be advantageous to become self-funded for certain benefits, as is permitted under the Employee Retirement Income Security Act, 29 U.S.C.A. § 1001 et seq. (West 2003). Accordingly, the Local retained Intermediary, an organization not then licensed by the Insurance Department, to prepare a Request for Proposal (“RFP”). It was that all potential bidders were furnished with all relevant information.

On November 16, 2004, Insurer made a formal proposal to the Local. On November 17, 2004, Intermediary responded to Insurer and indicated that the census as to participants utilized in the proposal was inaccurate. In a November 18, 2004 response to Intermediary, Insurer stated that it was reviewing the census count. Purportedly attached to Insurer’s November 18, 2004 communication was a premium equivalency data spreadsheet that differed from Insurer’s formal proposal of November 16, 2004.

As a result of the RFP and Insurer’s proposal, the Local entered into an arrangement with Insurer that is described below. The inquirer further reported that, included with the information furnished to Insurer prior to execution of the contract, was the latest census data from the HMO.

Insurer and the Local entered into a contract whereby Insurer was appointed claims administrator for the Local under an “Administrative Services Only” arrangement. In addition, Insurer issued a stop-loss policy to the Local. Both contracts ran from February 1, 2005 through January 31, 2006, although the stop-loss policy was not physically delivered to the Local until May 23, 2005.

In August 2005, Intermediary, in order to analyze the Local’s claims experience, requested claims information from Insurer. In response to this request, Insurer furnished Intermediary with aggregate loss deductible factors that differed from those in the Schedule of Insurance. The inquirer reports that, despite repeated requests by Intermediary, Insurer did not furnish a reconciliation of the differences.

On January 9, 2006, an Insurer representative furnished the Local with proposed policy terms for the policy period February 1, 2006 through January 31, 2007. In this communication, Insurer informed the Local of an “error” that it had made in calculation of the policy terms for the soon-to-be-expiring policy. This communication purportedly indicated that the deductible factors were those furnished to an Intermediary representative on October 26, 2004. The October 26, 2004 communication purportedly set forth factors differing from those contained in the policy issued by Insurer. The January 6, 2006 Insurer letter also made suggestions to the Local for modification of its continuing self-funded plans.

On February 7, 2006, Insurer informed the Local that it was paying under the “Individual Stop Loss” portion of the policy. The inquirer asserts that, based on the Expected Monthly Deductible factors set forth in the Schedule of Insurance concerning Aggregate Stop Loss, Insurer owes the Local a substantially larger amount.

Subsequently, there was extensive correspondence and several meetings, which did not resolve the dispute between Insurer and the Local. In January 2007, the inquirer, as Local’s attorney, lodged a complaint about Insurer’s conduct with the Insurance Department’s Consumer Services Bureau (“CSB”). By letter dated February 15, 2007, counsel for Insurer wrote to CSB and indicated that: (1) Insurer desired to resolve this complicated matter with the Local; and (2) Insurer had made an error in the initial quotation.

Analysis:

Before turning to the principal question - i.e., whether Insurer may properly deny the claim under the circumstances presented - there are other preliminary issues that first must be addressed.

As an initial matter, the inquirer alleges that Insurer violated Insurance Law § 3201(b)(1) by use of an unapproved form. That statute provides that no accident & health insurance form may be used in New York unless approved. However, Insurer has demonstrated that the Department approved its form by furnishing a copy of the Department’s approval dated May 15, 2000.

Next, he alleges a violation of § 216.6(d) of N.Y. Comp. Codes R. & Regs. tit. 11 Part 216 (Regulation 64). That regulatory provision states that an insurer must both promptly disclaim because of a lack of coverage, and provide details of the basis for its disclaimer. Similarly, Insurance Law § 2601(a), pursuant to which Regulation 64 has been promulgated provides that an insurer shall not engage in unfair claims settlement practices. Since both Insurance Law § 2601(a) and Regulation 64 require a general business practice, and since no evidence of a general business practice has been furnished here, the Department is in no position to conclude at this time, based upon the facts presented, that Insurer has violated either Insurance Law § 2601(a) or 11 NYCRR § 216.6(d). Nevertheless, the Department will review Insurer to determine whether there is any merit to the allegation.

The Department now turns to the principal question posed: whether CIGNA may deny the claim here on the basis of an alleged error with regard to census information.

Stop-loss insurance is governed by Insurance Law § 4237-a. That statute provides, in pertinent part:

(a) An insurer authorized to do the business of accident and health insurance in this state . . . shall be authorized to issue stop-loss insurance as provided in this section.

(b) ‘Stop-loss insurance’ means an insurance policy whereby the insurer agrees to pay claims or indemnify an employer for losses incurred under a self-insured employee benefit plan in excess of specified loss limits for individual claims and/or for all claims combined, or any similar arrangement.

