Currence v. Transamerica Life Insurance Company

Filing 17

OPINION AND ORDER denying 6 Motion to Dismiss. Signed by Charles B. Kornmann on January 31, 2012. (DLC) (Main Document 17 replaced on 2/1/2012) (DLC).

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PILED
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
NORTHERN DIVISION

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DELORESC.CURRENCE

Plaintiff,

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JAN 3 1 2012

-vsTRANSAMERICA LIFE INSURANCE

COMPANY,

an Iowa Corporation,

Defendant.

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I :11-CV-OIOI8

ORDER AND

OPINION

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Plaintiff-insured instituted this action on July 7, 2011, alleging defendant-insurer

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breached its duty of good faith and fair dealing and its fiduciary responsibilities by a bad faith
rejection of plaintiffs request for benefits under a long-tenn care policy. Defendant filed a
motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), arguing that plaintiff failed to state in the
complaint any claim upon which relief can be granted. There is a claimed failure to exhaust,
before bringing a claim in court, the S.D. administrative remedy available to insureds denied
long-tenn care benefits. This two-stage remedy entails an "internal appeal" processed within the
denying insurance company and, barring a favorable outcome for the insured, an "independent
review" process by an independent third party, as defined in S.D. Admin. R. 20:06:21 :87 through
20:06:21 :90, and 20:06:21 :91 through 20:06:21: 108, respectively. Defendant filed a brief.
Plaintiff sent additional infonnation to the defendant regarding her condition on August 2, 2011,
which defendant took as an initiation of the "internal appeal" component of the administrative
review procedure. While defendant was reviewing this appeal, plaintiff filed a response on
August 16,2011, along with a brief and affidavit. Defendant filed a memorandum in reply. On
September 9,2011, this court asked counsel to brief whether plaintiff's failure to exhaust state
administrative remedies requires dismissal of plaintiff's state law claims in federal court.
Defendant and plaintiff filed briefs.

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Plaintiff argues that the bad faith claim that the defendant knowingly or recklessly failed
to properly investigate plaintiff's claim before denying benefits cannot be decided by the
independent review organization. Thus, plaintiff's claim was ripe when filed. Additionally,
plaintiff argues that because the administrative process only binds the insurer, there is no need for
the insured to exhaust the process before bringing to trial a claim arising out of a denial of
benefits.
Because plaintiff's internal appeal resulted in a decision in plaintiff's favor and the
defendant is providing long-tenn care benefits, the plaintiff withdraws her 12(i) motion as moot.
The implication is that defendant's motion to dismiss is based on similarly moot grounds since
plaintiff exhausted the requisite administrative remedies. Plaintiff thereby contends that her
claims of bad faith and related attorney's fees still constitute an independent basis to allow her to
proceed.

I.

BACKGROUND
A.

Legal Standard of Review

Although defendant moves to dismiss plaintiff's bad faith claim pursuant to Fed. R. Civ.

P. 12(b)(6) for failure to state a claim upon which relief can be granted, defendant should have
brought the motion under Fed. R. Civ. P. 12(b)(I), since exhaustion of administrative remedies is
generally a prerequisite to judicial review and is thus a matter ofjurisdiction. See Patsy v. Bd. of
Re&ents, 457 U.S. 496, 502 (1982). Whether exhausting an administrative remedy is a
prerequisite to judicial review is largely detennined by legislative intent by analysis of the
statute. See ~ Federal courts look to the intent of the legislature as provided in the text and
structure of a particular state statute when plaintiff's rights arise under state law. See Jones v.
Grinnell Com.. 235 F.3d 972, 974 (5th Cir. 2001); Talley v. Wash. Inventory Serv., 37 F.3d 310,
311 (7th Cir. 1994). In analyzing a Rule 12(b)(I) motion, this court "must accept all factual
allegations in the pleadings as true and view them in the light most favorable to the nonmoving
party." Hastings v. Wilson, 516 F.3d 1055, 1058 (8th Cir. 2008). "The burden of proving
federal jurisdiction, however, is on the party seeking to establish it, 'and this burden may not be
shifted to' the other party." Great Rivers Habitat Alliance y. F.E.M.A., 615 F.3d 985, 988 (8th
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Cir. 2010) (quoting Newhard. Cook & Co. v. Inspired Life Ctrs.. Inc., 895 F.2d 1226, 1228 (8th

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Cir. 1990».

B.

