Court Opinion

ID: 3001876
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:21:54.563161+00
Date Added: 2024-06-11T11:24:55.147533
License: Public Domain

In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 07-2351
INDIANA FUNERAL DIRECTORS INSURANCE TRUST,
an Indiana Trust,
                                  Plaintiff-Appellant,
                        v.

BENEFIT ACTUARIES, INCORPORATED,
a Michigan corporation,
                                                Defendant-Appellee.
                          ____________
             Appeal from the United States District Court
     for the Southern District of Indiana, Indianapolis Division.
         No. 97 C 1248—John Paul Godich, Magistrate Judge.
                          ____________
     ARGUED FEBRUARY 28, 2008—DECIDED JUNE 24, 2008
                          ____________

 Before FLAUM, MANION, and EVANS, Circuit Judges.
  EVANS, Circuit Judge. Hoping to ensure affordable and
comprehensive health insurance for their employees, a
group of independent funeral directors who own small
mortuaries in Indiana got together and created the Indi-
ana Funeral Directors Insurance Trust. The Trust, formed
in 1972, in turn administered a multiple insurance em-
ployer welfare arrangement (known as a MEWA) to
provide health benefits to the employees. Five trustees
2                                                 No. 07-2351

administered the Trust, and they hired Benefit Actuar-
ies—which despite its name does not employ any actuar-
ies—to serve as the Trust’s third-party administrator,
insurance broker, and advisor.
  Things were hunky-dory for awhile, but eventually
there came a time when the Trust experienced an unex-
pected spike in claims and ran out of funds to pay them
all. In 1997,1 the Trust sued Benefit Actuaries, claiming
that it violated its fiduciary duty under the Employee
Retirement Income Security Act of 1972 (ERISA) and
that it breached its common-law duties to the Trust by
providing it with bad advice and failing to recommend
measures that would have staved off insolvency. Magis-
trate Judge John P. Godich, hearing the case with the
consent of the parties, granted summary judgment in
favor of Benefit Actuaries on some of the Trust’s claims
and, after a bench trial, found in favor of Benefit Actuaries
on the rest.
  The Trust’s financial woes can be traced back to 1984,
when it decided to self-insure (or self-fund) its health plan.
The self-insured plan operated by charging premiums
to member funeral directors and using those premiums
to cover participant employees’ claims. The Trust also
could require the funeral directors to make additional
payments, known as assessments, if it found itself
underfunded. By contrast, a fully funded health insur-
ance plan is purchased from an insurance provider,
which in turn shoulders the responsibility of paying
participants’ claims.

1
  This is not a misprint as the litigation is now into its sec-
ond decade.
No. 07-2351                                                3

  Among the risks that self-funded plans bear is the
possibility that claims will outstrip premiums, resulting
in an inability to pay them all. A trust administering a
self-funded plan protects against an unexpected rise in the
number and amount of claims by putting aside funds
in reserve to be used when premiums are insufficient to
cover claims. Additionally, two types of insurance cover-
age further limit this risk to self-funded plans.
  First, to protect against large individual claims, a
trust can purchase specific stop loss coverage, which
reimburses the trust for any amount that it pays a partici-
pant over a deductible, known as the attachment point.
Thus, if the attachment point (or deductible) is $50,000 and
a participant incurs $75,000 in covered expenses, the
specific stop loss insurance policy would reimburse the
trust for the last $25,000 paid to the participant. If a
trust has a specific stop loss policy, its risk is limited to
the deductible multiplied by the number of participants.
The lower the deductible, the higher the premiums the
trust must pay for coverage. Since a trust would pass
this cost on to its members, a low specific stop loss de-
ductible would have the obvious effect of increasing
members’ premiums.
  Second, a trust can purchase aggregate stop loss cover-
age, which caps the total amount, over all claims, a trust
is responsible for paying out. Once a trust’s claims ex-
ceed the attachment point (or deductible), the aggregate
stop loss coverage kicks in and reimburses the trust for
claims amounts above the deductible. For example, if a
trust had a $1 million deductible but owed $1.2 million
in claims reimbursements to participants, the aggregate
stop loss coverage would cover the last $200,000. Like
specific stop loss coverage, the lower the aggregate stop
4                                               No. 07-2351

