In Clark v. Prudential Ins. Company of America, 2010 WL 3522223 (D. N.J. September 9, 2010), a New Jersey resident filed a class action against Prudential, alleging common law and statutory fraud arising out of her purchase and subsequent renewal of a Comprehensive Health Insurance Policy (“CHIP”). The plaintiff alleged that in 1981, Prudential stopped selling CHIPs to new policyholders (i.e., “closed the block”). According to the plaintiff, Prudential understood that, as a result of its decision to close the block, the CHIP risk pool would face an “anti-selection crisis” where policyholders who could secure coverage elsewhere would terminate their CHIPs, resulting in a “death spiral.” In a “death spiral”, “repeated cycles of higher premiums and continually shrinking number of health policyholders cause premiums to eventually become so high that they force policyholders to drop their policies.” Id. at *2. Although Prudential allegedly knew design features of the CHIP made a “death spiral” inevitable, it never disclosed this reason for subsequent premium rate increases to policyholders, purportedly depriving the plaintiff of his ability to make an informed choice whether to renew his CHIP or search for other insurance.
Under the filed rate doctrine, “a rate filed with and approved by a governing regulatory agency is unassailable in judicial proceedings brought by ratepayers.” Id. at *8 (citations omitted). The doctrine should be applied “when one of its core purposes is implicated” – namely, “the prevention of price discrimination by carriers as among ratepayers” (non-discrimination) and “preservation of the role of regulatory agencies in approving reasonable rates and the exclusion of the courts from the rate-making process” (non-justiciability). Id. If applicable, the doctrine prevents a customer from enforcing contract or tort rights that contradict the filed rates. Id. Even “[w]here fraud is present, the courts have left enforcement to the regulators, who are best situated to discover when regulated entities engage in fraud and to remedy fraud when it arises.” Id. at *9.
In its motion to dismiss, Prudential argued the filed rate doctrine should bar all of the plaintiff’s claims because they sought monetary damages that directly or effectively would result in the policyholder paying less than the approved premium rate for his insurance. The district court agreed. Under the New Jersey regulations, plaintiff’s premium rates (including disclosure of the block closure) were submitted to and approved by the New Jersey Department of Banking and Insurance (“DOBI”). In addition, the DOBI had the authority to disapprove any filed policy if the benefits were unreasonable in relation to the rates, the form contained provisions which were misleading or the policy was sold in such a manner as to the mislead the insured. N.J. Stat. Ann. § 17B:26-1. Accordingly, said the court, “DOBI’s regulation of health insurance [did] implicate the non-justiciability prong of the filed rate doctrine.” Id. at *11. “DOBI is the regulatory agency vested with the primary authority to determine the reasonableness of health insurance premium rates,” and the rates [plaintiff] paid were approved by the DOBI.” Id. Also, the statute required DOBI to reject policies with misleading provisions or for being sold in a misleading fashion. “As such, the agency procedures appear to cover the relevant conduct in this case and the Court’s intrusion in this area may tend to interfere with DOBI procedures and rate determinations.” Id.
The court rejected the plaintiff’s argument that his claim did not require the court to second-guess agency determinations because he was not challenging rates, but rather was complaining about Prudential’s lack of disclosure that he claimed impeded his ability to make an informed decision. The court held that, even though plaintiff was not challenging the rates per se, the plaintiff’s decision-making allegedly impeded by Prudential’s alleged omissions was “directly related to the insurance premium rate.” Id. at *13. In addition, plaintiff’s claimed injury was that “he paid higher premiums than he would have for an alternative policy because the CHIP was in a death spiral,” and therefore, his alleged injury was “directly related to the filed rate.” Id. The court also noted that plaintiff challenged another aspect of the parties’ relationship that DOBI regulated, i.e., the manner in which the policy was sold.
The court also rejected the plaintiff’s argument that an award of damages would not interfere with the DOBI’s regulatory authority. The plaintiff argued that his claims were based on form letters, and not on the policy form, and therefore, did not implicate the doctrine’s policy goals. Id. at *14. In rejecting that argument, the court reiterated the rule that “‘any remedy requiring a refund of a portion of the filed rate is barred by application of the filed rate doctrine.’” Id. (citations omitted). The plaintiff’s request for compensatory damages and a refund of monies acquired by the alleged unlawful practices would require “the Court to recalculate past rates that [plaintiff] paid which were consistent with the filed rate” and “require the Court to determine what rate would have been reasonable and thereby interfere with DOBI’s rate-making process.” Id.
The court further held that the non-discrimination policy underlying the filed rate doctrine also supported dismissal of the plaintiff’s claims. The non-discrimination strand of the doctrine operates “on the presumption that the plaintiff had knowledge of the filed rates and, thus, could not reasonably rely upon the regulated entity’s misrepresentations or omissions of material facts.” Id. at 16 (citations omitted). According to the court, since Prudential’s disclosures to the DOBI had included information about the “death spiral”, the plaintiff could not “claim to have been deceived by Prudential’s failure to affirmatively disclose it to him.” Id.
In closing, the court acknowledged the result was “unsatisfying” because “of the harsh consequences of the filed rate doctrine,” but said it felt compelled to apply it to all of the plaintiff’s claims.
This case is significant because it involved a broad challenge to communications or omissions about premium rates, as opposed to a challenge to the premium rates themselves. Though the decision is premised upon New Jersey statutes, its reasoning should be equally valid in any setting where state insurance departments have analogous approval authority over insurance premium rates and forms.