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In the May 25, 2017 edition of the Los Angeles Daily Journal, Robert McKennon and Joseph McMillen of the McKennon Law Group PC published an article entitled “Decision Marks the End of an Era for Employee Benefit Plans,” about a new Ninth Circuit case.In the article, Mr. McKennon and Mr. McMillen explain that the case makes void and unenforceable “discretionary clauses” in insurer-funded employee benefit plans providing disability and life coverage to California residents.The decision will lead to a de novo standard of review in most ERISA actions, which is quite favorable for claimants. Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, 2017 DJDAR 4376 (May 17, 2017).

A slightly longer version of the article is posted below with the permission of the Los Angeles Daily Journal under a different title, “9th Circuit puts final nail in coffin for discretionary clauses in insurer-funded ERISA plans.”

By Robert J. McKennon and Joseph S. McMillen

Long-term disability insurers and life insurers frequently include clauses in their insurance policies affording them complete discretion to decide whether the claimant is eligible for the policy’s benefits, to decide the amount, if any, of benefits to which they are entitled, and to interpret the policy’s terms how they see fit. Employers and their claims fiduciaries (i.e., the insurers) regularly include these same types of “discretionary clauses” in their employee welfare benefit plan documents, and if the insurer is the funding source of the plan’s benefits, the inherent conflict of interest becomes readily obvious.

Employee benefit plans and the corresponding group insurance policies that fund them are governed by the Employee Retirement Income Security Act of 1974 (ERISA), codified at 29 U.S.C. Section 1001 et seq. The result of these discretionary provisions in ERISA cases, until recently, has been that a federal court reviewing the insurance company’s claim decision had to give deference to whatever the insurer decided, even if the court disagreed with the insurer’s decision, unless the insurer abused its discretion by acting arbitrarily and capriciously. The district court was required to apply an “abuse of discretion” or “arbitrary and capricious” standard of review rather than a de novo standard (where no such deference to the insurer’s decision is given). The former standard is more difficult than the latter for an insured to meet. While a district court applying an abuse of discretion standard to the insurer’s claim decision is not required to “rubber stamp” it with no oversight, its ability to overturn the decision is far more limited than when reviewing the insurer’s decision de novo.

On Jan. 1, 2012, no doubt aware of this potential for abuse by insurers, the California Legislature decided to put an end to discretionary provisions in disability and life insurance contracts. It enacted California Insurance Code Section 10110.6, which made void and unenforceable any grant of discretionary authority to an insurer or agent of the insurer in “a policy, contract, certificate, or agreement” that provides or funds disability or life insurance coverage for California residents. More than a dozen states have similar laws. Several of these states banned or limited discretionary clauses in response to notorious examples of insurers who, to boost their profits, intentionally used discretionary clauses to repeatedly deny claims they knew were valid.See, e.g.,Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 867 (9th Cir. 2008).

On May 11, the 9th U.S. Circuit Court of Appeals, inOrzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, 2017 DJDAR 4376, put the final nail in the coffin for grants of discretionary authority to insurers in ERISA-governed insurance policies and employer plan documents. In that case, The Boeing Company offered its employees long-term disability coverage through an ERISA-governed plan. Boeing arranged a group disability insurance coverage through Aetna Life Insurance Company to fund the plan’s disability benefits and vested Aetna with discretion to decide the merits of benefit claims. The plan documents granted it discretionary authority to “review all denied claims,” “determine whether and to what extent employees and beneficiaries are entitled to benefits,” and “construe any disputed or doubtful terms of the policy.” The plan further specified that, “Aetna shall be deemed to have properly exercised such authority unless Aetna abuses its discretion by acting arbitrarily and capriciously.” Boeing’s principal plan document, The Boeing Company’s Master Welfare Plan, similarly contained a broad grant of discretionary authority delegated to Aetna which included the power to “determine all questions that may arise including all questions relating to the eligibility of Employees and Dependents to participate in the Plan and amount of benefits to which any Participant or Dependent may become entitled.”

A Boeing employee, Talana Orzechowski, submitted a claim for long-term disability benefits under the plan because she suffered from physical illnesses, chronic fatigue syndrome and fibromyalgia, and could no longer perform her job duties as a result. After paying the claim for two years, Aetna decided to terminate her benefits based upon the plan’s 24-month limit for disabilities primarily caused by mental illness. Aetna determined Orzechowski’s condition was not physical, but only mental, based upon the opinions of medical consultants it hired to review her medical records. Aetna disagreed with Orzechowski’s treating physicians. They concluded that she had a physical disability and that her mental illness, depression and anxiety, were secondary to her physical problems, chronic fatigue syndrome and fibromyalgia.

Orzechowski filed suit in federal district court under ERISA to recover her disability benefits. The trial court upheld Aetna’s benefit decision. It reviewed Aetna’s decision for an abuse of discretion (because Boeing’s Master Plan gave Aetna discretionary authority), rather than de novo, the default standard in an ERISA case.

