Summary
applying public-duty rule to bar liability for negligent liquidation of assets
Summary of this case from Wallace v. Ohio Dept. of CommerceOpinion
No. 89-2172
Submitted December 12, 1990 —
Decided April 3, 1991.
Public employment — Negligence — Actions of agents or employees carrying out mandates of public employer could be actionable — R.C. Chapter 3903 does not provide for a special relationship between the state and a liquidated health maintenance organization.
O.Jur 3d Government Tort Liability §§ 13, 14.
O.Jur 3d Insurance §§ 117, 119.
1. When carrying out the mandates of a public employer, the actions of the agents or employees of that employer are distinguishable from the original decision to take action and thus could be actionable. ( Reynolds v. State, 14 Ohio St.3d 68, 14 OBR 506, 471 N.E.2d 776, construed and followed.)
2. R.C. Chapter 3903 was enacted for the benefit of the general citizenry and does not provide for a special relationship between the state and a liquidated health maintenance organization. ( Sawicki v. Ottawa Hills, 37 Ohio St.3d 222, 525 N.E.2d 468, followed.)
APPEAL from the Court of Appeals for Franklin County, No. 88AP-1178.
WellCare Health Plan, Inc. ("WellCare") was organized in July 1984, and licensed by the state of Ohio as a health maintenance organization ("HMO") in May 1985. On July 30, 1987, appellees, Donald D. Anderson et al. ("Anderson"), shareholders of WellCare, filed a complaint for damages in the Court of Claims against appellant, the Ohio Department of Insurance ("department"). The complaint requested approximately $8 million in damages on various counts of fraud, conversion, breach of a fiduciary duty, negligent misconduct, infliction of emotional distress, and interference with business relationships, originating with the department's actions surrounding WellCare's liquidation.
The statutory procedures for the liquidation and oversight of HMOs are found in R.C. Chapters 1742 and 3903. R.C. 1742.21(A) authorizes the Superintendent of Insurance (the "superintendent") to "* * * examine once annually or more frequently for due cause, the financial records of any health maintenance organization. The examinations shall be undertaken not less than once every three years." Once the superintendent conducts the examination of the HMO, if he "* * * has reasonable cause to believe that any * * * [HMO] is in such condition as to render the continuance of its business hazardous to the public or to holders of its policies or certificates of insurance * * *," the superintendent may issue an order that the HMO is under the supervision of the superintendent. R.C. 3903.09(B) and (C). Alternatively, the HMO may voluntarily consent to supervision. Id. During an examination of WellCare conducted pursuant to these statutes, the superintendent determined that WellCare needed additional capital investment and thus subjected WellCare to the superintendent's supervision. As permitted by the statute, WellCare consented to voluntary supervision by the superintendent pursuant to R.C. 3903.09(B) and (C).
During WellCare's supervision, the court determined that WellCare was insolvent and that further attempts to rehabilitate it would be futile or would substantially increase the risk of loss to its enrollees, subscribers, policyholders, creditors and the public. According to R.C. 3903.01(K), an insolvent HMO is one that "* * * is unable to pay its obligations when they are due, or when its admitted assets do not exceed its liabilities plus the greater of either of the following: (a) [a]ny capital and surplus required by law for its organization; (b) [t]he total par or stated value of its authorized and issued capital stock." Regardless of whether the HMO is under supervision, R.C. 3903.17 permits the superintendent to file an order for liquidation if the HMO is insolvent or "is in such condition that the further transaction of business would be hazardous, financially or otherwise, to its policyholders, its creditors, or the public." R.C. 3903.17(A), (B), and (C). Therefore, on April 10, 1987, the superintendent obtained an ex parte order liquidating WellCare.
After the court ordered the liquidation of WellCare, the superintendent took possession of and began converting the assets of WellCare pursuant to R.C. 3903.18, which provides:
"(A) An order to liquidate the business of a domestic insurer shall appoint the superintendent of insurance and his successors in office as liquidator and shall direct the liquidator forthwith to take possession of the assets of the insurer and to administer them under the general supervision of the court. The liquidator shall be vested by operation of law with the title to all of the property, contracts, and rights of action and all of the books and records of the insurer ordered liquidated, wherever located, as of the entry of the final order of liquidation. * * *"
On April 16, 1987, the Franklin County Court of Common Pleas vacated the April 10 order and entry of liquidation and ordered the superintendent to return all property and records to WellCare.
