A Medley of Interesting Disability Cases: Reviewing 2013 Cases

Another year has passed, and what better way to celebrate than by taking a look at the various interesting disability cases that have been issued during that time. This year they are collected in the Medley.

In this booklet I have summarized a couple of dozen individual and group disability opinions that were issued by both state and federal courts primarily over the 2013 calendar year. As is the case with each of my yearly collections, the cases included are meant to be illustrative of how judges resolve various issues, but those cases are not necessarily the only recent cases pertinent to each issue discussed. I have included both DI and LTD cases, with a focus on substantive over procedural issues (though both are included).

The format of this year’s Medley is the same as that of past collections: I have summarized the pertinent facts of each case and set forth how the court ruled on certain of the issues raised. At the conclusion of each case summary, I have provided my personal thoughts in a “Lessons Learned” section.

For those keeping track, this sixth booklet is the latest in a series that includes: (1) the Potpourri (2008 cases); (2) the Cornucopia (2009 cases); (3) the Smorgasbord (2010 cases); (4) the Cavalcade (2011 cases); and (5) the Ensemble (2012 cases). I am hopeful that collectively they provide a gestalt-ish “feel” for how courts seem to be resolving the issues that we all face. I am also hopeful that these summaries provide helpful guidance to those in the industry, whether they be making the initial decisions (the examiners and others working for disability carriers and third party administrators), giving legal advice about those decisions (in house counsel), defending those decisions (outside counsel), or performing other functions. We can all learn from the experience of the litigants whose disputes were resolved in these cases.

I would like to thank very much Natalie Ferrall, who gave significant time and great insight in assisting me with this publication.

If you would like a copy of this year's publication, or any prior year, please email me here.


Ninth Circuit Takes Narrow View of ERISA Surcharge Remedy

In Gabriel v. Alaska Electrical Pension Fund, the Ninth Circuit ruled that a pension plan participant could not be “made whole” by using the equitable remedy of surcharge to recover pension benefits he was erroneously told he would receive. 

As explained below, the Alaska Electrical opinion is significant because it clarifies and limits the reach of equitable remedies, such as surcharge, in ERISA cases under the Supreme Court’s 2011 decision in Cigna v. Amara. In doing so, the Ninth Circuit declined to follow decisions in the Fourth, Fifth and Seventh Circuits that suggested a broader application for equitable remedies under Amara

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ERISA Long Term Disability Claim Barred By Failure to Exhaust Administrative Remedies

DRI members Martin E. Rosen and Jenny H. Wang, partners with Barger & Wolen LLP in Los Angeles and Newport Beach, California, respectively, recently obtained a summary judgment from the U.S. District Court for the Central District of California.  The court ruled that a plaintiff seeking long-term disability (LTD) benefits under an ERISA-governed employee welfare benefit plan cannot maintain his lawsuit without first exhausting the plan’s administrative remedies and that appeals for help to the Department of Insurance do not constitute the proper exhaustion of remedies.  On that basis, the court summarily dismissed the plaintiff’s lawsuit.

Defendant United of Omaha Life Insurance Company administered plaintiff Richard Carey’s claim for LTD benefits under an ERISA plan established by his employer.  Carey claimed that he was totally disabled as defined by the plan and thus entitled to benefits.  After investigation, United denied Carey’s claim.  In its denial letter, United told Carey that he had the right to administratively appeal the claim denial, as set forth in the plan, and that he had to submit any appeal within 180 days.  The letter also informed Carey of his right to contact the Department of Insurance (DOI) about United’s handling of his claim.



U.S. Supreme Court Rules on Attorneys Fees in Two Patent Cases

Attorney’s fees were the subjects of two U.S. Supreme Court decisions today in high profile patent cases. In Octane Fitness v. Icon Health and Highmark v. Allcare Health, the Court decided in "exceptional cases" reasonable attorneys fees may be awarded to a prevailing party.

Interestingly, the Court leaves it to the trial court to define which cases are exceptional. This is to be done in the court's exercise of its discretion on a case-by-case basis. This is a dramatic change. The prior standard used in these types of matters required a finding of "subjective bad faith" and/or "objectively baseless" conduct. 

Those standards were very high; making the circumstances where a fee award was granted to be rare.  The policy surrounding this decision appears to deter parties who have abused the patent system for their own financial gain.

Originally posted to Barger & Wolen's Litigation Management & Attorney Fee Analysis blog.

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

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.

Court favors plain and ordinary meaning of policy terms when insured claims policy language is ambiguous

Two of Barger & Wolen's lawyers -- Martin Rosen and Ophir Johna -- received a victory from the Ninth Circuit Court of Appeal earlier this week in Glassman v. Crown Life Ins. Co., 2013 U.S. App. LEXIS 21312 (9th Cir. 2013). 

In Glassman, the plaintiff insured sued his disability insurer, Crown Life, claiming that while Crown Life had been paying his disability claim for well over two decades, it had failed to increase his benefits each year due to a cost of living adjustment rider that he had purchased with the policy. With well over 20 years of purported policy benefit increases at issue, the amount at stake exceeded $1.5 million.

Crown Life brought a motion to dismiss the action based on both policy interpretation and statute of limitation grounds. 

Although the United States District Court for the Central District of California (Judge Steven V. Wilson) permitted the insured to conduct discovery, the court eventually granted Crown Life's motion to dismiss. 

It ruled (as Crown Life had argued) that the language of the rider served to increase a potential residual disability benefit, but did not increase the amount of total disability benefits payable in any month. The insured appealed the district court's ruling. 

On appeal, the Ninth Circuit sided with Crown Life and affirmed the district court's ruling, finding that "The language of the Rider unambiguously applies only to partial or 'residual' disability benefits, rather than total disability benefits." Id. at *1-2.

The opinion, while unpublished, is a reminder to insureds and their lawyers that simply contending that policy language is ambiguous does not make it so, and that courts will construe policy language in its plain and ordinary meaning.

To listen to the Ninth Circuit arguments, click here.

SCOTUS Unlikely to Reject Three-Year Limit for Filing Lawsuit in ERISA Disability Claim

The transcript from this morning’s oral argument at the United States Supreme Court reflects that a majority of justices seem poised to uphold an ERISA plan provision imposing a three-year limit for claimants to file their lawsuits following the original submission of proof of loss. 

Several justices expressed skepticism over the need to intervene in this particular case, where the plaintiff/petitioner had approximately one year following the final denial of her claim within which to sue. Moreover, at least one justice noted that the federal government would be empowered to issue a clarifying regulation only if the Court ruled against the plaintiff and upheld the three-year limit.

In Heimeshoff v. Hartford Life & Accident Ins. Co., et al., the District Court of Connecticut had dismissed Julie Heimeshoff’s case, deeming it 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. For a more in-depth analysis of the District Court’s and Second Circuit’s rulings, see our prior blog entry, Accrual of Statute of Limitations for ERISA Disability Claim to be heard by SCOTUS.

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

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.


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Upcoming SCOTUS case could have wide implications for ERISA plans

Barger & Wolen partner Royal Oakes was interviewed by PLAN SPONSOR magazine on October 8, 2013, in regards to Heimeshoff v. Hartford Life & Accidental Insurance Co. High Court to Rule on Litigation Limitations Period.

The U.S. Supreme Court agreed to hear the case that could have far-reaching implications for litigation against Employee Retirement Income Security Act (ERISA)-covered plans.

In the case, Heimeshoff, a Walmart employee who submitted a claim for long-term disability benefits under her employer, argues that ERISA plans should not be allowed to impose a limitations period that begins before the claimant exhausts administrative remedies and is able to file suit, because doing so could allow the limitations period to waste away while the claimant is going through the plan's administrative review process.

Oakes told PLAN SPONSOR that the Supreme court will examine the extent to which any ERISA plan, including retirement plans, may specify a deadline to sue, and if it is subject to being protected by legal remedies or subject to being rewritten by courts. If the Supreme Court rules for Heimeshoff and upholds the idea of essentially rewriting plan terms simply because a claimant thinks they are unfair, it could open the door for much additional litigation against plans, he said.

Oakes argued the provisions of the plan in the case were unambiguous and agreed to by all parties. “If a claimant feels something is unfair because of administrative remedies and the duty to file suit, she has a right to use other legal doctrine,” he noted.

As an example, Oakes pointed to a doctrine called “equitable tolling,” which permits a policyholder to go to court and say the plan sponsor or insurance company is trying to enforce a statute of limitations in an unfair manner by being vague or compelling noncompliance. “There are other ways to protect claimants; it is not necessary to rewrite plan terms,” Oakes said, adding that use of other legal doctrines is a far less onerous remedy.

Oakes said the case is not about the ERISA statute of limitations. “If a law says you have this time to file, that is a statute of limitations; but if an insurance company has a deadline for filing litigation written in the plan terms, that is a contractual obligation,” he said.

“It’s a matter of common sense and fundamental fairness. When parties agree on plan terms and they are unambiguous, both sides are entitled to rely on those plain, straightforward terms being upheld,” Oakes contended. The law has safeguards against rewriting contracts, and claimants have other recourses when someone is under duress or the plan is wildly ambiguous, he concluded.

The Court is scheduled to hear the case on October 15, 2013. Barger & Wolen will continue to follow and update our readers as to the latest news.

More about the case and a link to DRI’s amicus brief is at http://www.dri.org/Article/96.

Could Medpay Be The Latest Target In California Bad Faith Claims?

Marina Karvelas was quoted in a July 18, 2013, article published by Claims Journal, Could Medpay Be The Latest Target In California Bad Faith Claims, about a recent appeals court decision in California dealing with bad faith claims related to medical payments coverage.

The case, Justin Barnes v. Western Heritage Insurance Company, involved a plaintiff who was injured at 11 years old when a table fell on his back during a recreational program. A superior court found that the plaintiff could not sue the recreational program provider's insurance for bad faith for denying him coverage in part because the plaintiff had already settled a suit against the program provider. The appeals court reversed the trial court's decision.

Karvelas told the Claims Journal that she thought the decision could increase bad faith claims relating to medical payments coverage if the decision survives scrutiny by the California Supreme Court.

The Barnes decision muddies the waters on the collateral source rule which up until this decision was fairly clear in California,” she said. “An insurance policy taken out and maintained by the alleged wrongdoer, including its medpay provisions, is not wholly independent of him/her and thus cannot be considered to be a collateral source.

