California Insurance Litigation Blog

By granting certiorari in Heimeshoff v. Hartford Life and Accident Insurance Co., 496 Fed. Appx. 129, 2012 U.S. App. LEXIS 19269, 2012 WL 4017133 (2d Cir. September 13, 2012), the United States Supreme Court is poised to address an issue that has left countless ERISA claimants without a remedy to challenge a wrongful denial of disability benefits.  Specifically, the Supreme Court will consider when the statute of limitations accrues following a decision to deny a claim for disability benefits.  Or, as a claimant would ask the question, “What is my deadline to file a lawsuit in an ERISA matter?”

In what may be a matter of first impression, Judge Cormac J. Carney of the United States Federal District Court for the Central District of California denied Sun Life and Health Insurance Company’s Objections to Proposed Judgment in an ERISA long-term disability insurance claim case handled by McKennon Law Group PC.  As detailed here, Robert J. McKennon and Scott E. Calvert of the McKennon Law Group secured a victory at trial for their client in an ERISA long-term disability insurance claim lawsuit against Sun Life, with the Court finding that Sun Life abused its discretion in denying Mr. Evans’ claim for long-term disability benefits.  Following the Court’s instructions, Mr. Evans filed a “Proposed Judgment Following Trial.”  Sun Life offered four separate objections to the Proposed Judgment, all of which were rejected by the Court.

Are insureds entitled to communications between an insurance company’s in-house counsel and the claims handlers that might otherwise be protected by the attorney-client privilege?  Following a new ruling by the Ninth Circuit Court of Appeals, if the claimant is insured under an ERISA plan, the answer might be “yes.”

For decades, courts, including the Ninth Circuit, have recognized a “fiduciary exception” to the attorney-client privilege in the context of ERISA.  Courts have required production of legal advice given to plan fiduciaries when they are acting as fiduciaries for the benefit of the beneficiaries.  This “fiduciary exception” has however been subject to exceptions.

In Skinner v. Northrop Grumman Retirement Plan B, 673 F.3d 1162 (9th Cir. 2012), the Ninth Circuit applied the Supreme Court’s ruling in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011) wherein the high court ruled that ERISA "summary documents, important as they are, provide communication with beneficiaries about the plan, but that their statements do not themselves constitute the terms of the plan for purposes of § 502(a)(1)(B)."  (The holding in CIGNA Corp. v. Amara was discussed in our blog here -- http://www.californiainsurancelitigation.com/article/boon-or-bust-for-employee-rights-under-erisa-plans/)  While the Ninth Circuit adopted the Supreme Court’s logic and ruling, it left open the possibility that language contained only in the Summary Plan Description (“SPD”) could be enforced if a claimant relied on that language. 

This article continues our series of articles answering basic questions about insurance law and the Employee Retirement Income Security Act of 1974 (commonly referred to as “ERISA”).  This one addresses:  In a lawsuit governed by ERISA, what actions taken by the claims administrator (usually an insurance company such as Blue Cross/Blue Shield or CIGNA) will reduce the level of discretion the court gives the insurance company’s decision when reviewing the decision for an abuse of discretion?

In a major victory for consumers, Governor Jerry Brown signed a bill that makes discretionary clauses – typically contained in ERISA-governed life, health and disability insurance policies/ERISA plans void and unenforceable in new or renewed policies.  SB 621 was authored by Senate Insurance Committee Chair Ron Calderon (D-Montebello) and sponsored by Insurance Commissioner Dave Jones, and was similar to AB 1686 vetoed by Governor Schwarzenengger in 2010.  

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.

