You already know that an individual disability policy may nevertheless be governed by ERISA, even when the employee pays her own premium.  This can occur when the employees benefit from a rate structure or premium discount the employer was able to negotiate in obtaining group benefits.

But does ERISA apply when the employee “converts” a group disability policy to an individual policy?

What does “conversion” mean, anyway?  Can the policy merely be a “continued” policy, rather than a “converted” policy?  Does ERISA apply then?  Maybe yes.

These issues are highlighted in the recent case of Henderson v. Paul Revere Life Insurance Company, 2013 WL 1875151 (N.D. Tex May 6, 2013) [PDF] (ERISA applied to individual disability policy because the policy was not “converted” but was merely “continued”.).

FACTS: Dr. Robert Henderson was the sole owner of Henderson PA. He provided all employees group health insurance benefits.  Henderson also obtained an individual disability insurance policy from Great West. This policy was initially owned by Henderson PA.  But when Henderson PA dissolved in 1991, the disability policy reverted to Dr. Henderson himself.  Henderson then joined another medical practice, DS Group, where the group remitted premiums through list billing for a Paul Revere individual disability policy. Henderson received a 15% discount premium for the Paul Revere policy as a result of the group purchase.

Henderson submitted a claim for disability under the Great West and Paul Revere individual disability policies.  The insurers contended the individual disability policies were governed by ERISA.

ISSUES:

-Were the individual policies governed by ERISA?

-Was a converted Policy governed by ERISA?

TRIAL COURT HELD: YES and NO.  The Great West Policy was not governed by ERISA;   But the Paul Revere Policy was governed by ERISA because it was not “converted”—it was merely a “continued” policy.

RATIONALE:

1.           “Under ERISA an ‘employee welfare benefit plan’…means an plan, fund or program…established or maintained by the employer…for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise…benefits in the event of sickness, accident, disability [or] death.”  Op. at 5

2.           “The plan must provide benefits to at least one employee, not including an employee who is also the owner of the business….” Op. at 5.

3.           Dr. Henderson says he was the sole owner and could not be considered an employee. “When an owner purchase a policy benefiting only the owner and no other employees, the policy is not part of an ERISA plan[.]”  Op. at 6.

4.           “Because the Great West policy covered only Dr. Henderson (the owner of Henderson PA) and no other employees…the court concludes as a matter of law that the Great West Policy is not part of an ERISA plan.”  Op. at 8.

5.           But the Paul Revere policy is governed by ERISA. “[E]ven when employees pay their own premiums, an employer nevertheless “contributes” for purposes of the safe harbor provision if the employees benefit from a rate structure or premium discount the employer was able to negotiate in obtaining group benefits.  Op. at 8.

6.           The court concludes as a matter of law that the 15% discount applied to the Paul Revere policy by virtue of the policy’s being list-billed and included in DS Group’s ESP is ‘contribution’ [by the employer]….”  Op. at 9.

7.           “Dr. Henderson received a 15% multi-life discount because he purchased the Paul Revere Policy together with other employees…. Whether he could have received a similar discount ‘if any employer assumed the task of paying the premiums’ is irrelevant to the question whether DS Group provided a ‘contribution’….”  Op. at 9.

8.           “When an employee converts an ERISA plan to an individual plan that covers only the employee as an individual, not as an employee of his former employer, the converted policy is not an ERISA plan.”  Op. at 11.

9.           Conversion of a policy occurs only when “‘an ERISA plan participant leaves the plan and obtains a new, separate, individual policy based on conversion rights contained in the ERISA plan.  The contract under the converted policy is directly between the insurer and the insured.  It is independent of the ERISA plan and does not place any burdens on the plan administrator or the plan.  There are also no relevant administrative actions by the employer.’”  Op. at 11

10.         A new, separate, individual policy was never created.  There was no reason to convert the policy from a group policy to an individual policy because it was issued as an individual policy.  Instead, the policy number and effective date remained the same and Dr. Henderson, post-employment, continued to receive the 15% premium discount.  Op. at 11.

11.         A “continued” policy is not a “converted” policy.  Because the Paul Revere policy was not converted into a new policy after it lapsed, the policy was governed by ERISA. Op. at 12.

