On May 13, 2011, the Court ruled that MetLife abused its discretion and improperly denied plaintiff’s claim for long-term disability (“LTD”) benefits made under an ERISA-governed employee welfare benefit plan.  With the ruling, the Court ordered that MetLife pay all benefits due under the policy’s “own occupation” definition of disability, and remanded the claim back to MetLife for a determination under the “any occupation” definition.

While MetLife argued that 29 C.F.R. § 2560.503-1 did not apply to its actions because the disability claim was remanded to MetLife following litigation, the District Court noted that MetLife failed to provide any authority to support that position.  The Court ultimately rejected MetLife’s argument, explaining that the plain language of the regulation, which “sets forth minimum requirements for employee benefit plan procedures pertaining to claims for benefits by participants and beneficiaries," applies to the remand of the LTD claim.

In denying MetLife’s motion, the District Court explained that:

Pursuant to 29 C.F.R. § 2560.503-1(f)(3), Defendants had until June 27, 2011, to either make a determination on Plaintiff's claim, or make a determination that more time was needed to resolve Plaintiff's claim and notify Plaintiff. Defendants did neither. After hearing nothing from Defendants, Plaintiff, on her own initiative, sent over her medical records to Defendants. The first time Defendants indicated that they needed more information was in October 2011, five months after the Court remanded the claim for consideration.

Given MetLife’s failure to act within the time limits set by 29 C.F.R. § 2560.503-1, the District Court held that “it is too late for [MetLife] to further delay by seeking an IME.”  Finally, the District Court ruled that “[p]ursuant to 29 C.F.R. § 2560.503-1(l), Plaintiff's claim for long term disability benefits under the ‘any occupation’ standard is deemed exhausted,” and the plaintiff could therefore initiate further litigation regarding MetLife’s failure to pay benefits under the “any occupation” definition.

This case highlights a claimant’s remedies when a claims administrator/insurer does not follow the applicable ERISA deadlines.  It is nice to see the courts protecting claimants when insurers such as MetLife blatantly violate the applicable ERISA and Department of Labor deadlines.

In an unpublished opinion, the Court of Appeal considered the trial court’s ruling on both of the post-verdict motions.  First, after reviewing the available record, the Court determined that the verdict in Bosetti’s favor was supported by substantial evidence, including specifically that her depression caused the disabling physical symptom of an increase in her fibromyalgia pain.  Based on these facts, the Court reversed the trial court’s ruling on the motion for judgment notwithstanding the verdict.  In reaching this conclusion, the Court of Appeal affirmed its earlier ruling that a limitation on coverage for “mental, nervous or emotional disorders of any type” does not apply if the insured‘s disability was caused, in any part, by her physical symptoms.

However, with respect to U.S. Life’s motion for a new trial, the Court of Appeal explained that the trial judge is afforded great deference and “an order granting a new trial `must be sustained on appeal unless the opposing party demonstrates that no reasonable finder of fact could have found for the movant on [the trial court's] theory,’” Applying this standard, the appellate court affirmed the order granting a new trial after finding that there was also substantial evidence that would have supported a verdict in U.S. Life’s favor. 

While the case was remanded to the trial court for a second trial, the Court of Appeal did not overturn its 2009 ruling, and thus Bosetti I and its position regarding mental disabilities with physical symptoms should still be considered good law.

"After representing Fortune 500 insurers for 25 years at a large California law firm, McKennon realized he was destined to take that expertise to the policyholders when he consistently won evaluative mock trial verdicts against his insurer clients, the last four of which resulted in $17 million, $33 million, $250 million and $500 million verdicts from the jurors.  All of them included punitive damages."

"We mount aggressive litigation against even the most powerful adversaries.  And we are not afraid to go to trial against them," Mr. McKennon says about why he and his firm are successful. 

The Forbes magazine story is the latest recognition for Mr. McKennon, who was also recently named as a 2012 Southern California super lawyer, an honor given to fewer than 5% of Southern California lawyers.

To view this article please click here.

• Benefits you receive if you become disabled will be tax-free, as long as you paid the insurance premiums with after-tax money;
• Own occupation policies ensure you for your inability to perform the substantial and material duties of your own occupation in the usual and customary manner and with reasonable continuity.  This California law standard is very favorable for consumers when insurance companies determine when you are disabled;
• The policy is not tied to your current occupation.  This means you can move around to different occupations and still maintain your policy;
• Once you obtain it, as long as you timely pay your premiums, most policies do not allow insurers to cancel disability policies, no matter your change in health;
• If you buy disability insurance when you are earning a high income, most policies provide that the benefits at the time you apply for a disability policy are based on a percentage of your income and your benefits will be locked in even if your income substantially diminishes;
• If you buy a policy with lifetime benefits and if you are permanently disabled, you now have a nice “annuitized” income for the remainder of your life;
• Your greatest asset is your earning capacity and disability insurance insures that asset – it should be an important part of your financial planning.

What are some important things to look for when considering disability insurance?

• Be sure the policy is “guaranteed renewable” and “non-cancellable."  This guarantees that policy premiums cannot be changed as long as you pay them and your policy must be renewed every year no matter your health condition;
• Be sure the policy provides benefits to age 65 or lifetime;
• Look for disability policies that have  "accident” or “injury” definitions that pay benefits for your lifetime;
• Although more expensive, always buy “own occupation” policies (with an occupational specialty rider if applicable);
• "Residual benefits" are available as an optional rider.  This benefit essentially allows you to collect partial disability benefits while you work if you can only work part-time or I can work full-time but can perform some, but not all, of your occupational duties.  I recommend against buying this rider because it is expensive and, under California law, it is mostly likely not necessary.  In addition, such a rider/provision can be interpreted to disallow total disability benefits when a residual rider is in place (insurers often make this argument);
• If you can afford it, a cost-of-living rider will protect your future benefits from inflation;
• Buy a policy with a right elimination period (time when you are disabled but you not entitled to receive benefits) – the longer this period, the less expensive your policy. 

