McKennon Law Group, Author at McKennon Law Group

Since 2004, when the California Supreme Court ruled that a “portion” of contingency attorney’s fees are recoverable in bad-faith insurance cases, plaintiffs and their lawyers have been able to recover attorney’s fees based in part on the specific terms of the contingency-fee retainer agreement. For starters, in order to recover attorney’s fees in these actions, a policyholder must prove that (1) contractual benefits were withheld in bad faith, and (2) reasonable fees were incurred by the policyholder to recover those benefits. However, any attorney’s fees incurred merely to prove the alleged “bad faith” claims are not recoverable at all; only fees incurred to prove actual coverage are recoverable. Cassim v. Allstate Insurance, 33 Cal.4th 780, 811 (2004).

In Cassim, plaintiffs Fareed and Rashida Cassim purchased a home in Palmdale in 1989 and insured the property against loss with Allstate Insurance. In December 1990, a fire (later determined to be arson) caused damage to the home. Although the fire burned only in the master bedroom and kitchen, the extensive heat, smoke and water damage to the rest of the structure rendered the entire home uninhabitable. After plaintiffs proved “bad faith” on the part of Allstate Insurance, a jury awarded plaintiffs a combined $3,594,600 in compensatory damages and $5 million in punitive damages. The plaintiffs’ attorney had a 40%-contingency-fee agreement.

The Cassim court held that a proper calculation of attorney’s fees requires the trier of fact to determine the percentage of fees attributable to securing just the contract recovery. This formula is based on the percentage of the attorney’s overall efforts devoted to the contractual recovery portion of the case and is divided into three categories: contract claim only, bad-faith claim only, and both claims. The Supreme Court remanded the case to the trial judge to make the calculation.

Using hypothetical numbers, and assuming a total compensatory award of $1 million, the 40% contingency fee would be $400,000. If the policyholder’s lawyer spent 1,500 total hours on the case and can prove the breakdown as follows: 200 hours on the contract claim only, 800 hours on the bad-faith claim only and 500 hours on both claims, then the trier of fact could, reasonably, conclude that one-half of the hours spent on the joint “contract and bad faith” issues are fairly attributable to the contract; i.e., half of 500 hours, or 250 hours, plus the 200 hours from the contract claim only, would total 30%. That 30% of the total attorney’s fee ($400,000) would be recoverable as well: $120,000 extra paid to the plaintiffs.

However, the Cassim court also cautioned judges to disregard fee agreements designed solely to manipulate the calculation of recoverable costs to the policyholder’s benefit, as have been shown to exist in some cases in the intervening years. For instance, the case of Pulte Home Corporation v. American Safety Indemnity, 14 Cal.App.5th 1086 (2017) disallowed a last-minute modification of a fee agreement from contingency to hourly, as an improper attempt to inflate the attorney’s fee (and punitive damage) award. This case involved the development of two residential housing projects that were built beginning in 2003 and sold between 2005-2006. The various subcontractors were required to name the developer as an “additional insured” on their policies, some of which were issued by American Safety. In 2013, several homeowners sued Pulte for alleged defects in the work performed by the subcontractors who were insured by American Safety. American Safety denied coverage and refused to provide a defense to Pulte because the construction had taken place 10 years prior.

Pulte sued American Safety, and prevailed on the “bad faith” claims, but American Safety then appealed the trial court’s award of attorney’s fees and punitive damages as violating the dictates set forth in the Cassim case, specifically improperly attempting to inflate the attorney’s fee (and punitive damage) award. Pulte’s lawyer in the bad-faith case originally had entered into a contingency-fee agreement with Pulte, which would have resulted in a fee award of only $371,000 under the Cassim formula, set forth above.

After the trial on bad faith, but before the punitive damage phase, Pulte “modified” the fee agreement to be based on an hourly rate instead and, thereafter, claimed an additional $274,000 in attorney’s fees actually incurred and paid, for a total of $645,000. The trial court disagreed with American Safety’s assertion that the change in the fee agreement was to manipulate the process. After making deductions for fees unrelated to pursuing amounts due under the insurance contract, the trial court awarded Pulte $471,313.52 in attorney’s fees. Based on the one-to-one ratio with attorney’s fees, the trial court also awarded $500,000 in punitive damages.