The U.S. Supreme Court yesterday strengthened the ability of employer health insurance plans to recoup payments for medical expenses paid for an injured plan participant who later sues to recover damages from a third party.

The case is US Airways v. McCutchen, U.S. Supreme Court, No. 11-1285.

http://www.supremecourt.gov/opinions/12pdf/11-1285_i4dk.pdf

This decision helps resolve a conflict among the federal courts of appeal over whether principles of fairness, or “equity,” can trump a health plan’s terms under the Employee Retirement Income Security Act (ERISA). The decision also will allow companies to draft their contracts to ensure full reimbursement and to avoid having to pay legal fees.

FACTS.  James McCutchen was injured in a car accident. The US Airways benefit plan paid $66,866 for McCutchen’s medical expenses. The ERISA plan had a provision requiring beneficiaries to reimburse for claims “out of any monies recovered from a third party.”  McCutchen hired an attorney and received $110,000 in settlement and underinsured motorist coverage funds. After McCutchen paid his lawyer a 40 percent contingency fee, he was left with a net recovery of $66,000. US Airways sued McCutchen to recover the funds by seeking “appropriate equitable relief under ERISA section 502(a)(3).

McCutchen argued he should not reimburse the US Airways plan because: (1) he had not been made whole by the settlements. The amount he recovered from the other driver and his own auto insurance policy was only a fraction of his $1 million total damages; (2) If the company was entitled to reimbursement, it should also be required to cover its share of the attorneys’ fees. Since McCutchen had paid his attorney 40 percent of the $110,000 he recovered, US Airways should have to reduce the $66,866 it was demanding from McCutchen by 40 percent.

HELD–REVERSING THIRD CIRCUIT: In a 5-4 ruling, the Supreme Court  concluded that as long as a contract gives the health plan administrator the right to full reimbursement from the recovered funds, judges cannot use principles of fairness to rewrite the contract terms to reduce that reimbursement.

Justice Elena Kagan writing for a five-member majority of the Supreme Court rejected McCutchen’s argument that fairness principles should trump the terms of a contract. The fact that McCutchen would not recover his medical expenses did not justify rewriting the contract to reduce US Airway’s reimbursement, the high court found.

However, the majority also found that the health plan contract did not specify how to divide the responsibility for attorneys’ fees in ERISA reimbursement cases. Because the contract was silent on that point, the court agreed to apply fairness considerations and force US Airways to share McCutchen’s legal costs.

The claimant seeking long term disability benefits under your ERISA Plan was found to be disabled by the Social Security Administration.

Does that automatically mean the claimant is entitled to disability benefits under the ERISA Plan? No, but you must explain why you are taking a position different from the Social Security Administration.  Met Life v. Glen, 554 U.S. 105 (2008) highlighted that claims administrators must reconcile the Social Security determination with their ultimate ERISA plan denial. In other words, you cannot ignore the decision, but you are not bound by it.

A  great new blog post explains how disability findings by the Social Security Administration involve different evaluative criteria, and give lots of weight to a claimant’s subjective complaints.  Avik Roy, on The Apothecary Blog, http://www.forbes.com/sites/aroy/2013/04/08/how-americans-game-the-200-billion-a-year-disability-industrial-complex/  explains:

  1. “Congress has dramatically expanded the definition of who gets called ‘disabled.’”
  2. Congress relaxed disability eligibility criteria, giving greater weight to an applicant’s own assessment of disability. In 1984, Congress unanimously passed the Social Security Disability Benefits Reform Act. The SSDBRA instructed the government to: (a) place greater weight on applicants’ own assessments of their disability, especially when it came to pain and discomfort; (b) replace the government’s medical assessments with those of the applicants’ own doctors; and (3) loosen the screening criteria for mental illness, among other things. “The overall effect was to create a giant loophole, by which an applicant’s subjective claim that he was in pain, or mentally incapacitated, would be enough to claim disability.”
  3. Statistics prove that while “Americans may be gaining weight, they suffer from fewer disabling conditions than they did 40 years ago, thanks to advances in medical technology.”  Yet a new investigation shows that compared to 50 years ago “diagnoses that lend themselves to subjective manipulation, like back pain and mental illness, have grown substantially.”
  4. The economic incentive to apply for Social Security Disability is greater than ever. According to published research, “the incentive to apply for [disability insurance] will increase with the rising value of health insurance through Medicare.”  The rising value of disability payments can “explain as much as 20 percent of the growth in [Social Security income] receipt.”