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Relevant Factual Background

Plaintiff is a resident of an assisted living facility in Sisseton, South Dakota. Defendant
has its principal place of business in Cedar Rapids, Iowa. Plaintiff was insured under a long-tenn
care nursing home insurance policy. By letter dated April 15, 2011, defendant notified plaintiff

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May 3,2011, which contained a physical and mental diagnosis of the plaintiff. In the doctor's

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opinion, plaintiff was unable to live alone due to a cognitive impainnent impacting her health

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that it was denying benefits. In response, plaintiff provided a letter from plaintiffs doctor, dated

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and safety. Plaintiff alleges that defendant, after receiving this letter, did not conduct any further
investigation to detennine plaintiff's eligibility for benefits-including any follow up with
plaintiffs doctor or any independent, reliable assessment of plaintiffs intellectual capacity.
Plaintiff subsequently received a letter dated May 31, 2011, again denying benefits.

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DECISION
A.

The Motion to Dismiss is Not Moot

In her supplemental filing, plaintiff argues that since the administrative process is now
complete there is no need to delay trying her claim or to dismiss the action. While this
admission, on face, seems confined only to plaintiffs Rule l2(i) alternative to a Rule l2(b)(1)
dismissal, defendant teases out of the subtext of this statement plaintiffs implicit argument for
denying the motion to dismiss: the need to exhaust the administrative remedy is now moot, and
with it the basis for the Rule l2(b)(1) motion. I find that whether plaintiff failed to exhaust
administrative remedies is not a moot issue because it is "capable of repetition yet evading
review." Sullivan y. Sullivan, 764 N.W.2d 895, 899 (2009).
Mootness is the requirement that courts may only decide "actual controversies affecting
people's rights." In re Woodruff, 567 N.W.2d 226, 228 (S.D. 1997). The "capable of repetition"
exception to the mootness doctrine applies when: "(1) the challenged action is in its duration too
short to be fully litigated prior to cessation or expiration, and (2) there is a reasonable expectation

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that the same complaining party will be subject to the same action again." Rapid City Journal v.
Delaney, 804 N.W.2d 388,391 (S.D. 2011).
Plaintiff has exhausted her administrative remedies by obtaining a favorable decision
through internal appeal of defendant's benefit trigger decision.' While this outcome obviates the
basis ofdefendant's motion to dismiss, thus making it moot, a case exists to consider the
"capable of repetition" exception to the mootness doctrine. Applying the first prong of the
exception to the law at issue, South Dakota rules provide that these administrative proceedings
should be short-lived. An insurer must make a decision on an internal appeal within thirty
calendar days of its receipt of all necessary information for a final determination. S.D. Admin.
R. 20:06:21 :89. The independent review organization then has thirty days to review the insurer's
decision. S.D. Admin. R. 20:06:21 :99. Such a short timeframe is evident in this case, as
plaintiff only went through an internal appeals process that took twenty-five days from receipt of
notice to approval of benefits. Such short timeframes do not provide trial courts with sufficient
time to decide the merits of motions inexorably tied to issues in these proceedings.
Defendant could again face similar "jump the gun" activities by other insureds, thereby
invoking the second prong of the exception. Even if an insured is not successful in an internal
appeal or an independent review process, it can by law exhaust the administrative process within
sixty-five calendar days.2 Concurrently filing with the court and the administrative process
provides a distinct advantage for the insured, permitting insureds to assert additional pressure,
namely civil fines and other sanctions, that are not yet available to the plaintiff within the

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regulation provides that only the insurer's decision to uphold its original denial of
benefits provides the insured with an option to appeal to an independent review organization.
See S.D. Admin. Rs. 20:06:21 :90, 20:06:21 :93. Since defendant vacated its earlier decision and
granted benefits, the administrative process is exhausted.
2 An internal appeal decision must be made within 30 calendar days of receipt of
plaintiff's information. S.D. Admin. R. 20:06:21 :89. The insurer has five business days-from
the point it receives a written request for independent review from the insured-to refer the case to
an independent review organization that is approved by the insured. S.D. Admin. R.
20:06:21 :92. The independent review organization has another 30 calendar days in which to
make a decision. S.D. Admin. R. 20:06:21 :99.
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administrative process and are not a part of the administrative process for the claim. Thus, there
is a "reasonable expectation" that the insurer will see future instances of this strategy used by
insureds. Accordingly, I find that the defendant's motion to dismiss is not moot.

B.

