INSURANCE: Efficient proximate cause of loss from collapsed deck was repeated seepage or leakage of water over extended time, an excluded peril. . . coverage denial reinforced by anti-concurrent clauses clause. . . Molloy.

Tafford & Larayne Oltz own a home at 11 Golf Drive, Whitefish, and have had coverage from Safeco since 1/13. In the summer of 2015 they noticed instability in the deck posts and that the deck was beginning to pull away from the house. They contacted Teksu Rivera to repair it. After discovering that the attachment was rotted, he and his employees began removing parts for safety reasons. During the removal, part of the deck collapsed. Removal of the home’s siding revealed water damage from the roof to the deck. Oltzes submitted a claim to Safeco. Adjuster Michael Hoover agreed to Rivera’s request to hire an engineer. Oltzes hired Paul Wells, who concluded that the sheathing & framing of the wall had suffered “extensive water damage,” likely from water routed “into the area of the roof/wall connection via a heat cord” and that an ice dam may have “greatly increased” the amount of water. On 10/28 Hoover wrote “ICE DAM would be a covered cause of loss, however this needs to be confirmed.” On 10/29 Safeco sent Oltzes a Reservation of Rights letter stating that coverage was under investigation. It hired Wade Sticht who concluded that the deck had likely detached because the wood where it was fastened had “deteriorated” and suspected that “it had been minimally fastened to the home.” He wrote that it was “more probable than not that the primary cause of the deterioration of the exterior wall framing and sheathing was long-term chronic exposure to moisture.” He concluded that the “seepage/penetration of water” occurred “as a result of: the as-built roof and wall configuration, inadequate weather proofing, inadequate flashing at the roof-to-wall interface, and the absence of adequate flashing at the windows.” Oltzes assert that claims handler Trevor Evans then instructed Rivera to submit all bills to him, requested an estimate, and instructed them to continue with demolition and repair. Safeco states that he reminded them that coverage had not been determined. (In an email exchange with Rivera 11/12 & 11/13, Evans requested “a copy of the building plans” and stated that after he had a chance to review the repair bid “I might have some questions on scope or pricing detail.”) Sticht sent his report to Evans 11/23. Safeco sent a 2nd Reservation of Rights letter 11/24 which included excerpts from the exclusions. Tafford Oltz emailed Evans 11/27 asking for an “immediate commitment that either Safeco is going to cover the repairs or not.” Evans emailed Rivera 11/29. Oltzes state that the email informed Rivera that it would be several weeks before a coverage decision would be made; Safeco states that it informed Oltzes that they could move forward with demolition and related repairs, but that coverage was under investigation and it could not commit to coverage or payments at that time. The email does not appear in the record. Safeco sent a 3rd Reservation of Rights letter 1/15/16, again including excerpts from the exclusions. It denied the claim 1/19/16:

As you can see in the above-referenced policy provisions losses resulting from continuous or repeated seepage or leakage of water, inherent defect, weather, faulty, inadequate or defective design, workmanship and construction, and wet or dry rot, are not covered. The exterior sheathing and windows are non-covered losses due to improper flashing and roof construction with non-covered ensuing loss of repeated seepage and leakage of water. The Additional Property Coverage for Collapse excludes coverage for decks unless the loss is a direct result of the collapse of the dwelling or part of the dwelling to which it is attached. Therefore, according to the terms and conditions of your policy, we are unable to provide any coverage for this loss.

Safeco did not initially consider Wells’s report, but did so after Oltzes’ counsel provided it in 2/16. Safeco concluded that it did not affect its decision. Work on the home was completed in 4/16. Oltzes assert that they were unable to completely repair their home in the most appropriate manner because Safeco refused to pay for their losses. They sued in State Court in 8/16 seeking declarative relief and alleging breach of contract, breach of the covenant of good faith & fair dealing, common law bad faith, and violation of the UTPA. Safeco removed to this Court and subsequently moved for summary judgment.

A. Moisture. Safeco argues that Oltzes’ losses are not covered because the policy excludes coverage for losses caused by long-term exposure to water & moisture, regardless of the source. It argues that 3 specific exclusions apply: continuous or repeated seepage or leakage, weather that contributes to an uncovered cause, and wet or dry rot. Oltzes insist that an ice dam is the proximate cause of their losses and that summary judgment is precluded by material fact questions. Safeco has the better argument.

1. Seepage or leakage exclusion. There is expert consensus that the damages were caused by repeated exposure to moisture over an extended time. The policy excludes losses from “continuous or repeated seepage or leakage of water . . . which occurs over a period of weeks, months or years.” However, Oltzes argue that water would not have infiltrated without an ice dam, which they insist is not an excluded peril. The experts agree that an ice dam was involved in allowing moisture to penetrate the siding. Oltzes rely on “efficient proximate cause.” Safeco insists that the ice dam was not the proximate cause. Park Saddle Horse (Mont. 1927) articulated the doctrine of efficient proximate cause:

In determining the cause of a loss for the purpose of fixing the insurance liability when concurring causes of the damage appear, the proximate cause to which the loss is to be attributed is the dominant, the efficient one that sets the other causes in operation; and causes which are incidental are not proximate, though they may be nearer in time and place of the loss.

