McKennon Law Group, Author at McKennon Law Group

Spending money quickly on lavish trips and fine dining could prevent collection on a debt owed to your ERISA plan. At least this may be the case if you are a plan participant who recently recovered money from a third party for injuries that already resulted in a payment of expenses by your plan.

ERISA Section 502(a)(3) allows plan fiduciaries to file suit “to obtain … appropriate equitable relief … to enforce … the terms of the plan.” In 1993, the Supreme Court interpreted this provision to mean that plan fiduciaries may only seek relief “typically available in equity.” Courts have since had to decide what qualifies as “equitable relief” under ERISA Section 502(a)(3). In an 8–1 decision on January 20, 2016, the Supreme Court decided that a plan could only seek reimbursement for expenses it paid through an equitable lien against specifically identifiable funds remaining in a plan participant’s possession or against traceable items that were purchased with such funds. See Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, __ U.S. ___ (2016). If the funds that a plan participant recovered from a third party were spent on non-traceable items (i.e. consumable goods and services), then any lien on such funds is eliminated and a plan fiduciary may not bring a lawsuit seeking reimbursement from a participant’s other assets. Id.

Plans regulated by ERISA often contain subrogation clauses requiring a participant to reimburse the plan for expenses paid if the participant later recovers money from a third party for their injuries. Section 502(a)(3) of ERISA authorizes plan fiduciaries to file suit to obtain appropriate equitable relief to enforce the terms of a plan. Whether relief is “equitable” depends on the basis for the claim and the nature of the underlying relief sought. See Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006).

In Montanile, the plan participant was injured by a drunk driver resulting in $120,000 being paid by the participant’s ERISA plan to cover medical expenses. The plan participant subsequently sued the drunk driver and recovered a $500,000 settlement. The plan participant’s attorney refused to reimburse the plan from the recovered funds, however he did provide notice that the funds were going to be distributed to the plan participant if there was no objection from the plan within 14 days. After the plan failed to object, the settlement funds were distributed to the plan participant by his attorney. Six months later, the plan sued the plan participant for reimbursement. After being informed that the plan participant had already dissipated most of the settlement funds on non-traceable items, the plan then sought to be reimbursed from the participant’s general assets. The District Court granted summary judgment in favor of the plan and the Court of Appeals affirmed.

The Supreme Court disagreed with the lower courts, determining that while the basis for the plan’s claim was equitable, the relief sought (attachment of the participant’s general assets) was not. The decision of the Court of Appeals was reversed, and the mater was remanded back to the District Court to determine the location and amount of any remaining settlement funds in the participant’s possession. The Supreme Court relied on legal precedent to determine that the plan could not sue for reimbursement under section 503(a)(3) of ERISA, because the participant’s general assets were not part of the specific funds from which the parties agreed the participant would reimburse the plan. Once the settlement funds were spent on non-traceable items by the participant, the plan could not seek reimbursement from the participant’s other assets, unless those assets could be traced back to the settlement funds.

While this decision appears to bestow an unexpected benefit to plan participants, we can expect that plan fiduciaries will now engage in a swift pursuit of reimbursement upon learning that a participant has recovered money from a third party. We can also expect litigation to increase as plan fiduciaries forfeit informal negotiations in favor of disbursement objections and orders enjoining the dissipation of funds. While the Supreme Court’s decision in Montanile clarifies the rules related to seeking equitable relief to recover a reimbursement or subrogation right, it may lead to a new round of litigation to determine when a fund is properly comingled with the third-party recovery to allow enforcement of the lien.

McKennon Law Group PC is proud to announce that its founding shareholder Robert J. McKennon has been recognized as one of Southern California’s “Super Lawyers” and appears in the 2016 edition of Southern California Super Lawyers magazine published on January 20, 2016.

Each year, Super Lawyers magazine, which is published in all 50 states and reaches more than 14 million readers, names attorneys in each state who attain a high degree of peer recognition and professional achievement. The Super Lawyer designation is given to less than 5% of lawyers nationally after being nominated and voted on by their peers.

In addition, the American Society of Legal Advocates recognized Mr. McKennon as one of the top 100 Insurance lawyers in the State of California for 2015. The American Society of Legal Advocates is an invitation-only, nationwide organization of top lawyers in practice today who combine excellent legal credentials with a proven commitment to community engagement and the highest professional standards.

Mr. McKennon was also awarded the designation of 2015 “Top Rated Lawyer in Insurance Law and Coverage” by American Lawyer Media and Martindale Hubbell, leading providers of news and rating information to the legal industry.

