American Travelers Life Insurance Company, Now Known as Conseco Senior Health Insurance Company v. Aig Life Insurance Company, American Travelers Life Insurance Company, Now Known as Conseco Senior Health Insurance Company v. Aig Life Insurance Company

Citations: 354 F.3d 755; 2004 U.S. App. LEXIS 113Docket: 03-1019

Court: Court of Appeals for the Eighth Circuit; January 6, 2004; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

American Travelers Life Insurance Company, now known as Conseco Senior Health Insurance Company, appeals the Eighth Circuit's affirmation of the district court's summary judgment and attorney's fee award to AIG Life Insurance Company. AIG counters by appealing the reduced attorney's fees and the denial of indemnification for a $5,000 settlement contribution. The case stems from a long-term nursing home healthcare insurance policy issued to Arden Haley by AIG in September 1986, which required a minimum three-day hospital stay for coverage to commence. Following a North Dakota law enacted on July 12, 1989, prohibiting such clauses, AIG failed to inform Haley or provide an alternative policy. In August 1991, AIG sold its long-term healthcare business to Conseco under a Pennsylvania law-governed purchase agreement, which included a clause assigning AIG's rights regarding defense and a separate indemnification clause obligating Conseco to assume related duties for policies post-acquisition. Conseco informed policyholders, including Haley, of this transfer, stating it assumed all responsibilities for benefit payments and premium collections. Conseco's communication to Haley suggested maintaining her policy, without disclosing the new legal restrictions or offering alternative options.

Haley maintained her insurance coverage after Conseco took over her policy and, on April 22, 1997, entered a nursing home without prior hospitalization. Following her admission, Haley filed a claim for benefits, which Conseco denied. In response, she sued both AIG and Conseco for breach of contract, bad faith, and fraudulent misrepresentation. Haley claimed that North Dakota law (N.D.C.C. 26.1-45-07) retroactively applied to her policy, asserting that the denial of benefits constituted a breach by both insurers. She also alleged that AIG and Conseco acted in bad faith by not informing her about the change in law and claimed fraud against Conseco for its assertion that her policy was the best available.

AIG attempted to pass the defense of the lawsuit to Conseco, which was refused. Both insurers filed cross-claims against each other, seeking indemnification for defense costs and any potential judgments. The district court dismissed the contract claims but allowed the other claims to proceed. AIG and Conseco later settled with Haley before the court ruled on their renewed summary judgment motions. Following the settlement, AIG sought summary judgment on its cross-claim for indemnification, which the district court granted for attorney's fees and defense costs but denied for AIG's $5,000 settlement contribution. AIG was awarded $66,839.76 for fees and costs after the court assessed their reasonableness.

Conseco appealed, claiming the district court incorrectly determined that it was responsible for defending AIG in the Haley litigation. AIG's appeal challenged the reduction of fees and the denial of indemnification for its settlement contribution. The case falls under Pennsylvania state law. The court's review of the summary judgment and application of state law is de novo. The indemnification issue hinges on the clarity of the indemnification agreement. Conseco argued that the agreement only required indemnification for ordinary claims, which it claimed Haley's lawsuit was not. However, the court found that Haley's breach of contract claim against AIG was valid and fell within the scope of the indemnification agreement, triggering Conseco's duty to defend.

Conseco is required to defend AIG against all claims related to the contractual relationship established with Haley, including bad faith and fraud claims, as these arise from the insurance contract. The precedent set in Birth Center v. St. Paul Cos. confirms that such claims are inherently linked to the contract's obligations. Consequently, Conseco's assertion that these claims are unrelated to the insurance contract is flawed.

The document further examines whether indemnifying AIG for its defense costs contravenes Pennsylvania's public policy against indemnification for negligent or fraudulent conduct. It asserts that such indemnification does not violate public policy since AIG was not found to have committed fraud, and the claims against it were deemed frivolous. As established in Ruzzi v. Butler Petroleum Co., indemnification for a party's own negligence requires explicit language in the agreement, which does not apply here since AIG's defense costs were related to defending against meritless allegations rather than its own wrongdoing.

Conseco acknowledges that AIG did not engage in fraudulent behavior, reinforcing that the claims were baseless. Thus, providing attorney's fees and costs is consistent with the contractual agreement, which anticipated Conseco's defense of AIG against policyholder claims. 

The document concludes with a procedural note on reviewing awards for attorney's fees and costs, stating that such determinations are subject to the trial court's discretion, with appellate review limited to cases of clear abuse of that discretion.

AIG sought indemnification from Conseco for attorney's fees and costs totaling $202,544.72 related to the Haley litigation, claiming it was entitled to all fees expended. However, Pennsylvania law only allows for reasonable fees. The district court aimed to apply a lodestar approach but found AIG did not demonstrate the reasonableness of its claimed hours and rates. Consequently, the court awarded $66,839.76 after considering several factors, including the case's settlement without trial, minimal hearings and depositions, excessive electronic research expenses, AIG's mandatory involvement even if Conseco took over the defense, and the disparity in attorney hourly rates. Despite the significant difference between AIG's claim and the awarded amount, the court's decision was upheld as it carefully evaluated all relevant factors and did not abuse its discretion.

Additionally, AIG challenged the district court's refusal to indemnify its $5,000 contribution to the Haley settlement. The court maintained that AIG bore the burden to demonstrate the settlement's reasonableness, which AIG failed to do. Thus, the district court's order and judgment were affirmed.