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.

When an insured under an accidental death and dismemberment policy governed by ERISA dies, coverage often turns on whether the death resulted from an “accident,” which is covered, or from the insured’s own intentional conduct which a reasonable person would have viewed as substantially certain to lead to death, which is not covered. In Wolf v. Life Insurance Co. of North America, 2021 WL 2105316, (W.D. Wash. 2021), the court had to determine whether the death of an insured who drowned after a car wreck was an “accident.” The case turned on whether driving 70-80 miles per hour the wrong way down a one-way road next to a bay, with a .17 blood alcohol level, would have led a reasonable person in the insured’s shoes to view death as substantially certain. While calling it a very close call, the court ruled in favor of the insured in finding the death was accidental, for which insurance benefits were due under the policy.

In the Ninth Circuit Court of Appeals, the standard for determining whether an insured’s intentional conduct leading to death was an “accident” for purposes of an accidental death policy governed by ERISA was decided in Padfield v. AIG Life Insurance Company, 290 F.3d 1121, at 1126–27 (9th Cir. 2002). In Padfield, the insured had died while engaged in autoerotic asphyxiation. The Ninth Circuit first had to decide what standard should apply.

The seminal case on this issue was decided by the First Circuit Court of Appeals, in Wickman v. Northwestern National Insurance Company, 908 F.2d 1077, 1088 (1st Cir. 1990). In Wickman, the First Circuit adopted a two-part test for deciding the issue. First, the court looks at whether the insured has a subjective expectation of death from the conduct. The court is to make the subjective intent analysis “from the perspective of the insured, allowing the insured a great deal of latitude and taking into account the insured’s personal characteristics and experiences.” Second, the court is to apply an objective standard if the court cannot determine whether the insured had a subjective expectation of death, or if the court determines that the insured did not have a subjective expectation of death, the court is to apply an objective test to determine whether the insured’s expectations were reasonable. The objective test adopted in Wickman is “whether a reasonable person, with background and characteristics similar to the insured, would have viewed the injury as highly likely to occur as a result of the insured’s intentional conduct.”

In Padfield, the Ninth Circuit adopted the Wickman two-part test with a modified version of the second part of the test –whether a reasonable person, with a background and characteristics similar to the insured, would have viewed death as “substantially certain” to occur as a result of the insured’s intentional conduct. Padfield, 290 F.3d at 1127. Under this standard, the Ninth Circuit determined that a reasonable person with the insured’s experience would not have viewed death as substantially certain from autoerotic asphyxiation. Indeed, the court held that these facts “fell far short” of the substantially certain to result in death standard. The court found that this insured had engaged in autoerotic asphyxiation without dying in the past and also relied on “the uniform medical and behavioral science evidence indicating that autoerotic activity ordinarily has a nonfatal outcome.” On the other end of the spectrum, the court noted that courts have found that playing Russian roulette does involve a reasonable expectation of a substantial certainty of death, regardless of the insured’s subjective expectations.

The Padfield court noted that courts use various formulations to indicate the degree of certainty with which an insured must expect injury for an injury to be nonaccidental, but concluded that “the ‘substantially certain’ test is the most appropriate one, for it best allows the objective inquiry to ‘serve [ ] as a good proxy for actual expectation.’ ” Id. at 1127 (citing Wickman, 908 F.2d at 1088; Todd v. AIG Life Ins. Co., 47 F.3d 1448, 1456 (5th Cir. 1995)).

In Wolf, the court applied the Ninth Circuit’s two-part standard to Wolf’s behavior leading up to his death. The court found that the evidentiary record was inconclusive regarding Wolf’s subjective expectations, although the court observed that his wearing of a seatbelt and use of emergency flashers possibly indicated a subjective intention that his conduct not be fatal. The court ruled that Wolf’s conduct, while “extremely reckless behavior,” was nonetheless an accident under the substantial certainty of death standard:

Speeding along a one-way road the wrong direction in the dark alongside a body of water does not ‘fall far short’ of what a reasonable person might expect to lead to death, [citation], but neither would a reasonable person . . . view death as “substantially certain” in these circumstances.

In contrast, the court in Wolf gave examples of reckless driving scenarios which a reasonable person would consider substantially certain to lead to death:

driving into oncoming highway traffic or driving alongside a cliff without a guardrail with one’s eyes closed.