“Stated simply, the injured plaintiff cannot recover against the tortfeasor under the liability provisions of the tortfeasor’s insurance policy and then sue the insurance company under the medpay provision of that same policy. The Barnes court concluded differently. The medpay provision in a tortfeasor’s liability policy can be construed as a collateral source. As a third party beneficiary of the medpay provisions, all the injured plaintiff has to do is allege the insurance company committed a wrongful act against him/her when handling the medpay claim. In Barnes, Western Heritage allegedly failed to notify the injured plaintiff of the one-year time limit to present medpay claims. The alleged failure violated California’s regulations governing the fair settlement of claims,” Karvelas said. “The Barnes decision is problematic for insurers not only with respect to the collateral source rule but reflects an ever increasing effort by California’s plaintiff’s bar to create private rights of action for violation of the fair claims settlement regulations.”

Karvelas also told the publication that policy changes to medical payments coverage may be looming.

“It may behoove insurers to add provisions to their liability policies that the Barnes court found were missing in the policy at issue. These would include provisions that reflect an intent that payment under the liability provisions of the policy extinguishes the insurer’s obligation under the medpay provisions of that same policy,” Karvelas said.


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.”


SCOTUS Rules: Right or wrong, arbitrator's interpretation stands

The United States Supreme Court in Oxford Health Plans LLC v. Sutter held that an arbitration agreement in a fee-for-services contract between physicians and a health insurance company required arbitration of a class dispute arising under the contract.

Sutter, a physician, entered into a contract with Oxford, a health insurer, to provide medical services to members of Oxford’s network. Oxford agreed to pay for Sutter’s services at an agreed upon rate. Sutter later filed suit against Oxford on behalf of himself and a proposed class of other physicians who also contracted with Oxford. Sutter’s complaint alleged that Oxford failed to reimburse the putative class as required by the contract and applicable state law.

Oxford moved to compel arbitration, relying upon a provision in the contract requiring arbitration of “any dispute arising under this Agreement.” The motion was granted, and the arbitrator determined that the contract authorized class arbitration. In doing so, the arbitrator relied upon the language of the contract’s arbitration provision.

Oxford moved to vacate the arbitrator’s decision on the grounds that he exceeded his powers under the Federal Arbitration Act (“FAA”) Section 10(a)(4) by, in effect, misinterpreting and/or improperly applying the arbitration provision. 

The Supreme Court held that the arbitrator’s decision could not be vacated because it was arguably based upon the arbitrator’s interpretation of the parties’ contract, and, right or wrong, the parties had contracted to arbitrate their disputes. 

In so holding, the Court observed that in construing whether an arbitrator exceeded his powers under the FAA, “the question for a judge is not whether the arbitrator construed the parties’ contract correctly, but whether he construed it at all.” 

Originally posted to Barger & Wolen's Insurance Litigation & Regulatory Law blog.

The Ninth Circuit Revisits - and Limits - the "Presumption of Prudence" For ERISA Fiduciaries

Earlier this week, the Ninth Circuit Court of Appeals ruled in Harris v. Amgen that an ERISA pension plan fiduciary is not protected from liability under the “presumption of prudence” for company stock investments where the plan offers – but does not require – investment in company stock and places restrictions on company stock purchases. 

In 2007, Amgen’s stock lost significant value due to safety concerns over drugs it developed for the treatment of anemia. Before 2007, Amgen allegedly knew or should have known that its stock price was artificially inflated due to material misrepresentations and omissions in connection with the anemia drugs and illegal sales of the drugs. Following the stock’s decline, participants in Amgen’s ERISA-governed pension plans sued for violations of the plan administrator’s fiduciary duties. Defendants filed a motion to dismiss, which the district court granted.   

Under the “presumption of prudence,” an ERISA fiduciary is entitled to a presumption that it has been a prudent investor with respect to company stock when the plan terms require or encourage investment primarily in company stock. See Quan v. Computer Sciences Corp., 623 F.3d 870 (9th Cir. 2010). 

The Ninth Circuit reversed the district court’s ruling that this presumption applied in Amgen. While the plan allowed fiduciaries to offer company stock as an investment choice, it did not require or encourage investment in company stock. To the contrary, the plan terms could be read to discourage investment in company stock by restricting the amount that could be purchased and by limiting the frequency and timing of sales. 

The court also reversed the district court’s ruling that Amgen could not be sued as a fiduciary. Although Amgen delegated investment authority to trustees and investment managers, the grant of authority was not exclusive, and Amgen still retained control over investment decisions. Therefore, without an exclusive grant of authority, Amgen could still be sued as a plan fiduciary. 

Insurer Has No Duty To Verify Accuracy of Insurance Application Representations

In American Way Cellular, Inc. v. Travelers Property Casualty Company of America, issued May 30, 2013, the California Court of Appeal for the Second Appellate District reaffirmed that insurers are not obligated to investigate and verify the accuracy of insurance application representations. 

American Way involved a commercial property policy issued by Travelers Property Casualty Company. American Way’s broker procured the policy and then submitted the application to Travelers’ agent on American Way’s behalf. The application, which had been completed by the broker, erroneously indicated that the subject property was equipped with smoke detectors, fire extinguishers and fire sprinklers. In fact, the property did not have fire sprinklers, and American Way’s principal purportedly never told the broker that the property was so equipped.

Travelers issued a policy to American Way which required it to maintain the fire sprinkler system as a condition of coverage. The policy further provided that Travelers had the right – but not the obligation – to inspect the property at any time.     

American Way subsequently made a claim on the policy for a fire loss. Travelers paid the claim pending its investigation of the loss; however, upon discovering that the property was not equipped with fire sprinklers, it informed American Way that the loss did not appear to be covered and that it would seek to recover the claim payment. 

American Way then sued Travelers for declaratory relief, breach of contract, bad faith and negligence. Travelers cross-complained for declaratory relief and reimbursement of the claim payment. The trial court granted summary judgment in favor of Travelers on both American Way’s complaint and Travelers’ cross-complaint. 

On appeal, American Way argued, among other things, that the trial court erred in granting summary judgment because Travelers negligently wrote an insurance policy without inspecting the premises and because there were triable issues of material fact regarding whether the broker was Travelers’ actual or ostensible agent. 

The appellate court disagreed, explaining that “an insurer does not have the duty to investigate the insured’s statements made in an insurance application and to verify the accuracy of the representations.” “Rather, it is the insured’s duty to divulge fully all he or she knows.” Moreover, while the policy permitted Travelers to inspect the property, it did not require that Travelers do so.   

Additionally, in order to prevail against Travelers, American Way had to show that the broker also acted as Travelers’ agent. The evidence presented to the trial court on summary judgment – including the broker’s own admission – showed that the broker acted on behalf of American Way only and was not Travelers’ agent. Accordingly, the appellate court concluded that Travelers could not be liable for the broker’s purported negligence.

Originally posted to Barger & Wolen's Insurance Litigation and Regulatory Law blog.

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

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.   

Supreme Court Considers Accrual of Statute of Limitations in ERISA LTD Plan

On April 15, 2013, the United States Supreme Court agreed to review a case involving the question of when the statute of limitations accrues for judicial review of an adverse benefits determination under an ERISA long-term disability plan.  

On November 18, 2010, Julie Heimeshoff (“Heimeshoff”) filed suit against Hartford Life & Accident Insurance Company (“Hartford”) and her former employer, Walmart Inc., after Hartford denied her claim for benefits under a long-term disability plan established by Walmart (the “Plan”). See Heimeshoff v. Hartford Life & Accid. Ins. Co, et al., 2012 U.S. Dist. LEXIS 6882 (D. Conn. 2012).

Hartford filed a motion to dismiss on the ground that Heimeshoff’s claim was barred by the three-year contractual limitations period in the Plan, which provided as follows: “Legal action cannot be taken against The Hartford . . . 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.”  

The district court granted Hartford’s motion to dismiss because Heimeshoff filed her complaint more than three years after proof of loss was required to be furnished under the Plan. In doing so, the district court rejected Heimeshoff’s argument that the Plan provision was ambiguous and that the limitations period did not begin to run until the final denial latter. The Court also rejected her argument that Hartford could not rely on the limitations period because it failed to advise Heimeshoff of the limitations period in the denial letter.  

The Court of Appeal for the Second Circuit affirmed, holding that, under Connecticut law, parties to an insurance contract may shorten the limitations period and that the “policy language is unambiguous and it does not offend the statute to have the limitations period begin to run before the claim accrues.” 

Heimeshoff filed a petition for writ of certiorari, which the Supreme Court granted on April 15, 2012, as to the following question: “When should a statute of limitations accrue for judicial review of an ERISA disability adverse benefit determination?” Heimeshoff v. Hartford Life & Accid. Ins. Co, et al., Case No. 12-729. 

The Supreme Court’s decision will be important because ERISA does not provide a limitations period for actions for plan benefits under 29 U.S.C. § 1132. As a result, federal courts apply the applicable state statute of limitations period that is most analogous or, if permitted, federal courts will apply the contractual limitations period, which may be shorter than the state statute. Thus, the Court’s decision will provide uniformity on the accrual of benefit claims under contractual limitations periods in ERISA group policies.


Supreme Court Directs Trial Courts To Look At The Merits In Determining Whether To Certify A Class

By Michael A.S. Newman

Comcast v Behrend is the latest in a series of United States Supreme Court cases in recent years that have restricted the ability of plaintiffs to certify federal class actions. In so doing, it has expanded the scope of the Court's landmark 2011 decision, Walmart v. Dukes (click here for our analysis of that decision).

In Comcast, plaintiffs were subscribers to Comcast's cable-television services. Plaintiffs alleged that Comcast engaged in a practice called "clustering," a strategy of concentrating operations within a particular region, and that this practice violated antitrust law. In particular, plaintiffs alleged that the clustering scheme harmed subscribers in the Philadelphia area by eliminating competition and elevating prices.

Plaintiffs sought to certify the class under Federal Rules of Civil Procedure, Rule 23(b)(3), which permits certification only if:

the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members." 

The district court held that to meet this predominance requirement, plaintiffs needed show:

  1. that the existence of individual injury "was capable of proof at trial through evidence that [was] common to the class rather than individual members" and
  2. that the damages resulting from the injury were measurable "on a class-wide basis" through the use of a "common methodology."

