Settlement of a Lengthy Lawsuit Changed the Meaning of a Long Term Care Policy
More than ten years ago policyholders sued Continental Casualty Company (CNA) over its interpretation of certain long-term care policies. A settlement resulted in CNA agreeing to, among other things, offer a new, alternative benefit to policyholders. In Kathleen O’Keeffe v. Continental Casualty Company, No. 20-3014, United States Court Of Appeals For The Sixth Circuit (August 27, 2020) challenged the parameters of that alternative benefit.
Prior to her death, Vivian O’Connell was insured under a long-term care policy issued by CNA. The policy defrayed the cost of a policyholder’s medical needs later in life by paying a daily “Long-Term Care Facility Benefit” (LTCF Benefit) for a “benefit period” chosen by the policyholder (in this case, six years). In addition to the benefit period limitation, the LTCF Benefit was also subject to a daily reimbursement limit (in this case, $60 per day). Further, the LTCF Benefit could be utilized only at facilities meeting strict qualifications.
In 2009, CNA policyholders initiated a class action challenging CNA’s standard for determining which long-term facilities qualify for LTCF Benefit coverage. Pavlov v. Cont’l Cas. Co., No. 5:07CV02580, 2009 WL 10689011 (N.D. Ohio Oct. 7, 2009). The case settled. As part of the settlement, CNA agreed that a facility would so qualify if it had a nurse on-site for five hours a day, seven days a week. For policyholders in facilities that did not meet even that lower bar, the settlement agreement offered a second option, the “Alternative Plan of Care (‘APC’). For policyholders utilizing non-qualifying facilities, the settlement APC benefit would pay the policyholder the greater of 25% of the daily LTCF Benefit limit or the actual daily cost of the facility, capped by the lesser of the daily LTCF Benefit limit or the actual daily cost of the facility.
The Pavlov Agreement contained a clause asserting that a breach of its provisions would be a breach of contract, not a violation of a court order. A second clause stated that the “claims handling change” relating to the nurse provision—itself exclusively part of the LTCF Benefit, and not the policy’s APC Benefit—”shall not affect any other term of the policy.”
The Current Case
O’Connell received two years of LTCF Benefits before moving to a non-qualifying facility. At the new facility, CNA provided her settlement APC benefits pursuant to the Pavlov Agreement. CNA terminated the settlement APC payments after four years, asserting that O’Connell had exhausted her collective six-year benefit period. O’Connell claimed that CNA breached its Pavlov settlement obligations; that CNA’s conduct amounted to bad faith under Illinois common law; and that she was entitled to attorney’s fees under Illinois law.
The district court granted CNA’s motion to dismiss. Interpreting the Pavlov Agreement and O’Connell’s policy, the district court held that the benefit period limitation applied to both LTCF Benefits and the Pavlov Agreement APC benefits. Likewise, because the policy’s maximum dollar benefit serves as a ceiling (but not a floor) on the sum of APC and LTCF Benefits, the district court rejected O’Connell’s argument that she was entitled to that full amount. Concluding that CNA did not breach the Pavlov Agreement the district court dismissed O’Connell’s remaining claims.
At the crux of this appeal is the district court’s reading of the Pavlov Agreement together with O’Connell’s original policy.
To receive the Pavlov APC benefit, the policyholder must meet all the requirements for the LTCF Benefit, save for the in-patient nursing services requirement. In exchange for the added flexibility in the facilities one can select from, the policyholder receives benefits lower than those guaranteed through the LTCF Benefit. Under the settlement APC benefit, the policyholder at most receives either the actual cost of the facility or a quarter of the LTCF Benefit, with that amount capped by the lesser of either the actual facility cost or the LTCF Benefit limit. And as a reduced version of the LTCF Benefit, the Pavlov APC benefit logically cannot outlast the LTCF Benefit. That is, the Pavlov APC benefit, as a lesser form of the LTCF Benefit, shares the same benefit period limitation, and thus terminates at the same time.
As a general matter, policyholders (including O’Connell) can purchase policies with a longer benefit period, a point O’Connell acknowledges. And as to the Pavlov Agreement specifically, it does not require that O’Connell accept either the LTCF Benefit or the settlement APC benefit offered. She remains free, as she was before the Pavlov settlement, to negotiate an alternative APC Benefit more to her liking. What O’Connell could not do is both accept the Pavlov APC benefit and, at the same time, rewrite the rules for that benefit without agreement from her insurer.
To accept O’Connell’s reading of the Pavlov Agreement, one would need to believe that CNA agreed to extend coverage to make full payments in the form of LTCF Benefits or full payments in the form of Pavlov APC benefits.
The Pavlov Agreement’s APC benefit does not reference a “maximum dollar benefit.” Clues in the Pavlov Agreement further undermine the notion that the Pavlov APC benefit is equivalent to the APC Benefit in O’Connell’s policy. For one, the Pavlov Agreement uses the term “APC Benefit” to refer to the policy’s APC Benefit, but uses the term “APC benefit or accommodation” to refer to the Pavlov APC. For another, those distinct APCs have distinct features. The APC Benefit does not guarantee O’Connell an unlimited benefit period although it entitles O’Connell to an opportunity to negotiate an alternative benefit period, but not a unilateral right to select one.
The Pavlov Agreement is not an insurance policy. Rather it is the product of both fierce litigation and negotiated compromise between sophisticated counsel. The Sixth Circuit concluded that best reading of the Pavlov Agreement is that the Pavlov APC benefit terminates at the end of a policyholder’s benefit period.
Because there is no breach O’Connell’s claims for bad faith and attorney’s fees both fail.
A settlement of an insurance dispute is not, nor could it ever be, an insurance policy unless the settlement created a new insurance policy. The Pavlov Agreement merely established how to interpret the CNA policy. Since its language was clear the court interpreted as it could be read and understood recognizing that it was created by careful lawyers on both sides of a major litigation. The attempt to turn it into an insurance policy so that ambiguities are construed against the insurer did not work because it was not a take it or leave it contract.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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