loss coverage deductible, the greater the cost of the premi-
ums to purchase the policy.
  Benefit Actuaries advised the trustees on how to
operate the Trust and manage its risks. In its role as third-
party administrator it handled adjustment and payment
of claims. It also served as the Trust’s insurance broker,
procuring the Trust’s insurance coverage. Further, it
was the Trust’s advisor, compiling detailed reports in
which it analyzed claims, projected the amount of future
claims, and made recommendations as to what pre-
miums to charge, what level of insurance to secure, and
how much to keep in reserve. It met yearly with the
trustees to report on the status of the Trust and to make
recommendations about setting premiums and procuring
insurance.
   Although Benefit Actuaries set a target reserve level,
the Trust did not stick to this goal as a matter of practice.
Instead, it kept reserves on a more haphazard basis. If
it had a good year, when claims were low, it would
hold the excess premiums in reserve; however, if claims
were high, it drew down its reserves. But the Trust did
maintain specific stop loss coverage. Originally, the
deductible was $40,000, but after consultation with Bene-
fit Actuaries the Trust agreed to a higher deductible of
$50,000 in 1994 and of $60,000 in 1995. The Trust did not
purchase aggregate stop loss coverage.
   In the 1990s the Trust began experiencing financial
problems. By 1994 it did not have enough funds to pay
all of the participants’ claims. To meet this problem, Bene-
fit Actuaries advised the trustees to reduce benefits, raise
premiums, and make assessments on the funeral direc-
tors. The trustees followed this advice, and the Trust
stayed afloat. Soon afterward, Benefit Actuaries told the
No. 07-2351                                              5

trustees that the Trust’s financial problems and changes
in the law would make it difficult for the Trust to con-
tinue to operate a self-funded plan, and it suggested that
they consider switching to a fully insured plan through
Blue Cross Blue Shield. The trustees rejected this advice
because Blue Cross Blue Shield would have raised premi-
ums by 50 percent and could not guarantee that it
would insure all employees.
   So there were hints that the Trust’s financial situation
was precarious, but the fatal blows were dealt in 1996
and 1997 when an unexpected and unprecedented num-
ber of large claims were made against the Trust. In an
effort to save the Trust from insolvency, Benefit Actuaries
recommended that the Trust raise premiums in the fall
of 1996. The trustees agreed and raised the premiums by
21 percent. Again Benefit Actuaries suggested that the
trustees look for a fully insured plan. In February 1997
Benefit Actuaries received a quote from Trustmark Insur-
ance Corporation, but because Trustmark would have
charged higher premiums than the funeral directors
were paying, the trustees again rejected the advice that
it switch to a fully insured plan.
  In April 1997 the trustees fired Benefit Actuaries. The
next day, Jay Matthew, the president of Benefit Actuaries,
wrote to one of the trustees warning that, despite the
premium increase, the Trust remained underfunded.
Matthew advised that, to maintain an adequate level of
reserves, the trustees would have to increase premiums
by an additional 41 percent and implement a three-month
assessment on the funeral directors. The trustees did
not follow this advice.
  Later in 1997 the situation became dire, and it was
evident that the Trust was heading towards insolvency.
6                                             No. 07-2351

The trustees finally decided to switch to a fully insured
plan. The Trust stopped accepting claims in September
1997, but the unpaid claims exceeded the funds in the
Trust. The trustees and the Indiana Funeral Directors
Association established a settlement fund to pay the
remaining claims, but after the fund was exhausted the
Trust still owed over $100,000 to medical providers,
employees, and funeral directors.
  In its suit, the Trust alleged that Benefit Actuaries
violated its fiduciary duty under ERISA and negligently
failed to provide competent advice. Both Benefit
Actuaries and the Trust moved for summary judgment.
Judge Godich denied the Trust’s motion and granted in
part Benefit Actuaries’ motion. The judge then permitted
the Trust to amend its complaint to add new state-law
claims, including that Benefit Actuaries had assumed a
duty to provide competent actuarial services consistent
with Michigan MEWA laws.
  Again the parties cross-moved for summary judg-
ment. As evidence that Benefit Actuaries assumed a duty
to act in accordance with Michigan law, the Trust sub-
mitted deposition testimony from Mr. Matthew that the
company follows Michigan’s MEWA regulations. The
judge denied the Trust’s motion and granted in part
Benefit Actuaries’s motion. He found that Matthew’s
deposition testimony was merely a general description
of how Benefit Actuaries, a Michigan company, con-
ducts business and that, in any event, the Trust had put
forward no evidence that it relied on Benefit Actuaries to
comply with Michigan law. Thus, he concluded that the
Trust could not establish that Benefit Actuaries assumed a
duty to administer the Trust in accordance with the
Michigan MEWA statute. The judge did allow the Trust to
No. 07-2351                                             7

