Opinion
Case No. CV 12-632-JFW (MANx)
12-19-2012
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, Plaintiff, v. GABRIELIAN & ASSOCIATES, Defendant. LEO GABRIELIAN; GABRIELIAN AND ASSOCIATES INSURANCE SERVICES, INC., Counterclaimants, v. THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, Counterdefendant.
FINDINGS OF FACT AND
CONCLUSIONS OF LAW
With the agreement of the parties, the Court found this matter appropriate for submission on the papers without oral argument and vacated the Court Trial calendared for November 27, 2012.
After considering the administrative record, evidence, and briefs filed by the parties, the Court makes the following findings of fact and conclusions of law:
Findings Of Fact
The Court has elected to issue its decision in narrative form because a narrative format more fully explains the reasons supporting the Court's conclusions. Any finding of fact that constitutes a conclusion of law is hereby adopted as a conclusion of law, and any conclusion of law that constitutes a finding of fact is hereby adopted as a finding of fact.
I. Introduction
Plaintiff and counter-defendant The Guardian Life Insurance Company of America ("Guardian") filed this declaratory relief action seeking an order from this Court confirming its rescission of the group disability insurance policy issued by Guardian to "Gabrielian & Associates" ("G&A") insuring G&A's employees. Leo Gabrielian ("Gabrielian") and Gabrielian and Associates Insurance Services, Inc. filed a counterclaim seeking disability benefits under the group policy. This action is governed by the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq.
II. Facts
A. The Application
On January 31, 2011, Gabrielian, as "CEO and President of G&A," applied for a group disability insurance policy to be issued by Guardian insuring G&A's employees. (AR 00006). Gabrielian represented on the Application that G&A was a corporation that employed two eligible employees who worked more than 30 hours per week, and that G&A sought insurance for both of these employees. (AR 0005). Gabrielian signed the Application, and represented that he "reviewed the statements made by [him] on this application, and they are true and complete." (AR 00006). He also acknowledged that"[i]t is understood that no individual shall become insured while not actively at work on a full-time basis, and only full-time employees shall be eligible. Full-time employee means one who regularly works the number of hours in the normal work week established by this planholder (but not less than 30 hours per week) at his Planholder's place of business." (AR 00006).
In addition to the Application, G&A submitted "Evidence of Insurability" for its two alleged "employees" - Gabrielian and Melissa Alexanians. (AR 00183-00187). G&A represented that Melissa Alexanians was a full time employee of G&A as of January 1, 2011. (AR 00183). The "Evidence of Insurability," submitted by G&A, stated that Alexanians was an insurance agent, that her annual earnings were $100,000, and that she had been actively working for G&A full time for full pay at least 30 hours per week, year round. (AR 00183).
B. The Plan
Based on the information provided in the Application, Guardian issued G&A the Group Policy with an Employer Rider group plan number G-00761339-GN (the "Group Policy."). (AR 00012). The Group Policy was issued under the Trustees of the Finance, Insurance, and Real Estate Industry Insurance Trust Fund. (AR 00012, 00026). G&A became a participating employer covered by the Group Policy effective February 1, 2011 (AR 00012, 00026). The Group Policy identifies the G&A's two covered employees as "President" and "Vice President." (AR 00014).
The Group Policy states: "For purposes of this plan, we will treat partners and proprietors like employees if they meet this plan's conditions of eligibility." (AR 00014). The Group Policy also states that it is governed by ERISA. (AR 00078-00079).
C. Gabrielian's Claim for Disability Benefits
On March 18, 2011, according to Gabrielian's treating physician, Gabrielian became totally disabled. Gabrielian submitted his claim to Guardian on July 8, 2011. (AR 00464).
D. Guardian's Rescission of the Group Policy
As part of Guardian's investigation of Gabrielian's claim for disability benefits, on January 4, 2012, Guardian's investigator, Robert Grandolfo, interviewed Melissa Alexanians, one of G&A's alleged "employees." (AR 00389). Melissa Alexanians advised Mr. Grandolfo that, in or around March 2011, she had considered going into business with Gabrielian as a partner. (AR 00389). She advised Mr. Grandolfo that she worked with Gabrielian on a part-time, trial basis to become familiar with insurance sales. (AR 00389). However, after about one month, she changed her mind about working and decided to be a "stay at home mom." (AR 00389). According to Alexanians, she never finalized any partnership arrangements with Gabrielian or entered into a written partnership agreement and never had a formal business relationship with Gabrielian or his insurance agency, G&A. She advised Mr. Grandolfo that she was never a paid employee of Gabrielian and never received any compensation from him. (AR 00389).
