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Beverly Clark, Jesse J. Paul v. the Prudential Insurance Company of America

March 15, 2011


The opinion of the court was delivered by: Debevoise, Senior District Judge



This case concerns allegations of deception and bad faith conduct by a health insurance company. Plaintiffs Beverly Clark, Jesse J. Paul, Warren Gold, and Linda M. Cusanelli have filed a putative class action complaint against The Prudential Insurance Company of America ("Prudential") alleging that Prudential concealed a fatal actuarial defect in their health insurance plans. Prudential now moves to: (1) dismiss all non-disclosure claims arising under California law based on the recent Levine v. Blue Shield of California ("Levine") decision and (2) strike all class action allegations made on behalf of New York, Ohio, or Texas plaintiffs as barred by the filed-rate doctrine. For the reasons set forth below, Prudential's motion to strike will be GRANTED with respect to the New York claims only. Prudential's motion is otherwise DENIED.


A. Procedural History

In the original Complaint, filed December 17, 2008, the two original plaintiffs, Clark and Paul, asserted three causes of action for: (1) violation of the New Jersey Consumer Fraud Act, N.J. Stat. Ann. 56:8-1 et. seq, ("NJCFA"); (2) breach of fiduciary duty; and (3) breach of the duty of good faith and fair dealing. The substance of Plaintiffs' claims is set forth more fully below, but in essence, Plaintiffs complain that Prudential took actions to render Plaintiffs' health insurance plans actuarially unsustainable. Plaintiffs allege that Prudential then deceived Plaintiffs about the inevitable collapse of their health plans over the course of several years. Because of this deception, Plaintiffs paid above-marked premiums and neglected to secure sustainable lower-cost insurance during a time period when it was available to them.

Prudential moved to dismiss the individual plaintiffs' claims. In an Opinion and Order dated September 14, 2009, the Court granted the motion in part, dismissing all claims except for Clark's claim for breach of the implied covenant of good faith and fair dealing.*fn1 Clark v. Prudential Ins. Co. of Am., Civ. No. 08-6197, 2009 U.S. Dist. LEXIS 84093 (D.N.J. Sept. 14, 2009) (Doc No. 40) ("2009 Op.").

Specifically, the September 2009 Opinion applied New Jersey's choice of law analysis to determine that Clark and Paul's home states at the time they purchased their CHIP policies- California and Indiana, respectively-had the greatest interest in having their laws applied to the consumer fraud, breach of fiduciary duty, and breach of good faith and fair dealing claims. Id. at *47. This Court found that under Indiana law, each of Paul's claims were barred by the applicable statute of limitations. The Court dismissed Clark's consumer fraud claim with leave to re-plead under the appropriate California law; dismissed Clark's breach of fiduciary duty claim for failure to allege that the relationship between Clark and Prudential involved a fiduciary duty under California law; and found that Clark's claim for breach of the duty of good faith and fair dealing stated a claim under California law. Id.

Subsequently, on October 30, 2009, Clark filed an Amended Complaint, asserting claims for unfair competition and breach of the duty of good faith and fair dealing against Prudential under California law. Thereafter, the parties stipulated that Clark and Paul would file a Second Amended Complaint asserting additional claims for common law fraudulent misrepresentation and fraudulent omission. The Second Amended Complaint ("SAC") was filed on November 12, 2009. It was shortly followed by a motion to dismiss from Prudential on December 3, 2009. After that motion was partially briefed, the parties stipulated that the Plaintiffs could file a Third Amended Complaint ("TAC"), adding Litwack as a new plaintiff. The parties agreed that the Court would address, during a single motion hearing, the issues raised in both the motion to dismiss the SAC and the motion to dismiss the TAC.

In an opinion dated September 9, 2010, this Court dismissed Litwack's claims with prejudice as barred by the filed rate doctrine as applied under New Jersey law. The September 9, 2010 opinion also dismissed Clark's requests for injunctive relief and treble damages under the UCL, and dismissed Paul's claim that the renewal provision of the CHIP policy contained a misrepresentation. This Court denied Defendant's motion to dismiss all California causes of action for fraudulent omission, unfair competition, and good faith and fair dealing.

On November 5, 2010, the California Court of Appeals rendered a decision in the Levine v. Blue Shield of California case.*fn2 In that decision, the court held that Blue Shield did not owe a duty to disclose to a customer how he or she could restructure his or her health insurance plan as to lower his or her health care premium. The case also dismissed a cause of action under the California Unfair Competition Law ("UCL") for failure to allege a business act that was "either fraudulent, unlawful, or unfair." Id. at 1136.

On November 9, 2010, Plaintiffs filed a Fourth Amended Class Action Complaint ("4AC"). On December 16, 2010, Prudential filed the instant motion to dismiss/strike portions of the 4AC, arguing inter alia that the Levine decision mandated dismissal of the California causes of action and that the New York, Ohio, and Texas class claims were untenable under the filed rate doctrine. Before this motion could be argued, Plaintiffs and Prudential entered into a stipulation under which Plaintiffs would file a Fifth Amended Class Action Complaint ("5AC"). This 5AC added claims by Plaintiffs Carole L. Walcher and Tern L. Drogell. The Parties agreed in their stipulation that this Court's ruling on the instant motion would apply with the same force to the allegations of the 5AC, and that the instant motion would also be considered a motion to dismiss Plaintiff Drogell's claims as barred by the filed rate doctrine.

