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Tristar Risk Management v. American Liberty Insurance Co., Inc.

United States District Court, D. Utah

August 31, 2017

TRISTAR RISK MANAGEMENT, a California corporation, and TRISTAR MANAGED CARE, INC., a California corporation, Plaintiffs,
v.
AMERICAN LIBERTY INSURANCE CO., INC., a Utah corporation, Defendant.

          MEMORANDUM DECISION AND ORDER GRANTING [11] DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

          DAVID NUFFER DISTRICT JUDGE.

         Plaintiffs Tristar Risk Management (“Risk Management”) and Tristar Managed Care, Inc. (“Managed Care”) (collectively “Tristar”) managed claims on behalf of Defendant American Liberty Insurance Company, Inc. (“American Liberty”). Some of these claims were for services rendered by IHC Health Services, Inc. (“IHC”).

         Managed Care also has a separate, previous contract with IHC for claims management. An arbitrator ordered Managed Care to pay IHC damages for underpayment because IHC claims were paid by Managed Care on the rates applicable to the agreement between Risk Management and American Liberty rather than on the rates in the contract between Managed Care and IHC. Tristar wants to be reimbursed by American Liberty for the arbitration award.

         Tristar's complaint (“Complaint”) alleges American Liberty: (1) breached a contract; (2) breached the implied covenant of good faith and fair dealing; (3) was unjustly enriched; and (4) should, in equity, indemnify Tristar.[1] American Liberty moves for summary judgment on Tristar's claims (“Motion”).[2] Tristar opposes the Motion (“Opposition”).[3] American Liberty filed a reply in support of the Motion (“Reply”).[4]

         There is no genuine dispute as to any material fact supporting Tristar's claims. American Liberty is entitled to summary judgment. Therefore, American Liberty's Motion for Summary Judgment[5] is GRANTED.

         Contents

         Background ..................................................................................................................................... 2

         Summar Judgment Standard ........................................................................................................... 4

         Undisputed Material Facts .............................................................................................................. 5

         Analysis ........................................................................................................................................... 8

         1. American Liberty Did Not Breach the Claims Service Agreement with Risk Management ............................................................................................................ 9

         A. Managed Care is not a third party beneficiary of the Claims Service Agreement and cannot assert a claim of breach of contract ..................... 10

         B. Because American Liberty is a not a party to the IHC Agreement, it is not obligated to pay amounts purportedly owed to IHC ................................. 13

         C. The undisputed facts do not show that American Liberty breached Article 5.5 of the Claims Service Agreement ....................................................... 15

         D. The undisputed facts do not show that American Liberty breached Article 9.2 of the Claims Service Agreement ....................................................... 17

         2. American Liberty Did Not Breach the Covenant of Good Faith and Fair Dealing ............................................................................................................................... 19

         3. American Liberty Was Not Unjustly Enriched by Managed Care ....................... 21

         4. American Liberty is Not Required to Equitably Indemnify Managed Care ......... 23

         Order ........................................................................................................................................... 25

         BACKGROUND

         This case concerns two separate contracts: (1) the Intermountain Facility Services Agreement By and Between IHC Health Services, Inc. and Tristar Managed Care (“IHC Agreement”);[6] and (2) the Claims Service Agreement between Risk Management[7] and American Liberty.[8]

         IHC and Managed Care signed the IHC Agreement in June 2010.[9] The IHC Agreement allowed Managed Care to give insurance companies (and patients insured by those companies) access to IHC services if Managed Care contractually obligated the insurance companies to pay certain rates listed in the IHC Agreement (“PPO” rates).[10] Managed Care never contracted with American Liberty to provide American Liberty insureds access to the IHC facilities or to pay the rates in the IHC Agreement.

         The Claims Service Agreement between Risk Management and American Liberty became effective in May 2011, and obligated Risk Management to perform claims handling services on American Liberty's behalf in exchange for compensation.[11] Risk Management was to use American Liberty funds to pay for claims.[12] Managed Care was not a party to this agreement but was designated in the agreement to perform functions.

