Wathor v. Mutual Assurance Administrators, Inc. , 87 P.3d 559 ( 2004 )

BOUDREAU, J.

T1 Oklahoma County offered its employees, like plaintiff Doug Wathor, access to its self-funded health insurance program called the Oklahoma County Health and Dental Plan (Plan}. Oklahoma County hired defendant Mutual Assurance Administrators, Inc. (MAA) as its third party administrator (TPA).¹ MAA's Administrative Service Contract (Contract) with Oklahoma County obligated MAA to provide the ministerial and clerical services required by the Plan in connection with its operation. Under the Contract, MAA initially determines whether any particular claim for benefits qualifies for payment under the Plan. The Oklahoma County Budget Board (Oklahoma County) handles all appeals of denied claims and has final authority to approve or deny claims. The Contract provides for MAA to be compensated by a flat fee based solely on the number of participants in the Plan on the first day of any given month. MAA assumes no risk for any claims filed under the Plan.

T2 Mr. and Mrs. Wathor (Wathors), individually and as parents of Nicholas, filed a petition alleging that MAA is an insurer who breached its contract with them and acted in bad faith when it violated Oklahoma's portability statute, 86 0.8.2001 § 4509.2, which prohibits insurers from excluding pre-exist-ing conditions from coverage if the insured had been covered under a previous plan.

13 The Wathors filed a motion for partial summary judgment on the issue of whether they could be denied coverage on the basis of a pre-existing condition. MAA filed a response and its own motion for summary judgment. In its motion, MAA asserted, among other things, that because it is a TPA, not an insurer, both of the Wathors' claims fail as a matter of law. The trial court agreed. It denied the Wathors' motion and granted MAA's motion. The Court of Civil Appeals affirmed. We granted certiorari to determine, among other issues, the first impression issue whether a third party administrator who is not an insurer may be subject to suit based on its alleged bad faith actions in administering an insurance plan.

I. STANDARD OF REVIEW

T4 Summary judgment is appropriate only where there are no material facts in dispute and the moving party is entitled to judgment as a matter of law. Oliver v. Farmers Ins. Group of Cos., 1997 OK 71, 941 P.2d 985. As this decision involves purely legal determinations, our standard of review of a trial court's grant of summary judgment is de movo. Kirkpatrick v. Chrysler Corp., 1996 OK 136, 920 P.2d 122. We review all inferences and conclusions to be drawn from underlying facts contained in evidentiary materials in a light most favorable to the party opposing the motion. Oliver, supra. If the uncontroverted facts support legitimate inferences favoring well-pleaded theory of the party against whom the judgment is sought or if the judgment is contrary to substantive law, the judgment will be reversed. Hargrave v. Canadian Valley Elect. Co-op., 1990 OK 43, 792 P.2d 50.

II. BAD FAITH CLAIM

15 The Wathors contend the trial court erred in concluding they could not maintain a tort action against a third party administrator for breach of an insurer's duty of good faith. Every contract in Oklahoma contains an implied duty of good faith and fair dealing. Doyle v. Kelly, 1990 OK 119, 801 P.2d 717, 718. In ordinary commercial contracts, a breach of that duty merely results in damages for breach of contract, not independent tort lability. Christian v. American Home Assur. Co., 1977 OK 141, 577 P.2d 899.

16 Insurance contracts, however, are not ordinary commercial contracts. Id. A "special relationship" exists between an insurer and its insured stemming from the quasi-public nature of insurance, the unequal bargaining power between the insurer and insured, and the potential for an insurer to unserupulously exert that power at a time when the insured is particularly vulnerable. Id. at 902-04. The special relationship ere-ates a nondelegable duty of good faith and fair dealing on the part of the insurer. Id. An insurer's breach of this duty gives rise to a separate cause of action sounding in tort. Id. at 904.

T7 The duty of good faith and fair dealing applies to activities after the establishment of the insurer-ingured relationship, and includes the claims handling process. Kincade v. Group Health Services of Oklahoma, Inc., 1997 OK 88, 945 P.2d 485, 489 n. 18. The duty is nondelegable so that insurers cannot escape it by delegating tasks to third parties. Barnes v. Oklahoma Farm Bureau Mut. Ins. Co., 2000 OK 55, ¶ 9 n. 5, 11 P.3d 162, 167 n. 5.²

T8 Normally, only the insurer owes the duty of good faith and fair dealing to its insured. Agents of the insurer-even agents whose acts may have been material to a breach of the duty-do not normally owe the insured a duty of good faith since agents are not parties to the insurance contract. Timmons v. Royal Globe Ins. Co., 1982 OK 97, 653 P.2d 907, 912-13 (rejecting an attempt to hold an insurance agent lable for breach of the duty of good faith by the insurance company).³