The 9th Circuit reversed, holding that the district court should have applied a de novo standard of review to Aetna’s claim decision. It ruled that California Insurance Code Section 10110.6 voided the discretionary provisions in both Aetna’s insurance policy and Boeing’s plan documents, including in the Master Plan. It remanded the case to the district court for it to review the insurer’s claim denial de novo, with instructions to focus on Orzechowski’s physical illnesses that Aetna had ignored when terminating her benefits.

The 9th Circuit first rejected Boeing’s argument that ERISA preempts the California statute. The court reasoned that while the California statute came within ERISA’s broad preemption clause, which preempts “any and all state laws insofar as they may now or hereafter relate to any employee benefit plan,” 29 U.S.C. Section 1144(a), ERISA’s savings clause saved the California law from preemption. The savings clause saves from preemption “any law of any State which regulates insurance, banking, or securities.” 29 U.S.C. Section 1144(b)(2)(A). For the savings clause to apply, the state law must satisfy a two-part test set forth inKentucky Association of Health Plans v. Miller, 538 U.S. 329, 342 (2003). First, the state law must be specifically directed toward entities engaged in insurance, and second, the law must substantially affect the risk pooling arrangement between the insurer and insured. TheOrzechowskicourt held the California statute meets both prongs of theMillertest, “regulates insurance,” and, therefore, is saved from ERISA preemption.

The court rejected Boeing’s other arguments that Section 10110.6 did not void the discretionary clause in the Master Plan because it (1) only voids discretionary clauses in insurance policies but not in employer plan documents, and (2) is not retroactive and became effective on Jan. 1, 2012 after the Jan. 1, 2011, Master Plan. The court reasoned the California statute, by its terms, covers not only “policies” that provide or fund disability insurance coverage but also “contracts, certificates, or agreements” that do so. It cited to 9th Circuit precedent holding that an ERISA plan is a “contract” and concluded Boeing’s Master Plan fell under Section 10110.6, not just Aetna’s policy.

The court rejected Boeing’s second argument because the California statute, while not retroactive, voids discretionary provisions in any policy “or contract” that renews after the statute’s effective date of Jan. 1, 2012. The statute defines “renewed” as “continued in force on or after the policy’s anniversary date.” The policy’s anniversary date was Jan. 1, 2012, and the Master Plan continued in force thereafter. The Master Plan, a contract, thus “renewed” after the statute’s effective date.

Conclusion

WhileOrzechowskimarks the end of an era that had allowed discretionary clauses in insurer-funded employee benefit plans providing disability and life coverage to California residents, there is still an open question whether California’s statutory ban will be extended to self-funded plans.Orzechowskidid not reach that issue. Many large employers fund their benefit plans. Thus, even afterOrzechowski, employers and their self-funded plans will continue to argue California’s ban does not apply to them. One thing we know for certain based on the 9th Circuit’sOrzechowskidecision: Discretionary clauses are void and unenforceable in insurer-funded ERISA employee benefit plans providing disability or life coverage for California residents, whether the clause appears in the insurer’s group policy, the employer’s separate plan document or both. Federal judges will thus have to apply a de novo standard of review more favorable to claimants in insurer-funded ERISA plans. This will lead to better results for claimants in litigated cases and, potentially, less claim denials from group disability and life insurers in the first instance.

The McKennon Law Group PC periodically publishes articles on its California Insurance Litigation Blog and Disability Insurance News that deal with frequently asked questions in the insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of the law. To speak to a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949) 387-9595 for a free consultation or go to our website at www.mckennonlawgroup.com and complete the free consultation form.

The Employee Retirement Income Security Act of 1974, otherwise known as ERISA, governs most employer-sponsored benefit plans, including plans that provide health insurance, disability insurance and life insurance to employees. ERISA protects employees and requires that plan and claim administrators adhere to strict standards and deadlines when resolving disputes. As such, litigation under ERISA is very different from other forms of litigation, even other insurance litigation. In this blog article, we briefly outline the top five issues to keep in mind when litigating an ERISA claim, including whether ERISA applies; ERISA’s 180-day mandatory appeal deadline; the standard of review; the administrative record; and calculating recovery.

1) Does ERISA Apply?

Determining which law governs your health, life or disability insurance claim is the first step in pursuing life, health or disability benefits that have been wrongfully denied. Keeping that in mind, the issue to keep an eye on (at first) is whether ERISA applies. As a general matter, ERISA does not apply to all employer-sponsored benefit plans and ERISA carves out specific exceptions for certain types of employers. For example, ERISA does not apply to plans that are established or maintained by a government or church entity. Absent these exclusions, ERISA most likely applies to an employer-sponsored plan. Again, determining whether ERISA applies to your claim is important because, as discussed below, ERISA claims are different from “regular” insurance litigation because ERISA imposes different requirements on claimants and administrators.

