Court Opinion

ID: 993292
Source: CourtListenerOpinion
Date Created: 2013-07-04 00:05:41.79285+00
Date Added: 2024-06-11T09:57:18.284957
License: Public Domain

UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

PAN AMERICAN LIFE INSURANCE
COMPANY,
Plaintiff-Appellant,

v.

BLUE CROSS AND BLUE SHIELD OF
SOUTH CAROLINA,
Defendant-Appellee,                No. 96-2081

and

RYOBI AMERICAN CORPORATION;
RICHARD MAYOTTE, SR., as
Conservator for Richard Mayotte,
Jr.,
Defendants.

PAN AMERICAN LIFE INSURANCE
COMPANY,
Plaintiff-Appellee,

v.

BLUE CROSS AND BLUE SHIELD OF
SOUTH CAROLINA,
Defendant-Appellant,               No. 96-2168

and

RYOBI AMERICAN CORPORATION;
RICHARD MAYOTTE, SR., as
Conservator for Richard Mayotte,
Jr.,
Defendants.
Appeals from the United States District Court
for the District of South Carolina, at Greenville.
Henry M. Herlong, Jr., District Judge.
(CA-95-3041-6-20)

Argued: October 2, 1997

Decided: October 23, 1997

Before LUTTIG and MOTZ, Circuit Judges, and MICHAEL,
Senior United States District Judge for the
Western District of Virginia, sitting by designation.

_________________________________________________________________

Affirmed by unpublished per curiam opinion.

_________________________________________________________________

COUNSEL

ARGUED: William Stevens Brown, V, NELSON, MULLINS,
RILEY & SCARBOROUGH, L.L.P., Greenville, South Carolina;
Peter David Hooper, JACKSON, LEWIS, SCHWITZLER & KRUP-
MAN, St. Petersburg, Florida, for Appellant. Stephanie Holmes Bur-
ton, GIBBES, GALLIVAN, WHITE & BOYD, P.A., Greenville,
North Carolina, for Appellee. ON BRIEF: George K. Lyall, NEL-
SON, MULLINS, RILEY & SCARBOROUGH, L.L.P., Greenville,
South Carolina, for Appellant. Don S. Clardy, GIBBES, GALLIVAN,
WHITE & BOYD, P.A., Greenville, North Carolina, for Appellee.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

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OPINION

PER CURIAM:

These appeals involve a dispute between two insurance companies,
Pan American Life Insurance Company, which provided a group
health insurance policy that served as Ryobi American Corporation's
employee benefit plan throughout 1994 and Blue Cross and Blue
Shield of South Carolina, which provided a policy that served as that
plan during 1995. The issue is which insurer is responsible for certain
medical benefits claimed by Richard Mayotte, Jr., a participant in the
Ryobi plan. Resolution of this question depends on the meaning and
validity of a provision in Pan Am's policy, whereby Pan Am con-
tracted to continue benefits for twelve months after cessation of insur-
ance if an insured was totally disabled when his insurance ceased. The
district court concluded that this provision was valid and, pursuant to
it, Pan Am was responsible for paying the benefits at issue here. We
affirm.

I.

Throughout 1994, Ryobi funded its employment benefits plan, a
plan governed by the Employment Retirement Income Security Act,
29 U.S.C. § 1000 et seq. (1974) ("ERISA"), by purchasing group
health insurance from Pan Am. The Pan Am policy provides in perti-
nent part:

          If an insured person is totally disabled when his insurance
          ceases, benefits will be extended for the twelve (12) months
          following cessation of insurance and only for the ailment
          causing the illness.

(Emphasis added).

According to Pan Am, the policy included this provision only
because of a requirement of South Carolina law. Section 38-71-760
of the South Carolina Code requires every group benefits policy to
"provide a reasonable provision for extension of benefits in the event
of total disability at the date of discontinuance of the group policy."
S.C. Code Ann. § 38-71-760(f) (1991).