In Wolf, the court made its decision under the de novo review standard. It emphasized that these facts would have presented a much closer call for the court under the “abuse of discretion” standard, in which the insurance company’s decision to interpret policy language and make coverage decisions is accorded deference by the court. The court cited to cases holding it was not an abuse of discretion for an administrator to deny coverage for claims involving very similar drunk driving scenarios.

Wolf provides a useful roadmap in how the “substantially certain” standard would be applied to other circumstances in which an insured dies while engaged in intentional conduct that was a cause of the death. For example, dying from jumping off a five-story building would not be an accidental death. But dying from jumping off that same building while bungy jumping, due to an equipment failure, would be.

Wolf shows the advantages to the insured beneficiary of having a court review a denial of benefits under an ERISA governed insurance policy under the de novo standard, rather than under an abuse of discretion standard.

Wolf shows the necessity of an insured seeking coverage under an accidental death and disability policy to hire a knowledgeable ERISA accidental death attorney to carefully analyze the factual circumstances of an insured beneficiary’s death, and to successfully navigate the insurance claim through the ERISA appeals process and, if necessary, litigation.

Court Determines That Recognized Medical Conditions Without Objective Proof of Disability Will Still Support a Claim for Long-Term Disability Benefits

Claimants for long-term disability benefits often face an uphill battle with their insurers when their recognized medical condition lacks the kind of objective proof found in x-rays or blood work and instead, rely on the claimant’s subjective self-reports to their treatment providers. In one recent case, Vicky Myers v. Aetna Life Insurance Company, et al. 2020 WL 7423109 (2020), the U.S. District Court for the Central District of California found the insurer improperly based its denial of benefits on such a lack of objective evidence where the claimant was diagnosed and treated for fibromyalgia, chronic fatigue syndrome, and other conditions.

In 2003, Vicky Myers was experiencing pain, fatigue, and memory problems and was later diagnosed with fibromyalgia and chronic fatigue syndrome. She began suffering from reduced cognitive ability in April 2017, which made it difficult for her to do her job as a Software Management Engineer. At the time she was often working 12 to 14 hours a day managing at least six projects. She increasingly had trouble remembering, solving problems, and was more likely to make mistakes. Myers also experienced increased fatigue and muscle and joint pain requiring her to rest most of her weekends. In January 2018, Myers stopped working due to her health conditions.

Myers sought treatment from a variety of physicians and specialists who concluded that her worsening medical conditions meant she could no longer perform the duties of her job. Myers began occupational therapy for her chronic fatigue syndrome in February and her therapist put her on a plan to increase her executive functioning and problem solving skills. She began seeing a psychiatric therapist who noted Myers “had difficulty concentrating, intense and recurrent lethargy, extreme fatigue, and forgetfulness.” Another doctor noted Myers’ complaints of dull and constant body pains and that nothing seemed to alleviate her fatigue.

Myers submitted a claim for long-term disability with her employer’s insurance plan administered by Aetna and governed by the Employee Retirement Income Security Act (“ERISA”) in June 2018. Along with the claim application, Myers submitted statements from her treating physicians and specialists which described her medical conditions and said she was unable to concentrate, and could not work. Myers spoke with an Aetna representative and repeatedly emphasized that her cognitive decline was the biggest problem.

Aetna reviewed medical notes from Myers’ doctors and conducted its own review. A behavioral health clinician determined there was no evidence of a mental health impairment based on a review of the medical records and a call with Myers during which the clinician felt Myers “had no immediately apparent functional impairments ….” A nurse clinician also reviewed the medical records and stated there was no showing of “any organic cognitive loss or physical functional loss” because of Myers’ reported conditions. Aetna subsequently determined Myers was not disabled under the long-term disability policy and denied her claim in September of 2018.

In April 2019, Myers’ attorneys informed Aetna that she was appealing its denial. Myers submitted additional medical records including a report from a neuropsychologist stating Myers had a decline in visual memory and executive functioning, and her “cognitive difficulties interfere with her capacity for independence in daily life.” Additionally, she submitted a vocational assessment that found Myers was unable to perform her occupation. Finally, another doctor who had been treating Myers for a year stated she was completely unable to perform her job duties because of her conditions, particularly her neurocognitive impairment.

