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The November 27, 2015 edition of the Los Angeles Daily Journal features an article written by Robert McKennon and Joseph McMillen of the McKennon Law Group entitled: “When is Insurer’s Delay a Breach?.” In the article, Mr. McKennon and Mr. McMillen discuss an important decision from the U.S. District Court for the Northern District of California, Travelers Indem. Co. of Connecticut v. Centex Homes, 11-CV-03638-SC (N.D. Cal., filed Oct. 8, 2015) in which the court wrestled with the issue of how much delay is too much before an insurer crosses the line and breaches its defense duty. In other words: What is the point at which an insurer’s delay in defending amounts to a breach of its duty to defend?
Insureds obligingly pay premiums on their life, health and disability insurance policies and dutifully provide updated information upon request by their insurers, but often do not enjoy the same courtesy when they file an insurance claim. In extreme cases, antagonistic insurers engage in a host of tactics, including appointing claims examiners who refuse to return phone calls, conducting intrusive surveillance, accusing insureds of filing false claims or inundating the insured’s employer and treating doctors with document demands—only to deny the insured’s claim. Astonished by this treatment, many insureds wonder if they can sue them for emotional distress damages. The short answer is yes—but there are hurdles.
California law imposes in every insurance contract a covenant of good faith and fair dealing, and a wrongful denial may be in “bad faith.” The bad faith claim potentially allows the insured to seek emotional distress damages. However, there may be another approach: sue the insurer for intentional infliction of emotional distress. To succeed on such a claim, insureds must establish: (1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff’s severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the defendant’s outrageous conduct.
Policies governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) present additional hurdles. First, Section 514(a) provides that the ERISA federal statutes “supersede[s] any and all State laws insofar as they may … relate to any employee benefit plan.” Second, ERISA does not contain a comparable statutory recourse for bad faith by an insurer. Accordingly, insurers routinely defeat emotional distress claims and insurance bad faith claims by asserting that ERISA preempts these state law claims, as such claims directly relate to the insured’s denial of benefits. However, a relatively unsung line of cases show that in cases where the insurer’s actions are so far removed from the claims handling function, an insured may escape ERISA preemption and seek damages typically available under California, but not federal, law.
In his recent Order, United States District Judge William Alsup ruled that ERISA does not preempt (or, in other words, defeat) an insured’s claim for intentional infliction of emotional distress in certain cases, even though the insurance policy is otherwise governed by ERISA. Daie v. The Reed Grp., Ltd., No. C 15-03813 WHA, 2015 WL 6954915 (N.D. Cal. Nov. 10, 2015). After Aetna denied his claim for disability benefits and appeal under an employer-sponsored plan, Plaintiff filed suit asserting only one cause of action for intentional infliction of emotional distress. Plaintiff’s complaint alleged, among other things, that Defendants accused Plaintiff of lying about and exaggerating his condition, pressured him to take experimental medications and forced him to undergo rigorous medical examinations without considering the results.
Defendants moved to dismiss the claim based on federal preemption under ERISA. Judge Alsup denied the motion, explaining that ERISA completely preempts a state-law only if: (1) an individual at some point could have brought the claim under ERISA Section 502(a)(1)(B), which allows an ERISA “participant or beneficiary” to bring a civil action to recover benefits due, enforce his rights, or clarify his rights under the plan and (2) no other independent legal duty is implicated. Here, neither prong was satisfied. First, Plaintiff’s claim hinged on the Defendants’ harassing and oppressive conduct unrelated to the claims handling function. Second, Defendants had a duty not to engage in tortious conduct, which was independent of the Defendants’ duties under ERISA. Judge Alsup further noted that absent the denial of benefits, Daie would still have a claim for intentional infliction of emotional distress.
