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On October 26, 2018, the Los Angeles Daily Journal published an article written by Robert J. McKennon of the McKennon Law Group PC. The article examines a recent case by the California Court of Appeal, which held that the notice-prejudice rule precluded the denial of life insurance benefits based upon the insured’s failure to give timely notice of disability as required under a disability premium waiver provision in the life insurance policy. Insurers often attempt to argue that a technical violation of the notice requirements voids their claim where there exists no prejudice to them. This recent opinion helps to reinforce the notice-prejudice rule in California and helps to protect insureds. For a full view of the article, read here.
Waiver and equitable estoppel serve as some of the legal systems’ fundamental checks on the fairness of a party’s actions. Both doctrines serve to prevent an individuals and insurers from performing actions contradictory to what they have previously guaranteed or established via their conduct. “A waiver occurs when a party intentionally relinquishes a right or when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” Salyers v. Metro. Life Ins. Co., 871 F.3d 934, 938 (9th Cir. 2017) (internal quotations omitted). Equitable estoppel “holds the [individual] to what it had promised and operates to place the person entitled to its benefit in the same position he would have been in had the representations been true.” Gabriel v. Alaska Elec. Pension Fund, 773 F.3d 945, 955 (9th Cir. 2014) (internal quotations omitted). Often times, an insurer makes a declaration to an insured only for the insurer to then change its position to the insured’s detriment. This occurs in a variety of contexts such as life insurance, accidental death or dismemberment insurance and disability insurance. In Salyers v. Metro. Life Ins. Co., 871 F.3d 934 (9th Cir. 2017), the Ninth Circuit Court of Appeals addressed waiver in the context of the Employee Retirement Income Security Act of 1974 (“ERISA”) and it has become one of the most important cases dealing with waiver and estoppel issues in ERISA employee benefit area.
In Salyers, the Ninth Circuit found an insurer liable for a $250,000 life insurance policy, despite the insured’s failure to provide evidence of insurability to the insurer, as required by the policy. Susan Salyers worked as a nurse at Providence Health & Services. Providence provided life insurance to its employees through a plan sponsored by MetLife. The insurance was governed by ERISA. MetLife’s Summary Plan Description provided that, for a dependent to be eligible for life insurance coverage, the dependent must submit evidence of insurability in the form of a “Statement of Health” for elected coverage over $50,000. In 2013, Ms. Salyers elected a total of $40,000 in coverage, $20,000 for herself and $20,000 for her dependent. As the result of an administrative error, Providence’s internal records showed Ms. Salyers and her dependent as having coverage of $500,000. Neither Metlife nor Providence corrected the error or requested a statement of health. Providence deducted premiums for $500,000 in coverage. In the 2014 open enrollment period, Ms. Salyers elected $250,000 in coverage for her dependent, and, again, neither Providence nor MetLife requested a Statement of Health.
Ms. Salyers’ dependent passed away. MetLife processed the claim but issued only $30,000 in death benefits. It asserted that Ms. Salyers never submitted a “Statement of Health” and, therefore, Ms. Salyers could only receive the lesser amount. On administrative appeal, MetLife continued to deny coverage asserting that “its receipt of premiums did not create coverage” under the plan. Id. at 937.