         While the Claims Service Agreement was in effect, American Liberty insureds received treatment at IHC facilities.[13] As outlined in the Claims Service Agreement, Risk Management forwarded the insureds' claims from IHC above $2500 (later $1500) to FairPay Solutions (“FairPay”) and the rest of the claims to Managed Care.[14] After FairPay adjusted the claims over $2500 (later $1500), it would tell Managed Care the amount it should pay to IHC in accordance with FairPay's schedule, not according to the rates in the IHC Agreement.[15] Managed Care would then “cut a check” to IHC.[16] For the other claims, below $2500 (later $1500), Managed Care not only made the check to IHC but also adjusted the claim.[17]

         Because IHC believed it was being underpaid for American Liberty claims that were adjusted by FairPay, IHC filed an arbitration action against Managed Care for breach of the IHC Agreement.[18] The arbitrator agreed with IHC and entered an award in IHC's favor.[19] The award requires Managed Care to pay IHC the difference between the claims as adjusted by FairPay (established under the Claims Service Agreement) and the claims as billed by IHC, applying the PPO reduction allowed in the IHC Agreement between Managed Care and IHC.[20] Because the IHC Agreement PPO rates are higher than the payments authorized by FairPay, IHC was awarded the difference.[21] Now, Tristar is seeking to recover the arbitration award from American Liberty.

         SUMMARY JUDGMENT STANDARD

         American Liberty is entitled to summary judgment if it “shows that there is no genuine dispute as to any material fact” and “is entitled to judgment as a matter of law.”[22] A dispute about a material fact is genuine “if the evidence is such that a reasonable jury could return a verdict for [Tristar].”[23] American Liberty satisfies its “initial burden of demonstrating an absence of a genuine issue of material fact” when it “indicat[es] to the court a lack of evidence for [Tristar] on an essential element of [Tristar's] claim.”[24] “Once [American Liberty] has done so, ‘the burden shifts to [Tristar] to go beyond the pleadings and set forth specific facts showing that there is a genuine issue for trial.'”[25] In determining whether there is a genuine dispute as to material fact, the court should “view the factual record and draw all reasonable inferences therefrom most favorably to [Tristar].”[26]

         UNDISPUTED MATERIAL FACTS[27]

         1. On June 1, 2010, IHC and Managed Care entered into the IHC Agreement.[28]

         2. The IHC Agreement contained a payment schedule.[29]

         3. American Liberty is not a party to the IHC Agreement.[30]

         4. In May 2011, American Liberty and Risk Management entered into the Claims Service Agreement [dealing with workers compensation claims].[31]

         5. Prior to entering into the Claims Service Agreement, American Liberty received from Risk Management a proposal concerning workers' compensation claims services (“Proposal”).[32]

         6. The Proposal contains five pages that discuss services to be provided by Managed Care.[33]

         7. Managed Care is not a party to the Claims Service Agreement.[34]

         8. The Claims Service Agreement does not refer to the IHC Agreement.[35]

         9. The Claims Service Agreement does not contain the payment schedule found in Attachment A of the IHC Agreement.[36]

         10. The Claims Service Agreement mentions Managed Care only once. Exhibit A to the Agreement states: “Pricing assumes TRISTAR Managed Care will direct all managed care as mutually agreed upon and as outlined in the Client Service Instructions.”[37]

         11. The Client Service Instructions list the services being provided to American Liberty as “Workers' Compensation Third Party Claims Administration and TRISTAR Managed Care Services.”[38]

         12. Under the Claims Service Agreement, FairPay-not Risk Management-would adjust medical bills above a threshold amount.[39]

         13. At all times when the Claims Service Agreement was in effect, Risk Management received American Liberty claims from IHC. Risk Management would forward any claims greater than $2500 (later greater than $1500) to FairPay for handling. Remaining claims were forwarded to Managed Care for review. For claims sent to Managed Care for review, Managed Care would cut checks on behalf of American Liberty to IHC that applied the PPO discount negotiated by Managed Care with a notation on the check that the Managed Care PPO rate was being applied. For claims sent to FairPay for handling, FairPay would review the claims and then instruct Managed Care the amount to pay on the claim. Managed Care would then “cut a check” on behalf of American Liberty to IHC in the amount instructed by FairPay and with a notation that the FairPay PPO rate was being applied.[40]

         14. American Liberty would not have received a PPO rate reduction from IHC on claims handled by Risk Management and Managed Care but for the agreement Managed Care had with IHC.[41]

         15. The Claims Service Agreement provides that “at no time will [Risk Management] be obligated to make any payments of Claims and Allocated Loss Adjustment Expenses out of [Risk Management] funds.”[42]