Subsequent to that order, WellCare initiated this suit against the department. The department filed a motion to dismiss for failure to state a claim upon which relief could be granted. The trial court granted the department's motion to dismiss, agreeing that any potential recovery by WellCare would be barred by the public duty doctrine announced by this court in Sawicki v. Ottawa Hills (1988), 37 Ohio St.3d 222, 525 N.E.2d 468.
In reversing the trial court's decision, the court of appeals held that under Reynolds v. State (1984), 14 Ohio St.3d 68, 14 OBR 506, 471 N.E.2d 776, the department's decision to liquidate WellCare was not actionable since that decision involved a high degree of discretion. However, the court of appeals reasoned, the manner in which the department carried out the liquidation could subject it to liability if its agents or employees acted in a negligent manner. Reynolds, supra.
Acknowledging that any claims against employees of the department would be barred unless the department owed a special duty to WellCare and its shareholders (as contrasted with a general duty owed to the public at large), the court of appeals found a special duty in the following language of R.C. 3903.02(D): "The purpose of sections 3903.01 to 3903.59 of the Revised Code is the protection of the interests of insureds, claimants, creditors, and the public generally, with minimum interference with the normal prerogatives of the owners and managers of insurers * * *." (Emphasis added.) The court of appeals concluded that a special duty was owed to WellCare and that if certain allegations contained in the amended complaint were proven to be true, the superintendent had violated state law and was amenable to suit.
The cause is now before this court pursuant to the allowance of a motion to certify the record.
Joseph S. Streb, for appellees.
Lee I. Fisher, attorney general, Loren L. Braverman, Simon B. Karas, Sheryl Creed Maxfield and William M. Mattes, for appellant.
This appeal presents two issues for our review. The first issue is whether the method and manner in which the department's employees liquidated WellCare are so inexorably intertwined with the decision to liquidate WellCare that the implementation of the liquidation is immune from suit. The second issue is, if the department's employees conducted the liquidation in a negligent manner, whether their actions give rise to a private claim for relief due to a special duty the department owed WellCare and its shareholders. We will dispose of the immunity issue first.
I
In Reynolds, supra, we established a rule to determine when a private cause of action may be instituted against the state. As we explained: "* * * the state cannot be sued for its legislative or judicial functions or the exercise of an executive or planning function involving the making of a basic policy decision which is characterized by the exercise of a high degree of official judgment or discretion. However, once the decision has been made to engage in a certain activity or function, the state may be held liable, in the same manner as private parties, for the negligence of the actions of its employees and agents in the performance of such activities." Id. at 70, 14 OBR at 508, 471 N.E.2d at 778.
The department urges us to accept its contention that the decision to regulate includes the manner and method in which that regulation will occur; i.e., that in a regulatory context, the making of the basic policy decision and the implementation thereof are not easily separated. Therefore, the department concludes, both its decision to liquidate WellCare and the manner in which that liquidation took place were highly discretionary activities that are immune from liability.
The holding in Reynolds, however, forces us to reject this argument. We recognize that a regulatory agency exercises a high degree of discretion in making its initial decision regarding liquidation. A regulatory agency, like any other agency, must be allowed to make basic policy decisions without fear of reprisals from private individuals who feel they have been injured. Reynolds acknowledges this need for governmental agencies to be allowed to govern.
However, as Reynolds also makes clear, even though a discretionary decision is immune from suit, the implementation of that decision can be carried out in a negligent manner. When carrying out the mandates of a public employer, the actions of the agents or employees of that employer are distinguishable from the original decision to take action and thus could be actionable.
In the instant case, we are not persuaded that the department is a unique regulatory agency that would prevent us from distinguishing between its decision to liquidate WellCare and the implementation of that decision. If, as WellCare alleges, the department failed to follow the statutory procedures for the liquidation of WellCare causing WellCare to suffer damages, the department faces potential liability for its actions. Reynolds, supra.