The Court of Appeal reversed, stating, “We have serious concerns that this change in Pulte’s fee agreement was apparently ‘designed to manipulate the calculation of Brandt fees’ to the plaintiff’s benefit.” Id. at 1132. The court also rejected Pulte’s argument that, because Pulte had actually incurred and paid the hourly fee, that amount must be considered as the proper amount for the attorney-fee award. The court concluded that the judge should have based the attorney-fee award on the agreement in force during the trial and, therefore, remanded the case to recalculate the proper amount of attorney’s fees (and to adjust the punitive damage award, since because it was based on the improper attorney-fee award). Id. at 1133.

The good news for plaintiffs’ attorneys is that any “bad faith” case can be prosecuted under a contingency-fee agreement, based on the Cassim case, and an award of attorney’s fees based on that fee agreement may be possible. California courts continue to define the outlying boundaries for recovering contingency attorney’s fees, but at least there is no question that “reasonable” fees (attributable to proving actual coverage) are recoverable.

McBean v. United of Omaha Life: Judge Anello Finds Employer Liable for Breach of Fiduciary Duty, Orders Payment of Life Insurance Policies’ Face Value under Equitable Surcharge Theory

Application of the doctrine of “equitable surcharge” in ERISA has become a very significant theory of recovery for ERISA plan participants in obtaining their life insurance and medical insurance benefits. In a recent decision by the U.S. District Court for the Southern District of California, McBean v. United of Omaha Life Insurance Company, 2019 WL 1508456, the ERISA surcharge theory was used to overturn the denial of a life insurance claim, thus salvaging substantial life insurance benefits that would otherwise have been lost through breach of fiduciary duty and misrepresentation.

In McBean, the Plaintiff won a significant victory in a case involving a claim for life insurance benefits under an ERISA-governed plan. The Plaintiff’s mother (“Decedent”) was covered by United of Omaha’s (“United”) Basic Life Insurance Policy and Voluntary Life Insurance Policy (“Policies”). United was the Claims Administrator, and the Plan Administrator/fiduciary was the employer By Referral Only, Inc. (“Referral”). The benefits at issue under the Policies were $43,550.00 and $100,000.00. At the age of 67, the Decedent was diagnosed with breast cancer, and left work on June 9, 2015 to have surgery. She returned to work part-time thereafter, but by August 10, 2016, she had to stop working, and died on August 5, 2017. United accepted the premium payments for the Policies made by Referral up to the date of the Decedent’s death.

According to the Policies, coverage ends “the last day of the month in which … [y]ou are no longer Actively Employed….” To be “Actively Employed” according to the Policies means to work 40 hours or more per week regularly, and to receive “compensation from the Policyholder for work performed for the Policyholder.” Among other provisions involving eligibility and enrollment updates, the Policies required Referral to inform United when an employee’s eligibility status changes, and they contained a conversion provision that allowed the covered employee to apply for an individual policy without providing health information. On February 6, 2017, the Decedent was granted long-term-disability benefits retroactive to September 6, 2015. On August 21, 2017, the Plaintiff (as trustee of his mother’s trust) submitted a claim to United for benefits under the Policies. United denied the claim, responding that the Policies were “not in force at the time of [Decedent’s] death on August 5, 2017” because she was no longer working. The Plaintiff appealed, explaining that Referral’s managing director told the Decedent and her family that the company would ensure payment of the premiums. On December 12, 2017, United affirmed its earlier claim decision that the Decedent was no longer covered when she died, and then it refunded the premiums Referral had paid for the Decedent during her period of ineligibility.