Exchanging correspondence with a plan administrator requesting reconsideration of a denial may preserve the right to sue by extending contractual time limitations and demonstrating that the pursuit of administrative remedies would be futile. The United States District Court Southern District of California determined that the date of an initial claim denial did not trigger a pension plan’s two-year time limitations clause, since the language within the clause indicated that resolution of the claim, rather than awareness of the claim, is the triggering event. Watkins v. Citigroup Retirement Systems, No. 15-CV-731 DMS (NLS), 2015 WL 9581838 (S.D. Cal. Dec. 30, 2015). The Court also declined to dismiss the plaintiff’s complaint for failing to exhaust administrative remedies due to the defendant’s persistent restatement of its position in response to Plaintiff’s repeated requests for reconsideration. Id.

In Withrow v. Halsey, 655 F.3d 1022 (2011), the Ninth Circuit recognized that a four year statute of limitations applies for contract disputes to ERISA benefits claims arising in California. However, the Supreme Court’s decision in Heimeshoff v. Hartford Life & Accident Insurance Co., 134 S. Ct. 604 (2013), provides that an ERISA plan may be contractually limited to a shorter timeframe to file suit, as long as that limitation is reasonable. While it is uncertain exactly when a shorter timeframe will be considered reasonable, the terms limiting the timeframe should provide some indication as to when that timeframe will begin.

In Watkins, the Plaintiff, a participant in Citigroup’s pension benefits plan (the “Plan”), dissolved his marriage. As part of the marriage dissolution, it was ordered that Plaintiff’s former wife be granted a half interest in the Plan as a straight life annuity. After the death of his former wife, Plaintiff requested that Citigroup reallocate the pension funds to his account. Citigroup provided an initial denial of Plaintiff’s claim on April 11, 2012, stating that the marriage dissolution order did not allow payments to return to Plaintiff upon the death of his former wife. Plaintiff and Citigroup continued to exchange correspondence and debate the denial for almost nineteen months until December 18, 2013, when Citigroup sent a letter to Plaintiff expressly advising Plaintiff of its denial and indicating that Plaintiff could pursue his claim through formal claims and appeals procedures with Citigroup.

Instead of pursuing the formal claims and appeals procedures with Citigroup, Plaintiff initiated a lawsuit by filing a complaint with the Court on April 3, 2015. Citigroup responded to Plaintiff’s complaint by filing a motion to dismiss, arguing that Plaintiff’s complaint was time barred under the Plan’s two-year contractual limitation, as it was filed nearly three years after he received the initial denial of his claim on April 11, 2012. The relevant portion of the Plan stated:

“A claimant must file any lawsuit…within two years from the date on which the claimant was aware, or should have been aware, of the claim at issue in the proceeding. The two-year limitation shall be increased by any time a claim or appeal on the issue is under consideration by the appropriate fiduciary.”

The court denied Citigroup’s motion to dismiss stating that the two-year provision indicated that resolution of the claim, as opposed to awareness of the claim, is the triggering event. The claim was no longer under consideration, at least informally, as of December 18, 2013 when Plaintiff was expressly advised his claim was denied and he could pursue his claim through the formal appeals and claims procedures. The Court did not allow Citigroup to ignore the language in the Plan indicating that the two-year limitation shall be increased while the issue is under consideration by the appropriate fiduciary, regardless of whether the consideration is informal.

A recognized exception to the requirement that plaintiffs must avail themselves of a plan’s internal appeal procedures prior to filing suit is when a resort to such administrative procedures is shown to be futile. Vaught v. Scottsdale Healthcare Corp. Health Plan, 546 F.3d 620 (2008). The Court refused to dismiss Plaintiff’s complaint for failing to exhaust administrative remedies. It held that requiring Plaintiff to pursue formal remedies with Citigroup would have been futile due to Citigroup’s continued re-statement of its position in response to Plaintiff’s persistent requests for reconsideration.

The decision in Watkins demonstrates that the terms of a time limitations clause should be carefully analyzed to determine exactly what event could trigger the running of a contractual limitations period. A plaintiff’s actual knowledge of an initial denial will not overcome continued debate and correspondence indicative of continued informal consideration by a fiduciary when such consideration increases the time to file a claim. This decision is also important in demonstrating how persistent communication with a plan fiduciary can show that resort to administrative remedies would be futile and can work to avoid dismissal of a lawsuit for failure to exhaust available administrative remedies.

Although we recently explained that policies offered, issued, delivered, or renewed on or after January 1, 2012 are afforded de novo review as a result of California Insurance Code section 10110.6 (see The Death of the Abuse of Discretion Standard of Review in ERISA Disability Insurance Cases in California), a recent ERISA case helps to remind us that older ERISA plans, which vest discretion in plan administrators and claim administrators, remain subject to the more lenient abuse of discretion standard of review. Accordingly, it remains critical to understand how courts review a plan administrator’s decision to deny benefits under this standard of review.

