Nicholes v. Combined Insurance Company of America

Filing 27

MEMORANDUM OPINION AND ORDER: That Plaintiff's 24 MOTION for Leave to File Second Amended Complaint be GRANTED and the attached proposed Second Amended Class Action Complaint be FILED as a separate docket entry; that Combined Insurance Company of America's 9 MOTION to Dismiss be GRANTED as to Count Two of the Second Amended Class Action Complaint, and DENIED as to Counts One and Three. Signed by Judge Irene C. Berger on 06/28/2017. (cc: attys; any unrepresented party) (msa)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
BECKLEY DIVISION

LUCENDA NICHOLES,
Plaintiff,
v.

CIVIL ACTION NO. 5:16-cv-10203

COMBINED INSURANCE COMPANY
OF AMERICA,
Defendant.

MEMORANDUM OPINION AND ORDER

The Court has reviewed the First Amended Class Action Complaint (Document 5),
Combined Insurance Company of America’s Motion to Dismiss (Document 9) and Memorandum
in Support of Motion to Dismiss (Document 10), Plaintiff Lucenda Nicholes’ Opposition to
Defendant’s Motion to Dismiss First Amended Complaint (Document 16), and Combined
Insurance Company of America’s Reply in Support of Motion to Dismiss (Document 17), as well
as all attached exhibits. In addition, the Court has reviewed the Plaintiff’s Motion for Leave to
File Second Amended Complaint and Memorandum of Law in Support (Document 24), the
attached proposed Second Amended Class Action Complaint (Document 24-1), Combined
Insurance Company of America’s Response in Opposition to Plaintiff’s Motion for Leave to File
Second Amended Complaint and Memorandum of Law in Support (Document 25), and the
Plaintiff’s Reply to Defendant’s Response in Opposition to Plaintiff’s Motion for Leave to File
Second Amended Class Action Complaint and Memorandum of Law in Support (Document 26).

For the reasons stated herein, the Court finds that the motion to amend should be granted, and the
motion to dismiss should be granted in part and denied in part.
MOTION TO AMEND
The Plaintiff’s response to the motion to dismiss indicated that she would seek to amend
her complaint to clarify the factual and legal basis of her claims if the motion to dismiss were
granted. The Court entered an order requiring her to file a separate motion to amend if she wished
to do so. The Plaintiff filed a motion to amend, together with her proposed second amended class
action complaint. She argues that she should be permitted to amend under the permissive standard
for amendments early in a case. The Defendant opposes the motion to amend, arguing that it
would be futile.
Rule 15(a)(2) of the Federal Rules of Civil Procedure encourages Courts to freely grant
motions for leave to amend pleadings “when justice so requires.” Fed. R. Civ. P. 15(a)(2). “A
district court may deny a motion to amend when the amendment would be prejudicial to the
opposing party, the moving party has acted in bad faith, or the amendment would be futile.”
Equal Rights Ctr. v. Niles Bolton Associates, 602 F.3d 597, 603 (4th Cir. 2010). “Motions to
amend are typically granted in the absence of an improper motive, such as undue delay, bad faith,
or repeated failure to cure a deficiency by amendments previously allowed.” Harless v. CSX
Hotels, Inc., 389 F.3d 444, 447 (4th Cir. 2004).
The Court finds that the filing of an amended complaint in this case would not prejudice
the Defendant, and that the amended complaint was not offered in bad faith.1 Given the status of

1 The Defendant suggests that the Plaintiff’s clarification regarding when she became aware that her Medicaid status
would preclude her from receiving insurance benefits may constitute bad faith. Attorneys should take care to ensure
that the facts alleged in a complaint are correct and reflective of their clients’ recollections of events. However,

2

the fully briefed motion to dismiss on the prior complaint, and the futility arguments briefed in
response to the motion to amend, the Court will combine the futility analysis with the arguments
made relative to the motion to dismiss to determine whether the amended complaint contains any
viable cause(s) of action. Thus, the factual allegations below are drawn from the proposed second
amended complaint.
FACTUAL ALLEGATIONS
The Plaintiff, Lucenda Nicholes, alleges that “Combined Insurance routinely and
systematically sells policies to West Virginia insurance consumers that, by law, are ineligible for
the insurance benefits for which they pay premiums under these Combined Insurance policies
because they are Medicaid recipients” and fails to disclose the illusory nature of the insurance.
(Sec. Am. Compl. at ¶ 9.) She asserts that sales agents are trained to “canvass poor and minority
neighborhoods” and use high-pressure sales tactics. (Id. at ¶ 18.) Agents do not disclose that
benefits under the health and accident insurance policies are unavailable to Medicaid recipients,
and that any insurance benefits would be denied or paid directly to medical providers. Instead,
they use prepared insurance applications that indicate the applicant is not a Medicaid recipient
without raising the issue with the consumers. Combined Insurance does not offer a refund of any
premium payments for Medicaid recipients.
Ms. Nicholes lives on Social Security of less than $800 per month. She receives Medicaid.
A Combined Insurance agent visited her home in September 2013 to sell her an “Accident &
Sickness Protector” policy, which she purchased by paying an initial premium of $54.17.