This can help reconcile why a finding of Social Security disability does not automatically render a claimant qualified to receive long term disability benefits under your ERISA plan.

What does “full and fair” review during an ERISA appeal mean?

Before the appeal decision is made, does the administrator have to disclose to the claimant medical opinions obtained during an appeal? Not if that opinion merely reaffirms or supplements the basis for the initial claim denial.

Here’s the recent case of Lee v. Hartford Life & Accident Insurance Company [pdf], __F.Supp.2d__, 2013 WL 794061 (D.D.C. March 5, 2013).

FACTS:  Lee received ERISA disability benefits. Hartford discontinued benefits after a medical review.  Lee appealed.  During the administrative appeal, Hartford obtained another medical opinion regarding Lee’s condition.  Hartford denied the appeal because this second medical opinion reaffirmed the accuracy of Hartford’s rationale for its initial denial of the claim. Hartford did not disclose the second medical opinion to claimant until after the appeal was denied.

Lee sued, claiming she was denied a “full and fair” review.

ISSUES:

  1. Whether Hartford denied Lee a “full and fair review” because it did not disclose a medical opinion obtained during the appeal, until after the appeal was denied?
  2. Can the Claimant “supplement the record” before the trial court under such circumstances? NO.

DISTRICT COURT HELD/Rationale:

  1. Under ERISA, “[a]fter the administrator denies the claim, the administrator must provide the claimant with notice of the decision” and ‘“relevant documents generated or relied upon during the initial claims determination [and] prior to or at the outset of an administrative appeal.’” Op. at 3-5.  Thereafter the claimant must be provided with a ‘full and fair opportunity’ to appeal the decision internally. Op. at 3.
  2. If the appeal is denied, the ERISA regulations require a second round of disclosures. “But ‘[c]onspicuously absent’ from this provision ‘is any requirement that the claimant be given the opportunity to review and rebut the health care professional’s conclusion’ before the administrator denies the appeal.” Op. at 5
  3. The ERISA regulations also state “that disclosure is required after an internal appeal is denied.” Op. at 5 (Emphasis in original.)
  4. Hartford did not “sandbag” claimant. Hartford merely used the second medical opinion obtained during the appeal to “reaffirm the accuracy of its initial denial.” Op. at 5. Where the results of additional tests and reviews do not provide a new basis for terminating the plaintiff’s benefits, but merely supplement its initial reasoning there is no requirement to disclose that information until at or after the appeal is denied.  Op. at 5.
  5. Plaintiff could NOT supplement the trial court record with additional documents beyond the administrative record.  “[H]er right to ‘full and fair’ review does not entitle her to supplement the record with new documents resulting in an essentially de novo review by this court on a new record.” (Op. at 5 Underscore Added).

What happens when the claimant refuses to seek and accept medical care that might enable the claimant to return to work?

Does the claimant have a duty to seek out and accept medical care aimed at returning to work?  YES.

But there are nuances.

Take a look at the recent case of  Metropolitan Life Insurance Company Life v. Cotter,* (Mass. March 15, 2013) (PDF) (Policy’s “Appropriate Care Clause” imposed on claimant the duty to seek out and accept medical care aimed at returning to work; claimant ineligible to receive benefits for failing to accept appropriate care.)

FACTS: James Cotter sought and obtained disability benefits under disability insurance he purchased, and thus was a non-ERISA case. He claimed his anxiety and an Adjustment Disorder rendered him totally disabled. His treater recommended weekly psychotherapy and a review of his medications.  But Cotter refused. Records confirmed Cotter was “not motivated to return to former employment.” An IME confirmed that Cotter should have weekly psychotherapy, with no medications. Met Life commences suit to determine the parties’ right/obligations under the policy.

TRIAL COURT HELD: Cotter was not receiving appropriate care under the terms of the policy, rendering Cotter ineligible for benefits.

