How do you defeat two arguments frequently used to challenge an ERISA-governed disability claim denial?
Argument (1) the rationale for the claim denial changed, or
Argument (2) the denial letter failed to tell claimant what additional information is needed for the claim.
Here’s a nice new case that highlights how to defeat those arguments. Fite v. Bayer Corporation, __ Fed. Appx. __, 2014 WL 407339 (10th Cir. February 4, 2014) (claim denial affirmed).
FACTS: Fite, a pharmaceutical representative, was denied ERISA-governed short term disability benefits, and decided to fight on in court. The plan contained discretionary language, but there was an inherent conflict of interest because Bayer was both the “decider and the payor of the benefits.”
Fite claimed, among other things, that Bayer abused its discretion because Bayer (1) “changed the rationale for it denial” and (2) the appeal denial letter failed to tell her what additional information she could submit to address the Committee’s adverse decision.
10th Circuit HELD:
- Conflict of Interest Standard of Review. The conflict of interest factor was given only limited weight on whether Bayer abused discretion because “Bayer took active steps to reduce any potential bias and to promote accuracy” by seeking an independent review of medical records by four different psychiatrists. Op. at 8-9.
- Changing Rationale for Denial Decision Was Not Abuse of Discretion. Bayer changed the rationale for denial of benefits between the initial and final decisions. That was ok. “The change is readily explained by the new evidence that came to light only during Ms. Fite’s appeal….” This is not like the case where a plan administrator “asserts an entirely new rationale…during the litigation that it did not rely on in the administrative process.” Op. at 9-10.
- Appeal Denial Letters Do Not Need to Tell Claimant What Additional Information is Needed. That is because different regulations govern what needs to be in an appeal denial letter versus the initial denial letter. “Ms. Fite’s complaint that the Committee’s letter…did not tell her what additional information she could submit to address the Committee’s adverse decision relies on a regulation that does not apply to a final decision following an administrative appeal. Compare 29 CFR 2560.503-1(g)(iii) (requiring that initial adverse determination include ‘[a] description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary’), with id. 2560.503-1(h)(2) (setting forth requirements for full and fair review of adverse benefit determination).” Op. at 10.
What happens when a long term disability claimant declares bankruptcy, and fails to list the long term disability claim in the bankruptcy estate?
Is he judicially estopped from bringing the lawsuit alleging wrongful denial of disability benefits? Probably not.
Here’s the case of Javery v Lucent Tech, Inc. Long Term Disability Plan, __ F.3d __ (6th Cir. February 3, 2014).
FACTS: Javery, a software engineer, sought long term disability benefits under an ERISA-governed plan. His claim was denied, after two administrative appeals. In October 2007 Javery declared Chapter 13 bankruptcy. In 2009 Javery brought suit in federal court alleging wrongful denial of long term disability benefits. The court remanded to the plan administrator for further review. The claim was later denied again in 2011. In 2012 Javery then moved to reactivate his case alleging wrongful denial of benefits.
The Plan alleged Javery should be judicially estopped from pursuing his long term disability suit because he failed to list his disability claim in his bankruptcy proceedings.
SIXTH CIRCUIT HOLDS:
- The Court applied de novo review in reviewing the trial court’s application of the doctrine of judicial estoppel. Op. at 13.
- “‘[J]udicial estoppel does not apply where the prior inconsistent position occurred because of ‘mistake or inadvertence.’” Failure to disclose a claim in a bankruptcy proceeding also may be excused where the debtor lacks a motive to conceal the claim or where the debtor does not act in bad faith.” (Citations omitted.) (Emphasis in original.) Op. at 15.
- Plaintiff’s wife prepared the bankruptcy information and any non-disclosure was “at best inadvertent and will be remedied.” Op. at 15.
- Defendant failed to produce any evidence that the Plaintiff’s factual assertions were incorrect. “There is simply no basis to infer intentional concealment.” Op. at 15.
- Under Ohio law, proceeds from a disability insurance policy are completely exempt from a debtor’s estate. “Accordingly, Plaintiff had no motive for intentionally concealing the claim.” Op. at 16.
BY THE WAY, how ‘bout those Seattle Seahawks?
You already know that a Social Security disability (SSDI) decision should be considered in the context of deciding whether the claimant is disabled under the terms of the disability policy.
But what happens when the SSDI decision occurs after you denied the claim, but during the ERISA-governed administrative appeal?
BETTER YET: What happens when the claimant refuses to send you the SSDI determination during the appeal process?
Read this new decision. It seems to lower the claimant’s burden of proving entitlement to disability benefits, and creates more burdens for claim administrators.