         16. The Claims Service Agreement does not obligate American Liberty to pay any particular rate for IHC services.[43]

         17. Tristar never alleges that American Liberty entered into a contract with Managed Care that requires American Liberty to pay any particular rate for IHC services.[44]

         18. An arbitrator has entered an award against Managed Care requiring Managed Care to pay the difference between American Liberty's claims as adjusted by FairPay and American Liberty's claims as billed by IHC, applying the PPO reduction allowed in the agreement between Managed Care and IHC.[45]

         19. Managed Care does not allege that it has made any payments to IHC.[46]

         20. Managed Care is now seeking to recover from Risk Management the amount awarded by the arbitrator.[47]

         ANALYSIS

         American Liberty seeks summary judgment on all of Tristar's claims.[48] The claims are: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) unjust enrichment; and (4) equitable indemnification.[49] Each claim will be discussed below. As the following explains in detail, American Liberty's Motion is GRANTED on all claims.

         1. American Liberty Did Not Breach The Claims Service Agreement With Risk Management.

         Tristar asserts that the Claims Service Agreement is a “binding and enforceable agreement” between American Liberty and Risk Management and that Managed Care is a third party beneficiary of that agreement.[50] Tristar then alleges American Liberty materially breached the Claims Service Agreement by:[51] 1) “[r]efusing to respond to [Risk Management] and [Managed Care's] requests that [American Liberty] pay amounts owed to IHC under the IHC Agreement;”[52] 2)” allowing [Risk Management] to be placed in a situation where [Risk Management] is required to pay claim-related costs out of its own funds;”[53] and 3) “failing to indemnify and hold harmless [Risk Management] and [Managed Care] for [American Liberty]'s negligence and willful misconduct.[54]” Neither party disputes that the Claims Service Agreement is a binding agreement between American Liberty and Risk Management.[55] Their dispute focuses on whether American Liberty breached its obligations under Claims Service Agreement.

         In Utah, “[a] breach of express contract claim arises out of the express terms of the contract, and the breach [must be] proven in relation to those terms.”[56] “When interpreting a contract, a court first looks to the contract's four corners to determine the parties' intentions, which are controlling.”[57] “If the language within the four corners of the contract is unambiguous . . . a court determines the parties' intentions from the plain meaning of the contractual language as a matter of law.”[58] In the following discussion, Managed Care's purported status as a third party beneficiary of the Claims Service Agreement will be addressed first, followed by the individual allegations that American Liberty acted in a way that breached the Claims Service Agreement.

         A. Managed Care is not a third party beneficiary of the Claims Service Agreement and cannot assert a claim of breach of contract.

         Because the Complaint contains both contractual and quasi-contractual causes of action, Managed Care's status as a third party beneficiary of the Claims Service Agreement must be resolved to determine if Managed Care may appropriately make claims against American Liberty. American Liberty's Motion argues that Managed Care is not a third party beneficiary of the Claims Service Agreement and has no right assert a breach of contract claim.[59] Tristar offers no response.[60]

         Under Utah law, “[t]he benefits conferred by contracts are presumed to flow exclusively to the parties who sign the contracts.”[61] “[A] third party has standing to sue if it is an intended, and not merely an incidental, beneficiary.”[62] “[T]hird party beneficiary status is determined by the examining a written contract.”[63] That written contract “must show that the contracting parties clearly intended to confer a separate and distinct benefit upon the third party.”[64] “Indeed, it is not enough that the parties to the contract know, expect or even intend that others will benefit from the contract.”[65] “[T]he contract must be undertaken for the plaintiff's direct benefit and the contract itself must affirmatively make this intention clear.”[66] Only when there is clear intent in the contract “to confer rights upon a third party” is that party able to “enforce rights and obligations of the contract.”[67] Absent this clear intent, “a third party who benefits only incidentally from the performance of a contract has no right to recover under that contract.”[68]

         It is undisputed that Managed Care is not a party to the Claims Service Agreement[69] and also that American Liberty is not a party to the IHC agreement.[70] The Claims Service Agreement does not incorporate or reference the Payment Schedule (with its PPO rate provision) attached as Exhibit A to the IHC agreement.[71] The Claims Service Agreement does not obligate American Liberty to pay any particular rate for IHC services.[72] The Claims Service Agreement mentions Managed Care only once in an exhibit: “Pricing assumes TRISTAR Managed Care will direct all managed care as mutually agreed upon and as outlined in the Client Service Instructions.”[73] The portion of the separate unsigned Client Service Instructions referring to Managed Care describes its services as “Workers' Compensation Third Party Claims Administration and TRISTAR Managed Care Services.”[74]

