Briefly, the original suit involved Daniel Rochow, an executive who applied for, and was denied, long-term disability benefits after being diagnosed with a severely debilitating brain infection. He brought suit under ERISA for the insurer’s failure to pay benefits and breach of fiduciary duty. The district court held the insurer’s denial was arbitrary and capricious, and on appeal, awarded $3.78 million to the estate, $910,629 for Rochow’s disability benefits and $2.8 million to disgorge the insurer’s profits based on return on equity as “appropriate equitable relief” under 29 U.S.C. section 1132(a)(3) (Rochow I). This award was upheld by the Court of Appeals under the theory of unjust enrichment in Rochow I, but vacated in Rochow II. Thus, the stage was set for Rochow III.
Rochow III addressed whether Rochow was entitled to recover benefits under both ERISA section 502(a)(1)(B) and equitable relief under section 502(a)(3). The Court explained:
A claimant can pursue a breach-of-fiduciary-duty claim under § 502(a)(3), irrespective of the degree of success obtained on a claim for recovery of benefits under § 502(a)(1)(B), only where the breach of fiduciary duty claim is based on an injury separate and distinct from the denial of benefits or where the remedy afforded by Congress under § 502(a)(1)(B) is otherwise shown to be inadequate.
The court noted that both of Rochow’s claims were based on the same underlying “injury” (the insurer’s failure to pay benefits), and an award granting him these benefits plus attorneys’ fees did make him whole. Accordingly, the court vacated the disgorgement award under section 502(a)(3).
Of note, the Rochow III dissent sends a strong signal that the disgorgement issue is far from settled, and offers insureds guidance for future ERISA claims. First, Circuit Judge Helene White notes that although she agrees with the majority decision that disgorgement was not adequately supported, she would allow consideration of a refashioned disgorgement remedy on remand. Significantly, Judge White points out that the justices “all appear to agree disgorgement of profits is a potential remedy under ERISA.” Moreover, Judge White disagrees that disgorgement requires two separate injuries—the inquiry should be whether other equitable relief is appropriate under the circumstances, and the extent to which disgorgement duplicates the benefits-denial claim is one factor in this inquiry. Indeed, even if Rochow recovered his benefits and attorneys’ fees, other equitable relief may be appropriate—as evidenced by the fact that the majority permitted an interest award. Judge White underscores the Court of Appeal did not discern why one equitable remedy (interest) was appropriate, but another (disgorged profits) was not. Finally, Judge White suggested that disgorgement may be appropriate where an insurer’s denial was based on “impermissible considerations” such as “an organizational policy to delay paying valid claims for as long as possible” or if disgorgement was necessary to ensure proper claims processing in the future.
The dissent by Circuit Judge Jane Stranch held disgorgement was appropriate because Rochow brought two distinct claims (to recover plan benefits and for an accounting and disgorgement of profits wrongfully earned through the insurer’s breach of its fiduciary duty) and suffered two distinct injuries (the insurer’s denial of his disability benefits, and breach of its fiduciary duties). Specifically, the insurer engaged in “deliberate and willful wrongful acts” to deny Rochow’s claim. This denial allowed the insurer to retain substantial funds rightfully due to Rochow in its corporate account and earn millions in profits during a seven-year period. Ultimately, the dissent held that the majority mischaracterized the Rochow’s injuries and disgorgement was a proper remedy.
Although Rochow III is undeniably a victory for insurance companies, the strong concurring and dissenting opinions reveal that the Court did not foreclose the possibility of a disgorgement award. However, insureds may have to show a distinct injury or “impermissible considerations” at the hands of the insurance company such that payment of their claim is insufficient to make them whole. Indeed, the takeaway from Rochow III appears to be the Sixth Circuit reassuring insureds, better luck next time. This issue has not been resolved in the Ninth Circuit. Maybe there will be better luck next time.