At the district court level, all parties agreed that the plaintiffs were strictly limited “to obtain other appropriate equitable relief” under ERISA.  On appeal, the Ninth Circuit explained that “the Amara Court stated that, under appropriate circumstances, § 502(a)(3) may authorize three possible equitable remedies: estoppel, reformation, and surcharge.”  The retirees only sought reformation and surcharge.  The Ninth Circuit rejected the reformation claim because there was no evidence that the plan documents “fail[ed] to reflect that drafter's true intent” or “that Northrop Plan B contains terms that were induced by fraud, duress, or undue influence.”  Similarly, the Ninth Circuit ruled that the ERISA claimants were not entitled to a surcharge remedy because it found that “by failing to enforce the terms of the 2003 SPD instead of the terms of the plan master document” there was “no evidence that the committee gained a benefit by failing to ensure that participants received an accurate SPD” did not constitute a breach of fiduciary duty.

While the Ninth Circuit ruled against the retirees, it noted that they did not make an estoppel argument because “they presented no evidence of reliance on the inaccurate SPD.”  Thus, while the Ninth Circuit found that, in this particular instance, the language of the plan documents would be enforced over the language in the SPD, the Court acknowledged that if a claimant could demonstrate reliance on the SPD, the language in the SPD might well control. 

Such a ruling is consistent with the recent ruling in the District Court of Puerto Rico where the court reject the defendant’s argument that Amara found that equitable estoppel is not an appropriate avenue for relief under ERISA.  Indeed, the court noted that “equitable estoppel forms a very essential element in . . . fair dealing, and rebuke of all fraudulent misrepresentation, which it is the boast of courts of equity constantly to promote.”  See Guerra-Delgado v. Popular, Inc., 2012 U.S. Dist. LEXIS 44432 (D. P.R. March 29, 2012) (internal quotations removed).

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.

• Rendering a decision without explanation, construing a plan provision in a way that conflicts with the plain language of the plan or relying on clearly erroneous findings of fact. 
• “Hiding the ball” by failing to advise claimants of documents needed to obtain approval of claim and an explanation of why such material or information is necessary, and failing to submit forms to claimant or his doctors that would have elicited the information needed. 
• Overstatement of and excessive reliance upon claimant’s activities in the surveillance videos and conducting a paper review rather than an “in-person medical evaluation.”
• Encouraging participant to file for Social Security Disability Insurance and, when benefits are awarded by Social Security Administration, failing to deal with and distinguish the contrary disability decision.
• Failing to obtain a physician's recommendation and relying on medical reports that are not credible. 
• “Tainting” medical file reviewer in the medical review process by giving the reviewer inaccurate negative information regarding the claimant.
• Failing to consult with a health care professional who has appropriate training and experience in the applicable field of medicine.
• Emphasizing a report that favored a denial of benefits while deemphasizing other reports suggesting a contrary conclusion, and failing to provide its independent experts with all of the relevant evidence.
• Failing to provide all bases for its denial and suggesting alternate reasons for denial after the fact, thereby precluding the claimant from responding to that rationale for denial at the administrative level. 
• Adding new terms to the Plan, particularly when those terms are both imprecise and impose a higher evidentiary burden on a claimant, such as requiring that disability be proved by “compelling objective” evidence.

These are just a select few of the acts that courts have ruled require that the insurer’s decision not be afforded full discretion.  Numerous other actions will also cause a court to review a claim decision with something less than full discretion.  For additional information on this and other insurance matters you can visit the FAQ section of our website:  www.mslawllp.com. 

If you need to consult with an attorney about a possible ERISA or insurance bad faith matter, please contact our office.

In Fossen v. Blue Cross and Blue Shield, __ F.3d __ (9th Cir. October 18, 2011), the Court considered an appeal from a District Court ruling that entered summary judgment in favor of Blue Cross on two causes of action.  Plaintiffs – which consisted of three brothers, their corporations and a partnership of the three corporations – sued Blue Cross after the health insurer increased their premiums by over 40%.  The lawsuit, filed in state court, alleged two causes of action:  violation of Montana Code Annotated § 33-22-526(a) (also known as Montana’s “little HIPAA” statute) and violation of Montana Code Annotated § 33-18-101 (also known as Montana’s Unfair Trade Practices Act).  Plaintiffs alleged that premium increase violated little HIPAA’s prohibition against imposing a “premium or contribution that is greater than the premium or contribution for a similarly situated individual” on account of "any health status-related factor of the individual” and the Unfair Trade Practices Act’s prohibition against “unfair discrimination between individuals of the same class and of essentially the same hazard in the amount of premium, policy fees, or rates charged.”  The action, filed in state court, was removed to the District Court, which eventually granted Blue Cross’ motion for summary judgment as to all causes of action.