Aetna had Myers’ file peer reviewed by three third-party doctors. Two of the doctors did not discuss Myers’ cognitive issues but concluded the medical records did not show objective support for a claim of impairment, such as physical exams or testing. One doctor stated that, while fibromyalgia could result in subjective discomfort, there was no basis for restrictions on daily living or any functional impairment. Another emphasized the records were inconsistent because some of Myers’ doctors said she appeared normal during visits and her test scores were variable. Based on this inconsistency, the doctor concluded there were no confident findings of impaired cognitive function. Aetna denied Myers’ appeal in October 2019 and her attorneys filed suit in the U.S. District Court for the Central District of California.

Following a bench trial on the administrative record, the court issued its findings of fact and conclusions of law. Under a de novo review of a challenge to an insurance company’s denial of benefits under ERISA, the court had to determine if Myers had established that she was disabled under the terms of the policy. The court also noted that the relevant provisions of Aetna’s policy focused on Myers’ ability to perform the duties necessary to do her job so proving Myers’ suffered from her medical conditions was not enough, she had to prove that those conditions also caused a disability affecting her ability to do her job.

Despite Aetna’s arguments about the lack of objective evidence, the court recognized that Myer’s conditions of chronic fatigue and fibromyalgia “are all difficult to measure objectively through tests or other evaluations” and doctors must rely on their patient’s descriptions of their conditions and other subjective information.

The court quoted from Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666, 678 (9th Cir. 2011) that “[m]any medical conditions depend for their diagnosis on patient reports of pain or other symptoms, and some cannot be objectively established until autopsy. In neither case can a disability insurer condition coverage on proof by objective indicators such as blood tests where the condition is recognized yet no such proof is possible.” Id. at 678. Additionally, the court quoted from the Seventh Circuit’s holding in Holmstrom v. Metro. Life Ins. Co., 615 F.3d 758 (7th Cir. 2010), “noting that for conditions like fibromyalgia, the court has ‘rejected as arbitrary an administrator’s requirement that a claimant prove her condition with objective data where no definitive objective test exists for the condition or its severity.’” Id. at 769.

Under ERISA, Aetna was not required to perform in-person medical evaluations. Nonetheless, the court was not persuaded by Aetna’s third-party doctors following their “paper” file review. The court discounted the conclusions to the extent they relied on inconsistencies in the records finding “such inconsistencies do not automatically negate any medical condition” nor do they show that Myers is unreliable and making a false claim. As noted above, two of the doctors did not even address Myers’ cognitive function, which was the main problem affecting her ability to work. Finally, the court found that one of the doctors unfairly minimized the effects of fibromyalgia by suggesting it cannot cause a disability, which is contrary to the Ninth Circuit’s holding in Salomaa and other cases. The court found credible the reports of Myers’ numerous treating physicians and specialists who concluded she was unable to work and that they were not only reliable measures of Myers’ medical condition, but also her ability to work.

The court found Myers’ met her burden of showing an entitlement to disability benefits and that her fibromyalgia and chronic fatigue interfered with the level of mental functioning necessary for her to perform the duties necessary for her job.

The findings in Myers are significant for those seeking long-term disability benefits for recognized medical conditions that do not provide the level of objective proof that insurance companies demand. The lack of such evidence may not be a bar to entitlements where statements by treating physicians and specialists are credible and support a finding of disability.

McKennon Law Group PC has significant experience in handling ERISA and non-ERISA insurance cases in which an insurer denied a claim. If your insurer or plan administrator has denied your claim, please contact us for a free consultation so that we may assess your matter.

Can You Receive Both Social Security Disability and ERISA Benefits?

If you are disabled, if you are unable to work, and if you need to receive disability benefits, start by having a discussion with a California disability benefits attorney. The right attorney will know what disability benefits you are eligible to receive and will help you obtain those benefits.

What help may be available to someone who suffers a disabling injury and is no longer able to work? What steps do you have to take to be approved for disability benefits? And what are your options if the benefits that you believe you are eligible for are denied to you? Do ERISA long-term disability plans reduce their benefit payments to insureds if they receive other types of disability benefits?

If you continue reading this brief discussion of disability benefits, these questions will be answered, and you will also learn where to find the help you may need if you are disabled and you are seeking to obtain long-term disability benefits.

What Programs Provide Disability Benefits?

When people say that they are “on disability,” it usually means that they are receiving any of the following benefits or some combination of these benefits:

Veterans’ disability compensation
State disability income
Social Security disability insurance
Private individual disability insurance
Group long-term disability insurance
Worker’s Compensation disability

These are different programs that provide financial assistance to disabled persons who cannot work at all or who cannot work full-time at their occupation or at any occupation. If you are disabled, it is important to know which benefits you are eligible for and how the programs work alone or in combination. It is more complicated than you may think at first.