proceed to trial on its claims that Benefit Actuaries
breached its duty to set appropriate claims reserves and
to obtain adequate insurance coverage; however, he li-
mited the types of damages the Trust could attempt to
prove.
  After the bench trial, Judge Godich found in favor of
Benefit Actuaries. He determined that Benefit Actuaries
had a duty to advise the trustees “with the degree of care
or skill exercised or possessed by other professionals
engaged in advising and administering self-insured plans
under similar circumstances” and concluded that Benefit
Actuaries had not breached this duty. After first finding
that Benefit Actuaries was not to blame for the Trust’s
failure to obtain aggregate stop loss coverage, a deter-
mination the Trust does not dispute on appeal, the judge
next concluded that Benefit Actuaries did not breach the
standard of care in advising the Trust to raise the
specific stop loss deductible in 1994 and 1995. He based
this finding on his evaluation of the testimony of two
expert witnesses.
  The Trust’s expert testified that by 1994 the Trust was
in a “death spiral,” which occurs when healthy partici-
pants abandon a plan for less expensive options and
leave behind only those who incur claims greater than
their share of the premiums paid in. He further explained
that the appropriate response to a death spiral is to
reduce the specific stop loss deductible and thus con-
cluded that Benefit Actuaries’ recommendation that the
Trust increase the deductible was improper. The judge,
however, credited the testimony of Benefit Actuaries’
expert, who opined that Benefit Actuaries’ advice to raise
the deductible was sound. This expert calculated that,
based on the amount of expected claims, the appropriate
8                                              No. 07-2351

specific stop loss deductible was between $50,000 and
$80,000, and thus it was acceptable to raise the deductible
to $50,000 in 1994 and $60,000 in 1995. Furthermore,
the judge credited the testimony of Benefit Actuaries’
president that, although the plan was losing participants
in 1994, it was not in a death spiral because the employees
leaving the plan were a heavier drain on the Trust’s
resources than those who remained.
  The judge then analyzed whether Benefit Actuaries
breached its duty to advise the Trust about setting ap-
propriate reserves. He determined that it failed to recom-
mend that the Trust set aside adequate reserves and
instead considered reserve levels as a “loose target, not as
a firm goal.” But the judge also found that the trustees did
not express concern when reserves fell below the target
level Benefit Actuaries tried to achieve. Furthermore, the
judge concluded, the trustees were highly tolerant of
risk and did not wish to operate with substantial reserves
because increasing reserves would impair their priorities
of making health care affordable and available to all
employees. The trustees had enough financial knowl-
edge to understand the risk of maintaining minimal
reserves. So, the judge concluded, Benefit Actuaries was
not responsible for the Trust’s paltry reserves.
  Finally, the judge refused to credit the testimony of the
trustees that, had Benefit Actuaries told them before 1997
that the Trust was in dire financial straits, they would
have terminated it. Instead, he concluded that, even if
Benefit Actuaries had advised the trustees to terminate
the Trust before 1997, the trustees would have ignored
the advice because a fully insured plan was too expensive
and would not have covered all employees. The judge
acknowledged that, as it turned out, Benefit Actuaries
No. 07-2351                                                  9

advised the Trust poorly, but he concluded that its advice
did not fall below the standard of care because it based
its advice on the trustees’ high level of risk tolerance. In
any event, the judge concluded, the Trust had failed to
prove damages.
  On appeal, the Trust first argues that the judge erred in
granting summary judgment on its claim that Benefit
Actuaries assumed the duty to comply with Michigan
law, or at least to perform competent actuarial services.
We review the ruling granting summary judgment de novo,
viewing all facts in the light most favorable to the Trust. See
Fischer v. Avanade, Inc., 519 F.3d 393, 401 (7th Cir. 2008). We
note, however, that the Trust supports its argument in
part with citations to trial testimony, but we have disre-
garded this evidence because we can consider only
what was before the judge at the summary judgment
stage. See Hildebrandt v. Ill. Dep’t of Natural Res., 347 F.3d
1014, 1024-25 (7th Cir. 2003).
  Every MEWA that operates in Michigan is obligated to,
among other things, file annual actuarial reports on its
financial condition and maintain a minimum level of cash
reserves. See MICH. COMP. LAWS ANN. § 500.7040(1)(a), (c).
Indiana did not adopt similar regulations for MEWAs
until 2003, over five years after the Trust became insolvent.
Although the MEWA here operated only in Indiana
and thus was not subject to the Michigan regulations, the
Trust insists that Benefit Actuaries assumed a duty to
comply with these rules. We have interpreted Indiana
law (which the parties agree controls their dispute) to
apply a three-part test to determine whether a defendant
has assumed a duty. See Holtz v. J.J.B. Hilliard W.L. Lyons,
Inc., 185 F.3d 732, 744 (7th Cir. 1999); Roe v. Sewell, 128
F.3d 1098, 1104 (7th Cir. 1997). First, the defendant must
10                                             No. 07-2351