Ms. Salyers filed suit arguing that MetLife was estopped from contesting coverage and, in the alternative, had waived the evidence of insurability requirement. The district court found in favor of MetLife, determining that Ms. Salyers had failed to meet the burden of establishing coverage via evidence of insurability. Ms. Salyers appealed and the Ninth Circuit reversed based on MetLife’s waiver through acceptance of premium payments by Providence, acting as MetLife’s agent in “collecting, tracking and identifying inconsistencies with the evidence of insurability requirement.” Id. at 941. The Ninth Circuit explained that “Courts have applied the waiver doctrine in ERISA cases when an insurer accepted premium payments with knowledge that the insured did not meet certain requirements of the insurance policy.” Id. at 939. MetLife was liable because of Providence’s apparent and implied authority to collect evidence of insurability on MetLife’s behalf. Because Providence failed to properly collect evidence of insurability for Ms. Salyers’ dependent, MetLife waived the right to enforce the Statement of Health requirement. Id. at 938-41. In footnote 5, the Salyers court noted that:
Generally, “[t]he doctrine of waiver looks to the act, or the consequences of the act, of one side only, in contrast to the doctrine of estoppel, which is applicable where the conduct of one side has induced the other to take such a position that it would be injured if the first should be permitted to repudiate its acts.” Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d 1551, 1559 (9th Cir. 1991)(internal citations and quotation marks omitted). We are mindful, however, of our previous statement that “in the insurance context, the distinction between waiver and estoppel has been blurred . . . . [I]t is consistent with ERISA to require an element of detrimental reliance or some misconduct on the part of the insurance plan before finding that it has affirmatively waived a limitation defense.” Gordon v. Deloitte & Touche, LLP Grp. Long Term Disability Plan, 749 F.3d 746, 752-53 (9th Cir. 2014)(internal citations and quotation marks omitted). Assuming, without deciding, that our holding inGordonapplies beyond the waiver of a statute of limitations defense at issue in that case, the record reflects that Salyers detrimentally relied on Providence and MetLife’s conduct, presumably by not buying other insurance. In a letter to Salyers, MetLife admits that “it appears that Ms. Salyers detrimentally relied on having Dependent Life Insurance great[er] than $30,000.”
Id. at 941, n.5.
Since Salyers, district courts do not appear to have placed much emphasis on footnote 5. For example, in Cohorst v. Anthem Health Plans of Kentucky, Inc., 2017 WL 6343592 (C.D. Cal. Dec. 12, 2017), a case which cited to Salyers, Aubrey Cohorst brought an action under ERISA against Anthem Health Plans of Kentucky, Inc. (“Anthem”). The underlying dispute involved Anthem’s denial of coverage for Ms. Cohorst’s artificial disc replacement surgery, which required the use of a “Mobi-C” device. Ms. Cohorst’s doctor determined that the surgery was medically necessary and sought Anthem’s prior approval. In the initial approval process, Anthem confirmed its approval of the surgery, but did not specify the medical device that would be used. Anthem’s internal documents mirrored its initial approval, describing the surgery as “medical necessary” and meeting “criteria guidelines.” See id. at *1-3.
When Ms. Cohorst’s physician contacted Anthem to confirm which medical device had been approved for surgery, Anthem told the doctor it approved the “Pro Disc-C” and not the “Mobi-C.” Shortly after this conversation, Anthem created a new reference number allegedly based on the request to use the “Mobi-C” device and overturned its original approval, finding the procedure to be “Experimental” or “Investigative” and thus not medically necessary under the terms of the plan. Ultimately, Ms. Cohorst underwent the surgery and Anthem refused to cover its costs.
Ms. Cohorst sued Anthem. Under a de novo standard of review, the court evaluated the plan and the relevant exclusionary language. The court determined that the procedure fell within the exclusion. Despite this, the District Court still found in favor of Ms. Cohorst based on a theory of waiver. Id. at *10. Emphasizing Anthem’s inconsistent behavior, the court held that Anthem waived its right to assert the exclusion when it first approved the surgery as medically necessary. Id. The court explained that Anthem had waived its right to deny Ms. Cohort’s claim because it initially approved her surgery, albeit with a “Pro Disc-C” device. The court explained that waiver occurs when “a party intentionally relinquishes a right” or “when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” Id. (citing Salyers, 871 F.3d at 938). The court reasoned that Anthem was fully aware of Ms. Cohorst’s medical condition when it initially approved the surgery and it was only after Dr. Bray appealed Anthem’s decision regarding the type of device to be used in the surgery that Anthem suddenly decided to completely reverse its prior authorization and deny Ms. Cohorst’s entire claim. The court found that because there was no new information regarding Plaintiff’s prior condition or any change in its medical policy, Anthem waived its right to rely on the exclusion that was available to it when it provided its initial approval. Id. at 10.
Of interest, the court did not analyze the case in terms of detrimental reliance. Instead, the court performed a standard waiver analysis, like it would for a case not involving ERISA.
Footnote 5 of Salyers raises another question. Has there been any change in how courts apply promissory estoppel in the ERISA context? Salyers is only a year old, but it appears that Salyers has not significantly altered how district courts in the Ninth Circuit apply the doctrine of promissory estoppel.
