You Can Plan On The Plan: United States Supreme Court Rejects Invitation To Rewrite Plan Terms In Heimeshoff v. Hartford Life & Accident Insurance Company

By Robert Renner & James Hazlehurst

On December 16, the United States Supreme Court issued its opinion in Heimeshoff v. Hartford Life & Accident Insurance Company. The unanimous decision, which was written by Justice Clarence Thomas, affirmed the Second Circuit’s ruling that the three-year contractual limitation period for filing suit to recover benefits under an ERISA plan is enforceable even though that limitation period begins to run before the participant’s right to sue accrues. 

The contractual limitation period at issue precluded a plan participant from bringing suit more than three years after “proof of loss” was due under the plan’s terms.  ERISA, however, has been judicially construed to require that plan participants exhaust administrative remedies through an internal review and appeal process before the participant has a right to sue to recover benefits.  This means that the contractual limitation periods like the one in Heimeshoff begin running before the cause of action, or right to sue, accrues.  In other words, the contractual limitation period could theoretically bar a lawsuit even before the plan participant had the right to sue. 

Heimeshoff argued that this result conflicts with the general rule that a limitation period commences when the plaintiff has the right to sue.  The court rejected this argument, noting that in the majority of cases the plan participant still had over a year left to bring suit after the exhaustion of administrative remedies. 

Justice Thomas explained that “[i]n the ordinary course, the regulations contemplate an internal review process lasting about one year.”  “We cannot,” Justice Thomas continued, “fault a limitations provision that would leave the same amount of time in a case with an unusually long internal review process while providing for a significantly longer period in most cases.”

The court therefore concluded that “[a]bsent a controlling statute to the contrary, a participant and a plan may agree by contract to a particular limitations period, even one that starts to run before the cause of action accrues, as long as the period is reasonable.”  The court did recognize that “rare” cases might arise in which the internal review process precluded a plan participant from bringing suit within the contractual limitation period.  The court expressed little concern for those situations, noting that judges could use equitable doctrines, such as waiver and estoppel, to address those unusual circumstances.  As Justice Thomas explained:

“[even] in the rare cases where internal review prevents participants from bringing §502(a)(1)(B) actions within the contractual period, courts are well equipped to apply traditional doctrines that may nevertheless allow participants to proceed. If the administrator’s conduct causes a participant to miss the deadline for judicial review, waiver or estoppel may prevent the administrator from invoking the limitations provision as a defense.  To the extent the participant has diligently pursued both internal review and judicial review but was prevented from filing suit by extraordinary circumstances, equitable tolling may apply.” (internal citations omitted)

At oral argument in October, Justice Sonia Sotomayor raised the possibility that if the court ruled against Heimeshoff, the Department of Labor could potentially issue a clarifying regulation requiring a minimum period of time – one year, for example – in which the participant could bring suit following the conclusion of the administrative process. 

The decision in Heimeshoff suggests that such a regulation is unlikely, especially given the court’s belief that equitable doctrines sufficiently address the “rare” situation where little or no time exists to file suit at the end of the administrative process.

Heimeshoff is noteworthy for, among other things, the court’s recognition of “the particular importance of enforcing plan terms as written.”  The Supreme Court’s decision offers reassurance to plan administrators and claim administrators that courts will uphold the agreement of the parties unless that agreement is contrary to a controlling statute or is unreasonable. 

For further analysis of this decision, please see SCOTUS DECIDES: Three-Year Contractual Limitations Period Enforceable in ERISA LTD Plan on Barger & Wolen's Insurance Litigation & Regulatory Law blog.

Accrual of Statute of Limitations for ERISA Disability Claim to be heard by SCOTUS

By Robert K. Renner and James A. Hazlehurst

On October 15, 2013, the United States Supreme Court will conduct oral argument in Heimeshoff v. Hartford Life & Accident Ins. Co., et al., addressing the accrual of the statute of limitations for judicial review of an adverse benefit determination under an employee benefit plan governed by the Employee Retirement Income Security Act (“ERISA”).

As discussed below, the District Court of Connecticut granted defendants’ motion to dismiss, holding that plaintiff’s lawsuit was time-barred given the plan’s contractual limitation requiring legal action to be commenced within three years “after the time written proof of loss is required to be furnished.” The Second Circuit Court of Appeals affirmed in an unpublished per curiam opinion. In granting the petition for review, the Supreme Court limited the scope of its inquiry to a single question, rejecting consideration of two others that had been posed.

This blog entry will therefore “tee up” Tuesday’s oral argument before the Supreme Court, summarizing the underlying District Court and Second Circuit decisions and clarifying what are – and what are not – the core issues to be resolved.

 

District Court proceedings

On November 18, 2010, Julie Heimeshoff filed her lawsuit against Hartford and Wal-Mart, claiming that defendants had violated ERISA by failing to provide long-term disability (“LTD”) benefits to which she was entitled under the employee benefit plan issued and offered, respectively, by defendants.

Heimeshoff claimed that she had to stop working as Senior Public Relations Manager for Wal-Mart on or about June 8, 2005 due to “significant pain, extreme fatigue, and cognitive impairment” based upon “likely Irritable Bowel Syndrome and possible Restless Leg Syndrome, Allergies, and strong past history of lupus.” On August 22, 2005, Heimeshoff submitted her claim for LTD benefits to Hartford, supported by an Attending Physician Statement from her rheumatologist, Dr. Michael Saitta, with a diagnosis of Systemic Lupus Erythematosis and Fibromyalgia.

On November 29, 2005, Hartford sent a letter to Heimeshoff notifying her that it had not yet received a response from Dr. Saitta regarding her functionality, stating that it therefore could not make a benefit determination. On December 8, 2005, Hartford sent another letter to Heimeshoff, denying her claim because of the failure to provide satisfactory proof of loss.

Heimeshoff subsequently underwent a two-day Physical Capacity Evaluation (“PCE”) on July 18 and 19, 2006 to provide Hartford with the requested functionality information. Heimeshoff’s counsel forwarded the resulting report to Hartford on October 2, 2006, also including a report from her primary treating physician confirming her disability.