2) ERISA’s 180-day Mandatory Appeal Deadline

ERISA imposes strict time limits and deadlines on ERISA claimants, including an obligation to appeal an initial denial within 180 days. Once the insurer has denied a disability, life, or health insurance claim governed by ERISA, the insured must appeal the denial within a specific time frame. Depending on the type of coverage at issue, i.e., disability or life insurance, that deadline may vary. For health insurance and disability claims, the time limit to appeal is 180 days. Failure to timely appeal may foreclose any further recovery, as claims under ERISA are required to “exhaust administrative remedies” before bringing a lawsuit. The insured must also keep in mind the varying deadlines to bring a lawsuit after an unsuccessful appeal. These deadlines are different from plan to plan and the insured is best served by contacting an attorney as soon as possible following a denial to ensure that the statute of limitations does not run before litigation is started.

3) What Is the Standard of Review?

Generally, ERISA cases may be governed by one of two standards of review: (1) de novo or (2) abuse of discretion. Under a de novo standard of review, the court looks at the terms of the policy and the evidence on the record and evaluates whether the insured satisfied the terms, without deference to the insurer’s decision. As such, de novo review is a more beneficial standard of review for the insured because the court gives no weight to an insurer’s initial denial decision. Under the abuse of discretion standard, the question the court asks is different: whether the insurer’s decision is supported by evidence on the record and is not otherwise arbitrary and capricious. The abuse of discretion standard of review is less beneficial to plan participants because the court gives more deference to the insurer’s decision. Whether the insurer’s decision was ultimately correct is essentially irrelevant; it only matters whether the decision was so incorrect as to be deemed arbitrary and capricious. Under ERISA, the de novo standard of review applies unless the plan contains a discretionary provision. However, in some states, like California, the de novo standard of review may still apply to disability and life insurance claims, even if there is a discretionary policy provision.

4) The Administrative Record

ERISA cases are decided based on an administrative record, typically limited to the facts, records and other evidence before the insurance claims administrator when it made the claim decision. Given that the court decides based on a limited record, traditional discovery is not usually available. However, some limited discovery may be warranted in special circumstances. For example, in some ERISA cases, the court may allow discovery to determine whether there is evidence of bias. Evidence of bias may include situations where the insurer denied a long-term disability claim based on the report of a physician beholden to the insurer.

5) Calculating Benefits

Calculating benefits in ERISA cases can be complex, particularly with long-term disability claims. For example, disability plans provide coverage in the unfortunate event that a disability prevents you from earning a living through your chosen occupation. Most disability plans do not cover your entire monthly salary, but instead cover only a portion, i.e., 60% of pre-disability income, pretax. However, this amount is also offset by any state or federal disability benefits the insured may be receiving, including Social Security Disability Insurance benefits, State Disability benefits or Workers’ Compensation benefits.

Overall ERISA cases are complex and the above are just a few things to keep in mind when making and litigating an ERISA claim. Having an experienced ERISA disability, health and life insurance attorney matters. If your claim for health, life, short-term disability or long-term disability insurance has been denied, you can call (949)387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA claims.

Disability and life insurers frequently include clauses in their insurance policies affording them complete discretion to decide whether a claim has merit. The clauses usually state the insurer has total discretion to decide whether the claimant is eligible for the policy’s benefits, to decide the amount, if any, of benefits to which they are entitled, to interpret the policy’s terms how they see fit, or something similar. Employers regularly include these same types of “discretionary clauses” in their employee welfare benefit plan documents, and if a group insurance policy is the funding source of the plan’s benefits, they then delegate that discretion to decide the merits of claims to the insurer.

Employee benefit plans and the corresponding group insurance policies that fund them are governed by a federal law, the Employee Retirement Income Security Act of 1974 (“ERISA”), codified at 29 U.S.C. section 1001, et seq. The result of these discretionary provisions in ERISA cases, until recently, has been that a federal court reviewing the insurance company’s claim decision had to give deference to whatever the insurer decided, even if the court disagreed with the insurer’s decision, unless the insurer abused its discretion by acting arbitrarily and capriciously. The district court was required to apply an “abuse of discretion” or “arbitrary and capricious” standard of review rather than a de novo standard (where no such deference to the insurer’s decision is given). The former standard, obviously, is much more difficult than the latter for an insured to meet. While a district court applying an abuse of discretion standard to the insurer’s claim decision is not required to “rubber stamp” it with no oversight, its ability to overturn the decision is far more limited than when reviewing the insurer’s decision de novo.

In most types of insurance policies, insurers have not been so brazen to include these draconian insurer discretionary provisions. It is astonishing that the California legislature let disability and life insurers get away with this practice for so long. The clauses directly contravene many “black-letter” pro-policyholder California insurance laws (such as the doctrine that ambiguous policy provisions must be strictly construed against the insurer as the drafter). Think about it. Under these provisions, the company legally responsible to pay an employee’s or beneficiary’s benefit claim also has nearly unchecked power to decide whether the claim has merit and to interpret the plan’s provisions. From the standpoint of a California policyholder and their counsel, that is shocking, truly shocking. It demonstrates the power of the insurance company lobby.

