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Smith v. Catamaran Health Solutions, LLC

United States District Court, D. South Carolina, Columbia Division

September 1, 2016

SHAREN SMITH, on behalf of herself and all others similarly situated, Plaintiffs,


          Bruce Howe Hendricks United States District Judge

         This matter is before the Court on Defendants' Catamaran Health Solutions, LLC, f/k/a Catalyst Health Solutions, Inc., f/k/a HealthExtras, Inc. (“Catamaran Defendants” or “HealthExtras”)[1] and Stonebridge Life Insurance Company (“Stonebridge”) Motion to Dismiss (ECF No. 13) Plaintiff Sharen Smith's Class Action Complaint (ECF No. 1) for lack of standing and failure to state a plausible claim for relief, pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). For the reasons set forth in this Order, Defendants' Motion is granted and the case is dismissed.


         On July 20, 2015, Plaintiff Sharen Smith, a resident of South Carolina, filed a complaint on behalf of herself and all similarly situated South Carolina residents concerning allegedly fraudulent insurance practices. Plaintiff asserted claims against the architect of the alleged fraudulent insurance scheme (Catamaran, f/k/a Catalyst, f/k/a HealthExtras) and an underwriter (Stonebridge) which lent its name to the architect in order to facilitate solicitation of customers in South Carolina. Plaintiff invoked this Court's subject matter jurisdiction under the Class Action Fairness Act, 28 U.S.C. § 1332(d), alleging a class of more than 100 members and an aggregate amount in controversy in excess of $5, 000, 000.00.

         Plaintiff alleged that the Defendants engaged in a pattern of wrongful conduct toward herself and others similarly situated in the State of South Carolina, including but not limited to the following: (a) the illegal selling and underwriting of blanket group insurance to consumers who were not members of any lawful, blanket group for which the sale of such an insurance product could be authorized; (b) the false and deceptive advertising, solicitation, sale, and post-sale marketing of disability insurance that is illegal under South Carolina law; (c) the creation of fictitious groups in which to place this insurance for the purpose of avoiding state insurance regulations and laws; (d) the calculation and collection of excessive premiums or fees charged for this illegal insurance product; (e) conspiracy among the defendants to create a sham organization operating under the name HealthExtras for the purpose of avoiding the State of South Carolina's insurance regulations and laws; (f) conspiracy among the defendants to create a sham organization operating under the name HealthExtras for the purpose of charging excessive illegal premiums for a virtually worthless disability insurance product; (g) conspiracy among the defendants to create a sham organization operating under the name HealthExtras for the purpose of concealing from the public and the State of South Carolina the true nature of the sham organization known as HealthExtras; (h) unjust enrichment; (i) breach of contract; (j) breach of contract accompanied by a fraudulent act; (k) breach of the duty of good faith and fair dealing; (1) violation of the South Carolina Unfair Trade Practices Act (“SCUTPA”), SC Code § 39-5-10, et seq.; and, (m) violation of the Racketeering Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-1968. (Compl., ECF No. 1 ¶¶ 19, 103-76.)

         Litigation against HealthExtras, its successors, affiliated entities, and related underwriters regarding similar and/or substantially identical insurance policies to those at issue in the case sub judice is prolific. Plaintiffs' counsel have filed several related putative class actions in various jurisdictions, making similar and/or identical claims: Campbell v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, et al., No. 1:14-cv-00892-RC (D.D.C.); Giercyk v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, et al., No. 2:13-cv-06272-MCA-MAH (D.N.J.); Gonzales v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, No. 15-cv-02259 (S.D.N.Y.); Graham v. Catamaran Health Solutions, et al., No. 4:14-cv-589 (E.D. Ark.), on appeal No. 16-1161 (8th Cir.); Johnson v. Catamaran Health Solutions, LLC, No. 15-cv-61752-RNS (S.D. Fla.), on appeal No. 16-11735 (11th Cir.); Patel v. Catamaran Health Solutions, LLC, No. 15-cv-61891-BB (S.D. Fla.), on appeal No. 16-10613 (11th Cir.); Petruzzo v. HealthExtras, Inc., et al., No. 5:12-cv-00113 (E.D. N.C. ), on appeal No. 15-1673; Waiserman v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 2:14-cv-667 (C.D. Cal.), on appeal No. 14-56813 (9th Cir.); Watson v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, et al., No. 2:14-cv-01312 (E.D. La.); Williams v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, et al., No. 1:14-cv-00309-MHS (N.D.Ga.), on appeal No. 16-11302 (11th Cir.); Williams v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, et al., No. 6:14-cv-00870-BHH (D.S.C.). This Court also presides over the South Carolina Williams case, which is currently stayed pending finalization of the terms of the parties' settlement agreement. (See No. 6:14-cv-00870-BHH, ECF Nos. 131, 133.)