Here is the case of Melech v Life Insurance Company of North America, 739 F.3d 663 (11th Cir. 2014)(“LINA had an obligation to consider the evidence presented to the SSA [even though LINA asked the claimant to submit additional information during appeal and claimant refused and] LINA did not have this evidence when it denied her last appeal—and in fact could not have had that evidence when it initially denied her claim….”)
FACTS: Melech, a Hertz station manager, experienced back problems and sought disability benefits under the Hertz ERISA-governed plan, administered by LINA. She concurrently applied for Social Security disability benefits (SSDI). In November 2007 the plan denied her disability claim. Melech’s application for SSDI benefits was still pending at the time of denial. Melech timely filed two administrative appeals.
During the administrative appeals, Melech informed LINA that the Social Security Administration (SSA) had Melech examined by two new physicians, and had granted her SSDI benefits in February 2008. LINA denied her first in appeal in April 2008. LINA invited Melech to submit additional evidence in a second appeal. Melech refused to submit any SSDI information. LINA then denied the second appeal in October 2008, without considering the SSA decision.
Whether an SSA disability determination, issued after initial claim denial, must be considered during an appeal?
Whether the claimant has a duty to send the claim administrator SSDI information?
DISTRICT COURT: LINA’s decision is affirmed. Review was limited to the administrative record before LINA at the time of its final decision. The SSDI determination was not part of the administrative record and the District Court did not consider it.
11th CIRCUIT: REVERSES and REMANDS
- “LINA had an obligation to consider the evidence presented to the SSA [even though LINA asked the claimant to submit additional information during the appeal and claimant refused and] LINA did not have this evidence when it denied her last appeal—and in fact could not have had that evidence when it initially denied her claim….” Op. at 3.
- “LINA made general requests for more evidence, but never asked Melech or SSA—as it was authorized to do by the disclosure authorization form—for any documentation of her SSDI award or any of the evidence that the SSA considered in approving her application.” Op. at 16.
- “We conclude that LINA should have considered the evidence generated by the SSA process….” Op. at 17.
- “LINA refused to wait for the SSA evidence….” Op. at 24.
Here is an excellent post by James Baker at Baker & McKenzie explaining the recent case law that roundly supports instituting arbitration as the mechanism to resolve employee benefit disputes.
Given the current case law which is enforcing class action waivers, arbitration is an excellent way of knocking out ERISA class actions.
You already know that a “church plan” is exempt from ERISA, unless the Plan specifically elects to be governed by ERISA under Internal Revenue Code Section 410(d).
But what does it take to become a “church plan”?
Does ERISA require that the Plan be established by a CHURCH before the “church plan” exemption applies? YES.
Here’s the case of Rollins v. Dignity Health, et al., __ F.Supp. 2d __, 2013 WL 6512682 (N.D. Cal. December 12, 2013)(Court gives no deference to “three decades” of IRS private letter rulings and concludes only a church can establish a church plan).
FACTS: Plaintiff Rollins was employed with Dignity Health, a non-profit healthcare provider associated with the Roman Catholic Church. Rollins sought pension benefits, and contended Dignity Health had failed to comply with ERISA administrative requirements.
Dignity Health contended the Plan was not governed by ERISA because it is a “church plan,” explicitly exempt from ERISA.
ISSUE: Whether ERISA requires a church plan to have been established by a church?
HELD: Dignity’s Pension Plan was governed by ERISA. Dignity did not qualify for the “Church Plan” exemption because it is not a “Church.”
- “Text (of the ERISA statute) and the history confirm that a church plan must still be established by a church. Because Dignity is not a church or an association of churches, and does not argue that it is, the Court concludes that Dignity does not have the statutory authority to establish its own church plan….” Op. at 12.
- “[T]he Court declines to defer to the IRS’s (‘three decades’ of) interpretation of the ERISA statute here.” Op. at 5.
- “The IRS’s private letter rulings apply only to the persons or entities who request them and are not entitled to judicial deference.” Op. at 5.
- “[W]e must presume that Congress acted intentionally in using the words ‘establish and maintain’…as something only a church can do.” Op. at 8.
- “The Court acknowledges that the position it takes here runs contrary to several cases outside this circuit….” Op. at 9
KEY TAKE AWAY: Watch out for this case in ERISA pension litigation. The decision may also play an important role in Long Term Disability litigation, as it supports a substantial narrowing of the Church Plan exemption.
Are those three year suit limitations provisions in ERISA-governed long term disability plans enforceable? YES!