Park Saddle submitted a claim to Royal Indemnity after a guide “carelessly and negligently lost his way and misguided [a] party into the mountains and forest where there was no trail” in Glacier Park and a guest was injured while walking her horse across steep terrain. The Court concluded that the accident was “caused efficiently and proximately by the use of horses in the operation of the insured’s business,” and that coverage therefore applied, the guide’s negligence notwithstanding. Park Saddle‘s “efficient proximate cause” is reconcilable with the USSC”s articulation of “proximate cause in the insurance field,” which “refers to that cause which is most nearly and essentially connected with the loss as its efficient cause.” Standard Oil (US 1950). That cause is “not necessarily the cause nearest in point of time to the loss,” nor does it differ materially from how Montana defines proximate cause in negligence law: “Proximate cause is an act or omission which, in a natural and continuous sequence, unbroken by any new, independent cause, produces injury, and without which the injury would not have occurred.” Pappas (Mont. 1994). The loss in Park Saddle was the cost of an injury to a tourist that “arose from” the use of a saddle horse, a risk specifically insured against. The loss here was the damage to Oltzes’ home, and that loss was caused by the repeated intrusion of water, a specifically excluded peril. If the Park Saddle policy had excluded negligent acts, the comparison that Oltzes attempt to draw would be more compelling. But the dominant cause was leaking water, and that cause is excluded. Assuming that the leakage would not have occurred but for the ice dam, the leakage was a superseding event in the causal chain: the damage only began when water began to leak into the home — the “initial event.” Hirschmann (Wash. 1989). Safeco properly relied on the seepage or leakage exclusion. (A savings clause in “Building Property Losses We Do Not Cover” states that Safeco insures “for any resulting loss” from, inter alia, the seepage or leakage exclusion. However, the savings clause does not apply if “the resulting loss is itself excluded.” The resulting loss here would be damage from rot, which is an excluded peril, as discussed below.)

2. Weather contributing with non-covered cause or event. The policy “do[es] not cover loss caused directly or indirectly by . . . Weather that contributes in any way with a cause or event not covered in this section to produce a loss. However, any ensuing loss caused by a covered peril and not otherwise excluded is covered.” “Weather” is not defined. Safeco relies on Wells’s identification of naturally occurring weather conditions as a source of the moisture that damaged the home. Oltzes argue that “under Safeco’s interpretation of the policy, it is difficult to imagine a scenario under which any water damage from any source would ever be covered.” The MSC has repeatedly emphasized that illusory coverage violates Montana public policy. However, the weather exclusion does not create illusory coverage. As Safeco points out, it applies to losses resulting from weather “that contributes in any way with a cause or event not covered.” It does not bar coverage caused by weather damage alone, but only where an excluded peril caused the loss and weather contributed. Safeco properly relied on the weather exclusion because weather contributed to “a cause or event not covered” to produce Oltzes’ loss.

3. Fungi and rot. The policy excludes “loss caused directly or indirectly by . . . . Fungi, Wet or Dry Rot, or Bacteria, meaning the presence, growth, proliferation or spread of fungi, wet or dry rot, or bacteria.” There is no question that the plywood sheathing and parts of the framing of Oltzes’ home were rotting. The expert testimony is that the rot was caused by the repeated intrusion of water, and as such the rot was not a direct cause of the loss, meaning that the loss due to wood rot could qualify for the exclusion exception. However, because seepage or leakage is an excluded peril and was the proximate cause of Oltzes’ losses, the exception does not apply. Thus the fungi and rot exclusion also bars coverage.

B. Defective design & maintenance. Safeco next argues that the policy provides no coverage for Oltzes’ losses because they are also the result of defective design & maintenance. Oltzes again insist that an ice dam is the cause of their damages and resulting losses, and that summary judgment is precluded by disputed facts as to the allegedly defective roof design, inadequate flashing, and deck collapse. As to disputed facts, Oltzes have the better argument.

1. Inherent defect & faulty design. The policy excludes loss caused by “faulty, inadequate or defective . . . design, specifications, workmanship, repair, construction . . . materials used in repair, construction, renovation or remodeling . . . or maintenance.” Safeco’s faulty workmanship argument relies on Sticht’s conclusion that the deck detachment may have been exacerbated due to minimal fastening and apparently infers that the collapse was due to faulty design or workmanship. However, one expert’s testimony that minimal fastening may have contributed to the deck collapse is inadequate to support summary judgment. Further, as Oltzes point out, Rivera stated that the deck appeared to be initially properly bolted to the home. Safeco also argues that the damage was caused by defective roof design and lack of adequate flashing at the windows, again relying on Sticht’s report. However, Hafferman Engineering noted that “the window flashing in the Sticht report, whether properly done or not, was not the source of the water damage,” and Wells noted that “the flashing that was installed along the slope of the roof/wall was properly installed and does not appear to have contributed to the damages. As to defective design, while Safeco leans heavily on Sticht’s conclusion that the “roof configuration” may have contributed to formation of an ice dam, he does not conclude that the design was defective. Finally, Safeco points to the heat tape as evidence of a design defect, effectively arguing that where heat tape exists, so too must a design defect, which is not supported by the record. Factual issues preclude summary judgment as to the inherent defect and faulty design exclusion.