Plaintiffs proposed four theories of antitrust impact. Of these four theories, the district court concluded that only one was capable of class-wide proof, and rejected the rest. 

In establishing that damages could be calculated on a class-wide basis, plaintiffs introduced the testimony of an expert, who introduced a model that calculated damages of over $875 million for the entire class. However, despite the fact that the district court had rejected three, and allowed only one, theory of antitrust impact, the model introduced by the expert did not isolate damages resulting from any one theory of antitrust impact.

The District Court approved the certification of the class, and Third Circuit Court of Appeal affirmed.  The Supreme Court, in a 5-4 decision authored by Justice Antonin Scalia, overturned these rulings, holding that the class action was improperly certified.

As Justice Scalia explained,

a model purporting to serve as evidence of damages in this class action must measure only those damages attributable to that theory.  If the model does not even attempt to do that, it cannot possibly establish that damages are susceptible of measurement across the entire class for purposes of Rule 23(b)(3)." 

The Court rejected the reasoning of the Third Circuit that such inquiry would involve consideration into the "merits," which, the Third Circuit believed, has "no place in the class certification inquiry."  To the contrary, Justice Scalia explained, "our cases requir[e] a determination that Rule 23 is satisfied, even when that requires inquiry into the merits of the claim." 

Comcast is part of a recent trend in Supreme Court jurisprudence allowing, and indeed even requiring, district courts to examine the merits of the claim in determining the suitability of class certification. 

This principle was announced in Walmart v. Dukes, and it is no accident that the Court begins the analysis section of Comcast with an invocation from that 2011 ruling. Moreover, Comcast extends the ruling of Walmart v. Dukes, which considered only Rule 23(a) (the requirement that plaintiffs establish commonality), to the predominance requirement of Rule 23(b)(3).

Originally posted to Barger & Wolen's Insurance Litigation & Regulatory Law Blog.

Supreme Court Closes CAFA Loophole

By Larry Golub

A unanimous decision by the United States Supreme Court has restored the integrity of the Class Action Fairness Act, or CAFA. At issue in Standard Fire Insurance Co. v. Knowles was the transparent attempt by a named plaintiff to ouster federal court jurisdiction by “stipulating” that the damages sought through a class action complaint would not exceed the $5,000,000 minimum jurisdictional limit of CAFA. 

In a brief and direct decision, Justice Stephen Breyer disallowed the use of such a pre-certification stipulation, concluding that prior to the issuance of any certification order, a named plaintiff does not have the ability to bind absent class members and to concede the value of those class members’ claims.

Knowles was the named plaintiff in an action filed in Arkansas state court against Standard Fire concerning an alleged practice of failing to include general contractor fees in homeowner’s insurance loss payments. The complaint filed by Knowles, as well as an attachment to the complaint, contained a stipulation that Knowles and the Class would not seek to recover damages “in excess of $5,000,000 in the aggregate.” 

Accordingly, after Standard Fire removed the action to federal court under CAFA jurisdiction, Knowles moved to remand the action back to state court based on the stipulation that Knowles claimed made the “amount in controversy” fall beneath the $5,000,000 CAFA threshold and therefore defeated jurisdiction under CAFA. While the federal district court agreed with Knowles, other cases reached the opposite view, and thus the issue ended up at the Supreme Court.

In Knowles, the district court had found that the amount at issue would have exceeded the $5,000,000 minimum limit, but for the stipulation. As such, the Supreme Court had little difficulty concluding that the stipulation was ineffective to bind absent class members because, at the precertification stage, the proposed class members are not yet – and potentially never will be – parties to the action, and thus the named plaintiff cannot bind those non-parties. At the pre-certification stage, the named plaintiff cannot bind “anyone but himself.”

In enacting CAFA, Congress sought to relax the jurisdictional threshold of class actions and ensure “Federal court consideration of interstate cases of national importance.” The unilateral “stipulation” attempted in Knowles and in other cases not only frustrated the intent of Congress but also prejudiced the claims of absent class members. The Supreme Court correctly restored the balance in CAFA.

Originally posted to Barger & Wolen's Insurance Litigation & Regulatory Law Blog.

SCOTUS Declines Review in Case Allowing Health Care Provider to Pursue State Law Misrepresentation Claims Against ERISA Health Plan

The United States Supreme Court recently denied certiorari in a Fifth Circuit case, United Healthcare Insurance Co. v. Access Mediquip LLC, that allowed a health care provider to pursue state law misrepresentation claims against an ERISA-governed health insurance plan. 

The provider, a medical device company, alleged that it supplied devices to patients based on representations from the ERISA plan that it would reimburse reasonable charges for the devices and related services.

The District Court ruled that ERISA preempted the state law misrepresentation claims. The Fifth Circuit reversed, holding that the state law claims could go forward because the alleged misrepresentations were based on promises of reimbursement, rather than the terms of the ERISA plan. That ruling drew a distinction between plan beneficiaries and healthcare providers with respect to reimbursement representations – ERISA preempted the former but not the latter.

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Update: Approval Slated for $73 Million Settlement of Life Insurance Class Action Alleging Unlawful Rate Increase

United States District Judge Howard Matz of the Central District of California indicated yesterday that he would preliminarily approve a proposed $73 million settlement of a class action lawsuit against Conseco Life Insurance Company.

The case was filed in 2011 after the named plaintiff, Celedonia Yue, obtained a judgment in a separate action declaring that premium rate hikes and cost-of-insurance increases (monthly charges based on the insured’s age) violated her policy’s provision for determining cost-of-insurance rates. 

The class action, which includes more than 45,000 California policyholders, consists of both policyholders with in-force policies and former policyholders whose policies lapsed or were terminated in connection with the increases. The proposed settlement, among other things, will reduce the premium and cost-of-insurance increases and allow for reinstatement of terminated or lapsed policies. Former policyholders who do not wish to reinstate their policies are eligible for a cash payment.

A further hearing is set for March 7, 2013. Barger & Wolen will continue to follow this case. 

UPDATE: On March 6, 2013, District Judge Howard Matz issued findings and an order for preliminary approval of the proposed settlement and directing notice of the settlement to the class members.  Judge Matz found that the proposed settlement, which was reached after the parties had engaged in discovery, was the result of arm's length negotiations and was sufficiently fair and reasonable to warrant sending notice of the settlement to the class members. 

The court will rule on final approval of the settlement at a fairness hearing scheduled for June 10, 2013. 

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.’”

Representations Of Future Tax Treatment To Induce Creation Of Pension Plan Are Not Actionable As A Matter Of Law

The California Fourth District Court of Appeal adopted the principle that:

it is inherently unreasonable for any person to rely on a prediction of future IRS enactment, enforcement, or non-enforcement of the law by someone unaffiliated with the federal government. As such, the reasonable reliance element of any fraud claim based on these predictions fails as a matter of law,” citing Berry v. Indianapolis Life Insurance Co.

In Brakke v. Economic Concepts, Inc., the trustee of a defined benefit plan and the principals of the company that established it brought suit against American General Life Insurance Company, Economic Concepts, Inc. and others for alleged fraud. The plaintiffs alleged they were induced to establish the pension plan by false representations that contributions to the plan were tax deductible under the Internal Revenue Code. Years after the plan was established, the Internal Revenue Service made an adverse ruling that the pension plan did not qualify for favorable tax treatment and required plaintiffs to pay back taxes and penalties.

The dispositive issues were whether defendants’ statements were actionable misrepresentations and if so, whether plaintiffs could establish reasonable reliance. The trial court sustained a demurrer without leave to amend.

On a purely factual basis, the appellate court noted inconsistencies between allegations in the complaint and exhibits to the complaint concerning the representations. More importantly, the representations were made and the plan was established in 2002-2003, whereas the IRS did not rule until 2006. This led the court to conclude that plaintiffs failed to allege the statements by defendants were false when made.

Equally fatal to plaintiffs’ position was the court’s reference to and reliance upon the Berry decision quoted above, albeit non-controlling, and analogous case law in California such as Holder v. Home Sav. & Loan Assn. (1968) (“statements with regard to future assessments or levies of taxes … made by a private person ... may not justifiably be relied on.”). The rationale in Holder was that:

“[t]he fixing of assessed values of property and of tax rates is solely within the power of public officials, whose decisions are not and should not be subject to control by a property owner.”

As a result, the Fourth District affirmed dismissal of the entire case.

Potential plaintiffs in comparable circumstances will need to find a more creative way around the court’s straightforward directive:

[I]t simply was not reasonable for plaintiffs to rely on representations concerning how the IRS would treat their pension plan in the future.”

Trial Court Abuses Its Discretion by Forcing Insurer to Bear the Cost of Giving Notice to Putative Class Members

By David McMahon

In In re Insurance Installment Fee Cases, 2012 DJDAR 16696 (2012), the California Court of Appeal for the Fourth Appellate District decided an important class action cost recovery issue. The case arose in the insurance context.

A class action was filed against State Farm (“State Farm”) by a class representative. The representative pursued discovery seeking access to the class members’ personal and payment information, designed to identify which insureds might be eligible as plaintiffs in the class.  State Farm objected to the discovery requests. The plaintiff filed motions to compel the requested documents and the parties agreed to refer the dispute to a discovery referee. The discovery referee overruled State Farm’s objections. State Farm filed written objections to the referee’s recommendation which were subsequently overruled by the trial judge. The trial court also ordered State Farm to pay for and to mail out the notices regarding the discovery propounded by the plaintiffs. The merits of the litigation were subsequently decided in favor of State Farm.

State Farm filed a memorandum of costs after prevailing at the trial court level. In the cost memorandum State Farm sought to recover the $713,463 it incurred in sending out the notices to putative class members. The plaintiffs filed a motion to tax those costs. The trial court granted the motion to tax costs in its entirety.

The court of appeal reversed the trial court’s decision in part, and concluded the trial judge abused his discretion in taxing the costs relating to the mailing of the notices to putative class members. 

The court of appeal noted that certain cost items may be awarded in the trial court’s discretion if they are “reasonably necessary to the conduct of the litigation.” CCP § 1033.5(c)(2) and Seever v. Copley Press, 141 Cal. App. 4th 1550, 1558 (2006). 

However, when a party demands discovery involving significant “special attendant costs” beyond those typically involved in responding to routine discovery, the demanding party should bear those costs if the party is not successful in prevailing in the litigation. 

