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In a recent decision, the Ninth Circuit Court of Appeals ruled that ERISA does not preempt causes of action based on unfair insurance practice claims brought under Montana’s Unfair Trade Practices Act. However, the Court did find that Montana’s so-called “little HIPAA” was preempted by federal HIPAA, which is part of ERISA.

In Fossen v. Blue Cross and Blue Shield, __ F.3d __ (9th Cir. October 18, 2011), the Court considered an appeal from a District Court ruling that entered summary judgment in favor of Blue Cross on two causes of action. Plaintiffs – which consisted of three brothers, their corporations and a partnership of the three corporations – sued Blue Cross after the health insurer increased their premiums by over 40%. The lawsuit, filed in state court, alleged two causes of action: violation of Montana Code Annotated § 33-22-526(a) (also known as Montana’s “little HIPAA” statute) and violation of Montana Code Annotated § 33-18-101 (also known as Montana’s Unfair Trade Practices Act). Plaintiffs alleged that premium increase violated little HIPAA’s prohibition against imposing a “premium or contribution that is greater than the premium or contribution for a similarly situated individual” on account of “any health status-related factor of the individual” and the Unfair Trade Practices Act’s prohibition against “unfair discrimination between individuals of the same class and of essentially the same hazard in the amount of premium, policy fees, or rates charged.” The action, filed in state court, was removed to the District Court, which eventually granted Blue Cross’ motion for summary judgment as to all causes of action.

On appeal, the Ninth Circuit first considered whether ERISA and federal HIPAA preempted state law causes of action based on Montana’s little HIPAA statute and conferred federal jurisdiction over the claim. Applying the two-part test detailed in Aetna Health Inc. v. Davila, 542 U.S. 200 (2004), the Ninth Circuit determined the little HIPAA claim was preempted because the same claim could have been brought under the federal HIPAA statute and there was no other independent duty implicated by Blue Cross’ actions. Specifically, the Ninth Circuit advised that:

Because the Fossens’ state HIPAA cause of action could have been brought under ERISA § 502(a), and because that cause of action is identical to and expressly dependent upon ERISA, the district court properly denied the Fossens’ motion to remand and exercised jurisdiction over this case.

Next, the Ninth Circuit evaluated whether ERISA preempts the plaintiffs’ statutory unfair insurance practice claim, considering both express preemption under ERISA § 514 (29 U.S.C. § 1144) and conflict preemption under ERISA § 502 (29 U.S.C. § 1132). With respect to express preemption, the court applied the two-part test detailed in Kentucky Association of Health Plans v. Miller, 538 U.S. 329 (2003) and determined that because statute is both “specifically directly toward entities engaged in insurance” and substantially affect[s] the risk pooling arrangement between the insurer and the insured” it is exempt from express preemption.

As to conflict preemption, the court again applied Davila, and determined that the unfair insurance practice claim was not preempted by ERISA because it sought relief (i.e., restitution) that was consistent with ERISA’s enforcement scheme, but that no provision of ERISA expressly guarantees the same rights as the statute.

Also, the unfair insurance practices statute creates a right that is separate from and could not possibly be remedied under ERISA. Whereas HIPAA (both the state and federal versions) prohibits plans and their insurers from charging different premiums on account of “health status-related factor[s],” 29 U.S.C. § 1182(b)(1); Mont. Code Ann. § 33-22-526(2)(a), the unfair insurance practices statute applies more broadly to bar “any unfair discrimination” with respect to premiums, Mont. Code Ann. § 33-18-206(2) (emphasis added); see, e.g., McCarter v. Glacier Gen. Assurance Co., 546 P.2d 249, 251 (Mont. 1976). Because these statutes are not identical in scope (as is the case with the state and federal HIPAA provisions), they are not conflict preempted.

Accordingly, the Ninth Circuit reversed the district court’s grant of summary judgment and remanded this claim for further consideration of the plaintiffs’ allegations that Blue Cross violated Montana’s Unfair Trade Practices Act.

On October 12, 2011, the McKennon Law Group PC law firm won a complete defense verdict on a $2 million successor liability claim against their client, Elephant Talk Communications Corp., in a case called Chong Hing Bank Limited v. Elephant Talk Communications, Inc., Orange County Superior Court Case No. 30-2009-00328467.

Chong Hing Bank Limited (Bank), a Hong Kong financial services company, began making loans to Elephant Talk Limited (ETL), a Hong Kong telecommunications company, beginning in 1996. In 2002 ETL reverse acquired a California public shell company called Staruni Corp. in a stock-for-stock exchange in which Staruni became the parent company and ETL became its wholly-owned subsidiary. Staruni changed its name to “Elephant Talk Communications, Inc.” (Elephant Talk) in connection with the reverse acquisition.

