By: Robert McKennon

It is no secret that employee benefit plan administrators use the Employee Retirement Income Security Act of 1974 to shield themselves from liability for their mistakes and transgressions with respect to employee benefits. They may make misrepresentations about the payment of medical, life, disability or pension benefits upon which plan participants rely. These plan administrators have a fiduciary obligation to the plan and to plan members to act and communicate honestly about the benefits they provide.  What happens when a plan administrator unintentionally misrepresents that plan participants will receive medical insurance for life if they retire from their employment in good standing, although the employee plan documents state that the plan does not provide lifetime benefits? Do the plan documents control?

On Sept. 13, the 9th U.S. Court of Appeals issued an important ruling under ERISA in Warmenhoven v. NetApp, Inc., 2021 DJDAR 9537, affirming in part and vacating in part the district court’s summary judgment in favor of defendants on plaintiffs’ claims under 29 U.S.C. Sections 1132(a)(1)(B) and 1132(a)(3). Plaintiffs alleged that termination of the NetApp Executive Medical Retirement Plan violated ERISA because plaintiffs, who were plan participants, had been promised lifetime benefits. The decision is important because it restated 9th Circuit authority that there is no scienter requirement for breach of fiduciary claims and, importantly, continued to expand equitable remedies available for breach of fiduciary claims under ERISA.

The Warmenhoven court held that because there was a genuine dispute of material fact as to whether NetApp incorrectly represented to plan participants that its plan provided lifetime health insurance benefits, Warmenhoven’s fiduciary duty claim survived summary judgment. There was a genuine issue of fact as to whether NetApp, Inc. breached its fiduciary duty by misrepresenting that the plan would provide lifetime benefits even though the terms of the plan included no such guarantee and even though NetApp could normally terminate the plan at any time.

Warmenhoven was the former CEO of NetApp and was CEO from 1994 to 2009 and executive chairman of its board of directors from 2009 to 2014. In 2003, Warmenhoven inquired about the creation of an executive retiree health plan, and such a plan was adopted by the board’s compensation committee in May 2005. In November 2015, the compensation committee decided to close the plan to new participants and in April 2016, it decided to terminate the plan altogether with an amended plan that would reimburse participants for the cost of purchasing health insurance on their own for a limited time. Warmenhoven and other participating retirees opposed the amended plan. This lawsuit followed.

As the court noted, “the default rule under ERISA is that employers my freely terminate welfare benefit plans like the Plan.” Warmenhoven claimed that NetApp had promised him that his health insurance benefits would continue for his lifetime relying primarily on representations made by NetApp in a series of PowerPoint presentations made to plan participants. An April 2005 PowerPoint indicated that the plan would provide certain retiring executives with medical coverage “as a fully insured plan” and represented that any company acquiring NetApp would have to agree to provide equivalent benefits “for the lives of the eligible employees.”

A March 2014 version of the PowerPoint more clearly “promised that the ‘Plan provides medical benefits for the retiree’s lifetime’ and that ‘[n]o retiree contributions [are] required.’” In addition to the PowerPoints, NetApp’s public filings contained disclosures that the plan was required to provide lifetime health care benefits to participants.

The certificates of coverage for the plan were prepared yearly by NetApp’s plan administrator CIGNA from its inception to 2012 and then by CIGNA’s replacement, UnitedHealthcare, from 2013-2016. The certificates of coverage all included at least one provision granting NetApp the authority to terminate benefits under the plan at any time — directly contradicting the promises in the PowerPoints of lifetime benefits.

Warmenhoven and six other retirees brought suit asserting two claims under ERISA: (1) that the PowerPoints themselves operated to vest lifetime benefits and sought recovery under Section 1132(a)(1)(B); and (2) that NetApp had breached its fiduciary duties by misrepresenting that the plan provided lifetime benefits, and plaintiffs were entitled to equitable remedies under Section 1132(a)(3). The district court granted summary judgment in favor of NetApp on both claims. Warmenhoven was the only plaintiff who appealed.

The court quickly dismissed the legal claim under Section1132(a)(1)(B) based on controlling circuit authority which requires that any change to the vesting schedule from the default position such that the plan can be terminated or amended at any time must be in writing in a plan document, citing Cinelli v. Security Pac. Corp., 61 F.3d 1437, 1441 (9th Cir. 1995).

The court then examined Warmenhoven’s equitable claim under Section 1132(a)(3), in which he claimed that if the PowerPoints did not vest lifetime benefits, he was entitled to equitable relief based on NetApp’s misrepresentation of plan benefits.