In reversing the trial court’s decision, the court of appeal reasoned that the costs State Farm incurred in providing the notice were “special attendant” costs beyond those involved in responding to routine discovery.

Originally posted to Barger & Wolen's Litigation Management & Attorney Fee Analysis blog.

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.

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.

Health Insurance Rescission Case Upheld by California Appellate Court

On Wednesday, December 28, 2011, the First District Court of Appeal affirmed the trial court's granting of summary judgment in Hagan v. California Physicians' Service dba Blue Shield of California, et al, Case No. A130809 (unpublished), a health insurance rescission matter.

The matter was handled by Barger & Wolen Senior Partners John M. LeBlanc and Sandra Weishart, Senior Associates Ophir Johna and Vivian Orlando, and Greg Pimstone of Manatt, Phelps and Phillips


In 2005, the Hagan family applied for health coverage with Blue Shield of California Life & Health Insurance Company. Beginning in 2001, Lori Hagan -- in her mid-thirties -- began to experience heavy menstrual cramping and bleeding. Over the next four years, she saw at least four physicians who diagnosed her with an enlarged uterus, fibroid tumors, menorrhagia and dysmenorrhea. She underwent exploratory laparoscopic surgery under general anesthesia, which confirmed the fibroid tumors and also revealed uterine adhesions and endometrial tissue. Ms. Hagan also underwent hormone therapy to treat the bleeding and severe pain. She was advised on multiple occasions that she needed to consider a hysterectomy or uterine ablation as treatment options.  

In applying for insurance coverage, however, the Hagans failed to disclose any of this information, despite application questions that asked the applicants to disclose any treatment, advice or symptoms concerning the female reproductive system, such as abnormal bleeding or fibroids, questions that inquired about any visits to the hospital, outpatient center, surgeries, and questions that requested disclosure of any other symptoms, conditions or recommended treatment not mentioned elsewhere on the application. 

In response to the application question that asked the applicants to disclose their last physician visit, Ms. Hagan failed to disclose that she had seen her physician just three weeks earlier, where he had again diagnosed her with painful symptoms related to her fibroids and where they again discussed hysterectomy as an option. 

Blue Shield Life rescinded the policy after it discovered these misrepresentations and omissions.

Though not required, Blue Shield Life paid all of the medical expenses incurred by the Hagans through the date of the rescission. The Hagans obtained replacement coverage within a few days, and Ms. Hagan was not deprived of any medical treatment as a result of the rescission.

Unfortunately, Ms. Hagan later passed away from uterine cancer. John Hagan sued Blue Shield Life alleging breach of contract, breach of the covenant of good faith and fair dealing and punitive damages. 

The Court's Decision

In upholding the trial court's decision granting summary judgment, the Court of Appeal first reviewed general principles governing an insurer's right to rescind. It rejected Hagan's argument that the language of Blue Shield Life's policy required it to prove that the Hagans' misrepresentations were intentional. 

The Court then reviewed the undisputed evidence in detail, in light of the specific questions on the application, as well as the excuses proffered by Hagan for why Ms. Hagan failed to disclose her long medical history, and concluded that the trial court properly granted summary judgment in Blue Shield Life's favor, in that there were clear misrepresentations and omissions of material facts on the application. 

The Court also found that Blue Shield Life did not engage in postclaims underwriting as defined in California Insurance Code section 10384

The Court held that the case was governed by the legal standards concerning underwriting and rescission set forth in Nieto v. Blue Shield of California Life & Health Insurance Company, 181 Cal. App. 4th 60 (2010) (click here for list of prior posts on Nieto). 

According to the Court, Blue Shield Life can only be guilty of postclaims underwriting if the "written information submitted on or with" the Hagans' application gave rise to "reasonable questions" that Blue Shield Life failed to resolve prior to issuing the policy. 

Against the background of California law that entitles Blue Shield Life to rely on the accuracy of the information the Hagans provided on their application (i.e., Blue Shield Life was not required to assume any of the Hagans' statements were false), Blue Shield Life properly completed its medical underwriting, and therefore did not violate Insurance Code section 10384.

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.

Collateral Source Rule Inapplicable When Injured Person's Medical Expenses are Discounted by Health Insurer

By Larry M. Golub

In a long-awaited, and nearly unanimous decision, the California Supreme Court has held that an injured plaintiff whose medical expenses are paid through private health insurance may recover as economic damages no more than the amounts paid by the plaintiff’s insurer for those medical services, and that this discounted amount does not fall within the collateral source rule. The decision is Howell v. Hamilton Meats & Provisions, Inc., decided August 18, 2011.

Rebecca Howell was injured in an automobile accident caused by a driver of Hamilton Meats & Provisions, Inc. The total amount billed by her medical providers for her medical care up to the time of trial was $189,978.63, but due to the preexisting contracts those providers had entered into with Howell’s health insurer, the bills were reduced by $130,286.90, such that the amounts paid to (and accepted by) the providers was only $59,691.73. 

At trial, Howell sought to recover the full amount of her medical bills, not the amount that her medical providers had accepted. While allowing Howell to present her the full-billed amounts to the jury, the trial court reduced those amounts in post-trial motion to the $59,691.73 paid to and accepted by the providers.

The Fourth District Court of Appeal reversed the reduction order on the ground that it violated the collateral source rule, and the Supreme Court accepted review of the case to resolve the following issue: 

Is the negotiated rate differential – the difference between the full billed rate for medical care and the actual amount paid as negotiated between a medical provider and an insurer – a collateral source benefit under the collateral source rule, which allows a plaintiff to collect that amount as economic damages, or is the plaintiff limited in economic damages to the amount the medical provider accepts as payment?

After providing a detailed discussion of the history of the collateral source rule, as “unequivocally reaffirmed” by the Court’s in the decision Helfend v. Southern Cal. Rapid Transit Dist., 2 Cal.3d 1, 6 (1970), and how that rule has been addressed over the past 40 years in case law (mostly involving Medi-Cal benefits) or excepted by statute in limited contexts, the Supreme Court explained that none of the prior cases had “discussed the question, central to the arguments in this case, of whether restricting recovery to amounts actually paid by a plaintiff or on his or her behalf contravenes the collateral source rule.” 

The Court then proceeded to resolve the four issues necessary to answer this question:

First, based on certain California Civil Code sections and the provisions of the Restatement of Torts, and as guided by a prior Court of Appeal decision involving Medi-Cal benefits, Hanif v. Housing Authority, 200 Cal. App. 3d 635 (1988), the Court held that

“a plaintiff may recover as economic damages no more than the reasonable value of the medical services received and is not entitled to recover the reasonable value if his or her actual loss was less.” (Emphasis by Court.)  

This is based on the well-established rule that a plaintiff’s expenses, to be recoverable, must not only be incurred but reasonable, and that this rule “applies when a collateral source, such as the plaintiff’s health insurer, has obtained a discount for its payments on the plaintiff’s behalf.”

Second, the basis for the limitation on recovery as to Medi-Cal recipients, adopted in the Hanif case, similarly applies to plaintiffs like Howell who possess private medical insurance. Since, by the purchase of such insurance, Howell’s prospective liability was limited to the amounts her medical insurer had agreed to pay the providers for the medical services they were to render, Howell could not “meaningfully be said ever to have incurred the full charges” or ever been personally liable for the full charges. 

Third, as to the argument that the tortfeasor (Hamilton in this case) would obtain a windfall “merely because the injured person’s health insurer has negotiated a favorable rate of payment with the person’s medical provider,” the Court disagreed. After addressing the “complexities of contemporary pricing and reimbursement patterns for medical providers,” the Court observed that the “negotiated prices” medical providers accept from health insurers “makes at least as much sense, and arguably more, than” the full prices that are billed by such providers where there is no negotiation between buyer and seller. 

“Accordingly, a tortfeasor who pays only the discounted amount as damages does not generally receive a windfall and is not generally underdeterred from engaging in risky conduct.”

Finally, in response to the contention by Howell that the “negotiated rate differential” is a benefit provided to the insured plaintiff under her policy and should be recoverable under the collateral source rule, the Court disagreed with this assertion as well. 

Since Howell did not incur liability for the full bills generated by the medical providers, due to the fact that her providers had agreed with her insurer on a different price schedule, she could not recoup those full bills as damages for economic loss under the collateral source rule. Moreover, the rule does not apply to the negotiated rate differential since it is not primarily a benefit to the plaintiff but the “primary benefit of discounted rates for medical care goes to the payer of those rates – that is, in largest part, to the insurer.”

As noted above, the Court’s decision was not wholly unanimous, as one Justice dissented. That Justice’s position was that, while Howell should not be able to recoup “the gross amount of her potentially inflated medical bills,” neither should they “be capped at the discounted amount her medical providers agreed to accept as payment in full from her insurer.” Instead, the dissent opted for an intermediate position, claiming this is the majority rule across the country: “Howell should be entitled to recover the reasonable value or market value of such services, as determined by expert testimony at trial.”  

With six Justices signing off on the Court’s opinion, however, the collateral source rule will not require defendants (or their liability insurers) in California to pay any amount greater for medical expenses than the discounted amounts paid by the insured person’s health insurer and accepted by her medical providers.

Originally posted on Barger & Wolen's Insurance Litigation & Regulatory Law blog.

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.

United States Supreme Court Holds that Summary Plan Descriptions are Not Part of the Plan

In a significant loss for employees, the United States Supreme Court has determined that a pension plan's Summary Plan Description ("SPD") is not a part of the plan itself (CIGNA Corp. v. Amara). 

The decision, supported by all eight justices who participated, severely limits the ability of plan participants to sue for benefits based upon claimed irregularities in the SPD.

Until 1998, CIGNA's pension plan provided a retiring employee with an annuity based on pre-retirement salary and length of service. The new plan replaced the annuity with a cash balance based on a defined annual contribution from CIGNA, plus interest. The new plan translated earned benefits under the previous plan into an opening amount in the cash balance account. 

Plaintiffs, beneficiaries under CIGNA's pension plan (and the plan itself), acting on behalf of approximately 25,000 beneficiaries, challenged the new plan in a class action, claiming CIGNA failed to give them proper notice of the changes, particularly because the new plan provided less generous benefits. 

