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Smith v. Life Investors Insurance Company of America

November 6, 2009


The opinion of the court was delivered by: McVerry, J.


Pending before the Court are PLAINTIFF'S MOTION FOR CLASS CERTIFICATION (Document No. 67) and PLAINTIFF'S AMENDED MOTION FOR CLASS CERTIFICATION (Document No. 150). The matter has been thoroughly briefed (Document Nos. 68, 121, 148, 161, 202, 220, 222, 254, 259, 264, 273, 278). Plaintiff amended her motion for class certification to align the class definition with the operative Second Amended Complaint and continues to rely on the legal arguments made in support of her original motion. The motions are ripe for disposition and will be combined for decision. Plaintiff seeks certification of a class defined as follows:

All individuals who either own or are a covered person under cancer-only insurance policies administered or underwritten by Life Investors Insurance Company of America ("Life Investors"), where (i) such policies were issued in Pennsylvania; (ii) the policies provided that benefits would be paid based upon "actual charges" for covered treatments, services or procedures; and (iii) Life Investors purported to pay benefits, or indicated that in the future it would only pay benefits, under such provisions based on the amounts providers were paid or agreed to be paid.

Factual Background

Defendant Life Investors Insurance Company of America ("Life Investors") is a corporation organized under the laws of Iowa and with a principal place of business in Iowa. Bankers United Life Assurance Company ("Bankers Life") merged into Life Investors on December 31, 2001. Effective October 2, 2008, after this litigation was filed, Life Investors merged into Transamerica Life Insurance Company ("Transamerica"). For convenience and consistency, Defendant will be referred to as "Life Investors."

Plaintiff Frances Smith is a 67-year-old Pennsylvania resident who purchased a supplemental cancer insurance policy written on Life Investors policy form LPC01PA. Her husband, William E. Smith, was a "covered person" under the policy.*fn1 Ms. Smith purchased the policy in October 1998 through her daughter, Mary Pennington, who worked as an insurance agent for Life Investors. Mr. Smith was diagnosed with cancer in November 2005 and began receiving chemotherapy treatments from the University of Pittsburgh Cancer Institute ("UPCI") beginning in December 2005. He died on December 24, 2008.

At issue in this litigation are the benefits which are based on "actual charges" for the services provided, including chemotherapy, radiation therapy, blood benefits, and ambulance services. The term "actual charges" is not defined in the Policy. Ms. Smith chose an unlimited yearly benefit for chemotherapy, radiation and blood benefits and paid a higher premium for this option. Prior to April 1, 2006, Life Investors paid benefits on the full amount billed by UPCI for Mr. Smith's chemotherapy treatments as set forth on the Explanation of Benefits forms ("EOB forms") sent by Life Investors to Ms. Smith, rather than the discounted amounts that UPCI accepted as payment. The monetary difference between the parties' conflicting interpretations of "actual charges" is in excess of $275,000.

The proposed class includes all individuals who either own or are covered persons under Life Investors policy form LPC01PA or substantially identical Bankers Life policy form BPC01PA supplemental cancer insurance policies issued in Pennsylvania. Policy forms LPC01PA and BPC01PA will be referred to collectively as "the Policy." Life Investors sold the Policy in Pennsylvania between 1996 and 2002. Because the Policy provides "supplemental" insurance, it pays cash benefits directly to the insured, irrespective of whether the medical expenses of the insured/covered person are paid by other insurance.

The Policy provides approximately 24 different categories of benefits. Some benefits are expressed as fixed dollar amounts, other benefits have yearly maximums, some are unlimited and others are based on "Usual and Customary charges." The Policy is renewable for life, subject to the timely payment of premiums. However, Life Investors may change the premiums prospectively upon proper notice:

This policy may be continued for life. As long as the premium is paid before the end of the grace period we cannot cancel this policy. However, we may from time to time change the table of rates that apply to your premiums. Any such change will apply to all policies issued in your Class. No change in the table of rates will take effect for this policy until the Renewal Date next following the date of such change. We will give the Insured written notice at least 31 days prior to any rate change.

As a result of rising healthcare and claims costs, Pennsylvania policyholders like Plaintiff have experienced substantial premium increases over the past eight years. Life Investors predicts that if it is required to pay "actual charges" based on list prices, there will be substantial additional premium increases over the next eight years. See Declarations of actuary Steven Gwin and expert witness Glen Alan Melnick, Ph.D.

The "actual charge" language originated more than thirty years ago. At that time, medical providers generally issued bills which reflected the actual amounts legally owed and the amounts being paid to the providers for the services rendered. Billing practices in the healthcare industry have significantly changed over the ensuing years, with increasing numbers of medical providers issuing statements that contain "list" or "chargemaster" prices, rather than the amounts that those providers accept as payment in full for their services from third-party payors such as Medicare and private insurers.