What is Social Security Disability Insurance (SSDI)?

If you become disabled, you may apply for Social Security Disability Insurance (SSDI). You will need to have enough work credits, and you will have to satisfy the stringent disability standards set by the Social Security Administration (SSA).

The number of work credits you must have in order to receive SSDI benefits depends on your age when you become disabled. Most workers will need forty credits, but in some cases, younger disabled workers with fewer credits may also be eligible for SSDI benefits.

You also must demonstrate to the SSA that you have a severe medical impairment by providing test results, imaging, and other medical records as evidence of the diagnosis and symptoms that define your disability.

What is ERISA and How Does it Apply to Long-Term Disability Claims?

If you have purchased long-term disability insurance through your employer, you may also file a claim for those disability benefits. Employee benefits are governed by the Employee Retirement Income Security Act of 1974 (ERISA).

ERISA is the federal law that sets the standards for most retirement, health, and disability plans offered by private employers. A California disability benefits lawyer who handles ERISA claims can help you with an ERISA disability claim or help you file an appeal if your claim is denied. It is too long of a discussion to outline all of the ways ERISA may impact your long-term disability claim. There are numerous ERISA rules and regulations that impact your claim and you should consult an ERISA disability claims attorney to help you navigate these rules and regulations.

If Your ERISA Disability Insurance Claim Is Denied, Then What?

ERISA disability insurance claims are denied more often than they are paid. That means your claim will likely be denied by insurers who put profit first in evaluating whether to pay claims. If your long-term disability claims is denied, ERISA rules require you to appeal a denial of long-term disability benefits directly with the insurance company, in accord with the wording of your policy, before you may sue the company over a denial of your benefit claim.

ERISA plans give you 180 days to appeal a denial of disability benefits. Some plans require two appeals before you may file a lawsuit. In any of these situations, you should have a disability benefits lawyer handle the appeal on your behalf.

It is faster (and sometimes easier) to receive disability insurance benefits from an insurer than it is to receive SSDI benefits. However, some disability insurance policies require you to apply for SSDI before a specific deadline, and if you are approved for SSDI, your insurance payout will be reduced.

How and Why Can Someone’s ERISA Disability Benefits Be Reduced?

ERISA plans almost always provide for offsets or deductions from the standard disability benefit owed under an LTD policy for certain types of disability benefits. This means that an insurance company may reduce the payout amounts in order to “offset” and recover any overpayments.

That is how insurance companies can shift their disability payout obligation to Social Security. In addition, LTD policies will often provide for offsets for benefits received from state disability income, other group long-term disability insurance, and worker’s compensation disability.

How Can You Know You Are Receiving the Right Benefits?

If this sounds complicated, it is. To make sure that you are receiving the benefits that you are legally entitled to receive – and to stay compliant with ERISA and Social Security rules – you may need the advice and services of a California disability benefits attorney. Your attorney can:

determine which benefits you qualify to receive and when to apply for those benefits
guide you step-by-step through the application process for disability benefits
ensure that your application forms and additional paperwork are accurate and complete
take legal action on your behalf to obtain the disability benefits that are rightfully yours
advise you as to what offsets are proper and in what amounts

Why Might Your ERISA Disability Benefits Be Denied or Terminated?

Even if the SSA has approved your application for SSDI benefits, you may still be denied ERISA long-term disability insurance benefits under your long-term disability policy.

It is the insurance policy’s definition of a disability that will determine if you qualify for long-term disability benefits. You should read – and you should be certain that you understand – how your ERISA long-term disability insurance policy works.

For example, in many long-term disability policies, the definition of a “disability” changes after the first 24 months that you are disabled. Your plan might pay disability benefits for the first 24 months because you can no longer work at your “own occupation.”

But after 24 months, the policy may change the definition of disability if you can work at “any occupation” – a more restrictive definition. Disabled persons may be surprised to learn their disability benefits may end after two years because of the changed definition of “disability.”

How Do California Courts Handle Denials of ERISA Claims?

ERISA rules and regulations often tend to favor insurance companies. In some states, a court will only order an insurance company to pay a denied claim for ERISA disability benefits if the court determines that the denial was “arbitrary and capricious.” In other states, a “de novo” standard of review will apply, which is much more favorable to insureds/employees.