SUPREME JUDICIAL COURT of MASSACHUSETTS AFFIRMS:

1.           “[A]n appropriate care clause imposes a duty on the insured to seek and accept care appropriate for his or her “disabling condition.” Whether care is “appropriate” turns on the meaning of the clause “the condition causing the disability.” That clause is to be read in light of the insurance policy as a whole, where “total disability” is defined as the insured’s inability to perform “the material and substantial duties” of the occupation in which he or she was engaged at the time the disability began. An objectively reasonable insured. . . would accordingly understand “the condition causing the disability” to mean the condition preventing the insured from returning to his prior occupation. It follows that care is “appropriate for the condition causing the disability” where, to the extent medically and otherwise reasonable, it seeks to ameliorate the condition preventing the insured from returning to his or her prior occupation.” Op. at 6.

2.           “Care provisions ‘serve the additional purpose of minimizing the insurer’s loss under the policy in cases in which the insured’s disability can benefit from a physician’s care by encouraging ‘insureds to seek prompt medical treatment for their disabling conditions.’”  Op. at 4.

Congratulations to Joseph Hamilton and David Fine on some nice work…

 

*Reprinted from Westlaw with permission of Thomson Reuters.  If you wish to check the currency of this case by using KeyCite on Westlaw you may do so by visiting www.westlaw.com.

Yesterday, Jordan Weissman’s excellent article, “Disability Insurance: America’s $124 Billion Secret Welfare Program,” published March 25, 2013 in The Atlantic,  explains how the number of former workers enrolled in Social Security Disability has doubled in 20 years.  He states:

“Since the early 1990s, the number of former workers receiving payments under it has more than doubled to about 8.5 million, as shown in Planet Money’s graph below. More than five percent of all eligible adults are now on the rolls, up from around 3 percent twenty years ago. Add in children and spouses who also get checks, and the grand tally comes to 11.5 million.”

That rapid, under-the-political-radar expansion has turned the program into a massive budget item. As of 2010, its monthly cash payments accounted for nearly one out of every five Social Security dollars spent, or about $124 billion. In 1988, by comparison, it accounted for just one out of eight Social Security dollars. Because disabled workers qualify for Medicare, they also added $59 billion to the government’s healthcare tab.

Are disabilities just becoming more common? According to economists such as MIT’s David Autor, the evidence says no. The workforce is indeed getting older, and thus more ailment prone. But Americans over 50, who make up most disability cases, report much better health today than in the 1980s. And demographers have found that the percentage of Americans older than 65 suffering from a chronic disability has fallen drastically since then. In the end, economists Mark Duggan and Scott Imberman estimate that, at most, the graying of America’s workers explained just 4 percent of the increase in the rate of disability program participation for women, and 15 percent for men, through 2004.

Instead, it seems two things have happened: Qualifying for disability got easier, and finding work got harder. As the Planet Money piece puts it, “there’s no diagnosis called disability.” According to the letter of the law, disability recipients must prove they are too physically or mentally impaired to hold a job. And early in the program’s life, the most commonly reported ailments were easy-to-diagnose problems such as heart-disease, strokes, or neurological disorders. But after the Reagan administration began trying to thin out the program’s rolls in the early 80s, an angry Congress reacted by loosening its criteria. Suddenly, subjective measures like self-reported pain or mental health problems earned more weight under Social Security’s formula. Today, the most common diagnoses are musculo-skeletal issues, such as severe back pain, and mental illnesses, such as mood disorders — health problems where the line between a disability and a mild impairment is far blurrier.”

You know already that a plan administrator can be liable for statutory penalties under ERISA for failing to provide requested plan documents.

But what if the claims administrator failed to provide documents   Will the claims administrator have to pay statutory penalties?  NO.

But what if an agent of the plan administrator failed to provide documents?  Does the plan administrator have to pay?  NO.

Here’s the case of Delprado v. Sedgwick Claims Management, United Health Group Inc., et al., __ F.Supp. 3d __(N.D. N.Y. March 20, 2013) (Plan administrator immune from statutory penalties under 502(c)(1)(B).)  Special thanks to Professor Roger Baron for noting this on his blog:  (http://erisawithprofessorbaron.com/)

FACTS: Delprado was a claims manager for United Healthcare.  She had joint pain and sought long term disability benefits under the ERISA plan. United Health Care Group, the plan administrator, delegated administration of claims to Sedgwick.  Delprado requested three times that Sedgwick provide forms to file a claim. Four months later, Sedgwick provided the forms. After her claim was denied, she sued seeking reversal of the claim denial and for “statutory penalties” under Section 502(c)(1)(B).