Our inquiry, however, does not end with this determination. Even if employees of the department acted in a negligent manner, WellCare cannot maintain its cause of action unless the department owed a special duty to WellCare and its shareholders that is separate and distinct from the duty the department owed to members of the general public. The law is well-settled in Ohio that the breach of a general duty to the public by a governmental entity does not give rise to a private claim of relief. Sawicki, supra.
II
As this court said in Sawicki: "`* * * [I]f the duty which the * * * law imposes upon * * * [a public official] is a duty to the public, [then] a failure to perform it, or an inadequate or erroneous performance, must be a public, not an individual injury, and must be addressed, if at all, in some form of public prosecution. On the other hand, if the duty is a duty to the individual, then a neglect to perform it, or to perform it properly, is an individual wrong, and may support an individual action for damages.' * * *
"* * * Rather than being an absolute defense, as was sovereign immunity, the public duty rule comported with the principles of negligence, and was applicable to the determination of the extent to which a statute may encompass the duty upon which negligence is premised. If a special relationship is demonstrated, then a duty is established, and inquiry will continue into the remaining negligence elements. * * *" (Citations omitted.) Id. at 230, 525 N.E.2d at 477.
Four elements must be proven in order to establish the existence of a special duty. The state, through the promises or actions of its employees, must evidence the assumption of an affirmative duty to act on behalf of the injured party and must be aware that its inaction would lead to the alleged harm. Direct contact between the state and the injured party also must occur. Finally, the injured party must justifiably rely upon the state's affirmatively undertaking its promised form of relief. Id. at 232, 525 N.E.2d at 478.
Applying the above test to the facts of this case, it becomes apparent that the department did not owe a special duty to WellCare. According to statute, the department's regulation of HMOs is for the benefit and protection of the public. As R.C. 3903.02(D) states: "The purpose of sections 3903.01 to 3903.59 of the Revised Code is the protection of the interests of insureds, claimants, creditors, and the public generally * * *." Pursuant to R.C. 3903.16(A), the department may file a motion for liquidation whenever the Superintendent of Insurance "* * * believes rehabilitation of an insurer would substantially increase the risk of loss to creditors, policyholders, or the public * * *." One of the bases for obtaining the liquidation order is "* * * [t]hat the insurer is in such condition that the further transaction of business would be hazardous, financially or otherwise, to its policyholders, its creditors, or the public." R.C. 3903.17 (C).
The statutory scheme for the regulation and liquidation of HMOs is designed to protect the interests of the public from the difficulties experienced by the company, not to protect the company and its shareholders. Contrary to the holding of the court of appeals, the statute was neither designed nor intended to create a special duty to a private individual to use as the basis for a claim of damages. R.C. Chapter 3903 was enacted for the benefit of the general citizenry and does not provide for a special relationship between the state and a liquidated HMO. WellCare has failed to prove the department's assumption of a special duty or the existence of a special relationship between itself and the department, thus rendering the special duty exception inapplicable.
Further, every wrong committed by the state does not give rise to a private cause for damages. As the Kentucky Supreme Court stated in Commonwealth Dept. of Banking Securities v. Brown (1980), 605 S.W.2d 497: "* * * There is no public policy requiring government to guarantee the success of its efforts. When the government entity is performing a self-imposed protective function * * *, the individual citizen has no right to demand recourse against it though he is injured by its failure to efficiently perform such function. Any ruling to the contrary would tend to constitute the Commonwealth an insurer of the quality of services its many agents perform and serve only to stifle government's attempts to provide needed services to the public which could be otherwise effectively supplied." Id. at 499.
In the instant case, if the department implemented WellCare's liquidation in a negligent manner, WellCare was not without recourse. WellCare could have requested a hearing pursuant to R.C. 3903.09(F)(1). It could have applied for immediate judicial relief pursuant to R.C. 3903.09(F)(2). It also could have requested that the superintendent review any action taken by a supervisor in accordance with R.C. 3903.17. R.C. 3903.09(G). Any or all of these remedies were available to WellCare to redress any wrongs committed by the state. They reflect the legislative design to recompense an injured party and they do not contemplate a private right of action for relief for that injury.
For the reasons set forth above, we reverse the judgment of the court of appeals and reinstate the decision of the trial court.
Judgment reversed.
HOLMES, WRIGHT and H. BROWN, JJ., concur.
SWEENEY, DOUGLAS and RESNICK, JJ., dissent.