California courts in most situations apply a the “de novo” standard of review, in which the judge simply determines if the insurance company was wrong or right when it denied a claim without giving deference to the insurer’s decision. ERISA rules and regulations are complicated and the courts will apply these ERISA rules and regulations to decide the outcome of your disability claim. That’s why, if the long-term disability benefits that you believe you are entitled to under ERISA are delayed or denied, you should obtain the advice and services of a California disability benefits lawyer as quickly as possible. Whether you receive disability benefits is often dependent on hiring an experienced ERISA disability claims attorney like McKennon Law Group PC.

Sometimes employers offer their employees the opportunity to purchase additional insurance coverage for the employees themselves and for their dependents as part of an employee benefit plan. In such cases, the employer often functions as a plan administrator and as the agent of the insurance company issuing the policy. To attempt to insulate themselves from legal liability, insurers often insert “non-waiver” provisions relating to the agency status of the employers to whom they sell life, health and disability insurance coverage.

Cho v. First Reliance Standard Life Insurance Co., 2021 WL 2885855 (9th Cir. 2021) involved an employee who purchased additional life insurance coverage in the amount of $500,000 for her dependent spouse through her employer, Giorgio Armani Corporation. Ms. Cho signed up for the coverage and paid premiums for it for more than a year when Ms. Cho’s dependent spouse died. First Reliance denied the claim based on the policy provision that clearly provided that the insured submit “proof of good health” for the coverage. Ms. Cho was forced to file suit against First Reliance in order to get the benefits of the insurance she had purchased and paid for. She claimed that First Reliance had waived its right to enforce the requirement for “proof of good health” because its behavior was “so inconsistent with an intent to enforce” it. The district court agreed and awarded her the full $500,000 policy benefit.

First Reliance appealed to the Ninth Circuit Court of Appeals. It contended that a “non-waiver” clause in the policy immunized it from liability and distinguished the case from the Ninth Circuit’s decision in Salyers v. Metropolitan Life Insurance Co., 871 F.3d 934, 940 (9th Cir. 2017), which the court commented was very similar on the facts. First Reliance claimed that it was not responsible for the acts and omissions of the plan administrator even though the plan administrator handled “nearly all the administrative responsibilities” of the plan. The Ninth Circuit easily found that the plan administrator was the agent of First Reliance, and, therefore, First Reliance was liable for the plan administrator’s conduct:

Cho is entitled to the benefits for which she paid. Because the plan was self-administered and Armani handled “nearly all the administrative responsibilities,” its “direct interaction with plan participants” would have suggested it was acting with “apparent authority on the collection of evidence of insurability.” See Salyers, 871 F.3d at 940–41 (citation and internal quotation marks omitted). For over a year Armani accepted Cho’s premiums without any submission of evidence of insurability though it “knew or should have known” the terms of the plan required such evidence. See id. at 941. Armani’s actions were “so inconsistent with an intent to enforce” the requirement that it was reasonable for Cho to believe she was not required to submit such evidence. See id. (citation and internal quotation marks omitted).

Cho, supra, 2021 WL 2885855, at *1.

This was an easy case – Armani “knew or should have known” that the terms of the plan required submission of proof of good health, and “Armani’s actions were ‘so inconsistent with an intent to enforce’ the requirement that it was reasonable for Cho to believe she was not required to submit such evidence.”

The Ninth Circuit did not enforce the non-waiver clause because “[a]llowing insurers like First Reliance essentially to vitiate Salyers and the good behaviors it seeks to promote by including one sentence in their plans would be unfair and unjust.”

Insurance companies can always be counted upon to do what they can to try to avoid liability through the use of self-serving provisions like the non-waiver clause at issue in Cho. However, they are still subject to principles of equity and fairness – they cannot “contract their way out” of liability for the substantial gross negligence of themselves or their agents.

If you have been unfairly denied insurance coverage based on mistakes made by insurance companies or their agents, McKennon Law Group, PC may be able to help you. We specialize in handling ERISA cases like this one and obtaining the maximum policy benefits, holding insurers responsible for the coverage they agreed to provide.