DISTRICT COURT HELD/RATIONALE:

  1. Neither 502(a)(1)(B) or 502(a)(3) encompass “statutory damages.”  “[T]he amount of damages a plan participant or beneficiary can recover under 502(a)(1)(B) is not determined by ERISA itself but by the terms of the plan claimed to have been violated.”  Op. at 7.
  2. A party is liable for statutory damages under 502(d)(1)(B) only if the terms of the ERISA plan specifically designate the party as the ‘plan administrator.’” Op. at 9.
  3. The plan administrator may NOT be penalized because of its agent’s misconduct in failing to provide documents requested by the plan participant. The Court states: “A plan administrator may not be held liable for requests directed to someone other than the administrator.” Giordano v. Thomson, No. 03-CV-5672, 2007 WL 1580081, at *4 (E.D.N.Y. May 29, 2007) (citing Hiney Printing Co. v. Brantner, 243 F.3d 956, 960-61 (6th Cir. 2001)); see also Davenport v. Harry N. Abrams, Inc., 249 F.3d 130, 135 (2d Cir. 2001) (“By its terms, ERISA allows for civil penalties only if an administrator has refused to comply with a request for information.” (emphasis added)). Here, Plaintiff alleges that she made requests for LTD Plan claim forms only to Defendant Sedgwick. Therefore, the Court holds that Defendant UHG, the Plans’ administrator, cannot be held liable under § 502(c)(1)(B) for Defendant Sedgwick’s refusal to provide Plaintiff the claim forms.  Op. at 12.

That subrogation claim you have might be governed by ERISA, at least in some circuits…

Here’s the case of Thurber v. Aetna Life Insurance Company,  __F.3d__ (2nd Cir. March 13, 2013) (Insurer’s counterclaim for return of overpaid benefits was an equitable claim for restitution, falling under ERISA’s jurisdiction).

FACTS. Sharon Thurber broke both legs in an auto accident.  She made a disability claim under an ERISA plan insured and administered by Aetna Life Insurance Company. She informed Aetna that she had received $7,213.92 in no-fault insurance payments. Under the plan, Aetna  could reduce benefits in the amount of other income received, like no fault insurance payments. After Aetna denied her long-term disability claim, and her administrative appeal was denied, Thurber filed a lawsuit challenging the denial. Aetna counterclaimed for equitable restitution of the overpaid short term benefits in the amount of the no fault payments she received.

DISTRICT COURT HELD:

(1) Aetna’s Counterclaim was denied because it was “legal” rather than equitable, and there was no ERISA jurisdiction.

(2) The Court granted Aetna’s denial of long term disability benefits.

SECOND CIRCUIT COURT OF APPEALS— REVERSES in Part

1.   Aetna’s Counterclaim for Reimbursement is “Appropriate Equitable Relief” governed by ERISA.

  • What constitutes “appropriate equitable relief” under 29 U.S.C. §1132(a)(3) “continues to perplex courts despite efforts by the Supreme Court during the past decade to shed some light in the matter.” Op. at 8.
  • Aetna’s counterclaim was equitable in nature because it sought specific funds in a specific amount, as authorized by the plan, that had been entrusted to Thurber and had been in her possession and control. Op. at 10.
  • The court followed the analysis of  First and Third Circuits, rather than the Ninth Circuit. (The Ninth Circuit Bilyeu v. Morgan Stanley Long Term Disability Plan (2012) case held that a similar counterclaim was not equitable in nature because (a) the money being sought was not the actual third party payment, but rather the plan’s overpayment in that amount; and (b) the overpayment had been spent. Op. at 9.

2.         AFFIRMED entry of Aetna’ summary judgment on the benefits denial claim.

Can ERISA apply to the claims made on individual policies purchased with discounted premiums? YES.   

