UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION. v. CASE NO. 4:05-cv TEXAS MUTUAL INSURANCE COMPANY,

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1 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION FAIR ISAAC CORPORATION, Plaintiff, v. CASE NO. 4:05-cv TEXAS MUTUAL INSURANCE COMPANY, Defendant DEFENDANT TEXAS MUTUAL INSURANCE COMPANY S ANSWER AND COUNTERCLAIMS In answer to Plaintiff Fair Isaac Corporation s ( Fair Isaac or "FIC") Complaint, Defendant Texas Mutual Insurance Company ( Texas Mutual ) answers the numbered allegations of the complaint, states its presently known affirmative defenses against Fair Isaac, and files its Counterclaims against Fair Isaac as follows: ANSWER I. PARTIES 1. Texas Mutual is without knowledge or information sufficient to form a belief as to the truth of the averments contained in Paragraph 1 of the Complaint concerning the corporate status and principal place of business of Fair Isaac. 2. Texas Mutual admits the allegations contained in Paragraph 2 of the Complaint concerning the corporate status, principal place of business, and service of Texas Mutual. TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 1

2 II. JURISDICTION 3. Texas Mutual admits the factual allegations contained in Paragraph 3 of the Complaint and admits that jurisdiction is proper in this Court. III. VENUE 4. To the extent that Paragraph 4 of the complaint states conclusions of law, no answer is required. To the extent an answer is required, however, Texas Mutual admits the factual allegations contained in Paragraph 4. Pursuant to Local Rule 5.2, Texas Mutual notes that on the same day this suit was filed, August 26, 2005, Texas Mutual filed suit against FIC in Travis County District Court styled Cause No. GN503028, Texas Mutual Insurance Company v. Fair Isaacs Corporation in the 201 st District Court of Travis County, Texas. IV. FACTS A. BACKGROUND 5. Texas Mutual is without knowledge or information sufficient to form a belief as to the truth of the averments contained in Paragraph 5 of the Complaint regarding Fair Isaac s business and clientele. 6. Texas Mutual admits the first sentence of Paragraph 6. Texas Mutual denies that it made a final decision about its bill review vendor in January Admitted in part. Texas Mutual denies that the written Contract was negotiated for several months. Fair Isaac has designated each page of the contract as "Fair Isaac Confidential and Proprietary." Texas Mutual has insufficient knowledge to form a belief as to whether any or all of the contract is confidential or proprietary within the meaning of paragraph. 3.1 of the Contract or otherwise. Texas Mutual admits that TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 2

3 Exhibit 1 is a true and correct copy except that it is incomplete and missing an amendment. 8. Admitted. 9. Admitted in part. Deny that only some problems were encountered. 10. Denied. In its experience, the problems Texas Mutual encountered with SmartAdvisor were out of the ordinary. 11. Denied. 12. Texas Mutual is without knowledge or information sufficient to form a belief as to the truth of the averments contained in Paragraph 12 of the Complaint regarding internal resource allocations at FIC, otherwise denied. 13. Denied. 14. Denied in part. Texas Mutual admits that after March 15, 2005, Texas Mutual has reduced the amount of time it takes to process medical claims. Otherwise denied. 15. Admit that FIC has invoiced Texas Mutual for sums it alleges are due. Texas Mutual has tendered payment under protest and with a reservation of rights. Otherwise denied. 16. Denied. B. CONTRACTUAL PROVISIONS 17. To the extent that Paragraph 17 of the complaint states conclusions of law, no answer is required. Texas Mutual admits that FIC has accurately recited the text of Otherwise denied. The Contract does not bar Texas Mutual s claims. TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 3

4 18 To the extent that Paragraph 18 of the complaint states conclusions of law, no answer is required. Texas Mutual admits there is a 6.2 but denies that it has been accurately recited. Otherwise denied. The Contract does not bar Texas Mutual s claims. 19. The first sentence is admitted. The second sentence is denied to the extent it suggests that Texas Mutual s fraud remedies are limited by contract. V. CAUSES OF ACTION A. COUNT 1 BREACH OF CONTRACT 20. Texas Mutual incorporates by reference its answers to Paragraphs 1-19 above. 21. Denied. 22. Denied. B. COUNT 2 QUANTUM MERUIT 23. Texas Mutual incorporates by reference its answers to Paragraphs 1-22 above. 24. Denied. 25. To the extent that Paragraph 17 of the complaint states conclusions of law, no answer is required. To the extent an answer is required, Texas Mutual is without knowledge or information sufficient to form a belief as to the truth of how much FIC has invested in SmartAdvisor. Otherwise, denied. C. COUNT 3 DECLARATORY JUDGMENT above. 26. Texas Mutual incorporates by reference its answers to Paragraphs 1-25 TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 4