Because the Fossens' state HIPAA cause of action could have been brought under ERISA § 502(a), and because that cause of action is identical to and expressly dependent upon ERISA, the district court properly denied the Fossens' motion to remand and exercised jurisdiction over this case.

Next, the Ninth Circuit evaluated whether ERISA preempts the plaintiffs’ statutory unfair insurance practice claim, considering both express preemption under ERISA § 514 (29 U.S.C. § 1144) and conflict preemption under ERISA § 502 (29 U.S.C. § 1132).  With respect to express preemption, the court applied the two-part test detailed in Kentucky Association of Health Plans v. Miller, 538 U.S. 329 (2003) and determined that because statute is both “specifically directly toward entities engaged in insurance” and substantially affect[s] the risk pooling arrangement between the insurer and the insured” it is exempt from express preemption. 

As to conflict preemption, the court again applied Davila, and determined that the unfair insurance practice claim was not preempted by ERISA because it sought relief (i.e., restitution) that was consistent with ERISA’s enforcement scheme, but that no provision of ERISA expressly guarantees the same rights as the statute. 

Also, the unfair insurance practices statute creates a right that is separate from and could not possibly be remedied under ERISA.  Whereas HIPAA (both the state and federal versions) prohibits plans and their insurers from charging different premiums on account of "health status-related factor[s]," 29 U.S.C. § 1182(b)(1); Mont. Code Ann. § 33-22-526(2)(a), the unfair insurance practices statute applies more broadly to bar "any unfair discrimination" with respect to premiums, Mont. Code Ann. § 33-18-206(2) (emphasis added); see, e.g., McCarter v. Glacier Gen. Assurance Co., 546 P.2d 249, 251 (Mont. 1976).  Because these statutes are not identical in scope (as is the case with the state and federal HIPAA provisions), they are not conflict preempted.

Accordingly, the Ninth Circuit reversed the district court’s grant of summary judgment and remanded this claim for further consideration of the plaintiffs’ allegations that Blue Cross violated Montana’s Unfair Trade Practices Act.

Discretionary clauses are provisions typically found in group life, health and disability plans that give the administrator/insurer the sole discretion to interpret the policy and to decide if a plan participant or beneficiary is entitled to plan benefits.  In ERISA cases, federal courts have interpreted these clauses to give administrators/insurers a higher standard of review when courts review their decisions.  This meant that the federal courts were required to give greater deference to decisions denying plan benefits under life, health or disability coverages, rather than weighing all the evidence under a “de novo” standard of review and making their own determination as to whether the insured was entitled to benefits under the policy or employee welfare benefit plan.

In voicing his support for the bill, Commissioner Jones explained:

"Discretionary clauses have been increasingly relied upon by insurers to reject legitimate claims for disability insurance when a consumer becomes disabled - insurers know that many consumers will give up their claim and that those who challenge the claim denial face a very high legal burden to overcome the denial since the discretionary clause vests sole discretion in the insurer to decide if the consumer is disabled.  SB 621 levels the playing field and gives consumers an even chance to prove that they are entitled to disability and other insurance, by eliminating the 'discretionary clauses' that insurers have been putting into their insurance policies."

SB 621 goes into effect on January 1, 2012

The California legislature enacted the Parity Act in 1999 after finding that “[m]ost private health insurance policies provide coverage for mental illness at levels far below coverage for other physical illnesses.”  1999 Cal. Legis. Serv. ch. 534 (A.B.88), § 1 (West).  The legislature further found that coverage limitations resulted in inadequate treatment of mental illnesses, causing “relapse and untold suffering” for people with treatable mental illnesses, as well as increases in homelessness, increases in crime and significant demands on the state budget.  Id.  Accordingly, plans that come within the scope of the Act – including the ERISA-governed plan established by Harlick’s employer – must cover all “medically necessary” treatment for nine listed mental illnesses (including anorexia nervosa), but can apply the same financial limits – such as yearly deductibles and lifetime benefits – that are applied to coverage for physical illnesses.

Harlick sued Blue Shield, but after the parties stipulated that Blue Shield’s decision would be reviewed under the abuse of discretion standard of review, the district court granted Blue Shield’s motion for summary judgment.