The Plaintiff filed an ERISA lawsuit setting forth a claim for breach of fiduciary duty against United and Referral. The Plaintiff’s first argued that United had waived the “active employment” eligibility requirements (which, on their own, would mean that the Decedent’s coverage had ended in June 2015 for the Voluntary Life Policy and June 2016 for the Basic Life Policy) because it continued to accept premiums even though it knew that the Decedent was not actively employed. The Plaintiff also claimed that United had waived the “written notice” requirements for extension of coverage. However, the court found that such an argument would create coverage where it did not exist in the Policies, and found as well that the Plaintiff had not shown sufficient evidence of “an intentional and voluntary relinquishment of United’s right to require a written request for continued coverage . . . .”

With regard to the Plaintiff’s claim for equitable surcharge under 29 U.S.C. Section 1132(a)(3) against United for breach of fiduciary duty—a remedy that would provide “compensatory damages for actual harm caused by . . . breach of duty”—Plaintiff argued that United had a duty to develop a system to confirm eligibility before it accepted premiums, rather than waiting until a mistake occurred to implement a system. Citing Fink v. Union Cent. Life Ins. Co., 94 F.3d 489, 492 (8th Cir. 1996), the court rejected that argument, finding that “United had no duty to train or supervise Referral because United did not have the authority to select or remove the plan administrator.” In addition, Referral was responsible for determining eligibility and updating United on which employees should be covered under the Policies.

Referral was also found to be a fiduciary under the policy because it is the plan sponsor and plan administrator, and breach of duty, the court ruled, was indicated by Referral’s misrepresentation to the Decedent that she would continue to have life insurance coverage. That promise was false and material and led to “detrimental reliance by the plaintiff.” In re Computer Scis. Corp. ERISA Litig., 635 F.Supp.2d 1128, 1140 (C.D. Cal. 2009). The standard for material misrepresentation involves “a substantial likelihood that it [the misrepresentation] would materially mislead a reasonable employee in making an adequately informed . . . decision.” (Id. At 1141.) With respect to detrimental reliance, that standard was met because the Decedent, trusting in what Referral told her, “lost the opportunity to convert or port her coverage, or obtain coverage she wanted through another channel, such as on the individual market for life insurance.”

It is noteworthy that the court rejected Plaintiff’s claim of derivative liability on the part of United based on Referral being its agent, and granted summary judgment in favor of the Plaintiff onhis claim against Referral in the amount of the Policies’ combined face value, $143,550.00; it also allowed Plaintiff to file a motion for reasonable attorneys’ fees and costs. It appears that Plaintiff’s counsel did not cite important and relevant Ninth Circuit authority that clearly would have made the insurer liable for the acts of the employer (this is why it’s important to hire the best ERISA lawyers in California, the McKennon Law Group PC). Even though the court awarded summary judgment against the employer on all claims but one, that one claim for the value of the life insurance policies under the doctrine of equitable surcharge proved invaluable for the family of the deceased employee.

The topic of attorneys’ fees has long been of interest to insurance lawyers and clients alike. Recently, the courts have grappled with issues such as: When are attorneys’ fees recoverable? What types of billing practices are reasonable? What are reasonable hourly rates? Attorneys want the assurance that the fees they charge will be deemed “reasonable,” and defendants (the insurance companies) want to know when they can raise defenses to the amount of an attorneys’ fees they may be expected to pay. In this article, we will consider a recent case that has helped bring some clarity to the issue of “reasonable” fees for legal work. Robert J. McKennon of McKennon Law Group PC acted as an expert in this case as to reasonable hourly rates. The court adopted his testimony in full.

In a recent decision by the U.S. District Court for the Central District of California, Harlow v. Metropolitan Life Insurance Company, 2019 WL 2265136, the Plaintiff successfully challenged the insurer’s decision to terminate her long-term disability payments. She then moved for attorney’s fees, with each side submitting multiple declarations and exhibits for or against specific amounts and practices. There was no question about the court’s discretionary authority to award reasonable attorneys’ fees in an ERISA case, and case law holds that a court must initially determine whether the plaintiff has “achieved some degree of success on the merits.” Simonia v. Glendale Nissan/Infinity Disability Plan, 608 F.3d 1118, 1119 (9th Cir. 2010). That success must go beyond a victory on mere procedural issues or some “trivial” matter. Beyond this test, a court must consider the five factors derived from Hummell v. S. E. Rykoff & Co., 634 F.2d 446, 452 (9th Cir. 1980). These “Hummell factors” are as follows:

(1) the degree of the opposing parties’ culpability or bad faith;

(2) the ability of the opposing parties to satisfy an award of fees;

(3) whether an award of fees against the opposing parties would deter others from acting under similar circumstances;

(4) whether the parties requesting fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA; and

(5) the relative merits of the parties’ positions.