On October 10, 2011, Guardian denied Gabrielian's claim for short term disability benefits, on the grounds that Gabrielian had not provided Guardian with information it had requested to support Gabrielian's disability claim. (AR 00559). Gabrielian appealed Guardian's denial of benefits. (AR 00548). Guardian acknowledged receiving Gabrielian's appeal and then continued to investigate Gabrielian's claim. (AR 00548).
On January 6, 2012, Mr. Grandolfo sent a letter to Ms. Alexanians, confirming their January 4, 2012 conversation, and stating: "[I]f any of the information included in this letter is incorrect or needs clarification, please feel free to make corrections or additions directly to the letter. Please initial any changes and fax or e-mail the letter back to my attention." (AR 00897). Ms. Alexanians did not make any corrections or additions or otherwise respond to the letter. (AR 00715-00716).
Mr. Grandolfo spoke with Ms. Alexanians again on January 12, 2012, to confirm that she had received his January 6, 2012 letter, and to obtain additional information. (AR 00717). Specifically, Mr. Grandolfo explained to Ms. Alexanians that certain of the information that had been entered on her application for insurance was inconsistent with the information she had provided during their previous conversation. (AR 00717). For example, Mr. Grandolfo advised her that, in the application, the beginning date of her employment with Mr. Gabrielian was listed as January 1, 2011 and that her signature was dated January 31, 2011. In addition, in the application, her annual income was reported as $100,000. (AR 00717). Ms. Alexanians explained that she could not remember the specific dates that she began working with Mr. Gabrielian and that the income figure reported on the application was for income that she had earned in years prior to 2011. (AR 00717). However, she again confirmed that she did not receive any income while working with Mr. Gabrielian. (AR 00717). On January 13, 2012, Mr. Grandolfo sent another letter to Ms. Alexanians, confirming their January 12, 2012 discussion. (AR 00898). Mr. Grandolfo asked Ms. Alexanians to sign and return the letter via fax or email. Ms. Alexanians never responded. (AR 00717).
Guardian underwriter Conie Hoeft reviewed the Application, and the information provided by Mr. Grandolfo, and determined that Melissa Alexanians was not a full-time employee of G&A. With only one full-time employee, Ms. Hoeft concluded that G&A would not have been eligible for the Group Policy and that, as a result, Guardian would not have issued the Group Policy. (AR 00001).
Accordingly, in a letter dated January 20, 2012, Guardian notified Mr. Gabrielian that it was rescinding the Group Policy issued to G&A, and refunded the premium paid by G&A. (AR 00215-00222). In that letter, Guardian advised Gabrielian that: "In addition, even if the coverage was not rescinded (which by this letter it is), you would still have not established that you are entitled to benefits for Short Term Disability." (AR 00217).
Although the January 20, 2012 letter advised Gabrielian that he had the right to appeal Guardian's decision and submit additional information, Guardian filed this declaratory relief action on January 24, 2012, before Mr. Gabrielian could appeal Guardian's decision. (AR 00219).
E. Mr. Gabrielian's position with respect to Ms. Alexanians' employment
Mr. Gabrielian submitted a declaration in addition to his Opening Trial Brief in this action, which states that, in early 2011, he intended to enter into a partnership named "Gabrielian & Associates" with Alexanians to sell insurance under his existing corporation "Gabrielian and Associates Insurance Services, Inc." Gabrielian Declaration at ¶ 3. Mr. Gabrielian states that he took the initial steps to create or establish the partnership "Gabrielian & Associates," including meeting with an attorney on the subject, but the required documents were never prepared. Gabrielian Declaration at ¶ 3. Although the documents to create or establish the partnership were never prepared, Gabrielian states that "Alexanians and I began working together in February 2011, both working in excess of 30 hours per week as far as I was aware. We worked together on numerous deals, sharing a large number of emails, documenting the work that we were doing together, submitting applications for insurance and distributing the commissions between ourselves." Gabrielian Declaration at ¶ 11. Gabrielian considered Alexanians his partner, even though no partnership agreement was ever executed. Gabrielian Declaration at ¶¶ 12, 14. Mr. Gabrielian admits that in May 2011, Alexanians advised Gabrielian that she no longer wished to work. Gabrielian Declaration at Exhibit D.