Once you become disabled, it is vitally important that you fully understand all provisions of your policy and that you obtain necessary counsel if your claim is denied.  If you have any questions about your disability coverage, your individual disability claim or ERISA disability claim, please contact us.

For 12 years, there was no communication between Reliance Standard and Withrow, other than Withrow’s monthly receipt of her disability check.  Then, in 2002, Withrow contacted a benefits manager at Bache Halsey (which by then had changed its name to Prudential Securities) to discuss her concerns that she was being underpaid.  After a series of communications with Prudential Securities and Reliance Standard, including a formal denial of Withrow’s claim and her subsequent appeal, in January 2004, Reliance Standard left a message for Withrow’s attorney indicating that Reliance Standard was upholding its decision that $3,950 was the proper monthly benefit amount. 

In 2006, Withrow initiated a lawsuit against the Plan, however the District Court granted the Plan’s   motion to dismiss based upon a statute of limitations defense.  The Ninth Circuit began its analysis by indicating that there were two issues presented by the appeal:

There are two parts to the determination of whether a claimant’s ERISA action is timely filed: we must determine first whether the action is barred by the applicable statute of limitations, and second whether the action is contractually barred by the limitations provision in the policy.  See Wetzel v. Lou Ehlers Cadillac Group Long Term Disability Ins. Program, 222 F.3d 643 (9th Cir. 2000) (en banc).

First, citing to Wetzel, the Ninth Circuit explained that “district court must apply the state statute of limitations that is most analogous to an ERISA benefits recovery program,” and that in this ERISA case “California’s four-year statute of limitations for contract disputes applies.”  Next, the Ninth Circuit explained that federal law governs when an ERISA cause of action accrues and triggers the start of the four-year clock.  Under Wetzel, an ERISA cause of action accrues “either at the time benefits are actually denied, or when the insured has reason to know the claim as been denied.”  Citing Wise v. Verizon Communications, Inc., 600 F.3d 1180, 1188 (9th Cir. 2010), the Ninth Circuit explained that the phrase “reason to know” means when the plan communicates a “clear and continuing repudiation of a claimant’s rights under a plan such that the claimant could not have reasonably believe but that his or her benefits had been finally denied.”

After finding that Withrow’s claim was “actually denied” in 2004 when her attorney was informed that Reliance Standard was standing by its original determination, the Court turned to when Withrow had a “reason to know” her claim was denied.  While Reliance Standard argued, and the District Court agreed, that Withrow had a reason to know that her claim was denied in 1990, the Ninth Circuit disagreed.  Specifically, the Ninth Circuit found that the events of 1990 were unclear, and Reliance Standard’s records failed to provide clear evidence of who made the call in 1990, what exactly was said and whether Withrow was provided with guidance as to how to submit her claim for review.  Thus, there was insufficient evidence to support Reliance Standard’s position that it communicated a “clear and continuing repudiation” of Withrow’s claim.  Accordingly, Withrow’s claim did not accrue in 1990, and her lawsuit was timely filed.

Finally, the Court turned to the issue of whether Withrow’s claim was time-barred by the plan’s internal statute of limitations period.  The plan required that legal actions must be initiated with three years of “the time written proof of loss is required.”  After holding that “contract limitation provisions in benefit policies still have force independent of ERISA in long-term disability cases,” the Ninth Circuit held that such provisions are “meaningless as applied to disputes over the proper calculation of the amount of monthly benefits, as opposed to disputes over whether the applicant is entitled to benefits at all.”

With this opinion, the Ninth Circuit is again informing ERISA administrators that, when informing a claimant that a claim for benefits is being denied, that message must be presented in such a manner that there can be no question that the decision is final and binding.  If the administrator fails to meet this standard, it will be barred from relying on the applicable statute of limitations as a defense to any lawsuit.

The recent decision of the District Court, Southern District of California in Barbour v. UNUM Life Ins. Co., 2011 U.S. Dist. LEXIS 91060 (S.D. Cal. 2011),  is a primary example of how an insurer’s misuse of in-house experts and its reliance on the “genuine dispute doctrine” can result in potential bad faith liability, as well as punitive damages.

Barbour involved a disability policy issued by UNUM through a school district and covering the Principal of a school in the district.  The Group Salary Protection Insurance Policy (“Policy”) at issue provided Accident and Sickness Disability Benefits for one year in the event of total disability, and after one year, the Policy provided monthly long term disability income benefits for as long as the claimant remains totally disabled or otherwise qualifies for benefits, up to age 65.  The Policy defined “Total Disability” during the first two years as the inability “to perform the material duties of your own occupation.”  After two years, the Policy defined “Total Disability” as the inability “to engage in any gainful occupation for which you are reasonably qualified by training, education or experience.”  In February 2003, the insured submitted a claim for disability benefits based on abdominal pain that restricted her from driving, walking/standing and sitting for extended period, and UNUM began paying benefits.  Over the course of several years, the insured suffered multiple further injuries relating to her initial injury, which required multiple surgeries, and which rendered her totally disabled.  The insured submitted regular medical reports and updates, and UNUM continued to pay disability benefits. 

In December 2007, UNUM hired an investigator to conduct surveillance on the insured to confirm the claimed disabilities.  The investigator observed a “female subject believed to be the insured” who was moving without the physical limitations represented to UNUM by the insured and her doctors.  The investigator’s report and video raised suspicion within UNUM regarding the insured’s disability, and resulted in UNUM conducting further surveillance.  UNUM investigators made a field visit in October 2008, and again conducted surveillance in January 2009.  In February 2009, UNUM’s in-house doctor/consultant reviewed the file and prepared a report which concluded that the insured’s claimed disability was inconsistent with her findings.  Then, in March 2009, UNUM’s “Designated Medical Officer” reviewed the file and determined that there were three occupations that the insured was capable of performing, notwithstanding her disability.  UNUM thereafter revoked the insured’s disability benefits effective March 31, 2009, and advised her that she had the right to file a civil action under the section 502(a) ERISA statute.  Unsurprisingly, the insured hired an attorney.