Life Investors stopped selling the Policy in 2002. In 2004, Life Investors and several related companies appointed a "Discontinued Supplemental Insurance Taskforce" ("DSI Taskforce") to investigate the causes of premium increases. The DSI Taskforce identified the manner in which it paid "actual charges" as an issue. On January 12, 2006, Life Investors sent a notice to 303 Pennsylvania policyholders, including Plaintiff, to explain that it was changing the manner in which it would pay "actual charges" benefits. The letter explained that information statements from medical providers to patients that contain "list" prices are not true "bills" and do not reflect the actual amounts accepted as payment by the medical providers. Accordingly, Life Investors stated that effective April 1, 2006, policyholders would be required to submit as proof of loss "documentation which shows the amount of the actual charges being paid to and accepted by the healthcare provider as payment in full for the medical services rendered." Mr. Smith continued to receive chemotherapy treatments after April 1, 2006, but Life Investors paid as benefits only the discounted amounts accepted as payment by UPCI rather than the full amount(s) billed by UPCI to the Smiths.

Ms. Smith is a retired laundry worker with a high school education. Throughout her adult life, she deferred to her husband on all household financial matters, including interactions with Life Investors and the prosecution of this lawsuit. When William Smith became incapacitated, Ms. Smith's daughter Frances began managing the household financial matters on her behalf. Ms. Smith testified in her deposition about her lack of substantive knowledge regarding her claims, nervousness which may prevent her from being able to testify, confusion and poor memory. See, e.g., Deposition at 27-28 ("My husband did all of this and I get nervous and I don't remember things like -- just because I just get nerves and I get nervous over it and I could be telling you a wrong thing and not a wrong thing, because I just get nervous.") She is not well-versed in the legal theories of this action, the differences in the various complaints or the positions of the parties in the case. For example, when asked during her deposition whether she was asserting claims for bad faith and declaratory relief, she answered "No."*fn2 Deposition at 43. Smith testified that she does not know who is in the class, and has not thought about how the lawsuit might affect premiums for other policyholders. Deposition at 173. Smith summarized that her claim is that Life Investors "haven't been paying what they are supposed to pay." Deposition at 42.

Procedural History

The original complaint in this case was filed by William Smith on April 12, 2007 in the Court of Common Pleas of Westmoreland County, Pennsylvania. The original class definition comprised "all individuals in Pennsylvania who (i) were covered under Life Investors cancer-only policies; (ii) received covered treatments, services or procedures for which Life Investors paid "actual charges"; and (iii) were paid lesser benefits based on the amounts paid to healthcare providers." In other words, the class was limited to current claimants, i.e., persons who had already accrued claims for "actual charges" which had been allegedly underpaid.Life Investors removed the case to this Court based on diversity jurisdiction. In connection with a motion to dismiss the class, Life Investors submitted an affidavit from James Byrne (Document No. 8), who averred that only six people met the criteria set forth in the proposed class.

In July 2007, an amended complaint was filed, which added Frances Smith as a Plaintiff and modified the class definition. Defendant filed a motion to dismiss the amended complaint, which the Court denied. Defendant then filed an answer, the parties participated in an unsuccessful mediation, and Defendant unsuccessfully sought to transfer this case to a Multi-District Litigation ("MDL") panel to consolidate it with several similar cases pending in other jurisdictions.

On August 20, 2008, the Court granted Plaintiff's motion to file a Second Amended Complaint to include persons covered by Bankers Life Policy Form BPC01PA. The Second Amended Complaint asserts three causes of action: breach of contract, bad faith, and declaratory relief. As set forth above, Plaintiff now seeks certification of a class comprised of all persons covered under policies issued in Pennsylvania in which Life Investors has either: (1) purported to pay "actual charges" benefits based on the amounts providers were paid or agreed to be paid; or (2) indicated that it would do so in the future. In effect, the current alleged putative class includes all covered persons under the Policy, regardless of whether or not they have filed a claim. Defendant filed an Answer and Counterclaim. Plaintiff sought to file a third amended complaint. By Memorandum Order dated December 11, 2008, the Court struck the counterclaim and denied Plaintiff's motion to amend the complaint yet again.*fn3

The Court has held the motions for class certification under advisement for several reasons. See generally Weiss v. Regal Collections, 385 F.3d 337, 347-48 & n.17 (3d Cir. 2004) (discussing judicial administration considerations in allowing class certification motions to "play out"). Since the filing of the original motion for class certification, the Court of Appeals for the Third Circuit has issued a landmark opinion in In re Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305 (3d Cir. 2008), which significantly developed the law regarding class certification. In addition, the parties have through discovery created a record sufficient to enable the Court to delve beyond the pleadings and conduct the type of in-depth analysis required by In re Hydrogen Peroxide. In particular, the parties filed concise statements of material facts in connection with Plaintiff's motion for partial summary judgment,*fn4 and discovery is now complete except for the matters addressed in the Court's Memorandum Order of October 16, 2009. The Court has also monitored the progress of putative class actions in other jurisdictions, particularly the nationwide classes proposed in Gooch v. Life Investors Ins. Co. of America, Case No. 07-16 (M.D. Tenn.), and Runyan v. Transamerica Life Ins. Co., Case No. CV-09-2066-3 (Circuit Court Pulaski County, Ark.). The Gooch action is presently closed administratively pending an appeal to the United States Court of Appeals for the Sixth Circuit and Smith has opted out of the Runyan action. The Court concludes that there is no compelling reason to further withhold resolution of the class certification motions in this case.

Standard of Review

Class certication is governed by Fed. R. Civ. P. 23, which states, in relevant part:

(a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if:

(1) the class is so numerous that joinder of all members is impracticable;

(2) there are questions of law or fact common to the class;

(3) the claims or defenses of the representative parties are typical of the claims or ...

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