2. Faulty, inadequate, or defective maintenance. The policy excludes “faulty, inadequate or defective . . . maintenance of property.” Safeco relies on Tafford Oltz’s deposition that he had never been on his roof and did not know if the heat cord was working before the damage was discovered. Oltzes respond that they adequately maintain their home and support their position with Tafford’s deposition that he hired someone to clean the gutters twice a year and the affidavit of Brett Miller, who painted the home in 7/15, that he saw no evidence of rot or water damage and believed the home was exceptionally well maintained. Oltzes point to a genuine material fact issue as to defective maintenance, making summary judgment as to this issue inappropriate.

C. Deck collapse. The policy excludes losses caused by collapse unless the collapse is covered under Additional Property Coverages. “Collapse means an abrupt falling down or caving in of a building with the result that the building or part of the building cannot be occupied for its intended purpose.” However, loss due to collapse of a deck is only covered if the cause of the collapse is a covered peril “unless the loss is a direct result of the collapse of the dwelling or any part of the dwelling to which it is attached.” Oltzes’ home has not collapsed, and summary judgment is appropriate as to the collapse exclusion. (The policy does include an additional coverage for collapse, but Oltzes did not purchase it. But because the collapse was caused by the seepage or leakage exclusion, additional coverage would not apply even had they purchased it.)

D. Anti-concurrent clauses clause. The “anti-concurrent clauses clause” (the “Clause”) provides that Safeco “do[es] not cover loss caused directly or indirectly by [the excluded perils],” and that “such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.” Because it is undisputed that at least 1 excluded peril (repeated seepage or leakage of water) caused Oltzes’ loss, the Clause precludes coverage unless it is deemed not to apply. While there is no Montana law on the subject, Oltzes argue that enforcing it would create illusory coverage, allowing Safeco to avoid its contractual duties. However, simply restricting the scope of coverage does not render coverage illusory. Nor, at least in this instance, does it prevent application of the efficient proximate cause doctrine. In fact, the Clause reflects the distinction between proximate and remote cause central to the doctrine. Thus, losses caused by excluded perils are excluded, even if any other “cause or event” contributed. Only if the excluded peril causes the loss is the Clause implicated. Nor does the Clause create ambiguity. The policy is clear: “accidental direct physical loss” is covered “except as limited or excluded.” And that limitation & exclusion hinges on whether a loss is caused, directly or indirectly, by an excluded peril. Oltzes point to no Montana law barring application of anti-concurrent causes clauses, and it is reasonable to conclude that the MSC would not bar application of the clause here, where it does not create illusory coverage, would be clear to a consumer, and is not ambiguous. Washington and California cases which Oltzes cite which refused to enforce anti-concurrent clause provisions draw from extensive efficient proximate cause law not present in Montana. Repeated leakage or seepage caused Oltzes’ losses, even though the ice dam was a contributing factor. The Clause simply reinforces Safeco’s denial of coverage.

Covenant of good faith & fair dealing. Safeco argues that Oltzes’ claims for breach of the covenant and common law bad faith are barred by the UTPA. Oltzes concede that summary judgment is appropriate as to common law bad faith but argue that they can maintain a claim for breach of the implied covenant as a contract action. However, because Safeco properly concluded that their losses were not covered, summary judgment is proper as to this claim as well. Safeco did not deal dishonestly with them, but kept them apprised of its investigations and the reasons for its no-coverage decision.

UTPA. Safeco had a reasonable basis — factually and legally — to contest Oltzes’ claim. The facts show that the damage was caused by long-term leaking water, and the policy excludes damage caused by repeated seepage or leakage. Summary judgment is appropriate as to this claim.

Loss occurred before policy period. Safeco finally argues that the policy was not effective on the date the damage 1st occurred. It raises this argument for the 1st time in its reply brief — and did not raise it in its denial of coverage or reservation letters. The argument will not be considered.

Safeco’s motion for summary judgment is granted as to all of Oltzes’ claims.

Oltz v. Safeco Ins., 44 MFR 182, 2/5/18.

Shelly Brander & Lucas Mann (Kaufman Vidal Hileman Ellingson), Kalispell, for Oltzes; Brooke Murphy & Talia Damrow (Matovich, Keller & Murphy), Billings, for Safeco.

ROBOCALL STATUTE not violative of free speech in protecting peace & tranquility of the home, §1983 claim dismissed on summary judgment. . . robocaller had standing to bring challenge, not barred by door-closing statute. . . Lovell.

Victory Processing LLC of Grand Rapids and its managing member Dave Dishaw engage in political consulting and data gathering primarily via automated phone calls. They assert that MCA 45-8-216 (1991) deprives them of the ability to convey political messages to Montana voters in violation of their right to free speech. 45-8-216 provides:

(1) A person may not use an automated telephone system, device, or facsimile machine for the selection and dialing of telephone numbers and playing of recorded messages if a message is completed to the dialed number for the purpose of:

(a) offering goods or services for sale;

(b) conveying information on goods or services in soliciting sales or purchases;

(c) soliciting information;

(d) gathering data or statistics; or

(e) promoting a political campaign or any use related to a political campaign.

(2) This section does not prohibit the use of an automated telephone system, device, or facsimile machine described under subsection (1) for purposes of informing purchasers of the receipt, availability for delivery, delay in delivery, or other pertinent information on the status of any purchased goods or services, of responding to an inquiry initiated by any person, or of providing any other pertinent information when there is a preexisting business relationship. This section does not prohibit the use of an automated telephone system or device if the permission of the called party is obtained by a live operator before the recorded message is delivered.