In Yancy v. United of Omaha Life Insurance Company, 2015 U.S. Dist. LEXIS 172233 (C.D. Cal. December 18, 2015), a plaintiff brought a lawsuit against United of Omaha Life Insurance Company (“Omaha”) alleging wrongful denial of long-term disability insurance benefits. The plaintiff suffered from a number of physical and cognitive problems, including fibromyalgia, major depression, and possible systematic lupus erythematosus. She was then placed on medical leave and treated by a number of specialists who prescribed her various medications for her symptoms and consistently confirmed that she was suffering from these conditions and who confirmed that the plaintiff was disabled and unable to return to work.

The plaintiff filed a claim for long term disability insurance benefits but Omaha denied the claim based on the opinions of two nurses who reviewed the claim and stated that the claim had no supporting documents evidencing any restrictions or limitations.

The plaintiff then supplemented her appeal with updated medical records supporting her condition. Omaha conducted a peer review for the appeal by a Dr. David Knapp. Dr. Knapp selected a handful of terms found in the medical records that might suggest that the plaintiff was not suffering from a disability and completely ignored the consistent findings of the plaintiff’s numerous other doctors. Dr. Knapp also questioned the accuracy of the methods for diagnosis of one of the plaintiff’s doctors, Dr. Castellon. Dr. Knapp concluded that he had “no objective evidence of any neurocognitive or neurobehavioral restriction or limitation for this claimant.”

The plaintiff requested that Dr. Castellon have an opportunity to provide a rebuttal opinion to justify his methods prior to Omaha’s final decision. Instead, Omaha failed to give Dr. Castellon the opportunity to do so, denied the appeal based on Dr. Knapp’s opinion, completely ignored the consistent opinions and medical records of plaintiff’s doctors, and cherry-picked isolated statements made by plaintiff’s doctors to construe them as supporting Omaha’s denial.

The facts in Yancy make clear that Omaha denied the plaintiff’s benefits despite clear and credible evidence of her disability. However, the court’s application of the abuse of discretion standard of review is worth recalling.

The court in Yancy explained that, while there are circumstances under which a plan administrator’s decision to deny benefits is clearly an abuse of discretion, the court generally determines whether the decision was an abuse of discretion by weighing a number of factors to find whether the decision was reasonable in light of all surrounding circumstances.

The court considers several case-specific factors in determining whether the decision to deny benefits was reasonable, such as the plaintiff’s evidence of his or her disability, the circumstances surrounding the plaintiff’s leave, the plan administrator’s supporting evidence, and the plan administrator’s conduct. In fact, the plan administrator’s conduct is particularly important in the court’s review of the decision to deny benefits. Indeed, if the plan administrator appeared to have acted upon some form of conflict of interest or to have committed a procedural error, the plan administrator’s credibility becomes an issue, and the court will then view the decision with “increased skepticism.”

As noted above, certain circumstances surrounding the decision to deny benefits may so clearly demonstrate an abuse of discretion that the court need not weigh the above factors. The court in Yancy named three: (1) when the plan administrator renders the decision without any explanation; (2) when the plan administrator construes the terms of the plan in a way that conflicts with the plain language of the plan; and (3) when the plan administrator fails to develop facts it found necessary in making its decision.

The court held that Omaha’s decision was an abuse of discretion because Omaha’s construction of the plan’s provisions were conflicting because Omaha effectively construed the plan as requiring objective evidence to prove the plaintiff’s claim, despite the plain language of the plan allowing for the use of subjective evidence. The court further held that Omaha’s decision was an abuse of discretion because, not only did Omaha fail to develop facts it deemed necessary in making its decision, but it relied on clearly erroneous findings of fact.

The court in Yancy also found that it should view Omaha’s denial with “increased skepticism” because (1) Omaha committed a procedural error by failing to consider Dr. Castellon’s rebuttal opinion, and (2) a structural conflict of interest existed as Omaha both funded the benefits for the policy and determined eligibility for policyholders’ claims.

Interestingly, the court also considered Omaha’s choice of hiring Dr. Knapp to review the appeal as probative evidence of Omaha’s conflict of interest. Most notably, the court actually looked outside of the administrative record at a letter written by Dr. Knapp, indicating Dr. Knapp’s biased opinion that disability benefits are actually harmful to people with fibromyalgia. The court justified looking outside the administrative record on the grounds that, “when a court must decide how much weigh to give a conflict of interest under the abuse of discretion standard . . . the court may consider evidence outside the record . . . to decide the nature, extent, and effect on the decision-making process of any conflict of interest.”

Thus the court held that, even if Omaha did not construe conflicting provisions or rely on an erroneous factual basis for its determination, in viewing the decision with increased skepticism, Omaha’s decision was not reasonable and, therefore, an abuse of discretion in light of all the evidence before the court.