Here is a great new case that highlights the analysis to establish that ERISA applies when employees purchase individual policies, with group discounted premiums. McCann v. UNUM Provident, __ F.Supp. 2d __ (D. New Jersey January 31, 2013)  

FACTS: Dr. Kevin McCann was a resident  and employee at the hospital when he applied for an Individual Supplemental Long Term Disability policy through the Residents’ Disability Insurance Plan. (The policy was to take effect one day after McCann left the Hospital’s employment.) Residents paid all premiums, but received a 15% discount in premium and other discounts, like hospital employees.  When McCann later became disabled, and UNUM terminated benefits, he sued.  UNUM claimed that his claim was governed by ERISA because of the discounted premium and moved for summary judgment.

TRIAL COURT HELD: UNUM’s summary judgment GRANTED—Claim was governed by ERISA.

RATIONALE: 

  1. Whether an ERISA plan exists is a question of fact.  An ERISA plan exists “if from the surrounding circumstances a reasonable person can ascertain the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits.”  Op. at 21.
  2. A reasonable person who was familiar with all of the attendant facts and circumstances could ascertain the intended benefits and beneficiaries, the source of financing, and the procedures for receiving benefits.  Op. at 21-22
  3. The hospital contributed to the plan with the discount. By offering the 15% discount, the Hospital “contributed” to the plan.  “[G]roup discounts applied to employee insurance policies, issued pursuant to an employee welfare benefit plan, constitute employer contributions.” Op. at 24-25.
  4. The hospital “endorsed” the plan.  An employer will be “deemed to have endorsed a program where an objectively reasonable employee … ‘would conclude … that the employer had not merely facilitated the program’s availability but had exercised control over it and made it appear to be part and parcel of the company’s own benefit package.’”  Op. at 26.
  5. By doing something more than merely permitting an insurer to publicize a plan or collecting premiums through payroll deductions, an employer demonstrates a sufficient degree of control over a plan to consider it part of the company’s benefits package. Op. at 27.
  6. The hospital “endorsed” the plan.  It did so by providing materials that established that the hospital  (a)“selected” Unum to provide supplemental disability insurance; (b) “referred” to the program as the Residents’ Supplemental Disability Insurance Plan”; and (c) pledged to provide an opportunity to purchase supplemental long term disability insurance. Op. at 29.
  7. The hospital “established” the plan.  Proving this can be done “rather easily” by showing that the employer did nothing more than making arrangements for a group-type insurance program.  Where multiple policies are purchased, covering a class of employees, this is significant evidence of establishment of a plan. Op. at 30-1.

Here’s a unique twist:

Does that workers’ compensation settlement agreement release the ERISA disability claim?  Probably not, unless the release explicitly mentions ERISA claims and the ERISA Plan.

Here’s the case of Duncan v. Hartford Life and Accident Insurance Company, 2013 WL 506465 (E.D. Cal. February 8, 2013)(workers’ compensation release did not eliminate ERISA disability claim).  This case also has a nice discussion on the issue of standard of review and when the court should remand.  The court remanded, rather than changing the standard of review from discretion to de novo.

FACTS.  Teresa Duncan made an ERISA long term disability claim.  Hartford Life and Accident Insurance Company, administrator of Lorillard Tobacco Company’s plan, paid Duncan disability benefits from 2005 to 2010.

In 2008 Duncan settled her workers’ compensation claim.  She signed a release of all claims, which included language that she would “not be able to go back to the defendant for additional treatment or disability payments….”

Lorillard (not Hartford) contended that when Duncan signed this release she also released her ERISA long term disability claim “after the date” the release was signed.

TRIAL COURT HELD:  Lorillard’s argument went up in smoke:  The worker compensation release did not bar or limit Duncan’s ERISA disability claim.

TRIAL COURT RATIONALE:

1.     Federal law always governs the validity of releases of federal causes of action.  But state decisions “will furnish an appropriate and convenient measure of the governing federal law.”  Op. at 6.

2.     Standard language used in a workers’ compensation claim release applies only to those claims that are within the scope of the workers’ compensation system. Id.

3.     Lorillard has the burden of proving its affirmative defense that the release precludes liability for Duncan’s ERISA claim. Id.

4.     The compromise and release “neither references ERISA or the receipt of ERISA benefits, nor contains language otherwise indicating that the settlement was meant to encompass claims outside of the workers’ compensation system.” Id.

5.     The release does not explicitly mention the ERISA plan by name, nor does it mention ERISA by name Op. at 6-7.