Not surprisingly, these discretionary provisions lead to a higher rate of claim denials by disability and life insurers than in other types of policies and, in our opinion, industry wide abuse, particularly for disability insurers. The U.S. Department of Labor estimates that a whopping 75 percent of long-term disability claims are denied. The statistics seems to provide empirical support for Lord Acton’s famous phrase uttered in the 1800’s, “power tends to corrupt and absolute power corrupts absolutely.”

On January 1, 2012, no doubt aware of this potential for abuse by insurers, the California legislature decided to put an end to discretionary provisions in disability and life insurance contracts. It enacted California Insurance Code section 10110.6, which made void and unenforceable any grant of discretionary authority to an insurer or agent of the insurer in “a policy, contract, certificate, or agreement” that provides or funds disability or life insurance coverage for California residents. More than a dozen states have similar laws, as noted in Standard Ins. Co. v. Morrison, 584 F.3d 837, 841 (9th Cir. 2009) (upholding Montana Insurance Commissioner’s practice of disapproving disability insurance policy forms with clauses vesting discretion in insurers). These states include California, Connecticut, Hawaii, Idaho, Illinois, Indiana, Kentucky, Maine, Maryland, Montana, New Jersey, New York, South Dakota, Texas, Utah, Vermont, Washington, Wyoming and perhaps others (some bar discretionary clauses in health insurance or other types of policies, not just in disability and life insurance policies). Several of these states banned or limited discretionary clauses in response to a notorious example of one insurer who, to boost its profits, had intentionally used discretionary clauses to repeatedly deny claims it knew were valid. See Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 867 (9th Cir. 2008).

Despite California’s statutory ban on insurer discretionary clauses, group disability and life insurers have steadfastly challenged the statute’s application to ERISA-governed policies and related employee welfare benefit plan documents. They routinely argue that ERISA preempts the State law, the statutory ban applies just to insurance policies but not plan documents, and other creative arguments, all to sustain the status quo of their mostly unfettered power to decide claims with little scrutiny by courts. Their arguments have been repeatedly rejected by most California federal district courts. A few rogue courts in the minority have agreed with the insurer’s creative arguments. This left, until now, some uncertainty about what the law in the 9th Circuit is for California employees.

On May 11, 2017, the 9th Circuit put the final nail in the coffin for grants of discretionary authority to insurers in ERISA-governed insurance policies and employer plan documents. Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, No. 14-55919, 2017 DJDAR 4376 (9th Cir. May 11, 2017). In that case, The Boeing Company (“Boeing”) offered its employees long-term disability coverage through an ERISA-governed plan. Boeing purchased a group disability insurance policy from Aetna Life Insurance Company (“Aetna”) to fund the plan’s disability benefits and vested Aetna with discretion to decide the merits of benefit claims. Aetna’s policy granted it discretionary authority to “review all denied claims,” “determine whether and to what extent employees and beneficiaries are entitled to benefits,” and “construe any disputed or doubtful terms of the policy.” The policy further specified that, “Aetna shall be deemed to have properly exercised such authority unless Aetna abuses its discretion by acting arbitrarily and capriciously.” Boeing’s principal plan document, The Boeing Company’s Master Welfare Plan (“Master Plan”), similarly contained a broad grant of discretionary authority delegated to Aetna which included the power to “determine all questions that may arise including all questions relating to the eligibility of Employees and Dependents to participate in the Plan and amount of benefits to which any Participant or Dependent may become entitled.” In short, the group policy and employer’s plan document each gave Aetna fairly unchecked power to decide the merits of claims, the claims Aetna was responsible to pay.

A Boeing employee, Talana Orzechowski, submitted a claim for disability benefits under the plan because she suffered from physical illnesses, chronic fatigue syndrome and fibromyalgia, and could no longer perform her job duties as a result. After paying the claim for two years, Aetna decided to terminate her benefits based upon the plan’s 24-month limit for disabilities primarily caused by mental illness. Aetna determined Ms. Orzechowski’s condition was not physical but only mental based upon the opinions of medical consultants it hired to review her medical records. Aetna disagreed with Ms. Orzechowski’s treating physicians. They concluded after examining her in-person that she had a physical disability and that her mental illness, depression and anxiety, was secondary to her physical problems, chronic fatigue syndrome and fibromyalgia.

Ms. Orzechowski filed suit in federal district court under ERISA to recover her disability benefits. Following a bench trial, the trial court upheld Aetna’s benefit decision. It reviewed Aetna’s decision for an abuse of discretion (because Boeing’s Master Plan gave Aetna discretionary authority), rather than de novo, the default standard in an ERISA case.