Hartford retained a rheumatology consultant to review the PCE, to speak with Dr. Saitta and to issue a report. On November 29, 2006, Hartford denied Heimeshoff’s LTD benefit claim. Heimeshoff pursued an administrative appeal of Hartford’s denial determination, submitting further evaluations and medical reports. Hartford retained two additional consultants, and – as alleged by Heimeshoff – issued “its last and final denial letter” on November 26, 2007.

In the litigation, defendants moved to dismiss the complaint, arguing that it was time-barred under the terms of the plan.

The plan provided that “[l]egal action cannot be taken against The Hartford … after the shortest period allowed by the laws of the state where the policy is delivered. This is 3 years after the time written proof of loss is required to be furnished according to the terms of the policy.” As to proof of loss, the plan required that “[w]ritten proof of loss must be sent to The Hartford within 90 days after the start of the period for which The Hartford owes payment.”

In opposition to defendants’ motion, Heimeshoff argued that the plan was ambiguous as to when proof of loss was due and that Hartford had failed to advise her of the plan’s three-year limitation in its denial letter.

The District Court dismissed the case. It first discussed well-settled law that because ERISA does not specify a limitations period, courts are to borrow from the most nearly analogous state limitations statute. However, a plan may prescribe a shorter limitations period than that state statute of limitations, and a limitations period that begins to run before a claimant may file a lawsuit is enforceable.

Citing a letter from Hartford that gave Heimeshoff up to September 30, 2007 to submit her additional claim information, the District Court concluded that written proof of loss was due – at the latest – by that date. As such, she was required to take legal action no later than September 30, 2010, but she did not file her lawsuit until November 18, 2010.

The District Court also rejected Heimeshoff’s contention that Hartford’s denial letter had to include notice of the plan’s limitations period. Discussing ERISA’s regulations, the District Court concluded that Hartford was required to provide “a statement of the claimant’s right to bring a civil action,” but not the applicable time limits for that action.

Second Circuit decision

By way of a brief Summary Order, the Second Circuit affirmed the dismissal of Heimeshoff’s case. The three-judge panel rejected Heimeshoff’s argument that the contractual limitations period did not begin to run until Hartford’s final denial of benefits. It noted that Connecticut’s six-year statute of limitations otherwise applied, but the three-year limitation in Hartford’s plan shortened that time frame. “The policy language is unambiguous and it does not offend the statute to have the limitations period begin to run before the claim accrues.”

The Second Circuit also found it unnecessary to resolve Heimeshoff’s contention that Hartford was required to disclose, in its denial letters, the time limits for filing a civil action. Heimeshoff’s counsel had conceded both in the District Court and at oral argument before the Second Circuit that he had received a copy of the plan containing, as described by the Second Circuit, “the unambiguous limitations provision long before the three-year period for Appellant to bring the claim had expired.”

Scope of Supreme Court’s review

In granting Heimeshoff’s petition for writ of certiorari, the Supreme Court accepted only one question: “When should a statute of limitations accrue for judicial review of an ERISA disability adverse benefit determination?”

Two other questions were not accepted for review: “What notice regarding time limits for judicial review of an adverse benefit determination should an ERISA plan or its fiduciary give the claimant with a disability claim?” and “When an ERISA plan or its fidicuary fails to give proper notice of the time limits for filing a judicial action to review denial of disability benefits, what is the remedy?”

In addition to briefing by the parties, numerous groups and entities were permitted to file briefs as amici curiae. The United States (specifically, the Department of Labor), AARP, National Employment Lawyers Association, and United Policyholders filed in support of Heimeshoff. American Council of Life Insurers, America’s Health Insurance Plans, Chamber of Commerce of the United States of America, and DRI – The Voice of the Defense Bar filed in support of Hartford and Wal-Mart.

Recent decision limits the protections from liability for ERISA pension plan fiduciaries

James Hazlehurst wrote an article published in The Daily Journal on June 12, 2013, that discussed the Ninth Circuit Court of Appeals ruling in Harris v. Amgen that limited the protections from liability for ERISA pension plan fiduciaries afforded by the “presumption of prudence” for investments in employer stock.

As Hazlehurst points out, the “presumption of prudence” developed out of the tension between the competing goals of protecting employee pension plan investments and providing loyalty incentives to employees. The prudent investor standard requires plan fiduciaries to diversify investments held by the plan. To allow for employee loyalty incentives through employer stock, Congress created an exception to the diversification requirement for investments in the stock of an employer. 

In Amgen, the Ninth Circuit expanded on a previous ruling, Quan v. Computer Sciences Corp., identifying circumstances under which the “presumption of prudence” does not apply. Hazlehurst notes that Amgen is important in defining the limits of the protections afforded by the “presumption of prudence.”

The case clarifies that a company is not protected from liability as a plan fiduciary unless the company exclusively delegates its investment authority under the plan and expressly disclaims that authority.

Without that delegation and disclaimer, Hazlehurst continues, the company may be liable for plan losses as a fiduciary.

Thus Amgen illustrates why companies should not only be concerned with running afoul of securities law for material misrepresentations and omissions in connection with the sale of their stock. Those same activities may expose the company to liability for pension plan losses where the company has not adequately delegated and disclaimed its investment authority under the plan and is not otherwise protected by the “presumption of prudence.”

 

Attorneys' Fees Reduce ERISA Plan's Recovery From Common Fund

By Robert Renner and James Hazlehurst

The United States Supreme Court ruled today that absent an express provision to the contrary, the amount an ERISA plan can recover from a plan participant’s lawsuit against a third-party tortfeasor must be reduced proportionately by the amount of attorneys’ fees the participant incurred to obtain the recovery. 

In US Airways, Inc. v. McCutchen, an ERISA health plan paid $66,866 for James McCutchen’s medical expenses for injuries sustained in an automobile accident. McCutchen later hired counsel and recovered $110,000 from the other automobile driver and from his own automobile insurer. After paying his attorneys their 40% contingency fee, McCutchen was left with a net recovery of $66,000. Given McCutchen’s total recovery of $110,000 and based upon a reimbursement provision if McCutchen recovered money from a third party, the ERISA plan sought recovery of the $66,866 it paid on his behalf. 