                    3
Until September 15, 1994, Ryobi employed Mayotte and he was a
participant in this ERISA plan; however, on that date the company
terminated Mayotte's employment. Thereafter, Mayotte elected to
continue his coverage under Ryobi's plan pursuant to the amendments
to ERISA contained in the Consolidated Omnibus Budget Reconcilia-
tion Act ("COBRA"). 29 U.S.C. § 1161 et seq. (1986). The day after
his termination, September 16, 1994, Mayotte was involved in an
accident and, consequently, suffered serious closed head injuries. For
the remainder of 1994, Pan Am provided Mayotte with the requisite
benefits claimed under the Plan, because Mayotte had elected to con-
tinue his coverage pursuant to COBRA.

On December 31, 1994, however, Ryobi ended its relationship with
Pan Am and entered into an agreement with Blue Cross. Effective
January 1, 1995, Ryobi funded its ERISA plan by purchasing a group
health insurance policy from Blue Cross. At issue in this case is the
responsibility for payment of Mayotte's benefits from January 1, 1995
until December 31, 1995. Pan Am has paid these benefits under a res-
ervation of rights to seek repayment.

Pan Am brought this action seeking a declaratory judgment to
determine which insurer -- itself or Blue Cross-- is responsible for
providing these benefits to Mayotte. Pan Am argues that Blue Cross
is responsible for Mayotte's benefits after December 31, 1994, while
Blue Cross maintains that the twelve-month extension of benefits pro-
vision in the Pan Am policy requires Pan Am to fund Mayotte's bene-
fits thru 1995. The parties filed cross motions for summary judgment.

After initially granting summary judgment to Pan Am, the district
court reversed itself and held Blue Cross entitled to summary judg-
ment. The court ruled that Pan Am's extension of benefits provision
obligated Pan Am to continue to provide benefits to Mayotte during
1995 and that this provision violated neither law nor public policy.

On appeal, Pan Am argues that the district court erred in interpret-
ing the terms of its contract with Ryobi to require Pan Am to pay ben-
efits to Mayotte after December 31, 1994. Alternatively, Pan Am
asserts that, even if the district court's interpretation of the language
of the contract was proper, enforcement of the contractual extension
of benefits provision violates law and public policy.

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We review de novo a district court's decision to grant summary
judgment. Denzler v. Questech, Inc., 80 F.3d 97, 101 (4th Cir. 1996);
Fritiofson v. Alexander, 772 F.2d 1225, 1239 (4th Cir. 1985).

II.

First, we consider the meaning of the extension of benefits provi-
sion in the Pan Am policy. In construing the policy language, we
apply standard contract principles and look to the plain, unambiguous
language of the policy in its ordinary sense. Wheeler v. Dynamic
Engineering, Inc., 62 F.3d 634, 638 (4th Cir. 1995).

The Pan Am policy provides in pertinent part "[i]f an insured per-
son is totally disabled when his insurance ceases, benefits will be
extended for the 12 months following the cessation of insurance . . . ."
(Emphasis added). Pan Am asserts that the term "insurance ceases"
must be construed by examining the remainder of the policy. In par-
ticular, Pan Am points to the section of the policy concerning termi-
nation of insurance:

          Employee insurance will cease on the earliest of:

...

          b. the date his employment with the Policyholder ceases
          ....

(Emphasis added). Based on this definition as to when "insurance will
cease," Pan Am contends that, under the terms of its policy, Mayot-
te's "insurance ceased" when his employment with Ryobi was termi-
nated on September 15, 1994. On that day, according to Pan Am,
Mayotte became eligible for COBRA coverage, but, technically, his
insurance had ceased under the policy. Because Mayotte became dis-
abled September 16, 1994, the day after his discharge, Pan Am main-
tains that his injury occurred one day after his"insurance ceased."
Therefore, Pan Am concludes that even if the "Extension Date to
Total Disability" provision of the contract is enforceable, it does not
apply to Mayotte.