The insured’s attorney sent a letter to UNUM advising that UNUM’s determination that the claim was governed by ERISA was erroneous.  The attorney also provided a letter from the insured’s doctor stating that the person observed during surveillance in December 2007 was not the insured.  UNUM was also provided a functional capacity evaluation by the insured’s physical therapist that concluded that the insured’s “physical limitations presented a barrier to work.”  This information was reviewed by UNUM’s in-house medical experts.  On October 6, 2009, UNUM sent a letter agreeing with the insured’s position as to ERISA, but stating that the new medical information did not change UNUM’s decision to deny benefits.

UNUM filed a motion for summary judgment to dismiss the insured’s claims for breach of the implied covenant of good faith and fair dealing (bad faith), intentional infliction of emotional distress and punitive damages.  To defeat the bad faith claim, UNUM relied on the “genuine dispute doctrine.”  In rendering its ruling, the court noted that the overarching issue in a bad faith claim is whether the insurer’s claims-handling conduct was reasonable.  Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 (9th Cir. 2002).  The court then explained the applicability of the genuine dispute doctrine:

"The genuine issue rule in the context of bad faith claims allows a district court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer's denial of benefits was reasonable--for example, where even under the plaintiff's version of the facts there is a genuine issue as to the insurer's liability under California law. In such a case, because a bad faith claim can succeed only if the insurer's conduct was unreasonable, the insurer is entitled to judgment as a matter of law." Amadeo, 290 F.3d at 1161-62 (citation omitted). "On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably." Id. at 1162 (citation omitted)(emphasis added).

The court held that a reasonable jury could conclude that UNUM acted unreasonably when it was informed that the evidence UNUM relied upon to deny the insured’s claim was wrong (i.e., the surveillance was of someone other than the insured).  The court further determined that there was no evidence that UNUM’s experts evaluated the evidence with an eye towards favoring the insured and in a manner which would indicate that she was indeed disabled as she and her doctors asserted.  The court relied upon the facts as viewed “in the light most favorable to Plaintiff” to determine that a jury could conclude that UNUM acted unreasonably, and thus in bad faith when it denied the insured’s claim.  The court therefore denied UNUM’s motion for summary judgment.

The court also discussed UNUM’s initial erroneous determination that the claim was governed by ERISA, and held that it created evidence of insurer bias, which could also indicate and support a claim for bad faith. Hangarter v. Provident Life & Acc. Ins. Co., 373 F.3d 998, 1010 (9th Cir. 2004) (citing Chateau Chamberay Homeowners Ass'n v. Associated Int'l Ins. Co., 90 Cal. App. 4th 335, 348 (2001)). 

The court placed a premium on UNUM’s apparent failure to reasonably and thoroughly investigate the insured’s claim.  In particular, the court found that UNUM’s failure to seek an independent medical examination of the insured supported her claim that UNUM acted unreasonably.  In so finding, the court discussed a line of cases which suggest that an insurer’s sole reliance on its own in-house experts, and its failure to obtain an independent medical examination, is clear evidence that an insurer has acted unreasonably. 

Based on these findings, the court held that the insured’s claims for intentional infliction of emotional distress and for punitive damages were equally as viable based on UNUM’s potentially unreasonable conduct in evaluating the insured’s claim.

With this decision, the court made it very clear that an insurer cannot escape liability for bad faith by relying on its own in-house experts and ignoring evidence presented by an insured which, when viewed in favor of the insured, would indicate coverage should be afforded.  An insurer cannot create a “genuine dispute” as to coverage on which it can deny an insured’s claim simply by relying on its own in-house experts.  An insurer who does so, does so at its own peril, and opens itself up to claims for bad faith and punitive damages.

Some of our previous decisions have indicated that only a benefit plan itself or the plan administrator of a benefit plan covered under ERISA is a proper defendant in a lawsuit under [29 U.S.C. § 1132(a)(1)(B)].  We conclude that the statute does not support that limitation, however, and that an entity other than the plan itself or the plan administrator may be sued under that statute in appropriate circumstances.

Reliance Standard appealed the decision, and the Ninth Circuit heard the case en banc.  In considering only the issue of whether an insurer/claim administrator is a proper defendant in an action to recover benefits under the terms of the plan, the Ninth Circuit noted that “[b]y its terms,  § 1132(a)(1)(B) does not appear to limit which parties may be proper defendants in a civil action.  Nor has the Secretary of Labor promulgated a regulation setting out such limits.”  The Ninth Circuit analyzed the United States Supreme Court’s decision in Harris Trust & Saving Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (2008) which examined a similar issue with respect to § 1132(a)(3) and noted that the section “makes no mention at all of which parties may be proper defendants—the focus, instead, is on redressing the ‘act or practice which violates any provision of [ERISA Title I]’”  Given the Supreme Court’s analysis of § 1132(a)(3), the Ninth Circuit could “see no reason to read a limitation into § 1132(a)(1)(B).”

The Ninth Circuit explained that, in this litigation, Reliance Standard was a proper defendant because:

Reliance denied Cyr’s request for increased benefits even though, as the plan insurer, it was responsible for paying legitimate benefit claims.  Reliance is, therefore, a logical defendant for an action by Cyr to recover benefits due to her under the terms of the plan and to enforce her rights under the terms of the plan, which is precisely the civil action authorized by § 1132(a)(1)(B).

With this ruling, the Ninth Circuit specifically overruled its previous rulings to the contrary, including Everhart, Ford v. MCI Communications Corp. Health & Welfare Plan, 399 F.3d 1076, 1081 (9th Cir. 2005), Spain v. Aetna Life Insurance Co., 13 F.3d 310, 312 (9th Cir. 1993) and Gelardi v. Pertec Computer Corp., 761 F.2d 1323 (9th Cir. 1985).