The district court granted summary judgment in favor of the ERISA plan, holding that it could recover from McCutchen the full amount it paid. The Third Circuit vacated the district court’s judgment, noting that McCutchen would be left with less then full payment for his medical bills and the result would give a windfall to the plan. The Supreme Court reversed, holding that while the ERISA plan could recover the medical expenses paid, any recovery had to be reduced proportionately - pursuant to the common-fund doctrine - by the amount of attorneys’ fees incurred in the lawsuit against the third-party tortfeasor. 

In a 5-4 decision, the Supreme Court reasoned that the ERISA plan’s governing documents did not explicitly provide that the plan had first priority to reimbursement from third-party recoveries. 

Justice Elena Kagan wrote the majority opinion, noting that full reimbursement from McCutchen produced the odd outcome whereby McCutchen was in a worse position by pursuing and obtaining a third-party recovery:

Without cost sharing, the insurer free rides on its beneficiary’s efforts – taking the fruits while contributing nothing to the labor.” 

Instead of permitting the ERISA plan to recover up to the amount of McCutchen’s net recovery (i.e., $66,000), the Court held that where the plan does not specify rules for allocating a third-party recovery between the plan and the participant, the common-fund doctrine provides the default allocation rules. McCutchen was therefore entitled to retain 40% of his net recovery as his “attorney fee” for recovering a common fund for the benefit of another.      

The Court unanimously agreed that equitable principles cannot override the plain terms of an ERISA plan. However, the dissent, which was authored by Justice Antonin Scalia, would not have applied the common-fund doctrine because it disagreed that the plan’s terms were ambiguous. Justice Scalia stated that the Court granted certiorari based on an understanding that the plan’s terms unambiguously allowed for full reimbursement from third-party recoveries without any reduction for attorneys’ fees and costs.   

 

Recovery From Dissolved Corporation's Liability Insurer Barred By Foreign Survival Statute

The recent case of Greb v. Diamond International Corp. highlights the need for dissolved corporations and their insurers to consider the survival statute of their state of incorporation when defending against actions brought in California.

In Greb, the California Supreme Court held that California law does not preclude the application of a foreign jurisdiction’s survival statute. The defendant, a Delaware corporation, argued that Delaware’s three-year survival statute barred the action. Plaintiffs contended that California corporate law – which places no time limit on suits against dissolved corporations – governed their suit.

The trial court agreed with the defendant and sustained its demurrer with prejudice on the grounds that Delaware’s survival statute barred the action which was filed more than three years after defendant dissolved. The court of appeal affirmed.

The Supreme Court unanimously affirmed the appellate court’s judgment. The opinion, authored by Chief Justice Cantil-Sakauye, rejected plaintiffs’ arguments that foreign corporations that qualified to do business in California were thereby organized under the laws of California.

The court found “no evidence” that the legislature intended to accomplish that “dramatic result.” Furthermore, “such a scheme would require foreign corporations to ‘follow a litany of requirements regarding various corporate activities that their home state already regulates.’”

For more information on this matter, please contact the article authors: James Hazlehurst, Ed Oster or Robert Renner.

Recovery From Dissolved Corporation's Liability Insurer Barred By Foreign Survival Statute

The recent case of Greb v. Diamond International Corp. highlights the need for dissolved corporations and their insurers to consider the survival statute of their state of incorporation when defending against actions brought in California.

In Greb, the California Supreme Court held that California law does not preclude the application of a foreign jurisdiction’s survival statute. The defendant, a Delaware corporation, argued that Delaware’s three-year survival statute barred the action. Plaintiffs contended that California corporate law – which places no time limit on suits against dissolved corporations – governed their suit.

The trial court agreed with the defendant and sustained its demurrer with prejudice on the grounds that Delaware’s survival statute barred the action which was filed more than three years after defendant dissolved. The court of appeal affirmed.

The Supreme Court unanimously affirmed the appellate court’s judgment. The opinion, authored by Chief Justice Cantil-Sakauye, rejected plaintiffs’ arguments that foreign corporations that qualified to do business in California were thereby organized under the laws of California.

The court found “no evidence” that the legislature intended to accomplish that “dramatic result.” Furthermore, “such a scheme would require foreign corporations to ‘follow a litany of requirements regarding various corporate activities that their home state already regulates.’”

For more information on this matter, please contact the article authors: James Hazlehurst, Ed Oster or Robert Renner.

Supreme Court Upholds Affordable Care Act, But Just Barely

Barger & Wolen partner John LeBlanc and summer associate Natalie Ferrall wrote an article published in the Westlaw Journal – Insurance Coverage on Aug. 10, 2012, about the Supreme Court's closely watched ruling on healthcare reform and how the court found its controversial individual mandate to be constitutional.

In their article, LeBlanc and Ferrall note that the court focused on two key provisions of the Patient Protection and Affordable Care Act: the individual mandate, requiring most Americans to have insurance coverage; and the Medicaid expansion requirement which, had the court not struck it down, would have required states to meet certain federal requirements to receive funding. The article provided legal context and background on the Affordable Care Act and discussed how the court came to the conclusion that the law was “mostly constitutional.”

“In doing so, the court emphasized that its role was not to address the soundness of federal policy, but rather to interpret the law and enforce limits on federal power,” LeBlanc and Ferrall wrote.

Please click on the link to download the PDF: Supreme Court Upholds Affordable Care Act, But Just Barely.

Health Reform Bills Approved by California Assembly Health Committee

By John M. LeBlanc and Natalie J. Ferrall

The California Assembly Committee on Health recently heard and approved two high-profile health care reform bills with the stated purpose of bringing California into compliance with the federal Affordable Care Act (“ACA”). 

