Modesto sues broker it claims connected it with “sham” health insurer, seeks $8.3M

As Modesto grapples with roughly $8.3 million in unpaid employee medical claims after the financial meltdown of one of its health insurance providers, it has filed a lawsuit against the insurance broker that recommended the provider to the city.

Modesto filed a lawsuit May 31 in Stanislaus Superior Court against Peter C. Foy & Associates, accusing the Southern California insurance brokerage firm of professional negligence, breach of contract and fraud.

The city is seeking general and punitive damages, including the roughly $8.3 million, as well as its court costs and attorney fees.

Modesto states in its lawsuit that it relied upon Foy and its expertise to evaluate health insurance options, and Foy recommended the city use Riverstone Capital. The lawsuit alleges Foy “knew, or in the exercise of due diligence would have known” Riverstone was an “unauthorized, financially unsound” provider and “a sham company.”

The U.S. Department of Labor filed a civil complaint against Southern California-based Riverstone on Feb. 1 alleging it charged low premiums that were not sustainable in an effort to attract customers while charging exorbitant fees. “The rates that were set by (Riverstone) were not approved by an actuary and were not actuarially sound,” according to the complaint. “

Riverstone is no longer operating and an independent fiduciary appointed by the court is resolving the unpaid claims among the more than 100 employers, including Modesto, that relied upon Riverstone for insurance. In April, the fiduciary estimated there were $36 million in unpaid claims but only about $3.5 million in assets to pay them.

Modesto used Riverstone from January 2017 to March of this year before replacing it with another health insurance provider. Riverstone had provided health insurance for about 700 of the city’s roughly 1,200 employees. Modesto also has replaced Foy.

Peter C. Foy founded the insurance brokerage firm in 1987, according to the firm’s website, and is a former member of the Ventura County Board of Supervisors. He did not respond to an email seeking comment Friday. A woman who answered the phone at the firm said, “we are not talking to anyone,” before hanging up.

Modesto switched to Riverstone in 2017 because it was facing steep premium increases with one of its health insurance providers. Riverstone was offering rates that were 25 percent lower than what employers were then paying before the premium increases. Riverstone also promised not to raise rates during the first two years and by no more than 5 percent in the third year.

That raises the question of whether Foy & Associates and Riverstone were offering something too good to be true.

Deputy City Manager Caluha Barnes said she could not answer that because of the city’s lawsuit against Foy & Associates. But she said the city worked with its labor groups in reaching the decision to use Foy and Riverstone. She also said the city quickly responded to problems as soon as it learned of them.

The lawsuit states the city started receiving complaints about a year ago from employees that medical claims were not being paid. The city followed up with Foy & Associates, whose officials said everything was fine, according to the lawsuit

Foy & Associates told the city Riverstone was “financially sound and well-managed” and attributed the problems to health-care providers’ “billing errors, employee misunderstandings of the health benefits offered, a change in a third-party administrator (which managed the claims) and other benign causes,” according to the lawsuit.

“Unbeknownst to the (city), the real cause was that Riverstone did not have sufficient funds to pay claims because it was sham insurance, that was underfunded, mismanaged, and its funds misappropriated,” the lawsuit states.

The lawsuit also alleges Foy & Associates “intentionally hid from (the city) the fact that Riverstone had insufficient funds to pay claims. “

The millions in unpaid medical claims has caused stress and uncertainty for the employees and their families who used Riverstone.

The wife of a city worker said her family has more than $30,000 in unpaid medical claims, with some of them more than a year old. She said some claims have gone to collections and a letter she has provided providers from the independent fiduciary has not helped.

“We are in collections for three of these claims,” said the woman. She and her husband asked that their names not be used for fear of retribution from the city. “And the others have told me they are heading to collections.”

She said they worry this eventually could hurt their credit rating. “My husband says we don’t want to lose our credit over something that was not our fault.”

The woman says she understands the city’s human resources department must be inundated with requests from employees and their families. But she said human resources has not responded to her emails and phone calls.

“With a crisis of this magnitude they should do something, hire temp workers just to answer the phones,” the woman said. “... We don’t feel there is anyone we can call to get an answer.”

The City Council in early April authorized spending an initial $2.6 million to settle the unpaid medical claims for a third of what is owed, hire a third-party administrator to settle the claims with the health-care providers and reimburse employees who had paid claims. City officials have said they expect Modesto could need more money to settle the claims.

But the woman said she wonders whether the employees and their families will have to pay the claims if settlements cannot be reached. “Are we going to be responsible?” she asked. “That is something the city has not communicated to us.”

Barnes, the deputy city manager, said the independent fiduciary has clearly stated the claims are the responsibility of the employers and Modesto has followed that position. She said it is frustrating health-care providers have sent claims to collections despite the independent fiduciary saying they cannot do that.

She expects that will get better now that the fiduciary recently and directly notified all health care providers that claims cannot be sent to collections and that the work to resolve claims involving all employers should start soon. She said the work to settle the claims could not start until all unpaid claims had been submitted to the fiduciary by the May 28 deadline.

“We definitely understand employees’ frustration and their desire to get this over,” she said.

Barnes said the city is asking employees to continue to be patient, and the city expects this matter to be wrapped up by the end of the year. She added the city has been updating employees about every two weeks or as soon as it learns about new developments.

This story was originally published June 8, 2019 at 2:51 PM.