Here’s today’s case, Heimeshoff v Hartford Life & Accident Insurance Co., __ U.S. __ (December 16, 2013) (“3 year from time proof of loss must be submitted” suit limitation provision enforced as reasonable).
FACTS. Heimeshoff made an ERISA-governed long term disability claim on August 22, 2005. The claim, administered by the Hartford, was denied. Then Heimeshoff received extensions to file an appeal by September 30, 2007. The appeal was denied on November 26, 2007.
The plan had a suit limitations provision which reads: “Legal action cannot be taken against The Hartford…[more than] 3 years after the time written proof of loss is required to be furnished according to the terms of the policy.”
Heimeshoff filed suit on November 18, 2010.
ISSUE. Was Plaintiff’s claim barred by the Plan’s limitations provision? YES
United States Supreme Court Rationale:
- “ERISA Section 502(a)(1)(B) does not specify a statute of limitations. Instead, the parties in this case have agreed by contract to a 3 year limitations period.” Op. at 5.
- “‘[I]n the absence of a controlling statute to the contrary, a provision in a contract may validly limit, between the parties, the time for bringing an action on such contract to a period less than that prescribed in the general statute of limitations, provided that the shorter period itself is a reasonable period.’” Op at 6.
- “We must give effect to the Plan’s limitations provision, unless we determine either the period is unreasonably short, or that a ‘controlling statute’ prevents the limitations provision from taking effect.” Op. at 9.
- “We hold that the Plan’s limitations provision is enforceable.” Op. at 16.
Key Take Aways: The opinion addresses a number of legal and theoretical objections to suit limitations provisions, and rejects them. The decision also provides excellent language emphasizing that ERISA plan language should be enforced. This is a very helpful decision from the Supreme Court.
Wow—You need to know what happened last week in the Sixth Circuit:
Disgorgement of profits as a remedy in an ERISA long term disability case?
Rochow v. LINA, __ F.3d __, 2013 WL 6333440 (6th Cir. December 6, 2013)(In a 2-1 decision, Court concludes disgorgement of unjust enrichment ($3.8m) is an appropriate equitable remedy under ERISA in a long term disability case).
It’s not over, however. As an outsider looking in, one can expect that petitions for en banc review likely will follow.
FACTS: Rochow filed a long term disability claim. He appealed the denial three times. Rochow then filed suit and the District Court concluded LINA abused its discretion when it denied benefits. LINA appealed, and the Sixth Circuit affirmed and remanded.
Then, Plaintiff filed a “motion seeking an equitable accounting and a request for disgorgement.” Plaintiff claimed disgorgement of profits was appropriate because LINA breached fiduciary duties and that disgorgement was necessary to prevent LINA’s unjust enrichment resulting from profits it earned on wrongfully retained benefits. Plaintiff presented an “expert” who opined on a calculation of unjust enrichment damages.
LINA argued, among other things, that disgorgement is inappropriate because equitable relief under Section 502(a)(3) is available only when Section 502(a) fails to provide an adequate remedy.
The District Court ordered disgorgement of $3.8 million.
ISSUE: Is disgorgement an appropriate equitable relief in a long term disability claim? YES
6th Circuit Rationale (with Dissent):
- “Nothing in ERISA itself or Varity [Corporation v. Howe, 516 U.S. 489 (1996)] limits this Court to allowing remedies under Section 503(a)(3) that focus on plaintiff’s injuries.” Op. at 15.
- “[T]he remedy of disgorgement of profits under Section 502(a)(3) was recognized by the Eighth Circuit…. Accordingly, we hold that disgorgement is an appropriate remedy under Section 502(a)(3) and can provide a separate remedy on top of a benefit recovery.” Op. at 16.
- “Disgorgement does not result in double compensation….” Op. at 15.
- There is a long discussion on how an expert calculates “unjust enrichment” for purposes of disgorgement of profits. Op. at 18-23.
- The decision “undermines ERISA’s remedial scheme and grants an astonishing $3,797,867.92 windfall under the catchall provision in Section 502(a)(3).” Op. at 25.
- “Both the Supreme Court and this Circuit have interpreted ERISA to prevent such double recoveries.” Op. at 26.
- “The majority’s ruling works a fundamental change in the interplay between Section 502(a)(1)(B) and Section 502(a)(3). This is not authorized by Supreme Court precedent.” Op. at 26.
- “Plaintiff was made whole when he was paid his disability benefits and attorney’s fees.” Op. at 25.
Key Take Aways:
- There are lots of problems with this split decision. The decision makes no sense when viewing the historical precedent on availability of equitable relief under ERISA. Besides that, denying a benefit should not be viewed, on its own, as a breach of fiduciary duty. But that is what this majority seems to allow.