The 9th Circuit held the district court should have applied a de novo standard of review to Aetna’s claim decision. It ruled that California Insurance Code section 10110.6 voided the discretionary provisions in both Aetna’s insurance policy and Boeing’s plan documents, including in the Master Plan. It reversed the district court’s decision and remanded the case for it to review the insurer’s claim denial de novo, with instructions to focus on Ms. Orzechowski’s physical illnesses that Aetna had ignored when terminating her benefits.

ERISA Preemption and Savings

The 9th Circuit rejected Boeing’s argument that ERISA preempts the California statute. The Court reasoned that while the California law comes within ERISA’s broad preemption clause, which preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan,” 29 U.S.C. § 1144(a), ERISA’s savings clause saved the California law from preemption. The savings clause saves from preemption “any law of any State which regulates insurance, banking, or securities.” 29 U.S.C. § 1144(b)(2)(A). For the savings clause to apply, the State law must satisfy a two-part test set forth in Kentucky Association of Health Plans v. Miller, 538 U.S. 329, 342 (2003). First, the State law must be specifically directed toward entities engaged in insurance, and second, the law must substantially affect the risk pooling arrangement between the insurer and insured. After some very technical arguments, the Orzechowski Court held the California statute meets both prongs of the Miller test, “regulates insurance,” and, therefore, is saved from ERISA preemption.

Statute Interpretation Arguments

The Court rejected Boeing’s other arguments that section 10110.6 did not void the discretionary clause in the Master Plan because it (1) only voids discretionary clauses in insurance policies but not in employer plan documents, and (2) is not retroactive and became effective on January 1, 2012 after the January 1, 2011 Master Plan. The Court reasoned the California statute, by its terms, covers not only “policies” that provide or fund disability insurance coverage but also “contracts, certificates, or agreements” that do so. It cited to 9th Circuit precedent holding that an ERISA plan is a “contract” and concluded Boeing’s Master Plan falls under section 10110.6, not just Aetna’s policy.

The Court rejected Boeing’s second argument because the California statute, while not retroactive, voids discretionary provisions in any policy “or contract” that renews after the statute’s effective date of January 1, 2012. The statute defines “renewed” as “continued in force on or after the policy’s anniversary date.” The policy’s anniversary date was January 1, 2012 and the Master Plan continued in force thereafter. The Master Plan, a contract, thus “renewed” after the statute’s effective date.

Conclusion

While Orzechowski marks the end of an era – that had allowed discretionary clauses in insurer-funded employee benefit plans providing disability and life coverage to California residents – there is still an open question whether California’s statutory ban will be extended to self-funded plans. Orzechowski did not reach that issue. Many large employers fund their benefit plans with their own money rather than through an insurance policy. Thus, even after Orzechowski, employers and their self-funded plans will continue to argue California’s ban does not apply to them. The debate remains alive and well in California (for self-funded plans) and, for both insurer- and self-funded plans, in most states because they have not enacted similar laws to California’s statute.

One thing we know for certain based on the 9th Circuit’s Orzechowski decision: discretionary clauses are void and unenforceable in insurer-funded ERISA employee benefit plans providing disability or life coverage for California residents, whether the clause appears in the insurer’s group policy, the employer’s separate plan document or both. Federal judges will thus have to start applying a standard of review more favorable to claimants, de novo, in insurer-funded ERISA plans. This will probably lead to better results for claimants in litigated cases and, potentially, less claim denials from group disability and life insurers in the first instance.

The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of law. To speak with a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949)387-9595 for a free consultation or go to our website at www.mckennonlawgroup.com and complete our free consultation form today.

In some instances, ERISA plan participants may be able to “continue” or “convert” their employer-sponsored long-term disability, life, medical or other insurance policy even after they no longer work for their employer. This ability to convert to an individual policy arises from the language in some policies, which may allow ERISA plan participants to either continue or convert a group policy even after their employment has been terminated. For example, in Alexander v. Provident Life & Acc. Ins. Co., 663 F.Supp.2d 627 (E.D. Tenn. 2009), the ERISA-governed long-term disability policy provided for continued coverage for a certain period of time, regardless of employment. In this case, the plaintiff elected to continue coverage and so, even though he was no longer considered an employee, he was still covered by the employer-sponsored disability policy. In other cases, the employer-sponsored plan does not continue, but “converts,” at which point ERISA plan participants may still be eligible for coverage, but will be individually responsible for the premiums (thus “converting” the policy from a group policy to an individual policy). For our recent blog on when ERISA applies to such continued or converted policies, see https://mslawllp.com/when-does-erisa-apply-to-a-continued-or-converted-group-insurance-policy/.