In reviewing Harlick’s case, the Ninth Circuit evaluated whether Blue Shield abused its discretion in denying Harlick’s request for coverage for her treatment at Castlewood.  In ERISA cases, if there is a conflict of interest (i.e., same entity pays benefits and makes the coverage decision), than the administrator’s review and claim decision is “tempered by skepticism,” even if it is reviewed under the abuse of discretion standard.  Here, while the Court did not find that Blue Shield abused its discretion in denying Harlick’s claim, it did find that Blue Shield was responsible for Harlick’s residential care, based upon the Parity Act.  The Ninth Circuit stated:

Harlick’s Plan does not itself require that Blue Shield pay for residential care at Castlewood for her anorexia nervosa.  However, California’s Mental Health Parity Act provides that Blue Shield “shall provide coverage for the diagnosis and medically necessary treatment” of “severe mental illness” including anorexia nervosa.  Blue Shield is foreclosed from asserting that Harlick’s residential care at Castlewood was not medically necessary.  We therefore conclude that Blue Shield is obligated under the Parity Act to pay for Harlick’s residential care at Castlewood, subject to the same financial terms and conditions it imposes on coverage for physical illness.

The Court then turned to the question of whether Harlick’s treatment was medically necessary.  Blue Shield did not dispute that treatment at Castlewood was medically necessary until supplemental briefing filed after oral argument.  Blue Shield argued that it should be allowed to reopen its administrative process in order to determine whether Harlick's residential care was medically necessary.  The Court explained an ERISA administrator’s obligations:

ERISA and its implementing regulations are undermined 'where plan administrators have available sufficient information to assert a basis for denial of benefits, but choose to hold that basis in reserve rather than communicate it to the beneficiary.'  Mitchell v. CB Richard Ellis Long Term Disability Plan, 611 F.3d 1192, 1199 n.2 (9th Cir. 2010) (quoting Glista v. Unum Life Ins. Co. of Am., 378 F.3d 113, 129 (1st Cir. 2004)). Claimants should not be 'sandbagged by a rationale the plan administrator adduces only after the suit has commenced.'  Mitchell, 611 F.3d at 1199 n.2 (quoting Jebian v. Hewlett-Packard Co. Employee Benefits Org. Income Prot. Plan, 349 F.3d 1098, 1104 (9th Cir. 2003)) (some internal quotation marks omitted).  Just as claimants should present all of their arguments for granting the claim to the insurer during the administrative process, an insurer should tell the claimant all of its reasons for denying the claim.  Cf Diaz v. United Agric. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir. 1995).

During the administrative process, Blue Shield never said that it was denying the claim because treatment at Castlewood was not medically necessary.

The Court therefore concluded that by not including as a reason for denial of the claim that the treatment was not medically necessary, Blue Shield waived this reason to deny the claim:

Blue Shield has discretion to determine whether treatment is medically necessary during the administrative review process.  But Blue Shield had to tell Harlick the "specific reasons for the denial" - not just one reason, if there was more than one - and provide a "full and fair review" of the denial. 29 U.S.C. § 1133 (emphasis added). Blue Shield told both Harlick and her mother, as well as the DMHC, that medical necessity was not the reason for its denial of Harlick's claim. It cannot now bring out a reason that it has "held in reserve" and commence a new round of review.  See Mitchell, 611 F.3d at 1199 n.2.

Thus, even if it is expressly excluded from a plan, a California insurer is now obligated to ensure that coverage for certain medically necessary treatment for mental illness is on par with the coverage provided for necessary treatment for physical illnesses.  This ruling will thus have significant application to coverage for mental illnesses, especially autism.

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.

From 2000 to 2008, Galloway worked as a machinist for Turbine Engine Components Technologies Corporation (“TECT”).  On January 1, 2002, Lincoln National issued a group life insurance policy to TECT and on October 14, 2004, Galloway, a TECT employee at the time, enrolled in the policy.  The policy contains a provision ensuring continued coverage, without payment of premiums, if a participant becomes totally disabled.

In January 2008, Galloway stopped working at TECT due to Achilles tendonitis.  In July 2008, Galloway requested that Lincoln National grant him a waiver from paying premiums on his life insurance policy due to his total disability.  

After litigation ensued, the court granted the Estate’s motion to supplement the administrative record with the declaration of Dr. Robert T. Fraser, Ph.D., who was the Estate’s vocational assessment expert.  In doing so, the court held that the Fraser declaration evidenced Lincoln National’s failure to conduct a proper vocational assessment of Galloway’s self-reported limitations.  The court held that this failure prevented the full development of the administrative record, relying on Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 973 (9th Cir. 2006).

The court decided to remand the matter back to Lincoln National so that the parties could conduct a “meaningful dialogue” about Galloway’s self-reported symptoms.  Lincoln National once again conducted a cursory review of Galloway’s claim – primarily limited to asking an independent expert to review reports from his podiatrist – but made no attempt to secure additional information regarding Galloway’s reported restrictions and limitations.  The limited nature of Lincoln National’s investigation did not prevent it from denying Galloway’s waiver of premium claim again after remand. 