While, on its face, this case seems to impose liability on insurance companies they did not previously face, in reality, this is not the case.  In most ERISA cases for life insurance benefits, health insurance benefits or disability insurance benefits for which the insurance company was financially responsible, the insurance company typically controlled the defense of these lawsuits and paid any amounts due after a settlement or judgment, regardless of whether it was named as a defendant.  This decision realized the practical reality that insurance companies should be allowed defendants in ERISA cases involving life insurance benefits, health insurance benefits or disability insurance benefits for which insurance companies are financially responsible.  This decision simply put into law what was already happening in actual practice.

In ruling that the medical records supported Burnett’s claim, the court Gee criticized the findings of MetLife’s so-called “independent” expert Dr. Mark Schroeder, a psychiatrist.  Specifically, the court determined that “Dr. Schroeder arbitrarily discounted the opinion of Dr. Friedman, the treating physician whom Burnett saw weekly, and distorted the importance of the progress reports submitted by Dr. Anderson.  Further, the court held that Dr. Schroeder “overemphasized the significance of Dr. Anderson’s February 20 and March 19 progress reports to the exclusion of the overwhelming weight of the evidence in the record, including the characteristics of the job that Burnett previously occupied and the corroborating results of the MMPI-2.” 

Overall, the court classified Dr. Schroeder’s findings as “unreasonable” and awarded Burnett “STD benefits for the maximum 10-week period—from February 15 through April 25—because the evidence clearly shows that Burnett qualified as fully disabled during that time period.”

17. The general exhaustion rule covering ERISA claims requires a claimant to "avail himself or herself of a plan's own internal review procedures before bringing suit in federal court." Diaz v. United Agr. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir. 1995) (citing Amato v. Bernard, 618 F.2d 559, 566-68 (9th Cir. 1980)). The general rule of exhaustion, however, is not a statutory requirement, and a court "may waive the exhaustion requirement, and should do so when exhaustion would be futile." Horan v. Kaiser Steel Ret. Plan, 947 F.2d 1412, 1416 (9th Cir. 1991) (citing Amato, 618 F.2d at 568).

18. The Court finds that, under the facts of this case, Burnett's exhaustion of the LTD administrative remedies would have been futile for the following reasons. First, the definitions for "fully disabled" for purposes of STD benefits and LTD benefits are substantially the same. (A.R. 7, 39.) Second, the STD and LTD plans are integrated, such that they rely on and refer to each other. (A.R. 40.) MetLife's termination of Burnett's STD Plan benefits essentially doomed any claim he might have to LTD Plan benefits. Finally, because MetLife is the designated Claim Administrator under both the STD and LTD plans (A.R. 6, 38.), the plans are administered by the same entity. In light of the foregoing—considered together with MetLife's unwavering denial of Burnett's post-March 13 STD benefits—MetLife likely would have denied any LTD benefits claim Burnett submitted for the same reasons it terminated his STD benefits claim.

19. Finally, the Court considers the policy implications of the exhaustion doctrine, which include "the reduction of frivolous litigation, the promotion of consistent treatment of claims, the provision of a nonadversarial method of claims settlement, the minimization of costs of claim settlements and a proper reliance on administrative expertise." Diaz, 50 F.3d at 1483. None of these policy considerations preclude the Court from applying the futility exception to the facts of this case. To require Burnett to submit a written claim for LTD benefits—which would be subject to a denial similar to that of his STD benefits claim—only then to require him to exhaust his administrative appeals and then possibly return to this Court, would exalt form over substance and defeat the fair and efficient administration of justice.

The court therefore awarded Burnett LTD benefits through July 1, 2008, the date of the more recent medical record in the Administrative Record. 

Finally, the court’s ruling in also interesting for its analysis of MetLife’s conflict of interest.  Previously, courts generally held that if a plan was self-funded – that is, benefits were paid by the employer, not the insurer/claims administrator – then there was little danger that the administrator’s claim decision was improperly impacted by an interest in reducing the amount of claims it paid out.  Here, however, the Court noted that:

Although no structural conflict of interest exists, MetLife does maintain a contract with Raytheon to provide claim administration services under Raytheon's disability benefit plans. Thus, MetLife has an incentive to maintain that contract by keeping the cost of Raytheon's disability benefit program low. This is but one factor the Court weighs in determining whether MetLife abused its discretion in terminating Burnett's STD benefits beyond March 13. See Abatie, 458 F.3d. at 967 (noting that the Court's abuse of discretion review is to be informed by the nature, extent, and effect on the decision-making process of any conflicts of interest).

Thus, claimants must always be aware that a claims administrator’s decision could be improperly influenced, not only by a desire to pay our less in claims, but also to keep the employers as a customer. 

Litigation pursuant to the Employee Retirement Income Security Act (“ERISA”) is rather unique.  Unlike most cases, ERISA disputes are based on a limited scope of permissible evidence.  The range of that scope is ultimately dependent on which standard of review is employed by the courts.  Typically, when the standard of review is abuse of discretion, the scope of admissible evidence is limited to what was before the claims administrator when the claims decision was made, i.e. the “administrative record.”  The reason for this limited subset of evidence is based on the sole question before the court, namely “Did the claim administrative abuse its discretion in rendering its decision?”  Obviously, evidence discovered or submitted after the claims decision was made would be irrelevant to that question, hence the narrow scope.  However, when the standard of review is de novo, the question before the court changes to whether or not the claimant is entitled to benefits.  In other words, it is simply whether or not the claimant is disabled.  Consequently, this change in question also alters the realm of admissible evidence. 

Recently, the court in Ermovick vs. Mitchell, Silberberg & Knump LLP Long Term Disability Plan, 2010 WL 3956819 (Decided October 8, 2010), addressed the question of whether evidence of procedural deficiencies should be considered in the context of a de novo review.  The facts are relatively straight forward.  James Ermovick worked as a word processor at the law firm of Mitchell, Silberberg & Knump.  His claim for disability benefits was based on depression, anxiety and pain radiating in his back and neck due to myeloradiculopathy.  Ermovick claimed to be totally disabled from any occupation while Prudential, the claims administrator, believed his disability to be temporary and therefore denied his benefits claim. 