The court noted that a claim under Section 1132(a)(3) has two elements: (1) that there is a remediable wrong, i.e., that the plaintiff seeks relief to redress a violation of ERISA or the terms of a plan; and (2) that the relief sought is appropriate equitable relief.

The Warmhoven court had no difficulty finding that Warmenhoven had presented evidence of a “remediable wrong” sufficient to overcome summary judgment. Warmenhoven claimed that a named fiduciary misrepresented the terms of the plan by stating that the plan provided lifetime coverage. The court explained that prevailing circuit authority, Barker v. American Mobil Power Corp., 64 F.3d 1397, 1403 (9th Cir. 1995), held that “’fiduciaries breach their duties if they mislead plan participants or misrepresent the terms or administration of a plan.’” The court then examined the U.S. Supreme Court’s ruling in Varity Corp. v. Howe, 516 U.S. 489 (1996), which held that a plan fiduciary violated its fiduciary duties by intentionally deceiving plan beneficiaries to save the plan sponsor money at the expense of the plan beneficiaries.

Although Varity involved an intentional breach of fiduciary duty by a named fiduciary, the court noted that intent to mislead plan participants is not required under current circuit law. The court found that the district court erred in finding that NetApp did not breach a fiduciary duty because it only made honest statements regarding its intention to provide lifetime benefits. The court explained that under King v. Blue Cross & Blue Shield of Ill., 871 F.3d 730, 744 (9th Cir. 2017) and Mathews v. Chevron Corp., 362 F.3d 1172, 1183 (9th Cir. 2004), the fiduciary duty of loyalty is rooted in trust law, not tort law, and accordingly there is no reason to transplant the element of scienter from the law of torts.

The court noted that its decision in Mathews followed a line of cases from other circuits that do not require a showing of intent. Specifically, the Mathews court followed 6th Circuit precedent in James v. Pirelli Armstrong Tire Corp., 305 F.3d 439 (6th Cir. 2002). In James, company management made repeated oral promises to prospective retirees that their benefits would continue unchanged both during retirement and during their lifetimes. After the plaintiffs retired, the company increased the costs of health care benefits. The James court held that the company thereby breached its fiduciary duty under ERISA Section 1104(a)(1). The court did not address whether Warmenhoven would be entitled to appropriate equitable relief to redress the alleged wrong — a requirement of an equitable claim under Section 1132(a)(3) — but instead left that issue for the district court to consider on remand.

Warmenhoven is the latest case from the 9th Circuit to expand equitable relief for plan participants and their beneficiaries under ERISA for breach of fiduciary duties.  This case reinforces existing law that imposes upon ERISA plan fiduciaries, such a plan sponsors and plan administrators, potential liability for their misrepresentations to employees who make important decisions based on these representations. This is the right result given that ERISA’s remedies are equitable in nature and drawn from the law of trusts, where strong fiduciary duties are imposed on those who are in a position of trust and responsibility.

Robert McKennon is a shareholder at McKennon Law Group PC. He specializes in representing policyholders in life, health and disability insurance, insurance bad faith, ERISA and unfair business practices litigation. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.

In its September 7. 2021 issue, the Los Angeles Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon and Larry J. Caldwell. The article addresses McHugh v. Protective Life Insurance Co., a new case in which the California Supreme Court held that the grace and notice periods in Insurance Code Sections 10113.71 and 10113.72 apply to life insurance policies issued and delivered in California before January 1, 2013, as well as to life insurance policies issued, delivered, or renewed after January 1, 2023. McHugh provides significant new protections against loss of life insurance coverage for the policyholders and beneficiaries on all life insurance policies issued or delivered in California prior to or after January 1, 2013.

High Court Clarifies Life Insurance Grace Period Law

By Robert J. McKennon and Larry J. Caldwell

Most insureds pay regular monthly life insurance premiums for years without a problem. Occasionally, a policyholder may miss a premium payment. For example, in the last few months of her life, the policyholder may be so ill or incapacitated that she uncharacteristically fails to pay the monthly premium. If the policyholder misses a premium payment by the due date, or within a grace period following the due date, the policy will lapse, and the insurer will decline to pay death benefits on this basis — even though the policyholder may have paid premiums faithfully for years, or even decades.