5 27. Paragraph 27 of the Complaint does not contain an allegation to which an answer is required. 28. Texas Mutual admits that FIC seeks a declaration of its rights under the Contract. Texas Mutual admits that both parties are entitled under Texas Civil Practice & Remedies Code to seek attorney s fees. 29. Denied. VI. DAMAGES 30. Denied. VII. CONDITIONS PRECEDENT VIII. DEMAND FOR JURY 31. Paragraph 31 of the Complaint does not contain an allegation to which an answer is required. AFFIRMATIVE DEFENSES 1. Texas Mutual restates each and every preceding and following allegation of this instrument including its counterclaims and incorporates each by reference as though set forth fully herein. 2. Fraudulent Inducement to Enter Into the Contract. As alleged in Texas Mutual s Counterclaims below, FIC fraudulently induced Texas Mutual to enter into the contract. 3. Separate Fraud After the Contract. As alleged in Texas Mutual s Counterclaims below, FIC then separately defrauded Texas Mutual into transferring its medical bill processing functions to FIC on November 8, TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 5

6 4. Set-Off/Recoupment. The damages caused by FIC s misrepresentations and SmartAdvisor s failures are vastly greater than the total invoiced to date. Texas Mutual is entitled to set-off these damages or is entitled to recoup them from FIC. 5. Payment. Texas Mutual has paid, under protest and with a full reservation of its rights and remedies, all amounts invoiced by FIC. Specifically, Texas Mutual has made three payments, $563,572.26, $208,313.17, and $777, respectively. Totaling $1,549,628.52, this amount represents all amounts invoiced by FIC. Texas Mutual does not admit that such amounts are due or that they have been properly calculated under the Contract. To the contrary, FIC has admitted that it has calculated the past invoices using an inaccurate algorithm. FIC has stated that it will recalculate the past invoices. 6. Failure of Conditions Precedent. FIC is barred from asserting a contract claim absent pleading and proof that FIC was at all times in compliance with the contract. FIC also failed to follow the requirements of the Contract, including but not limited to its failure to timely deliver a Notice of Service Availability. For these and other failures to establish conditions precedent, payment is not due. 7. Estoppel. FIC s claims for relief are barred under the doctrine of estoppel. 8. Unclean Hands. FIC s claims for relief are barred under the doctrine of unclean hands. 9. Waiver. FIC claims for relief are barred by the doctrine of waiver. TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 6

7 COUNTERCLAIMS Separately from the foregoing answer, Texas Mutual, as counter-plaintiff, complains of Plaintiff FIC, as counter-defendant, and for cause of action alleges the following by way of counterclaim: I. INTRODUCTION 1. FIC defrauded Texas Mutual twice. First, FIC fraudulently induced Texas Mutual to enter into a contract entrusting Texas Mutual's entire medical bill review process to an FIC software product known as SmartAdvisor. FIC represented that SmartAdvisor was a tested and in-use product. FIC obstructed and impaired Texas Mutual s ability to determine that SmartAdvisor did not, in fact, exist. Second, after the contract was signed, FIC independently defrauded Texas Mutual again. FIC represented that SmartAdvisor was a tested and in-use product ready for a November 8, 2004 Go- Live use on Texas Mutual's medical bills. FIC failed to disclose that SmartAdvisor was at that time only a prototype, in need of beta-testing, and not ready for Texas Mutual s commercial needs. FIC also falsely represented that its medical bill audit personnel were trained and ready for medical bill review on Texas Mutual s overflow bills using Texas state rules and Texas Mutual developed bill review protocols. In reliance on FIC's false representations and because of FIC's failures to disclose the truth, Texas Mutual allowed SmartAdvisor to go live on November 8, SmartAdvisor failed catastrophically. It took months for FIC to make SmartAdvisor capable of performing its basic bill review functions and to train personnel to perform theirs. During those months, Texas Mutual suffered millions of dollars in damages in the form of overpayments to health care TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 7

