Court Opinion

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Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

12-16-2004

UPMC Health Sys v. Metro Life Ins Co
Precedential or Non-Precedential: Precedential

Docket No. 03-3677

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                                                 PRECEDENTIAL

            UNITED STATES COURT OF APPEALS
                 FOR THE THIRD CIRCUIT

                           No. 03-3677

                  *UPMC HEALTH SYSTEM, a
                Pennsylvania non-profit corporation
                            Appellant

                                 v.

              METROPOLITAN LIFE INSURANCE
               COMPANY, a Delaware Corporation

    *(Amended in accordance with Clerk’s Order dated 3/15/04)

 ON APPEAL FROM THE UNITED STATES DISTRICT COURT
    FOR THE WESTERN DISTRICT OF PENNSYLVANIA
                    (D.C. No. 01-cv-00147)
         District Judge: Honorable Arthur J. Schwab

                   Argued September 28, 2004

       Before: ROTH, BARRY, and GARTH, Circuit Judges.

                   (Filed December 16, 2004)

Anthony Cillo, Esq. (Argued)
Richard R. Nelson, Esq.
Cohen & Grigsby
11 Stanwix Street, 15 th Floor
Pittsburgh, PA 15222

Attorneys for Appellant
Daniel E. Wille, Esq. (Argued)
Darren P. O’Neill, Esq.
Reed Smith, Esq.
435 Sixth Avenue
Pittsburgh, PA 15219

Attorneys for Appellee

                  OPINION OF THE COURT

BARRY, Circuit Judge

       In this case, we are asked to review the grant of summary
judgment in favor of an insurer and damages awarded by the
District Court to the insurer. For the reasons that follow, we will
affirm in part, reverse in part, and remand for further
proceedings.

                      I. BACKGROUND

        UPMC Health System (“UPMC”), a nonprofit corporation
that operates a system of hospitals and health care facilities,
negotiated with Metropolitan Life Insurance Company
(“MetLife”) for an umbrella dental insurance policy for all of
UPMC’s employees. On July 29, 1999, MetLife issued a written
quote for a one-year insurance policy for a “High Option” dental
plan. UPMC rejected this proposal, requested changes, and
MetLife issued a revised proposal, dated August 26, 1999. This
revised proposal included dual option coverage, whereby
employees would be able to choose between High Option and
Low Option plans, and a two-year coverage commitment and
rate guarantee, which provided that the rates for the second year
of coverage would be no more than 5% higher than the rates for
the first year.1

       1
         MetLife had offered maximum renewal increases such as this
before, and so this aspect of the proposal was not unique.

                                 2
       Because MetLife could not know in advance how many
UPMC employees would choose the High Option versus the
Low Option, its revised proposal included rates 5.5% higher to
account for this risk, although it based its calculations on an
assumed 75/25 split between the High and Low Options. It also
increased its rates by 1.5% to account for the increased risk
associated with its two-year, as opposed to its original one-year,
commitment. Important for this appeal, the proposal included a
reservation of rights provision that stated:

       Notwithstanding any rate guarantee, we reserve the
       right to change our rates for any of the following
       reasons:

       a.     The composition of the group, employees,
              dependents or life insurance volume, has
              changed 10% or more from the composition
              when quoted
       b.     The financial arrangement on any part of
              the package is changed
       c.     Any of the coverages are cancelled or not
              issued
       d.     Any of the plan designs are changed

(49a, 56a.) This revised proposal was to remain in effect until
January 1, 2000.

       UPMC accepted the revised proposal in September 1999.
Its employees were thereby required to enroll in MetLife’s plan
before January 1, 2000 in order to be covered in 2000.
Enrollment was complete in November, with a 90/10 split
between the High Option and the Low Option, which fact
MetLife knew prior to the commencement of coverage on
January 1. Policy number 101491-G issued and became
effective on January 1, 2000.