By 2004 ETL was in default on all of the loans. In 2005 a European investment group acquired control of Elephant Talk. In 2009 the Bank called the loans and filed suit against Elephant Talk (the parent company of the entity that took out the loans) in Orange County Superior Court on a theory of successor liability. The Bank did not proceed directly against ETL. The Bank contended that the reverse acquisition was a statutory merger, a de facto merger or an asset purchase resulting in Elephant Talk’s assumption of liability for the loans to ETL. Elephant Talk contended that the reverse acquisition was merely a stock exchange acquisition in which ETL became Elephant Talk’s wholly-owned foreign subsidiary, and maintained its separate existence as a Hong Kong company in order to do continue doing business in China. Elephant Talk denied any successor liability, denied otherwise assuming liability for the loans, and contended that California’s four-year statute of limitations had already run on the Bank’s claims.

Elephant Talk and the Bank stipulated to a bench trial on all issues. After a five-day bench trial, the court issued a decision in favor of Elephant Talk on the issue of successor liability, on the first cause of action for breach of contract, on the second cause of action for open book account, and on the Bank’s proposed amendments to add causes of action for intentional misrepresentation and negligent misrepresentation. The court entered judgment in favor of Elephant Talk on November 2, 2011.

Eric J. Schindler and Scott E. Calvert tried the case on behalf of Elephant Talk.

Under certain circumstances, an insurer has the right to intervene in a case against its insured to protect its own rights and to avoid harm to the insurer. These circumstances usually involve cases where an insured is either prevented from appearing and defending, or simply chooses not to and a default is taken against the insured. The recent case Western Heritage Insurance Company v. Superior Court, __ Cal. App. 4^th __ (Oct. 11, 2011), addresses the second set of circumstances, and provides an examination of California intervention law and holds that an insurer has the right to intervene in a case and take over in litigation if an insured is not defending the action, and may contest both liability and damages while doing so.

In Western Heritage, the insurer Western Heritage defended its insured and its insured’s employee under a reservation of rights following the employee’s automobile accident during the course of employment. It was revealed that the employee was not participating in her defense and that Western Heritage had filed an answer on her behalf without her participation or consent. As a result, the answer was stricken and a default was entered. Western Heritage therefore filed a complaint in intervention to protect its own interests. The trial court granted the intervention, but ruled that Western Heritage could only dispute damages, not the liability of the employee.

Western Heritage filed a petition for writ of mandate and the court of appeals granted the requested writ relief and held that Western Heritage had “the right to assert, on its own behalf, all defenses that otherwise would be available to the insured parties whether as to liability or damages.” The appellate court explained its reasoning for allowing an insurer to fully defend its own interests:

Indeed, there would be no purpose in allowing an insurer to intervene in order to protect its own interests but then limit the scope of the insurer’s defense to those issues to which its insured, because of the default, is limited to pursuing…. The entire purpose of the intervention is to permit the insurer to pursue its own interests, which necessarily include the litigation of defenses its insured is procedurally barred from pursuing.

Thus, an insurer has the right to intervene in a case when an insured elects to abandon his own defense of claims asserted against the insured, and may assert the same defenses to liability and damages as the insured. With this holding, the court seems to indicate that an insurer retains the right to defend its own interests equal to its insured’s interests when defending its insured. This may serve as a cautionary tale when an insured seeks to assert defenses that are not aligned with the interests of the insurer.

In a major victory for consumers, Governor Jerry Brown signed a bill that makes discretionary clauses – typically contained in ERISA-governed life, health and disability insurance policies/ERISA plans void and unenforceable in new or renewed policies. SB 621 was authored by Senate Insurance Committee Chair Ron Calderon (D-Montebello) and sponsored by Insurance Commissioner Dave Jones, and was similar to AB 1686 vetoed by Governor Schwarzenengger in 2010. Discretionary clauses are provisions typically found in group life, health and disability plans that give the administrator/insurer the sole discretion to interpret the policy and to decide if a plan participant or beneficiary is entitled to plan benefits. In ERISA cases, federal courts have interpreted these clauses to give administrators/insurers a higher standard of review when courts review their decisions. This meant that the federal courts were required to give greater deference to decisions denying plan benefits under life, health or disability coverages, rather than weighing all the evidence under a “de novo” standard of review and making their own determination as to whether the insured was entitled to benefits under the policy or employee welfare benefit plan. Insurance companies and plan administrators often rely on these clauses when they deny claims, knowing that the insured must demonstrate that the insurance company acted arbitrarily/abused their discretion – typically a burden – in order to prevail in a lawsuit against them. With the passage of this new law, insurance companies and plan administrators will no longer be able to rely on discretionary clauses in an attempt to insulate their decisions from critical judicial scrutiny. Accordingly, in the future, judges will no longer be required to defer to the decision of the insurance company and plan administrator, lessening the burden placed on ERISA plan participants and beneficiaries in seeking to overturn insurance claim denials. In voicing his support for the bill, Commissioner Jones explained:

“Discretionary clauses have been increasingly relied upon by insurers to reject legitimate claims for disability insurance when a consumer becomes disabled – insurers know that many consumers will give up their claim and that those who challenge the claim denial face a very high legal burden to overcome the denial since the discretionary clause vests sole discretion in the insurer to decide if the consumer is disabled. SB 621 levels the playing field and gives consumers an even chance to prove that they are entitled to disability and other insurance, by eliminating the ‘discretionary clauses’ that insurers have been putting into their insurance policies.”

SB 621 goes into effect on January 1, 2012

California Governor Jerry Brown recently signed a new law that will provide increased protection to seniors and other consumers who are interested in purchasing an annuity. AB 689, which was sponsored by the California Department of Insurance and authored by Assembly Budget Committee Chair Bob Blumenfield (D-San Fernando Valley), requires that insurers verify that an annuity purchase is suitable and appropriate for the consumer based on an evaluation of his or her age, income, financial objectives and ten other factors. The bill was unanimously passed by both the state Senate and the state Assembly.

Lawmakers felt that additional protection was necessary because many consumers have only a vague understanding of the conditions and risks associated with the purchase of an annuity. Assembly Member Blumenfield said that another reason for the new law is that annuities are often sold to seniors, who sometimes do not understand “that their money will be unavailable to them for years.” In addition, annuities are typically very expensive in the short term, a fact which is not always properly conveyed to consumers. Finally, as noted by Blumenfield, the sale of annuities is often a “breeding ground for fraud.”

Before the passage of the new law (located in the California Insurance Code, beginning at section 10509.910), agents and insurers were required to fulfill only limited requirements when selling or replacing life insurance policies and annuities. Now, insurance companies and agents must comply with very specific requirements when recommending that a consumer purchase, exchange or replace an annuity. Specifically, after evaluating 13 different suitability factors (detailed in section 10509.914(i)), an insurance company and agent can only sell an annuity if there are “reasonable grounds for believing that the [annuity] is suitable for the consumer.” See Insurance Code section 10509.915(a). The bill also requires that an insurance agent receive Insurance Commissioner-approved training before he or she can sell annuities.

McKennon Law Group PC has several cases dealing with unsuitable annuities. More often than not, annuities are not properly sold and we often find that insurance agents and insurers often do not make truthful representations about them. Although this law should help stem the tide of unsuitable annuity sales, problem annuity sales will continue to plague the insurance industry for a long time to come.

In an important decision, the Ninth Circuit Court of Appeals ruled that California’s Mental Health Parity Act (“Parity Act” ) requires that health insurers cover certain medically necessary treatment for certain mental illnesses, even if the insurance policy explicitly excludes such coverage. In Harlick v. Blue Shield of Calif., __ F.3d __ (9th Cir. August 26, 2011), the Ninth Circuit reversed the district court’s granting of Blue Shield of California’s motion of summary judgment, and held that under the Parity Act, Blue Shield was required to provide medically necessary health insurance benefits for mental illnesses on par with the treatment for physical illness covered under Harlick’s ERISA-governed health insurance plan.

The California legislature enacted the Parity Act in 1999 after finding that “[m]ost private health insurance policies provide coverage for mental illness at levels far below coverage for other physical illnesses.” 1999 Cal. Legis. Serv. ch. 534 (A.B.88), § 1 (West). The legislature further found that coverage limitations resulted in inadequate treatment of mental illnesses, causing “relapse and untold suffering” for people with treatable mental illnesses, as well as increases in homelessness, increases in crime and significant demands on the state budget. Id. Accordingly, plans that come within the scope of the Act – including the ERISA-governed plan established by Harlick’s employer – must cover all “medically necessary” treatment for nine listed mental illnesses (including anorexia nervosa), but can apply the same financial limits – such as yearly deductibles and lifetime benefits – that are applied to coverage for physical illnesses.