8 providers, interest on late payments to providers, and extra costs to salvage medical bill review. II. FACTS 2. Texas Mutual is a not-for-profit mutual insurance company that provides insurance in the Texas workers compensation system. Texas Mutual provides more Texas workers' compensation insurance than any other insurer. Texas Mutual was created by the Texas legislature to serve as a competitive force in the Texas workers' compensation insurance market. 3. Health care treatments are a major workers compensation benefit. Payments for workers compensation health care treatments are a major workers' compensation cost. Texas law imposes rigorous requirements for paying medical bills on workers compensation insurers. Workers compensation insurers must process medical bills rapidly, and are liable for interest payable to the providers and for fines payable to the regulatory agency for late payments. Texas law also requires that workers compensation carriers process bills accurately, and deny or reduce payment in accordance with hundreds of regulatory rules designed to achieve the statutory goal of effective medical cost control. 4. FIC is a self-described leading provider of analytics and decision technology. FIC provides medical bill review software and services for workers compensation insurance carriers, among other products. TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 8

9 A. Before the Execution of Contract. 5. In 2003, Texas Mutual sought proposals for the provision of automated medical bill review services by means of a request for information to FIC and other potential vendors. 6. FIC proposed to process all of Texas Mutual s medical bills on FIC s computers, using a software product called SmartAdvisor, which it represented as an industry leading medical bill review engine. FIC proposed an ASP (authorized service provider) model for the FIC-Texas Mutual relationship. In the typical licensing arrangement, a client pays a fee to have the vendor s proprietary software installed onto the client s computer network (subject to client oversight and control). In FIC s proposed ASP model, all software processes and automation of the bill review process would occur at FIC s facilities on FIC s machines beyond the control of Texas Mutual. 7. In early November 2003, a number of FIC representatives including Ted Raycroft, Tara Ambrose and others traveled to Texas Mutual s Austin headquarters to make a sales presentation to a large group of Texas Mutual employees including Lisa Corless, Vice President of Claims, and Tracy Caraway, Senior Manager of Operations. During that meeting, FIC made an oral and electronic presentation to Texas Mutual that described the use and capabilities of SmartAdvisor. FIC represented, inter alia, that a. SmartAdvisor was the Industry leading Medical Bill Review engine; b. SmartAdvisor was developed, tested and maintained by Fair Isaac staff; c. it enabled clients to configure and implement their own business rules and workflow; d. SmartAdvisor had an active drag and drop report builder tool; e. its experience included over 10 million bills per year; f. its human service branches could function as the primary solution or as an overflow resource; g. SmartAdvisor was one of three world class solutions comprising what the platform looks like today; TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 9

10 h. SmartAdvisor s features included: automated duplicate detection, custom and standard reporting, and complete on-line help; i. no user intervention was required 74 to 90% of the time; j. 7.5 million workers compensation bills were repriced each year; k. implementation would be $10,000 plus travel; and l. SmartAdvisor could yield a potential savings of $236,873,596. Throughout this meeting and presentation, FIC representatives were pushing SmartAdvisor, a product they represented as then-ready for Texas Mutual s needs. At no point during this presentation did FIC representatives disclose that SmartAdvisor was a prototype, that it had not been completely built, and that it had not been tested for commercial release. 8. During the time period leading up to the execution of the contract between the parties, FIC made these and similar representations. For example, Ted Raycroft sent an with attachments to Texas Mutual s Lisa Corless and Tracy Caraway on December 5, 2003 that represented that SmartAdvisor was a rebranding of a prior product CompAdvisor, that the rebranding did not involve a major rewrite of CompAdvisor, and that SmartAdvisor had been released in the third quarter of In early December 2003, FIC hosted a group of Texas Mutual representatives including Lisa Corless, Tracy Caraway, and others at FIC s office in Coppell, Texas. The purpose of the visit was for FIC to provide further information about SmartAdvisor, the bill review solution it was marketing as then-ready for Texas Mutual s needs. At that visit, FIC s Ted Raycroft told Tracy Caraway that FIC then had live installations of SmartAdvisor at other customer locations. FIC also represented that: SmartAdvisor was then Scriptnet ready; that SmartAdvisor then had a software function that would transfer invoices from one claim to another; that the Software then had claim maintenance functions that allowed changing and deleting of claims; that SmartAdvisor TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 10

