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Youth Advocate Programs, Inc. v. Kansas City Life Insurance Co.

May 30, 2007


The opinion of the court was delivered by: Judge Conner


Before the court is defendant's motion to stay the instant proceedings and compel arbitration of plaintiff's claims in the manner specified by an agreement that existed between the parties during the relevant time period. For the reasons that follow, the motion will be granted.


The Administrative Services Only Agreement

Plaintiff Youth Advocate Programs, Inc. ("Youth Advocate") is a Pennsylvania non-profit organization that serves youths and families through non-residential community-based programs. From 1996 forward, Youth Advocate has maintained an employee benefit program (the "Plan") that uses traditional insurance and self-insurance mechanisms to provide medical, dental, vision, and disability benefits to its more than 2,000 employees.

Youth Advocate has no specialized, in-house expertise in the area of plan administration, so it contracts with an administrative services provider that is responsible for the management of the Plan. In May 2002, and then again in May 2003, Youth Advocate entered into a twelve-month administrative services only agreement (the "ASO") with defendant Kansas City Life Insurance Company ("KCL"), whereby KCL was to act as Youth Advocate's administrative services provider in association with the Plan. Among other things, the ASO set forth responsibilities of the parties and contained a clause requiring "any dispute, controversy or question arising under" the ASO to be resolved through binding arbitration.

The Trustmark Stop-Loss Insurance Policy

In order to insure against catastrophic financial losses from unexpected high claims payments under the Plan, Youth Advocate purchased a "stop-loss" insurance policy to cover losses exceeding certain pre-determined limits on a per claim or aggregate basis. During the relevant time period, Youth Advocate's stop-loss insurance was underwritten by Trustmark Insurance Company ("Trustmark"). As part of the underwriting process, Trustmark required Youth Advocate to identify claimants who could potentially exceed the stop-loss policy deductible or who suffered from ongoing conditions material to the underwriting of the stop-loss policy. Trustmark set forth various disclosure parameters and required the relevant information 30 days before the proposed effective date of the stop-loss policy. Additionally, Trustmark required that the disclosures be updated through the effective date of the stop-loss policy.

On or about May 28, 2003, Youth Advocate received from KCL an application for the stop-loss insurance coverage to be underwritten by Trustmark. Youth Advocate completed the application and returned it to KCL, which forwarded the application to Trustmark. KCL then compiled the information to be disclosed to Trustmark. On June 13, 2003, Susan Treadwell of KCL provided Youth Advocate with a form identified as a "Disclosure Statement" that was to be signed by Youth Advocate and returned to Trustmark as part of the underwriting process. Several reports were attached to the disclosure statement, including "Member Maintenance" and "Member Benefit History" forms and a "Disability History Report" covering the period from May 1, 2003, through June 15, 2003.

Relying on Treadwell's representations that the documentation was complete and responsive to Trustmark's requests, Minette Bauer of Youth Advocate signed the disclosure statement on June 23, 2003, and mailed it to KCL on or about June 25, 2003. After receiving the signed disclosure statement, KCL forwarded the same to Trustmark without updating any information. In October 2003, following this application and disclosure process, Youth Advocate and Trustmark entered into a stop-loss insurance contract effective May 1, 2003, through April 30, 2004 (the "Stop-Loss Policy").

In 2003, two individuals employed by Youth Advocate, Clinton Fischer and Winifred Brinson, incurred hundreds of thousands of dollars of medical expenses covered under the Plan and for which Youth Advocate sought coverage under the Stop-Loss Policy. Trustmark insisted on conducting a "disclosure review" regarding these patients and their claims, and concluded that the failure to include certain information about Fischer and Brinson in the disclosure statement and associated reports excluded them, in whole or in part, from coverage under the Stop-Loss Policy.

Youth Advocate alleges that it has suffered damages in an amount not less than $639,019.27 as a result of the inadequate disclosures prepared by KCL and the resulting exclusion of certain claims from coverage under the Stop-Loss Policy. 2004 litigation*fn2

As a result of the denial of the Fischer and Brinson claims, Youth Advocate commenced a diversity action in 2004 in the Middle District of Pennsylvania against both KCL and Trustmark. See Youth Advocate Programs, Inc. v. Kansas City Life Ins. Co., No. 1:04-CV-02459 (filed Nov. 11, 2004). Youth Advocate alleged that Trustmark breached its obligations under the Stop-Loss Policy and violated Pennsylvania's Bad Faith Statute, 42 Pa. Cons. Stat. § 8371, et seq., and as a result, Youth Advocate sought damages and a declaratory judgment that Fischer and Brinson were covered by the Stop-Loss Policy.*fn3 (Doc. 1.)

Youth Advocate also asserted a breach of contract claim against KCL arising from its failure to disclose the relevant medical information about Fischer and Brinson to Trustmark. Youth Advocate alleged that the compilation of this information, completion of the disclosure forms, and generation of the appropriate and up-to-date reports were obligations KCL assumed under the ASO, and that the ASO ...

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