The first bill, Senate Bill 951 (Hernandez, D-West Covina), would require individual and small group health care service plans and insurance policies to cover essential health benefits beginning in 2014. Under the ACA, essential health benefits must include the following ten categories of items and services:

  • Ambulatory patient services
  • Emergency services
  • Hospitalization
  • Maternity and newborn care
  • Mental health and substance use disorder services, including behavioral health treatment
  • Prescription drugs
  • Rehabilitative and “habilitative” services and devices (to date, there is no guidance as to what the “habilitative” umbrella will include)
  • Laboratory services
  • Preventive and wellness services and chronic disease management
  • Pediatric services, including oral and vision care

SB 951 designates the Kaiser Small Group HMO as the benchmark standard for essential health benefits coverage in California.

The second piece of legislation, Senate Bill 961 (Hernandez, D-West Covina), prohibits health care service plans and insurers from denying coverage to individuals based on preexisting conditions. It requires guaranteed issue of individual health service plans and insurance policies. The bill only allows health plans and insurers to use age, geographic region, and family size in establishing individual coverage rates.

Supreme Court Rules Affordable Care Act is Constitutional

By John M. LeBlanc and Natalie J. Ferrall

In a 5-4 decision, the United States Supreme Court ruled that the Patient Protection and Affordable Care Act (“ACA”) is constitutional. The majority opinion, authored by Chief Justice Roberts, upheld the centerpiece of the ACA—the individual mandate—requiring citizens to obtain health insurance or pay a penalty to the IRS beginning in 2014. The Court construed the penalty as a tax on persons who choose not to purchase health insurance and thus within Congress’ taxing power. The Chief Justice, however, rejected the argument that the individual mandate was constitutional under the Commerce Clause. He stated that the Commerce Clause “authorizes Congress to regulate interstate commerce, not to order individuals to engage in it.” Justices Scalia, Kennedy, Thomas, and Alito filed a dissenting opinion in which they also found that the individual mandate could not be upheld under the Commerce Clause.

The Court further addressed the so-called Medicaid expansion provision, which required states to extend Medicaid coverage by 2014 to all individuals under the age of 65 with incomes below 133% of the federal poverty line; if a state fails to do so, the federal government could withdraw all of the state’s existing Medicaid funds. The Court held that it was unconstitutional under the Spending Clause for the federal government to coerce states into accepting changes to Medicaid, describing this financial threat as a “gun to the head”, leaving states with no meaningful choice but to accept the terms of the Medicaid expansion. The Court struck the provision, but left the remaining portions of the ACA intact.

Click here to read the full decision (pdf).

"Dismemberment by Severance" v. Loss of Use: A Smorgasbord of Interesting Disability Cases

Fier v. Unum Life Ins. Co. of America, 629 F.3d 1095 (9th Cir. 2011)

Facts and holding: In 1992, Robert Fier (“Fier”) was shot in the neck and rendered permanently quadriplegic. He filed a claim for benefits with Unum Life Insurance Company of America (“Unum”) under his ERISA-governed Accidental Death and Dismemberment Insurance Policy (“AD&D policy”).

UNUM denied Fier’s claim because the AD&D policy defined loss of hands or feet as “dismemberment by severance at or above the wrist or ankle joint” and, although Fier was a quadriplegic, his limbs were still physically attached to his body.

Fier filed suit in District Court asserting a claim for declaratory relief that he was entitled to benefits under the AD&D policy, among other claims. The District Court held that Fier was ineligible to receive benefits under the AD&D policy because his limbs were not physically severed from his body. Fier appealed to the Ninth Circuit, arguing that although his limbs remained physically attached to his body, he had no functional use of them due to the “severance” of his spinal cord.

As a matter of first impression, the Ninth Circuit construed the policy’s terms in their “ordinary and popular sense” and concluded that the phrase “dismemberment by severance” is unambiguous and required “actual, physical separation.” (The same result was reached by the Second Circuit in Cunninghame v. Equitable Life Assurance Society of the United States, 652 F.2d 306, 307 (2d Cir. 1981).) Accordingly, Unum did not owe Fier benefits under the AD&D policy.

Lessons Learned: Although a reasonable interpretation of the intent of the policy might be to award benefits to an insured who has completely and permanently lost all use of his limbs, courts will not rewrite the terms of a policy if they are clear and unambiguous.

Note that when disability policies provide total disability benefits for presumptive loss of both hands or legs, and the policy does not specifically require severance of the limbs, courts often view the requirement as being satisfied by the functional loss of use of the limbs. See generally Couch on Insurance 3d, Chapter 146:58 (1998).

 

From A Smorgasbord of Interesting Disability Cases.

Burden of Proof: The "What Changed?" Argument from "A Smorgasbord of Interesting Disability Cases"

Muniz v. Amec Construction Mgmt., 623 F.3d 1290 (9th Cir. 2010)

Facts and holding: Due to his HIV diagnosis, in 1992, Dierro Muniz (“Muniz”) began receiving long term disability benefits under his ERISA-governed long-term disability insurance plan issued by Connecticut General Life Insurance Company (“CGLIC”).

Under the terms of the plan, Muniz was entitled to continue to receive benefits after 24 months if he was “totally disabled,” which was defined by the plan as being “unable to perform all the essential duties of any occupation.”

In April 2005, Muniz’s claim came up for periodic review. During the review process, CGLIC’s nurse case manager determined that Muniz’s current medical records did not support the severity of the symptoms he reported. In addition, CGLIC determined in its vocational assessment that Muniz could perform sedentary work, thus rendering him qualified for clerical positions.

Muniz’s treating physician advised CGLIC that he disagreed with its findings and that it was his opinion that Muniz could not work in any field, sedentary or otherwise. However, he did not provide any objective medical evidence in support of this opinion. As a result, CGLIC requested that Muniz undergo a Functional Capacity Evaluation (“FCE”).

Although Muniz was willing to have an FCE, his treating physician refused to authorize the exam, given Muniz’s fatigue and overall condition. CGLIC then requested updated medical records from Muniz’s treating physician. Upon review of those records, CGLIC terminated Muniz’s benefits. Muniz’s appeals were denied and Muniz filed an ERISA suit.