In 2012, the California Legislature enacted new statutes to protect life insurance policyholders and beneficiaries from this situation. Insurance Code Sections 10113.71 and 10113.72 require: (1) insurers to provide notice to applicants and annual notice to policyholders of their right to designate someone other than themselves to receive lapse notices (Section 10113.72 (a), (b)); (2) policyholders and any designees to receive notice within 30 days of a missed premium payment, and any termination for nonpayment will not be effective unless insurers send notice to these parties at least 30 days prior (Sections 10113.71 (b)(1), (3), 10113.72 (c)); and (3) all policies have a 60-day grace period, which lines up with the two 30-day notice windows (Section 10113.71 (a)).

The first requirement, only applicable to individual life insurance policies, allows policyholders to designate a person in addition to the policyholder to receive lapse notices, making it less likely non-payment of a premium will cause a loss of coverage. The law took effect on Jan. 1, 2013.

Policyholders and insurers have agreed that the new requirements in Sections 10113.71 and 10113.72 apply to all life insurance policies issued or delivered in California on or after Jan. 1, 2013. But there had been a long-running legal dispute regarding whether these new requirements applied to life insurance policies issued before Jan. 1, 2013 and whether policies “renewed” after this date incorporate these statutory requirements. Policyholders and beneficiaries under life insurance policies (including my firm) argued that these new rules should apply to all life insurance policies, regardless of when first issued or delivered in California. Not surprisingly, insurers argued that these statutory rules should not apply to life insurance policies issued prior to Jan. 1, 2013, because this would be a “retroactive” application of the statutes, and the Legislature only intended the statute to apply prospectively.

A decision by the California Supreme Court, McHugh v. Protective Life Insurance, 2021 DJDAR 9020 (Aug. 20, 2021), settles this legal dispute in favor of policyholders and beneficiaries. In a unanimous decision, the court reversed the California Court of Appeal in holding that the statutory grace period and notice requirements apply to all life insurance policies issued in California, regardless of when they were issued. The court rejected the insurer’s arguments that applying the statutory requirements to life insurance policies issued prior to Jan. 1, 2013, would constitute a “retroactive” application of the statute, even though the Legislature purportedly did not indicate a clear intention for the statute to apply retroactively. The court further held that, in any event, the legislature did intend the statute to apply to life insurance policies in force before Jan. 1, 2013.

In March 2005, Chase Life Insurance Company, the predecessor to Protective Life Insurance Company, issued a $1 million term life insurance policy to William McHugh. He paid annual premium payments through 2012. McHugh missed his annual premium payment due on Jan. 9, 2013. Despite warning notices sent to him, he failed to make the payment during the policy’s grace period. Protective Life then terminated his policy for non-payment of premium. McHugh passed away in June 2013, after the policy was lapsed and terminated.

McHugh’s daughter, Blakely McHugh, the primary beneficiary on the policy, submitted a claim for the death benefit, which Protective Life denied, because the policy was not in force at the time of William McHugh’s death

Blakely McHugh and her mother sued Protective Life for breach of contract and insurance bad faith. At trial, the trial court instructed the jury that Sections 10113.71 and 10113.72 applied to the policy, even though it was issued before Jan. 1, 2013. The jury found that McHugh had either performed or been excused from performing all conditions necessary for Protective Life to pay the death benefit, but nevertheless found against plaintiffs and in favor of Protective Life on both claims for breach of contract and insurance bad faith.

The Court of Appeal affirmed the judgment on the grounds that Sections 10113.71 and 10113.72 did not apply to life insurance policies issued prior to Jan. 1, 2013, thus did not apply to plaintiffs’ life insurance policy, because it was issued prior to this date.

The California Supreme Court reversed the Court of Appeal, holding that sections 10113.71 and 10113.72 apply to all life insurance policies in force when these two sections went into effect, regardless of when the policies were originally issued. The court correctly noted that this interpretation fits the provisions’ language, legislative history, a uniform notice scheme, and it protects policyholders, especially those who are elderly, hospitalized, or incapacitated, ones who may be particularly vulnerable to missing a premium payment. The court explained that this is “consistent with the provisions’ purpose.”

The court based its decision on two primary rationales: that applying the statutory requirements to existing policies does not constitute a “retroactive” application of the statute; and that, in any event, the legislature intended the new requirements to apply to all life insurance policies issued or delivered in California, regardless of when they were issued or delivered.