The Harlow court ruled that the Plaintiff was entitled to reasonable attorney’s fees, pointing out that MetLife itself made no argument denying the Plaintiff had “achieved success on the merits of her action,” nor cited any “special circumstances” that might have precluded the fee demand. Moreover, the Hummell factors only apply when the merits of the Plaintiff’s claim are still under serious consideration.

The court next addressed what makes an attorney’s fee “reasonable.” A reasonable fee is determined by means of “a hybrid lodestar/multiplier approach.” McElwaine v. US West, Inc., 176 F.3d 1167, 1173 (9th Cir. 1999) (citations omitted). A lodestar amount is determined by “multiplying the number of hours reasonably expended by each attorney’s reasonable hourly rate.” Id. This determination notwithstanding, a court would be within its rights to disallow “excessive, redundant, or otherwise unnecessary” claims. Id. When—as in Harlow—a Plaintiff seeks an award of $184,750 for attorneys’ fees, the issue of “reasonableness” deserves scrutiny. The court first cited case law in favor of looking to “the prevailing market rate for similar services ‘by lawyers of reasonable comparable skill, experience, and reputation.’” Mardirossian v. Guardian Life Ins. Co. of Am., 457 F.Supp.2d 1038 (C.D. Cal. 2006), citing Blum v. Stenson, 465 U.S. 886, 895 n.11 (1984). The Plaintiff’s counsel charged $400 per hour, a figure she reached upon making partner, while her fellow counsel billed at $700 per hour. The court found these sums reasonable due to the respective attorneys’ long experience with ERISA claims. In support of the Plaintiff’s counsel on this matter of relevant experience, Robert J. McKennon, managing shareholder of The McKennon Law Group PC, submitted evidence via testimony based on his more than thirty years in insurance law and ERISA law, especially in the areas of life, disability and health.

In opposition to MetLife’s assertion that the fees quoted run contrary to “policy considerations” and ERISA’s purpose “to provide inexpensive, expeditious resolution to disputes concerning qualifying employee benefit plans” (citations omitted), the court pointed to the Ninth Circuit’s determination that courts should not arrive at an appropriate rate “by reference to the rates actually charged the prevailing party” but instead “by reference to the fees that private attorneys of an ability and reputation comparable to that of prevailing counsel charge their paying clients for legal work of similar complexity.” Welch v. Metro. Life Ins. Co., 480 F.3d 942, 947 (9th Cir. 2007). With regard to the claim made by MetLife about ERISA’s public policy imperative, the court again cited the Ninth Circuit, which determined that among ERISA’s goals were “protect[ing] employee rights” and “secur[ing] access to federal courts.” Smith v. CMTA-IAM Pension Trust, 746 F.2d 587, 589 (9th Cir. 1984). The court found that allowing “reasonable” attorneys’ fees would in fact help clients gain such access. If attorneys cannot charge the prevailing rate, they might be unwilling to take on ERISA clients, which would effectively deprive such clients of access to the courts.