Defendants challenge Plaintiffs’ standing because the claim rests on the legal rights & interests of others. However, while Plaintiffs’ refusal to divulge the names of any potential customers (on grounds of confidentiality) provides only a thin basis for standing, the Court believes the law applies to their proposed robocalls and arguably affects a constitutional interest, they have shown an intention to violate the law, and it is likely that Montana would enforce its law against them if they were to register, for example, with the State to conduct robocalling. Further, self-censorship may suffice to state a sufficient injury “even without an actual prosecution.” Italian Colors Restaurant (9th Cir. 2018); Am. Booksellers Ass’n (US 1988). When a threatened enforcement implicates 1st Amendment rights, the inquiry “tilts dramatically toward a finding of standing.” LSO (9th Cir. 2000).

Defendants argue that Montana’s door-closing statute bars Plaintiffs’ claim: “A foreign corporation transacting business in this state without a certificate of authority may not maintain a proceeding in any court in this state until it obtains a certificate of authority.” MCA 35-1-1027(1). However, Plaintiffs’ complaint is filed pursuant to 28 USC 1331 (federal question jurisdiction). Therefore, Defendants’ argument is not well-taken. See Woods (US 1949) (barring claim pursuant to state door-closing statute when claim is brought pursuant to diversity jurisdiction).

AG Fox asserts that the statute serves a compelling and long-respected government interest. “The State’s interest in protecting the well-being, tranquility, and privacy of the home is certainly of the highest order in a free and civilized society.” Frisby (US 1988). “The First Amendment permits the government to prohibit offensive speech as intrusive when the `captive’ audience cannot avoid the objectionable speech.” Id. The statute narrowly tailors to the governmental interest in protecting the peace & tranquility of the household by requiring, in most instances, that a live operator give control over the message to the recipient for the purpose of consenting, declining, or asking to be taken off the calling list. The statute is not overinclusive because all calls that are reasonably likely to be unwelcome are covered. It is not underinclusive because the few category of calls not restricted by the live-operator requirement are understood to have implied consent. It still leaves ample means of communication for individuals and organizations. Advance permission for calls can be obtained from donors and potential donors. Use of a live operator to introduce the recorded message may be an option, or live operators may communicate the entire message. There is also leafleting and pamphleting of residences and street corners. There are billboards, posters, and yard signs. Bulk mailing is available. Internet and other media provide enormous opportunities for bulk message distribution.

Summary judgment for the State.

Victory Processing and Dishaw v. AG Fox, 44 MFR 181, 2/9/18.

James Brown (Brown Law Office), Helena, and Blake Johnson (Bruning Law Group), Lincoln, Neb., for Plaintiffs; Dale Schowengerdt (Montana DOJ) and Asst. AG Patrick Risken.

ERISA: Disability insurer improperly changed injury causing disability designation from MS to below-knee amputation to take advantage of med-mal settlement as deductible source of income. . . beneficiary entitled to reinstatement of full amount of settlement offset. . . attorney-client privilege not applicable to documents pre-dating denial of appeal. . . beneficiary entitled to attorney fees. . . Molloy.

The question in this case boils down to a simple issue: Who is the beneficiary of a suit stemming from an ERISA employee’s misfortune? Is it the ERISA plan or the unfortunate employee? While the all or nothing propositions asserted by both parties are not reasonable interpretations of the plan, the facts favor Dawn Rustad-Link. Unum’s shortcomings, among other mistakes, was to prioritize its plan interpretation to its financial interest. It argues that it is entitled to offset its disability payments for lost income against every penny recovered because of the employee’s misfortune. Rustad-Link, the unfortunate victim of medical malpractice, argues that there should be no offset because her below-knee amputation settlement was not for lost income, but encompassed a multiplicity of other damages that are not subject to the plan’s offset provisions. Unum insists that it paid disability benefits regardless of the basis of the claim, whether in this case MS, below-knee amputation, or a variety of other medical problems that impact Rustad-Link’s entitlement to disability benefits, and thus it is entitled to an offset against the entirety of the proceeds of her med-mal settlement. Rustad-Link’s motion for summary judgment is granted as her reasoning is more persuasive. 1st, Washington law mandates a de novo standard of review. 2nd, Unum cannot assert attorney-client privilege against Rustad-Link — its fiduciary — as to communications with counsel that occurred before the parties became adverse. Finally, it breached its fiduciary duty to her when it changed her disabling diagnosis following notice of her 3rd-party settlement and deducted against her disability payments.

Rustad-Link was an employee or disabled former employee of Providence Health & Services at Providence St. Joseph Medical Center in Polson. Providence is the policyholder of a long-term disability plan underwritten by Unum. Rustad-Link was diagnosed with MS in 1996. In 2010 she suffered a below-knee amputation resulting from negligent medical care after an occlusion in her iliac artery blocked flow to her foot. She applied for disability benefits and Unum informed her in 6/10 that her MS was a pre-existing condition that would not be covered for 12 months. Rustad-Link responded that the amputation — not the MS — had disabled her. CNP Judith Gustafson identified on a Unum claim form MS as her primary disability and the amputation as her secondary disability, and noted that she had severe weakness & tremors and her disability was likely permanent. Unum granted Rustad-Link 6-months short-term disability. It did not communicate the specific condition or conditions that supported its determination. Her physician Mark Weber informed Social Security Disability, noting that her MS “along with her new amputation has resulted in profound impairment of her functional mobility.” On 7/23/10 Rustad-Link submitted a disability report to SSA listing conditions that limited her ability to work: “(1) multiple sclerosis; (2) right transtibial amputation; (3) right iliac artery occlusion; (4) chronic gastritis; (5) hypokalemia; (6) chronic pain; (7) phantom limb pain; (8) anemia.” On 9/7/10 a Unum claim director — Tom Salce — held a roundtable review of her file, which confirmed disability due to the amputation and indicated that recovery “would be 4-6 months from present as [Rustad-Link] indicated she is still cleaning wound.” It also noted that it was “unclear what her work capacity will be as she also has MS,” and it was not clear why restrictions and limitations for her right upper extremity existed. Also on 9/7/10, Unum granted her request for long-term disability benefits, but did not explain what condition or conditions supported its determination.