Plaintiff's Decision to File a Claim in Federal Court Does Not Violate the

Exhaustion Doctrine

The exhaustion doctrine is detailed in case law and enumerated in the Administrative
Procedures Act. See SDCL § 1-26-30. The doctrine is "a settled rule ofjudicial administration
that 'no one is entitled to judicial relief for a proposed or threatened injury until the prescribed
administrative remedy has been exhausted.'" S.D. Bd. of Regents v. Heege, 428 N.W.2d 535,
539 (S.D. 1988) (citing Robinson v. Human Relations Comm'n, 416 N.W.2d 864,866 (S.D.
1987)). "The reason for the [exhaustion] rule is obvious, administrative resolution of the issue
may make judicial involvement unnecessary." Robinson, 416 N.W.2d at 866. The exhaustion
doctrine must be applied in each case with an "understanding of its purposes and of the particular
administrative scheme involved." McKart v. United States, 395 U.S. 185, 193 (1969). "The
basic purpose of the doctrine is to allow an administrative agency to perform functions within its
special competence-to make a factual record, to apply its expertise, and to correct its own errors
so as to moot judicial controversies." Parisi v. Davidson, 405 U.S. 34, 37 (1972). Federal courts
handling controversies arising out of state law claims must look to the "text and structure" of a
particular state law in deciding "whether exhaustion of administrative remedies is a jurisdictional
prerequisite to judicial review." Mann v. Tyson Fresh Meats. Inc., No. 08-4010, 2008 WL
4360914, at *3 (D.S.D. Sept. 24,2008) (citing Jones v. Grinnell Corp., 235 F.3d 972, 974 (5th
Cir.2001)).
The administrative procedure spelled out in S.D. Admin. Rs. 20:06:21:87 through
20:06:21103 clearly applies to this claim premised on a wrongful denial of long-term care
benefits. By statute, the Division of Insurance has authority to "design standards to prohibit
unjust, unfair, or discriminatory treatment of any person insured or proposed for [long-term care]

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coverage." See SDCL 58-17B-4; S.D. Admin. R. 20:06:21 :88. The rulemaking by the Division
described this administrative procedure as providing "timely claims processing and an external
review procedure" for long-tenn care insurers. 36 S.D. Reg. 141-142 (Mar. 22, 2010). The
question becomes whether the administrative procedure must be exhausted before filing in
federal court.

1. Plaintiff's Bad Faith Claim is Not Redressable Within the Administrative
Procedure
South Dakota recognizes five exceptions to the exhaustion doctrine, two of which
plaintiffis able to meet. The five exceptions are:
(l) Exhaustion is not required where a person, through no fault of his own, does
not discover the purported wrong until after the time for application of
administrative relief.
(2) Exhaustion is not required where the agency fails to act.
(3) Exhaustion is not required where the agency does not have jurisdiction over
the subject matter or parties.
(4) Exhaustion is not required where the board having appropriate jurisdiction has
improperly made a decision prior to a hearing or is so biased that a fair and
impartial hearing cannot be had.
(5) Exhaustion is not required in extraordinary circumstances where a party faces
impending irreparable harm of a protected right and the agency cannot grant
adequate or timely relief.

O'Brien v. W. Dakota Technical Inst., 670 N.W.2d 924, 929 n.l (S.D. 2003) (citations omitted).
Plaintiff invokes the third exception, citing Johnson v. Kolman. 412 N.W.2d 109 (S.D. 1987).
In Johnson, a fonner employee sued for breach of contract, wrongful tennination, breach

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of severance agreement, fraud, and breach of fiduciary duty. Id. at 111. Plaintiff filed these
claims after unsuccessfully seeking a claim of unemployment insurance benefits before the South

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Dakota Department of Labor. ld. The trial court denied the exhaustion doctrine's application to
plaintiffs claims on the basis that such claims could be adjudged properly by the Department.

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Id. The Supreme Court reversed, fmding that the exhaustion doctrine was misapplied. IQ.. at 112.
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The Court based its decision upon the fact that, "[b]y definition, the exhaustion doctrine applies
only to disputes cognizable by an administrative agency. In other words, a party must exhaust all
available administrative remedies only if the agency actually has authority to deal with the
particular question raised." Id. (emphasis in original). The Court said that the Department only
had authority to determine whether plaintiff was eligible for unemployment benefits, which
required them to determine whether plaintiffs conduct constituted "misconduct" as set forth by
statute. Id. The Court held that even if wrongful termination of employment was cognizable,

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another exception to the exhaustion doctrine applied to Johnson: the administrative remedies

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were inadequate for his claims. Id. at I 12-13.
Applying Johnson, the claim of bad faith is not cognizable under the administrative

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proceeding at issue. S.D. Admin. R. 20:06:21 :92(3) provides that the review by the independent

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review organization "shall be limited to the information or documentation provided to and