B. Allegations of the Complaint

The 4AC alleges four claims for relief: (1) fraudulent misrepresentation, on behalf of a Multi-State Fraud Class; (2) fraudulent omissions, on behalf of a Multi-State Fraud Class; (3) breach of the duty of good faith and fair dealing, on behalf of a California Subclass; and (4) violation of California's Unfair Competition Law (UCL), Cal. Bus. & Prof. Code § 17200, et seq., on behalf of a California Subclass.

The following are the allegations of the 4AC, which are, for the purpose of this motion only, accepted as true and construed in the light most favorable to the Plaintiffs. Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008).


Prudential is, and at all relevant times was, a corporation organized and existing under the laws of the State of New Jersey with its principal place of business in Newark, New Jersey. (4AC ¶ 16.) Prior to 2001, Prudential was a mutual life insurance company. Id. ¶ 17.

Prudential sold an individual health policy, known as the Comprehensive Health Insurance Policy ("CHIP"), to individuals throughout the United States from 1973 through 1981. Id. ¶ 1. CHIP is a major medical insurance policy designed to provide policyholders with coverage for medical expenses, including high or unexpected medical expenses. Id. ¶ 2. The risk of high medical expenses is managed by Prudential through the creation of a risk pool, where a large group shares the risk that certain policyholders will generate higher than expected claims. Id. Large premium increases are generally not necessary in a functioning risk pool because the premiums of healthy low-cost members subsidize the higher costs of less-healthy members. Id.

Prudential developed, marketed, and sold CHIP in the District of Columbia and all 50 states of the United States. Id. ¶ 20.

The CHIP stated the following regarding continuation or termination of the policy:

You may continue this Policy in force for successive premium periods of one month each by payment of the premiums as specified in the following paragraphs. However, Prudential may refuse to continue this Policy as of any Policy Date anniversary, but only if Prudential is then refusing to continue all policies with the same provisions and premium rate basis in the jurisdiction where you reside. If Prudential takes this action you will be notified not less than 31 days before the Policy Date anniversary.

Id. ¶ 21.

ii.Prudential "Closes the Block"

In 1981, Prudential ceased selling CHIP to new policyholders (it "closed the block"). Id.

¶ 1. The block closure prevented new policyholders from entering into the CHIP risk pool. Id. ¶ 3. New policyholders are generally healthier, and their premiums subsidize the premiums of less-healthy policyholders, who have higher rates of claims. Id. It is alleged that Prudential knew that closing the CHIP block would lead to an "anti-selection crisis" where healthy policyholders who could secure coverage elsewhere terminated their CHIP. Id. With CHIP closed to new entrants, and an insufficient percentage of healthy policyholders remaining to subsidize the costs of unhealthy policyholders, Prudential knew that the result would be what is colorfully termed a "death spiral." Id. In a death spiral, repeated cycles of higher premiums and a continually shrinking number of healthy policyholders cause premiums to eventually become so high that they force all policyholders to drop their policies. Id.

Prudential knew at the time it closed the block that the design features of the CHIP policy made a death spiral inevitable after the block was closed. Id. ¶ 4. For example, the CHIP policy lacked inside limits on specific policy benefits, which allowed very ill policyholders to incur massive claims. Id. ¶ 26. A lack of inside limits accentuates the dynamics of a death spiral. Id. Although Prudential knew that massive increases in premiums in the future were inevitable because it had closed the block, it concealed these facts from policyholders. Id. ¶ 4. While policyholders were informed when premiums increased, they had no reason to know that the premium increases were a result of closing the block. Id. ¶ 5. Prudential also failed to disclose that, by the time the inevitable massive increases in the premiums forced them to drop their policies, the policyholders might be unable to secure comparable coverage for medical conditions that they developed later. Id. ¶ 6. Because this information was not disclosed, policyholders continued to renew their CHIP policies rather than look for alternative health insurance coverage. Id. ¶ 29.

Plaintiffs further allege that policyholders expected that they would not be forced to obtain alternative health insurance because Prudential limited its right to discontinue the CHIP policy. Id. ¶ 8. The CHIP policy states that policyholders "may continue this Policy in force . . . by payment of premiums," and that Prudential retained the right to discontinue the policy "only if Prudential is then refusing to continue all policies with the same provisions and premium rate basis in the jurisdiction where [the policyholder] reside[s]." Id.

At the time Paul purchased his CHIP policy in 1980, Prudential made written representations that, The premiums for your plan depend on the current costs of medical care and treatment. We continually review these costs and make adjustments in the premiums you pay so that they are kept current for the ages of those insured under your plan and the area in which you live. Medical care costs have been rising in recent years also. There is also a tendency for individual costs to increase with age. As a result, you may expect that there will be an increase in your premium each year on the anniversary date of ...

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