The problem the court faced was that the evidence, although relevant to the issue of Prudential’s credibility, was ultimately irrelevant on the narrow issue of whether Ermovick was disabled.  Not to be deterred, Ermovick cited to the 10th Circuit case of Niles v. American Airlines, Inc., 269 Fed. Appx. 827, 833 (10th Cir.2008), which held that “[a] showing that the administrator failed to follow ERISA procedures therefore provides a basis for reversal separate from that provided by de novo review of the merits of the claim.”  There, the court in Niles concluded that such procedural deficiencies effectively created an independent basis for reversal of a claims administrator’s decision.  However, not every circuit believed this to be the case.  For example, the Sixth Circuit took a more hard-line view.  In Wilkins v. Baptist Healthcare System, Inc., 150 F.3d 609, 613 (6th Cir.1998), the court found that analysis of procedural deficiencies were not necessary under a de novo review provided that the denial of benefits was correct.  If the decision made by the claims administrator was ultimately the right one, then the convoluted manner in which it reached that conclusion was irrelevant. 

Since existing case law in the Ninth Circuit did not provide clear guidance, the court in Ermovick came to the conclusion that it should follow the Sixth Circuit rational based on Abatie v. Alta Health & Life Ins. Co., 458 F. 3d 955 (9th Cir. 2006).  In Abatie, the Ninth Circuit held that “even in instances of wholesale and flagrant violations of the procedural requirements of ERISA, the Court's remedy is to accord no deference to the Plan and review the record de novo.”  By according no deference, the Ninth Circuit left no room for an independent basis for reversal.  The Ermovick court interpreted this holding to mean that to give “no deference” also equates to providing to no weight to procedural deficiencies.  There was, of course, one exception to this rule.  Where the procedural deficiencies caused the record itself to be incomplete, then the court may supplement the administrative record with additional evidence. 

In Ermovick, since neither party asked to supplement the record, the court reasoned that the administrative record was complete.  As a result, the court held that evidence of procedural deficiencies was not necessary when the standard of review was de novo.  On that basis, the court proceeded to conduct its own independent review of the record which revealed that despite the errors in handling the case, Prudential’s decision to terminate benefits was correct. 

Assuming the Ninth Circuit doesn’t reverse this decision on appeal, it seems clear that when the standard of review is de novo, the court will not consider procedural deficiencies in ERISA cases. 

One of the latest is the unpublished opinion in Sterio v. HM Life, 2010 U.S. App. LEXIS 4615 (E.D. Cal., Mar. 4, 2010) which represents the first case out of the Ninth Circuit Court of Appeals to substantively discuss the application of the conflict of interest analysis set forth in Montour. This case provides valuable insight into how may courts will apply the factors set forth in Montour.

As with many insurance cases, the ultimate benefits decision was made by HD Life, who was also the insurer of the plan. This situation creates a structural conflict of interest. In Glenn, supra, the Court held that the presence of a conflict of interest does not change the standard of review, but instead becomes a factor in determining whether an administrator abused its discretion. Here in Sterio, the court discussed five factors which it held, demonstrated that HD Life abused its discretion. The first was HD Life’s failure to address what the court believed was reliable medical evidence. This conflicted with HD Life’s claim that there was no objective medical evidence supporting her disability. Second, HD Life failed to address or even acknowledge the Social Security Administration’s determination that Sterio was permanently disabled. Although the SSA’s determination would not be binding on HD Life, their failure to even address the issue was suspect. The third factor was the failure to conduct an in-person medical evaluation. Independent medical exams are not required but in this case, HD Life engaged six different independent reviewing physicians, each of whom conducted only a paper review of the evidence. The fourth factor addressed by the court is the failure of the administrator to communicate to the claimant the specific evidence necessary to establish the claim. Here, HD Life discounted Sterio’s Functional Capacity Evaluation because there was no bone density study performed. However, HD Life failed to communicate to Sterio that information which prevented her from taking steps to prove her claim by undergoing a bone density study. The final factor discussed by the court was HD Life’s violation of ERISA procedures by “tacking on a new reason for denying benefits in its final decision, thereby precluding Sterio from responding to that rational for denial at the administrative level.” (internal citations omitted). This action, the court reasoned, was evidence of the conflict of interest and demonstrated that the decision may not have been entirely based on the medical evidence.

Based on the abovementioned factors, the court held that HD Life abused its discretion when it denied Sterio’s LTD benefits. For the purposes of future litigation, this case highlights the application of the conflict of interest analysis and is useful to both plaintiffs and defendants, by discussing in detail the Ninth Circuit’s desired application of Montour.

The California Insurance and Life, Health, Disability Blog at californiainsurancelitigation.com and at mslawllp.com
All rights reserved

1. AB 23: Cal-COBRA Premium Assistance

• Establishes notice requirements that must be provided to eligible qualified beneficiaries regarding the availability of premium assistance under the American Recovery and Reinvestment Act of 2009 (ARRA).
• Qualified beneficiaries eligible for federal assistance may elect coverage under Cal-COBRA, and those enrolled in Cal-COBRA as of February 17, 2009 may request the federal premium assistance.

2. AB 76: Life and Annuity Consumer Protection Fund

• Extends the provision creating the Life and Annuity Consumer Protection Fund to January 1, 2015.
• Requires the California Insurance Commissioner (“Commissioner”) to publish an annual report on its Web site detailing certain protections for consumers of insurance products.

3. AB 108: Individual Health Care Coverage

• Prohibits, except as specified, rescission, canceling, limiting the provisions, or raising premiums of a contract or policy due to omission, misrepresentation, or inaccuracy in the application after 24 months following issuance of the same.

4. AB 119: Pricing of Health Care Coverage

• Prohibits premium, price or charge differentials based on the gender of specified individuals, commencing January 1, 2011.

5. AB 381: Unemployment Compensation Disability Benefits

• Permits a community college district to elect to become an employer, subject to specified requirements pertaining to disability compensation.