amending a complaint in part to correct an error is not evidence of bad faith. The Court refuses to presume, without
factual support, that the Plaintiff and/or her counsel chose to lie in the proposed second amended complaint to avoid
the potential statute of limitations problem raised by the Defendant.

3

Subsequently, her bank account was debited $54.17 per month. The agent “unilaterally filled out
the entire application…without obtaining material, relevant information from the Plaintiff in order
to accurately respond to the questions asked in the application, including her Medicaid status.”
(Id. at ¶ 31.) He marked, incorrectly, that she was not on Medicaid, and did not inform her that
her Medicaid status would render her ineligible for policy benefits. The agent showed Ms.
Nicholes only the signature page of the application, as well as a separate form authorizing
automatic debit payments. The same agent sold Ms. Nicholes another “Accident & Sickness
Protector” policy on or about November 25, 2014, using an electronic application he had
previously filled in. He again presented only the signature page of the application to Ms.
Nicholes. The agent sold Ms. Nicholes a third policy, with the same sales methods, on March 17,
2015, after leading her to believe her November 2014 policy had lapsed. After the purchase of
the March 2015 policy, “Combined Insurance began debiting Plaintiff’s bank account twice every
month in the amount of $54.17 to collect the monthly premiums on both the March 2015 and the
November 2014 policies.” (Id. at ¶ 41.) Ms. Nicholes alleges that she became aware of the
multiple debits because they caused her account to be overdrawn. She began calling Combined
during the summer of 2015 to address the double withdrawals on her account. During those
communications, a Combined employee asked about her Medicaid status, but did not inform her
that she could not receive insurance benefits while on Medicaid. Ms. Nicholes obtained counsel
due to the account debits and overdraft fees in the fall of 2015. She became aware that she was
ineligible for benefits because of her Medicaid status after her counsel obtained documents from
Combined in December 2015.
The Plaintiff brings this case on behalf of herself and the following proposed class:

4

(a)
All West Virginia residents who purchased a Combined
Supplemental Insurance policy under which Medicaid recipients are
ineligible to receive payment of benefits under the policy; and
(b)
The Supplemental Insurance policy was purchased in the
four years preceding the filing of this lawsuit at which time the
insured was covered by Medicaid benefits.
(Id. at ¶ 54.) She seeks relief under the Insurance Trade Practices Act, the Consumer Protection
Act, and for mutual mistake and rescission. Ms. Nicholes seeks class certification; a declaration
that the described sale of supplemental insurance to Medicaid recipients violates the Insurance
Practices Act and the Consumer Protection statute; an injunction preventing Combined Insurance
from selling to Medicaid recipients; compensatory damages, actual damages, and statutory
damages; rescission of the insurance policies and costs and attorneys’ fees.
STANDARD OF REVIEW
A motion to dismiss filed pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the
legal sufficiency of a complaint. Francis v. Giacomelli, 588 F.3d 186, 192 (4th Cir. 2009);
Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir. 2008). 2

“[T]he legal sufficiency of a

complaint is measured by whether it meets the standard stated in Rule 8 [of the Federal Rules of
Civil Procedure] (providing general rules of pleading) . . . and Rule 12(b)(6) (requiring that a
complaint state a claim upon which relief can be granted.)” Id. Federal Rule of Civil Procedure
8(a)(2) requires that a pleading must contain “a short and plain statement of the claim showing that
the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).

2 The same standard is applicable to a motion for judgment on the pleadings pursuant to Rule 12(c). Drager v.
PLIVA USA, Inc., 741 F.3d 470, 474 (4th Cir. 2014).