When interpreting a statute, courts normally begin with a presumption that a statute applies only prospectively in the absence of clear evidence that the legislature intended the statute to apply retroactively. In McHugh, the court emphasized the importance of deciding the threshold issue of whether a statute applies “retroactively,” before proceeding to the presumption. In analyzing alleged “retroactivity,” the Supreme Court “focused on whether the statutory change in question significantly alters settled expectations: by changing the legal consequences of past events, or vitiating substantial rights established by prior law.” The court determined that,

“The grace period and notice obligations added by Sections 10113.71 and 10113.72 do not impact a life insurer’s liability for past, preenactment defaults …. Nor do the changes otherwise impinge on a contracting party’s substantial rights or unfairly upset the bargain memorialized in the insurance policy, for example, by requiring an insurer to provide substantially expanded coverage without also giving it an opportunity to raise premiums.”

Observing that “the arguments offered [by the insurer] fall short of clearly showing how the sections’ new protections constituted a disruptive contract change of the sort that would qualify as ‘retroactive’ under our precedent,” the court determined that applying the new requirements in Sections 10113.71 and 10113.72 to pre-existing life insurance policies is a prospective application.

As a second basis for its ruling, the court also stated that, in any event, the legislature intended Sections 10113.71 and 10113.72 to apply to all existing life insurance policies:

“[T]he statutory sections appear to create a single, unified pretermination notice scheme …. [I]t seems doubtful the Legislature contemplated that insurance companies would, going forward, simultaneously implement two vastly different notice schemes: one applying to pre-2013 policies that requires only 31-day notices before termination and no right to designations, and a post-2013 scheme as described.”

The Supreme Court’s said its decision was motivated by the importance of life insurance coverage:

“Millions of California consumers manage financial risks for their families by purchasing life insurance. Through these policies, Californians ensure that their families and other designated beneficiaries are protected by a financial safety net — and are able to plan for contingencies — in the event of the policy owners’ untimely death.”

McHugh provides significant new protections against loss of life insurance coverage for the policyholders and beneficiaries on all life insurance policies issued or delivered in California prior to or after Jan. 1, 2013. Owners of such policies that have previously lapsed may potentially now have grounds for reinstatement of their policies, whether or not the policy owner is still living. Beneficiaries whose claims for coverage have been denied based upon a lapse in coverage that would have been prevented by these new statutes may now have a basis for seeking reconsideration of denial. They may also have claims for breach of contract and insurance bad faith regarding such denials. Life insurers will lament this decision because it will result in death benefits being paid under numerous previously lapsed life insurance policies, thus preserving thousands of valuable life insurance policies. But, policyholders and their beneficiaries will be consoled in knowing that a single missed premium payment will not necessarily result in the termination of their policies for which they paid premiums for many years without fail.

Robert J. McKennon is a shareholder of McKennon Law Group PC in its Newport Beach office. His practice specializes in representing policyholders in life, health and disability insurance, insurance bad faith and ERISA litigation. He can be reached at (949) 387-9595 or rm@mckennonlawgroup.com. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.

Larry J. Caldwell is of counsel to McKennon Law Group PC in its Newport Beach office. He has litigated insurance claims for over 35 years and specializes in representing policyholders in ERISA, insurance coverage, and insurance bad faith litigation regarding disability, life, accidental death, pension and health insurance claims.

The private sector, employer-sponsored insurance plans are regulated by the Employee Retirement Income Security Act of 1974 – ERISA. ERISA is the federal law that establishes the minimum standards for group insurance plans that are offered through private-sector employers. Should your claim for ERISA disability benefits be denied, you will need to have a California ERISA claims attorney to challenge that denial on your behalf.

However, under ERISA, before you may bring a lawsuit against an insurance company for denying your claim, you are required to pursue one or more “administrative” appeals through the company. If the appeals fail, only then may you bring a lawsuit challenging the claim denial.

If your own ERISA life, health, or disability insurance claim has been denied, and if your administrative appeal does not succeed, what happens when you file a lawsuit to overturn the denial and to obtain your disability insurance benefits?

As we discuss below, there are different review standards used by the courts in these cases, and you will also learn where to turn for the legal help you may need if your own ERISA life, health or disability claim is rejected.

What Is a Standard of Review?

When a lawsuit against an employer or insurance company for denying an ERISA life, health, or disability claim gets to court, there is no jury, and even if you can convince the judge that the insurance company was wrong, in some states, your lawsuit still may not prevail – because of the “standard of review.”

Two standards of review may be used by a court in these cases: the “de novo” standard and the “abuse-of-discretion” standard. A court will use one of these review standards when it hears your lawsuit:

1. To succeed with a lawsuit in a court that uses the abuse-of-discretion review standard, a judge must determine that the insurer was wrong to deny your claim, and the judge also must determine that the company abused its discretion by denying your claim.
2. To succeed with a lawsuit in a court that uses the de novo standard, the judge, reviewing the administrative record with “fresh eyes,” essentially determines if the insurance company was right or wrong to deny the claim for disability insurance benefits.