In this article, we address a plan administrator’s fiduciary duty to adequately inform the employee of the ability to convert a long-term disability, life or other insurance policy. In a recent opinion from the United States District Court for the Western District of Pennsylvania, Erwood v. Life Ins. Co. of N. Am., Civ. 2017 WL 1383922 (W.D. Pa. 2017), Plaintiff Patricia Erwood sought to recover losses and damages related to two group life insurance policies purchased by her late husband, Dr. Scott Erwood. Mrs. Erwood brought suit against Defendant WellStar Health System, Inc. and Group Life Insurance Program (collectively, “WellStar”) alleging that they breached a fiduciary duty to her when they failed to adequately inform her of the need to convert two group life insurance policies as part of an ERISA benefit plan. Ultimately, Magistrate Judge Maureen P. Kelly ruled in Mrs. Erwood’s favor and required WellStar provide $750,000 to Mrs. Erwood for the lost coverage.

Prior to his death, Dr. Erwood worked as a neurosurgeon at WellStar. As a WellStar employee, he participated in the employer-offered benefit plans, which included basic and supplemental life insurance. Under his employer-sponsored policies, Dr. Erwood had a total of $1,000,000 in life insurance coverage.

Tragedy struck Dr. Erwood in late 2011, when he suffered a seizure, later determined to be the result of a malignant brain tumor. At this point, Dr. Erwood went on leave from work and remained on leave until September 4, 2012. After exhausting his leave, WellStar informed him that unless he returned to work, he would be considered separated from employment. WellStar mailed Dr. Erwood a Family Medical Leave Act (“FMLA”) leave packet, which gave him limited information regarding the continuation or conversion of his life insurance policy. WellStar did not provide notice or otherwise inform the Erwoods of the need to convert the policies. WellStar also did not provide the forms necessary to convert the policies, despite express instruction to do so in the manual on plan administration. As a result, the life insurance policies lapsed shortly before Dr. Erwood succumbed to his illness. Mrs. Erwood learned of this lapse upon her application for death benefits, which WellStar rejected.

In a strong opinion for ERISA plan participants outlining the importance of the fiduciary’s role in administering an ERISA-governed plan, the court found WellStar’s failure to communicate the information necessary to actually convert Dr. Erwood’s life insurance policies to be a misrepresentation and failure to adequately inform in violation of its fiduciary duty to act “solely in the interest of the participants and beneficiaries and— (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries….” under ERISA § 404, 29 U.S.C. Section 1104(a)(1). The court found that by “executing the Application for Group Insurance and the Appointment of Fiduciary form, WellStar expressly undertook the fiduciary duty to administer the Plan and to provide notice to employees of their right to convert the group life insurance.” The court continued, finding WellStar acted in a fiduciary capacity in the administration of the relevant life insurance policies for the Erwoods and, in particular, in the explanation of those benefits. In sum, the court found that WellStar’s conduct violated ERISA and ruled in favor of Mrs. Erwood for what would have been the remaining amount owed on the life insurance policies, awarding her the sum of $750,000. In doing so, the Court acknowledged the important fiduciary role that employers play as plan administrators in ERISA-governed plans, including providing adequate information regarding an employee’s ability to convert a policy after termination of employment.

Life, health and disability insurers, whether governed by ERISA or state insurance bad faith laws, often do not have your best interests in mind, despite what the law requires of them. Insurers, like other businesses, are motivated by profits. Sometimes that drive leads to crossing legal, ethical or moral lines to improve the bottom-line. That is what occurred in a recent pro-policyholder Ninth Circuit Court of Appeal case, Burnett v. Conseco Life Insurance Company, 2017 WL 1828145 (9th Cir. May 4, 2017) (reversing the district court decision found at 87 F. Supp. 3d 1238 (N.D. Cal. Apr. 9, 2015)). In that case, applying California state insurance bad faith laws, the Ninth Circuit held a life insurer cannot completely absolve itself from further liability under a whole life insurance policy by terminating it. If it breaches the policy before termination, the life insurer is liable for damages caused by that breach, even if the policy is later surrendered. While that is the legal principle gleaned from the case, and it is an important one, what is far more interesting is the look into the life insurer’s boardroom and corporate decision-making the case facts provide.

Jeffrey Burnett, Joe Camp and many other class action plaintiffs had purchased whole life insurance policies from a life insurer in the 1980s and 1990s, which policies were later assumed by the defendant, Conseco Life Insurance Company. The policies provided a death benefit, investment income to the insured during his lifetime (including a guaranteed rate of interest on the policy’s account value), and a cash value payable upon the policy’s surrender. The policies had explicit provisions governing the amount of premiums that could be charged, and even included a “vanishing premium” after five years if certain policy formulas were met.

By the early 2000s, Conseco was losing money on the policies. In 2008, it substantially raised the premiums on the product to all policyholders in breach of the policy’s premium provisions and formulas. Conseco expected and intended thousands of policyholders would respond to the shock of massive premium increases by surrendering their policies or letting them lapse because they were no longer economically worth keeping, thus saving Conseco tens of millions of dollars on a money-losing product line. The strategy worked. Mr. Burnett, Mr. Camp and several other class members surrendered their policies in 2009 and 2010 because they were too expensive. In short, Conseco forced its policyholders to surrender their whole life insurance policies by improperly raising the premiums in violation of the terms of the contract. The company was driven by greed and profit, not its policyholders’ interests, contractual rights and benefits as the law requires.