9 In the typical case the insured is adequately protected by the nondelegable duty that the law imposes on the insurer. However, the imposition of a nondelegable duty on the insurer does not necessarily preclude an action by an insured against a plan administrator for breach of an insurer's duty of good faith. In Wolf v. Prudential Ins. Co. of America, 50 F.3d 793 (10th Cir.1995), the Tenth Cireuit Court of Appeals considered the issue of whether an insured under a self-funded health benefits plan could sue the plan administrator for its own bad faith refusal to pay for treatment.

¶ 10 In Wolf, the plan administrator had primary control over benefit determinations (including some intermediate appeals). As payment for administering the plan, the plan administrator received a percentage of the premiums paid for participant coverage. The plan administrator's percentage increased as losses decreased. In addition, if losses increased to a certain level, the plan administrator had to share the risk with the board; if losses got even higher, the plan administrator had to underwrite the entire risk.

¶ 11 In determining whether the plan administrator owed the insured a duty of good faith, the Tenth Cireuit refused to decide the issue by simply concluding the plan administrator was a stranger to the insurance contract. Rather, the court emphasized that the analysis should focus on the factual question whether the plan administrator acted sufficiently like an insurer such that there was a "special relationship" between the plan administrator and the insured that would give rise to the duty of good faith. Id. at 797. The Tenth Cireuit predicted the Oklahoma Supreme Court would impose a duty of good faith on an entity in the position of the plan administrator in Wolf, for the same reasons we imposed that duty on "true" insurers in Christian. Wolf, 50 F.3d at 798.

¶ 12 We agree with the analysis of the Tenth Circuit under the facts presented in Wolf. In a situation where a plan administrator performs many of the tasks of an insurance company, has a compensation package that is contingent on the approval or denial of claims, and bears some of the financial risk of loss for the claims, the administrator has a duty of good faith and fair dealing to the insured.

¶ 13 Applying this analysis to the facts of this case, we observe the following. Like the plan administrator in Wolf MAA unquestionably performed some of the tasks of an insurance company in its claims handling process. However, in contrast to the facts in Wolf MAA's compensation package was not tied to the approval or denial of claims but was instead a flat fee based on the number of participants in the Plan. Likewise, MAA did not share the risk of loss with the Plan if losses increased to a certain level, and did not underwrite the entire risk if losses got even higher. In other words, under the facts presented in this case, MAA had neither the power, the motive, nor the opportunity to act unserupulously. See Christian, 577 P.2d at 902. Accordingly, we affirm the trial court's judgment in favor of MAA on the Wathors' bad faith claim.⁴

III. BREACH OF CONTRACT CLAIM

¶ 14 The Wathors also contend the trial court erred in dismissing their claim for breach of contract against MAA. While the Wathors are strangers to the Administrative Service Contract between Oklahoma County and MAA, it is well settled that third party beneficiaries of a contract may maintain an action on the contract. Keel v. Titan Constr. Corp., 1981 OK 148, 639 P.2d 1228; 15 O.S. 2001 § 29; see also 15 O.S.2001 § 29 ("A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.").

115 Assuming, without deciding, the Wathors are third party beneficiaries of the Administrative Service Contract, that status merely entitles them to step into the shoes of Oklahoma County to enforce Oklahoma County's contractual rights against MAA. The Administrative Service Contract obligates MAA to provide claims handling service for Oklahoma County. It does not obligate MAA to pay covered claims on behalf of Oklahoma County. The relief sought by the Wathors from MAA is not claims handling service, but payment under the Plan for what they contend is covered treatment. Thus, even assuming the Wathors are third party beneficiaries of the Contract, that status does not entitle them to maintain a breach of contract action against MAA for failure to pay their claim. We affirm the trial court's judgment in favor of MAA on the Wathors' breach of contract claim.⁵

IV. CONCLUSION

¶ 16 Because of the special relationship between insurers and their insureds, Oklahoma imposes a duty of good faith and fair dealing on insurers which gives rise to an independent action in tort. Normally we do not impose such a duty on third party administrators of health insurance plans because the administrators are not parties to the insurance contract between the insurer and the insured. See Timmons v. Royal Globe Ins. Co., 1982 OK 97, 653 P.2d 907.⁶ However, such a duty may be imposed on a plan administrator where, under the specific facts and cireumstances of the case, the plan administrator acts sufficiently like an insurer such that there is a "special relationship" between the plan administrator and the insured that gives rise to the duty.