In other words, to win under the abuse-of-discretion standard of review, the judge must find that the insurance company’s denial of your life, health or disability claim was so unreasonable that it constituted an abuse of the company’s discretion. This standard of review gives a decided advantage to employers or insurers who deny life, health or disability claims.

But under the de novo review standard, a judge simply decides if the company was right or wrong to deny your claim. This standard of review gives neither party any advantage going into the courtroom. But, a life, health or disability claimant always has the burden of proof.

Why Do Insurance Companies Prefer the Abuse-of-Discretion Standard?

Under the abuse-of-discretion review standard, a court must agree with the employer’s or the insurance company’s denial of your disability claim and its denial of your administrative appeal – unless the company actually “abused” its discretion when it rejected your claim or your appeal.

In recent years, fewer states are allowing insurance companies to hide behind the abuse-of-discretion standard. California and other states now have laws that require courts to use only the de novo standard of review.

If you are seeking ERISA disability or life insurance benefits in California, and if your claim was denied and your appeal also failed, you will in most instances receive a de novo review of your claim if you and your attorney file a lawsuit against your employer or insurance company.

What Does the De Novo Standard Mean?

Even under a de novo review standard, if you have a California life, health, or disability ERISA claim, you and your California ERISA claims lawyer still must prove that you are entitled to the ERISA life, health, or disability insurance benefits you were denied. The de novo standard, however, lets the court make its determination more fairly and independently than if the abuse-of-discretion review standard applied.

In other words, under a de novo review, the court may consider both the legal and the factual issues about your entitlement to life, health, or disability insurance benefits, and the court is not required to give any deference to the plan administrator’s or insurance company’s decision to deny benefits.

This all means that states that have required a de novo review through legislation, such as California, allow courts to make their own decisions in these cases, thus allowing the courts to substitute their own discretion rather than giving deference to the decision of an insurance company or plan administrator who have obvious biases toward denying life, health or disability insurance claims that negatively affect their financial interest.

What is the “Default” Standard of Review and What Standard is Now Used in Most Courts?

The de novo standard of review is the “default” national standard, and it has been since 1989, when the United States Supreme Court held (in Firestone Tire & Rubber Co. v. Bruch) that, by default, claimants are entitled to de novo reviews of ERISA life, health or disability insurance benefit denials.

However, the court also held that the abuse-of-discretion standard may apply if the language of the ERISA-governed plan unambiguously grants the plan administrator or insurance company full “discretionary authority” to determine benefits or to fully interpret the plan’s terms and conditions.

How Does the De Novo Standard Benefit California Consumers?

As explained above, California law prohibits the inclusion of discretionary authority clauses in life, health, and disability plans. The effect of that prohibition is to require California courts to use only the de novo standard of review in all cases that involve fully insured plans.

Thus, in the words of the Ninth Circuit Court of Appeals (in Abatie v. Alta Health Life Insurance, 2006), the court “must conduct an independent, thorough analysis of the entire administrative record” and “evaluate the persuasiveness of conflicting testimony.”

In fact, to conduct an adequate de novo review, the court may take additional evidence into account by allowing the parties to augment the administrative record to evaluate the credibility of medical opinions or to hear claims that the medical reports in the case are inaccurate. For example, if a disability claimant received a favorable disability opinion from Social Security Administration, courts will typically allow disability claimants to augment the record to include them.

When Do You Need an ERISA Attorney’s Advice and Services?

Would you go to a knee surgeon if you had cancer? Of course not. You need to consult with an experienced ERISA attorney who knows ERISA life, health or disability insurance inside and out. A workers’ comp or personal injury attorney will almost certainly not be familiar with ERISA. You must be represented by a California ERISA life, health or disability insurance claims attorney who has considerable experience advocating for clients who are seeking ERISA insurance benefits.

If you are applying for ERISA life, health, or disability insurance benefits – or if your claim has been rejected – you should have the specific and personalized advice that only a lawyer who is familiar with ERISA can provide.

ERISA lawyers usually provide your initial legal consultation at no cost and with no obligation. Your first consultation is your opportunity to obtain the personalized advice you need and to learn how the law applies to your own case and circumstances.

If you are disabled and you are applying for ERISA life, health, or disability insurance benefits, or if your claim has been denied, act now. To initiate legal action – or if you need to learn more – contact California ERISA claims lawyers McKennon Law Group PC as quickly as possible.