MetLife also made a number of unavailing arguments against the sums charged by the Plaintiff’s counsel. MetLife argued that the hours billed were excessive, duplicative, overly reliant on prefabricated “boilerplate” language, prone to non-itemized block-billing, and inclusive of inappropriate administrative or merely clerical labor. The court’s responses to these concerns testified to the complexity and dynamic quality of the labor involved in lawyering, and affirmed the awarding of reasonable attorneys’ fees to be in line with ERISA’s overarching purpose: providing plaintiffs with access to the federal court system in their attempts to recover benefits to which they believe they are entitled. With respect to supposedly “duplicative” hours billed, the court cited case law: “a lot of legal work product will grow stale; a competent lawyer won’t rely on last year’s, or even last month’s, research.” Moreno v. City of Sacramento, 534 F.3d 1106, 1112 (9th Cir. 2008). Essentially, the court inferred that since the law itself changes, so must an attorney’s research undergo diligent updating. As for the tendency of several lawyers to work on the same set of tasks, while the court acknowledged it as a genuine concern, it found that where there is appropriate division of labor among the attorneys—in their example from the present case, one attorney drafts a document while others review it carefully—there is little need to worry about the reasonableness of work thus accomplished. The court deducted only $2,100 from the total of the Plaintiff’s counsel’s fees, stemming from a charge of 7.8 hours for half a day’s mediation work. With regard to the issue of “boilerplate” language in legal pleadings and other documents, the court accepted the view of the Plaintiff’s counsel that not using such language would only have occupied more of their time: “the time spent preparing this Motion would have been substantially greater had they not efficiently re-used past efforts.” Finally, the court did not find that the Plaintiff’s counsel’s block-billing reached the point where a reviewer could not tell “how much time was spent on particular activities,” and neither did it accept MetLife’s argument that preparing subpoenas using partially recycled language, or preparing exhibits, was too “clerical” to call for an attorney’s full hourly fee.

In summary, the court’s decision prevents defendant insurers from too easily challenging the fees claimed by counsel in their efforts to help ERISA clients recover duly owed long-term disability benefits.

When insurance companies, including those offering disability, life, health or accidental death policies, engage in conduct that is sufficiently egregious, a court may award punitive damages against the insurance company. California Civil Code Section 3294 (“Section 3294”) provides that where the defendant is guilty of oppression, fraud or malice, the plaintiff may recover punitive damages for the sake of example and by way of punishing the defendant. If the defendant is a corporation, such as an insurance company, the defendant is liable for punitive damages if the act of oppression, fraud or malice was authorized or ratified by an officer, director or managing agent of the corporation or if the officer, director or managing agent was personally guilty of such conduct. While it may be relatively simple to determine who would qualify as an officer or director of a corporation, the question of who qualifies as a managing agent is notably less clear.

In a recent decision by the California Court of Appeal, Mazik v. GEICO General Insurance Company, No. B281372, (May 17, 2019), the Court concluded that a regional liability administrator who had broad authority over the settlement of a large number of claims qualified as a “managing agent” to support an award of punitive damages against GEICO General Insurance Company (“GEICO”). The Court affirmed the trial court’s decision approving punitive damages of $1 million to the plaintiff for GEICO’S bad faith conduct in handling an underinsured motorist claim. The Court also found that the award of $1 million was within the constitutionally permitted range in view of the degree of reprehensibility of GEICO’s actions.

On August 11, 2008, Michael Mazik was involved in a serious automobile accident in which he sustained a comminuted fracture of his left heel bone which ultimately resulted in a left foot deformity, chronic pain, difficulty walking and a severely restricted range of motion in his left foot. At trial, Mazik’s medical expert testified that the injury to his heel was “devastating” and that the severe nature of Mazik’s injury was apparent from the doctors’ diagnoses “right from the beginning” as a comminuted fracture refers to a fracture producing many pieces of bone. Mazik submitted a claim to GEICO under his own underinsured motorist policy for $50,000 which represented the full policy limits of $100,000 offset by a $50,000 settlement he had already received from the driver of the other vehicle involved in the accident.

After receiving Mazik’s demand, a GEICO claims adjuster obtained approval from GEICO’s regional liability administrator, Lon Grothen (“Grothen”), to reject the demand and offer Mazik $1,000 to settle his claim. Approximately eight months later a new claims adjuster was assigned to the file and increased GEICO’s settlement offer to $13,800. Four months later, GEICO increased its offer to $18,000. On May 23, 2011, GEICO conducted an independent medical evaluation (“IME”) of Mazik. GEICO’s medical examiner determined that Mazik’s injury did not restrict his occupation as a teacher, that no further medical care was indicated and that Mazik’s prognosis was good. The claim went to arbitration in April 2013 and Mazik was awarded the full policy limits.

