Antitrust Law Daily Wrap Up, RICO—DSD: RICO Claims Against Insurance Company over Denial of Long-Term Care Benefits Not Adequately Alleged, (Feb 25, 2013)

By Tobias J. Gillett, J.D., LLM.

The representative for the estate of an individual formerly insured under a long-term care insurance policy did not adequately allege RICO claims against the insurance company over a denial of benefits), the federal district court in Sioux Falls, South Dakota has ruled. The estate’s representative did not sufficiently allege the existence of a RICO enterprise to satisfy Federal Rule of Civil Procedure 9(b), did not allege two specific RICO predicate acts, and did not specifically allege fraud to satisfy Rule 9(b (Burke v. Ability Insurance Co., February 22, 2013, Schreier, K.).

Berniece Hermsen purchased a long-term care insurance policy from Mutual Protective Insurance (MPI) in January 2000. In September 2007, Ability Resources, Inc. acquired MPI, and MPI became Ability Insurance Company (AIC). In January 2009, Hermsen submitted a claim for benefits, and in February 2009 AIC denied her claim, allegedly without discussing the medical necessity provision in her policy or consulting with her physician.

Terry Burke, as the personal representative of Hermsen’s estate, brought suit against AIC and four other corporate entities alleged to be AIC’s alter egos, asserting a claim under the RICO Act, among other claims.

The court began its analysis of Burke’s RICO claim by noting that a RICO claim based on mail or wire fraud, like Burke’s claim, must satisfy Rule 9(b)’s heightened pleading requirements for claims premised on fraud. The court also observed that a RICO claim must establish four elements: “(1) the existence of an enterprise; (2) conduct by the defendants in association with the enterprise; (3) the defendants’ participation in at least two predicate acts of racketeering; and (4) conduct that constitutes a pattern of racketeering activity.”

Enterprise. The court determined that Burke had failed to establish the existence of a RICO enterprise. The court noted that a corporation would not function as a RICO “person” distinct from its own subsidiaries, under Eighth Circuit law, and could not conspire with them. Although Burke alleged an enterprise that consisted of “Defendants and Ability officers, employees, or agents identified in the Amended Complaint,” and “include[d] references throughout the amended complaint to acts accomplished by” employees of AIC and related entities, he did not “allege the enterprise with particularity,” and did not “specify which agents, officers, employees or entities conspired together or together formed an enterprise to engage in racketeering activity.” Burke’s “generic references” thus did not satisfy the requirements of Rule 9(b).

Predicate Acts and Pattern of Racketeering Activity. Moreover, the court concluded that Burke had not established that the defendants’ alleged predicate acts constituted the proximate cause of Hermsen’s harm. Burke had alleged the commission of “at least two predicate acts under § 1962 through administration of claims, creation of the claim procedures that led to the denial of Hermsen’s claim, misrepresentation of policy provision, and authoring the denial letters of Hermsen’s claim.” However, Burke had failed to allege specifically how any of the defendants had committed the alleged fraudulent acts.

Furthermore, although Burke had alleged generally that the defendants had “conspire[d] to misrepresent policy eligibility requirements by mail and phone” and that they had “committed fraud and misrepresentation by U.S. mail and by wire (telephone) many times,” he had only asserted one specific allegation that related to Hermsen, the sending of the letter denying her claim. Therefore, he had failed to allege the two predicate acts necessary for a RICO claim.

The court also concluded that Burke’s “general allegations about a fraudulent scheme” did not satisfy Rule 9(b). He had not demonstrated any “evidentiary correlation between the denial of Hermsen’s claim and any fraudulent act by a specifically alleged defendant.” Without that “nexus,” his claim failed. Moreover, the court agreed with other courts that had concluded that no private action existed for aiding and abetting a RICO violation. Therefore, the court dismissed Burke’s RICO claim.

However, the court declined to grant the defendants’ motion to dismiss as to Burke’s claims for breach of contract and breach of the duty of good faith and fair dealing. Moreover, the court permitted Burke to pierce the corporate veil to grant the court jurisdiction over several noncontracting companies of which AIC was a subsidiary, but did not allow Burke to proceed on a claim for damages in his individual capacity as opposed to his capacity as representative for Hermsen’s estate.

The case is No. 12-4051-KES.

Attorneys: Michael Charles Abourezk for Berniece Hermsen. Daniel F. Duffy (Bangs, McCullen, Butler, Foye & Simmons) for Ability Insurance Company. Stephen C. Landon (Cadwell, Sanford, Deibert & Garry, LLP) for Ability Resources, Inc.

Companies: Ability Insurance Co.

Cases: RICO SouthDakotaNews