5

In reviewing a motion to dismiss under Rule 12(b)(6) for failure to state a claim, the Court
must “accept as true all of the factual allegations contained in the complaint.” Erikson v. Pardus,
551 U.S. 89, 93 (2007). The Court must also “draw[ ] all reasonable factual inferences from those
facts in the plaintiff’s favor.” Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999).
However, statements of bare legal conclusions “are not entitled to the assumption of truth” and are
insufficient to state a claim. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). Furthermore, the Court
need not “accept as true unwarranted inferences, unreasonable conclusions, or arguments.” E.
Shore Mkts., v. J.D. Assocs. Ltd. P’ship, 213 F.3d 175, 180 (4th Cir. 2000). “Threadbare recitals
of the elements of a cause of action, supported by mere conclusory statements, do not suffice…
[because courts] ‘are not bound to accept as true a legal conclusion couched as a factual
allegation.’” Iqbal, 556 U.S. at 678 (quoting Atlantic Corp. v. Twombly, 550 U.S. 544, 555
(2007)).
To survive a motion to dismiss, “a complaint must contain sufficient factual matter,
accepted as true, ‘to state a claim to relief that is plausible on its face.’” Iqbal, 556 U.S. at 678
(quoting Twombly, 550 U.S. at 570.) In other words, this “plausibility standard requires a plaintiff
to demonstrate more than ‘a sheer possibility that a defendant has acted unlawfully.’” Francis v.
Giacomelli, 588 F.3d 186, 193 (4th Cir. 2009) (quoting Twombly, 550 U.S. at 570.) In the
complaint, a plaintiff must “articulate facts, when accepted as true, that ‘show’ that the plaintiff
has stated a claim entitling him to relief.” Francis, 588 F.3d at 193 (quoting Twombly, 550 U.S.
at 557.) “Determining whether a complaint states [on its face] a plausible claim for relief [which
can survive a motion to dismiss] will ... be a context-specific task that requires the reviewing court
to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679.

6

DISCUSSION
Combined moves to dismiss and to deny the motion to amend.

It argues that Ms.

Nicholes’ claims are beyond the one-year statute of limitations applicable to the Unfair Trade
Practices Act (UTPA), and that the West Virginia Consumer Credit Protection Act (WVCCPA) is
not applicable to insurers. Combined also argues that any confusion regarding Ms. Nicholes’
ability to receive insurance benefits while on Medicaid is a mistake of law, not a mistake of fact
as required for a rescission claim based on mutual mistake. Ms. Nicholes responds that a twoyear statute of limitations is applicable to her UTPA claims because they are based on fraud, and
that the WVCCPA is applicable because her premium was paid by an automatic monthly debit.
In her amended complaint, she alleges that she initiated suit less than one year after she learned
that her Medicaid status would preclude her from receiving benefits from Combined.

Ms.

Nicholes also argues that her rescission claim is based on a mistake of fact: that both parties
mistakenly believed that she, and other putative class members, would receive benefits under the
policies.3
A. Count One – Unfair Trade Practices Act
In West Virginia, “A five step analysis should be applied to determine whether a cause of
action is time-barred.”
First, the court should identify the applicable statute of limitation for
each cause of action. Second, the court (or, if questions of material
fact exist, the jury) should identify when the requisite elements of
the cause of action occurred. Third, the discovery rule should be
3 The Court recognizes the potential inconsistency in the Plaintiff’s argument that her UTPA claims are based on
fraud and her argument that both parties “mistakenly” believed she could receive benefits under the policy in support
of her rescission claim, particularly in light of the language of the complaint. However, given the Court’s analysis
and the bases of the rulings herein, the Court will not address this issue further.

7

applied to determine when the statute of limitation began to run by
determining when the plaintiff knew, or by the exercise of
reasonable diligence should have known, of the elements of a
possible cause of action. Fourth, if the plaintiff is not entitled to the
benefit of the discovery rule, then determine whether the defendant
fraudulently concealed facts that prevented the plaintiff from
discovering or pursuing the cause of action. Whenever a plaintiff is
able to show that the defendant fraudulently concealed facts which
prevented the plaintiff from discovering or pursuing the potential
cause of action, the statute of limitation is tolled. And fifth, the court
or the jury should determine if the statute of limitation period was
arrested by some other tolling doctrine.
Syl. Pt. 5, Dunn v. Rockwell, 689 S.E.2d 255, 258 (W. Va. 2009) (internal citation omitted). The
Court finds that Combined Insurance is correct that the statute of limitations for UTPA claims is
one year. Syl. Pt. 1, Wilt v. State Auto. Mut. Ins. Co., 506 S.E.2d 608, 608 (W. Va. 1998); Casto
v. Nw. Mut. Life Ins. Co., No. CIV.A. 2:09-CV-00377, 2009 WL 2915132, at *3 (S.D.W. Va. Sept.
2, 2009) (Goodwin, C.J.).
The elements of the UTPA claim occurred when the insurance contracts were sold in
September 2013, November 2014, and March 2015. Ms. Nicholes alleges that she was ineligible
to receive benefits under the policies at any point because she was on Medicaid, and that Combined
purposely sold policies without disclosing that information. Her second amended complaint
alleges that she learned that “her Medicaid status had an impact on her right to receive payment of
insurance benefits under the policies” only after receiving a letter from Combined, dated December
3, 2015, that suggested she could receive a refund based on her Medicaid status. (Sec. Am.
Compl. at ¶ 47.) She initiated this suit on or about August 23, 2016. Though the parties’ briefing
indicates that there will be a factual dispute regarding when Ms. Nicholes learned of the Medicaid
issue, the Court assumes that her allegations are true for purposes of both the motion to dismiss
and the determination of whether her amendment would be futile. She also alleges that Combined
8