Mazik later filed a bad faith action against GEICO. In July 2016, a jury returned a verdict in favor of Mazik and awarded him $313,508 in compensatory damages and $4 million in punitive damages. The trial court reduced the amount of punitive damages to $1 million. GEICO appealed the award of punitive damages.

In upholding the award of punitive damages, the appellate court in Mazik determined that there was sufficient evidence in the record to show that GEICO’s managing agent ratified conduct warranting punitive damages. The plaintiff had argued that Grothen, who was a regional liability administrator for Orange County, Los Angeles, San Bernardino and Alaska, was a managing agent based upon his broad regional authority over adjusters and managers in cases up to $100,000. In analyzing the issue, the Court first turned to Section 3294 which establishes the legal standard for punitive damages in California. Section 3294 provides, among other things, that a corporate employer can be liable for punitive damages based on the acts of an employee if an officer, director or managing agent of the corporation authorized or ratified the wrongful conduct. The Court cited to White v. Ultramar, Inc., 21 Cal.4th 563 (1999) for the definition of managing agents. In White, the California Supreme Court explained that managing agents are employees who exercise substantial independent authority and judgment in their corporate decision-making so that their decisions ultimately determine corporate policy. White, 21 Cal.4th at 566-567. The Mazik court concluded that there was ample evidence that Grothen met this definition of managing agent.

The Court noted that Grothen had wide regional authority over claims settlements, over 100 claims adjusters were “funneled up” to him for approval of settlements and he typically had 18 to 20 meetings per day with claims adjusters seeking his approval or direction for handling claims. Grothen even testified that an extremely important part of his role was to maintain consistency in settlement valuations within his region. The Court found that a jury could have reasonably concluded that this type of broad decision-making responsibility for establishing GEICO’s settlement standards ultimately determined corporate policy.

Having determined that Grothen was a managing agent of GEICO, the Court next turned to the issue of whether Grothen ratified conduct warranting punitive damages. The Court pointed to evidence provided by Mazik that showed that GEICO deliberately “cherry-picked” medical information and disregarded unfavorable findings. For instance, the evidence showed that GEICO’s claims adjusters prepared an initial claim evaluation summary and summaries in advance of the arbitration that were misleading and omitted important information that appeared in Mazik’s medical records. GEICO argued that the claims adjusters’ conduct cannot support punitive damages because Grothen himself was not personally involved in investigating Mazik’s claim. The Court rejected this argument finding that there was sufficient evidence for the jury to conclude that Grothen engaged in oppressive conduct by ignoring information concerning the serious and permanent nature of Mazik’s injuries for the purpose of saving the company money.

The Court looked at the numerous instances as documented in the record where Grothen provided direction and/or approval for decisions affecting Mazik’s case such as his approval to reject Mazik’s initial policy demand, his instruction to the claims adjuster to obtain an IME and his approval to move the case toward arbitration. Grothen also testified that he has access to the entire claims file and that he “spot checks” the information the adjusters provide. The Court thus concluded that he had more than a “passing familiarity” with Mazik’s claim and that a jury reasonably could have found that not only he knew the claims adjusters’ summaries were misleading, but that he himself was fully aware of the severe nature of Mazik’s injuries. Importantly, the Court recognized that, when sufficiently egregious, an insurer’s bad faith conduct can also satisfy the standard for punitive damages. See Egan v. Mutual Omaha Ins. Co., 24 Cal.3d 809, 821-822 (1979). Based on the evidence, the Court determined that the jury had a sufficient basis to conclude that Grothen ratified such egregious conduct by approving unreasonably low offers to Mazik that ignored medical records showing the serious and permanent nature of his injuries.