6. AB 389: Long-Term Care Insurance

• For long-term care insurance policies issued before new premium rate schedules are approved and for which rate revisions are filed on or after January 1, 2010, changes the calculation for determining what benefits are deemed “reasonable” in relation to premiums.
• Permits the Commissioner to approve a rate revision based on less than a certain loss ratio in order to protect the financial condition of the insurer.
• Revises the required qualifications of actuaries used by the Commissioner to review rate applications relative to long-term care insurance.

7.  AB 1541: Health Care Coverage (Late Enrollment)

• An individual, or dependent, who has lost or will lose Healthy Families Program coverage, Access for Infants and Mothers Program coverage, or Medi-Cal program coverage can requests enrollment within 60 days (changed from 30 days) after termination of that coverage without being considered a “late enrollee.”

8. AB 1543: Medicare Supplement Coverage[1]

• Adopts changes and provisions as required by the federal Medicare Improvements for Patients and Providers Act and Genetic Information Nondiscrimination Act.
• Adopts other amendments relating to open enrollment and guaranteed-issue.

LIFE SETTLEMENTS

• SB 98 defines when certain trusts and special interest entities do not have an insurance interest in a life insurance policy. It also establishes a number of new provisions to regulate viatical and life settlements. It adds two new license classifications for “Life Settlement Provider” and “Life Settlement Broker.”

PROPERTY AND CASUALTY INSURANCE 1. AB 63: Service Contract, Retailers

• Requires retailers of service contracts to maintain certain information about a contract that is in effect and provide such information or a copy of the contract to the contract purchaser or beneficiary upon request.
• Does not apply to vehicle service contracts.

2. AB 601: Motor Vehicle Insurance, Special Assessments

• Extends until January 1, 2015, the special assessment imposed on insurers, which is charged per motor vehicle insured.

3. AB 1179: Motor Vehicle Insurance, Damage Assessments

• Requires that additional information regarding right to independent estimate be included in the Auto Body Repair Consumer Bill of Rights.

4. AB 1200: Motor Vehicle Insurance, Direct Repair Programs

• Provides that insurers may (notwithstanding prohibition against requiring use of specific auto repair shop) provide truthful and nondeceptive information regarding the services and benefits available to the claimant.

5. SB 291: Mortgage Guaranty Insurance Reserves

• Amends definition of “face amount of an insured mortgage” for purposes of determining surplus requirements. 
• Requires notice to Commissioner before insurer falls below surplus threshold and creates ability to seek waiver of requirement.

MISCELLANEOUS 1. AB 299: Insurance Omnibus     Among other things, the bill:

• Requires the California Department of Insurance to remove from, or clarify on, its Web site any pleading, order or document relating to an enforcement action that has been withdrawn.
• Requires the Commissioner to consider additional criteria when examining the business and affairs of the insurer.
• Allows the Commissioner to disclose market analysis data to any state or country insurance department, law enforcement officials, federal agency or NAIC.
• All analyses pursuant to authorized examinations are at the expense of the insurer.
• Requires insurer annual audits to be conducted in conformity with “standards adopted by the [NAIC],” and allows the Commissioner to grant multiple 30-day extensions to the audit due date.
• Permits domestic insurers to invest in credit unions.
• Prohibits excess fund investments in a loan or any other obligation to any one borrower or obligor as specified.
• Requires insurers to provide to the Commissioner advance notice of the intent to enter into a tax sharing agreement.
• Requires auto liability policy to provide for replacement of a child seat, as defined, that was damaged in a covered accident.

2. AB 328: Electronic Transactions

• Deletes the exclusion of certain insurance statutes from applicability of Civil Code provisions permitting parties to conduct transactions by electronic means.
• With respect to certain automobile insurance transactions, prohibits electronic delivery of certain documents unless the transaction commenced electronically.
• Permits required notices related to certain types of insurance to be made electronically with consent of the parties, and imposes certain system and records requirements on the insurer related to the same.
• Permits an insurer to pay claims with electronic fund transfer, with the consent of the insured.

3. AB 409: California Insurance Guarantee Association

• Provides that the initial premium charge shall be adjusted by applying the same rate of premium charge as initially used to each insurer’s written premium as shown on the annual statement for the 2nd year following the year on which the initial premium charge “was based” (change from “is made”).

4. AB 470: Insurance Information Confidentiality

• Authorizes the disclosure of information from an accident report, supplemental report, or investigative report to an insured’s lawyer if the insured is otherwise entitled to obtain the report.

5. AB 800: Insurance Producer Omnibus     Makes a number of changes with respect to producer licensing, including that it:

• Deletes pre-licensing education requirement for resident applicants with current nonresident licenses.
• For persons licensed in 2010 or after, eliminates certain exemptions from education requirement.
• Permits licensed California nonresident business entity producers to use licensed California resident individual producers to transact insurance.”

[1] AB 1543 was enacted as an urgency statute. As such, it became effective when it was chaptered on July 2, 2009.

The survey also concluded that 73% of California employers offer health care coverage, compared to 60% of employers around the U.S.  

So, what does all of this mean? Californians are paying more for less coverage.  Is health insurance reform needed?  You be the judge.