The Ninth Circuit has reversed itself and ruled that insurance companies that make claim decisions or are responsible for paying benefits can serve as defendants in ERISA actions for benefits or to enforce the terms of the plan.  In Cyr v. Reliance Standard Life Insurance Company, 642 F.3d 1202 (9th Cir. 2011), the Ninth Circuit overruled some of its earlier precedents, including Everhart v. Allmerica Financial Life Insurance Company, 275 F.3d 751 (9th Cir. 2001), and ruled that potential liability under 29 U.S.C. section 1132(a)(1)(B) of ERISA is not limited to the benefit plan or the Plan Administrator.  In explaining this shift, which allows insurance companies that make the claim decision or are responsible for paying benefits to be named as a defendant, the Ninth Circuit stated:

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.

Under ERISA, insurers/claim administrators are required to give every insurance claim a full and fair review. Courts in the Ninth Circuit have construed this requirement in a manner that requires insurers/claim administrators to do more than simply have an in-house physician or nurse conduct a paper review of medical records.  This trend continues with the decision in Galloway, et. al. v. Lincoln National Life Insurance Company, 2011 U.S. Dist. LEXIS 45866 (W.D. Wash.  April 28, 2011).

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.  

It will not be surprising to many readers of this blog that insurance companies often deny life insurance, health insurance and disability insurance claims.  Many times, insurance companies are wrong in their decisions.   And, sometimes they acknowledge their mistakes.  The question becomes: what are the odds of an insurance company changing its mind and reversing the decision?  Our firm knows firsthand that the odds are extremely good when a reputable and respected law firm is involved in representing the policyholder’s interests.  But that is just our experience.  What is the overall experience when a health insurance claim is denied and a subsequent appeal is filed?  We now have our answer. 

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.

In 1987 Robert Fier started working for the Boyd Group (“Boyd”) as a casino slot repairman.  After a promotion to management, Fier subsequently enrolled into Boyd’s two benefits programs: a Long Term Disability (“LTD”) Policy and an Accidental Death and Dismemberment Insurance (“AD&D”) Policy.  Both policies are maintained pursuant to the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq.

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.

The question of who has the burden of proof can often decide the outcome of litigation.  Given its importance, it is common to see litigants attempt to shift that burden to the opposing side in order to secure a tactical advantage.  Recently, in Muniz v. Amec Construction Management Inc., __ F.3d __, 2010 WL 4227877 (Decided October 27, 2010), the Ninth Circuit Court of Appeals addressed the question of whether the burden of proof can be shifted in an ERISA disability case.  In Muniz, a claimant diagnosed with HIV applied for benefits through his employer’s long-term disability plan (the “Plan”).  Benefits were approved and paid for the first 24 months.  However, as is common with many benefit plans, after 24 months the definition of disability changed.  In order to qualify under the Plan, the claimant must be unable to perform all the essential duties of any occupation.  As a result, the Plan terminated his benefits. 

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. 

Today Governor Schwarzenegger vetoed AB 1868 that would have banned discretionary clauses in group insurance policies.  This is a disappointment to consumer groups but not to insurers who rely on them.  Currently, the Department of Insurance bans them in group policies anyway.  Here are the Governor’s comments on why it was vetoed:

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

The Wednesday August 11, 2010 edition of the Los Angeles Daily Journal featured my article, entitled “The Waiver Doctrine, Alive And Well in ERISA Cases,” in the Perspective column. It explains a very recent case from the Ninth Circuit Court of Appeals in Mitchell v. CB Richard Ellis Long Term Disability Plan, 2010 DJDAR 11532 (9th Cir. July 26).  The article is posted below with permission of Daily Journal Corp. (2010). 

Last month, the U.S. Supreme Court handed ERISA plan participants a big victory when they decided the important ERISA disability case of Hardt v. Reliance Standard Life Insurance, __ U.S. __ (Decided May 24, 2010)(see our blog discussion here) holding that an ERISA plan participant may be able to collect attorneys’ fees from a plan or claim administrator without obtaining a judgment in the action.  It did not take long for the Ninth Circuit Court of Appeals to apply Hardt.  In Simonia v. Glendale Nissan/Infiniti Disability Plan, __ F.3d __ (9th Cir. June 24, 2010), the court rejected a plan participant’s claim for attorney’s fees.