Finally, the Court addressed the amount of the punitive damages award. In analyzing the degree of reprehensibility of GEICO’s conduct, the Court found that GEICO’s oppressive conduct was repeated based on the numerous instances that Grothen either authorized unreasonably low settlement offers or approved decisions not to increase offers. It also found that Mazik was financially vulnerable and that there was evidence that GEICO intentionally manipulated the facts by “cherry-picking” medical information and disregarding unfavorable findings. Each of these factors supported the conclusion that the $1 million punitive damages award was constitutionally permissible. The Court also found that the three-to-one ratio of punitive to compensatory damages did not exceed constitutional restraints.

The Mazik case is significant because it broadens the scope of who can be considered a managing agent for purposes of obtaining a punitive damages award. This decision establishes that a claims supervisor who has wide regional authority over claim settlements can qualify as a managing agent of an insurance company such that his conduct will be imputed to the insurance company for purposes of punitive damages. It should be noted that according to earlier cases, in-house claims managers and adjusters who handled claims with little if any supervision could be treated as “managing agents:” “When employees dispose of insureds’ claims with little if any supervision, they possess sufficient discretion for the law to impute their actions concerning those claims to the corporation.” Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 822-823 (1979); see also Major v. Western Home Ins. Co., 169 Cal. App.4th 1197, 1220-1221 (2009) (outside claim representative vested with discretionary authority to pay or deny claims). In light of this decision and earlier decisions, claimants should look closely at the conduct of any managers or supervisors involved in the claims-handling process.

Insurance companies acting as ERISA plan administrators often are guilty of abusing their discretion to interpret policy language related to the level of benefits payable to a claimant under a long-term disability (“LTD”) policy in a manner most beneficial to them, rather than the claimant. In a recent decision by the Tenth Circuit Court of Appeals, Hodges v. Life Insurance Company of North America, 920 F.3d 669 (10th Cir. 2019), the court addressed the ability of insurance companies such as Life Insurance Company of North America (“LINA”) from interpreting policy language that may determine the level of benefits payable to a claimant.

In Hodges, the Tenth Circuit Court of Appeals affirmed the ruling of the district court that LINA failed to meet its burden to show it was entitled to deference in deciding who qualified as “Sales Personnel” and who did not under a group LTD policy issued to Endo Pharmaceuticals, Inc. The policy language did not give the Plan Administrator the authority to interpret the meaning of Sales Personnel yet LINA did so, depriving the claimant of thousands of dollars in benefits.

Lou Hodges was a cryotherapy technician for Endo Pharmaceuticals, Inc. (“Endo”) until he was forced to retire due to a degenerative eye condition in 2012. Hodges was insured under Endo’s group LTD insurance policy which was part of its ERISA Plan, administered by LINA. The Policy divided Endo’s employees into two classes: Class I employees included “all active, Full-time and part-time Employees of the Employer, excluding Sales Personnel, regularly working a minimum of 20 hours per week.” Class 2 employees included “all active, Full-time Employees of the Employer classified as Sales Personnel regularly working a minimum of 20 hours per week.”

The policy entitled all Class 1 and Class 2 employees to monthly LTD benefits of 60% of their average pre-disability earnings, but defined the earnings of Class 2 Sales Personnel far more broadly than non-Sales Personnel. The definition of earnings for all Class 2 Sales Personnel included payments “received from bonuses or target incentive compensation bonus[es].”

In evaluating Hodges’s claim for LTD benefits, although concluding he was medically eligible, LINA sought information on his job description and duties from both Hodges and his employer, Endo, to determine whether he qualified as Class 2 “Sales Personnel” for determining the level of benefits to which he was entitled. LINA informed Hodges his claim for benefits was approved but that they deemed him a Class 1 employee. This meant a much lower amount of benefits would be paid to Hodges because he would not be able to include his bonus and/or incentive compensation in LINA’s calculation of 60% of his pre-disability income.

Hodges challenged LINA’s determination, appealing twice. After the denial of his second appeal, Hodges filed suit in the United States District Court for the District of Colorado. In February 2017, the district court concluded the policy failed to reserve LINA discretion to decide employee-classification questions and remanded the case for LINA to conduct further fact finding on Hodges’s employment classification. On remand, LINA again determined that Hodges was a Class 1 employee, relying upon a statement from Endo’s Senior Vice President and Associate General Counsel.