         On the undisputed facts, Managed Care is only an incidental beneficiary of the agreement between Risk Management and American Liberty. Although the references to Managed Care in the Claims Service Agreement certainly might have caused American Liberty and Risk Management to know or expect Managed Care would benefit from the contract, these references do not make it affirmatively clear that the Claims Service Agreement was undertaken for Managed Care's direct benefit. In particular, without any reference in the Claims Service Agreement to the IHC Agreement or to the fact that Managed Care would be providing client services under the Claims Service Agreement subject to its contractual obligations to IHC, nothing in the Claims Service Agreement enables Managed Care to make a claim against American Liberty under the IHC Agreement.[75]

         At most, the single reference to Managed Care in the Claims Service Agreement and the single reference in the Client Service Instructions demonstrate that Managed Care, as a nonparty to the Claims Service Agreement, incidentally benefits from the agreement as it one of two designated entities that was to provide claims handling services.[76] Because Managed Care is not an intended third party beneficiary that may assert rights under the Claims Service Agreement, Managed Care may not obtain reimbursement for the arbitration award through the breach of contract claim or the associated breach of the implied covenant of good faith and fair dealing claim.

         B. Because American Liberty is a not a party to the IHC Agreement, it is not obligated to pay amounts purportedly owed to IHC.

         Risk Management's first allegation of contractual breach is that American Liberty materially breached the Claims Service Agreement by “refusing to respond to Risk Management and Managed Care's requests that American Liberty pay amounts owed to IHC under the IHC Agreement.”[77] American Liberty argues that no language in the Claims Service Agreement “requires American Liberty to pay the rates listed in the IHC Agreement[, ]”[78] nor is there any “separate contract with American Liberty that requires American Liberty to pay the rates contained in the IHC Agreement.”[79]

         American Liberty's arguments are supported by the undisputed facts. As outlined earlier, the Claims Service Agreement does not obligate American Liberty to pay any particular rate for IHC services.[80] American Liberty is not a party to the IHC agreement which obligates Managed Care to arrange payment at the PPO rates, [81] and the Complaint does not allege that American Liberty entered into a contract with Managed Care that requires American Liberty to pay the PPO rate for IHC services.[82] No enforceable language in the Claims Service Agreement binds American Liberty to pay the rates specified in the IHC agreement.

         Tristar, through Managed Care, could have executed such an instrument with American Liberty. In fact, the express language of the IHC Agreement mandates that Managed Care do so. By the IHC Agreement, Managed Care is obligated to “obtain and maintain … a valid enforceable agreement with each Purchaser that obligates such Purchaser to comply with the applicable terms and condition of this agreement.”[83] “Purchaser” is defined in the IHC Agreement as “an employer group which pays a premium or service fee, or whose funds are used to pay health care providers for Covered Services under the Worker's Compensation Medical Benefits.”[84] Later in the IHC Agreement, Managed Care indicated that it “understands and agrees that it is responsible, and [Managed Care] will obligate Purchasers under agreement with [Managed Care] to be responsible for claims administration and for all payments to [IHC] Facilities, for all Covered Services rendered to Employees under this Agreement.”[85] Managed Care also agreed “that payments for Covered Services to [IHC] Facilities will be made in accordance with the payment schedules in Attachment A, ‘INTERMOUNTAIN Facilities and Payment Schedule' . . . .”[86]

         Managed Care was clearly obligated to enter into agreements with insurance providers to abide by the terms of the IHC Agreement when the providers' policy holders received treatment at IHC facilities and the providers paid for that treatment. Yet Plaintiffs do not allege that American Liberty entered into a contract with Managed Care that required American Liberty to pay any particular rate for IHC services.[87] In the absence of such a separate agreement-that Managed Care was required by the IHC Agreement to obtain-or the inclusion of language in the Claims Service Agreement reflecting Managed Care's obligations to IHC, American Liberty is not bound by the terms of the IHC Agreement. Therefore American Liberty's refusal of Tristar's request to pay amounts that Tristar claims are owed to IHC is not a breach of the Claims Service Agreement.