In Simonia, Aleck Simonia became physically disabled due to a herniated disc.  He had disability insurance under his employer's group insurance plan, which was ultimately insured by the Hartford Insurance Co.  Hartford concluded that Simonia was no longer physically disabled but had a mental disorder subject to his ERISA plan's twelve-month payment limit.  Hartford also learned that Simonia had been awarded $1,551 per month in Social Security Disability Insurance (“SSDI”) benefits retroactively, which should have been offset against his payments from Hartford.  Thus, Hartford informed Simonia he would be receiving payments subject to the plan's twelve-month mental disorder limit and that he owed Hartford $22,310.

Simonia sued Hartford for improperly reclassifying his disability as a mental disorder.  Hartford filed a  counterclaim to recover its overpayment.  Simonia informed Hartford that the Social Security Administration had retroactively reduced his SSDI award, and he requested that Hartford recalculate the alleged overpayment.  The parties later settled the counterclaim and stipulated to its dismissal. Simonia did not prevail in his claims against Hartford for continuing benefits.  Simonia thereafter filed a motion seeking $63,745 in attorney’s fees because he “was successful as a counter-defendant in that the defendant dismissed its counterclaim.”

For most insurance litigation, the majority of the evidence used by both sides comes from the claim file, also known as the administrative record in ERISA cases.  The claim file represents the insurance carrier’s written record of its handling and processing of an insurance claim.  Obviously, this information is highly relevant whenever coverage or a claim is disputed.  Moreover, in the case of life, health, or disability insurance cases, the claim file will also be full of personal and confidential information such as medical records and social security numbers.

The federal courts have for a long time struggled with how to apply the deferential standard of review to actions taken by ERISA plan administrators in light of the United States Supreme Court holding in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).  Firestone held that an ERISA plan administrator with discretionary authority to interpret a plan is entitled to deference in exercising that discretion.  Courts have reached different results on an important issue: is a plan administrator that incorrectly interprets a plan document still entitled to an abuse of discretion standard of review when courts review the administrator’s actions?  The Supreme Court answered that question in the affirmative in Conkright v. Frommert, __ U.S. __ (April 21, 2010).  The Court telegraphed how it would rule when it framed the issue as: “The question here is whether a single honest mistake in plan interpretation justifies stripping the administrator of that deference for subsequent related interpretations of the plan.”

What happens when an ERISA plan provides for a certain level of benefits and the required summary plan description (“SPD”) given to plan participants provides for greater benefits?  The District Court for the Central District of California answered that question recently with its holding in Skinner v. Northrop Grumman Retirement Plan B, 2010 U.S. Dist. LEXIS 6591 (C.D. Cal. Jan 26, 2010).  In that case, the court held that former employees who received an inaccurate SPD were not entitled to increased retirement benefits as a result of the error.  In so ruling, the court determined that plaintiffs failed to demonstrate “reasonable reliance” on the SPD, which plaintiffs contended did not provide them sufficient notice of the plan’s offset provision.  The district court applied the standard set by the Ninth Circuit in reversing a prior ruling granting a motion for summary judgment wherein the court, in an unpublished decision in Skinner v. Northrop Grumman Retirement Plan B, 334 Fed. Appx. 58, 2009 WL 1416725, *1 (9th Cir. May 21, 2009), concluded:

On remand, the district court should reconsider each of [Plaintiffs'] claims in light of our conclusion that (1) the 2003 SPD's incorporation of the 1998 SPD by reference did not notify [Plaintiffs] that the annuity equivalent offset would apply to their transition benefits, and (2) in terms of [Plaintiffs']  expectations for Part B of the transition benefit, the 1998 SPD's description of the offset's limited applicability controls over the 2003 Restatement's description of the offset as universally applicable. (emphasis original)