The court reviewed Lincoln National’s decision under the abuse of discretion standard of review and ruled that Lincoln National abused its discretion because it failed to conduct an adequate investigation into the basis for Galloway’s request for a premium waiver in large part because it failed to contact Galloway’s treating physician.  Specifically, the court ruled:

Here, the legal question before the court is whether Lincoln National abused its discretion in denying Mr. Galloway a waiver of premiums.  This determination depends on whether Lincoln National requested the needed information and offered a rational reason for its denial of Mr. Galloway’s claim.  See Booton v. Lockheed Med. Benefit Plan, 110 F.3d 1461, 1463 (9th Cir. 1997).  If Lincoln National meets this standard its decision to deny benefits would be given substantial deference.  Id.  After a review of the record before and after remand, the court finds that Lincoln National failed to follow-up with Mr. Galloway, or any medical expert, regarding the limitations Mr. Galloway listed in his self-assessment that, if true, rendered him completely disabled during the elimination period.

Thus, Lincoln National’s denial of benefits was not based on a full and fair review of the record as required by ERISA and Ninth Circuit authority.  See id.  (“Lacking necessary—and easily obtainable—information, [the plan administrator] made its decision blindfolded.”); see also Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 870-71 (9th Cir. 2008) (the plan administrator must give a “fair chance” to the beneficiary to present evidence to support her claim); see also Kunin v. Benefit Trust Life Ins. Co., 910 F.2d 534, 538 (9th Cir. 1990) (holding that to deny the claim without explanation and without obtaining relevant information is an abuse of discretion).  As it turned out, the opportunity for Lincoln National to engage in a meaningful dialogue with Mr. Galloway, before or after it made the initial denial decision, was cut short by the death of Mr. Galloway only a month later.

On remand, Lincoln National was given a second opportunity to attempt a full and fair review of Mr. Galloway’s claimed restrictions.  The evidence actually garnered during remand, however, only further exemplified why a meaningful dialogue is required in the first place.  On remand, the information provided by the treating physicians supported the claimed restrictions in Mr. Galloway’s self-assessment.  These restrictions should have formed the basis of Lincoln National’s original review but, due to its failure to consider fully the claims made by Mr. Galloway before denying his claim, it never contacted his treating physicians.

Lincoln National’s decision to deny Mr. Galloway’s claim without obtaining all the required information and without engaging in a meaningful dialogue with him was an abuse of discretion.  Moreover, had it engaged in any dialogue with Mr. Galloway, Lincoln National would have learned that two of his treating physicians believed him to be unable to perform any work, including sedentary work.  Based on the record before the court, and on its finding that Lincoln National abused its discretion in denying Mr. Galloway the requested waiver of premiums for his life insurance policy, the court orders Lincoln National to pay life insurance benefits to the Estate of Mr. Galloway.  (Emphasis added.)

Thus, because Lincoln National failed to contact Galloway’s treating physicians and otherwise failed to properly gather medical information related to Galloway’s claim, he was denied a full-and-fair review owed to all ERISA claimants.  The court determined that Lincoln National’s failure to conduct an adequate investigation and failure to engage in a “meaningful dialogue” with Galloway regarding the claim resulted in an abuse of its discretion, and order Lincoln National to pay the full death benefits due under the policy.

If you believe you have an individual or ERISA-governed life insurance, health insurance or disability insurance policy issued by Lincoln National, or any other insurer, for which you have failed to properly receive benefits, contact McKennon Law Group PC for a free consultation.

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. 

In his article entitled “Don’t take a health insurer’s rejection as the final word on your medical claim,” Tom Murphy of the Associated Press cites a recent report from the Government Accountability Office which found that overall, appeals have an approximately 50% success rate.  The article lists a number of actions policyholders can take to increase the likelihood of success on appeal.  Murphy mentions obtaining and submitting copies of the entire medical file, enlisting a treating doctor to write letters explaining the policyholder’s relevant medical history, understanding policy language, writing a detailed letter with supporting records and information and complying with all deadlines.

Here is Murphy’s article verbatim:

FIGHTING AN INSURANCE CLAIM DENIAL CAN PAY OFF

By Tom Murphy, The Associated Press
Published Friday, April 8, 2011

INDIANAPOLIS — Don't take a health insurer's rejection as the final word on your medical claim.

Appeals can have a surprising success rate if patients shape a good argument with help from their doctor, some research and a healthy dose of persistence. Insurers always offer at least one chance to appeal when they deny a claim. Here's how to make your case.

For starters, what are the odds of success?

A recent report from the Government Accountability Office found a 50 percent success rate of appeals to insurers in some states.

