The opinion of the court was delivered by: WALLS
This matter comes before the Court upon defendants' motion to dismiss counts three, six, seven, eight, nine and ten of plaintiffs' complaint. For the reasons that follow, defendants' motion is granted as to counts six, seven, eight, nine and ten. Defendant U.S. Life's motion to dismiss count three is also granted. As to all other defendants, the motion to dismiss count three is denied.
This action has been brought by Lisa Yourman on behalf of herself and her infant children Sarah and Jeffrey Yourman, and involves the offer and issuance of an insurance policy. That policy was issued by Durham Life Insurance Company (hereinafter "Durham"), represented here by defendant People's Security Life Insurance Company ("People's Security" or "People's") which became successor in interest to Durham when the two companies merged in September 1994. Defendant Group Administration Agency, Inc. ("Group Administration") processed and administered the policy, and defendant The United States Life Insurance Company in the City of New York ("U.S. Life") is present in this action because plaintiff alleges that as of November 1, 1993, U.S. Life assumed the policy from Durham subject to all of Durham's obligations.
This action was commenced in state court and removed by defendant People's Security pursuant to 28 U.S.C. § 1441. Plaintiffs are all residents of the State of New Jersey. Defendant People's Security is a North Carolina corporation with its principal place of business in Durham. Defendant Group Administration is an Illinois corporation, and defendant U.S. Life is a New York Corporation. Because the amount in controversy exceeds $ 75,000.00, the court has diversity jurisdiction over this matter under 28 U.S.C. § 1332.
This action arose from Durham's advertisement and later sale of an insurance policy of excess major medical insurance to Lisa Yourman in 1992. Offered through Hadassah, the Women's Zionist Organization of America, the policy was available, upon application, to Hadassah members, their spouses and dependant children. Under the terms of the policy, Durham would provide up to one million dollars of excess medical benefits following exhaustion of the policy deductible. Enrollees were offered a choice of two deductibles: $ 25,000 and $ 50,000.
Both Lisa Yourman and her infant child Sarah were members of Hadassah. In May 1992, Lisa Yourman submitted an enrollment application to Group Administration which listed Sarah as the primary insured. Later that month, Group Administration responded by letter that it would not forward the application to Durham because, as a minor, Sarah Yourman could only be insured as a dependant. The letter instructed Lisa Yourman to send a new application listing herself as the primary insured and Sarah Yourman as a dependant child. The complaint alleges that in a subsequent conversation with Group Administration, plaintiff revealed that Sarah Yourman suffered from cystic fibrosis.
In August 1992, plaintiff submitted another application which listed herself as the primary insured and Sarah as a dependant child. Upon receipt of this application, Group Administration advised plaintiff of a provision in the plan which states:
If the insured or covered dependant was totally disabled on the effective date, the effective date is deferred until such person is no longer totally disabled. "Totally disabled" means the inability of such person to engage in his gainful occupation, or, if such person except for such disability, is not regularly engaged in a gainful occupation, then the inability of such person to perform the normal duties of a person of like age and sex.
At Group Administration's direction, Lisa Yourman submitted a third enrollment form on November 2, 1992, again listing herself as the primary insured and Sarah Yourman as a dependant child. This application was accompanied by a doctor's letter which stated that Sarah Yourman suffered from a "mild form of cystic fibrosis," was, at present, "asymptomatic," and "leads the full, active and normal life of any 2 year old girl." Group Administration also received additional correspondence from another doctor which stated that despite her disease, "Sarah is able to function as a normal 2 year old and is able to participate in all age appropriate activities including normal play activities and normal school activities." Notwithstanding these letters, Durham continued, through December 1992, to refuse to issue a policy to Lisa Yourman and Sarah Yourman on the grounds that Sarah Yourman was "totally disabled" under the terms of the plan.
Plaintiff had numerous telephone conversations with representatives of both Durham and Group Administration in December 1992. In January 1993, Durham agreed to issue coverage on the condition that plaintiff accept a $ 50,000 deductible proviso. The company represented that its underwriting guidelines prevented it from issuing a policy with the $ 25,000 deductible. Plaintiff accepted Durham's terms but requested that the company honor the August or November enrollment forms. Durham agreed to do so upon plaintiff's submission of an original enrollment form dated November 2, 1992. As a result, coverage became effective as of December 1, 1992.
During the course of her negotiations with the defendants, Lisa Yourman had given birth to Jeffrey Yourman on December 21, 1992. Within three days of his birth, Jeffrey Yourman exhibited symptoms of cystic fibrosis. Plaintiff did not inform Group Administration of Jeffrey's birth until January 15, 1993, but because the policy had been deemed effective as of December 1, 1992, Jeffrey Yourman became automatically covered as a dependant child upon his birth.
According to the complaint, Lisa Yourman has submitted claims totaling $ 30,226.81 to Durham and U.S. Life (which plaintiffs contend assumed ownership, as of November 1, 1993, of all policies underwritten by Durham in the state of New Jersey) on behalf of Jeffrey Yourman beginning shortly after his birth. Plaintiffs allege that because Sarah Yourman's medical expenses have never exceeded $ 50,000 during a relevant policy period, Lisa Yourman has never submitted a claim on Sarah Yourman's behalf. Plaintiffs complain that if the policy had been issued with the $ 25,000 deductible, a significant portion of Sarah Yourman's medical expenses would have been reimbursable and a more significant portion of Jeffrey Yourman's expenses would have been recovered.