In March 2006, Jeanene Harlick (“Harlick”) was advised by her doctors to seek treatment for her anorexia nervosa at a residential treatment facility. After Harlick and her doctors concluded that none of the in-network treatment facilities suggested by Blue Shield could provide effective treatment, Harlick registered at Castlewood Treatment Center, a facility outside of the state and outside of Blue Shield’s treatment network. Harlick was at Castlewood, a residential treatment facility, for more than 8 months. However, Blue Shield refused to pay for Harlick’s care, because the plan specifically stated that “residential care” was not covered.

Harlick sued Blue Shield, but after the parties stipulated that Blue Shield’s decision would be reviewed under the abuse of discretion standard of review, the district court granted Blue Shield’s motion for summary judgment.

In reviewing Harlick’s case, the Ninth Circuit evaluated whether Blue Shield abused its discretion in denying Harlick’s request for coverage for her treatment at Castlewood. In ERISA cases, if there is a conflict of interest (i.e., same entity pays benefits and makes the coverage decision), than the administrator’s review and claim decision is “tempered by skepticism,” even if it is reviewed under the abuse of discretion standard. Here, while the Court did not find that Blue Shield abused its discretion in denying Harlick’s claim, it did find that Blue Shield was responsible for Harlick’s residential care, based upon the Parity Act. The Ninth Circuit stated:

Harlick’s Plan does not itself require that Blue Shield pay for residential care at Castlewood for her anorexia nervosa. However, California’s Mental Health Parity Act provides that Blue Shield “shall provide coverage for the diagnosis and medically necessary treatment” of “severe mental illness” including anorexia nervosa. Blue Shield is foreclosed from asserting that Harlick’s residential care at Castlewood was not medically necessary. We therefore conclude that Blue Shield is obligated under the Parity Act to pay for Harlick’s residential care at Castlewood, subject to the same financial terms and conditions it imposes on coverage for physical illness.

The Court then turned to the question of whether Harlick’s treatment was medically necessary. Blue Shield did not dispute that treatment at Castlewood was medically necessary until supplemental briefing filed after oral argument. Blue Shield argued that it should be allowed to reopen its administrative process in order to determine whether Harlick’s residential care was medically necessary. The Court explained an ERISA administrator’s obligations:

ERISA and its implementing regulations are undermined ‘where plan administrators have available sufficient information to assert a basis for denial of benefits, but choose to hold that basis in reserve rather than communicate it to the beneficiary.’ Mitchell v. CB Richard Ellis Long Term Disability Plan, 611 F.3d 1192, 1199 n.2 (9th Cir. 2010) (quoting Glista v. Unum Life Ins. Co. of Am., 378 F.3d 113, 129 (1st Cir. 2004)). Claimants should not be ‘sandbagged by a rationale the plan administrator adduces only after the suit has commenced.’ Mitchell, 611 F.3d at 1199 n.2 (quoting Jebian v. Hewlett-Packard Co. Employee Benefits Org. Income Prot. Plan, 349 F.3d 1098, 1104 (9th Cir. 2003)) (some internal quotation marks omitted). Just as claimants should present all of their arguments for granting the claim to the insurer during the administrative process, an insurer should tell the claimant all of its reasons for denying the claim. Cf Diaz v. United Agric. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir. 1995).

During the administrative process, Blue Shield never said that it was denying the claim because treatment at Castlewood was not medically necessary.

The Court therefore concluded that by not including as a reason for denial of the claim that the treatment was not medically necessary, Blue Shield waived this reason to deny the claim:

Blue Shield has discretion to determine whether treatment is medically necessary during the administrative review process. But Blue Shield had to tell Harlick the “specific reasons for the denial” – not just one reason, if there was more than one – and provide a “full and fair review” of the denial. 29 U.S.C. § 1133 (emphasis added). Blue Shield told both Harlick and her mother, as well as the DMHC, that medical necessity was not the reason for its denial of Harlick’s claim. It cannot now bring out a reason that it has “held in reserve” and commence a new round of review. See Mitchell, 611 F.3d at 1199 n.2.

Thus, even if it is expressly excluded from a plan, a California insurer is now obligated to ensure that coverage for certain medically necessary treatment for mental illness is on par with the coverage provided for necessary treatment for physical illnesses. This ruling will thus have significant application to coverage for mental illnesses, especially autism.

Cause of Action Asserted Against Blue Cross for Violation of Montana’s Unfair Trade Practices Act is Not Preempted by ERISA

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