        The policy was a form policy for one year, and included
only the first year rates, not the second year rates or guarantee.
MetLife’s standard practice was to issue form policies such as
this regardless of negotiated multi-year rate guarantees. The

                                 3
policy, however, included a “Changes in Rate” section (“Section
6”), which stated:

       Metropolitan may change any or all of the
       premium rates if there is a change in the terms of
       this Policy. Metropolitan may also change any or
       all of the premium rates (a) on the first day of each
       Policy Period which begins after the Date of Issue
       and (b) on any Premium Due Date following the
       date there has been a change, since the last day of
       the prior Policy Period, of 10% more in the
       number of Employees insured for Personal
       Insurance and/or Dependent Insurance under this
       Policy.

(67a.) The term “Policy Period” was defined as each calendar
year, thereby giving MetLife the right to increase rates for the
second year of coverage. It also included an integration clause
(Section 14), titled “Entire Contract,” which provided that “[t]his
Policy and the application of the Employer constitute the entire
contract between the parties. A copy of the application is
attached to this Policy.” (69a.) The copy of the policy provided
to UPMC, however, did not contain the application, although it
was included in the copy produced from MetLife’s files. The
application stated that, by signing it, the policyholder agreed that
“[a]ll of the terms and conditions under which the insurance is to
be provided will be set forth in the Group Policy (or Policies)
issued.” (521a.) UPMC never signed the application, and, it
argues, never agreed that all of the terms of its contract with
MetLife were set forth in the policy.

        By June 2000, MetLife was losing money on the UPMC
policy, and realized the mistake it had made during underwriting
in entering data into its computer spreadsheet, causing it to quote
rates at least 23% too low. Upon realizing this error, the
MetLife Regional Vice President decided to “pull” the second
year rate guarantee. MetLife calculated that, even if it did not
try to recoup its year 2000 losses, it would need a 69.7% rate
increase to reach its profitability goals for 2001. In July 2000,
MetLife tried to convince UPMC to accept higher rates for the

                                 4
second year of coverage because it was losing money on the
policy, and because it claimed that UPMC had not provided all
of the data required during the quote process. By mid-
September, MetLife conceded that it had been given the required
data, and instead invoked its right to increase the rate because
the number of “lives” had changed by 10%. It soon abandoned
this justification, and, instead, on September 26, 2000, invoked
its right under the August 26 revised proposal to increase the rate
because the “composition of the group” had changed
sufficiently, and threatened a 57% increase.2 Notably, MetLife
did not then argue that the two-year rate guarantee was
inapplicable because the policy was an integrated contract; it
argued only that the provisions of that guarantee allowed it to
unilaterally raise its rates because of the changed circumstances.

        UPMC refused to pay the threatened rate increase, and on
October 27, 2000, MetLife issued a renewal notice that called
for a 55% rate increase. On December 22, 2000, UPMC
informed MetLife that it would not accept any rate increase
beyond 5%, and that it intended to enforce the two-year coverage
commitment and rate guarantee. In response, MetLife informed
UPMC that it would send a premium bill reflecting the 55%
increase. UPMC paid only the 5% rate increase agreed to as a
result of the August 26, 1999 revised proposal, although MetLife
continued paying claims. During 2001, MetLife submitted
premium bills to UPMC totaling $11,173,878.91, but UPMC
remitted only $7,569,792.39 – a difference of $3,604,086.52.

        On January 18, 2001, UPMC filed this action in the U.S.
District Court for the Western District of Pennsylvania, seeking
both a declaratory judgment that MetLife was contractually
obligated to provide group dental insurance at a guaranteed rate
for a two year period (Count One), and damages for conduct in
violation of Pennsylvania’s Bad Faith Statute, 42 PA. C ONS.
S TAT. A NN. § 8371 (Count Two). MetLife counterclaimed for

        2
         As one person at MetLife handling the account put it, “I agree
that a law suit [sic] is bad given the circumstances, however another $2.5
million loss is significant . . . I think we all agree, that if can get out of
the deal without egg on our face, we should.” (594a.)

                                      5
breach of contract, seeking damages for UPMC’s refusal to pay
the 55% rate increase.