concealed the fact that Medicaid status prevented consumers from receiving benefits by pre-filling
insurance applications. Because she alleges that she discovered the elements of her UTPA claim
less than one year before she filed the claim, her amendment is not futile, and the Defendant’s
motion to dismiss Count One based on the statute of limitations should be denied.
B. Count Two – West Virginia Consumer Credit Protection Act
The Court finds that the WVCCPA is not applicable to Ms. Nicholes’ claims. The
WVCCPA prohibits certain intrusive and/or deceptive debt collection practices. West Virginia
Code § 46A-1-105 states that the WVCCPA “does not apply to…the sale of insurance by an
insurer, except as otherwise provided in this chapter.” W.Va. Code § 46A-1-105(a)(2). “‘Debt
collection’ means any action, conduct or practice of soliciting claims for collection or in the
collection of claims owed or due or alleged to be owed or due by a consumer.” W.Va. Code §
46A-122(c). Judge Copenhaver recently analyzed the application of the WVCCPA to insurance
payments, and found that without a “deferral of payment” there is no debt or claim, and thus no
debt collection activity. Hinkle v. Matthews, No. CV 2:15-13856, 2016 WL 3945734, at *3
(S.D.W. Va. July 19, 2016) (Copenhaver, J.) Ms. Nicholes does not allege that Combined
extended credit to her or permitted her to defer payments on her insurance policies. Thus, as in
Hinkle, the sections of the WVCCPA dealing with debt collection are not applicable.
Ms. Nicholes relies in part on Article 6 of the WVCCPA, which provides for consumer
protection in non-credit transactions.

Section 46A-6-104 provides: “Unfair methods of

competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are
hereby declared unlawful.” The definition of “services” contained in the WVCCPA expressly
includes insurance. W.Va. Code § 46A-1-102(47).
9

However, in Hinkle, Judge Copenhaver

concluded that the WVCCPA’s general exclusion of insurance sales applies to Article 6, as Article
6 does not expressly provide that it is applicable to insurance. Id. at 4. As noted in Hinkle, the
terms “services” is used throughout the WVCCPA, and finding that the WVCCPA does apply to
insurance wherever the term “services” appears would render the insurance exclusion ineffective.
Therefore, the WVCCPA is not applicable to the conduct described in the second amended
complaint, and Combined’s motion to dismiss should be granted as to Count Two.
C. Count Three – Rescission
Rescission is the unmaking of a contract to restore the parties to their pre-contractual
positions. See Black’s Law Dictionary (10th ed. 2014).

“A mutual mistake is one which is

common to all parties, wherein each labors under the same misconception respecting a material
fact or provision within the agreement.” Syl. Pt. 4, Smith v. Smith, 639 S.E.2d 711, 712 (W. Va.
2006). In general, “the mistake must be one of fact, not of law [and] must be mutual and common
to both parties.” Id. at Syl. Pt. 5. However, “courts have formulated numerous exceptions to the
general rule that a transaction or act of a party will not be set aside on the ground of mistake of
law.”4 Webb v. Webb, 301 S.E.2d 570, 575 (W. Va. 1983). The West Virginia Supreme Court
noted that “a mistake as to the legal effect of a contract, though a mistake of law, will be treated
as a mistake of material fact where the mistake is mutual…and results in a written instrument
which does not embody the ‘bargained-for’ agreement of the parties.” Id. at 575 n. 5. In
addition, “where a person is ignorant or mistaken with respect to his own antecedent and existing

4 Indeed, the Second Restatement of Contracts, which West Virginia courts largely follow, does not draw a
distinction between mistakes of fact and mistakes of law. Restatement (Second) of Contracts § 151.