In December 1995, plaintiffs filed a complaint with the New Jersey Department of Banking and Insurance questioning whether Durham's decision to issue coverage for Sarah Yourman only on the condition that plaintiffs accept a $ 50,000 deductible was consistent with Durham's internal underwriting guidelines. The department began an investigation of the matter and in its initial correspondence with People's Security-- the successor in interest to Durham-- the department investigator indicated his opinion that the plan at issue was a "guaranteed-issue" policy, and that as such, it entitled Lisa and Sarah Yourman to unconditional enrollment.
People's responded that it had exercised its rightful discretion in its handling of Lisa and Sarah Yourman's application. People's also claimed that it found plaintiff's behavior with regard to Jeffrey Yourman's enrollment "questionable." The letter stated that if the department would agree to abandon its investigation, People's Security would not seek reimbursement from plaintiffs for claims paid on behalf of Jeffrey Yourman, and would not pursue an action against Lisa Yourman with the Division of Insurance Fraud Prevention for misrepresentations on an application for health insurance.
A federal court sitting in diversity is obliged to apply state substantive law as decided by the highest court of the state whose law governs the action. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938); Commercial Union Co. v. Bituminous Cas. Corp., 851 F.2d 98, 100 (3d Cir. 1988).
I. Plaintiffs' Consumer Fraud Act Claim
Count three of the complaint asserts that Group Administration and People's, as successor to Durham, violated the New Jersey Consumer Fraud Act, ("CFA"). N.J.S.A. 56:8-1, et seq., by advertising the Hadassah Plan as a guaranteed-issue policy and then refusing to insure Sarah and Jeffrey Yourman at the $ 25,000 deductible rate. Defendants seek dismissal of this claim on the grounds that the CFA does not apply to the insurance industry. Because the Court finds that the CFA does apply to the sale and marketing of insurance policies, defendant's motion is denied.
The CFA is a broad consumer protection measure enacted to "eliminate sharp practices and dealings in the marketing of merchandise and real estate." Channel Cos. v. Britton, 167 N.J. Super. 417, 418, 400 A.2d 1221 (App. Div. 1979). As such, it prohibits
the act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing  concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance of such person as aforesaid, whether or not any person has in fact been mislead, deceived or damaged thereby. . . .
The statute defines "merchandise" to be "any objects, wares, goods, commodities, services or anything offered, directly or indirectly to the public for sale." N.J.S.A. 56:8-1(c). "Advertisement" is
the attempt directly or indirectly by publication. . . solicitation. . . or circulation or in any other way to induce directly or indirectly any person to enter into any obligation or acquire any title or interest in any merchandise or to increase the consumption thereof. . . .
Despite these broad definitions and the clear legislative intent that the CFA be applied broadly to root out consumer fraud, see, e.g., Barry v. Andrew Pontiac, 100 N.J. 57, 69, 494 A.2d 804 (1985), at the time the parties filed their papers on this motion, there had been no clear statement from the New Jersey Supreme Court on whether the statute would apply to the fraudulent marketing of insurance policies. See Rodio v. Smith, 123 N.J. 345, 587 A.2d 621 (1991) (explicitly declining to rule on whether the statute applied to the insurance industry.) Guidance from the lower courts was similarly limited. For example, in Pierzga v. Ohio Cas. Group of Ins. Cos., 208 N.J. Super. 40, 504 A.2d 1200 (App. Div. 1986), cert. denied, 104 N.J. 399, 517 A.2d 402 (1986), the Appellate Division declined to apply the CFA to an insurance company's refusal to pay a claim under a policy it had issued, but the opinion in that case is both too broad and too narrow to be of substantial value to the situation at bar. On one hand, the Pierzga court explicitly refused to allow a cause of action under the CFA, noting that "the Legislature has [already] provided an administrative remedy under the Insurance Trade Practices Act, ("ITPA"), N.J.S.A. 17:29B-1 et seq., for unfair claims settlement practices." 208 N.J. Super. at 45. The court reasoned that application of the CFA was inappropriate because to permit a second avenue of regulation "could result in conflicting rulings." Id. at 47; Cf. Daaleman v. Elizabethtown Gas Co., 77 N.J. 267, 272, 390 A.2d 566 (1978) (New Jersey Supreme Court, under same reasoning, refused to apply the CFA to the rate setting of utility company). But on the other hand, the Pierzga court also explicitly noted that the facts of that case did "not involve a case of a consumer being victimized by unscrupulous or fraudulent marketing practices." Id.
Not surprisingly, defendants' papers selectively focus on the former point, noting that the Insurance Trade Practices Act
, ("ITPA"), N.J.S.A. 17B:30-1 et seq., which contains provisions specifically prohibiting misrepresentations in advertisements of insurance policies, should preclude the application of the more general CFA. According to defendants, jurisdiction over plaintiffs' fraud claim lies solely in the hands of the Commissioner of Banking and Insurance. In response, plaintiffs have, of course, seized the limiting language of Pierzga, and strive to distinguish that case factually. In the absence of any ...