         On September 21, 2015, Defendants filed the instant Motion to Dismiss (ECF No. 13), arguing that Plaintiff lacks standing to sue because she has not suffered an injury in fact and the case should therefore be dismissed for lack of subject matter jurisdiction under Rule 12(b)(1). Defendants further argue that even if Plaintiff has standing, she has not set forth factual allegations that, accepted as true, are sufficient to show she is entitled to relief and her claims should be dismissed under Rule 12(b)(6). Plaintiff filed a Response on October 8, 2015 (ECF No. 17), and Defendants filed a Reply on October 19, 2015 (ECF No. 18). Additionally, between December 2015 and February 2016 Defendants filed three Notices of Supplemental Authority (ECF Nos. 22, 23, 24), appraising the Court of relevant rulings in some of the related cases listed above. On May 5, 2016, Plaintiff filed a Notice of Settlement as to Defendant Catamaran (i.e. HealthExtras), but indicated that Plaintiff has not reached a settlement with the remaining Defendant, Stonebridge Life Insurance Company. The Court has thoroughly reviewed the parties' submissions and the relevant legal authority, and now issues the following ruling.


         The following facts are drawn from Plaintiff's Class Action Complaint (“Complaint”). This case involves allegations that Defendants engaged in the fraudulent advertising, marketing, and sale of “group” disability insurance (“the Policy”) to South Carolina residents who were not members of any group for which such an insurance product was authorized, and thus the policies were illegal. Plaintiff, Sharen Smith (“Plaintiff” or “Smith”), purchased one of the policies. Plaintiff claims that the policy she purchased was the same “HealthExtras Benefit Program” under the same alleged HealthExtras scheme as the plaintiffs in the Williams matter, No. 6:14-cv-00870-BHH, with the only difference being that the One Million Dollar ($1, 000, 000.00) lump sum Accident Permanent and Total Disability Benefit is underwritten by Defendant Stonebridge rather than National Union Fire Insurance of Pittsburgh, PA (one of the defendants in Williams). (ECF No. 1 ¶ 1.) Smith never made a claim against the Policy and is seeking to represent a class of purchasers in a similar position. (See Id. ¶ 28 (class definition).) Indeed, the proposed class specifically excludes, inter alia, any policy holder for whom an actual identifiable claim for disability benefits has arisen that may be payable under the terms of the Policy. (Id.) Plaintiff further alleges that Defendants knew that the products they were selling were illegal and that the coverage promised by the policies was illusory because there was no intention to pay claims under that purported coverage. (Id. ¶¶ 82-83.)

         The Alleged Scheme

         Plaintiff claims that Defendants sent advertising materials to people through a partnership with major credit card companies and banks. (Id. ¶ 38.) Defendants' advertisements featured the late Superman actor, Christopher Reeve, who famously became a quadriplegic after falling from a horse, along with Mr. Reeve's statements endorsing the HealthExtras Benefit Program. (Id. ¶¶ 34, 38, 45, 81.)

         The marketing flyers offered (1) a One Million Dollar ($1, 000, 000.00) Accidental Permanent and Total Disability Benefit insurance product, and (2) an Out of Area Emergency Accident and Sickness Medical Expense Benefit that purported to cover up to Two Thousand Five Hundred ($2, 500.00) in medical expense in the event of an accident or sickness while away from home (“HealthExtras Benefit Program”) “for as little as Nine Dollars and Ninety-Five cents ($9.95) per month or Fifteen Dollars and Ninety cents ($15.90) per month depending on whether the individual added his or her spouse.” (Id. ¶¶ 1, 38(d).) Plaintiff claims that, in reality, the insurance she was sold was effectively worthless because of a series of harsh and confusing exclusions that conflicted with what was represented in the marketing materials. (Id. ¶ 74.) The marketing materials contained statements such as,

“This program provides valuable protection in the event you become permanently totally disabled due to an accident” and
“You're covered with a $1, 000, 000 tax-free cash payment if you are permanently disabled as a result of an accident”

(Id. ¶ 73). However, Plaintiff avers that Catamaran and Stonebridge: (1) conspired to develop policy language and exclusions that would prevent policy holders from collecting on valid disability claims (Id. ¶¶ 75, 78); (2) that they had no intent to ever pay disability claims; and (3) that they had the specific intent to deny any disability claims made by victims of the HealthExtras scheme (Id. ¶¶ 76, 77).