       On May 10, 2002, MetLife moved for summary judgment
on liability. On August 4, 2003, the Hon. Arthur J. Schwab, to
whom the case had been reassigned, issued a memorandum
opinion and order granting MetLife’s motion. Among other
things, the District Court held that the policy was an integrated,
enforceable contract that contained all of the terms of the
parties’ agreement in unambiguous terms. It concluded that the
August 26, 1999 revised proposal could not be considered to
defeat those clear terms, and that even if it could, the rate
increase for 2001 was allowed under that proposal because there
had been a sufficient change in the composition of the group of
employees. The Court also dismissed UPMC’s bad faith claim
because it was not premised on M etLife’s refusal to pay a claim.
The parties were directed to either stipulate to damages, or to file
position papers on damages.

        On August 28, 2003, after the parties exchanged briefs on
damages, the District Court awarded $4,062,229.03 to MetLife –
the $3,601,950.81 in premiums UPM C refused to pay, 3 plus
$460,278.22 in pre-judgment interest, and post-judgment interest
at a rate of 6% in accordance with Pennsylvania law. UPMC
appealed both the order of August 4th and the order of August
28th, 2003.

      The District Court had jurisdiction under 28 U.S.C. §
1332. We have jurisdiction under 28 U.S.C. § 1291.

                        II. DISCUSSION

       A.     Summary Judgment on Liability

       Our standard of review on summary judgment is well-
established:

       3
        The premium differential is $3,604,086.52,         not   the
$3,601,950.81 figure computed by the District Court.

                                 6
       Summary judgment is appropriate if there are no
       genuine issues of material fact presented and the
       moving party is entitled to judgment as a matter of
       law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett,
       477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d
       265 (1986); Wisniewski v. Johns- Manville Corp.,
       812 F.2d 81, 83 (3d Cir. 1987). In determining
       whether a genuine issue of fact exists, we resolve
       all factual doubts and draw all reasonable
       inferences in favor of the nonmoving party.
       Suders v. Easton, 325 F.3d 432, 435 n. 2 (3d Cir.
       2003). “Although the initial burden is on the
       summary judgment movant to show the absence of
       a genuine issue of material fact, ‘the burden on the
       moving party may be discharged by “showing” –
       that is, pointing out to the district court – that there
       is an absence of evidence to support the
       nonmoving party’s case’ when the nonmoving
       party bears the ultimate burden of proof.”
       Singletary v. Pennsylvania Dept. of Corrections,
       266 F.3d 186, 192 n. 2 (3d Cir. 2001) (quoting
       Celotex, 477 U.S. at 325, 106 S.Ct. 2548).

Conoshenti v. Public Serv. Elec. & Gas Co., 364 F.3d 135, 140
(3d Cir. 2004). On appeal, “[w]e apply the same standard that
the District Court should have applied.” Stratton v. E.I. DuPont
De Nemours & Co., 363 F.3d 250, 253 (3d Cir. 2004) (citing
Farrell v. Planters Lifesavers Co., 206 F.3d 271, 278 (3d Cir.
2000)).

               UPMC argues that, for various reasons, the District
Court erred in granting summary judgment. We need not discuss
all of those reasons because we are persuaded that the District
Court erred as a matter of law in refusing to apply
Pennsylvania’s doctrine of reasonable expectations under which
the agreed upon two-year rate guarantee is enforceable, and
erred in resolving ambiguities and/or disputed facts vis-a-vis the
“composition of the group” in MetLife’s favor.

                                  7
              1.     Is the Two Year Rate Guarantee
                     Enforceable?

               The Pennsylvania doctrine of reasonable
expectations states that “[t]he reasonable expectations of the
insured is the focal point of the insurance transaction . . .
regardless of the ambiguity, or lack thereof, inherent in a given
set of documents.” Collister v. Nationwide Life Ins. Co., 388
A.2d 1346, 1353 (Pa. 1978). It is intended to protect against the
inherent danger, created by the nature of the insurance industry,
that an insurer will agree to certain coverage when receiving the
insured’s application, and then unilaterally change those terms
when it later issues a policy. See, e.g., Tonkovic v. State Farm
Mut. Auto Ins. Co., 521 A.2d 920 (Pa. 1987) (“We hold that
where, as here, an individual applies and prepays for specific
insurance coverage, the insurer may not unilaterally change the
coverage provided without an affirmative showing that the
insured was notified of, and understood, the change, regardless
of whether the insured read the policy.”).