The District Court held that CIGNA's descriptions of the new plan were significantly incomplete and inaccurate and that CIGNA intentionally misled its plan participants, violating sections 102(a), 104(b) and 204(h) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").  See 29 U.S.C. §§ 1022(a), 1024(a), 1054(h)

The District Court found that only class members who had suffered harm due to CIGNA's disclosure improprieties could obtain relief, but it did not require each class member to show individual injury. 

Instead, it found the evidence raised a presumption of "likely harm" suffered by class members and that, because CIGNA failed to rebut this presumption as to some or all participants, the evidence warranted class-applicable relief. 

Although section 204(h) of ERISA permits invalidation of plan amendments imposed without proper notice, the District Court did not do so here, reasoning that striking the new plan would further harm, rather than help, injured class members. 

Instead, granting relief under section 502(a)(1)(B) of ERISA, which authorizes a civil action to recover "benefits due" under the terms of the plan, the District Court reformed the new plan, substituted a more generous retirement payment, and ordered CIGNA to pay benefits under the plan, as reformed.  See 29 U.S.C. § 1132(a)(1)(B). 

The Court of Appeals for the Second Circuit affirmed. 

The Supreme Court held that the lower court improperly relied upon section 502(a)(1)(B) of ERISA, as that section does not authorize the District Court to change plan terms, rather than enforce existing terms. 

The Court rejected the argument that the District Court merely enforced existing terms of the plan because it enforced the SPD, which is part of the plan. 

In rejecting this theory, the Supreme Court reasoned that the SPD is not part of the plan, but merely information about the plan.  See 29 U.S.C. § 1022(a)

The Court commented that the argument ignores the distinction between the plan sponsor (which creates the plan and the procedures for making plan amendments) and the plan administrator (which manages the plan and provides the SPD in readily understandable form). 

The Court explained that, even where the duties of the plan sponsor and the plan administrator are performed by the same entity, the division of responsibilities between sponsor and administrator is significant. 

Imposing a rule that makes the SPD part of the plan and, therefore, allows statements in the SPD to modify the plan "might bring about complexity that would defeat the fundamental purpose of the summaries." 

While the Supreme Court did not find authority to reform plans under section 502(a)(1)(B), it nevertheless held that such authority exists under section 502(a)(3), which allows "other appropriate equitable relief" to redress violations of ERISA or plan terms.  See 29 U.S.C. § 1132(a)(3). 

Accordingly, even though a legal remedy such as compensatory damages is not permitted, the Supreme Court concluded that the District Court had the power to impose equitable remedies, including reformation of plan terms, injunctions to enforce plan terms, and orders to refrain from taking already accrued benefits (i.e., equitable estoppel).  

The Supreme Court noted ERISA does not establish a particular standard for determining harm, but requires the plan administrator to distribute written notice that is "'sufficiently accurate and comprehensive to reasonably apprise'" participants of "'their rights and obligations'" under the plan (quoting § 102(a)).

Thus, the Court explained the requirement of harm must come from the law of equity. Moreover, to determine if "detrimental reliance" must be proved to obtain equitable relief, the lower court must look to the specific equitable remedy it seeks to impose.  

With respect to the action against CIGNA, the Supreme Court explained that, to obtain relief by surcharge for the claimed ERISA violations, a plan participant or beneficiary must show that the violation caused injury--i.e., harm and causation, but not necessarily detrimental reliance, and that the prejudice standard, if applicable, must be borrowed from equitable principles, as modified by the obligations and injuries identified by ERISA itself. 

The Supreme Court remanded the case, allowing the District Court to further evaluate the remedy it will impose in light of its opinion.   

Although this case arose in the context of alleged irregularities concerning pension benefits, the decision will apply with equal force to other forms of plan benefits, including SPDs concerning insurance benefits.


Patient Protection and Affordable Care Act of 2009 Declared Unconstitutional and Void

On January 31, 2011, United States District Judge Roger Vinson, sitting in the Northern District of Florida, ruled that the Minimum Essential Coverage Provision in the Patient Protection and Affordable Care Act of 2009 (“PPACA”), recently enacted by Congress, violated the United States Constitution

The Minimum Essential Coverage Provision – referred to as the “individual mandate” -- requires that most United States citizens purchase health insurance by 2014 or face a penalty included in the individual’s tax return.

Because he found that this provision was not severable from the remainder of the PPACA, Judge Vinson declared the entire PPACA void. 

The lawsuit challenging the constitutionality of the PPACA was filed by the Attorneys General and/or the Governors of Alabama, Alaska, Arizona, Colorado, Florida, Georgia, Idaho, Indian, Iowa, Kansas, Louisiana, Maine, Michigan, Mississippi, Nebraska, Nevada, North Dakota, Ohio, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Washington, Wisconsin, and Wyoming, along with two private citizens and the National Federal of Independent Business (collectively the “Plaintiffs”). 

The Plaintiffs contended, among other items, that the individual mandate exceeded the power of Congress under both the Commerce Clause and Necessary and Proper Clause of the United States Constitution. 

Judge Vinson agreed, explaining in a 78-page opinion, that the provision attempted to impermissibly regulate “economic inactivity,” as the Commerce Clause only permits Congress to regulate “activity.” A copy of Judge Vinson’s opinion can be found here.

It is widely anticipated that the ultimate resolution of the constitutionality of the PPACA will be made by the United States Supreme Court.

Provision in the Patient Protection and Affordable Care Act of 2009 Requiring Individuals to Purchase Health Insurance Declared Unconstitutional

On December 13, 2010, United States District Judge Henry Hudson, sitting in the Eastern District of Virginia, ruled that the Minimum Essential Coverage Provision in the Patient Protection and Affordable Care Act of 2009 (“PPACA”) recently enacted by Congress violated the United States Constitution. The Minimum Essential Coverage Provision requires that most United States citizens purchase health insurance by 2014 or face a penalty included in the individual’s tax return. 

The lawsuit challenging the constitutionality of the Minimum Essential Coverage Provision in the PPACA was filed by the Commonwealth of Virginia. The state contended, among other items, that the Minimum Essential Coverage Provision exceeded the power of Congress under both the Commerce Clause and General Welfare Clause of the United States Constitution. Judge Hudson agreed, explaining in a 42-page opinion, that the provision “exceeds the constitutional boundaries of congressional power.”

Reports indicate that President Obama’s administration intends to appeal the decision. It is widely anticipated that the ultimate resolution of the constitutionality of the Minimum Essential Coverage Provision will be made by the United States Supreme Court.

Insurer Has No Duty to Disclose Means of Obtaining Lower Premiums

In Levine v. Blue Shield of California, the California Court of Appeal for the Fourth Appellate District, Division One, unanimously held that a health insurer has no duty to advise an applicant concerning how coverage could be structured to obtain lower monthly insurance premiums. 

The Levines filed the action, both individually and on behalf of a putative class, alleging causes of action for fraudulent concealment, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, unjust enrichment and unfair competition under Business and Professions Code section 17200

The appellate court affirmed the trial court's order sustaining Blue Shield's demurrer to the entire complaint, holding that Blue Shield had no duty to disclose the information that the Levines alleged was not provided during the application process.

Continue Reading...

Liability Insurer Does Not Waive Right to Raise Misrepresentations in Application for Failing to Follow Internal Underwriting Guidelines

While this blog is dedicated to Life, Health and Disability Insurance, including ERISA matters, a recent Court of Appeal liability insurance decision concerning waiver, estoppel and Health & Safety Code § 1389.3 Colony Insurance Co. v. Crusader Insurance Co.should apply with equal force to life, health and disability insurers.

Colony Insurance Company sought a declaration that Crusader Insurance Company improperly refused to defend a tenant lawsuit and share the costs incurred in defending the tenant litigation. Among the many issues argued was Colony’s contention that Crusader engaged in post-claims underwriting in violation of Health & Safety Code § 1389.3, relying on Hailey v. California Physicians’ Service, a case tried and won by Barger & Wolen partner John LeBlanc, as discussed here.

Mr. LeBlanc has taken the time to analyze the issue in Colony.

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California Supreme Court Holds Treble Damages Not Permitted under the Unfair Competition Law - Restitution is the Sole Monetary Remedy

Earlier today, the California Supreme Court issued its unanimous opinion concluding that Civil Code section 3345, which allows treble damages to be awarded to seniors when a statute provides for a fine or penalty, is not permitted under the Unfair Competition Law, Business & Professions Code section 17200 (the “UCL”)

The decision, Clark v. Superior Court (National Western Life Insurance Company), confirms that the only monetary remedy available under the UCL is restitution, and that a claim for treble damages is not restitution, nor is the nature of restitution comparable to a penalty.

The plaintiffs in the case filed a class action lawsuit against National Western Life Insurance Company arising out of the sale of deferred annuities issued to California residents who were senior citizens. The trial court denied certification as to all claims except one under the UCL. In addition to seeking restitution in the UCL claim, the plaintiffs sought treble damages on their restitution claim under section 3345.

As reported in our earlier blog post last September when the Supreme Court accepted review, in the more than two decades since the enactment of section 3345, no case had ever permitted any sort of damages, be they compensatory, treble or punitive, under the UCL. The trial court dismissed the claim for treble damages, but the Court of Appeal reversed, finding that the plain meaning of section 3345 applied to a private action seeking restitution under the UCL.

In reversing the decision issued by the Court of Appeal, the Supreme Court focused on two issues.

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Don't Miss the Barger & Wolen Presentations at the 2010 Western Claim Conference

Barger & Wolen partners Martin E. Rosen and Robert E. Hess will each present at the 2010 Western Claim Conference (June 27-29, 2010 | Indian Wells, CA).

Disability Legal Update by Martin E. Rosen (Session 2 | Monday, June 28)

  • Keep up to date! What topics have disability insurers and their insured’s been battling about in the courts over the past year? And with what results? Come hear an outside counsel seasoned in litigating disability bad faith disputes discuss some of the issues that judges from around the country have written about in their published legal decisions.

"Help! They want to take my deposition!" by Robert E. Hess (Session 3 | Monday, June 28)

  • This presentation is designed to help personnel across the insurance industry prepare for and give a quality deposition.

We look forward to seeing you at the WCC. If you cannot attend, but would like a copy of the materials, please contact Mr. Rosen or Mr. Hess directly.