Conclusions Of Law
I. Jurisdiction And Venue
This action involves the rescission of an employee welfare benefit plan regulated by ERISA. As such, the Court has original jurisdiction over this matter under 28 U.S.C. § 1331 and 29 U.S.C. § 1132(e). Venue in the United States District Court for the Central District of California is invoked pursuant to 29 U.S.C. § 1132(e)(2).
The parties do not dispute the facts requisite to federal jurisdiction and venue.
II. Standard Of Review
Generally, where the plan grants discretionary authority to the administrator or fiduciary to determine eligibility for benefits or to construe the terms of the plan, the Court reviews the decision to rescind the plan for an abuse of discretion. See Shipley v. Arkansas Blue Cross and Blue Shield, 333 F.3d 898 (8th Cir. 2003) (applying the abuse of discretion standard to insurer's decision to rescind the plan because plan granted discretion to interpret the terms of the plan, including the enrollment form). However, even where a plan grants such discretion to the administrator or fiduciary, the Court will review the insurer's decision to rescind the plan de novo when the administrator or fiduciary fails to exercise that discretion or engages in "wholesale and flagrant violations" of the procedural requirements of ERISA. Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955,971-72 (9th Cir. 2006).
In this case, both parties agree that the Group Policy grants discretion to Guardian to determine eligibility for benefits and to construe the terms of the plan with respect to claims. (AR 00047; 00705). However, each party has taken conflicting positions regarding whether the Court should review Guardian's decision to rescind the Group Policy de novo or for abuse of discretion. In its Opening Brief, Guardian argued that the Court should review its rescission decision de novo. Then, in its Opposition, Guardian argued that the Court should review its rescission decision for abuse of discretion. In contrast, in their Opening Brief, G&A and Gabrielian argued that the Court should review Guardian's rescission decision for abuse of discretion. Then, in their Opposition, G&A and Gabrielian argued that the Court should review Guardian's rescission decision de novo.
In light of the fact that Guardian filed this action before Gabrielian or G&A could appeal Guardian's decision to rescind the Group Policy, the Court will apply the de novo standard of review. See, e.g. Kowalski v. Farella, Braun & Martel, LLP, 2007 WL 2123324, at *2 (N.D. Cal. July 23, 2007) (reviewing defendants' termination of plaintiff's disability benefits de novo where defendants never ruled on plaintiff's appeal); Vaught v. Scottsdale Healthcare Corporation Health Plan, 2009 WL 649806, at *2 (D. Ariz. Mar. 10, 2009) (finding de novo review appropriate where Plan failed to exercise its discretionary authority by failing to act on claimant's appeal). Accordingly, the Court gives no deference at all to Guardian's decision to rescind the Group Policy.
Moreover, because Gabrielian did not have an opportunity to appeal the decision before Guardian filed this action, he also did not have an opportunity to present evidence in opposition to Guardian's conclusion that Alexanians was not a full-time employee of G&A. The Court may exercise its discretion to allow evidence that was not before the plan administrator "when circumstances clearly establish that additional evidence is necessary to conduct an adequate de novo review of the benefit decision." Mogeluzo v. Baxter Travenol Long Term Disability Ben. Plan, 46 F.3d 938, 944 (1995) (quoting Quesinberry v. Life Ins. Co. of North America, 987 F.2d 107, 1025 (4th Cir. 1993) (en banc)). Because Gabrielian did not have the opportunity to present evidence in opposition to Guardian's decision to rescind the Group Policy, the Court will consider the extrinsic evidence submitted by Gabrielian and G&A with respect to Alexanians' employment. See Quesinberry, 987 F.2d at 1027 (noting that exceptional circumstances that may warrant an exercise of the court's discretion to allow additional evidence include "circumstances in which there is additional evidence that the claimant could not have presented in the administrative process.").