Applying a de novo standard of review, the District Court ruled that the administrative record was insufficient to determine whether Muniz was totally disabled under the terms of the plan and ordered Muniz to submit to an FCE. Thereafter, the court ruled that the results of the FCE did not support Muniz’s position that he was totally disabled, and Muniz appealed.

The Ninth Circuit affirmed, rejecting Muniz’s argument that the burden of proof should shift to the claim administrator when the claim administrator terminates benefits without providing evidence of how the claimant’s condition changed or improved since the initial benefits award.

The Court held that although the fact that a claimant is initially found disabled under the terms of a plan may be considered as evidence of the claimant’s disability, paying benefits does not “operate forever as an estoppel so that the insurer can never change its mind.”

The Court held that under the applicable de novo standard of review, the burden of proof remained with the claimant. Here, Muniz did not provide sufficient evidence to demonstrate that the district court’s holding was “clearly erroneous.”

The Ninth Circuit also rejected Muniz’s assertion that the district court improperly rejected the medical opinion of his treating physician, holding that courts are not required to give special weight to the opinions of a claimant’s treating physician. (That position has been well-established since the U.S. Supreme Court so ruled in Black & Decker Disability Plan v. Nord, 538 U.S. 822, 834 (2003).) 

Finally, the Ninth Circuit rejected Muniz’s argument that the results of the court-ordered 2009 FCE were irrelevant to the issue of whether he was disabled when his benefits were terminated in 2006.

Although the results were not conclusive, they potentially provided insight as to Muniz’s previous condition because Muniz had many of the same symptoms and activity levels in 2009 as he did in 2006. Moreover, the district court did not rely solely on the FCE results; rather, it considered them in combination with the other evidence.

Lessons Learned: This case highlights the “What changed?” argument often advanced by insureds. (“If you found me disabled before, then you should have to show that something changed if you are not going to continue to find me disabled.”)

The Ninth Circuit rejected this argument; just because an insurer commences disability payments to an insured does not render the insured presumptively disabled until the insurer can demonstrate otherwise.

Note, however, that the argument has found favor with certain courts. For example, last year a Florida district court adopted the contrary view. In Kafie v. Northwestern Mutual Life Ins. Co., 2010 U.S. Dist. LEXIS 24184 (S.D. Fla. 2010), the court suggested that once an insurer makes disability payments, it has the burden of proof in demonstrating that the insured is no longer disabled. (The Kafie case was included in last year’s Cornucopia.)

From A Smorgasbord of Interesting Disability Cases.

Bad Faith: A Smorgasbord of Interesting Disability Cases

Roth v. Madison National Life Ins. Co., 702 F.Supp.2d 1174 (C.D. Cal 2010)

Facts and holdingPaul Roth (“Roth”) was insured under two life insurance policies issued by Madison National Life Insurance Company (“Madison”). Both policies contained a “Critical Illness Benefit Rider” which provided that 10% of the policies’ death benefits would be advanced in the event the insured underwent an angioplasty procedure and certain conditions were met. One of those conditions was that the insured furnish Madison with evidence of significant electrocardiographic (“EKG”) changes.

In July 2004, Roth received an angioplasty and submitted a claim to Madison for benefits. In evaluating Roth’s claim, Madison obtained Roth’s medical records relating to the angioplasty procedure. Those records revealed that prior to the angioplasty, Roth underwent an EKG, the results of which were normal. As a result, Madison denied Roth’s claim. Thereafter, Roth sued Madison for breach of contract and bad faith.

Madison brought a motion for partial summary judgment on Roth’s bad faith claim, arguing that it could not be liable for bad faith because, in denying Roth’s claim, it had simply complied with the express terms of the riders. Roth conceded that he did not provide Madison with evidence of significant EKG changes, but argued that the terms of the riders were outdated and should be disregarded because his physician concluded that the angioplasty was medically necessary.

The Court ruled that a claim for bad faith fails where the alleged bad faith conduct is specifically permitted by the policy. Put another way, the implied covenant of good faith and fair dealing cannot contradict the express terms of a contract. Since Madison had specifically relied on the terms of the contract as a precondition to paying benefits (in requiring Roth to submit evidence of EKG changes), that insistence could not be considered bad faith conduct.

Lessons LearnedThe principle the Roth Court articulated is an offshoot of the more well-known and long-standing principle in California that although there is an implied covenant of good faith and fair dealing in every contract, it will only be recognized to further the contract’s purpose. It naturally follows that the implied covenant cannot serve as a basis for prohibiting a party to do that which is expressly permitted by that contract (the policy).

(The author was counsel for Madison in the above dispute.)

 

From A Smorgasbord of Interesting Disability Cases.

Appropriate Care: A Smorgasbord of Interesting Disablity Cases

Paul Revere Life Ins. Co. v. DiBari, 2010 U.S. Dist. LEXIS 122906 (D. Conn. 2010)

Facts and holdingOn April 29, 2008, dentist Michael DiBari (“DiBari”) submitted a claim for total disability benefits under his disability income and business overhead expense coverage (“BOE”) policies with Paul Revere Life Insurance Company (“Paul Revere”) as a result of bilateral carpal tunnel syndrome.

Paul Revere ultimately denied DiBari’s claim because after conservative treatment failed to alleviate his symptoms, DiBari declined to undergo carpal tunnel release surgery. Although DiBari’s treating physician believed there was a risk that the surgery might not be successful, he and DiBari’s neurologist both agreed that DiBari did not have any contraindications to the surgery and that the surgery was not “medically inappropriate.” Additionally, Paul Revere’s in-house board certified orthopedic surgeon and an independent hand surgeon both agreed that by failing to undergo release surgery, DiBari was not seeking and receiving “appropriate care” for his symptoms. 

In order to be eligible to receive total disability benefits under the policies DiBari was required to be “receiving Physician’s Care,” among other things. Both policies defined “Physician’s Care” as

the regular and personal care of a Physician which, under prevailing medical standards, is appropriate for the condition causing the disability.” (Emphasis added.)