"Prevailing Party" Status Not Necessary for an ERISA Attorneys' Fees Award

In a decision authored by Justice Clarence Thomas, the United States Supreme Court has declared that an ERISA claimant need not be a “prevailing party” to be eligible for an attorneys’ fees award. In Hardt v. Reliance Standard Life Insurance Co., __ U.S.__ (2010), the Court ruled that under 29 U.S.C. §1132(g)(1), a party may be awarded attorneys’ fees if “some degree of success on the merits” is achieved, as opposed to the more stringent requirement imposed by some circuit courts that they be a “prevailing party.”

Bridget Hardt initiated the litigation seeking long-term disability benefits under an ERISA plan. Faced with cross motions for summary judgment, the United States District Court for the Eastern District of Virginia denied Reliance’s motion finding that “Reliance’s decision to deny benefits was based on incomplete information.” The District Court also denied Hardt’s motion for summary judgment, but in doing so, found “compelling evidence” that Hardt was totally disabled. The District Court accordingly remanded the claim to Reliance with instructions that all of the evidence in the file be adequately considered within 30 days, otherwise “judgment will be issued in favor of Ms. Hardt.” 

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Court Refuses Requests to Depublish Decision Affirming Rescission of Health Insurance Policy

On April 28, 2010, the California Supreme Court declined to review the Second District Court of Appeal’s decision in Nieto v. Blue Shield of California Life & Health Insurance Company, 181 Cal. App. 4th 60 (2010) (previously discussed here). The Supreme Court also declined to depublish the Nieto decision, despite numerous requests from consumer groups and a specific request from the Los Angeles City Attorney’s office. 

The Supreme Court’s decision confirms the Nieto court’s holding that the underwriting standards addressed by the Second District in Hailey v. California Physicians’ Service, 158 Cal. App. 4th 452 (2007), have no application to health insurers in California. It also confirms the holding in Nieto that advising applicants in the application, and in the policy, that an insurance policy is issued in reliance on the application statements will satisfy the requirements of the California Insurance Code attachment statutes to “endorse” the application on the policy. 

Finally, the Nieto decision is also being widely reviewed for its holding concerning when successive motions for summary judgment can be filed.

Further discussions on the Hailey and Nieto decisions can be found here:

Court Finds Triable Issue of Fact as to Rescission of Health Insurance, but Upholds Dismissal of Bad Faith and Punitive Damage Claims

Following the Hailey and Nieto decisions, issues exist whether a Health Care Service Plan completed sufficient medical underwriting prior to rescission

In Nazaretyan v. California Physicians’ Service, the California Court of Appeal reversed the trial court’s grant of summary judgment in favor of California Physicians’ Service dba Blue Shield of California (“Blue Shield”), a health care service plan, following its rescission of Gevork Nazaretyan and Narine Ghazaryan’s (the “Plaintiffs”) health care coverage. In a fact-driven decision, the Court of Appeal held that Blue Shield failed to establish, as matter of law, that its investigation prior to issuing Plaintiffs’ coverage was sufficient to demonstrate that it completed medical underwriting, as required under Health & Safety Code § 1389.3, to rescind for non-willful, material misrepresentations in the application for coverage.

The Court of Appeal also concluded that, as a matter of law, it could not hold that the Plaintiffs, who are husband and wife, willfully misrepresented material information in their application to Blue Shield. However, the Court of Appeal affirmed summary adjudication in Blue Shield’s favor on the Plaintiffs’ bad faith and punitive damage claims.

In August 2004, the Plaintiffs applied for health care coverage with Blue Shield with the assistance of their long-time insurance broker Ahman Yusop. On September 10, 2004, Blue Shield sent Yusop a form requesting information that was missing from the initial application. On September 21, 2004, the missing-information form was returned to Blue Shield with the questions answered, and on October 12, 2004, the Plaintiffs resubmitted their application to Blue Shield. Based on the information in the applications, Blue Shield approved coverage at its most favorable rate on November 1, 2004.

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California Court of Appeal Upholds Rescission of Health Insurance Policy

Concludes that Health Insurer Does Not Have to Physically Attach the Application to the Policy to Rely on Misrepresentations in Application to Support Rescission

In Nieto v. Blue Shield of California Life & Health Insurance Company, ___ Cal.Rptr.3d. ___, 2010 WL 162027 (2010), the Court of Appeal considered whether Blue Shield Life – an California insurance company subject to the California Insurance Code – could rescind plaintiff Julie Nieto’s (“Nieto”) individual health insurance policy based on misrepresentations concerning her medical history contained in the application she submitted to Blue Shield Life.

The Court of Appeal affirmed the trial court’s grant of summary judgment in Blue Shield Life’s favor, concluding that Blue Shield Life had no statutory duty to physically attach Nieto’s application to the insurance policy, nor to conduct further inquiries beyond the application during the underwriting process to ascertain the truthfulness of Nieto’s representations in the application before it issued the policy.

In reaching this conclusion, the Court discussed its holding in light of the recent decisions in Ticconi v. Blue Shield of California Life & Health Ins. Co., 160 Cal.App.4th 528 (2008) and Hailey v. California Physicians' Service, 158 Cal.App.4th 452 (2007).

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United States' Amicus Brief Argues Medicare Act Preempts Statutory Consumer Protection and State Common Law Claims

Since January 1, 2006, Part D of the Medicare Act has provided Medicare beneficiaries with an elective prescription drug benefit option. Under Part D, benefits are administered to beneficiaries through private health insurance companies, known as “sponsors,” which contract with the Centers for Medicare & Medicaid Services (CMS).

In late 2005, Do Sung Uhm and Eun Sook Uhm (the “Uhms”), Medicare beneficiaries, applied for the prescription drug benefit plan offered by Humana (the “Plan”). In accordance with the Uhms’ election to receive benefits under Part D, the Social Security Administration withheld monthly premiums from their social security benefits.

Pursuant to the Plan, the Uhms’ benefits were to begin on January 1, 2006; however, as of February 6, 2006, the Uhms had not received any information from Humana regarding how to obtain their benefits. As a result, the Uhms had to pay out-of-pocket for their prescription medications.

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California Appellate Court Affirms Trial Court's Order Holding Putative UCL Class Should Not Be Certified

In a decision published October 26, 2009, a unanimous panel of the Fourth Appellate District, Division Three, affirmed the trial court’s order denying class certification in a case handled by Barger & Wolen, Kaldenbach v. Mutual of Omaha et. al. Among other things, the court of appeal held that the California Supreme Court's recent decision in In re Tobacco II Cases, 46 Cal.4th 298 (2009) (“Tobacco II”) did not mandate reversal of the trial court's decision.

Kaldenbach's case arose from his purchase of an alleged “vanishing premium” life insurance policy. He claimed that, when he purchased an “Advantage Life” universal life insurance policy from Defendant Mutual of Omaha Life Insurance Company (“Mutual”), his agent represented that he would have to pay only four annual premiums, after which he would never have to pay another premium. Kaldenbach alleged those oral representations were false, as he later was required to pay more than four premiums to keep his policy in force. Seeking to transform his individual dispute into a class action, Kaldenbach also alleged that Mutual committed “class-wide” misrepresentations and omissions in scripted presentations and standardized marketing and training materials which, among other things, supposedly violated California’s Unfair Competition Law, Business and Professions Code section 17200 et seq. (“UCL”).

In opposing class certification, Mutual showed that the class allegations involved thousands of individualized point-of-sale transactions between a policy owner and an agent — a scenario that courts consistently hold is not subject to class treatment. Mutual’s evidence demonstrated that Kaldenbach’s case, like those of the other putative class members, was based upon the unique dialogue between an agent and a policy owner, and that marketing materials, agent training and sales illustrations were not uniform. The trial court denied class certification, holding that Kaldenbach failed to meet any of the criteria required for class certification. Kaldenbach thereafter filed an appeal.

Prior to the hearing on Kaldenbach’s motion for class certification, Californians passed Proposition 64 (“Prop 64”), which limited standing under the UCL to a “person who has suffered injury in fact and has lost money or property as a result of [such] unfair competition.” See Business and Professions Code § 17204. Additionally, Prop 64 mandated that UCL representative actions satisfy class action requirements under California Code of Civil Procedure section 382. At the time the trial court decided Kaldenbach’s class certification motion, Tobacco II — which raised the issue of whether, after Prop 64, each class member was now required to show an injury in fact, consisting of lost money or property, as a result of the alleged unfair competition — was pending before the California Supreme Court.

After Kaldenbach and Mutual completed their briefing and oral argument on appeal, the Supreme Court issued its opinion in Tobacco II, holding that, to demonstrate standing to pursue a UCL claim as a class action, only the named plaintiff must show an injury in fact, consisting of lost money or property, as a result of the alleged unfair competition. Tobacco II, supra at 305-306, 324. The Supreme Court explained that the “standing requirements are applicable only to the class representatives, and not all absent class members.” Id. at 306. Significantly, the Supreme Court also concluded that “Proposition 64 was not intended to, and does not, impose section 17204’s standing requirements on absent class members in a UCL class action where class requirements have otherwise been found to exist.” ld. at 324.

In light of Tobacco II, the court of appeal in Kaldenbach requested further briefing on UCL class action issues. In one of the first appellate decisions to interpret Tobacco II, the court of appeal affirmed the trial court’s decision, rejecting Kaldenbach’s argument that class certification was appropriate because reliance need not be proven on a class-wide basis under the UCL. The court of appeal reasoned that reliance was only one of the individualized issues noted by the trial court. Moreover, unlike Tobacco II, which involved identical misrepresentations and/or nondisclosures made to the entire class, in Kaldenbach’s case, no evidence linked alleged sales materials, training or illustrations to what was actually said or demonstrated in any sales presentation. Accordingly, the appellate court held that individualized issues predominated as to whether Mutual in fact committed an unfair business practice that was “likely to mislead” the putative class. 

Sandra Weishart and Misty Murray of Barger & Wolen are counsel for Mutual.

Health & Safety Code Only Required Blue Cross to "Offer" to Provide Infertility Group Coverage

The Court of Appeal recently interpreted the infertility treatment provisions of Health and Safety Code section 1374.55 in Yeager v. Blue Cross of California, __ Cal. Rptr. 3d __, 2009 WL 2033209 (July 15, 2009). Yeager sued Blue Cross, alleging that it violated its duty under section 1374.55 to offer coverage for infertility treatment in the group plan that Blue Cross provided through Yeager’s employer, Westmont College. Blue Cross moved for summary judgment, arguing that it complied with section 1374.55 by offering optional coverage of up to $2,000 a year for half the cost of each group member’s infertility treatment, which Westmont College declined to purchase for cost-related reasons. The trial court granted summary judgment, and Yeager appealed.