On 2/28/11 Unum received an updated physician’s statement from Rustad-Link’s primary provider — CNP Michelle Hellwig — which again identified her amputation as the primary disability and MS as the secondary. Unum had another roundtable and noted that her restrictions & limitations were medically supported but that “fine motor skills are not supported since she had mild tremors prior to [the amputation].” Hellwig provided another physician’s statement 9/14/11 which also indicated that the amputation was the primary cause of disability, with MS and chronic pain as secondary, noting “pain, limp, tremors.” Unum held another roundtable 11/18/11, concluding that Rustad-Link’s injury causing disability “should be updated to reflect [below knee amputation] and MS as secondary.” She was not notified of the change.

Unum wrote Rustad-Link 11/21/11 that beginning in 8/12 her coverage would be subject to a stricter definition of disability as she reached 24 months of payments. It received neurologist Stephen Johnson’s statement 8/21/12 which identified MS as the primary diagnosis and did not identify any other causes of disability. Unum prepared a summary of her condition 9/14/12, noting that she had been awarded SSD for her amputation and MS and that a voc-rehab consultant noted that it might be possible to identify light or sedentary employment. It determined that her “Injury Causing Disability” should be updated to MS.

Helwig provided another physician’s statement 10/7/12 which again stated that Rustad-Link’s primary disability diagnosis impacting functional capacity was her amputation and that secondary diagnoses were MS and chronic pain. Unum held another roundtable 10/22/12 and concluded that her restrictions & limitations as to her upper extremities due to MS, the poor labor market in North Dakota (where she had moved), and the likelihood that her conditions would deteriorate qualified her for continued long-term disability and that her injury causing disability should be updated to MS. It informed her that same day that continuation of her disability payments under the stricter definition of disability had been approved. It did not advise her that her injury causing disability had been updated to MS.

On 2/14/14 Rustad-Link’s attorney informed Unum of a pending 3rd-party settlement regarding her amputation. Unum asserted a right to recover benefits as deductible sources of income under the Plan and began assessing whether her settlement would qualify as a deductible source of income. On 8/9/14 it sent another letter requesting information regarding her settlement. Her attorney informed Unum that it was solely on the basis of her amputation and did not involve any recovery for her MS. Unum then consulted in-house counsel and initially concluded that the settlement would not qualify for the 3rd-party settlement offset because it would represent attorney fees and past & future medicals. (Unum claims that the internal communication detailing this decision is protected by attorney-client provilege. However, the fiduciary exception applies to this document. See infra. It also concluded that a medical review was not necessary. Despite these conclusions, its Financial Recovery Unit initiated an evaluation of Rustad-Link’s injury causing disability to resolve whether it would “be supporting the claim for MS despite the amputation.” Unum subsequently informed Rustad-Link that “MS is not a basis for her disability and that she is impaired only as a result of her below-the-knee amputation. This condition alone causes her current inability to work in any gainful occupation.” It informed her that as a result of her 3rd-party settlement it had overpaid benefits by $46,856.28 and would reduce her payments $1,924.60/mo to $115.71. Rustad-Link’s attorney responded by noting that Unum’s position “ignores the unambiguous medical opinions of all providers that the MS and the amputation combine to render her disabled.” The letter also disputed the proration of the lump sum settlement for life-long losses, which it asserted should have been calculated over her life expectancy instead of her work-life. Unum responded that it was “not required under the policy to apportion a deductible source of income with respect to the disabling diagnostic condition associated with that source of income” and that “the third party settlement will be considered a deductible source of income for the duration of her claim.” On 1/7/15 Unum notified counsel that it had begun reimbursing itself for the “overpayments” by deducting from her monthly payments and that she would not receive a payment until the overpayment was paid in full. Rustad-Link appealed 6/30/15. Unum denied the appeal 7/14/15, again asserting that the Plan did not require it “to consider an apportionment of the settlement with respect to the disabling condition(s) associated with the deductible source of income.”

Rustad-Link sued 10/20/16 claiming that Unum’s assertion of the offset and repayment provisions constitute breach of the Plan and wrongful refusal to pay benefits in violation of 29 USC 1132(a)(1)(B) & (a)(3). She seeks an award of all disability benefits available including reimbursement for benefits wrongly withheld, prejudgment interest, and attorney fees & costs. Both parties request summary judgment.