10

private legal rights…and enters into a transaction, the legal scope and operation of which he
correctly understands, for the purpose of affecting his assumed rights, equity will grant relief.”
Id. Further, “[t]he jurisdiction of equity to reform written instruments, where there is a mutual
mistake, or mistake on one side and fraud or inequitable conduct on the other, if the evidence be
sufficiently cogent to thoroughly satisfy the mind of the court, is fully established and undoubted.”
Syl. Pt. 2, First Am. Title Ins. Co. v. Firriolo, 695 S.E.2d 918, 920 (W. Va. 2010). Contracts or
contract terms may also be voided for unconscionability. See, e.g., Brown v. Genesis Healthcare
Corp., 729 S.E.2d 217, 220–22 (W. Va. 2012).
In general terms, Ms. Nicholes alleges a mutual mistake of fact as to the most basic purpose
of the contract: her ability to receive insurance benefits. Considered with more specificity,
however, the facts do not support a mutual mistake of fact theory. Nicholes was aware that she
received Medicaid, but was unaware that her Medicaid status would prevent her from directly
receiving benefits under the supplemental insurance policies. She alleges that Combined was
unaware “either that Plaintiff and Class Members were Medicaid participants or that Plaintiff and
Class members were not eligible to receive and retain benefits from the insurance policies
Defendant sold to them.” (Sec. Am. Compl. at ¶ 105.) Ms. Nicholes’ mistake is akin to that of
the plaintiff in Webb, who sought to void his disclaimer to an inheritance. In Webb, the plaintiff’s
father died, and the plaintiff wanted the inheritance to go exclusively to his mother, in accordance
with his father’s wishes. An attorney assisted him in filing a disclaimer. However, because the
plaintiff had a child, of whom the attorney was unaware, the effect of the disclaimer was to pass
the plaintiff’s interest in the inheritance to his daughter, rather than to his mother. The court
concluded that the plaintiff had made a mistake of law because his misunderstanding was as to the

11

effect of the disclaimer under the laws of inheritance, rather than the existence of his child. Webb,
301 S.E.2d at 570–75 (W. Va. 1983). The court in Webb declined to permit rescission because
the plaintiff’s own negligence led to the mistake.5 Similarly, Ms. Nicholes misunderstood the
effect of her Medicaid status on her ability to receive insurance benefits, not the fact that she
received Medicaid.
The Court nonetheless finds that the Plaintiff’s rescission claim herein is not futile.
Although the parties’ briefing focused on mutual mistake of fact, contract rescission is an equitable
remedy available under multiple legal theories. Throughout her complaint, Ms. Nicholes alleges
that Combined engaged in fraudulent conduct to sell policies to a population that included many
Medicaid recipients.

Ms. Nicholes alleges that Combined was unaware that she received

Medicaid only because Combined presented her with the signature page of a pre-filled application,
on which a Combined agent indicated that she did not receive Medicaid. The facts alleged, taken
as true, support an inference that Combined deliberately sold policies in a manner that insured
many purchasers would be unable to receive benefits, and deliberately fostered Ms. Nicholes’
mistake of law. Under the principles permitting rescission for a combination of mistake on one
side and fraud or inequitable conduct on the other, the totality of the facts alleged are sufficient to
state a claim for rescission at this stage of the litigation. A motion to dismiss should be granted
only if, accepting factual allegations as true and drawing reasonable factual inferences in the
plaintiff’s favor, “it appears certain that the plaintiff cannot prove any set of facts in support of his
claim entitling him to relief.” Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999).

5 In Webb, there was no other party to the disclaimer, and the plaintiff was assisted by counsel.

12

Thus, reading the complaint as a whole, the filing of the Second Amended Complaint is not futile
within the meaning of the law.
CONCLUSION
Wherefore, after thorough review and careful consideration, the Court ORDERS that the
Plaintiff’s Motion for Leave to File Second Amended Complaint (Document 24) be GRANTED
and that the attached proposed Second Amended Class Action Complaint (Document 24-1) be
FILED as a separate docket entry. The Court further ORDERS that Combined Insurance
Company of America’s Motion to Dismiss (Document 9) be GRANTED as to Count Two of the
Second Amended Class Action Complaint, and DENIED as to Counts One and Three.
The Court DIRECTS the Clerk to send a copy of this Order to counsel of record and to
any unrepresented party.
ENTER:

13

June 28, 2017