Other cases offer insight as to what type of actions by insurers may survive ERISA preemption. One example involves an insurance company who engaged in surveillance tactics, including falsely impersonating a bank lender to obtain personal information about a plaintiff (Dishman v. Unum Life Insurance Co. of America, 269 F.3d 974 (9th Cir. 2001)). Sarkisyan v. CIGNA Healthcare of California, Inc., 613 F. Supp. 2d 1199, 1208-09 (C.D. Cal. 2009) distinguishes what claims may, or may not be, preempted. In Sarkisyan, CIGNA denied authorization for a liver transplant for Plaintiff’s daughter, upheld the denial, and the girl passed away days later. The grief-stricken parents brought suit alleging several causes of action, including intentional infliction of emotional distress. CIGNA removed the case to federal court, then filed a motion to dismiss, contending Plaintiffs’ claims were expressly preempted by ERISA. The District Court ruled that Plaintiff’s state law claims for intentional infliction of emotional distress based on wrongful denial of coverage under their CIGNA health insurance plan related directly to CIGNA’s denial of benefits, and thus were preempted by ERISA. However, Plaintiffs’ state law claim for intentional infliction of emotional distress based on the verbal abuse, heckling, and “lewd hand gesture” by CIGNA employees was not preempted, because the claim was based on events occurring after the coverage decision, and thus did not directly relate to the claim decision.
These cases demonstrate that where a plaintiff’s allegations of intentional infliction of emotional distress clearly implicate an independent legal duty owed by the insurer, distinct from actions directly related to the claim for benefits, ERISA preemption does not defeat the claim. Indeed, these holdings are consistent with public policy concerns and serve as a disincentive to insurers who mistreat their insureds, or risk liability in the form of extra-contractual damages for intentional infliction of emotional distress.
McKennon Law Group PC is proud and honored to announce that Robert J. McKennon, founding shareholder of McKennon Law Group PC, has been named in the Business Edition 2015 Thomson Reuters/Super Lawyers annual list of the nation’s top attorneys in business practice areas.
The November 6, 2015 edition of the Los Angeles Daily Journal features an article written by Robert McKennon and Joseph McMillen of the McKennon Law Group entitled: “Supreme Court Ramps Up Interest in ERISA.” In the article, Mr. McKennon and Mr. McMillen discuss five important United States Supreme Court cases involving litigation over employee life, health and disability benefit claims governed by the Employee Retirement Income Security Act of 1974. It discusses these cases and explains that the High Court has: (1) relaxed the standard for an employee to recover his attorney fees; (2) allowed discovery previously not permitted; (3) significantly expanded employee remedies; (4) determined plan language controls benefit reimbursement claims; and (5) confirmed an employer’s right to choose plan terms limiting the time to file a lawsuit.
Short-term disability insurance and long-term disability insurance policies provide insurance benefits to consumers who are unable to continue working due to injury or sickness. Such coverage can be offered as a benefit of employment by an employer (in which case, the policy is usually governed by a federal law called the Employee Retirement Income Security Act of 1974 or ERISA) or can be purchased by the individual insured.
Regardless of how the coverage is obtained, the terms of every policy form for disability insurance must be approved by the California Department of Insurance before it is offered for sale. Recently, Governor Jerry Brown signed Assembly Bill 387, authored by Assembly Member Kevin McCarty and co-sponsored by Insurance Commissioner Dave Jones, which will improve the Department of Insurance’s ability to review draft disability policies before they are sold to the general public.
Among other changes, the new law increases the time the California Department of Insurance has to review policy forms and any associated risks and premium rates from 30 to 120 calendar days. Here is the press release from the California Department of Insurance:
New law improves rate filing review process
SACRAMENTO, Calif.– Governor Brown signed Assembly Bill 387 today, authored by Assembly Member Kevin McCarty. Co-sponsored by Insurance Commissioner Dave Jones, the law will ultimately improve the department’s ability to review and approve disability policy filings more effectively and completely in the specified timeframe.
“This law will allow my department to continue to protect consumers, make the approval process more effective and still allow for timely marketplace availability of products,” said Commissioner Jones. “I’d like to thank Assembly Member McCarty for authoring this bill.”
AB 387 reflects an agreement between the California Department of Insurance and the Association of California Life and Health Insurance Companies. The law extends the period of time allowed for the department to review and approve policy forms and any associated risks and premium rates from 30 to 120 calendar days.
The new law will also authorize the Commissioner to develop and publish new guidelines on the department’s public website for the purpose of streamlining and expediting the department’s file review process for life and disability insurance forms. Providing clear guidelines for insurers to follow when submitting policies for approval, coupled with increasing the amount of time to review and approve policies, will improve the overall process and reduce confusion for consumers and the industry.