The policyholders entered surrender agreements with Conseco whereby their policies were terminated in exchange for it paying the cash surrender value of the policies. That was far less than the death benefit. For example, one of the class action members, Mr. Camp, received a little over $89,000 when he surrendered his policy, but the death benefit, which was no longer available because the policy terminated upon surrender, would have been $500,000.

Burnett, Camp and other class members, now former policyholders of their terminated policies, sued Conseco for breach of contract, alleging it had forced them to surrender their policies by raising premiums in breach of the policy’s terms. The former insureds sought consequential damages caused by Conseco’s breach, such as the difference between the premiums they had been paying to Conseco and the premiums they would have to pay to another insurer in the marketplace for a like amount of whole life insurance, i.e. the replacement cost of the life insurance policies they had surrendered.

Conseco filed a motion to dismiss the Complaint for failure to state a claim, arguing that a former policyholder cannot sue on a terminated life insurance contract. The plaintiffs argued that they were entitled to consequential damages for Conseco’s breaches of contract because the breaches occurred while their policies were still in effect (even though the policies were later surrendered). The district court agreed with the insurer and dismissed the case, reasoning that because the plaintiffs received cash value upon the termination of their life insurance policies which were now surrendered, their claims were no longer “legally cognizable.”

The Ninth Circuit reversed the district court, siding with the former policyholders. The Ninth Circuit cited California law that “generally permits pre-termination breach of contract claims, including claims involving insurance contracts.” And, where “a contract is terminable at will, liability attaches for breaches occurring prior to the termination of the contract.” In other words, because Conseco breached the terms of the policies before the policies terminated (by illegally raising premiums), the now former policyholders could sue for those pre-termination breaches even post-termination of the contracts. They were entitled to recover the consequential damages caused by the pre-termination breaches – the replacement cost of the surrendered policies – but not the death benefit. The Ninth Circuit also pointed out that in the surrender agreements between the plaintiffs and Conseco, the plaintiffs did not expressly waive their right to sue for breach of contract.

Our take: The life insurer did not fare too badly. It lost the legal battle but won the profitability war. While it was found liable for breach of contract, it is economically better off for breaching. It forced numerous insureds to surrender their policies by drastically raising premiums (when it did not have that right under the contract), which allowed it to get out from under having to pay the death benefit and ongoing investment income on thousands of policies. It was able to dump an unprofitable product for a fraction of what it would have cost had the policies remained in force. It only had to pay for the plaintiffs’ cost to replace their terminated policies in the marketplace instead of much higher policy benefits.

The Burnett case is just one example of how some life insurers use deceitful business practices to avoid paying policy benefits. The insurer was willing to breach the contract to get the profit it wanted. We have seen far worse in the way of insurers denying legitimate claims, especially when the insured has not hired an experienced ERISA or bad faith lawyer. Life, health and disability insurers love to take your premiums but they resist paying claims. Do not let your insurer do that. If you have a legitimate life, health or long-term disability insurance claim, you need an experienced attorney to fight hard for you. At McKennon Law Group PC, our lawyers have decades of experience litigating these types of claims, both under ERISA and state insurance bad faith laws. Let us try to win your case for you.

The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long term disability insurance, annuities, accidental death insurance, ERISA and other areas of law. To speak with a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949)387-9595 for a free consultation or go to our website at www.mckennonlawgroup.com and complete our free consultation form today.

Long-term disability insurance may be the most important type of insurance policy one can buy. In the unfortunate event that an unexpected disability prevents you from working, long-term disability insurance provides a substitute income in your time of need. However, insurers deny claims for long-term disability benefits more often than not. In fact, the U.S. Department of Labor estimates that insurers deny a whopping 75% of long-term disability claims. See our previous blog on the topic at https://mslawllp.com/prevalence-of-benefit-claim-denials-is-astounding/. Of course, insurance companies are playing the odds, counting on people not having the stamina, or the resources, to challenge every claim that is denied. At McKennon Law Group PC, we know insurance companies hate to see us representing their insureds because our years of experience, formidable reputation and dedicated and passionate legal advocacy help even those odds.

In this blog, we cover the important subject of attorneys’ fees, so you can better determine the best option to suit your individual needs. We briefly explain the benefits and drawbacks of the two basic fee structures for long-term disability claims: “contingency” and “hourly.” Of course, keeping in mind that less expensive is not always better and having a skilled and experienced disability benefits attorney handle your matter can make difference between getting hundreds of thousands of dollars in benefits and fees or nothing.

When Does the Insurer Cover My Attorneys’ Fees in an ERISA matter?