• [T]here are issues related to how your clients conduct themselves in communicating their disability to their physician, how to handle a field claims representative and how to conduct themselves should the insurer request an I.M.E. (independent medical evaluation) or F.C.E. (functional capacity evaluation).
• Your client may think he has a residual (partial) claim from an emotional standpoint but in reality has a total disability claim from a contractual standpoint. There are issues related to objective symptoms vs. subjective symptoms. As an example, the claimant told the physician he felt nauseous. That’s subjective. If he then “threw up” in front of the physician that would be objective! Some claims may lean very strongly toward subjective symptoms yet be quite disabling in terms of doing the material duties of the job.
• How would your client handle a request by the insurance company that he see a rehabilitation specialist when the contract provides a “your occupation” definition?
• In past years, disability claim forms asked limited questions and insurance companies paid claims in a rather routine fashion. Because of mounting losses, many insurance carriers have made major adjustments in their claim departments. In addition, they utilize the services of C.P.A.s, psychiatrists, physicians with specific backgrounds, field investigators, video surveillance and other investigative agencies to analyze the claim to a finite degree.
• Today, many claims are being denied because “going it alone” leaves the policyholder (claimant) at a serious disadvantage. Although you may think you, as a producer, know a lot about disability insurance, you may not be equipped to provide advice in terms of the knowledge and effort required on your part.
• If your client has his claim terminated and it appears the claim is justified…what are his options? Should he remain in the corner with his thumb in his mouth in the fetal position or should he have available the services of a disability claim consultant? Should he seek the services of an attorney? Why or why not? Since we are often talking about a potential payout in the millions of dollars, shouldn’t your client have available a person to protect that money well? Do you want your client to collect on a fraudulent claim? Obviously, the answer is no. Insurers have every right to investigate a claim. But do they have the right to intimidate your client? Do they have the right to continuously ask for more information to the point where your client feels like a dog running around in circles chasing its “tail?”
• The days of your client completing one or two pieces of paper are long gone. A half dozen or more forms may be required and an inadvertent or improper response by your client, his attending physician or employer can prejudice your client’s rights with a denial being the result.
• * * *
• Although “Goliath” might outweigh you or your client, a smart approach and strategy can bring “Goliath” to his knees. There is a war out there as it relates to a disability claim. If you believe the saying “I’m from the IRS and I’m here to help you,” you’ll believe the disability carrier has your client’s best interest at heart!

Bosetti was employed by the Palos Verdes Peninsula Unified School District. As part of her employment benefits, she was covered under a group long-term disability insurance policy issued by The United States Life Insurance Company in the City of New York (“U.S. Life”).

Bosetti‘s job was eliminated for economic reasons. Shortly after she learned that her employment would be terminated, she saw a doctor for depression and was placed on temporary disability. Her disability extend beyond two years, and had a physical component as well as an emotional one.  Under the policy, Bosetti could obtain disability benefits for two years if she was disabled from her own occupation. After that time, she could only obtain disability benefits if she was disabled from “any occupation.”  U.S. Life concluded that Bosetti was not disabled from any occupation and terminated her disability benefits at the end of two years. That determination was based primarily upon the two-year benefits limitation for mental or nervous disorders, the results of a functional capacity examination, and an independent physician consultation.

After the U.S. Life moved for and was granted summary judgment, Bosetti appealed.  The court of appeal held that the limitation was ambiguous and was not applicable if the claimant’s physical problems contributed to her disabling depression or were a cause or symptom of that depression. The Bosetti court further concluded that the insurer’s denial of benefits based upon that two-year limitation was not in bad faith under the genuine dispute doctrine.

The Bosetti court explained that the insured’s disability had both mental and physical elements, noting that one of her doctors had suggested that her physical disability arose out of her emotional disability and another that her emotional disability or depression arose out of her physical problems and chronic pain. The court held that the two-year mental limitation was ambiguous because it “does not clearly explain whether the limitation applies when the total disability is due in part to a mental, nervous …disorder” and because an insured’s reasonable expectations are that disabling depression arising from a physical condition like fibromyalgia and, correspondingly, disabling physical symptoms arising from depression, would not fall within the mental/nervous limitation.  

As part of its analysis, the court rejected the rationale of Equitable Life Assurance Society v. Berry, 212 Cal. App. 3d 832, 835, 840 (1989), a California opinion concerned with an insured who was diagnosed with manic-depressive illness, a condition which has a chemical (physical) etiology, rather than a purely mental one. The Berry court concluded, as a matter of law, that there was no coverage due to a disability policy‘s exclusion for “[m]ental or nervous disorders” and a health policy‘s limitation on benefits for treatment for a neurosis, psycho-neurosis, psychopathy, psychosis, or mental or nervous disease or disorder of any kind, on the basis that these exclusions were unambiguous and referred solely to symptoms, rather than causes.  Id. at 840.  The court disagreed with Berry for two reasons: it disagreed with its analysis and its holding was abrogated by statute.

The court found that the holding of Berry did not survive Insurance Code section 10123.15, which provides that “every group policy of disability insurance which covers hospital, medical, and surgical expenses on a group basis, and which offers coverage for disorders of the brain shall also offer coverage in the same manner for the treatment of the following biologically based severe mental disorders: schizophrenia, schizo-affective disorder, bipolar disorders and delusional depressions, and pervasive developmental disorder. Coverage for these mental disorders shall be subject to the same terms and conditions applied to the treatment of other disorders of the brain.”  It appears that based on the court’s ruling, the two-year mental or nervous disorders limitation can never be applied in California to the biologically based severe mental disorders of “schizophrenia, schizo-affective disorder, bipolar disorders and delusional depressions, and pervasive developmental disorder.”

The court adopted the Ninth Circuit’s approach in Patterson v. Hughes Aircraft Co., 11 F.3d 949, 950 (9th Cir. 1993) where the court concluded that a limitation on benefits resulting from “mental, nervous or emotional disorders of any type” was ambiguous as to whether mental disorders referred to causes or symptoms, and whether a disability is mental when it results from a combination of physical and mental factors.  The court resolved the ambiguity in favor of the insured, holding that the limitation on coverage did not apply if the insured‘s disability was caused, in any part, by his physical symptoms.

The employee benefit plan in this case is known as a “top hat” plan. ERISA “defines a top hat plan as one which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.” Sznewajs at *4. Because of the specialized nature of “top hat” plans, Congress exempts such plans from certain ERISA regulations.  Gilliam v. Nevada Power Co., 488 F.3d 1189, 1192-93 (9th Cir. 2007).

In most ERISA cases, the administrator’s claim decision is reviewed under the de novo standard of review unless the plan documents grant the administrator discretionary authority.  Here, Franciene argued that, despite the discretion granted to the plan administrator, the district court should utilize the de novo standard of review because payments made to beneficiaries come directly from the company’s pockets and those payment decisions are made by the company’s executive committee. Franciene’s argument was consistent with holdings in the Third and Eighth Circuits, both of which have ruled that “top hat” plans are subject to a de novo standard of review despite the existence of a grant of discretionary authority for the very same reasons. However, the Ninth Circuit disagreed, explaining that applying a de novo standard of review to “top hat” plans “would create unnecessary confusion.” Therefore, in the Ninth Circuit, “top hat” plans are subject to the same standard of review analysis as other ERISA plans.