11 then had a balance and control functionality that permitted reconciliation if an invoice is deleted. Each of these statements was false at that time. FIC made these statements knowing they were false and for the purpose of inducing Texas Mutual to commit to SmartAdvisor and FIC. 10. During both the visit to Texas Mutual and the on-site visit at Coppell, FIC demonstrated software or displayed images that purported to be SmartAdvisor. During the Coppell visit, SmartAdvisor functions were demonstrated. For example, Lisa Corless observed for several minutes an unidentified FIC representative who was supposedly using SmartAdvisor s Report Designer tool. FIC represented that the Report Designer screens showed SmartAdvisor in operation. FIC could not have been demonstrating a functionally workable version of the SmartAdvisor application because FIC later admitted that Report Designer did not work. 11. FIC also represented that it could provide skilled and trained auditors to assist with those bill review functions that require processing by a person. In its November 2003 presentation, FIC represented that it had significant skilled capacity at the ready, that Texas Mutual could rely on FIC employees to provide specialty review functions, and that this large overflow capacity would allow Texas Mutual to effectively navigate any sudden bill volume changes. 12. FIC represented that SmartAdvisor possessed another key feature, the ability to quickly generate reports through the report designer tool. This feature was important to Texas Mutual's decision to contract with FIC for SmartAdvisor because Texas Mutual needs such reports for internal system compliance monitoring, for regulatory compliance, and to assist Texas Mutual in special anti-fraud responsibilities TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 11

12 assigned to it, in cooperation with law enforcement authorities, under its statute. On December 22, 2003, Ted Raycroft of FIC sent Tracy Caraway a copy of the Standard Reports User s Guide. This document described, in the present tense and as if it were a working product, the multiple report generating features of the software including detailed instructions on how to use SmartAdvisor s reporting tools. FIC later admitted that the promised SmartAdvisor Report Designer never worked and will never work. 13. Before March 2004, FIC sent the Fair Isaac SmartAdvisor Standard Reports User s Guide and other documentation that described SmartAdvisor and contained instructions on how to use SmartAdvisor. These materials spoke of SmartAdvisor in the present tense and described in detail the then existing functionality of the software. They did not disclose that SmartAdvisor was a product not in production and not in use by other customers. 14. FIC s representations including that SmartAdvisor was the industry leading medical bill review engine, that it was a presently existing commercially ready software, that it was only a rebranding of CompAdvisor, that SmartAdvisor was live at other client sites, that it had the current capability to generate on demand ad hoc reports and had a Report Designer feature, and that it had been released in the third quarter of 2003 were false. 15. FIC s misrepresentations and omissions went to the heart of the Hosting Services it was offering. 16. FIC s conduct, including its affirmative misrepresentations and failures to disclose, impaired and obstructed Texas Mutual s ability to inspect and investigate the services FIC was offering. TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 12

13 17. FIC made these representations aware of their falsity. In addition to these false statements, FIC failed to disclose the untested, unready, and unfinished nature of SmartAdvisor. FIC chose not to disclose the actual facts known to it, but not known to Texas Mutual, in order to induce Texas Mutual to enter into a contract with FIC. 18. Throughout this time period, FIC was fully aware of Texas Mutual s precise requirements and the historical volume for medical bill processing. FIC was also fully aware of the sensitive nature of the work it was seeking to undertake and the intense and demanding regulatory structure that governs the processing of medical bills in the Texas workers compensation system. FIC knew that failures to process medical bills accurately and timely would expose Texas Mutual to large-scale overpayments to providers and to administrative penalties and fines and could otherwise damage Texas Mutual s financial and reputational standing. 19. In reasonable reliance on FIC s representations and because of FIC's failure to disclose the actual status of SmartAdvisor, Texas Mutual, on about March 15, 2004, signed a multi-year contract with FIC entitled Master Application Service Provider Agreement ( Agreement ). Under the terms of the Agreement, FIC promised, inter alia, to become the exclusive provider of medical bill review services for Texas Mutual through its software application SmartAdvisor. FIC insisted that the Agreement be exclusive. TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 13