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considered by the insurer in making its determination." The scope of review becomes quite large
when plaintiff is allowed to provide the independent review organization with "any ... new or
additional information not previously provided to the insurer but pertinent to the benefit trigger
denial." S.D. Admin. R. 20:06:21 :97. While broadly defined, and while this information may
help to decide whether benefits are due, nevertheless, such information is not helpful as to
whether the insurer subjectively refused to grant benefits without a reasonable basis for denial, a
key element ofa bad faith claim. See Brooks y. Milbank Ins. Co., 605 N.W.2d 173, 177-78
(S.D. 2000).
This conclusion is also supported by the limited value of the administrative decision and
its limited remedies. The only administrative decision that may have relevance in court is the
independent review organization's determination, which "shall be used solely to establish
liability for benefit trigger decisions, and is intended to be admissible in any proceeding only to

the extent it establishes the eligibility of benefits payable." S.D. Admin. R. 20:06:21 :99
(emphasis added). The only administrative decision admissible is that the insured is entitled to

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benefits-nothing more. The only question in the administrative proceeding is whether benefits
are payable, not whether bad faith is present.
Insufficient remedies are yet another exception to the exhaustion doctrine. Johnson, 412
N.W.2d at 112 (citing N,L-R,B, v. Indus. Union of Marine & Ship Workers, 391 U.S. 418,
(1968)), It is possible for an insured to obtain, through the administrative proceeding, penalties
against the insurer for flagrant or frequent violations of particular sections of the rules. S.D,
Admin. R. 20:06:21:108. However, the sort of flagrant violations penalized under this provision
do not pertain to the facts here. There is no element of a bad faith claim that could have been
decided administratively. Thus, plaintiff is barred from seeking any remedy other than payment
of benefits within the administrative proceeding.

2. Since the IRO Decision is Binding Only on the Insurer, Exhaustion is Not
Required
Plaintiff argues that the administrative proceeding does not end the bad faith litigation

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because it only binds the insurer, not the insured. Plaintiff cites S.D. Admin. R. 20:06:21 :99,

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which provides that the "decision of the independent review organization with respect to whether

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the insured met the benefit trigger will be final and binding on the insurer." Id. (emphasis

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added). No similar language binds the insured.
In Zuke v, Presentation Sisters. Inc., 589 N. W.2d 925 (S,D. 1999), plaintiff suffered a
broken nose on the job and sought nasal reconstructive surgery. When both the hospital's

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owners and the insurance company for the owners denied approval for the surgery, plaintiff filed
a complaint alleging bad faith and deceit on the part of the owners and its insurance company.
Id. at 926-28. Zuke appealed a summary judgment. The defendants argued that the worker's
compensation statutes governed with a required hearing before the S,D. Department of Labor.
The Supreme Court found that plaintiff should have presented her claim to the Department
before proceeding with a bad faith claim in court because "[b]efore a trial court may grant relief
for ... bad faith denial ... it must decide whether the plaintiff is entitled to benefits."

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The Court noted that "the agency which has the most experience and expertise in dealing with
these type of issues" should make the decision. Id. This clarifies the legal impact of plaintiff's
argument. In the administrative worker's compensation proceeding, the Department of Labor's
finding that the plaintiff is not entitled to benefits would provide strong support that a parallel
bad faith tort claim filed in court is not valid, Jordan v. Union lOS. Co., 771 F. Supp. 1031, 1033
(D.S.D. 1991), since such a finding attaches to both parties. In the administrative proceeding at
issue, however, the independent review organization's determination that benefits are not
triggered does not bind the insured, nor could it inform a court's analysis of a bad faith claim.
Since the administrative proceeding detailed in S.D. Admin. R. 20:06:21 :87 through
20:06:21: 108 lacks jurisdiction on the matter of plaintiff's bad faith claim, the exhaustion
doctrine does not apply to that claim. Because exhaustion of administrative remedies is the sole
basis for defendant's motion to dismiss, plaintiff has met her burden to establish federal subject­
matter jurisdiction. Defendant's motion should be denied.
The court has independent concerns as to whether a state statute, let alone a state
administrative rule, can bar access to a federal court. Nothing but the clearest legislative policy
and directive would pennit the court to, in effect, lock the federal courthouse door. There is no
need to decide such weighty issues here, given the previous discussion of the court.
The bulk of the claims by plaintiff originally involved, of course, the substantial costs of
the nursing home care. Such damages are no longer to be recovered since the expenses have
been paid and apparently will continue to be paid. Only claims for bad faith damages and
attorney fees remain. The court frankly wonders whether the required amount in excess of
$75,000 in damages, exclusive of interest and costs, in controversy, pennits this court to continue
to exercise jurisdiction.
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III.

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ORDER

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Based upon the foregoing,

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IT IS ORDERED that defendants' motion, Doc. # 6, to dismiss plaintiffs complaint is

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denied.

Dated this3L~y of January, 2012.

BY THE COURT:

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CHARLESB.KORN~

ATIEST:

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DEPUTY

United States District Judge

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