McKennon Law Group, Author at McKennon Law Group

The California Department of Insurance, along with five other state insurance departments, reached a settlement with Metropolitan Life Insurance Company, Inc. (“MetLife”) over allegations that the company failed to properly utilize the Social Security Administration’s Death Master File database to identify deceased life insurance policyholders and pay their beneficiaries. In addition to promising to enact business reforms to ensure that it promptly pays life insurance benefits to the proper beneficiaries, MetLife will pay $40 million to the state insurance departments.

In announcing the settlement, California Insurance Commissioner Dave Jones called the settlement “an important victory for consumers,” explaining that:

“For many years, MetLife selectively used the Social Security Administration’s Death Master File database to cut off payments to annuity holders but did not use that database to identify deceased life insurance policyholders and pay their beneficiaries. Under today’s settlement, that practice will end. I hope other life insurers will follow MetLife’s lead and enter into similar agreements.”

As a result of this settlement, every month, MetLife is required to use the Social Security Death Master File to determine whether its life insurance policyholders, annuity owners and holders of retained asset accounts have died. If MetLife learns that a policyholder died, it must conduct a thorough search for beneficiaries, using contact information in its records and online search and locator tools. If MetLife does not find a beneficiary within a year of learning of a death, it must transfer the benefit to the appropriate state controller as unclaimed property.

The state departments of insurance alleged that, prior to this settlement, MetLife had a decades-long practice of improperly retaining life insurance benefits that should have been paid to the beneficiaries of its life insurance policies. Earlier this year, Commissioner Jones reached a similar settlement agreement with Prudential Life Insurance Company.

If you believe that a life insurance company failed to pay the benefits you are owed under a life insurance policy, please contact our office for a free consultation. Our firm is currently advising existing clients regarding these issues.

The McKennon Law Group PC periodically publishes articles on its California Insurance Litigation Blog that deals with frequently asked questions in the insurance bad faith and ERISA area of the law. This is another such article in that series.

Generally, in order to sue for insurance bad faith there necessarily must be an insurance policy at issue that establishes a concept known as “privity of contract” between an insured and an insurer. This means that an insured under an insurance policy typically may sue for bad faith if the insured is entitled to benefits under a policy and if those benefits are wrongfully withheld or payment was wrongfully delayed. This includes the contracting parties (persons named as insureds) as well as others entitled to benefits as “additional insureds” or as express beneficiaries under the policy. In insurance parlance, this means that the “named insured” and any “additional insureds” may sue.

Furthermore, a designated beneficiary of an insurance contract has standing to sue for both the policy benefits and extra-contractual damages if the benefits are wrongfully withheld. An express beneficiary need not be specifically named. An insured may have standing to sue if a member of a class for whose benefit the contract was made. Someone not a party to the contract has no standing to sue. Thus, in the disability insurance context, even though a spouse may have suffered emotional distress, if she is not an insured, she cannot sue the insurer for bad faith. However, if an insurer breaches an independent duty it owes to a spouse, it is possible for that spouse to sue for damages (e.g., intentional infliction of emotional distress). In the life insurance context, a beneficiary of the policy would have standing to sue for insurance bad faith.

In addition, an insurance bad faith claim can be assigned. In the context of a third party claim, it is possible to assign a bad faith claim under certain circumstances. This is most typically done in connection with a failure by an insurer to defend and indemnify an insured for third party liability. However, because purely personal tort claims are not assignable, the insured’s claims for emotional distress damages and punitive damages are not assignable. Essex Ins. Co. v. Five Star Dye House, Inc., 38 Cal. 4th 1252, 1263 (2006). An assignment allows the third-party to obtain more than the policy limits from the insurer. Without the assignment, a third-party can only sue the insurer for the amount of the judgment as third party beneficiary of those liability policies. Ins. Code § 11580(a).