14 B. After Initiation of the Contract 20. FIC initially proposed a date in June 2004 as the implementation date the date that the medical bill processing functions could be taken over entirely by FIC. This date was referred to as the Go-Live date. The Go-Live date was later pushed back to November 8, In the months leading up to the November 8, 2004 Go-Live date, Texas Mutual personnel made multiple inquiries to FIC about the readiness of SmartAdvisor for Go-Live. On numerous occasions, FIC represented that the product was ready for Go-Live and that other customers were using SmartAdvisor. 22. During an August 2004 training session at Texas Mutual conducted by FIC, FIC s representatives struggled with the SmartAdvisor application. In response to direct inquiry, FIC s Denis Sevard represented that SmartAdvisor had been live for two years. 23. Throughout this time period, when problems were encountered, Texas Mutual would inquire how other customers handled various problems. FIC consistently answered such inquiries in a manner that did not disclose that there were no comparable customers and that the software was largely untested. In the critical months before Go- Live, the FIC repeatedly assured Texas Mutual that each problem was minor and could be addressed. FIC never disclosed that there were no comparable customers and that basic and advanced functions of SmartAdvisor were incomplete or untested. 24. For example, less than one month before Go-Live, Texas Mutual s Wanda Prall wrote to FIC identifying slow processing problems. She noted that this was a critical issue as it can not take 8 minutes to process one bill, that would kill us. FIC s TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 14

15 Eric Fritz wrote back on October 14, He stated that he could not reproduce similar performance problems and reassured her if such problems were encountered they could be consistently seen and identified. 25. FIC's post-contract representations concerning SmartAdvisor's readiness for live commercial operation were false when FIC made them. SmartAdvisor was not released for commercial use until well into Before Go-Live, SmartAdvisor had not been used by any customer with a monthly volume exceeding 25,000 bills per month. 26. In the weeks leading up to Go-Live, FIC was fully aware that the SmartAdvisor product was not ready for the high volume demands that processing all of Texas Mutual s medical bills would require. FIC was aware that there was a high risk of total product failure on the November 8, 2004 Go-Live. FIC neither communicated these concerns to Texas Mutual nor undertook any effort to protect Texas Mutual by delaying or canceling the Go-Live event. 27. Throughout the weeks before Go-Live, FIC instead consistently represented that SmartAdvisor was ready for the November 8, 2004 Go-Live and failed to disclose the true state of the facts. 28. In reasonable reliance on FIC's false representations and because of FIC's failure to disclose the actual facts, Texas Mutual allowed FIC to go forward with Go- Live on about November 8, If FIC had told the truth and disclosed the true status of SmartAdvisor and its human auditors, Texas Mutual would not have transferred its mission critical medical bill review functions to FIC on November 8, TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 15

16 29. Texas Mutual also misrepresented the quality of its human audit staff. In the summer of 2004, FIC s Ted Raycroft assured Texas Mutual that before Go-Live FIC could, within two or three days, have the equivalent of 15 full-time skilled auditors processing Texas Mutual s bills by hand. the start day. C. Total Failure of SmartAdvisor 30. SmartAdvisor was a catastrophic failure. The product failed to work on 31. When Texas Mutual called the FIC help desk, it was told that no such product as SmartAdvisor existed. 32. SmartAdvisor problems were fundamental, widespread, and lasting. FIC, despite its alleged dedication of tremendous efforts and thousands of work hours, was unable to deliver a functioning SmartAdvisor until four months after Go-Live. In the first months after implementation: a. SmartAdvisor was either completely down or very slow; b. Texas Mutual went from a pre-implementation average of 55,000 bills a month to 24,000 in first month; c. SmartAdvisor inaccurately processed bills; d. SmartAdvisor was unable to allow processing of reevaluations; e. timeouts were routinely experienced throughout the day; f. downtime was routinely experienced throughout the week; g. the system experienced significant slowness; h. there were repeated data transmission failures; i. bills unnecessarily recycled through rules engines; j. SmartAdvisor overwrote denials and paid claims; k. hundreds of bills in system were not visible and could not be processed; l. FIC overflow staff made numerous basic and costly errors; m. Report Designer was not and will never be available; n. other reporting functions were not available -- including many simple queue and work in progress reports -- (and some that were available were wrong); o. duplicate document control numbers were issued (for invoices); p. ScripNet Bridge did not work; and TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 16

17 q. FIC was running background jobs that halted performance. 33. In early December, FIC acknowledged that the SmartAdvisor engine was backed up and that it would pend bills even when the rules were checked off and no new ones were firing. 34. Texas Mutual advised FIC within days of Go-Live that Texas Mutual might incur fines as a result of SmartAdvisor s performance. 35. FIC representatives were unable to identify the cause of problems because of quirky errors. In later months, FIC representatives described many of the key software features as rogue processes, unable to function as designed. 36. It took FIC months after Go-Live to modify SmartAdvisor to make it capable of performing basic health care provider bill review functions with reasonable accuracy and speed. 37. As a result, thousands of bills were paid late, and Texas Mutual was obliged to pay more than a hundred thousand dollars in interest on those bills. In order to ensure timely processing of bills, many of the payment decision rules that SmartAdvisor was supposed to apply automatically had to be removed or suspended. 38. FIC later identified additional rules to suspend or remove in order to further limit the number of invoices sent into pending status. The result was that, during the months it took FIC to modify SmartAdvisor to make it workable and to train FIC personnel to perform their duties, Texas Mutual overpaid health providers by millions of dollars. FIC understood that suspending these rules would cause overpayments to providers. TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 17