have promised or otherwise agreed to undertake a duty.
Holtz, 185 F.3d at 744. Second, the defendant had to know
that the plaintiff would rely on the assumption of the duty.
Id. Third, if the plaintiff is claiming misfeasance, the
defendant must have taken some affirmative action, or,
if the plaintiff is claiming nonfeasance, there must have
been detrimental reliance. Id.
   We agree with Judge Godich that the Trust did not put
forward any evidence that Benefit Actuaries promised to
administer the Trust in accordance with Michigan’s
MEWA law or that Benefit Actuaries knew the Trust
would rely on it to follow the Michigan statute. The Trust
points to a single mention of a “Commissioner,” which,
it argues, refers to Michigan’s Insurance Commissioner,
in its contract with Benefit Actuaries, and to Matthew’s
deposition testimony that Benefit Actuaries operated
consistently with Michigan law, as evidence that creates
a genuine issue of material fact about whether Benefit
Actuaries agreed follow Michigan’s MEWA law in ad-
ministering the Trust. But the contract between Bene-
fit Actuaries and the Trust does not mention Michigan
law, and the vague reference to the “Commissioner” does
not raise a triable issue as to whether Benefit Actuaries
agreed to abide by Michigan law. Nor does Matthew’s
deposition testimony explaining generally that the com-
pany operates under the MEWA law create an issue of
fact. Although Benefit Actuaries, as a Michigan company,
must comply with Michigan law when necessary, nothing
in Matthew’s testimony reflects that Benefit Actuaries
agreed to follow Michigan law when administering this
Indiana trust. And even if Benefit Actuaries had promised
to undertake obligations under Michigan law, the Trust
presented no evidence that Benefit Actuaries knew the
No. 07-2351                                               11

Trust would rely on that promise. To the contrary, the
Trust concedes in its brief that it “may not have relied upon
Benefit Actuaries to adhere to Michigan’s MEWA stat-
utes directly.”
  The Trust goes on to argue, however, that at the very
least Benefit Actuaries assumed the duty to provide
competent actuarial advice. But the evidence the Trust
submitted on summary judgment does not support this
conclusion. The Trust presented no evidence that Benefit
Actuaries, despite its name, promised to act as an actuary
for the Trust. Instead, the evidence showed that Benefit
Actuaries undertook to act as the third-party admin-
istrator, insurance broker, and advisor for the Trust, and
nothing suggests that these services required actuarial
expertise. At most, the Trust’s evidence established that
Benefit Actuaries might have referred to actuarial tables
in performing its analyses. But this is not enough to create
a triable issue as to whether Benefit Actuaries promised
to assume the duties of an actuary, and much less
whether the Trust relied on this promise.
  The rest of the Trust’s arguments fault the determina-
tion made by the judge after the bench trial that Benefit
Actuaries did not breach its duty to provide competent
services as a third-party administrator, insurance broker,
and advisor. Whether a particular act or omission consti-
tutes a breach of the duty of care is generally a question of
fact. See N. Ind. Pub. Serv. Co. v. Sharp, 790 N.E.2d 462,
466 (Ind. 2003). And we will overturn factual determina-
tions, as well as the application of the law to the facts,
only if they are clearly erroneous. See Trs. of Chicago
Painters & Decorators Pension, Health & Welfare, & Deferred
Sav. Plan Trust Funds v. Royal Int’l Drywall & Decorating,
Inc., 493 F.3d 782, 785 (7th Cir. 2007). We defer to the
12                                                No. 07-2351