Insurance companies often make the initial decision to deny a claim based limited information like a diagnosis or procedure code from a claim form the doctor submits. They rarely see a patient's file for that first decision, said Jennifer Jaff, executive director of Advocacy for Patients with Chronic Illness Inc., a non-profit that helps patients with claim denials.

"When you provide them with additional clinical information ... it may turn out to be a very easy decision for them," she said.

What are the first steps to take after receiving a rejection?

Learn as much as you can about the reason. Get the policy language and any information the insurer used to make its decision. Patients are entitled to this, so persist if the insurer moves slowly.

It's also important to know the insurer's appeal process. This should be laid out in the letter you receive telling you about the rejection. Understand the deadlines for appealing.

"These deadlines are serious," Jaff said. "I've never seen an insurance company grant an extension."

How do you build your case?

Write a detailed argument with records backing up your claims. Enlist your doctor's help.

If the insurer says it doesn't have to pay because your condition existed before your coverage began, a doctor may be able to argue otherwise.

The insurer may say the treatment isn't medically necessary. Your doctor can illustrate how all alternatives were exhausted before you started receiving the treatment in question.

Rely on more than just a doctor's statement.

"Insurance companies do not assume everything a doctor says in a letter is 100 percent true and accurate," Jaff said. "What they really want to see are the medical records."

Patients should be prepared to send their insurer any of those confidential records that would support their case.

If the insurer deems a treatment experimental, some additional research may be needed, and your doctor can help there as well. Medical journal articles can show an insurer that your treatment is a widely accepted practice.

If the doctor is unwilling or unavailable for help, Jaff recommends for research the National Institutes of Health website www.pubmed.gov . Patients can use it to search medical journals around the world for articles on their treatment.

Abstracts, summaries and some articles are free. Those that are not can be pricey, costing between $30 and $50 to buy online. But patients also can check with a medical library near them for copies.

Asking for a compassionate allowance can be another strategy for patients. Some insurance policies will make exceptions to cover something if it could be lifesaving.

An employer that offers a self-funded plan also might be persuaded to overrule the insurer and permit coverage, but Jaff said this is rare. Self-funded plans are generally used by big employers. In those cases, they provide the actual insurance and the managed care company just administers the plan.

Ask your human resources department if your company plan is self-funded.

What are the keys to a successful appeal?

Keep your emotions out of the argument and give the insurer something new to consider. Avoid rehashing information the company already has.

"It's a business decision, it's not personal on the insurer's side," said Pat Jolley of the Patient Advocate Foundation, another non-profit that helps people handle payment problems.

Know your insurer's appeal process. Some may offer a couple rounds of internal reviews and provide a specialist to examine your claim. That means you can have an oncologist review your claim for cancer treatment.

Keep detailed notes of your contact with the insurer, including which representative you spoke to and when.

Send appeals by certified mail to document when an insurer receives them in case the company later claims you missed a deadline.

Communicate in writing whenever possible. This keeps you from having multiple phone conversations with different insurance representatives who provide different answers.

Samuel Salomaa was an employee of the American Honda Motor Company, Inc. for more than twenty years.  His supervisor described him as “the best employee to have worked for me” and Salomaa never called in sick, never left work early and never came in late.  Unfortunately, in October 2003 Salomaa developed what he thought was the stomach flu.  However, this “flu” was followed by grossly excessive fatigue, headaches, insomnia and excessive sensitivity to stimuli.

Because he was no longer able to perform his job duties, Salomaa filed a claim for disability benefits with Life Insurance Company of North America, which is a wholly owned subsidiary of CIGNA.  Salomaa made his claim though the ERISA-governed disability insurance plan offered by his employer.  However, his claim for benefits was denied after CIGNA concluded that because his “thyroid, calcium, albumin, serum electrolytes, and CBC results were normal,” his medical records contained “no positive objective physical findings” supporting disability. 

With their decision, CIGNA ignored the explanation by Salomaa’s physicians that for those suffering from CFS “laboratory tests are always normal and there is no test that is available at the present time for chronic fatigue syndrome.”  CIGNA’s decision to ignore this explanation was especially egregious given that both the Center for Disease Control and CIGNA’s own health care guidelines explain that there are no specific diagnostic studies specific to the diagnosis of CFS and that chronic fatigue syndrome is diagnosed by excluding other underlying diseases.

After CIGNA denied his claim for disability benefits, Salomaa filed a lawsuit.  In reviewing CIGNA’s decision, the Ninth Circuit noted that because CIGNA both administers the insurance plan and pays benefits out of its own pocket it is operating under a conflict of interest and “has a financial incentive to cheat” Salomaa and other claimants.