               We have recognized and applied this doctrine in
cases where the insured reasonably expected certain coverage,
even when those expectations were in direct conflict with the
unambiguous terms of the policy. For example, in Bensalem
Township v. Int’l Surplus Lines Ins. Co., 38 F.3d 1303 (3d Cir.
1994), we reversed the dismissal of an insured’s declaratory
judgment action. The insurer had unilaterally expanded an
exclusion in a professional liability insurance policy bought by
the plaintiff. This expanded exclusion was unambiguously
stated in the renewed policy, the insurer denied coverage based
on it, and the District Court dismissed the insured’s complaint
because there was no ambiguity. We instructed the District
Court to allow the plaintiff to proceed with discovery in an effort
to demonstrate that the expanded exclusion was inconsistent
with the insured’s reasonable expectations. Relying upon the
decisions of the Pennsylvania Supreme Court, 4 we stated that
“where the insurer or its agent creates in the insured a reasonable

       4
       Collister, supra; Standard Venetian Blind Co. v. American
Empire Ins. Co., 469 A.2d 563 (Pa. 1983); and Tonkovic, supra.

                                 8
expectation of coverage that is not supported by the terms of the
policy that expectation will prevail over the language of the
policy . . . an insurer may not make unilateral changes to an
insurance policy unless it both notifies the policyholder of the
changes and ensures that the policyholder understands their
significance.” Id. at 1311. See also Nationwide Mut. Ins. Co. v.
Cosenza, 258 F.3d 197, 208, 213 (3d Cir. 2001) (reaffirming the
viability of the reasonable expectations doctrine in coverage
disputes); Medical Protective Co. v. Watkins, 198 F.3d 100, 106
(3d Cir. 1999) (although concluding that the exclusion clause at
issue was ambiguous, we noted that the reasonable expectations
of the insured control, “‘even if they are contrary to the explicit
terms of the policy’”) (quoting West Am. Ins. Co. v. Park, 933
F.2d 1236, 1239 (3d Cir. 1991) (citing State Farm Mut. Auto Ins.
Co. v. Williams, 392 A.2d 281, 286-87 (Pa. 1987))).

                The District Court did not take issue with the fact,
and fact it be, that the parties had agreed on a two-year rate
guarantee. Rather, the Court held that the terms of the policy
were clear and unambiguous, as was its integration clause, and,
therefore, that parol evidence such as the August 26, 1999
revised proposal with its two-year rate guarantee “cannot be
considered in determining the ‘reasonable expectations’ of the
parties.” 12a. As the above discussion should make clear, this
conclusion is simply not supported by our caselaw or by the
Pennsylvania cases on which we relied.

               The District Court erred in another respect as well.
The concern for the vulnerability of non-commercial insureds
entering into adhesion contracts with large insurance companies
clearly motivates the application of the doctrine of reasonable
expectations. Nevertheless, we have predicted that Pennsylvania
courts would apply that doctrine even where the insured is a
sophisticated purchaser of insurance – i.e. “a large commercial
enterprise that has substantial economic strength, desirability as
a customer, and an understanding of insurance matters, or readily
available assistance in understanding and procuring insurance.”
Reliance Ins. Co. v. Moessner, 121 F.3d 895, 904-05, n.8 (3d
Cir. 1997). This is so, we stated, when “the insurer unilaterally
alters the insurance coverage requested by the insured,” and,

                                  9
thus, the insured “does not receive the actual insurance policy
until after offering to buy insurance and paying the first
premium.” Id. at 905. Status as a sophisticated purchaser is a
“factor to be considered when resolving whether the insured
acted reasonably in expecting a given claim to be covered,” but
does not automatically disqualify it. Id. at 906. According to the
District Court, however, because UPMC was a “sophisticated
party” and the policy “a freely negotiated agreement entered into
by parties of equal status,” the doctrine of reasonable
expectations was inapplicable. 13a. The District Court was
wrong.