judge’s credibility determinations, see Murdock & Sons
Constr., Inc. v. Goheen Gen. Constr., Inc., 461 F.3d 837, 840
(7th Cir. 2006), and if there are multiple ways to view
the evidence, the judge’s choice of one interpretation
over others cannot be clearly erroneous; so, we will not
reverse a factual finding as long as it is plausible in light
of the record, see Johnson v. Doughty, 433 F.3d 1001, 1012
(7th Cir. 2006).
  The Trust first argues that it was clearly erroneous for
the judge to conclude that Benefit Actuaries did not
breach its duty by recommending that the Trust adopt a
higher specific stop loss deductible in 1994 and 1995. The
Trust relies on the testimony of its expert that, when
Benefit Actuaries recommended the Trust raise the deduct-
ible, the Trust was in a death spiral, and so the only
reasonable advice would have been to lower the deduct-
ible, or at least to maintain it at its then-current level. But
there was also ample evidence to support a contrary
determination. Benefit Actuaries’ president disagreed
with the Trust’s expert and testified that the death spiral
did not begin until 1997. Furthermore, Benefit Actuaries’
expert concluded that the deductible Benefit Actuaries
chose and that the Trust adopted was reasonable. The
judge explained that he credited the testimony of Benefit
Actuaries’ expert because his conclusion was based on
specific calculations and was consistent with the level of
risk tolerance the Trust historically had shown. He also
relied on evidence that maintaining a low deductible
would have increased premiums to the funeral directors,
a result the judge determined was at odds with the priori-
ties of the Trust. The judge therefore chose one plausible
interpretation of the evidence over another, and his
choice was not clearly erroneous.
No. 07-2351                                             13

   The Trust next argues that the judge clearly erred in
finding that Benefit Actuaries did not breach its duty
by failing to advise the trustees about the risk of raising
the specific stop loss deductible and about the Trust’s
poor financial situation. The trustees testified that Bene-
fit Actuaries did not support its recommendations with
sufficient analyses and that, if they had known sooner
how dire the Trust’s financial situation was, they
would have terminated the Trust earlier. But the judge
found this testimony incredible. He concluded that the
trustees had enough financial acumen to understand the
trade-offs associated with choosing a higher deductible.
In effect, they knew they were choosing more affordable
coverage in exchange for accepting greater financial risk.
Furthermore, he pointed out that, when faced with finan-
cial problems, the trustees often refused to follow
Benefit Actuaries’ advice if it would have resulted in
increased cost to funeral directors or decreased coverage
to employees. He noted that the Trust twice declined to
transition to a fully insured plan and decided not to
raise premiums and make assessments as the Trust’s
financial situation deteriorated in 1997. He found that
the trustees had a high tolerance for risk and that they
valued availability and affordability of medical benefits
above ensuring the Trust’s long-term financial stability.
It was not clearly erroneous for Judge Godich to con-
clude that, knowing the requirements of its clients,
Benefit Actuaries did not breach its duty by failing to
continually sound the alarm that the sky was falling.
  The Trust next argues that the judge erred when he
rejected its contention that Benefit Actuaries breached a
duty by failing to recommend that the Trust maintain
adequate reserves. Specifically, it points to the judge’s
14                                            No. 07-2351

finding that Benefit Actuaries recommended reserve
levels based on a “loose target, not as a firm goal,” and
argues that this finding compels the conclusion that
Benefit Actuaries breached its duty to the Trust. We agree
that some evidence supports the view that Benefit Actuar-
ies should have provided the trustees with more advice
about the dangers of a fly-by-the-seat-of-your-pants
approach to reserves. But the evidence does not compel
this conclusion, and there is sufficient support in the
record for the judge’s finding that maintaining a
steady level of reserves was not a priority for the Trust.
The judge based his determination on the testimony of
the trustees and Benefit Actuaries’ officers about the
relationship of the parties and the trustees’ history of
declining to follow the advice of Benefit Actuaries when
doing so would have increased the cost to the member
funeral directors or excluded some employees from
coverage. He further found that the trustees’ confidence
in their risky strategy had been affirmed by the Trust’s
recovery from its financial problems in 1995 despite its
lack of adequate reserves. The judge considered the
totality of the evidence before him and reached a plausible
conclusion.
  Finally, the Trust argues that the judge improperly
limited the types of damages it could attempt to prove
at trial. But we need not address this issue because we
conclude the judge did not err in finding that Benefit
Actuaries breached no duty to the Trust. Without a
breach, the Trust is not entitled to damages.
 Therefore, the judgment is AFFIRMED.

                   USCA-02-C-0072—6-24-08