As a preliminary matter, there are instances where you may not have to pay for attorneys’ fees at all. If your long-term disability plan is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), then your insurer may be responsible for your attorneys’ fees. ERISA law, as interpreted by the courts, allows for recovery of attorneys’ fees, although whether the attorneys’ fees are covered is at the discretion of the judge. McKennon Law Group PC has never lost a motion to for attorneys’ fees after it has won an ERISA case. Although you do not necessarily need to win your case to recover your attorneys’ fees (you only need to show a degree of success on the merits), most courts consider several factors when deciding whether to award attorneys’ fees. Those factors include the unreasonable nature of the denial, the resources of the defendant, the deterrent effect of the award, whether the award will result in benefits for other employees under the same plan and the merits of each party’s position.

However, even if your attorneys’ fees are covered under ERISA, there are a few important considerations to keep in mind. ERISA cases require that you go through an appeal process directly to the ERISA plan administrator or to the insurance company. As a general matter, this requires gathering additional evidence to support your claim and drafting an appeal responding to the insurer’s reasons for denial. Before an ERISA claimant can pursue litigation, he must complete the appeal process so as to “exhaust administrative remedies.” Having an attorney early in the ERISA process can drastically improve the chances of your claim’s success by getting a strong appeal letter and evidence in to the administrative record. However, when it comes to attorneys’ fees, ERISA does not allow recovery for attorneys’ fees spent working on the appeal. This could affect an attorneys’ desire to handle an ERISA appeal.

How Do ERISA Insurance Lawyers Earn Their Fees? Contingency, Hourly and Other Fees Arrangements

In general, ERISA lawyers who represent claimants/plaintiffs typically take your case on either a “contingency” or “hourly” basis and there are benefits and drawbacks to both. It is possible to even pay a fixed fee or a hybrid of both an hourly and contingency fee. Whichever option you decide, it is important that you fully understand the fee arrangement you have with your attorney, and you should freely discuss any concerns you have at the outset.

When it comes to long-term disability cases, most lawyers work on a “contingency” fee basis. This means that, when you hire an attorney on contingency fee basis, the attorney is only compensated if you obtain a recovery, typically through a settlement or trial win. If you lose your case and there is no recovery, you typically would owe no fees or costs that the lawyer covers for you, which is what makes such contingency fee arrangements most attractive to clients. Typically, such a contingency fee is 35% to 45% of your total recovery. The percentage is usually tied to the stage you are at when the recovery is achieved. For example, a 35% fee if the recovery is made during the appeal process; a 40% fee if the recovery is made during the first part of litigation and a 45% fee if the recovery is made during the latter part of litigation. As an example, say you are successful in pursuing your wrongful denial of long-term disability benefits and the total award for past-due benefits is $80,000, then your attorneys’ will recover $28,000, $32,000 or $36,000, respectively. In some cases, your long-term disability insurer will reinstate your claim for benefits, and you will receive future monthly benefits. Depending on the type of fee agreement, your lawyer may also receive a percentage of those future benefits. Most good and highly experienced ERISA disability insurance lawyers will take a fee out of future disability benefits. The reason: appeals and especially litigation can take a law firm hundreds of hours in achieving a recovery for a disability insurance claimant and it is not economically viable to take these cases without taking a fee on future benefits.

Alternatively, you may decide to hire an attorney on an hourly basis, although most clients with a denied claim for long-term disability prefer contingency, simply because they cannot afford to pay a lawyer hourly. Under this option, your attorneys’ fees are paid directly to the lawyer, charged on an hourly basis. You are required to cover the costs and fees at the outset, but if you are successful on your claim, you receive the total recovery without sharing it with your attorney. Many times, ERISA disability claimants wish to have experienced ERISA disability insurance lawyers provide consulting services to guide them in the claims process, before a disability claim is denied by an insurer. In these situations, some ERISA lawyers will handle these matters on an hourly basis only. Some experienced ERISA disability lawyers like McKennon Law Group PC will provide such consulting services on an hourly basis or on a contingency fee basis, in the latter situation, taking a reduced fee from disability benefits paid in the future.

Is it Possible to Hire an ERISA Disability Insurance Lawyer and Keep All or Most of Your Long-Term Disability Benefits?

Yes, believe it or not. McKennon Law Group PC has a unique provision in its fee agreements with its clients: The firm can choose to keep 100% of an award of attorney’s fees as its total fees earned, which, if the fees are sufficiently high, may allow our clients to keep all of most of past-due and future disability benefits.

At McKennon Law Group PC, we work with our clients to find an arrangement best suits their needs and have represented claimants under all of the above fee structures. We have been told by the insurance industry and by objective mediators that we have a very strong reputation for effectively prosecuting policyholder claims and that we are the most aggressive California law firm they see fighting insurance company claim denials. We fight for our clients effectively and efficiently. If your ERISA or non-ERISA claim for health, life, short-term disability or long-term disability insurance has been denied, you can call (949)387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and Non-ERISA insurance claims.

Los Angeles Daily Journal: “Decision Marks the End of an Era for Employee Benefit Plans”