              Neither any lack of ambiguity in the policy
language nor UPMC’s status as a sophisticated purchaser of
insurance prevented application of the doctrine of reasonable
expectations; indeed, the reasonable expectations of UPMC are
not even questioned here at least insofar as UPMC and MetLife
negotiated and agreed upon the rate guarantee for the second
year of coverage.5

               2.     Was There a 10% or More Change in the
                      “Composition of the Group”?

                Because the doctrine of reasonable expectations
applies, we reject the District Court’s conclusion that the terms
of the policy clearly and unambiguously permitted MetLife to
change its rates and, therefore, that the two-year rate guarantee
was unenforceable. The District Court also concluded, however,
that, even if it were to consider the two-year rate guarantee,
MetLife’s unilateral rate change was permissible because there
was a 10% change in the “composition of the group,” a phrase
contained in the reservation of rights provision of the revised
proposal, when the ratio of UPMC employees enrolled in the

       5
         One further comment. While we recognize that Bensalem, its
progeny, and the leading Pennsylvania Supreme Court cases such as
Collister and Tonkovic are all coverage cases, we do not consider it an
expansion of the doctrine of reasonable expectations to apply it to this
dispute; indeed, the same logic that motivates the application of the
doctrine in coverage cases motivates its application here.

                                  10
High Option versus Low Option plans changed from 60/40 to
90/10.

                UPMC argues that this change was not a change in
the composition of the group, but rather a change in members’
coverage choices. At the least, it argues, the term “composition
of the group” is ambiguous, and should have been submitted to
the jury for interpretation. UPMC also argues that the
composition of the group did not change because MetLife knew
of the 90/10 split before it issued the policy.6 MetLife, for its
part, successfully argued to the District Court that the phrase
should be construed in accordance with its dictionary meaning
and, so construed, the evidence showed that the composition of
the group had changed by more than 10% and M etLife could
raise its rates notwithstanding any rate guarantee.

               We agree with UPMC, at least to the extent that
“composition of the group” is ambiguous enough that it should
have been left to the jury to determine what the parties meant by
that phrase when they used it. UPMC’s arguments in that regard
and whether a change in the High/Low Option ratio was, in fact,
a change in the “composition of the group” as that term was used
in the revised proposal should not have been so quickly
dismissed by the District Court. This dispute will be for a jury to
decide.

             Because we are reversing the grant of summary
judgment on liability, it follows that we will vacate the award of
damages and pre- and post-judgment interest to MetLife. We
note, however, that if, following trial, there is to be an award of
post-judgment interest, that award is to be calculated in

       6
         UPMC argues, as well, that MetLife’s right to change the rates
based on a change in the composition of the group expired on December
31, 1999 when the August 26th revised proposal expired. This may be
a self-defeating argument: if the proposal expired on December 31, then
so did the rate guarantee included therein. But it just may have legs if
one considers the expiration date as the date MetLife’s offer exploded,
not the date the terms therein were no longer enforceable if UPMC were
to accept the offer.

                                  11
accordance with 28 U.S.C. § 1961 and not in accordance with
Pennsylvania law.

       B.     Summary Judgment on UPMC’s Bad Faith
              Claim

       UPMC alleges that, in failing to disclose that its loss in
the year 2000 was at least partly due to its own mistake in
entering data onto a computer spreadsheet, MetLife violated the
Pennsylvania Unfair Insurance Practices Act, P A. S TAT. A NN. tit.
40 § 1171.5 (“UIPA”), specifically, subsection (a)(1)(vi), which
defines a “misrepresentation for the purpose of inducing or
tending to induce the lapse, forfeiture, exchange, conversion or
surrender of any insurance policy” as an unfair or deceptive
practice in the business of insurance. This violation, UPMC
argues, constitutes bad faith under Pennsylvania’s Bad Faith
Statute, 42 PA. C ONS. S TAT. A NN. § 8371 (“§ 8371”), which
creates a private right of action in the event “an insurer has acted
in bad faith toward the insured.”

