JULY 2011 BAD FAITH CASES INSURED WITHOUT “SPECIAL RELATIONSHIP,” STANDING TO CHALLENGE INTERNAL DECISIONS OF CORPORATE NON-PROFIT(Pennsylvania Supreme Court)

In Petty v. Hospital Service Association of Northeastern Pennsylvania, the plaintiff, Petty, was the owner of a construction company called R.G. Petty Masonry. The company contracted with Blue Cross of Northeastern Pennsylvania to provide health insurance coverage for all of its employees including the eponymous Petty. Petty and his company allege that Blue Cross breached its duty of good faith as well as the state’s non-profit laws by accumulating excessive profits and surplus well beyond the “incidental profit” permitted by the statute.

The trial court concluded that the plaintiffs (Petty and his company) did not have standing to bring suit since they could not show that they were personally aggrieved by either a breach of contract or a breach of fiduciary duty by Blue Cross. This was because, the lower court reasoned, the plaintiffs’ contract with Blue Cross had been for the provision of coverage to pay for health care services and the plaintiffs did not allege a breach of that particular contractual relationship. The court further opined that Blue Cross’s only fiduciary relationship to the insured was that which specifically related to the performance of its duties under the insurance contract (and thus did not relate to any profit surpluses).

Plaintiffs’ appealed but the intermediate appellate court agreed that they lacked standing, noting that the challenged action had nothing to do with the specific duties arising out of the parties’ contractual relationship

The issue before the Supreme Court on appeal was whether policyholders who have  purchased medical insurance from a non-profit corporation have standing under the state’s Non-Profit Corporation statute—15 Pa.C.S. 5793 (a)— to challenge that corporation’s actions in court, especially when those actions do not directly relate to the specific agreement between the insured and the corporation.

The court found that corporate decisionmaking does not call for the inclusion of a layperson (e.g. the plaintiff policy holder in this case) with no vested interest or authority in the corporation’s inner workings. The plaintiff’s argued that they should have standing to bring suit because they and other similarly situated Blue Cross subscribers are the only parties with reason to challenge inappropriate corporate action.

While the Supreme Court did not find the plaintiffs’ position unreasonable, its reasoning ultimately led it to side with the corporate defendants. As a matter of policy, the court believed that to allow subscribers and policyholders to challenge the inner workings of a corporation would effectively hamstring the corporation.

As such, plaintiffs—as mere policyholders without any other “special relationship” to the corporation—were found to lack standing to challenge Blue Cross’s corporate actions.

Date of Decision: June 20, 2011

Petty v. Hosp. Serv. Ass’n of Northeastern Pa, No. 34 MAP 2010, Supreme Court of Pennsylvania, 2011 Pa. LEXIS 1376, 23 A.3d 1004 (June 20, 2011)(Eakin, J.)