Paul Revere interpreted this language to mean that DiBari must obtain “appropriate care” for his bilateral carpal tunnel syndrome.

Paul Revere brought a complaint for declaratory relief and moved for summary judgment on the grounds that by refusing the release surgery, DiBari was not receiving “appropriate care” and was thus ineligible to receive disability benefits. DiBari interpreted the same policy language to require only that he receive “regular and personal care,” which he argued did not include surgery.

The Court agreed with Paul Revere’s interpretation of the policy language, holding that the policy obligated DiBari to do more than receive “regular care”; he was required to seek and accept appropriate medical care for his condition. It was undisputed that conservative treatment failed to alleviate DiBari’s symptoms and his treating physicians agreed that release surgery did not pose any risk to DiBari, and was not medically inappropriate. Accordingly, Paul Revere was entitled to summary judgment on its complaint for declaratory relief.

Lessons LearnedIn reaching its decision, the Court relied in part on the Northern District of California’s decision in Buck v. Unum Life Ins. Co., 2010 U.S. Dist. LEXIS 22479 (N.D. Cal. 2010), a case which the author included in last year’s Cornucopia presentation. The Buck case also dealt with the issue of an insured’s duty to undergo carpal tunnel surgery under the “appropriate care” provisions of the disability policy at issue. The policy language at issue in Buck was similar to the disputed policy language in the present case, requiring the insured to be “receiving medical care from someone other than himself which is appropriate for the injury or sickness.” The Buck Court held that this language obligated a claimant to receive “appropriate care.” However, the Buck Court declined to grant a summary judgment motion on the issue of whether the insured’s failure to undergo carpal tunnel surgery equated with a failure to receive appropriate care because, in that case, there were conflicting opinions as to whether surgery was appropriate treatment for Buck. 

In the present case, there were no conflicting opinions concerning whether surgery would be appropriate for DiBari. The undisputed facts demonstrated that conservative treatment failed to alleviate DiBari’s carpal tunnel symptoms and that DiBari’s physicians believed that the surgery was neither contraindicated nor medically inappropriate. Therefore, while the determination as to what is “appropriate care” is often fact and case-specific, a court should not decline to decide the issue on summary judgment where the facts are undisputed that the care in question is “appropriate.”

 

From A Smorgasbord of Interesting Disability Cases.

A Smorgasbord of Interesting Disablity Cases: Accidental Bodily Injury

Boly v. The Paul Revere Life Ins. Co., 238 Ore. App. 702 (2010)

Facts and holding: In the late 1980s, Jeffrey Boly (“Boly”) was diagnosed with sleep apnea and narcolepsy. With treatment, doctors were able to stabilize Boly’s nighttime sleeping, but Boly’s daytime tiredness persisted and interfered with his ability to perform his job duties. As a result, Boly applied for and received partial disability benefits from his insurer, The Paul Revere Life Insurance Company (“Paul Revere”). 

Thereafter, Boly began to experience cognitive impairment. He was evaluated by a neuropsychologist who determined that Boly’s cognitive impairment likely resulted from chronic, nocturnal hypoxia (lack of oxygen to the brain) associated with sleep apnea that occurred prior to the diagnosis and treatment of Boly’s sleep apnea.

In 2006, the year before Boly’s 65th birthday, Boly requested that Paul Revere reclassify his disability as resulting from “injury” rather than from “sickness.” (Under the terms of Boly’s policy, disability benefits were available until age 65 if the disabling condition resulted from “sickness,” but for life if it resulted from “injury.”) The policy defined “injury” as “accidental bodily injury,” but did not define the term “accidental.” During its consideration of Boly’s request, Paul Revere had its doctors examine Boly’s medical records and, like Boly’s physicians, concluded that Boly’s cognitive impairment resulted from sleep apnea and narcolepsy. Based on this finding, Paul Revere denied Boly’s request and discontinued his benefits on his 65th birthday.

Boly brought suit against Paul Revere seeking reinstatement of his disability benefits and a declaration that he was entitled to lifetime benefits. Paul Revere moved for summary judgment on the grounds that Boly’s disability resulted from a sickness — sleep apnea. Boly argued that his brain injury was an accidental injury

because it was an unintended result of an external event – either his failure to breathe during episodes of sleep apnea or his physician’s failure to diagnose his sleep apnea.

The trial court granted Paul Revere’s motion for summary judgment, ruling that Boly’s nocturnal hypoxia was the consequence of his sleep apnea (a sickness). The Court of Appeal affirmed. Since Boly’s policy did not provide a definition for “accidental bodily injury,” the meaning of the term depended on the “understanding of the ordinary purchaser of insurance.” Applying that standard, the Court rejected Boly’s argument that every unintentional result is accidental as long as it is caused by external events or forces. And the Court was right. Otherwise, every heart attack that could be traced to high cholesterol and every case of lung cancer that could be traced to smoking would also be considered “accidental injuries.”

The Court held that Boly’s failure to breathe and his undiagnosed sleep apnea where not “forces” or “events” in the same sense as lightening (as in being struck) or gravity (as in falling). The typical purchaser of insurance would regard Boly’s condition as analogous to organ failure or damage that resulted from disease. Such disabilities do not arise from “accidental bodily injury.” Therefore, Boly’s brain damage was not “accidental.” 

Lessons LearnedBoly’s position was that his hypoxia should be considered an “accidental bodily injury” because it was the unintended result of his sleep apnea. While an unintended result is one factor many courts consider in determining whether a disabling condition is an “accident,” the condition must also not be the result of a naturally occurring process, such as cancer, aging, medical disorders, etc. See, e.g., Khatchatrian v. Continental Casualty Co., 332 F.3d 1227 (9th Cir. [Cal] 2003) (death from stroke not “accidental” because death was caused by natural, rather than external causes).

For a related case in which a heart attack at rest was considered not to be accidental, see Evans v. Mutual of Omaha Ins. Co., 2008 Cal. App. Unpub. LEXIS 2572 (2008) (in which the author prevailed).