The same “privity of contract” requirement applies in determining who may be sued. Generally, only the insurer(s) on the risk as the party to the contract can be sued. This includes “primary,” “excess” and “umbrella” insurers. Moreover, it is possible to sue an insurer’s alter ego or joint-venturer, typically a parent company. It is also possible under certain circumstances to sue a “managing general agent” who is appointed by the insurer to manage all or part of its insurance business. An insurance agent can be sued for professional negligence, but not for insurance bad faith. See Kurtz, Richards, Wilson & Co. v. Insurance Communicators Marketing Corp., 12 Cal. App. 4th 1249, 1257 (1992) (“At a minimum, an insurance agent has a duty to use reasonable care, diligence, and judgment in procuring the insurance requested by its client. An agent may assume additional duties by an agreement or by holding himself or herself out as having specific expertise.”); Williams v. Hilb, Rogal & Hobbs Ins. Services of Calif., Inc., 177 Cal. App. 4th 624, 635–636 (2009) (holding that a special duty will arise when an agent holds himself out as having specific expertise.)

Insurance bad faith claims can be potent weapons for insureds or beneficiaries who have been mistreated by insurance companies in the handling of their insurance claims. Knowing who can sue and be sued is therefore important to understand if you are considering an insurance bad faith lawsuit.

In Skinner v. Northrop Grumman Retirement Plan B, 673 F.3d 1162 (9th Cir. 2012), the Ninth Circuit applied the Supreme Court’s ruling in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011) wherein the high court ruled that ERISA “summary documents, important as they are, provide communication with beneficiaries about the plan, but that their statements do not themselves constitute the terms of the plan for purposes of § 502(a)(1)(B).” (The holding in CIGNA Corp. v. Amara was discussed in our blog) While the Ninth Circuit adopted the Supreme Court’s logic and ruling, it left open the possibility that language contained only in the Summary Plan Description (“SPD”) could be enforced if a claimant relied on that language.

In Skinner, two retirees sued for additional retirement benefits under an ERISA-governed pension plan. The retirees alleged that their pension benefits should be calculated using the formula set forth in the SPD, rather than the plan documents. The Plan moved for, and was granted summary judgment by the trial court on the grounds that the retirees had not raised a genuine issue of material fact with respect to the proper amount of pension benefits they were entitled to receive.

At the district court level, all parties agreed that the plaintiffs were strictly limited “to obtain other appropriate equitable relief” under ERISA. On appeal, the Ninth Circuit explained that “the Amara Court stated that, under appropriate circumstances, § 502(a)(3) may authorize three possible equitable remedies: estoppel, reformation, and surcharge.” The retirees only sought reformation and surcharge. The Ninth Circuit rejected the reformation claim because there was no evidence that the plan documents “fail[ed] to reflect that drafter’s true intent” or “that Northrop Plan B contains terms that were induced by fraud, duress, or undue influence.” Similarly, the Ninth Circuit ruled that the ERISA claimants were not entitled to a surcharge remedy because it found that “by failing to enforce the terms of the 2003 SPD instead of the terms of the plan master document” there was “no evidence that the committee gained a benefit by failing to ensure that participants received an accurate SPD” did not constitute a breach of fiduciary duty.

While the Ninth Circuit ruled against the retirees, it noted that they did not make an estoppel argument because “they presented no evidence of reliance on the inaccurate SPD.” Thus, while the Ninth Circuit found that, in this particular instance, the language of the plan documents would be enforced over the language in the SPD, the Court acknowledged that if a claimant could demonstrate reliance on the SPD, the language in the SPD might well control.

Such a ruling is consistent with the recent ruling in the District Court of Puerto Rico where the court rejected the defendant’s argument that Amara found that equitable estoppel is not an appropriate avenue for relief under ERISA. Indeed, the court noted that “equitable estoppel forms a very essential element in . . . fair dealing, and rebuke of all fraudulent misrepresentation, which it is the boast of courts of equity constantly to promote.” See Guerra-Delgado v. Popular, Inc., 2012 U.S. Dist. LEXIS 44432 (D. P.R. March 29, 2012) (internal quotations removed).