(c) A stop-loss insurance policy delivered, issued for delivery, or entered into in this state shall clearly describe: (1) the entire money or other consideration for the policy; (2) the time at which the insurance takes effect and terminates; (3) the specified per-claim, per-employee, or aggregate amount of claims above which payment or reimbursement is to be made by the insurer [attachment point]; and (4) the payments to be made by the insurer once the specified stop-loss thresholds have been exceeded.

Here, calculation of the appropriate aggregate attachment point - i.e., the point at which Insurer became liable to pay claims after the Local had paid the stated aggregate amount - involved a number of factors defined in the policy: (1) “Actual Attachment Point”; (2) “Actual Claim Payment”; (3) “Aggregate Stop Loss Limit”; (4) “Corridor”; (5) ”Expected Monthly Deductible Factor”; and (6) ”Minimum Attachment Point.” Each of the factors necessary to calculate the appropriate attachment point depends on the underlying census and experience data.

The Local furnished Insurer with raw data, including several census counts, with which to make the requisite calculations. But, when Insurer submitted a proposal in response to the RFP, Insurer did not inform the Local which of the various possible assumptions, including which census count, it had used to calculate the aggregate attachment point. While it might have been possible for the Local, with sufficient information, to calculate back to the census numbers relied upon by Insurer, the Insurer bid did not provide the Local with any of the assumptions underlying Insurer’s bid. Accordingly, Insurer was in sole possession of the information that it utilized to arrive at the aggregate attachment point, and the Local thus could not effectively review Insurer’s calculation.

With respect to “Clerical Error”, the policy at issue provides:

Clerical error by the Contractholder will not end coverage or continue terminated coverage. In the event of such clerical error, a premium adjustment will be made. However, such adjustment will not be made beyond the preceding anniversary date of the contract.

Also relevant to the issue is Insurance Law § 3204(a). That statute provides:

(1) Every policy of . . . accident or health insurance . . . delivered or issued for delivery in this state, shall contain the entire contract between the parties, and nothing shall be incorporated therein by reference to any writing, unless a copy thereof is endorsed upon or attached to the policy or contract when issued.

. . .

(3) Such policy or contract cannot be modified, nor can any rights or requirements be waived, except in a writing signed by a person specified by the insurer in such policy or contract.

Since the supposed error here was that of Insurer, the insurer had no right under Insurance Law § 3204(a) to unilaterally modify the policy. In any event, the respective rights and obligations of the insurer and insured, including the attachment point, were fixed at the time of issuance of the policy. See Bier Pension Plan Trust v. Estate of Schneirson, 74 N.Y.2d 312, 546 N.Y.S.2d 824 (1989). Accordingly, the attachment point was not, as Insurer asserts, subject to modification during the policy period.

Insurer notes that contract law allows for reformation of an existing contract in the event of mutual mistake. To this end, Insurer cites Greater New York Mutual Insurance Company et al v. United States Underwriters, 36 A.D.3d 441, 827 N.Y.S. 2d 147 (1st Dept. 2007). Greater New York Mutual involved an attempt by an insured to “reform” a policy to add an insured address. The court there held:

It is well established that when interpreting an insurance contract, as with any written contract, the court must afford the unambiguous provisions of the policy their plain and ordinary meaning and may not make or vary the contract of insurance to accomplish [its] notion of abstract justice or moral obligation.

. . .

A claim for reformation of a written agreement must be grounded upon either mutual mistake or fraudulently induced unilateral mistake. In the case of mutual mistake, it must be alleged that the parties have reached an oral agreement and, unknown to either, the signed writing does not express that agreement, whereas in the case of unilateral mistake, it must be alleged that one party to the agreement fraudulently misled the other, and that the subsequent writing does not express the intended agreement. A bare conclusory claim of unilateral mistake, which is unsupported by legally sufficient allegations of fraud, fails to state a cause of action for reformation. The essential elements of a claim of fraud are misrepresentation of a material fact, falsity, scienter and deception.

36 A.D.3d at 442, 827 N.Y.S.2d at 148.

While it is for a court of competent jurisdiction to determine whether Insurer is entitled to reformation of the policy, the Department’s Office of General Counsel is aware of no case that has permitted reformation where, as here, the insurer has made a supposed error, and the purported error was of the sort about which the insured could not have known, based on information transmitted by the insurer to the insured. Indeed, there is no indication here that the insured Local was aware of the exact nature of CIGNA’s calculations with regard to the census.

In light of the foregoing, the Department is of the view that Insurer should, absent a binding court determination to the contrary, honor the policy as written.

For further information you may contact Principal Attorney Alan Rachlin at the New York City office.

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1  A “stop-loss” policy is defined in N.Y. Ins. Law § 4237-a(b) (McKinney 2007) as “an insurance policy whereby the insurer agrees to pay claims or indemnify an employer for losses incurred under a self-insured employee benefit plan in excess of specified loss limits for individual claims and/or for all claims combined, or any similar arrangement.”