The Court of Appeal held that section 1374.55 – which states that “every health care service plan contract . . . shall offer coverage for the treatment of infertility . . . under those terms and conditions as may be agreed upon between the group subscriber and the plan” – merely obligated Blue Cross to offer coverage for infertility treatment, and left the amount and cost of that coverage to agreement between Blue Cross and Westmont College. Thus, the court agreed that Blue Cross complied with the statute.



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California Supreme Court Holds That Section 17200 Claims Must Comply With Class Action Requirements

Arias v. Superior Court of San Joaquin (Angelo Dairy), 46 Cal.4th 969 (2009)

Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (First Transit, Inc.), 46 Cal.4th 993 (2009)

In a pair of cases, the California Supreme Court restricted the use of California Business & Professions Code Section 17200 et seq.   One case affirmed what many expected, that Proposition 64, a 2004 voter initiative, requires plaintiffs to follow strict class-action procedures when seeking to recover under California’s unfair competition law (Bus. & Prof. Code § 17200 et seq.) which prohibits “any unlawful, unfair or fraudulent business act or practice . . . .” 

Before 2004, any person could assert representative claims under the unfair competition law to obtain restitution or injunctive relief against unfair or unlawful business practices. Such claims were not required to be brought as a class action, and a plaintiff had standing to sue even without having personally suffered an injury. (See Former §§ 17203, 17204; Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal. 4th 553, 561 (1998)).

In 2004, however, the California electorate passed Proposition 64, amending the unfair competition law to provide that a private plaintiff may bring a representative action under this law only if the plaintiff has “suffered injury in fact and has lost money or property as a result of such unfair competition” and “complies with Section 382 of the Code of Civil Procedure . . . .” This statute provides that “when the question is one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court, one or more may sue or defend for the benefit of all.” The Court has previously interpreted Code of Civil Procedure section 382 as authorizing class actions. See Richmond v. Dart Industries, Inc., 29 Cal. 3d 462, 470 (1981).

In Arias v. Superior Court of San Joaquin (Angelo Dairy), __ Cal. 4th __ , 2009 WL 1838973 (June 29, 2009), the Court held that employees can pursue penalties for wage-and-hour violations under the Private Attorneys General Act, or (“PAGA”), without having to qualify their lawsuit as a class action.

Justice Joyce L. Kennard, writing for the majority, also analyzed the effect of Proposition 64. Plaintiff contended that because Proposition 64’s amendment of the unfair competition law required compliance only with “[s]ection 382 of the Code of Civil Procedure” and because that statute makes no mention of the words “class action,” his representative lawsuit brought under the unfair competition law need not comply with the requirements governing a class action. The Court rejected this assertion, explaining:

In light of this strong evidence of voter intent, we construe the statement in section 17203, as amended by Proposition 64, that a private party may pursue a representative action under the unfair competition law only if the party “complies with Section 382 of the Code of Civil Procedure” to mean that such an action must meet the requirements for a class action. (See Fireside Bank v. Superior Court, supra, 40 Cal.4th at p. 1092, fn. 9.)

In a concurring opinion by Justice Werdegar, she disagreed with the majority’s “nonliteral interpretation of Proposition 64 (Gen. Elec. (Nov. 2, 2004)), which forecloses a variety of representative actions the measure clearly permits. Unlike the majority, I do not believe we would frustrate the voters’ intent by enforcing the measure according to its plain language.”

Similarly, in Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (First Transit, Inc.), __ Cal. 4th __ , 2009 WL 1838972 (June 29, 2009), the Court ruled that the requirement that a plaintiff be one “who has suffered injury in fact,” combined with the PAGA requirement that a labor action be initiated by an “aggrieved employee,” prevents a union from bringing a UCL action based on associational standing.

Victory in Health Care Rescission Case

On May 28,  Barger & Wolen client Blue Shield of California won a complete victory in the landmark health care rescission case, Cindy Hailey and Steven Hailey v. California Physicians’ Service dba Blue Shield of California (pdf).  According to a Blue Shield representative:

Today's verdict is a complete vindication for Blue Shield of California. It means we acted properly every step of the way. It means that our underwriting procedures were fair and complete, our application was clear, and we acted in good faith. There was no post-claims underwriting. The evidence of deceit by the Haileys was overwhelming. This decision proves that Blue Shield of California had every right to rescind the Haileys' coverage.

Congratulations to Barger & Wolen partner and lead trial counsel John M. LeBlanc and his team: partner Andrew S. Williams, associates Vivian I. Orlando and Jason C. Love, legal assistant Gloria Valles, and paralegals Cathie Sorenson and Eve Torres.

California Supreme Court Holds that Only the Class Representative Needs to Meet the Standing Requirements of Proposition 64 to Pursue a Representative Action

In Re Tobacco II Cases, 46 Cal.4th 298 (2009) 

Following the passage of Proposition 64 on November 2, 2004, in order to bring a representative claim under the unfair competition law (“UCL”), a plaintiff must meet the following standing requirements: (1) establish that he or she “has suffered injury in fact and has lost money or property as a result of such unfair competition” and (2) comply with the class action requirements as set forth in California Code of Civil Procedure Section 382. Bus. & Prof. Code §§ 17203, 17204 and 17535. After the passage of Prop 64, litigants continued to debate whether only the named plaintiff or all class members had to meet the more stringent standing requirements of injury in fact and loss of money or property as a result of the alleged conduct. 

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Denial of Claim for Health Benefits Alone Not Sufficient to Support IIED

Mintz v. Blue Cross of California, __ Cal. App. 4th __, 2009 WL 1019039 (April 16, 2009).

On April 16, 2009, the Second Appellate District in Mintz v. Blue Cross of California, found Blue Cross liable in negligence when acting as claims administrator for CalPERS, when its claims denial caused physical injury to the member. Blue Cross denied the member's treatment on the grounds it was experimental. The member appealed, and though Blue Cross advised the member of his contractual appeal rights, it failed to advise him of his statutory right to Independent Medical Review.

While the court held that the administrator, as representative of the insurer, may not be held liable for interfering with its principal's contract, and the denial of health insurance benefits, without more, is not the kind of extreme outrageous conduct necessary to state a claim for intentional infliction of emotional distress, the court did hold that the administrator owes a duty to the members to exercise due care to protect them from physical injury caused by its negligence in making benefit determinations.  

Judicial Opinion Available Here

California Court Disallows Non-Party Spouse to Health Insurance Policy the Ability to Sue for Fraud

The Mega Life and Health Insurance Company v. Superior Court (Closson), 2009 WL 989386, __ Cal. App. 4th __ (April 14, 2009)

The California Court of Appeal recently addressed the issue of whether a widower, who was not a party to the health insurance policy at issue, could sue the health insurer for fraud in his individual capacity. In The Mega Life and Health Insurance Company v. Superior Court (Closson), 2009 WL 989386, __ Cal. App. 4th __ (April 14, 2009) , the court held that although the non-contracting party spouse could properly sue as his spouse’s representative to receive all damages legally available on her behalf, he had no separate and individual tort claim based on the policy.


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The Top Life, Health, Disability and ERISA Decisions of 2008

The annual meeting of the Defense Research Institute took place on October 22, 2008 in New Orleans, Louisiana. Presented at the meeting was this article titled, “The Top Life, Health, Disability and ERISA Decisions of 2008.”   Written by three prominent defense attorneys, this article highlights some of the most influential decisions from 2008.

The article, available here, was authored by:

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Non-Contracted Emergency Care Providers Cannot "Balance Bill" Plan Enrollees

Prospect Medical Group, Inc. v. Northridge Emergency Medical Group, 45 Cal. 4th 497 (2009)

The California Supreme Court was recently faced with the issue of whether emergency care providers that do not have contracts with the health care service plan (the “plan”) can bill the patient for the difference between the bill submitted to the plan and the actual amount received from the plan—a practice known as “balance billing.” In Prospect Medical Group, Inc. v. Northridge Emergency Medical Group, 45 Cal. 4th 497 (2009), the Court held that non-contracted emergency care providers may not engage in balance billing of plan members.

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Insurer Abused Discretion by not Considering Medical Report Created After Date of Disability

Fontana v. The Guardian Life Insurance, 2009 WL 73743 (N.D. Cal. January 12, 2009)

Fontana, a software product manager, sued The Guardian Life Insurance Company for denying her claim for long-term disability benefits under an ERISA-governed plan. Guardian gave two explanations for its claim decision: (1) that a medical report based on examination conducted five months after the date the operative definition of disability changed cannot demonstrate Fontana’s disability; and (2) that Fontana’s activities as a graduate student dispute her claim. On cross motions for summary judgment on the Administrative Record, the Court ruled that both of these reasons constituted an abuse of discretion, and remanded the matter to Guardian for a new determination of Fontana’s administrative appeal.

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Erreca, Moore, Austero, and now. . . Hecht

Hecht v. Paul Revere Life Ins. Co., 168 Cal. App. 4th 30 (2008)

Practitioners in the field of bad faith disability law are all familiar with the "grandaddy" of DI cases, Erreca v. Western States Life Ins. Co., 19 Cal. 2d 388 (1942), as well as its children, Moore v American United Life Ins. Co., 150 Cal. App. 3d 610 (1984) and Austero v. Nat. Casualty Co., 84 Cal. App. 3d 1 (1978), overruled on other grounds in Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d (1979). For years these cases have explained how the concept of "total disability" is to be interpreted in California. In citing these cases, plaintiffs lawyers -- and often the courts -- would usually only cite to the first part of the famous Erreca definition: "[T]he term 'total disability' . . . means such a disability as renders the insured unable to perform the substantial and material acts necessary to the prosecution of a business or occupation in the usual or customary way." The courts seemed reluctant to qualify the definition with the second part of Erreca's teachings: "Conversely, the insured is not totally disabled if he is physically and mentally capable of performing a substantial portion of the work connected with his employment." Now Erreca has spawned a "grandchild" that confirms that the second part of the definition is equally important.

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The End of Discretionary Authority in Montana?

Standard Ins. Co. v. Morrison, 537 F. Supp. 2d 1142 (D. Mont. 2008).