From A Smorgasbord of Interesting Disability Cases.

 

A Smorgasbord of Interesting Disablity Cases: Accident v. Sickness

Kerns v. The Northwestern Mutual Life Ins. Co., 2010 U.S. Dist. LEXIS 126769 (E.D. Cal. 2010) 

Facts and holding: Gary Kerns (“Kerns”) owned two disability policies with The Northwestern Mutual Life Insurance Company (“Northwestern Mutual”). Under the terms of both policies, total disability benefits were payable to Kerns for the duration of his life if he became disabled due to accidental bodily injury, but only until age 65 if he became disabled due to sickness.

On October 3, 2006, Kerns submitted a claim for total disability benefits to Northwestern Mutual. He asserted that he had become disabled from his occupation as an insurance agent in February 2006 due to neck and head pain. Kerns claimed that his disability was due to “accident” from two sporting incidents which occurred in 1987 and 2001.

Northwestern Mutual rejected Kerns’ claim that his disability resulted from the 1987 and 2001 incidents (accidents) and determined that Kerns was totally disabled from degenerative arthritis of the spine (a sickness). Northwestern Mutual approved Kerns’ claim on that basis and paid Kerns monthly disability benefits consistent with the policy’s terms governing disability due to “sickness.”

In reaching its determination that Kerns’ disability was the result of sickness, Northwestern Mutual relied on the opinion of its medical consultant that Kerns had progressive degenerative arthritis, which was asymptomatic until 2006, and that neither the 1987 nor the 2001 incidents accelerated his condition. Northwestern Mutual also relied on Kerns’ medical records, which reflected that following the 2001 incident, Kerns underwent a CT scan and x-ray, the results of both of which were normal. Further, the medical records from 2000 did not reference any complaints of headache or cervical issues.

Kerns disagreed and brought suit against Northwestern Mutual for breach of contract and a declaration that he was entitled to lifetime benefits because his disability was due to “accident,” rather than “sickness.”

In support of his claim, Kerns’ expert witness, an orthopedic surgeon, testified that the traumas Kerns experienced in the 1987 and 2001 incidents were “‘most likely’ a large cause of Kerns’ total disability.” The Court held that this was insufficient to support a reasonable inference that Kerns’ disability was caused by accident because it was based on “assumptions of fact” or “conjectural factors.” 

According to the Court, an “accident” is defined by California case law as “a casualty — something out of the usual course of events and which happens suddenly and unexpectedly and without any design of the person injured.” Since Kerns’ symptoms arose in 2006 without any precipitating event, his accidental injury claim was unsupported. Therefore, after a bench trial, the Court gave judgment to Northwestern Mutual.

Lessons learned:Claims of this kind – where the insured asserts that an accident (often not contemporaneously reported to his doctors) is a contributing cause of his later claimed disability – occur with some regularity. These types of claims are difficult to resolve by summary judgment. In this instance, the Court found the insured’s assertion that certain accidents were the cause of his disability to be based on unsupported assumptions and conjecture.

Typically, in this kind of litigation there is significant uncertainty as to what conclusion the fact-finder will reach (accident versus sickness). And the consequences of an adverse determination may be heightened if a bad faith claim is also asserted. Here, by the time the bench trial occurred, there was no bad faith cause of action. Most insurers feel much more comfortable trying such cases if any such bad faith claim has already been eliminated.

For a mini-primer on the standards that might be used in assessing whether a disability claim is an accident or a sickness, those interested may wish to read Alessandro v. Massachusetts Casualty Ins. Co., 232 Cal. App. 2d 203 (1965), McMackin v. Great American Reserve Ins. Co., 22 Cal. App. 3d 428 (1971) and Salas v. Minnesota Mutual Life Ins. Co., 1994 U.S. App. LEXIS 30035 (9th Cir. [Cal.] 1994).

From A Smorgasbord of Interesting Disability Cases.

 

A Smorgasbord of Interesting Disablity Cases: Abuse of Discretion / Objective Evidence of Disability

Hagerty v. American Airlines Long Term Disability Plan, 2010 U.S. Dist. LEXIS 91995 (N.D. Cal. 2010)

Facts and holdingOn November 15, 2004, Brian Hagerty (“Hagerty”), a flight attendant, filed a claim for long term disability benefits with his employer’s ERISA-governed long term disability plan (the “Plan”) due to HIV, Hepatitis C, fatigue and various other conditions.

Hagerty’s claim was approved and he received disability benefits under the Plan for three years. On April 14, 2008, the administrator of the Plan terminated Hagerty’s benefits on the grounds that Hagerty did not provide sufficient evidence that he was disabled, in part because he had provided no objective medical evidence of his fatigue claims. Further, the administrator determined that based on the medical information reviewed, Hagerty would be able to work as a sales attendant, appointment clerk or cashier. Following Hagerty’s appeal and the final denial of his claim, Hagerty filed a lawsuit against the Plan. The Plan moved for summary judgment.

Applying an abuse of discretion standard of review, the Court denied the Plan’s motion on the following grounds:

  1. The Plan required Hagerty to provide it with objective medical evidence of fatigue when the Plan itself did not expressly require such proof; this suggested that the Plan abused its discretion;
  2. The Plan failed to inform Hagerty that he had not attached relevant medical information to his claim submission and instead decided his claim based on an incomplete file; this also suggested abuse of discretion;
  3. The Plan never considered whether Hagerty’s HIV status affected his ability to perform any occupation and did not contest the importance of doing so; and
  4. The Plan never obtained Hagerty’s Social Security file and never addressed the fact that although the Plan determined that Hagerty was not disabled, the Social Security Administration determined that Hagerty was disabled.

Therefore, the Court could not conclude as a matter of law that the Plan did not abuse its discretion in denying Hagerty’s claim for continued long term disability benefits. As a result, the Plan’s motion for summary judgment was denied.

Lessons LearnedAlthough this is a lesson most LTD insurers have at one time or another already learned, the conclusion is perhaps simply that the application of an “abuse of discretion” standard does not mean that courts will “rubber stamp” the insurer’s decision.