In sum, the abuse of discretion standard of review is a question of reasonableness. As we move forward, the day may come when the abuse of discretion standard will become obsolete in ERISA cases filed in California Federal Courts. However, this recent case reminds us that, until that day comes, it is necessary that we maintain our understanding of the abuse of discretion standard for those cases to which the standard still applies.

In April 2015, the United States Court of Appeals for the Ninth Circuit upheld a ruling by District Court Judge Cormac J. Carney awarding a McKennon Law Group PC client his past-due ERISA long-term disability plan benefits, plus interest. Following that decision, the McKennon Law Group filed a motion for attorneys’ fees and costs, which Sun Life Financial vigorously opposed. However, the Ninth Circuit rejected every argument that Sun Life made in opposing the motion for fees and costs. In reviewing the hourly rates charged by the McKennon Law Group and the time spent advocating on behalf of its client in the appeal, the Ninth Circuit determined that both were completely reasonable and appropriate. Based on this finding, the Ninth Circuit ruled that the McKennon Law Group was entitled to 100% of the attorneys’ fees and costs incurred and applied for on the appeal.

From time to time, the U.S. Department of Labor promulgates new regulations governing disability insurance benefit claims and health insurance benefit claims that are governed by the Employee Retirement Income Security Act of 1974, commonly referred to as ERISA. The regulations must be followed by plan administrators and claim administrators when reviewing disability insurance and health insurance benefit claims submitted by claimants. Recently, the Department of Labor proposed changes to the regulations governing long-term disability insurance benefit claims and short-term disability insurance benefit claims.

The proposed regulations, if approved, will benefit a claimant by providing greater access to information during the claims review process and requiring administrators to explain why their claim decision differs from State or Federal agencies that considered the claimant disabled and unable to return to work.

The stated purpose of the proposed new regulations, which can be found here, is to provide “procedural fairness” to claimants, as well as to adopt procedural protections and safeguards that are currently applicable to group health plans under the Affordable Care Act.

One of the changes is that a claims administrator would be required to “[a]llow a claimant to review the claim file and to present evidence and testimony as part of the disability benefit claims and appeals process.” In addition, the new regulations would:

Provide that, before an adverse determination on review is made, the plan administrator shall provide the claimant, free of charge, with any new or additional evidence considered, relied upon, or generated by the plan (or at the direction of the plan) in connection with the claim. Such evidence must be provided as soon as possible and sufficiently in advance of the date on which the notice of adverse determination on review is given, in order to give the claimant a reasonable opportunity to respond before that date.

Currently, until an adverse decision is made, the claims administrator is entitled to withhold from the claimant the entirety of the claim file. This allows the claim administrator to withhold opinions and reports regarding disability offered by paid physicians, who typically never examine the claimant, and any other evidence in the claim file. Refusing to allow the claimant access to the claim file while the claim is open forces the claimant to operate without a full and complete understanding of the opinions that the insurance company may be relying on in reviewing the claim. This makes it unnecessarily difficult for a claimant to know what information the insurer might deem important and sufficient to support the claim for disability insurance benefits.

Another important change is that denial letters must include “the basis for disagreeing with the views or decisions of any treating health care professionals or other payers of benefits who granted the claimant’s similar claims (including disability determinations by the SSA).” Recently, some district courts have ruled that a failure to distinguish contrary disability determinations, whether related to Workers’ Compensation Benefits, State disability insurance benefits or Social Security disability insurance benefits, will result in a reduction in the amount of discretion afforded to the administrator in abuse of discretion cases. This new regulation would codify this requirement nationwide and expand it, as it would force the administrator to explain in all claim denials why its opinion that a claimant is not disabled differs from conclusions reached by other entities after evaluating the same disabling conditions, medical evidence and job duties.

Finally, a failure by the administrator to follow these and other requirements will allow a claimant to consider the claim to be “deemed denied.” This would allow a claimant to be “deemed to have exhausted the administrative remedies under the Plan,” and proceed to litigation without the necessity of an appeal. However, the regulations also note that if a court finds the violation to be “de minimus,” then the matter would be remanded back to the plan administrator for further review. Given the risk of remand and resulting delay, a claimant might be reluctant to exercise this option.

As a whole, these regulations, if enacted, would greatly benefit claimants and should make it easier from them to understand the claim review process, the reasons for denial and easier to provide their administrators with documents to support their claims. Indeed, these proposed regulations would “give some teeth” to the requirement that insurers engage in a “meaningful dialogue” with the claimant.

Supreme Court Requires Plan Fiduciaries to Act Fast if They Want to Ensure Reimbursement from Plan Participants

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