As explained in Gabriel v. Alaska Electrical Pension Fund, 773 F.3d 945, 955 (9th Cir. 2014), a Ninth Circuit case that predates Salyers, to establish equitable estoppel, a party must establish “(1) the party to be estopped must know the facts; (2) he must intend that his conduct shall be acted on or must so act that the party asserting the estoppel has a right to believe it is so intended; (3) the latter must be ignorant of the true facts; and (4) he must rely on the former’s conduct to his injury.” To assert a claim for equitable estoppel under ERISA, additional requirements must be met. “Accordingly, to maintain a federal equitable estoppel claim in the ERISA context, the party asserting estoppel must not only meet the traditional equitable estoppel requirements, but must also allege: (1) extraordinary circumstances; (2) that the provisions of the plan at issue were ambiguous such that reasonable persons could disagree as to their meaning or effect; and (3) that the representations made about the plan were an interpretation of the plan, not an amendment or modification of the plan.” Id. at 956 (internal quotations omitted).
Post Salyers, some district courts in the Ninth Circuit still use this same test listed in Gabriel. See Spies v. Life Ins. Co. of N.A., 312 F.Supp.3d 805, 812-13 (N.D. Cal. 2018); Meakin v. California Field Ironworkers Pension Trust, 2018 WL 405009, at *7 (N.D. Cal. Jan. 12, 2018); O’Rouke v. Northern California Elec. Workers Pension Plan, 2017 WL 5000335, at *15 (N.D. Cal. Nov. 2, 2017); Polevich v. Tokio Marine Pac. Ins. Ltd., 2018 WL 4356583, at *9-10 (D. Guam Sept. 13, 2018); Berman v. Microchip Tech. Inc., 2018 WL 732667, at *14 (N.D. Cal. Feb. 6, 2018).
Berman v. Microchip Technology Inc., 2018 WL 732667 (N.D. Cal. Feb. 6, 2018), provides a good example of how estoppel can apply in the ERISA context. In Berman, a group of former Atmel employees sued their employer over alleged violations of a severance benefits plan arising under ERISA. The employer created the severance benefits plan due to uncertainty surrounding the employer’s future and its attempts to secure a merger partner. The plan was outlined in a series of letters to the employees. The letters explained that the plan would terminate on November 1, 2015 “unless an Initial Triggering Event . . . occurred prior to November 1, 2015, in which event the [Atmel Plan] will remain in effect for 18 (eighteen) months following that Initial Triggering Event.” Id. at *1. Initial triggering event was defined as “enter[ing] into a definitive agreement . . . on or before November 1, 2015, that will result in a Change of Control of the Company.” The plan benefits would only be provided if a change of control occurred and the employees were terminated without cause within 18 months of the triggering event.
Atmel and a company called Dialog Semiconductor PLC executed and announced a formal merger agreement before November 1, 2015. Before the closing date of the Dialog merger, Atmel and Microchip entered into merger negotiations. Atmel withdrew from the agreement with Dialog and entered into an agreement with and became a wholly owned subsidiary of Microchip. When communicating with its employees, Atmel and Microchip explained that the plan would still apply even if the deal with Microchip, as opposed to Dialog, was completed.
Subsequently, Microchip failed to honor the plan. Several terminated employees sued to obtain their severance benefits under the plan. Microchip moved to dismiss the complaint. One of the plaintiffs’ arguments relied on equitable estoppel. The court relied on the standard Gabriel test. See id. at *14. Defendants argued that the plan was not ambiguous and the circumstances failed the extraordinary circumstances prong of the test. The court did not agree with the defendants. It stated:
First, the Court is satisfied, notwithstanding Plaintiffs’ assertions that the provisions of the Atmel Plan are unambiguous, that reasonable parties could disagree as to whether the Plan required the Initial Triggering Event and the Change of Control to involve the same merger partner—particularly at the motion to dismiss stage, and particularly since that interpretation is one of the primary disputes in this case. Second, Plaintiffs sufficiently allege detrimental reliance on an oral, material misrepresentation of that ambiguity by Defendants.