18 39. Additionally, Texas Mutual suffered damages in the form of increased operational costs and expenses incurred in responding to the crisis created by SmartAdvisor s failure. 40. Even as late as January, FIC initiated a rapid response team, a process for emergency diagnostics gathering for SmartAdvisor performance. The goal was to try to get a handle on the system latency and workflow issues. 41. The FIC auditors lacked basic knowledge of both medical bill review processes and FIC s software. FIC s overflow staff were unskilled, untrained, and unready at Go-Live and for months thereafter. Texas Mutual employees had to train FIC s Coppell employees in the basic functions of SmartAdvisor. 42. These FIC auditor shortcomings contributed significantly to the problems encountered after Go-Live. FIC auditors made numerous serious and costly mistakes when auditing the medical bills. 43. SmartAdvisor was untested until FIC made Texas Mutual, without Texas Mutual's knowledge and consent, the guinea pig for FIC's live Beta test. That testing revealed that SmartAdvisor was deeply flawed. FIC s deliberate decision to make a Beta test of Texas Mutual without Texas Mutual's knowledge and consent was fraudulent, unconscionable, and has caused Texas Mutual extensive damages. III. CAUSES OF ACTION A. Fraudulent Inducement to Contract 44. Texas Mutual incorporates paragraphs 1-19 and by reference herein. 45. As alleged above, before March 15, 2004, in order to induce Texas Mutual to enter into a contract, FIC intentionally or with reckless disregard for the truth made TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 18

19 false representations to Texas Mutual and fraudulently concealed known facts where there was a duty to disclose. Specifically, FIC s acts, omissions and misrepresentations in 2003 and before March 15, 2004 constitute the following factual misrepresentations: a. that SmartAdvisor was a currently existing software application; b. that SmartAdvisor was in use by other customers; c. that SmartAdvisor had been released in the third quarter of 2003; d. that SmartAdvisor had certain features including a reporting tool named report designer; e. that SmartAdvisor was merely a re-branding from the prior software application, CompAdvisor; f. that SmartAdvisor could handle the specific volume demands presented by Texas Mutual; g. that SmartAdvisor had other features described above; and h. that FIC s audit staff was trained and skilled at bill review. 46. FIC knew that its representations, including those made affirmatively and those made by silence and failure to disclose, were inaccurate, false, and material. FIC intended that Texas Mutual rely upon these material misrepresentations and omissions to induce Texas Mutual execute the Agreement. Texas Mutual actually relied upon material misrepresentations and omissions by FIC in executing the Agreement to use SmartAdvisor. 47. FIC's misrepresentations and failure to disclose constitute fraud and fraudulent inducement and caused Texas Mutual damages for which it seeks recovery. B. Fraud 48. Texas Mutual incorporates paragraphs 1-47 by reference herein. TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 19

20 49. As alleged above, after March 15, 2004, FIC intentionally or with reckless disregard for the truth, made false representations to Texas Mutual and fraudulently concealed known facts where there was a duty to disclose. Specifically, in the summer and fall of 2004, FIC s acts, omissions and misrepresentations constitute the following factual misrepresentations: a. that SmartAdvisor was actively in use by other customers before Go-Live; b. that SmartAdvisor had been in use for two years; c. that SmartAdvisor was ready and capable of handling the demands imposed by going live with Texas Mutual s entire volume of medical bills; d. and that that FIC s audit staff was trained and skilled at bill review. 50. FIC knew that its representations, including those made affirmatively and those made by silence and failure to disclose, were inaccurate, false, and material. FIC intended that Texas Mutual rely upon these material misrepresentations and Texas Mutual did actually rely in transferring its mission critical medical bill review function to FIC on November 8, FIC's misrepresentations and failure to disclose constitute fraud and caused Texas Mutual damages for which it seeks recovery. C. Negligent Misrepresentation 52. Texas Mutual incorporates paragraphs 1-51 by reference herein. 53. FIC s acts, omissions, and misrepresentations constitute misrepresentations of material fact in the course of FIC s business and in transactions in which FIC had a pecuniary interest. TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 20