         C. American Liberty did not breach Article 5.5 of the Claims Service Agreement.

         Risk Management's next allegation of contractual breach is that American Liberty materially breached the Claims Service Agreement because it “[a]llow[ed] [Risk Management] to be placed in a situation where [Risk Management] [was] required to pay claim related costs out of its funds.”[88] Tristar clarifies in the Opposition that this conduct breached Article 5.5 of the Claims Service Agreement, in which “American Liberty acknowledges that at no time will [Risk Management] be obligated to make any payments of Claims and Allocated Loss Adjustment Expenses out of [Risk Management] funds.”[89] Risk Management treats the arbitration award against Managed Care as a claims payment that is “now be[ing] put upon Risk Management.”[90]American Liberty argues that it did not breach this provision because Tristar did not allege that American Liberty “asked Risk Management to use its funds to make claim payments to IHC”[91]or that “Risk Management is obligated to make claims payments out of its funds.”[92]

         As noted at the outset of this section, “[a] breach of express contract claim arises out of the express terms of the contract, and the breach [must be] proven in relation to those terms.”[93]The express language contained in other subsections within Article 5 provide additional context for the acknowledgement in Article 5.5. Article 5.4 provides that “[Risk Management][94] shall make payment of claims and Allocated Loss Adjustment Expenses from a claims payment account funded by American Liberty . . . .”[95] Article 5.1 describes how the claims payment account is funded and the purpose of the account itself:

[Risk Management] shall have the authority to draw upon a bank account which shall be established and funded by American Liberty for the purpose of making payments on claim files. It is the responsibility of American Liberty to have sufficient funding available in the account to allow [Risk Management] to be able to make all payments in a timely manner and as required by law.[96]

         Under the express terms of the Claims Service Agreement, American Liberty was obligated to supply sufficient funding for a claims payment account that Risk Management would draw from as it made timely payments on the claims it handled. American Liberty would breach that obligation if it failed to provide sufficient funding to the claims payment account and caused Risk Management to pay for the claims it handled out of its own funds. Notably, Tristar does not allege or offer evidence that the claims payment account was insufficiently funded. Instead, Plaintiffs seek to contort this section of the Claims Service Agreement into a requirement that American Liberty pay for Managed Care's failure to adhere to its obligations to IHC. But Managed Care is not a party to, or intended beneficiary of, the Claims Service Agreement. The allegation that American Liberty breached Article 5.5 has no evidentiary support.

         D. American Liberty did not breach Article 9.2 of the Claims Service Agreement.

         Risk Management's other allegation of breach of contract is that American Liberty breached the Claims Service Agreement by “[f]ailing to indemnify and hold harmless [Risk Management] and [Managed Care] for American Liberty's negligence and willful misconduct.”[97] The requirement for American Liberty to indemnify and hold harmless Risk Management and its agents is found in Article 9.2 of the Claims Service Agreement:

American Liberty agrees to defend and hold harmless [Risk Management], their officers, agents and employees, from and against any and all liability, loss, damage or expense, including extra contractual and punitive damages and attorney's fees, incurred in connection with claims or demands for damages arising out of the services provided under this Agreement, when such claims or demands arise from or are caused by the sole negligence or willful misconduct of American Liberty.[98]

         Managed Care was Risk Management's agent.

         Risk Management argues that, by providing services under the Claims Service Agreement, Managed Care was acting on behalf of Risk Management as Risk Management's agent and thus entitled to indemnity. Risk Management argues that American Liberty's underpayment of IHC claims was negligent and willful and was the direct cause of the damages incurred through the arbitration award.[99]For Managed Care to be an agent of Risk Management for potential indemnification under Article 9.2, “three elements must exist: (1) the principal must manifest its intent that the agent act on its behalf, (2) the agent must consent to so act, and (3) both parties must understand that the agent is subject to the principal's control.”[100] An exhibit to the Claims Service Agreement between American Liberty and Risk Management states that the pricing of fees or cost of services “assumes TRISTAR Managed Care will direct all managed care as mutually agreed upon and as outlined in the Client Service Instructions.”[101] The separate unsigned Client Service Instructions show that the provided services included “TRISTAR Managed Care Services.” When Risk Management received American Liberty Claims from IHC, it would forward claims less than $2500 (later $1500) to Managed Care for handling.[102] These facts satisfy the elements of an agency relationship: (1) Risk Management manifested its intent that Managed Care act on its behalf; (2) Managed Care consented to do so; and (3) both Risk Management and Managed Care understood that Managed Care was subject to Risk Management's control.

         American Liberty did not engage in conduct entitling Risk ...


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