A careful reading of the policy reveals the flaw in Pan Am's argu-
ment. The "Termination of Insurance" provision of the policy, in

                    5
addition to stating that an employee's insurance ceases on "[t]he date
his employment with the Policyholder ceases," also expressly notes
that there are "exceptions" to this rule, including those contained in
the "Continuance of Insurance" provision of the policy. The "Continu-
ance of Insurance" provision states that "benefits may continue past
the day it [sic] would cease;" the policy later identifies COBRA as an
avenue by which an individual can ensure that his benefits will con-
tinue. Thus, by its own language, the policy clearly provides an
exception to cessation of insurance upon cessation of employment, if
a former employee opts for "continuance of insurance." Because
Mayotte indisputably choose "continuance of insurance," his insur-
ance did not "cease" on the day his employment ceased.

Pan Am concedes as much in its complaint. There, Pan Am
acknowledges that its policy served as the ERISA Benefits Plan for
Ryobi's employees until the end of 1994 and admits that Mayotte
"continued as a participant" in this Plan after Mayotte's employment
terminated on September 15, 1994. Thus, by Pan Am's own admis-
sions Mayotte's insurance did not cease when his employment ceased.

We note that if Pan Am's present interpretation of its policy (which
it concedes served as Ryobi's ERISA Plan) were adopted, the Plan
would not comply with COBRA. Under Pan Am's interpretation,
Ryobi's ERISA plan would provide greater benefits to non-COBRA
plan participants than to those covered because of COBRA, in that
benefits would not continue for one year for an individual totally dis-
abled while covered because of COBRA but would continue for a
year for other plan participants who become totally disabled while
covered. This is contrary to COBRA, which requires coverage for
COBRA participants to be "identical" to that of other plan partici-
pants. 29 U.S.C. § 1162(1).

In sum, the district court correctly concluded that (1) Pan Am "ob-
ligated" itself under its policy to continue to pay benefits to Mayotte
for twelve months after his insurance ceased and (2) that his insurance
did not cease until December 31, 1994.

III.

Alternatively, Pan Am contends that even if the district court's
interpretation of the language of the contract was proper, enforcement
of the contractual provision at issue here is illegal or contrary to pub-
lic policy.

                     6
A.

Pan Am maintains that the sole reason it included the extension of
benefits provision in its policy was to comply with state statutory
requirements. South Carolina law requires a group policy to provide
a twelve-month extension of benefits if an insured is totally disabled
when an employer changes insurers. S.C. Code Ann.§ 38-71-760(f).
The prior insurer only remains responsible to continue any coverage
for which it was obligated at the time of the change of insurers. § 38-
71-760(l). Pan Am argues that ERISA preempts § 38-71-760 and for
this reason, the extension of benefits provision required by § 38-71-
760 is contrary to law and unenforceable.

The district court held that the extension of benefits provision
remained a viable component of the Pan Am policy. The court rea-
soned, even if ERISA does preempt § 38-71-760, and so the parties
were mistaken as to the effect of that state statute, this did not make
the contractual extension of benefits provision contrary to law or
unenforceable because a mistake of law does not affect the interpreta-
tion of a contract. See, e.g., Fidelity & Deposit Co. of Maryland v.
F.D.I.C., 54 F.3d 507 (8th Cir. 1995); Aydt v. DeAnza Santa Cruz
Mobile Estates, 763 F.Supp. 970 (N.D.Ill. 1991). Pan Am points out
that this is true only if contractual terms have been voluntarily and
freely included in a contract. 17A Am. Jur.2d Contracts § 238 (2d ed.
1991). Pan Am maintains that because it included the extension of
benefits provision to comport with § 38-71-760, the provision was not
included in the policy voluntarily.