21 54. In the course of making such misrepresentations, FIC supplied false information for the guidance of Texas Mutual in its business. 55. FIC did not exercise reasonable care or competence in obtaining or communicating the false information. 56. Texas Mutual justifiably relied on FIC s misrepresentations to its detriment and suffered substantial damages for which it seeks recovery. IV. EXEMPLARY DAMAGES 57. The wrong done to Texas Mutual was aggravated by the kind of fraud for which the law allows the imposition of exemplary damages in that FIC made a material misrepresentation that was false, knowing it was false or with reckless disregard as to its truth, and as a positive assertion, with the intent that Texas Mutual act on it. Texas Mutual relied on the representation and suffered injury as a result of that reliance. FIC s conduct also constitutes gross negligence, and involves such an entire want of care as could only have resulted from a conscious indifference to the rights of Texas Mutual. FIC s conduct was specifically intended to cause substantial damage to Texas Mutual or was carried out with flagrant disregard for Texas Mutual s rights and welfare, and with actual awareness that the conduct would result in actual damages to Texas Mutual. As such, FIC s conduct also constitutes malice. As result of FIC s conduct, Texas Mutual is entitled to exemplary damages. 58. Because FIC s conduct as described above is felonious in that it violates TEX. PEN. CODE 32.46, Texas Mutual is entitled to exemplary damages as awarded by the jury without reference to the limitations imposed by TEX. CIV. PRAC. & REM. CODE et seq. TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 21

22 V. ACCOUNTING 59. Wholly apart from recovery of the enormous damages that FIC has caused Texas Mutual, as described above, Texas Mutual also asks that FIC be required to account for the amounts that it has invoiced Texas Mutual, which Texas Mutual has paid under protest. FIC has failed to give proper details as requested by Texas Mutual to support the invoiced amounts, and Texas Mutual believes that the invoiced amounts exceed any amounts that might properly be claimed under the contract. In addition to recovery of damages as described above, Texas Mutual asks for recovery of all amounts of contractual fees previously paid under protest, to the extent that the invoices exceeded proper contractual calculations. VI. ATTORNEY S FEES AND EXPENSES 60. Texas Mutual is entitled to recover its attorney s fees under Texas Civil Practice & Remedies Code and other grounds for awards of attorney s fees. VII. PREJUDGMENT AND POST-JUDGMENT INTEREST 61. Texas Mutual is entitled to recover pre- and post-judgment interest as allowable by law. VIII. PRAYER WHEREFORE, Texas Mutual prays that the relief requested by Fair Isaac be denied and that judgment be entered in favor of Texas Mutual as follows: a. Actual damages; b. Exemplary damages; c. Equitable relief, including an accounting; TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 22

23 d. Attorneys fees; e. Court costs; f. Prejudgment and post-judgment interest as allowed by law; and g. All other relief, in law or equity, to which Texas Mutual may be entitled. Respectfully submitted, GRAVES DOUGHERTY HEARON & MOODY a Professional Corporation, John J. McKetta, III State Bar No P.M. Schenkkan State Bar No Michael J. Whellan State Bar No Congress Avenue, Ste Austin Texas (512) (512) (Fax) By s/michael J. Whllan Michael J. Whellan REEVES & BRIGHTWELL LLP Paul Schlaud State Bar No W. 6th. Street, Suite 1000 Austin, Texas (512) (512) (Fax) TEXAS MUTUAL INSURANCE CO. Mary Barrow Nichols, General Counsel State Bar. No Texas Mutual Insurance Company 6210 E. Hwy 290 Austin, TX ATTORNEYS FOR TEXAS MUTUAL INSURANCE COMPANY TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 23

24 CERTIFICATE OF SERVICE I hereby certify that on September 19, 2005, a true and correct copy of the foregoing Answer and Counterclaim was served on counsel of record by mailing a copy via U.S. Certified Mail, Return Receipt Requested and/or First Class Mail, postage prepaid, addressed to: Maria Wyckoff Boyce W. Zachary Hughes 910 Louisiana Houston, Texas s/michael J. Whellan Michael J. Whellan TEXAS MUTUAL S ANSWER AND COUNTERCLAIMS 24