Id. at *15. The court denied Microchip’s motion insofar as it related to the employees’ claim for equitable estoppel. See id.
In the ERISA context, the doctrines of waiver and estoppel can be difficult to invoke. However, sometimes, an insurer makes a critical mistake and must honor its word. Whereas Salyers may be an indication of a gradual change in the doctrine, the change has not yet been firmly established. District courts still rely on the traditional forms of waiver and equitable estoppel. It is quite possible that the foundation for a shift in the doctrines is being laid, but only time will tell if that is the case.
In the next article, we will discuss the similar claims for breach of fiduciary duty and surcharge, which are often easier to prove and prove similar and very satisfying remedies for an ERISA plaintiff/claimant.
Every insurance policy, including disability, life, health or accidental death policies, contains an implied covenant of good faith and fair dealing between the insurance company and the insured. This covenant requires that insurance companies refrain from acting in a way that unreasonably jeopardizes, impairs or interferes with the rights of the insured to receive the benefit of the insurance contract. The Unfair Insurance Practices Act (California Insurance Code Sections 790, et seq., “UIPA”) was enacted to regulate the business of insurance by defining and prohibiting practices which constitute unfair methods of competition or unfair or deceptive acts or practices.
California Insurance Code Section 790.03(h) (“Section 790.03(h)”) enumerates a list of sixteen specific unfair claims settlement practices that insurance companies are prohibited from engaging in and which, if the insurance company is found to be in violation, could subject the company to severe penalties. These unfair claims settlement practices include, but are not limited to, misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverage at issue, failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under the insurance policies, failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured, and failing to provide promptly a reasonable explanation of the basis relied on for the denial of a claim.
The California Insurance Commissioner (“the Commissioner”) is tasked with implementing regulations necessary to administer the UIPA. The Commissioner’s authority to promulgate such regulations was recently challenged in the matter of PacifiCare Life & Health Ins. Co. v. Jones, No. G053914, __ Cal. App.4th __ (September 20, 2018). The plaintiff PacifiCare Life & Health Ins. Co. (“PacifiCare”) brought an action challenging the validity of three regulations which the Commissioner relied on in finding that PacifiCare engaged in over 900,000 violations of the Insurance Code and imposing penalties in excess of $173 million. Specifically, PacifiCare argued that the regulation which purported to authorize enforcement action based on a single, knowing commission of a violation is facially invalid since it is inconsistent with Section 790.03(h). PacifiCare claimed Section 790.03(h) does not include the single knowing commission of a violation in its definition of an unfair claims settlement practice, but rather applies only to repetitive acts of misconduct which indicate a general business practice. PacifiCare also argued that the regulation which purported to define the term “knowingly committed” as including implied or constructive knowledge was invalid since this definition is inconsistent with the ordinary meaning of the term, and that the regulation which defined the term “willful” or “willfully” as not requiring intent to violate law or to injure another was also invalid snice the definition was inconsistent with the statutory definition of “willful” found in the Insurance Code.
The trial court granted PacifiCare’s motion for judgment on the pleadings and request for injunctive relief. The Commissioner appealed. Upon review, the California Court of Appeal reversed, disagreeing with PacifiCare and concluding that the Legislature intended to authorize the Commissioner to regulate activities based not only on patterns of unfair claims settlement practices, but also on single acts of misconduct by an insurer. The Court therefore upheld the validity of the challenged regulation and found that Section 790.03(h) defines an unfair claims settlement practice to be either a single knowing commission of a violation, or conduct that is committed with such frequency as to indicate a general business practice. The Court also determined that the regulations defining the terms “knowingly committed” and “willful” or “willfully” were permissible interpretations of UIPA and were therefore valid.
This case is significant in that it makes clear that insurance companies can engage in the sixteen prohibited acts enumerated in Section 790.03(h) by just once committing the described misconduct, and that the Commissioner is authorized to pursue enforcement action based on a single knowing commission of a prohibited practice. As the Court of Appeal stated, this result is consistent with the Legislature’s intent in enacting Section 790.03(h) and related provisions of the UIPA to curb insurer violations of the California Insurance Code.
