Recent Court Decisions

By Stempel, Jeffrey W. | Journal of Risk and Insurance, March 1999 | Go to article overview

Recent Court Decisions


Stempel, Jeffrey W., Journal of Risk and Insurance


MCCARREN-FERGUSON ACT DOES NOT BAR RICO CLAIM AGAINST INSURER THAT MISLED POLICYHOLDERS

Humana, Inc. v. Forsyth, ___ U.S. ___, 119 S. Ct. 710, 142 L. Ed.2d 753, 67 U.S. Lw. 4085 (Jan. 20, 1999)

Under group health insurance policies issued during the 1985-88 period, Humana Health Insurance of Nevada, Inc. agreed to pay eighty percent of a policyholder's covered hospital charges, with the policyholder to pay the standard twenty percent co-payment established under many health policies. Unbeknownst to the insureds, Humana Insurance had arranged steep discounts with Humana Hospital-Sunrise, which was owned by affiliated company Humana, Inc. As a result of the discounts, which ranged between forty percent and ninety percent, Humana Insurance paid far less than the amount indicated on the bills received by its insureds, even though the insureds paid the full twenty percent to Humana Hospital.

Humana Insurance did not disclose these discounts and did not pass on any of its savings to its policyholders. For example, on a $5,000 Humana Hospital bill, Humana Insurance might pay as little as $550 (instead of the $4,000 suggested by the bill and the insurance policy) while the insured paid $1,000 (twenty percent of $5,000). As a result, the insured's true share of the actual hospital bill would be sixty-five percent rather than the twenty percent promised by Humana.

Understandably, persons insured under these group policies were a little upset. They filed a class action lawsuit seeking not only damages for the overpayments and punitive damages under state law but also treble damages and counsel fees pursuant to the federal Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. 1961 et. seq. Specifically, the insureds alleged a pattern of racketeering activity consisting of mail, wire, radio, and television fraud. Under RICO, the defendant must have committed two or more "predicate acts" (such as mail fraud) during a 10-year period that are part of a scheme to injure the plaintiffs person or property.

The plaintiffs theory of the case - and a rather good one on the facts as stated by the Supreme Court - was that Humana Insurance induced them to sign up for the group insurance by promising a twenty percent co-pay and then effectively extracted much higher percentages of co-payment because of its success arranging large discounts with a related entity, keeping the discounts secret and thereby continuing the fraud.

In response to plaintiffs' RICO claim, defendant Humana did not contest the merits so much as it raised a procedural and technical defense in its motion for summary judgment: that plaintiff's RICO claim was barred by the McCarran-Ferguson Act, which establishes a norm of state regulation of insurance and forbids application of federal law to insurers where this might "invalidate, impair, or supercede" applicable state regulation. See 15 U.S.C. [section] 1012(b).

Humana argued that a RICO claim against it would undermine applicable Nevada law, which permits recovery of compensatory and punitive damages against insurers due to fraud but does not provide for the treble damages found in RICO. In fact, the Nevada Insurance Commissioner investigated and entered into a consent decree with Humana Insurance, in which Humana agreed to terminate the practice and paid a fine of $50,000. Furthermore, the State of Nevada did not participate in the Humana v. Forsyth litigation and did not suggest to any of the courts reviewing the matter that the State considered the claim to be an intrusion on the State's regulatory prerogatives. See 119 S. Ct. at 719.

However, the trial court initially granted Humana's motion to eliminate the RICO claim, reasoning that the federal RICO penalties were so much greater than the Nevada state law penalties that it amounted to congressional interference with the state's insurance regulation and enforcement scheme. The United States Court of Appeals for the Ninth Circuit reversed, finding that the greater size of the federal remedy was not so inconsistent with state law as to require reversal. …

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