Can a plan participant sue for breach of fiduciary duty when his individual account is diminished by a failure of the administrator to follow his investment instructions? The U.S. Supreme Court answered this important question in the affirmative in James LaRue  v. DeWolff, Boberg & Associates Inc., 128 S. Ct. 1020 (2008).  LaRue filed an action under ERISA alleging that his employer (also the plan administrator) breached its fiduciary duty with regards to an ERISA-regulated 401(k) retirement savings plan by failing to follow his investment instructions.  Relying on the Supreme Court’s ruling in Massachusetts Mutual Life Insurance Co. v. Russell that a participant could not bring a suit to recover consequential damages resulting from the processing of a claim under a plan that paid a fixed level of benefits, the Fourth Circuit Court of Appeals affirmed the district court’s grant of summary judgment in favor of the plan on the grounds that section 502(a)(2) did not provide a remedy for LaRue’s “individual injury.”  The Supreme Court disagreed. 

In an opinion written by Justice Stevens, the Court held that “although § 502(a)(2)  does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of the plan assets in a participant’s individual account.”  The Court reasoned that in the context of defined contribution plans, the misconduct did not need to threaten the solvency of the entire plan in order for section 409 (which provides remedies for breach of fiduciary duty) to apply.  Rather, the legislative history and plain language of the statute authorizes a participant to enforce fiduciary obligations under ERISA, and the administrator’s failure to follow the LaRue’sinvestment instructions could qualify as a breach of those duties.

After the United States Supreme Court decided MetLife Ins. Co. v. Glenn in which the Court held that a reviewing court must consider the conflict of interest arising from the dual role of an insurer acting as a plan administrator and payor of plan benefits as a factor in determining whether the insurer abused its discretion in denying benefits, several courts have struggled with this standard.  The Ninth Circuit Court of Appeals clarified how courts within the Ninth Circuit will apply this standard in Montour v. Hartford Life & Accident, 582 F.3d 933 (9th Cir. 2009).  In Montour, the court adopted a new standard of reviewing ERISA abuse of discretion cases where the insurer has a conflict of interest. The court held that a “modicum of evidence in the record supporting the administrator’s decision will not alone suffice in the face of such a conflict, since this more traditional application of the abuse of discretion standard allowed no room for weighing the extent to which the administrator’s decision may have been motivated by improper considerations.”

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.

On Monday October 19, 2009, Lisa Girion of the Los Angeles Times reported on the healthcare reform bills being debated in Congress and their potential impact on claim denials by insurers. Girion states that, “Despite growing frustration with the way health insurers deny medical treatments, major healthcare bills pending in Congress would give patients little new power to challenge those sometimes life-and-death decisions.” She further explains that “a patient's ability to fight insurers' coverage decisions could be more important than ever because Congress, in promoting cost containment and price competition, may actually add to the pressure on insurers to deny requests for treatment.”

The article discusses the wrongful death lawsuit filed by Hilda and Grigor Sarkisyan, whose daughter Nataline died in 2007 after Cigna decided not to cover a liver transplant. The lawsuit against Cigna over the transplant denial was dismissed this year by a federal judge, who ruled that the Employee Retirement Income Security Act (“ERISA”) preempts suits with state law claims for damages over such health benefit decisions. The Sarkisyans traveled to Washington this year to try to persuade members of Congress to pass legislation which would remove ERISA’s bar of certain types of damages that are now available under state law.

Rep. Adam B. Schiff (D-Burbank), who met with the Sarkisyans in Washington, said that there are not enough votes in Congress to pass such legislation.  Insurers and employers strongly support ERISA’s limitations on damages. They say any increase in litigation would drive up costs and could force some employers to drop health benefits.

The healthcare reform bill pending in the House would extend the right to sue under state law for damages to anyone who buys coverage through one of the health insurance exchanges it envisions. That could include small businesses. However, the pending legislation does not remove ERISA’s barrier to such suits by employees who procure coverage in the employment-based insurance market.