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In the unpublished case of Probst v. Superior Court (Health Net of California, Inc., et al), No. A133742 (March 6, 2012), Division Five of the First Appellate District refused to enforce an arbitration provision in an enrollment form. Brian Probst (who filed a putative class action alleging that Health Net of California, Inc. and Health Net, Inc (“Health Net”) failed to adequately protect private personal and medical information from unauthorized disclosure to third-parties) sought writ relief from an order compelling him to arbitrate his claims against Health Net. The Court granted the requested relief because the health plan enrollment form signed by Probst failed to comply with the disclosure requirements of the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act, Health & Saf. Code, § 1363.1, subdivision (b)), rendering the arbitration agreement unenforceable.

The Knox-Keene Act, Health & Saf. Code section 1363.1 provides:

“Any health care service plan that includes terms that require binding arbitration to settle disputes and that restrict, or provide for a waiver of, the right to a jury trial shall include, in clear and understandable language, a disclosure that meets all of the following conditions: [¶] . . . [¶] (b) The disclosure . . . shall be prominently displayed on the enrollment form signed by each subscriber or enrollee.”

The Court relied heavily on Zembsch v. Superior Court (2006) 146 Cal. App. 4th 153, 160-161, where another arbitration agreement was held unenforceable. The Court ruled that the disclosure provided by Health Net “does not command attention to its existence.” The provision was contained in a comparatively small and dense section of text. The Court explained that the arbitration disclosure is “essentially buried on the lower one-third of the second page” of the enrollment form. It appeared within a crowded group of other provisions beneath an “Acceptance of Coverage” heading. In explaining why the arbitration provision did not satisfy the “prominently displayed” requirement, the Court stated:

Relative to the bulk of the provisions contained in the enrollment form, the arbitration provision is contained in a comparatively small and dense section of text that does not capture the reader’s attention. As previously described, the first page and the first two-thirds of the second page of the enrollment form contain various provisions which stand out and are readily noticeable, including the sections governing personal, employee and family information, disclosure of other health care coverage, declination of coverage, and selected coverage. Those sections are preceded by headings appearing in white typeface in dark gray boxes stretching seven inches across the page. They also include boxes that are required to be checked, and generous spacing between individual questions and provisions.

In contrast, the arbitration disclosure is essentially buried on the lower one-third of the second page of the enrollment form. The arbitration disclosure appears within a crowded group of provisions appearing beneath the “ACCEPTANCE OF COVERAGE” heading. The small, narrow font used in this section is surrounded by narrow spacing, giving an overall compressed appearance and making it more difficult to read. While the font used in the arbitration disclosure appears to be somewhat larger and perhaps slightly darker than the other provisions in this section, and the line spacing somewhat greater, this is so by only the most minimal degree. The arbitration provision is not written in a significantly larger or bolder font, it is not italicized, underlined, or in all caps, and the spacing around the provision is not sufficiently large so as to highlight the provision and make it readily noticeable.

Furthermore, the arbitration disclosure is divided between two columns, unlike the other provisions appearing beneath the “ACCEPTANCE OF COVERAGE” heading. The breaking up of the disclosure between two columns hinders its readability, and serves to make the disclosure even less noticeable than the other provisions in this section.

The Court concluded:

In enacting section 1363.1, subdivision (b), the Legislature plainly intended that arbitration disclosures in health care service plans be readily observable by the reader. While health plans have flexibility in selecting elements to give prominence to arbitration disclosures (Burks, supra, 160 Cal.App.4th at p. 1028), defendants did not achieve the required prominence in the enrollment form signed by plaintiff. It is apparent from reviewing other, nonarbitration related provisions of plaintiff’s enrollment form that defendants possessed the ability to make the arbitration disclosure prominent. (See Zembsch, supra, 146 Cal.App.4th at p. 165 [when measured against other portions of the form, “Health Net clearly could have made the text of the disclosure more prominent had it chosen to do so”].) However, it cannot reasonably be said in this case that the arbitration disclosure stands out, or is readily noticeable, conspicuous, or striking. (Imbler, supra, 103 Cal.App.4th at p. 579; Burks, supra, 160 Cal.App.4th at p. 1026.)