       The District Court disagreed, and granted summary
judgment in Met Life’s favor. It held that there was no issue of
fact because the terms of the policy were clear and unambiguous.
It added that any such bad faith claim must be predicated, under
Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680 (Pa.
Super. Ct. 1994), on a frivolous or unfounded refusal to pay the
proceeds of a policy. Given that UPMC’s allegations did not
involve any such refusal, no claim under § 8371 could be
asserted.

       With respect to the District Court’s first reason, it is
unclear to us why clear contract terms would necessarily
preclude a bad faith claim under § 8371. However clear the
terms may be, MetLife may still have intentionally
misrepresented facts to UPMC in an effort to avoid its
obligations under the rate guarantee.

        We agree, however, with the District Court as to the
second reason. The Pennsylvania Supreme Court, which held
that there is no common law remedy for bad faith on the part of

                                 12
insurers, see D’Ambrosio v. Pa. Nat’l Mutual Cas. Ins. Co., 431
A.2d 966, 970 (1981), has not articulated a standard for a claim
under the subsequently enacted § 8371. In particular, it has not
stated whether conduct that violates the UIPA constitutes bad
faith on the part of the insurer for purposes of a § 8371 claim;
rather, the leading case on § 8371, Terletsky, was decided by the
Pennsylvania Superior Court. That Court explained that bad
faith is “‘any frivolous or unfounded refusal to pay proceeds of a
policy,’” and that “‘such conduct imports a dishonest purpose
and means a breach of a known duty . . . through some motive of
self-interest or ill will.’” Terletsky, 649 A.2d at 688 (quoting
B LACK’S L AW D ICTIONARY 139 (6th ed. 1990)). To recover
under a claim of bad faith, then, UPMC must “show [1] that the
defendant did not have a reasonable basis for denying benefits
under the policy and [2] that defendant knew or recklessly
disregarded its lack of reasonable basis in denying the claim.”
Id.

       Later decisions of the Pennsylvania Superior Court have
applied the Terletsky standard. See O’Donnell v. Allstate Ins.
Co., 734 A.2d 901 (Pa. Super. Ct. 1999); Cresswell v. Pa. Nat’l
Mutual Cas. Ins. Co., 820 A.2d 172, 180 (Pa. Super. Ct. 2003).
We, too, have done so. See Keefe v. Prudential Prop. & Cas.
Ins. Co., 203 F.3d 218, 225-26 (3d Cir. 2000); W.V. Realty v.
Northern Ins. Co. of N.Y., 334 F.3d 306, 311-12 (3d Cir. 2003).

        Applying Terletsky to this case, UPMC cannot rest its bad
faith claim on the violations of the UIPA it alleges because
MetLife’s decision to conceal its miscalculation was intended, at
most, to extract a higher premium from UPMC. There is no
allegation that MetLife denied benefits; indeed, it paid benefits
throughout 2001, even at a loss. While the alleged bad faith
need not be limited to the literal act of denying a claim, see
O’Donnell, 734 A.2d at 904 (bad faith during pendency of a
lawsuit can violate § 8371 if intended to aid denying a claim),
the essence of a bad faith claim must be the unreasonable and
intentional (or reckless) denial of benefits. Cresswell, 820 A.2d
at 180; see also Belmont Holdings Corp. v. Unicare Life &
Health Ins. Co., No. CIV. A. 98-2365, 1999 WL 124389, at *2-3
(E.D. Pa. Feb. 5, 1999) (Terletsky and the legislative history of §

                                13
8371 limit that statute’s reach to bad faith handling or payment
of claims, and do not apply to disputes over contract terms).
Thus, under Pennsylvania law, the District Court correctly
determined that UPMC did not state a § 8371 claim.

                                14