Are in-house consultations on plan term interpretation, before a final appeal denial, privileged and confidential?  NO says the Ninth Circuit…

Here’s the attached case of Stephan v. Unum Life Insurance Company of America, __F.3d__, 2012 WL 3983767 (9th Cir. September 12, 2012) that highlights the point.

 The case also shows that:

  •  an Insurance Commissioner’s ban on discretion language may not affect a plan that is “amended” rather than having a “new” policy added;
  •  “bonus” might be considered in calculating “basic monthly earnings” in some circumstances.

FACTS: Plaintiff Stephan earned $200,000 annually, plus a $300,000 guaranteed annual bonus.  He became permanently disabled and a quadriplegic after a biking accident. His employer’s long term disability plan was underwritten and administered by UNUM. The plan conferred discretion.  Unum paid benefits using his monthly salary (and did not consider the bonus) in calculating the “basic monthly earnings” calculation.

Stephan claimed Unum should have included his annual bonus in the benefit calculations.  His appeal was denied and he sued.

Stephan contended discretionary review should not apply because: (1) California Settlement Agreement with Unum and California rules ban discretionary review and (2) discretionary review is against public policy.

Stephan also sought discovery of internal memos between claims analysts and in-house counsel (before his final appeal) about how the insurance policy ought to be interpreted and whether the bonus ought to be considered as “monthly earnings.”

District Court Held:

  1. Discretionary review applied and Unum’s conflict of interest did not weigh heavily in decision-making process.
  2. Summary judgment granted: Unum did not abuse its discretion in the benefit calculation.

Ninth Circuit Court of Appeals Reverses.

1.       Discretionary review applies and the Insurance Commissioner ban on discretionary language has no effect because:

  • The old policy containing discretionary language merely had been amended.  It was not a “new” policy. Op. at 6
  • The 2007 California Insurance decision does not void all discretionary clauses in policies issued or renewed. This policy form was written and approved by the Insurance Commissioner in 1991. After Unum and California reached a settlement agreement, the policy was re-approved.
  • Because the policy was a renewal, the Plan could contain discretionary language and be in compliance. Op. at 6.
  • Because the Plan had been approved by the Insurance Commissioner, it must be “conclusively presumed to comply” with California Law.  Op at 6.

2.       Weighing Conflict—Bench Trial with Evidence Outside Record.

  • Unum’s dual role as administrator and insurer created structural conflict. Op. at 8
  • The trial court should weigh the effect of conflict “in a light most favorable” to the claimant.  Op. at 8. The trial court did not do this.
  • The trial court may need to hold a bench trial to determine the impact of Unum’s conflict of interest.  Op. at 8.
  • The court should permit evidence outside of the administrative record, including internal memoranda between claims analyst and in-house counsel. Op. at 9.

3.      Discoverability of Internal Unum Documents with In-House Counsel Prior to Final Appeal are Not Privileged.

  • Stephan sought discovery of internal memos between claims analysts and in-house counsel about how the insurance policy ought to be interpreted and whether the bonus ought to be considered as “monthly earnings.” Op. at 10
  • The documents “offer advice solely on how the Plan ought to be interpreted [and] do not address any potential civil or criminal liability…”.
  • “[I]t is not until …after the final administrative appeal that the interests of the Plan fiduciary and the beneficiary diverge.”  Op. at 10-11.
  • Communications prior to a final appeal decision are not “preparation for litigation” and therefore are not privileged. Op. at 11.

4.      What is Gross Monthly Benefit?  Include the bonus.

  • The “central question…is not whether Stephan was entitled to receive his bonus in its entirety, but whether he earned it on a pro rata basis each month as part of his income.” Op. at 14  (Emph. In original).
  • Unum relied on evidence from the offer letter, premiums paid, and interviews with the employer to conclude the bonus was not to be considered monthly income.  Op. at 13-14.  The Court rejected this analysis.
  • “[T]he record confirms that [the employer] understood Stephan’s bonus as part of his monthly earnings, and therefore as earnings upon which disability payments ought to be calculated.” Op. at 14.