After Hodges asked the district court to reopen the case, in June 2018 it ruled that LINA had once again failed to adequately investigate Hodges’s employment classification. Concluding that a second remand would be futile, the district court determined that Hodges was a salesperson under the ordinary meaning of that term, reversed LINA’s contrary decision, and awarded Hodges Class 2 benefits.

Upon appeal by LINA, the Tenth Circuit agreed with the district court that Hodges indeed qualified as a Class 2 Sales Personnel employee due to his responsibilities to sell and promote Endo’s commercial products and services at every available juncture; to sell doctors on performing more cryotherapy procedures; to assist in the growth and development of existing and new business lines, to market the technology and submit a minimum of one lead a month for new cryotherapy users, new applications for existing cryotherapy users, or any other lead for any of Endo’s business.

The Tenth Circuit based its decision on a lack of discretionary authority granted to LINA in construing the terms of the plan. The Tenth Circuit noted that it reviews de novo a plan administrator’s denial of benefits “unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan.” Hodges, 920 F.3d at 675 citing Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). However, the court considered whether the plan granted discretion to determine whether or not benefits were payable in accordance with the terms of the policy. The court acknowledged that plans which contain clear and unambiguous discretion-conveying language afford the court the ability to grant discretion over all decisions that arise in the claims process. Here, however, the court found that nothing in the policy granted LINA the discretion to conclude who qualified as a salesperson under the plan, and noted that thirty years have passed since the Supreme Court’s holding in Firestone. Thus, plan drafters have had ample time to include language giving discretion if they so desired.

Turning to the issue of whether Hodges qualified as a salesperson, the record reflected that Hodges received a significant portion of his income from bonuses when he did sell products and services and those earnings were designated as bonuses on his pay stubs. Hodges received $3,000 for every $100,000 of pathology work that a doctor performed using Endo’s equipment and services and a monthly bonus for every case he worked on. The Tenth Circuit found that these substantial sales responsibilities and sales driven compensation would cause a reasonable person such as Hodges to believe he was a salesperson and devote his efforts to sales to increase his compensation. In addition, although he derived a majority of his compensation from performing cryotherapy services, he could not continue cryotherapy services without selling the company’s products.

The Court of Appeal’s ruling resulted in a higher level of LTD benefits payable to Hodges than he would have received had the Court determined the plan administrator had discretionary authority to interpret policy definitions regarding employee job classifications. This set an important precedent that without the clear and unambiguous authority to do so, a plan administrator does not have the discretionary authority to interpret policy language related to an employee’s job classification that would negatively affect his or her level of benefits payable under an ERISA Plan.

Hodges’s case against LINA reveals that skilled and aggressive legal representation is often necessary if you have any concerns regarding an ERISA plan administrator’s interpretation of a long-term disability policy under which you are insured and the level of disability benefits payable to you. Insurers are notorious for interpreting policy language in their favor in order to protect their own financial interests, to the detriment of ERISA claimants and in conscious disregard of their rights.

McKennon Law Group PC’s founding and managing shareholder, Robert J. McKennon and senior attorney, Joseph S. McMillen, will speak on an MCLE panel for the Orange County Bar Association on June 13, 2019, discussing “ERISA and California Bad Faith Litigation, Hot Topics and Trends in Disability, Life and Health Insurance Claims.” Mr. McKennon has been practicing in the areas of ERISA, life, disability and health bad faith insurance litigation and business litigation for 33 years. Mr. McMillen has been practicing in the areas of insurance and bad faith litigation for two decades, including numerous ERISA-governed disputes over disability and life insurance benefits. The MCLE event is scheduled to take place at the OCBA headquarters from 12:15 P.M. – 1:30 P.M. and registered attendees will receive 1.0 hour of MCLE credits.

Cassim v. Allstate Insurance: Attorney’s Fees in Contingency-Fee “Bad Faith” Cases

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