While the district court upheld the CIGNA’s claim decision, the Ninth Circuit ruled that CIGNA’s decision was “illogical, implausible and without support.”  In holding that CIGNA abused its discretion, the Ninth Circuit noted that every doctor who personally examined Salomaa determined that he was disabled and that CIGNA unreasonably demanded objective tests to prove the existence of a condition for which there are no objective tests.

The Ninth Circuit also determined that CIGNA failed to provide Salomaa with a full and fair review of his claim.  Specifically, while CIGNA’s internal physicians concluded (without examining Salomaa) that he was not disabled, CIGNA did not “give Salomaa and his attorney and physician access to the two medical reports of its own physician upon which it relied.”  The Court also criticized CIGNA for telling Salomaa that he should provide “x-rays, CT, MRI reports, etc. that support your physician’s assessment,” but failing to tell him exactly what tests it wanted.  Indeed, the Ninth Circuit classified this request as “absurd” since CIGNA was well aware that x-rays, computerized tomography and magnetic resonance imaging are not used to diagnose CFS.  The court explained:

The plan evidently based its denial in large part on review of Salomaa’s file by two physicians, one for the first denial, another for the final denial.  They both wrote their appraisals for the plan administrator.  Yet the plan failed to furnish their letters to Salomaa or his lawyer.  The regulation, quoted above, requires an ERISA plan to furnish “all documents, records, and other information relevant for benefits to the claimant.”  A physician’s evaluation provided to the plan administrator falls squarely within this disclosure requirement.  The disclosure requirement serves the purpose of facilitating what the regulation also requires, providing claimants “the opportunity to submit written comments, documents, records, and other information relating to the claim for benefits.”  Had the plan met its duty of providing copies of its physicians’ evaluations, then Salomaa’s treating physicians could have provided such comments and performed such additional examinations and tests as might be appropriate.  By denying Salomaa the disclosure and fair opportunity for comment, the plan denied him the statutory obligation of a fair review procedure.

As stated by the Salomaa court, in order to “conform to the claim procedure required by statute and regulation,” a plan administrator is required to “explain, upon denial, any additional ‘information needed’” to support a claim for benefits.  The Salomaa court concluded:

The administrator’s procedural violations are similar to those in Saffon v. Wells Fargo & Company Long Term Disability Plan and Boonton v. Lockheed Medical Benefit Plan.  There, as here, the administrator did not provide material sufficient to meet the requirement of “meaningful dialogue.”  We held in those cases, where the denials were based on absence of some sort of medical evidence or explanation, that the administrator was obligated to say in plain language what additional evidence it needed and what questions it needed answered in time so that the additional material could be provided.  An administrator does not do its duty under the statute and regulations by saying merely “we are not persuaded” or “your evidence is insufficient.”  Nor does it do its duty by elaborating upon its negative answer with meaningless medical mumbo jumbo.  In this case, the skeptical look required by us in a case of a conflicted administrator requires us to conclude that the administrator acted arbitrarily and capriciously, both procedurally and substantively, thereby abusing its discretion in the denial of Salomaa’s claim.

Finally, the Ninth Circuit criticized CIGNA for failing to consider Salomaa’s Social Security disability award and for shifting the reason for its denial decision after Salomaa and his physician’s refuted CIGNA’s initial denial decision.

After concluding that CIGNA abused its discretion, the Ninth Circuit remanded the case to the district court with instructions that Salomaa be awarded the disability benefits he initially sought. 

Plan participants will certainly want to use this decision as a key component of their arguments that plan administrators/insurers did not give them a full and fair review. 

In 1992, as a result of a shooting, Fier became permanently quadriplegic (i.e. the loss of both arms and legs).  In 1993, Fier returned to work in a new job specifically tailored to his physical limitations where he earned the same salary as he had prior to the accident.  In 1997, Fier’s salary was reduced by $20,000 when he was assigned to a new position at Boyd.  In early 1997, Fier submitted a claim for benefits under the LTD policy, and received benefit payments from UNUM.  Between 1997 and late 2004, UNUM paid Fier $152,069.02. 

In late 2004, UNUM informed Fier that regarding his 1997 LTD claim, it should have ceased payments in 1998 because Fier left Boyd to take another job.  At the new job, Fier was earning approximately the same salary he had earned before the accident.  The rationale for UNUM’s decision was based upon the LTD policy which stated:

Disability benefits will cease on the earliest of:

The date the insured is no longer disabled;

The date the insured dies;

The end of the maximum benefit period;

The date the insured’s current earnings exceed 80% of his pre-disability earnings.

On appeal with the United States Court of Appeals for the Ninth Circuit the lower court correctly determined Fier’s ineligibility for benefits from 1993 to 1997 and from 1998 forward under the LTD policy.  The policy was not ambiguous as to when benefits would terminate.  In addition, the Ninth Circuit court also held the district court correctly determined that Fier’s LTD benefits terminated in 1998 when Fier left his employment with the Boyd. 