The new law also requires the requesting of an independent study to examine and compare California law with standards set forth in the Interstate Insurance Product Regulation Compact. This study would examine important consumer protections established under current law for annuity, life insurance, disability income, and long-term care insurance products.
Recently, we explained that District Courts within the state of California, applying California Insurance Code section 10110.6, ruled that, even if an insurance Plan contains language giving discretion to a claim administrator, that language is unenforceable, and de novo is the proper standard of review. See The Death of the Abuse of Discretion Standard of Review in ERISA Disability Insurance Cases in California. A recent ruling expanded the application of California’s anti-discretionary language statute to self-funded plans, further signaling the end of the abuse of discretion standard of review in California Federal Courts.
In Williby v. Aetna Life Insurance Company, 2015 WL 5145499 (C.D. Cal. August 31, 2015), the plaintiff initiated the lawsuit after Aetna denied her claim for short-term disability (“STD”) benefits. The facts of the benefits dispute are fairly straightforward, and the District Court eventually ruled that Aetna’s decision to deny the plaintiff’s claim for STD benefits was improper, regardless of the standard of review. What is unique about the ruling is the District Court’s application of California Insurance Code section 10110.6.
The ERISA Plan in Williby was a self-funded plan. This means that the employer, not Aetna, was responsible for paying any disability benefits due under the Plan. Aetna argued that Insurance Code section 10110.6 did not apply to self-funded plans, but only insured plans (where the claims administrator/insurer, not the employer, is responsible for any benefits payable under the Plan). This argument was based on the language in the statute that bars provisions which “reserve[] discretionary authority to the insurer.” See Insurance Code section 10110.6(a). The Court disagreed with Aetna’s interpretation of the statute, instead holding that the California State Legislature intended for the statute to apply, not only to insurance policies, but also insurance contracts. Specifically, the Court explained:
[P]rovisions that reserve discretionary authority to insurers to determine eligibility for benefits in contracts or policies in effect after January 1, 2012, are void and unenforceable under California Insurance Code § 10110.6.
…
Defendant argues that the insurance code does not apply because (1) the STD benefits are self-funded by Boeing, and (2) Aetna is granted discretion by the Plan, which is not an insurance policy, and thus, not regulated by the insurance code. Several district courts have found, although not in the context of self-funded plans, that Section 10110.6 applies to ERISA plan documents because the statute expressly applies to contracts and insurance policies. A federal court interpreting a state statute gives the language of the statute its “usual, ordinary import,” but if the statute’s wording is ambiguous, it may consider extrinsic evidence of legislative intent. In re First T.D. & Inv., Inc., 253 F.3d 520, 527 (9th Cir. 2001). Section 10110.6 by its plain language applies to any insurance policy, contract, certificate or agreement, and “an ERISA plan is a contract.”Harlick v. Blue Shield of Cal., 686 F.3d 699, 708 (9th Cir. 2012). The statute’s legislative history reinforces its application to employer-sponsored ERISA plans. A report from a June 22, 2011, hearing refers to an opinion letter from the Insurance Commissioner’s counsel that explained: “in group, employer-sponsored disability contracts that are governed by ERISA, the presence of a discretionary clause has the legal effect of limiting judicial review of a denial of benefits to a review for abuse of discretion. . . .[t]his standard of review deprives California insureds of the benefits for which they bargained, access to the protections of the Insurance Code[,] and other protections in California law.” See June 22, 2011, Senate Bill No. 621. The Court finds that the provisions conferring discretionary authority to Aetna are void and unenforceable pursuant to Cal. Ins. Code § 10110.6. Because the Court finds the provisions conferring discretionary authority to Aetna are void and unenforceable, the Court reviews whether Aetna correctly or incorrectly denied benefits de novo. See Firestone, 489 U.S. at 957; see also Abatie, 458 F.3d at 963. (Emphasis added.)
This ruling is further proof that the abuse of discretion standard of review will no longer apply in a vast majority of the ERISA cases filed in Federal Courts in California.
If your claim for short-term disability insurance or long-term disability insurance was denied, you can call (949) 387-9595 for a free consultation with the attorneys of the McKennon Law Group, several of whom previously represented insurance companies, who are exceptionally experienced in handling ERISA short-term and long-term disability insurance litigation.