The fundamental difficulty with this argument is Pan Am's failure
to cite any evidence that the parties did not freely contract and volun-
tarily agree to include the extension of benefits provision in the pol-
icy. Since there is no evidence in the record that the parties did not
voluntarily agree to the terms of the policy -- including the extension
of benefits provision -- the district court correctly concluded that the
policy should be enforced, even if ERISA preempts§ 38-71-760.1
_________________________________________________________________
1 Indeed, it is not even clear that the parties included the extension of
benefits provision solely because of § 38-71-760, as Pan Am asserts.
Unlike the cases upon which Pan Am relies, see City of Cleveland v.
Clement Bros. Constr. Co., 65 N.E. 885 (Ohio Ct. App. 1902); People
v. Coler, 59 N.E. 716, 723 (N.Y. Ct. App. 1901), the Pan Am policy does

                    7
B.

Pan Am's contention that the extension of benefits provision vio-
lates public policy is equally meritless.

An agreement is unenforceable "if the interest in its enforcement
is outweighed in the circumstances by a public policy harmed by
enforcement of the agreement." Town of Newton v. Rumery, 480 U.S.
386, 392 (1986). Whether an agreement violates public policy is
decided on a case-by-case basis. Id. We have previously held that
public policy can only be implicated in interpreting a contract where
"it is explicit, well defined and dominant, and ascertainable by refer-
ence to the laws and legal precedents and not from the general consid-
erations of supposed public interests." L & E Corp. v. Days Inn of
America, Inc., 992 F.2d 55, 58 (4th Cir. 1993). Pan Am makes two
arguments as to why enforcement of the extension of benefits provi-
sion violates public policy.

First, Pan Am asserts that enforcement of this provision would
impede legislative goals. Pan Am maintains that because ERISA pre-
empts § 38-71-760, enforcing a contract provision mandated by § 38-
71-760 would hinder Congress' goal in enacting ERISA-- to regu-
late the entire field of employee benefit plans and preempt state laws
concerning employee benefit plans. See Sejman v. Warner-Lambert
Co., Inc., 845 F.2d 66, 68 (4th Cir. 1988) (describing ERISA as "the
most sweeping federal preemption statute ever enacted by Congress").
However, even if ERISA preempts South Carolina Code§ 38-71-760,
this does not demonstrate that the policy provision violates public pol-
icy. Congress' interest in regulating the entire field of employee bene-
fit plans justifies preemption of state laws but does not justify
rendering contractual agreements invalid. Rather, parties are certainly
_________________________________________________________________

not state that this provision was included in order to comply with a state
law mandate. In fact, the policy does not even reference state law as
inspiration for the extension of benefits provision. Yet, the insurer surely
knew how to do this; witness the fact that the immediately prior policy
provision expressly explains that "state law" provides for a policy bene-
fit.

                     8
free to undertake contractual obligations in addition to those man-
dated by federal law.

Pan Am also contends that enforcement of the extension of benefits
provision contravenes public policy because it disrupts the parties'
justified expectations. Pan Am charges that Blue Cross does not have
a justified expectation in avoiding responsibility for Mayotte's benefit
in light of the fact that Blue Cross has received premium payments
from Mayotte for continuation coverage. In addition, Pan Am main-
tains that since Mayotte has made premium payments to Blue Cross,
he has no justified expectation that Pan Am bear responsibility for his
medical expenses.

This argument is misguided. Pan Am's policy requires it to extend
benefits for twelve months "only for the ailment causing the illness."
The policy term provides explicitly that the twelve month extension
of benefits provision "applies only to the disabled person and no pre-
mium is due." Thus, Pan Am recognized from the inception that it
might have to extend benefits to disabled insureds for twelve months
and agreed to charge no premium for providing such benefits. The
payments Mayotte is currently making to Blue Cross are presumably
for medical treatment that may be required for illnesses or injuries
other than those causing his disability, or for coverage of dependents.

IV.

For all of these reasons, the judgment of the district court in No.
96-2081 is

AFFIRMED.2
_________________________________________________________________
2 In view of our holding, we need not reach the issue raised in Blue
Cross' cross appeal -- whether ERISA preempts S.C. Code Ann. § 38-7-
760. Accordingly, we dismiss the cross appeal, No. 96-2168, as moot.

                     9