Consequently, the superior court erred in compelling plaintiff to arbitrate his claims against defendants. (Zembsch, supra, 146 Cal.App.4th at p. 168 [violation of section 1363.1 renders any arbitration agreement unenforceable].)

This case is the latest case from the Court of Appeals to invalidate arbitration provisions by health service plans governed by the Knox-Keene Act.

In Kroll v. Kaiser Foundation Health Plan Long Term Disability Plan, 2012 U.S. Dist. LEXIS 25063 (N.D. Cal. February 10, 2012), the Court refused to require that the plaintiff appear for an independent medical examination (“IME”) because Metropolitan Life Insurance Company (“MetLife”) failed to request the IME within 45 days, as required by 29 C.F.R. § 2560.503-1. With the ruling, the District Court confirmed that the time limits set forth in the Department of Labor regulation apply to claims that are remanded to an ERISA administrator following litigation. On May 13, 2011, the Court ruled that MetLife abused its discretion and improperly denied plaintiff’s claim for long-term disability (“LTD”) benefits made under an ERISA-governed employee welfare benefit plan. With the ruling, the Court ordered that MetLife pay all benefits due under the policy’s “own occupation” definition of disability, and remanded the claim back to MetLife for a determination under the “any occupation” definition. In connection with the remand, plaintiff’s counsel wrote to MetLife’s counsel requesting the forms needed to pursue the remanded LTD claim. On May 16, 2011, he was informed that MetLife would let him know what documents and information would be required. Unwilling to wait for MetLife to act, in June 2011, plaintiff sent MetLife just under 1,000 pages of medical records in connection with her claim. Five months later, in October 2011, MetLife finally provided plaintiff with claim forms and requested information to review the claim. MetLife also ordered the plaintiff to appear for an IME, but her counsel objected that the request was untimely pursuant to 29 C.F.R. § 2560.503-1(f)(3). With the plaintiff refusing to appear for the IME, MetLife filed a motion to compel the examination. While MetLife argued that 29 C.F.R. § 2560.503-1 did not apply to its actions because the disability claim was remanded to MetLife following litigation, the District Court noted that MetLife failed to provide any authority to support that position. The Court ultimately rejected MetLife’s argument, explaining that the plain language of the regulation, which “sets forth minimum requirements for employee benefit plan procedures pertaining to claims for benefits by participants and beneficiaries,” applies to the remand of the LTD claim. In denying MetLife’s motion, the District Court explained that:

Pursuant to 29 C.F.R. § 2560.503-1(f)(3), Defendants had until June 27, 2011, to either make a determination on Plaintiff’s claim, or make a determination that more time was needed to resolve Plaintiff’s claim and notify Plaintiff. Defendants did neither. After hearing nothing from Defendants, Plaintiff, on her own initiative, sent over her medical records to Defendants. The first time Defendants indicated that they needed more information was in October 2011, five months after the Court remanded the claim for consideration.

Given MetLife’s failure to act within the time limits set by 29 C.F.R. § 2560.503-1, the District Court held that “it is too late for [MetLife] to further delay by seeking an IME.” Finally, the District Court ruled that “[p]ursuant to 29 C.F.R. § 2560.503-1(l), Plaintiff’s claim for long term disability benefits under the ‘any occupation’ standard is deemed exhausted,” and the plaintiff could therefore initiate further litigation regarding MetLife’s failure to pay benefits under the “any occupation” definition. This case highlights a claimant’s remedies when a claims administrator/insurer does not follow the applicable ERISA deadlines. It is nice to see the courts protecting claimants when insurers such as MetLife blatantly violate the applicable ERISA and Department of Labor deadlines.

MetLife Pays $40 Million To Settle Allegations That It Failed To Properly Identify And Pay Life Insurance Beneficiaries

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