With respect to the AD&D policy, Fier appealed the district court’s determination that to be eligible for any AD&D benefits; he had to have suffered dismemberment by “severance.”  The Ninth Circuit, not having had to construe this term before, relied upon Cunninghame v. Equitable Life Insurance Society of the Untied States, 652 F.2d 306  (2d Cir. 1981).  In Cunninghame, the Second Circuit held the policy’s definition of ‘loss’ was not ambiguous, and interpreted the terms ‘dismemberment by severance’ by stating:

The word ‘dismemberment’ itself implies actual separation; the noun derives from the transitive verb ‘dismember’, defined as meaning ‘to cut or tear off into pieces; take apart roughly or divide (a whole) into sections or separate units’ or, obsoletely, to ‘lop’ or ‘sever’.  “Dismemberment” as a noun, therefore, refers to “the act of dismembering or the state of being dismembered: division into separate parts or units.”

Therefore, the Ninth Circuit concluded that Fier was not owed any benefits under the AD&D policy because he “did not suffer the physical detachment of his limbs.” 

The Court applied long-standing law in the Ninth Circuit that if there is no ambiguity to the interpretation of a policy provision, courts will not create one, and will “interpret terms in ERISA insurance policies in an ordinary and popular sense as would a [person] of average intelligence and experience.” Evans v. Safeco Life Ins. Co., 916 F.2d 1437 (9th Cir. 1990).

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At trial, the parties agreed that the standard of review was de novo since the Plan did not grant discretion to the claims administrator.  Accordingly, the district court placed the initial burden upon Muniz as the claimant to show that he was entitled to benefits under the terms of the plan.  Muniz submitted evidence to the court from his primary physician, Dr. Towner, who concluded that Muniz was totally disabled from performing any occupation.  This, argued Muniz, was sufficient to shift the burden of proof to the Plan to demonstrate that its claim decision was justified.  However, the Ninth Circuit disagreed.  Drawing from decisions in the Eleventh and Eighth Circuits, the Appellate Court concluded that the claimant retained the burden of proving that he was entitled to benefit even in light of the proffered evidence. 

As concluded by other circuit courts which have addressed the question, when the court reviews a plan administrator’s decision under the de novo standard of review, the burden of proof is placed on the claimant.  See, e.g., Horton v. Reliance Standard Life Ins. Co., 141 F.3d 1038, 1040 (11th SCir. 1998) (“A plaintiff suing under [29 U.S.C. § 1132(a) (1)(B)] bears the burden of proving his entitlement to contractual benefits.”); Farley v. Benefit Trust Life Ins. Co., 979 F.2d 653, 658 (8th Cir. 1992) (“[W]e agree that it was [the claimant’s] burden to show that he was entitled to the ‘benefits . . . under the terms of his plan.’ ”) (omission in original) (quoting 29 U.S.C. § 1332(a)(1)(B)).”

In addition, the Ninth Circuit recognized that Muniz could cite to no precedent where a court conducting a de novo review shifted the burden of proof to the claim administrator.  The case law cited by Muniz in support of his argument all dealt with cases where the standard of review was abuse of discretion.  In those situations, the court focused on whether the Plan abused its discretion in denying benefits.  However, under a de novo review, that analysis is irrelevant to the issue of whether the claimant was entitled to benefits.  Similarly, case law that supports burden shifting under an abuse of discretion framework would be irrelevant where the standard of review is de novo.  Since Muniz could not provide any precedent in support, he retained the burden of proof.  The court did note that if the standard of review was abuse of discretion, the burden would shift to the insurer to prove that its actions were not tainted by the structural conflict of interest that results when it review and decides entitlement to benefits and also is the funding source. 

Further, the court addressed Muniz’s argument that once a claimant proves he or she is totally disabled, the burden shifts to the insurer to show an change in condition:

Muniz argues that the district court committed clear error in its analysis because his medical records did not show a change in his condition over the years he was covered by the CGLIC plan. As noted above, the fact that the claimant was initially found disabled under the terms of the plan may be considered evidence of the claimant's disability, but as the Eighth Circuit stated in McOsker v. Paul Revere Life Insurance Co., “[w]e are not suggesting that paying benefits operates forever as an estoppel so that an insurer can never change its mind.” 279 F.3d 586, 589 (8th Cir.2002). Muniz did not provide sufficient evidence to demonstrate that the district court committed clear error in its analysis of the record

After all of the evidence for and against Muniz’s position was balanced against each other, the end result as determined by the district court was that Muniz failed to prove that he was entitled to benefits.  Ultimately, it is not clear whether Muniz would have won his case even if he did not have the burden of proof.  However, this holding creates an additional obstacle for all future claimants and confirms that in the Ninth Circuit, claimants retains the burden of proof for establishing entitlement to benefits under a de novo standard of review.