         Plaintiff further claims that only a small fraction of the premiums paid by members of the HealthExtras Benefit Program went to an insurance company to actually provide insurance coverage. (Id. ¶¶ 50, 70, 173.) The rest of the funds, Plaintiff avers, went to HealthExtras entities and its marketing partners rather than being used for coverage or any purpose that would benefit Plaintiff or the putative class members.[2] (Id.)

         Plaintiff alleges that Defendants facilitated the sale of these questionable insurance policies by fraudulently circumventing regulatory supervision and scrutiny established by South Carolina law that is intended to prevent such abuse. (Id. ¶¶ 41, 65.) According to Plaintiff, South Carolina law requires blanket group disability insurance to be marketed and sold to an employer or to a group that has been organized and is maintained in good faith for purposes other than that of obtaining insurance. (Id. ¶ 37.) The purpose of the rule is to allow the group, as the entity with the insurable interest in its members, to scrutinize the terms of coverage and price of coverage to ensure its members are receiving a good insurance product for a fair price. (Id.) Plaintiff avers that in order to get around this limitation, Defendants designated their policy holders as “members” of a fictitious “group” and deposited their premiums into an account held under the name of the fictitious group or a bogus “trust, ” before distributing them to Defendants for their profit. (Id. ¶¶ 37, 38, 57.) As the complaint alleges:

Despite statutory requirements and specific knowledge that a group of credit card holders were not a valid group for purposes of blanket or group accident polices, in an extraordinary display of self-dealing, Defendants Stonebridge, Catamaran, and others created a fictitious group and issued the policies to HealthExtras, Inc. as the “Policyholder.” HealthExtras, Inc. was not an employer, or any other organization as defined under S.C. Code Ann. § 38-71-730. HealthExtras Inc. was not a group or association at all. HealthExtras, now Catamaran, was a fictitious, illegal and sham company, with premiums collected for the benefit of it and its business partners, rather than a valid group of persons. There was no constitution or bylaws and the HealthExtras “members” had no voting privileges or representation on any boards or committees. This group was created for the sole purpose of selling the HealthExtras Scheme to consumers, while avoiding supervision and oversight of the South Carolina Department of Insurance in direct violation of South Carolina law.

(Id. ¶ 61.) Furthermore, because the insurance was a “group policy, ” the “group” formed by Defendants was the actual holder of the policy and those who purchased coverage were not given a copy of the master policy, but rather a Certificate of Insurance that summarized the coverage terms and explained the individual's rights under the master policy. (Id. ¶ 52.)

         Plaintiff asserts that the insurer(s) who were contracted to underwrite the benefits either misrepresented to the state insurance regulators that the Policy was intended to be issued to a valid group under state law or intentionally failed to apply for approval. (Id. ¶ 38(h)-(i).) Consequently, the Catamaran Defendants reaped massive profits with their revenues increasing from $5.3 million in 1999 to $44.2 million in 2000. (Id. ¶ 40.) In addition, avers Plaintiff, the HealthExtras scheme resulted in a huge windfall for HealthExtras, Inc. and CEO David Blair; specifically, after HealthExtras Inc. and its successor corporation Catalyst Health Solutions were sold for $4.4 billion to SXC Health Solutions in July 2012, creating the company now known as Catamaran Health Solutions, LLC, Mr. Blair received a $16 million compensation package in 2012, which followed his earnings of $9.4 million in 2011. (Id. ΒΆ 42.) Plaintiff alleges that Stonebridge essentially sold its name and insurance license to the Catamaran Defendants (none of which were licensed to conduct the business of insurance in South Carolina) for use in the scheme, with specific knowledge that the insurance program was ...

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