A ruling by District Court Judge Donald Molloy may signal the end of discretionary authority for ERISA plans in Montana.  Standard Insurance Company brought suit against John Morrison, the Insurance Commissioner for the State of Montana.  Morrison had implemented a state-wide policy disapproving ERISA plans that contained any clauses that conferred discretionary authority to the plan/claims administrator, which would give rise to a more deferential judicial standard of review when the decision of the plan/claim administrator is challenged in the district court. 

Standard Insurance argued Morrison’s actions were pre-empted by ERISA and exceeded his authority.  However, the court found neither argument persuasive and stated that there was no law granting Standard the right to a particular standard of review.  The court reasoned that “ERISA’s Savings Clause recognized the traditional role of states in regulating insurance on behalf of state citizens and in accordance with state public policy objectives.”  This case "is the straight forward regulation of insurance, a matter ERISA expressly saves from preemption.”

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When Compensatory Damages Are "Substantial," Third Circuit Adopts a 1:1 Punitive Damages Ratio

Jurinko v. The Medical Protective Company, 2008 U.S. App. Lexis 26263 (3d Cir. December 24, 2008)

The Third Circuit, in a non-precedential (but citable under FRAP 32-1) opinion, recently reduced a punitive damages award in an insurance bad faith case from a compensatory damages to punitive damages ratio of 3:1 to a 1:1 ratio. 


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ERISA Authorizes a Participant to Sue for Misconduct when it Impairs Plan Assets in Participant's Individual Account

James LaRue  v. DeWolff, Boberg & Associates Inc., 128 S. Ct. 1020 (2008).

LaRuefiled 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 § 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 § 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. 

No Abuse of Discretion Where Plan Fails to Consider Plaintiff's Salary in "Any Occ" Benefits Determination

Pannebecker v. Liberty Life Assur. Co. of Boston, 542 F.3d 1213 (9th Cir. 2008).

A participant in an ERISA plan became disabled and filed a claim for LTD benefits. After paying benefits for 18 months under the “own occupation” definition of disability, the Plan reviewed the participant’s claim under the “any occupation” standard. The “any occupation” definition required an examination as to whether the participant could perform any job for which she was “qualified by training, education, or experience.” After determining that the participant could work in any number of sedentary occupations, the administrator terminated her claim for further LTD benefits.

The participant asserted that administrator’s claim determination was an abuse of discretion because the “any occupation” language included an implicit requirement that the administrator consider her salary or station in life when making a disability determination. The court ruled that there was no such requirement and upheld the administrator’s claim determination.

Read Judicial Opinion Here

ERISA Preempts State Law Requiring That Insurer Reimburse Claimant for Copying Costs

Sgro v. Danone Waters of North America, Inc., 532 F.3d 940 (9th Cir. 2008).

A participant in an ERISA plan sued his employer (as plan administrator) and MetLife seeking unpaid disability benefits, reimbursement of copying costs and statutory penalties for failure to respond to a document request.

The claim for copying costs was based on California state law, which requires that an insurer reimburse claimants for costs associated with duplicating medical records. While ERISA preempts most state laws, some laws that “regulate insurance” are saved from preemption. Here, the Ninth Circuit ruled that, although the regulation requiring reimbursement by insurers is undoubtedly aimed at insurance companies, it does not “significantly affect the risk-pooling arrangement between the insurer and insured,” and therefore cannot be said to regulate insurance. Accordingly, the state law was preempted by ERISA.

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The Failure to Disclose Information to the Participant Justified an Increased Level of Scrutiny and the Court's Review of "New" Evidence Not Offered During The Claim

Torres v. Reliance Standard Life Ins. Co., 551 F. Supp. 2d 1221 (D. Or. 2008)

Both the Plan Administrator and Participant moved for summary judgment on a cause of action challenging the denial of long-term disability benefits under ERISA.  Noting that the Plan contained discretionary language and citing Abatie, the District Court rejected the Participant’s contention that the claim decision should be reviewed de novo.  However, the court stated that a “moderate level” of scrutiny of the Defendants’ claim decision was justified due to the structural conflict of interest and because, during the claim review process, the Plan Administrator failed to disclose information regarding the Participant’s activities it obtained from the Internet.  Additionally, the Court ruled that because of the administrator’s failure to disclose the information, the Participant was denied the opportunity to present counter evidence that might further support her claim for benefits, and, thus, the Court allowed Torres to submit information responding to the new “internet information”

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Under Abatie, Discovery of Profitability Reports is Not Allowed

Bartholomew v. Unum Life Ins. Co., 579 F.Supp.2d 1339 (W.D.Wash. 2008)

Plaintiff, who sued to recover benefits under her long-term disability (LTD) plan, sought to expand the scope of discovery under ERISA by seeking documents outside the Administrative Record. Among others, the Plaintiff requested; “Details of compensation and financial incentives,” “revenue and profitability reports for the last 10 years,” and “[a]ny document discussing the claims handling process published during the last 10 years.” Despite the recent rulings in Abatie allowing weight to be given to structural conflict of interest analysis, the District Count held that Plaintiff was not allowed to engage in a fishing expedition. Here, the discovery requests were not narrowly tailored to lead to discovery of admissible evidence. Therefore, Plaintiff’s request for discovery outside the statutory guidelines was appropriately denied.

Hearsay Exception Required for Certain Documents Outside the Administrative Record

Bartholomew v. Unum Life Ins. Co. of America, 588 F. Supp. 2d 1262 (W.D. Wash. 2008.)

A Plan participant brought suit under ERISA challenging the claim administrator’s decision to terminate long term disability benefits. On a motion for summary judgment, the District Court held that the hearsay rule barred the court from considering documents that discussed the administrator’s past claims handling practices. In its decision, the Court acknowledged that a history of biased claim administration was a key factor in weighing the conflict of interest. Nevertheless, the court held that documents containing a recitation of the defendant’s past administrative abuses did not fall under any of the hearsay exceptions. The court also considered the Regulatory Settlement Agreement (“RSA”) with the Department of Labor and found the report admissible as an admission of a party opponent. However, while the RSA could not be offered as evidence of claims handling in this case, the RSA warranted a more “elevated level of skepticism” with regard to the structural conflict of interest.

Nevertheless, even in light of the structural conflict of interest, the court found that Unum afforded the Plaintiff an opportunity for a “full and fair review” of her claims. Therefore, the administrator’s decision was upheld because it was based on a reasonable interpretation of the plan’s terms and made in good faith.

Structural Conflict Exists Even When Benefits Paid Out of a Trust

Burke v. Pitney Bowes Inc. Long-Term Disability Plan, 544 F.3d 1016 (9th Cir. 2008).

The Plan terminated benefits because it determined that the employee was not totally disabled from any occupation. After appealing their decision and exhausting all administrative remedies, the employee sued in federal court. In light of the recent Supreme Court holding in Glenn, the court vacated the grant of summary judgment and remanded back to the district court to allow the discovery of documents outside the administrative record in order to properly evaluate the structural conflict of interest. The court came to this conclusion even though the employer had no direct financial incentive to deny claims because benefits were paid out of a trust. However, the court disagreed with the holdings in Post v. Hartford (3d Circuit) and Gilley v Monsanto (11th Circuit). Instead, the court reasoned that since the employer would ultimately need to contribute to the trust in order for it to maintain its solvency, it had an incentive to keep claims as low as possible. Therefore, a structural conflict of interest existed.

 Read Judicial Opinion Here

It is an Abuse of Discretion to Ignore Contrary Evidence

Caplan v. CNA Financial Corp., 544 F.Supp.2d 984 (2008).

In what appears to be a relatively standard claim for benefits under ERISA, the District Court ruled that it was an abuse of discretion to ignore contrary evidence. When the participant in this case made a claim for disability benefits, Hartford submitted his file to an independent medical evaluation service. The IME opinion, which conflicted with the treating physician opinion, was the basis for Hartford to deny the claim.

The court noted that the participant had submitted a “wealth of evidence” to support his contention that he was disabled. Hartford claimed that their decision was based on the “totality of the medical information provided.” However, the only information that supported the decision was the IME opinion. The court factored the discrepancy in the amount of medical support for Hartford’s decision with the evidence of financial incentives for the IME and found an abuse of discretion in this case.

 Judicial Opinion Available Here

Abuse of Discretion to Rely on Employer's Accommodation that Materially Altered Participant's Job Duties

Garrison v. Aetna Life Ins. Co., 558 F. Supp. 2d 995 (C.D. Cal. 2008)

This case addressed the issue of an employer’s accommodation of an employee’s disability, and how the claim administrator considered that factor when assessing disability. Here, a Boeing employee submitted a claim for benefits under the “own occupation” definition of disability. At the time of her disability, her position was described as “light,” requiring 12-hour shifts and a great deal of travel. In response to the onset of the employee’s disability, Boeing attempted to make accommodations by eliminating the travel requirement and reducing the number of hours worked. Based on the accommodations, the claim administrator reclassified the participant’s occupation from “light” to “sedentary,” and finding that she was capable of sedentary work, denied her claim.

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City Ordinance Requiring Minimum Health Care Expenditures for Employees is Not Preempted by ERISA

Golden Gate Restaurant Ass'n v. City and County of San Francisco, 546 F.3d 639 (9th Cir. 2008).

The city of San Francisco passed an ordinance requiring that most city-based employers make a certain level of health care expenditures on behalf of their covered employees.  (Basically, employers were required to either provide health care benefits to employees or pay the City a certain amount of money per employer hour worked to fund a city-run Health Access Plan.)  Employers argued that the ordinance was preempted by ERISA because it impermissibly created an ERISA plan, or related to employers’ existing ERISA plans.  Citing a presumption against preemption, the Court of Appeals for the Ninth Circuit found that the ordinance was not preempted by ERISA.

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Structural Conflict of Interest Warrants Discovery of Statistical Information on Claims

Walker v. Metropolitan Life Ins. Co., 585 F. Supp. 2d 1167 (N.D. Cal. 2008.)

Plaintiff sued MetLife and Kaiser Permanente Benefits Plan for denying his claim for long-term disability benefits.  The court denied cross motions for summary judgment on the grounds that the Administrative Record did not contain sufficient information regarding MetLife’ relationship with a company, NMR, retained to conduct independent medical reviews such that the court could assess the impact of MetLife’s undisputed structural conflict of interest.  In order to obtain this information, the court ordered MetLife to provide the number of claims that were approved and denied after a review was conducted by an NMR-retained physician.

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