Rustad-Link insists that de novo review should be applied to Unum’s decision to offset against her PI settlement pursuant to Washington Administrative Code 284-96-012 which provides that “no disability insurance policy may contain a discretionary clause.” Unum argues that the Regulation does not void the Policy’s discretionary language and that abuse of discretion is the appropriate standard. Rustad-Link has the better argument, although the outcome is the same under either standard. De novo review is appropriate based on Washington law and federal district courts’ interpretation of that law in analogous circumstances. But even if the Regulation does not apply, Unum’s structural conflict of interest requires a more searching abuse of discretion review. Where a fiduciary “both decides who gets benefits and pays for them,” that fiduciary “has a direct financial incentive to deny claims” and therefore “labors under a conflict of interest.” Saffon (9th Cir. 2008). Unum’s conflict is apparent where its determination of Rustad-Link’s disabling condition changed from amputation to MS over time, but reverted to amputation when it became apparent that settlement money might be available for an offset. While Unum argues that it pays regardless of disability categorization, it cannot then twist Plan language to conclude that it gets to offset any source of compensation by denominating it as “income.”

Unum claims attorney-client privilege over a number of documents detailing consultations between its claims and financial employees and its in-house counsel. Rustad-Link argues that it cannot assert the privilege because at the time of the communications it owed her a fiduciary duty. Unum argues both that it can assert the privilege and that the communications are irrelevant when a court conducts a de novo review. Rustad-Link correctly argues that the fiduciary exception applies. “It is not until after the final determination — after the final administrative appeal — that the interests of the Plan fiduciary and the beneficiary diverge for purposes of application of the fiduciary exception.” Stephan (9th Cir. 2012). 22 documents that Unum claims are protected predate its denial of Rustad-Link’s appeal, with 1 more occurring on the same date as the denial. Those documents must be produced. The remaining documents post-date Unum’s denial of Rustad-Link’s appeal and therefore fall on the end of the spectrum “where a plan fiduciary retains counsel in order to defend [itself] against the plan beneficiaries.” Mett (9th Cir. 1999). They do not need to be produced.

Rustad-Link argues that Unum breached its fiduciary duty when it interpreted the Plan to suit its own financial interest by determining that it was entitled to offset her benefit payments based on the settlement she received for her amputation. Unum insists that it correctly interpreted the undefined term “same disability.” Rustad-Link has the better argument. Rustad-Link argues that “same disability” means the same medical condition. Unum insists that it means the same time period of disability. Its interpretation is impermissibly self-serving. While both the definition of “sickness” and “injury” include that they must begin while the insured is covered, neither they nor the definition of “disability” includes language stating or implying that disability constitutes a time period. The plain language of the Plan supports Rustad-Link’s interpretation. Even were the definition of “same disability” a close call, “ambiguities must be construed against the insurer.” Kunin (9th Cir. 1990). Unum relies on several out-of-circuit cases for the proposition that “same disability” means the time period of disability. These cases do not carry the day. Backquie (2nd Cir. 2007) applied arbitrary & capricious — not de novo — review, and as Rustad-Link points out, its logic — which held that “same disability” is best understood as the effect of a diagnosis rather than the diagnosis itself — is flawed. By that logic, an ERISA administrator could deduct against 3rd-party settlements for any kind of injury or sickness during the time that it paid disability benefits, an interpretation that favors the insurer at the expense of the insured. Rustad-Link also accurately notes that Unum’s assertion that “same disability” does not mean same medical condition is undercut by its decision to switch her injury causing disability from MS back to amputation after it learned of her settlement, due to her amputation and a settlement agreement that excludes “income.”

A participant or beneficiary may bring a civil action “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits.” 29 USC 1132(a)(1)(B). Rustad-Link is entitled to reimbursement of the full amount of the amputation settlement offset Unum has taken against her disability payments. 1st, its definition of “same disability” is unreasonably self-serving. 2nd, its assertion of the deductible source of income offset rests on an ambiguous policy provision that must be read in Rustad-Link’s favor. This does not mean that all 3rd-party settlements would be beyond the reach of the Plan’s deductible sources of income or that simply allocating settlement proceeds away from wages would prevent a reasonable offset. Instead, it reflects that Unum has attempted to benefit from Rustad-Link’s misfortune by unreasonably asserting an offset against a settlement for a different disabling condition. Thus, while neither party’s absolutist argument is compelling, applying “a fair, reasonable, and sensible construction as would be given to the [Plan] by the average person purchasing insurance,” Quadrant (Wash. 2005), means Rustad-Link prevails.

In an action by a plan beneficiary, “the court in its discretion may allow a reasonable attorney’s fee and costs of action to either party.” 29 USC 1132(g)(1). “A fees claimant must show some degree of success on the merits before a court may award attorney’s fees.” Hardt (US 2010). “A claimant does not satisfy that requirement by achieving trivial success on the merits or a purely procedural victory, but does satisfy it if the court can fairly call the outcome of the litigation some success on the merits without conducting a lengthy inquiry into the question whether a particular party’s success was substantial or occurred on a central issue.” Id. Rustad-Link has shown that Unum wrongfully deducted against her disability benefits and that it should be required to reinstate her present and future benefits without an offset against her settlement. An award of reasonable fees is appropriate.

Rustad-Link v. Providence Health & Services and Unum Group, 44 MFR 180, 1/31/18.

Caitlin Boland Aarab & Samir Aarab (Boland Aarab), Great Falls, and Michael Best (Best Law Offices), Great Falls, for Rustad-Link; Mikel Moore (Moore, Cockrell, Goicoechea & Johnson), Kalispell, for Defendants.