In this several-part blog series titled The Basics of an ERISA Life, Health and Disability Insurance Claim, we discuss the basics of an ERISA life, health, accidental death and dismemberment & disability claim, from navigating a claim, to handling a claim denial, through the subsequent appeal and litigation. In Part Fifteen of this series, we discuss a court’s awarding of interest on unpaid benefits. Under the Employee Retirement Income Security Act of 1974 (“ERISA”), a prevailing party is entitled to interest on the benefits that they are awarded by the court.

Under federal law, “A district court may award prejudgment interest on an award of ERISA benefits at its discretion.” Blankenship v. Liberty Life Assurance Co. of B., 486 F.3d 620 (9th Cir. 2007). “[T]he interest rate prescribed for post-judgment interest under 28 U.S.C. § 1961 is appropriate for fixing the rate of pre-judgment interest unless the trial judge finds, on substantial evidence, that the equities of that particular case require a different rate.” Grosz-Salomon v. Paul Revere Life Ins. Co., 237 F.3d 1154, 1164 (9th Cir. 2001). The base level of interest provided by Section 1961 is the “weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date of the judgment.” At times, that rate of interest can be quite low, sometimes even lower than 1%. As such, it may be in someone’s best interest to attempt to find an exception to this default rate of interest.

As the court in Blankenship explained, a prevailing party may be entitled to a higher rate of interest if there is “substantial evidence” that the individual would have obtained a higher rate of interest on the funds, had they been paid in a timely manner. See Blankenship, 486 F.3d at 627-28. “Substantial evidence is defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” Id. at 628. This naturally raises the question, What evidence is sufficient to persuade a court to award the party a higher rate of interest?

In Blankenship, the court awarded a 10.01% interest rate based on a declaration that the prevailing party “was forced to replace the $6,093.82 per month he would have received with his own personal funds. Those funds would otherwise have been invested in a Vanguard mutual fund in which he had already invested over one half million dollars, and which had a 10.01–percent return since its inception in June 2000.” Id. at 628. As Blankenship makes clear, forgoing a clear investment opportunity is one way of obtaining an award based on a higher interest rate.

Whereas a clear investment opportunity is generally required to convince a court to stray from Section 1961, some courts have awarded higher interest rates for other reasons. For example, in Hart v. Unum Life Insurance Co. of America, 2017 WL 4418680 (N.D. Cal. Oct. 4, 2017), upon an ERISA plaintiff’s motion for attorneys’ fees, costs and prejudgment interest, the court found that the balance of equities weighed in the plaintiff’s favor, entitling her to an award of 10% prejudgment interest. The court noted that the plaintiff had submitted a declaration explaining that defendant Unum’s wrongful termination of her benefits caused her to lose her house, car and health insurance and to rely on her daughter for financial support. Id. at *3. The court held that her attestation set forth a “believable narrative and constituted ‘substantial evidence’ warranting a higher rate of prejudgment interest.” Id.

In Bosley v. Metropolitan Life Insurance Co., 2017 WL 4071346 (N.D. Cal. Sep. 14, 2017), upon an ERISA plaintiff’s motion for attorneys’ fees, costs and prejudgment interest, the court found that the balance of equities and the compensatory nature of prejudgment interest weighed in the plaintiff’s favor, entitling him to an award of 10% prejudgment interest. Id. at 3. The court noted that the plaintiff sought prejudgment interest to help compensate him for the losses he incurred because of MetLife’s wrongful denial and withholding of his long-term disability benefits for over three years. The court recognized the declaration that the plaintiff had submitted, which detailed how MetLife’s denial of his claim had contributed to financial difficulties that ultimately led him to move to Missouri for more affordable housing. Id. The court found this hardship and loss sufficient to compel an award of the higher rate of interest.

Ultimately, an ERISA dispute may take years to resolve. This means that years’ worth of disability or pension benefits may be at stake. The value of a sizable life insurance policy may be in dispute. If the interest has been accruing for several years, the difference between 1% and 10% is significant. It can be the difference between $3,000 and $30,000. As such, this is one aspect of the litigation, or any settlement negotiations, that a party should not ignore.

McKennon Law Group PC has significant experience in handling ERISA and non-ERISA insurance cases in which an insurer denied a claim. We have significant experience in obtaining the maximum possible award for our clients. If your insurer or plan administrator has denied your claim, please contact us for a free consultation so that we may assess your matter.

Los Angeles Daily Journal Publishes Article on September 7, 2021 by Robert J. McKennon and Larry J. Caldwell Entitled “High Court Clarifies Life Insurance Grace Period Law”