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. 

To the Members of the California State Assembly:

I am returning Assembly Bill 1868 without my signature.

This bill would prohibit the Insurance Commissioner from approving any disability or

life insurance policy if it includes a provision that would reserve discretionary authority

to the insurer to determine eligibility for benefits, and voids certain provisions of a policy

or agreement if it provides or funds life insurance or disability insurance coverage.

This bill is unnecessary, as the Insurance Commissioner already has the authority to

prohibit the use of discretionary clauses.

For this reason I cannot sign this bill.

Sincerely,

Arnold Schwarzenegger

California Governor Arnold Schwarzenegger has the opportunity to sign California Assembly Bill 1868 (“AB 1868”) and to prohibit these discretionary clauses.  In the recent case of Standard Insurance Company v. Morrison, the Ninth Circuit Court of Appeals ruled that the California Insurance Commissioner has the authority to disapprove any disability insurance policies that contain discretionary clauses.

WASHINGTON BUREAU -- The long-term disability insurance (LTD) industry took a licking today during a Senate Finance Committee hearing.

Senate Finance Committee Chairman Max Baucus, D-Mont., said LTD insurers have doctors with conflicts of interest review claims.

“Many of these doctors are employed either by the insurance company or by companies that do a lot of business with the insurance company,” Baucus said. “These arrangements make it far too easy for the doctors to deny claims, terminate claims, or reject appeals.”

Ronald Leebove, a rehabilitation counselor who appeared for the American Board of Forensic Counselors, Springfield, Mo., said private group LTD policies fail to provide the protection insurers promise.

“There are many tricks and tactics used by the insurance companies to deny claims,” Leebove said.

Several witnesses talked about employers’ and insurers’ use of Employee Retirement Income Security Act (ERISA) provisions to give plan administrators’ discretion over LTD benefits decisions, and to ward off challenges of benefits determinations.

Mark DeBofsky, a partner at Daley, DeBofsky & Bryant, Chicago, a law firm, said the courts have gone against legislative intent and transformed ERISA into “a shield that protects insurance companies from having to face the consequences of unprincipled benefit denials and other breaches of fiduciary duty.”

In most cases involving LTD claim disputes, there is not even a trial, DeBofsky said.

“Instead,” DeBofsky said, “courts conduct reviews of claim records assembled and shaped by self-serving insurance companies without hearing any testimony whatsoever, under a procedure that gives more deference to the insurance company than a court would give a Social Security administrative law judge in its review of a Social Security disability benefit claim denial.”

Judge William Acker Jr., a senior district court judge in northern Alabama, testified that the “courts have not rescued ERISA” in its handling of long-term disability cases. “If anything, they have dug the ERISA hole deeper,” Acker said. “ERISA jurisprudence will stay as messed up as it is unless Congress reworks it.”

Paul Graham, a senior vice president at the American Council of Life Insurers (ACLI), Washington, defended disability insurers.

Disability insurance can be susceptible to fraud and abuse, and many states have passed regulations that require short-term disability (STD) insurance and long-term disability disability insurance companies to report instances of suspected fraud, Graham said.

“While fulfilling their contractual and regulatory responsibilities, insurers need to remain attentive to potentially fraudulent claims,” Graham said.

Therefore, he said, an eligibility determination, whether made by the insurance carrier or other fiduciary, is only valid for the information at that point in time and must be periodically re-evaluated to account for changes in the claimant’s condition.

Graham said a 2008 industry study that included a majority of group disability carriers found that 79% of submitted claims were approved.

Of those claims not approved, over 25% were not paid because the claimant recovered too quickly to collect benefits, Graham testified.

Emergency process for urgent claims, and a process for experimental or investigational treatment. 

For plans governed by ERISA or not otherwise covered by a state law external appeal process, a federal external review program will be required.  Since these are still interim rules, a framework for the federal external review process has not been established.  However, the federal review process will likely be modeled along the NAIC Model Act.

These regulations are clearly a win for consumers who have long complained that the internal appeals process is biased towards insurance companies.  Unfortunately, it will take some time for consumers to reap the benefits of these changes.  Health plans that were in effect on March 23, 2010 and have not been significantly modified since then are considered “grandfathered” and not subject to these regulations. However, over time, expect to see an external review process become a standard component of the claim review process.

[1] Source: “Fact Sheet: The Affordable Care Act: Protecting Consumers and Putting Patients Back in Charge of Their Care,” dated July 22, 2010.