INSURANCE: Montana law to be applied to Kansas policy pursuant to choice of law provision and occurrence of MVA in Montana… Morris.

David Broadway was injured in an MVA in Great Falls 7/9/14 when his Hyundai was hit by Kari Meek. Broadway sued Meek in State Court in 4/16 and settled with her insurer Progressive for $100,000 limits. He now seeks $100,000 UIM from Allstate, which has refused to pay. He sued Allstate in State Court in 3/17 asserting breach of contract and bad faith. Allstate removed to Federal Court based on diversity. The parties’ summary judgment motions present a choice of law question. Allstate argues that Kansas law applies; Broadway argues that Montana law applies.

The Allstate policy has a choice of law provision, which the parties agree should be applied. It states that Kansas law should govern all disputes unless the occurrence happened outside Kansas in which case the dispute “may be governed by the laws of the jurisdiction in which that occurrence happened,” and that Montana law, as the location of the occurrence, may apply “if the laws of that jurisdiction would apply in the absence of a contractual choice of law provision such as this.”

The Court should deem Montana to be the anticipated place of performance when policy coverage provisions apply in all states. Mitchell (Mont. 2003). The Allstate policy describes the coverage area as “occurrences within the United States of America, its territories or possessions or Canada, or between their ports.” Montana serves as the anticipated place of performance of the policy. It also serves as the actual place of performance as the MVA occurred in Montana, Broadway incurred injuries in Montana, and he filed his PI suit in Montana. Id.

Allstate argues that Tenas (Mont. 2008) supports a determination that the policy must be interpreted under Kansas law. The Tenas provision stated unequivocally that Nevada law would apply to all disputes relating to the policy. The Montana Supreme Court analyzed whether Montana had a materially greater interest in the dispute to overcome the choice of law provision. Not surprisingly, it determined that Nevada law should apply. Unlike Tenas, the Allstate provision does not state that Kansas law should apply to all disputes. It contemplates that Montana law should be applied to occurrences in Montana as long as Montana law would apply absent a contractual choice of law provision. Montana law must be applied to the Allstate policy.

Broadway v. Meek and Allstate Ins., 44 MFR 172, 12/5/17.

Joseph Engel, Great Falls, for Broadway; Stephanie Oblander (Smith, Oblander & Meade), Great Falls, for Allstate.

ERISA: Claims against “Chamber Choices” health insurance program for assessing surcharges that were kicked back to Chamber of Commerce and charges for insurance products without consent of small businesses rejected for failure to establish fiduciary duty, failure to segregate funds… state law claims impermissible “alternative enforcement mechanisms”… Christensen.

The Depot, Union Club Bar, and Trail Head initiated this putative class action in 6/16 arising from the “Chamber Choices” health insurance program marketed by the Montana Chamber of Commerce. Plaintiffs paid premiums to BCBSMT for group health insurance 2006-14. HCSC purchased BCBSMT’s health insurance business 7/31/13 and BCBSMT changed its name to CFM, and HCSC began doing business as BCBSMT. Without informing Plaintiffs, Defendants overcharged Plaintiffs for medical premiums by assessing surcharges which were kicked back to the Chamber and assessed charges to purchase insurance products, resulting in the Securities Commissioner fining BCBSMT. In 4/14 a group of Chamber Choices participants filed a class-action in State Court solely under state law. Judge Sherlock dismissed on summary judgment, and Ibsen (Mont. 2016) affirmed, finding that the plaintiffs had no claim under Montana statutory or common law. Plaintiffs then brought state and federal claims in this Court. CFM moved to dismiss and stay discovery in 8/16. HCSC joined both motions. This Court denied the motion to stay in 12/16. Defendants move to dismiss because they are not fiduciaries within the meaning of ERISA, ERISA provides no equitable relief to remedy Plaintiffs’ grievances, and ERISA preempts their state law claims.

The issue is whether Defendants were acting as fiduciaries when they charged more than Plaintiffs would have agreed to pay had they known where the money would be spent. Plaintiffs argue that reservation of the right to make “administrative changes or changes in dues, terms, or Benefits” constitutes “exercise of any discretionary authority or discretionary control respecting management of the plan.” 29 USC 1002(21)(A)(i). However, nothing about the member plan or allegations in the Complaint suggest that the relationship differed from that of an ordinary participant/insurer. If the Court were to apply their argument in another case, for example, an insurer could be determined to be a fiduciary whenever it increased or decreased rates, even if those rates were entirely reasonable. Such a broad finding of fiduciary status for insurers could transform the industry. Plaintiffs also argue that because Defendants described the additional fees with “cryptic notations,” they concealed the rates, essentially overriding Plaintiffs’ authority & control over management. If these facts may give rise to an ERISA claim for breach of fiduciary duty, it must be because Defendants interfered with the spending of plan assets, not with management or control of the plan. As with their argument that the member guide gives rise to a finding that Defendants were fiduciaries, this theory is insufficiently connected to Defendants’ conduct — assessment and use of premiums — and has nothing to do with how the plan was administered. If Defendants are fiduciaries under ERISA it must be because they “exercised any authority or control respecting management or control of assets.” Defendants argue that once the premiums changed hands they were no longer plan assets. As both parties ably argue, the cases cited by their opponents — nearly all from other jurisdictions — are readily distinguishable from the facts alleged. However, the Court need not turn to case law, as the answer is in ERISA itself. Plaintiffs have brought a claim against insurers — not administrators. Whether it is a feature or a bug, §502(a)(2) does not allow a cause against an insurer under the circumstances here.