The Employee Retirement Income Security Act (“ERISA”), a 1974 federal law, sets minimum standards for many employee benefit plans and serves to provide protection for individuals in these plans. Discovery in ERISA cases is often limited because the statute’s primary goal is to provide inexpensive and expeditious resolution to employee benefit claims. District courts are generally limited to the administrative record unless a so-called structural conflict of interest exists. Considering that insurers make benefit determinations on life, health and disability insurance claims and profit when an adverse decision is made, this scenario creates an inherent conflict of interest whenever an insurer administers a claim.
Courts find that a conflict of interest exists where the “entity that administers the plan, such as an employer or an insurance company, both determines whether an employee is eligible for benefits and pays benefits out of its own pocket.” Metro Life Ins. Co. v. Glenn, 554 U.S. 105, 108 (2008). Where this conflict of interest exists, the plaintiff may be entitled to discovery outside of the administrative record to determine the “nature, extent, and effect” the conflict may have had on the decision-making process. Burke v. Pitney Bowes Inc. Long-Term Disability Plan, 554 F.3d 1016, 1028 (9th Cir. 2008) quoting Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 970 (9th Cir. 2006).
In Black v. Hartford Life Insurance Co., 2018 WL 3872113 (D. Or. Aug. 14, 2018), the court considered the history of bias of Hartford Life Insurance Company (“Hartford”), a leading long-term and short-term disability insurance provider, in deciding whether to allow discovery of its history of biased claims administration. In its ruling, the court found Hartford had a history of biased claims administration based on its litigation history and allowed discovery into this area.
The plaintiff, David Black (“Black”), was employed by DMX Music as a customer service representative. He was diagnosed with Atypical Parkinson’s Disease and obtained Long Term Disability (“LTD”) benefits beginning in December 2005. Black’s LTD policy was insured by Hartford, which was responsible for determining the plaintiff’s eligibility for benefits and for paying benefit awards. He was granted an initial 24 months of LTD benefits based on his inability to perform the material duties of his “own occupation.” After the 24-month period ended, Black continued to receive benefits under the more stringent “any occupation” standard for approximately nine years. See id. at *1.
On November 20, 2015, Defendant Hartford’s Special Investigation Unit (“SIU”) investigated Black’s LTD claim based on online information that Black had started a business. Hartford hired a third-party vendor to conduct surveillance of Black, which showed him walking with a cane, using public transportation, going to the bank, getting his hair cut, shopping and carrying groceries. Hartford also discovered a YouTube video of Black playing in a band in May 2014. The SIU scheduled an interview with Black, which was conducted in March 2016 and hired a neurologist to examine him in June 2016. Based on the neurologist’s examination and review of Hartford’s surveillance footage, he concluded that Black did not have Atypical Parkinson’s disease. See id.
On August 31, 2016, Hartford wrote a letter to Black informing him his LTD benefits had been terminated. Black appealed, which was denied by Hartford. After Hartford’s denial of the plaintiff’s appeal, Black brought suit alleging that Hartford abused its discretion under ERISA when it decided to terminate his LTD benefits claim. Black then served discovery on Hartford and then filed a discovery motion to compel production, seeking three categories of documents: Hartford’s relationships with vendors HUB Enterprises (“HUB”), MES Solutions and/or MES Group (“MES”) and its neurologist, Dr. Robert Egan. Black asserted these areas of discovery would reveal a history of biased claims administration. See id. at *2.
The court noted that permitting “conflict” discovery is well within the discretion of the court and the Ninth Circuit has not endorsed imposing a threshold burden of production on the plaintiff before permitting discovery. See id., citing Burke v. Pitney Bowes Inc. Long-Term Disability Plan, 544 F.3d 1016, 1028 n. 15 (9th Cir. 2008). The court found that in other ERISA cases within the Ninth Circuit, Hartford has used HUB and MES several times to conduct biased investigations. See id.