- Look for the Plaintiff’s bar to grab this case and add another cause of action for disgorgement.
PROBLEM: During the claim process your claims administrator mistakenly tells the claimant that the ERISA-governed plan is NOT governed by ERISA. Uh oh.
Do you lose ERISA as the governing law over the policy and claim? NO. This rule makes a lot of sense. Claims administrators have a tough job, and sometimes clerical mistakes can be made. The courts seem to understand this.
Here the case of Hill v. Lincoln National Life Insurance, [PDF] __ F. Supp.2d __, 2013 WL 5863007 (N. D. Cal. October 30, 2013) that illustrates the point.
FACTS. Hill made a claim for long term disability benefits. Defendant contended the claim was governed by ERISA. During the claims process, however, a claim summary incorrectly stated the claim was “non-ERISA” and that a Legal Referral form incorrectly stated “Group is Non-ERISA.” Plaintiff contended that the insurance policy was not an ERISA plan because of these statements in the claim file.
ISSUE. Whether incorrect statements by the claims administrator (that the policy is “non-ERISA”) estop the plan from arguing that ERISA applies.
HELD: Mistaken statement or writings cannot change the application of ERISA.
- If the plan was originally governed by ERISA, “employee statements or writings opining on legal determinations that are not binding admissions of an insurer …do not determine the interpretation of an insurance contact.” Op. at 7.
- “To establish estoppel, Plaintiff must show that she justifiably relied on the statements. Here, there is no evidence that Plaintiff even knew about these documents before discovery in this case, much less relied on them.” Op. at 7.
- The real debate in the case was whether the documents and practices satisfied requirements to establish that ERISA governed the insurance policy. The opinion has a good discussion about what it takes to make sure the court considers the policy to be governed by ERISA. In this case the court concluded it was a “triable issue of fact” whether ERISA governed the insurance policy. See Op. at 8-9.
What language is needed in the ERISA plan to confer discretion?
The bar was just raised in the 4th Circuit.
Here’s the case of Cosey v. Prudential Insurance Company of America, [PDF] __F.3d__ (November 12, 2013).
FACTS: Cosey was a marketing manager, eligible for short and long term disability (LTD) benefits under the company ERISA plan. The LTD plan, administered by Prudential, stated that benefits will be paid only if the claimant “submit[s] proof of continuing disability satisfactory to Prudential” (emphasis added).
ISSUE: Does the language confer discretion, or does the de novo standard of review apply?
4th CIRCUIT HELD: De novo review applies—the language did not confer discretion.
- “[F]ive of our sister circuits recently have held that this language does not unambiguously confer discretionary authority…. We agree with the conclusions reached by the five sister circuits.” Op. at 7.
- “[T]he phrase ‘proof satisfactory to us’ is inherently ambiguous. Op. at 7-8
- The phrase does not clearly confer discretion because “such a construction…would not be an insured employee’s ‘most likely’ interpretation of that language.” Op. at 8.
- [A]mbiguities in an ERISA plan must be construed against the administrator responsible for drafting the plan.” Op. at 9.
- The court sidesteps language in Gallagher v. Reliance Standard, 305 F.3d 264, 268, 269 (4th Cir. 2002). There, the 4th Circuit stated that plan language requiring that a claimant submit “proof…that is satisfactory to [the plan administrator]” would “occasion abuse of discretion review.” But in this case the 4th Circuit stated the language in Gallagher was “dictum and does not bind our consideration of the plan language before us.” Op. at 7.
What does it take to assert an effective exhaustion of remedies defense in ERISA cases? Properly drawn plan documents that expressly impose the duty upon the claimant to exhaust remedies before bringing a lawsuit.
Here is an excellent blog post by one of the true experts in the field, Stephen Rosenberg, and his Boston ERISA & Insurance Litigation Blog.
1. The Second Circuit may have weakened the “failure to exhaust administrative remedies” defense.
2. In addition to the Second Circuit, two other “circuits have held that, where a plaintiff reasonably interprets the plan terms not to require exhaustion and, as a result, does not exhaust her administrative remedies, the case may proceed in federal court.”
3. “[T]here have been a smattering of decisions over the years . . .finding that an administrator cannot insist on particular internal claim procedures if the plan documents themselves do not clearly impose them.”
4. KEY TAKE AWAY: “Properly drawn plan documents, which clearly imposed such an obligation, would have been sufficient to preclude the Court’s ruling, and to allow the plan to prevail solely on the ground that the participant had failed to exhaust administrative remedies available under the plan.”