The question of whether an insurer can demand “objective” evidence of a disability is one that many cases have addressed. The above opinion was an LTD case that was ERISA-governed. However, certainly in the DI field, the issue provides a trap for the unwary. In the author’s opinion, while DI carriers may consider the lack of objective evidence of impairment or disability in making a claims decision, they cannot insist upon such evidence when the policy does not require it. The trap is set when the DI carrier denies a claim, but is “loose” with its language in the denial letter as to the role that a lack of objective evidence played in the decision. Given how often an insured claims that the insistence by the insurer of objective medical evidence constitutes bad faith, the author has long been an advocate in making the DI insurer’s position clear. As but one example:

 We also note that you failed to provide any objective evidence of your impairment. While objective evidence is not required in providing adequate proof of loss, and while we do not require that disability claims be established solely by objective evidence, your claim of [condition or impairment] is one for which we would typically expect to see such evidence. Thus, the lack of such evidence in the circumstances present here was one factor in our assessment.” 1

1. Lawyer’s exculpatory fine print: The author is not suggesting that the above language is appropriate for any particular claims decision, or that use of such language will exculpate a disability insurer from a claim of bad faith or abuse of discretion. It is provided simply to demonstrate that if an insurer is relying upon the lack of objective evidence in support of a claim, it should make clear the distinction between considering the lack of objective evidence (for whatever weight it is worth) and requiring such evidence to establish a valid claim.

A Smorgasbord of Interesting Disability Cases - An Introduction

Every year I review and summarize a number of recent disability cases I have found to be interesting and of value to our clients and publish them in one booklet. For the first time, I will be sharing the individual cases here on the Life, Health and Disability Insurance Law blog.

In content, these cases span a couple of dozen issues that typically arise in the handing of disability income claims. For this year’s publication, A Smorgasbord of Interesting Disability Cases, I have limited the review to cases that were issued from 2010 through around mid-2011.

This was not intended to be an exhaustive review of the law over the past one to two years. Instead, it is (hopefully) a helpful review of recent cases for one who wants to obtain a “flavor” of recent disability insurance case law.

I would like to thank my associate, Karen Denvir, for her assistance in the production of this booklet.

If you would like to receive a copy of the full publication, please feel free to email me here. You can click on the following link for our first post: Abuse of Discretion / Objective Evidence of Disability.

Insurers That Fund ERISA Plans and Administer Claims Are Proper Defendants in Lawsuits for Benefits

Martin E. Rosen and Misty A. Murray

In Cyr v. Reliance Standard Ins. Co., 2011 U.S. App. LEXIS 12601  (9th Cir. 2011), an en banc panel of the Ninth Circuit Court of Appeals was presented with the issue of whether ERISA authorizes actions to recover plan benefits against a third-party insurer that funds the plan and administers claims for the plan. The specific statute involved, 29 U.S.C. § 1132(a)(1)(B), provides:

A civil action may be brought . . . by a participant or beneficiary . . . to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.

Prior Ninth Circuit precedent held that such suits may only be brought against the plan, or in some cases the plan administrator, but that an ERISA participant or beneficiary could not sue a plan’s insurer for benefits. See, e.g., Ford v. MCI Communications Corp. Health and Welfare Plan, 399 F.3d 1076, 108 (9th Cir. 2005); Everhart v. Allmerica Financial Life Ins. Co., 275 F.3d 751, 754 (9th Cir. 2001); Gelardi v. Pertec Computer Corp., 761 F.2d 1323, 1324 (9th Cir. 1985).

In Cyr, the Ninth Circuit overruled these prior decisions. 

The Court reasoned that in Harris Trust & Savings Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (2000), the Supreme Court had addressed the question of who can be sued under a different subsection of Section 1132(a), specifically subsection 1132(a)(3). Section 1132(a)(3) permits civil actions:

by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.”  

The en banc panel noted that the Harris Court “rejected the suggestion that there was a limitation contained within § 1132(a)(3) itself on who could be a proper defendant in a lawsuit under that subsection,” reasoning as follows:

[Section 1132(a)(3)] 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]." 29 U.S.C. § 1132(a)(3) (emphasis added).

Other provisions of ERISA, by contrast, do expressly address who may be a defendant. See, e.g., § 409(a), 29 U.S.C. § 1109(a) (stating that "[a]ny person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable" (emphasis added)); § 502(l), 29 U.S.C. § 1132(l) (authorizing imposition of civil penalties only against a "fiduciary" who violates part 4 of Title I or "any other person" who knowingly participates in such a violation). And § 502(a) itself demonstrates Congress' care in delineating the universe of plaintiffs who may bring certain civil actions. See, e.g., §502(a)(3), 29 U.S.C. § 1132(a)(3) ("A civil action may be brought . . . by a participant, beneficiary, or fiduciary . . ." (emphasis added)); ("A civil action may be brought . . . by the Secretary . . ." [Harris, supra at 246-47; emphasis added]

Thus, the Ninth Circuit saw “no reason to read a limitation into § 1132(a)(1)(B) that the Supreme Court did not perceive in § 1132(a)(3).” 

The Ninth Circuit further noted that Section 1132(d)(2) also supported its conclusion. Section 1132(d)(2) provides that:

[a]ny money judgment under this subchapter against an employee benefit plan shall be enforceable only against the plan as an entity and shall not be enforceable against any other person unless liability against such person is established in his individual capacity under this subchapter.” [Emphasis added.] 

The Ninth Circuit reasoned that the “‘unless’ clause [of Section 132(d)(2)] necessarily indicates that parties other than plans can be sued for money damages under other provisions of ERISA, such as § 1132(a)(1)(B), as long as that party's individual liability is established.”

The Ninth Circuit’s ruling in Cyr is not likely to have any significant impact. That is because often times third-party insurers that fund ERISA plans and administer claims were named as defendants in lawsuits involving disputes over ERISA benefits, notwithstanding prior case law. And even when the plans themselves were named as defendants, the insurers would often defend the litigation.