¶ 17 The plan administrator in this case, MAA, does not act sufficiently like an insurer . and therefor does not have a tort duty of good faith and fair dealing toward the Wa-thors. Accordingly, we affirm the trial court's judgment in favor of MAA on the Wathors' bad faith claim. %18 We also affirm the trial court's entry of judgment in favor of MAA on the Wathors' breach of contract claim. The Wathors are strangers to the Administrative Service Contract between Oklahoma County and MAA. Assuming, without deciding, that the Wathors are third-party beneficiaries of the Administrative Service Contract, that status does not entitle them to maintain a breach of contract action against MAA for failure to pay a covered claim because the Administrative Service Contract does not obligate MAA to pay covered claims on behalf of Oklahoma County.

OPINION OF THE COURT OF CIVIL APPEALS VACATED; JUDGMENT OF THE TRIAL COURT AFFIRMED.

HODGES, LAVENDER, KAUGER, BOUDREAU, EDMONDSON, JJ., Concur. HARGRAVE, WINCHESTER, JJ., Concur in Result. WATT, C.J., OPALA, V.C.J., Dissent.

1 . As a TPA, MAA is subject to the Third Party Administrator's Act, 36 0.$.2001 §§ 1441 et seq. Pursuant to § 1442, an administrator is any person who collects premiums for an insurer or trust or whose adjuster settles claims for an insurer or trust, in connection with life or health insurance coverage or annuities in this State.

2 . "We ruled over seventeen years ago [in Timmons v. Royal Globe Ins. Co., 1982 OK 97, 653 P.2d 907] that an insurer could not avoid liability for breach of the duty of good faith and fair dealing by delegating its responsibility to an independent contractor." Barnes, 11 P.3d 162, 167 n. 5.

3 . The dissent argues that summary judgment should not have been granted because the trial court could not determine, on the record before it, whether MAA (the third party administrator) served as an agent for Oklahoma County or as an independent contractor. Under the facts of this case, this inquiry is legally irrelevant. The non-delegable duty of good faith and fair dealing arises from the "special relationship" created by an insurance contract. It is undisputed that MAA was a stranger to the insurance contract between Oklahoma County and Doug Wathor. Accordingly, MAA, whether it be characterized as an agent or an independent contractor, owed no such duty to the Wathors unless it acted sufficiently like an insurer such that there was a "special relationship" between it and the Wa-thors to give rise to such a duty. The undisputed facts in MAA's motion for summary judgment establish that it did not act sufficiently like an insurer.

4 . Although the dissent proposes to offer a different test from that adopted in Wolf v. Prudential Ins. Co. of America, 50 F.3d 793 (10th Cir.1995), by the Tenth Circuit, the two tests are essentially identical. The dissent would inquire as to whether the tasks of the third party administrator are "integral to the functions of an insurer and encompass a well-defined legal duty making MAA liable gua insurer." Wolf would inquire as to whether the administrator acted sufficiently like an insurer such that there is a "special relationship" between MAA and the insured that would give rise to the duty of good faith.

5 . We are also convinced that the Wathors were covered for their medical expenses pursuant to Oklahoma's portability statute, 36 0.$.2001 § 4509.2, prohibiting insurers from excluding pre-existing conditions from coverage if the insured had coverage under a previous plan. However, under the facts of this case, they were required to pursue the coverage issue against the self-irisured employer, Oklahoma County, rather than against the third party administrator, MAA.

6 . The dissent would extend direct liability for bad faith to the insurer's agents (e.g., adjusters, claims representatives, investigators employed by the insurer, and perhaps attorneys employed by the insurer), despite the fact that these agents are not insurers and are strangers to the insurance contract which gives rise to the duty of good faith on the part of the insurer. This is contrary to our holding in Timmons that agents of the insurer-even agents whose acts may have been material to a breach of the duty-do not normally owe the insured a duty of good faith since agents are not parties to the insurance contract. The dissent also argues that the insurer "stands exonerated" if its agents (or independent contractors) bear no liability for a bad faith tort. This is simply not so. An insurer has a non-delegable duty of good faith while performing the functions of claims management, adjustment and settlement. This duty requires the insurer to take positive steps to adequately investigate, evaluate, and respond to its insureds' claims. An insurer may employ an agent or an independent contractor to perform these functions, but this does not absolve the insurer of its own non-delegable duty. If the agent or independent contractor fails to adequately perform the functions, the insurer is liable, not under the doctrine of respondeat superior, but because of its own failure to comply with its non-delegable duty of good faith.