Finally, in making this ruling, the court found that the Plan did not abuse its discretion in its interpretation of the term “retirement.”

Robert Montour was a telecommunications manager for Conexant Systems, Inc. His employer provided him with a group long-term disability plan governed by ERISA. Hartford was both the insurer and claims administrator of the plan. The plan granted Hartford discretionary authority to interpret plan terms and to determine eligibility for benefits.

Montour applied for and received disability benefits, initially for an acute stress disorder, in 2003. In 2004, Montour consulted an orthopedic surgeon, Dr. Kenneth Kengla, about knee and back pain and subsequently underwent surgery. Dr. Kengla diagnosed Montour with degenerative changes in both areas and notified Hartford that Montour was suffering from physical disability which prevented him from returning to the labor force. Dr. Kengla listed numerous restrictions on Montour’s physical activities.

In November and December 2005 Hartford conducted surveillance on Montour over the course of four days. Video footage from this surveillance depicted Montour driving his car along with other activities. Shortly thereafter, a Hartford investigator conducted a personal interview with Montour at his home, during which Montour listed a “bad back, [an] arthritic right knee, and sleep apnea” as the “disabling medical condition(s)” preventing him from returning to work. He also described an inability to concentrate, which he attributed to the medication he must take to treat his “constant pain.” Montour acknowledged that the surveillance video footage accurately depicted his level of functionality.

In May 2006 a Hartford nurse case manager submitted a letter to Dr. Kengla indicating that Montour was capable of performing “sedentary to light” work and soliciting their agreement. Dr. Kengla indicated that he disagreed with Hartford’s conclusions, citing Montour’s persistent orthopedic symptoms and physical restrictions.

In July 2006 Hartford hired a consulting physician, Dr. Gale Brown, to conduct a file review. Dr. Brown concluded that medical evidence supported the existence of a lower back condition but that Dr. Kengla’s offered restrictions were excessive. He acknowledged that the medical evidence supported Montour’s chronic pain but found that Montour was nevertheless capable of working full-time with modest restrictions, such as changing positions every thirty to forty-five minutes.

After Hartford enlisted a vocational rehabilitation expert to compile an Employability Analysis Report which concluded that Montour was capable of working in a high-level managerial capacity in five different fields, in August 2006 Hartford denied his claim. Montour appealed this decision and included a vocational appraisal report which concluded that Montour was “not employable in any setting” and that Hartford’s decision was based on numerous mistakes, including a disregard for the fact that the Social Security Administration (SSA) considered Montour to be “totally disabled.”

In response, Hartford hired a physician to conduct a second file review. The physician reviewed Montour’s records for evidence of a physical condition that would preclude sedentary work and, like Dr. Brown, found none. He noted in particular a lack of objective, clinical data demonstrating the extent to which Montour’s pain impacted his functionality. He also noted that Montour’s activities depicted on the surveillance videos exceeded the activity requirements of a “sedentary” job.

In light of concerns raised in the vocational appraisal report, Hartford requested a vocational specialist to conduct an Employability Analysis Report addendum, which reached the same conclusion as the initial Employability Analysis Report regarding the sedentary nature and thus the feasibility of the five proposed managerial positions. In February 2007, a Hartford appeal specialist affirmed the company’s previous decision to terminate Montour’s benefits. In a bench trial, the district court rendered its decision in favor of Hartford, upholding its denial.

In reversing the district court, the Ninth Circuit first explained that when an ERISA plan grants the administrator discretionary authority to determine eligibility for benefits or to construe the terms of the plan, the court reviews the decision for abuse of discretion. The court agreed with the district court that the abuse of discretion standard applied and that Hartford had a conflict of interest. However, the appeals court criticized the district court’s application of the “clear error” test, explaining that a reviewing court must also take into account the administrator’s conflict of interest as a factor in the abuse of discretion analysis. The appeals court concluded that the district court’s decision did not adequately balance the conflict factors. Accordingly, the appeals court proceeded to do so.

The appeals court gave a comprehensive description of the “signs of bias” it found were exhibited by Hartford throughout the decision-making process. These included overstatement of and excessive reliance upon Montour’s activities in the surveillance videos Hartford’s decision to conduct a paper review rather than an “in-person medical evaluation;” Hartford’s insistence that Montour produce objective proof of his pain level; and Hartford’s failure to deal with and distinguish the Social Security Administration’s contrary disability decision. The appeals court also noted Hartford’s “failure to present extrinsic evidence of any effort on its part to ‘assure accurate claims assessment.’”

The appeals court concluded that Hartford’s bias had infiltrated the entire administrative decision-making process, leading the court to accord significant weight to the conflict of interest. Weighing all of the factors together, the court concluded that Hartford’s conflict of interest improperly motivated its decision to terminate Montour’s benefits. The court reversed and remanded the matter for entry of judgment in favor of Montour and for reinstatement of long-term disability benefits.

SSDI applications rose 5.9% in 2008, to 2.3 million, and the number of workers approved for SSDI benefits increased 8.7%, to 895,000, the CDA reports.

The percentage of workers covered by the SSDI program who are receiving SSDI benefits increased to 4.8% in 2008, from 3.5% in 1998.

At CDA member companies, the number of individuals receiving long-term disability benefits payments increased 1.5% in 2008, to 573,500, and 30% of the member companies’ LTD claimants do not qualify for SSDI benefits, the CDA says.

Because of the aging of the U.S. workforce, the percentage of claims filed by workers under age 50 has been declining, and the number filed by workers over that age has been increasing.

• But 27% of the survey participants said the overall claims rate has stayed about the same, and 64% said the incidence rate has been falling.

Only one of the participating companies said the recession has had any noticeable effect on disability claims.