The parties also dispute whether — if Defendants are not fiduciaries — Count I may proceed under §502(1) (3): a participant or fiduciary may bring a civil action “(A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.” Plaintiffs cannot seek injunctive relief, as Defendants have not assessed charges for kickbacks or unwanted insurance products since 2014. As to “other appropriate equitable relief,” they have requested restitution and/or disgorgement, and the parties disagree as to whether the remedies sought are legal or equitable. Plaintiffs have not alleged that Defendants were fiduciaries; thus “make-whole” relief is not available. Under Montanile (US 2016), which both parties cite, a party cannot recover in equity unless the funds have been maintained in a segregated account. “Equitable remedies are, as a general rule directed against some specific thing; they give or enforce a right to or over some particular thing rather than a right to recover a sum of money generally out of the defendant’s assets.” Id. Although this ostensibly allows a defendant to escape liability simply by spending or commingling funds, it is the rule. See id. (Ginsburg dissenting, describing the outcome of Montanile as “bizarre”). Plaintiffs argue that Montanile should not apply because the defendant in that case was a beneficiary rather than an insurer. Although it is certainly factually distinguishable, its holding regarding remedies under §502(a)(3) applies here. Plaintiffs have cited no authority that restitution and/or disgorgement may be an equitable remedy when it is recovered from the general fund of a defendant that is not a fiduciary. They have not alleged that the overcharges have been kept in a segregated account. They argue in their brief that “the funds in question are among those that have been set aside in the separate repository that is [CFM].” However, they allege in their Complaint that all public assets were transferred from BCBS to CFM when HCSC acquired BCBS’s health insurance business. Thus the Court cannot “enforce a right to or over” the specific portion of the premiums that went to kickbacks or unwanted insurance products. Id. Restitution or disgorgement would necessarily be from a general fund and equivalent to money damages. Bast (9th Cir. 1998). Because of this defect, Plaintiffs cannot proceed with a claim under 502(a)(3) at this time.

Plaintiffs bring state law claims for breach of contract and the implied covenant, negligent misrepresentation, breach of fiduciary duty, unjust enrichment, and CPA violations. Defendants argue that the claims are preempted under conflict preemption and express preemption. Because the claims are expressly preempted, the Court does not reach conflict preemption. ERISA “supersedes any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” §1144(a). 514(a) preempts any state law that has a “connection with” or “reference to” an employee benefit plan. NYSCBCBSP (US 1995); Gobeille (US 2016). The parties agree that the relevant inquiry is whether Plaintiffs’ state law claims have an impermissible “connection with” ERISA plans. Although Plaintiffs allege violation of laws that are not specifically targeted at employee benefit plans, the claims have an unlawful “connection with” ERISA plans. Defendants’ alleged wrongful conduct falls squarely within the scope of ERISA; it just happens to be the unfortunate case that the precise facts alleged in the Complaint do not give rise to an ERISA claim. Plaintiffs’ Complaint must be dismissed in its entirety, but they shall have the opportunity to amend to remedy the defects.

– – –Plaintiffs filed an amended complaint 3/8/17, alleging that their relationship with Defendants was distinguishable from the average insured/insurer because Defendants were able to modify terms of the insurance arrangement during the calendar year, and that Plaintiffs — all small businesses — are uncommonly dependant on Defendants’ services due to their lack of sophistication in selecting & administering employee benefits. They also allege new claims under State law for fraudulent inducement and constructive fraud and have reframed their negligent misrepresentation claim, asking the Court to consider only conduct predating creation of the ERISA plan. Defendants argue that Plaintiffs have failed to remedy the deficiencies identified in the earlier order. The Court agrees.

The most significant differences between the original and amended complaints are designed to support Plaintiffs’ argument that Defendants are fiduciaries under ERISA. They have alleged additional facts intended to show that the relationship was “extraordinary” — beyond the scope of the normal insurer/insured relationship. They misconstrue Defendants’ argument and the Court’s earlier order. Even if the parties did not have equal bargaining power, the relationship was ordinary in the sense that Defendants sold insurance and Plaintiffs purchased that insurance. Plaintiffs have not alleged that Defendants advised them in any way as to insurance products, only that they depended on them to consider their best interests. While the Court is sympathetic, particularly considering that they are small businesses dependent primarily on an unskilled workforce, it does not alter the Court’s reasoning. And because their new claims for fraudulent inducement and constructive fraud are premised on the same facts and therefore fall within the ground covered by ERISA, they are also “alternative enforcement mechanisms” preempted by federal law.

The Clerk shall enter judgment for Defendants.

The Depot, Union Club Bar, Trailhead v. Caring for Montanans and Health Care Service, 44 MFR 106 2/14/17, 44 MFR 124 6/23/17.

John Heenan (Bishop & Heenan), Billings, and John Morrison & Linda Deola (Morrison, Sherwood, Wilson & Deola), Helena, for Plaintiffs; Anthony Shelley (Miller & Chevalier), DC, and Michael McLean & Stefan Wall (Wall, McLean & Gallagher), Helena, for CFM; Kimberly Beatty, Stanley Kaleczyc, and Christy McCann (Browning, Kaleczyc, Berry & Hoven), Helena and Bozeman, for HCS.