In light of the Court's decision to review Guardian's rescission of the Group Policy de novo, the parties agree that Guardian must prove, by a preponderance of the evidence, that its decision to rescind the Group Policy was correct.
III. Discussion
Based on its review of the administrative record and the extrinsic evidence, the Court concludes that Guardian was entitled to rescind the Group Policy.
Under ERISA, an insurer may rescind an insurance contract when it is entered into on the basis of a fraudulent or material misrepresentation. See Security Life Ins. Co. Of America v. Meyling, 146 F.3d 1184, 1191 (9th Cir. 1998). "[T]o establish materiality in the insurance context, the misstatements must have either affected insurability or the amount of premium paid by the insured. In essence, materiality is determined by the misrepresentation's effect on the insurer's informed acceptance of risk, i.e., would knowledge of the true facts have influenced the insurer in deciding whether to accept the risk or in assessing how much premium should be paid for undertaking the risk." Id. at 1192 (emphasis added). Contrary to Gabrielian and G&A's argument, Guardian is not required to establish that the misrepresentation caused it financial harm.
In this case, the Court concludes that Gabrielian misrepresented the status of Alexanians' employment on the insurance application. Specifically, Gabrielian represented that Alexanians was a full-time employee of a corporation. However, the Court finds that Alexanians was not a full-time employee of a corporation, and at most was associated with Mr. Gabrielian in selling insurance under the name of Gabrielian & Associates. Indeed, based on Gabrielian's own admission in his declaration, G&A was the proposed name of a partnership to be formed between Gabrielian and Alexanians in the future and the documents to create or establish the partnership were never prepared. While it is true that Gabrielian and Alexanians worked together as insurance brokers, submitting applications for insurance and splitting commissions between themselves and other insurance agents, as Alexanians stated to Guardian's investigator, she never entered into any partnership with Gabrielian and never even had a formal business relationship with Gabrielian or G&A.
The Court concludes that Gabrielian's misrepresentation regarding Alexanians' employment status was material, in that it would have influenced Guardian in deciding whether to enter into the insurance contract. Had Guardian known of the true facts, it would not, and in fact, could not, have issued the Group Policy, governed by ERISA, to G&A. In order to qualify as an "employee benefit plan" under ERISA, the plan must cover at least one employee. See Peterson v. American Life Ins. Co., 48 F.3d 404, 407 (9th Cir. 1995) ("The regulations implementing this section provide that a plan 'under which no employees are participants' does not constitute an ERISA benefit plan."). Because the Court finds that Alexanians was not an employee of G&A and was at most associated with G&A in selling insurance, Guardian could not have issued the Group Policy governed by ERISA to G&A. Moreover, even assuming that both Gabrielian and Alexanians were somehow partners doing business under the name of G&A as Gabrielian contends, Guardian still could not have issued the Group Policy governed by ERISA to G&A. "Neither an owner of a business nor a partner in a partnership can constitute an 'employee' for purposes of determining the existence of an ERISA plan." Id. Accordingly, the Court finds by a preponderance of the evidence that Gabrielian made a material misrepresentation in G&A's Application for insurance, and that Guardian was entitled to rescind G&A's Group Policy.
As Gabrielian points out, the Group Policy states: "For purposes of this plan, we will treat partners and proprietors like employees if they meet this plan's conditions of eligibility." However, this provision does not affect the materiality of the misrepresentation in G&A's application for insurance. As long as the partners employ at least one employee, Guardian could have issued the Group Policy and the partners would be treated like employees for the purposes of coverage under the Group Policy.
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IV. Conclusion
For all of the foregoing reasons, the Court finds that Guardian correctly rescinded G&A's Group Policy, and thus that Gabrielian is not entitled to any disability benefits.
Counsel shall meet and confer and prepare a joint proposed Judgment consistent with these Findings of Fact and Conclusions of Law. The joint proposed Judgment shall be lodged with the Court on or before January 7, 2013. In the unlikely event that counsel are unable to agree upon a joint proposed Judgment, the parties shall each submit separate versions of a proposed Judgment along with a declaration outlining their objections to the opposing party's version on or before January 7, 2013.
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JOHN F. WALTER
UNITED STATES DISTRICT JUDGE