For example, in Hertz v. Hartford Life & Accessories Insurance Co., 991 F.Supp.2d 1121, 1127 (D. Nev. 2014), Hartford hired HUB to conduct surveillance of the plaintiff in that case. There, the court recognized that Hartford knew its vendors had financial incentives to produce reports that would justify denying benefits. The district court in Hertz granted summary judgment in the plaintiff’s favor, concluding that Hartford’s conflict of interest improperly motivated its benefits decision. Id. at 1143. Similarly, in Caplan v. CAN Financial Corp., 544 F.Supp.2d 984, 991-93 (N.D. Cal. 2008), the Northern District of California considered Hartford’s reliance on a vendor it knew was incentivized to produce biased reports in order to maintain its financial relationship with Hartford. Likewise, a Central District of California court considered Hartford’s “well-established relationship” with MES, noting the increase over time in payments and LTD claim referrals from Hartford to MES. See Black, 2018 WL 3872113 at *2; Kurth v. Hartford Life & Acc. Ins. Co., 845 F.Supp.2d 1087, 1096 (C.D. Cal. 2012).
In the Black case, the court thus found that Hartford operated under a conflict of interest and had a history of biased claims administration. The court was ultimately persuaded by the fact that Hartford used the same vendors as were used in Hertz, Caplan and Kurth and exercised its discretion to allow Black to obtain the discover of Hartford’s financial relationship with its vendors. Black, 2018 WL 3872113 at *3.
The court then considered discovery regarding the performance and evaluation of six Hartford employees involved in terminating Black’s LTD benefits claim. The court noted that whether or not the performance of the employees involved was measured by reference to their ability to deny or terminate LTD claims directly related to whether Hartford’s conflict of interest biased its decision-making process. In Hertz, Hartford’s employees were “acutely aware” that Hartford evaluated them on that basis. Black, 2018 WL 3872113 at *3 citing Hertz, 991 F.Supp.2d at 1134. Evidence produced in that case showed the investigator responsible for terminating Hertz’s claim was evaluated based on her ability to close claims. Another district court found that Hartford’s performance reviews “may reveal a structural incentive for individual claims adjustors to deny disability claims.” Stout v. Hartford Life & Acc. Ins. Co., No. 11-6186 CW JSC, 2012 WL 4464605, at *2 (N.D. Cal. Sept. 25, 2012). The court found that Black’s requests were proportional with the needs of the case and that Black was entitled to discovery of performance evaluations and other incentive-related documents. The court reasoned that such documents have been used by other courts in similar cases as evidence of biased decision-making process. Black, 2018 WL 3872113 at *4.
Conclusion
When dealing with an insurer during an adverse claim decision, it may feel like the company does not have your best interests at heart. Because we litigate often against insurers who deny disability, life and health insurance claims, we know this to be true. While ERISA helps to set guidelines to protect beneficiaries, insurers like Hartford oftentimes overstep these bounds to benefit financially. The Black opinion helps to shed light on the ways insurers administer claims and allow financial bias to permeate their claims decisions. Insurers like Hartford hire biased vendors to render an adverse decision or incentivize employees of the insurers in an attempt to deny benefit claims. Discovery of this evidence may be helpful to determine whether the administrator abused its discretion when it made the benefits decision.
On September 21, 2018, Feedspot created a list of the Top 50 Insurance Law Blogs, News Websites and Newsletters to Follow in 2018. McKennon Law Group PC | Insurance Litigation Blog was selected by the panelists at Feedspot as one of the Top 50 Insurance Law Blogs and was selected the 13th overall Law Blog among thousands on the internet. Feedspot ranked the Insurance Law Blogs on the web using Google reputation and search ranking, influence and popularity on social media, quality and consistency of posts and Feedspot’s own editorial team and expert review. The article is posted below:
This article is posted with the permission of Feedpost. Sep. 21, 2018.
<https://blog.feedspot.com/insurance_law_blogs/>
In the September 21, 2018 issue of the Los Angeles Daily Journal, the Daily Journal published a list of its top “Verdicts & Settlements,” which included the McKennon Law Group’s case of Brian Wright v. AON Hewitt Absence Management LLC, et al. The judgment in Mr. Wright’s favor was rated as the third highest award of damages for a plaintiff for the period of time covered. The McKennon Law Group PC represented Mr. Wright in a dispute over the payment of short-term and long-term disability benefits. We won this ERISA case at trial and our client was awarded all of his disability insurance benefits, attorney’s fees, costs and interest. The list includes a summary of the case. To review the article, take a look at the blog, here.
