Accidental Death and Dismemberment Archives - Page 3 of 5

Los Angeles Daily Journal Publishes Article on October 26, 2018 by Robert McKennon Entitled “Court says insurer can’t dodge coverage through ‘technical escape hatch’”

In the October 26, 2018 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group’s Robert J. McKennon. The article addresses 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.

This article is posted with the permission of the Los Angeles Daily Journal.

Court says insurer can’t dodge coverage through ‘technical escape hatch’

A recent Court of Appeal opinion said 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.

By Robert J. McKennon

Most first-party insurance policies, including life insurance, disability insurance, property insurance and liability insurance policies, require that an insured policyholder provide notice of a claim within a specified period of time, typically, “as soon as practicable,” “during the Elimination Period” or a similar formulation. See e.g. Ins. Code Section 10350.7 (requirement in disability policies). With respect to liability insurance policies, notice of a claim is required in both claims-made and occurrence policies. Notice generally must be given within a “reasonable time” or within a specified period. Insurance policies often specify that timely reporting of claims is a condition precedent to coverage.

In the case of claims-made policies, the requirement is considered a fundamental element of the insurance contract, and it typically is included in the policy’s insuring agreement. Failure to provide timely notice — especially failure to provide notice within the policy period or grace period of a claims-made policy — can result in a loss of coverage regardless of whether the insurer is prejudiced by the delay in giving notice.

This rule is different in occurrence policies and life and disability insurance policies. But even where a policy specifies that timely notice is a condition precedent to coverage, a policyholder-friendly rule known as the “notice-prejudice rule” has been adopted by the California courts. The rule provides that unless an insurer can demonstrate actual, substantial prejudice from late notice of a claim, the insured’s failure to provide timely notice will not defeat coverage. See, e.g., Northwestern Title Security Co. v. Flack, 6 Cal. App. 3d 134, 141-43 (1970); Scottsdale Insurance Co. v. Essex Insurance Co., 98 Cal. App. 4th 86, 97 (2002); Root v. American Equity Specialty Insurance Co., 130 Cal. App. 4th 926, 936 (2005).

In both first- and third-party cases, in the absence of prejudice from the delay, an insurer generally may not refuse a claim solely because of delayed notice from the insured: “(T)hough an insurer may assert a defense based upon an alleged breach of the notice requirements of the policy, the breach cannot be a valid defense unless the insurer was substantially prejudiced thereby.” See Downey Saving & Loan Ass’n v. Ohio Casualty. Insurance Co., 189 Cal. App. 3d 1072, 1089 (1987) (emphasis added).

Further, the burden is on the insurer to prove actual and substantial prejudice: “An insured’s failure to comply with the notice or claims provisions in an insurance policy will not excuse the insurer’s obligations under the policy unless the insurer proves it was substantially prejudiced by the late notice …. Prejudice is not presumed from delayed notice alone …. The insurer must show actual prejudice, not the mere possibility of prejudice.” See Safeco Insurance Co. of America v. Parks, 170 Cal. App. 4th 992, 1003-1004 (2009) (internal quotes and citations omitted).

In Lat v. Farmers New World Life Ins. Co., 2018 DJDAR 10235 (Oct. 18, 2018), the California Court of Appeal 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.

In December 1993, Maria Carada purchased an “occurrence” flexible premium universal life insurance policy from Farmers. The policy contained a “Waiver of Deduction Rider” under which Farmers agreed “waive the monthly deductions due after the start of and during [Carada’s] continued total disability,” if she provided Farmers with timely written notice and proof of her disability. The rider provided that Farmers needed to receive written notice of disability during the period of disability “unless it can be shown that notice was given as soon as reasonably possible.” The rider “will end when,” among other events, “the policy ends.”

In August 2012, Carada was diagnosed with cancer and became disabled. Carada did not pay the premiums due under the policy while she was disabled. On July 23, 2013, Farmers informed her that the policy had lapsed due to her failure to pay premiums. In August 2013, Carada contacted the insurance agent who had sold her the policy and advised the agent of her illness and disability and asked if the policy could be reinstated. The agent informed a Farmers representative that Carada was dying of cancer and asked if the policy could be reinstated. The representative told the agent that the policy had lapsed and could not be reinstated. The agent relayed this information to Carada. Carada died on Sept. 23, 2013.

Thereafter, the beneficiaries under the policy contacted Farmers to file a claim for the policy’s death benefits. Farmers told the beneficiaries they were not entitled to receive death benefits due to the lapse of the policy. The beneficiaries then sued Farmers alleging causes of action against Farmers for breach of contract, breach of the implied covenant of good faith and fair dealing, and vicarious liability for the alleged negligence of its agent.

Farmers moved for summary judgment, claiming that once the policy lapsed, the rider ended and could not be invoked by the policy’s beneficiaries. The trial court granted Farmers’ motion for summary judgment, and the beneficiaries appealed the ruling. The Court of Appeal reversed, holding that Farmers was not entitled to judgment as a matter of law and the trial court erred in granting the motion for summary judgment. The court found Farmers’ argument, that a lapse of the policy terminated the rider and termination of the rider precluded the beneficiaries’ claim, to be circular. The court determined that under application of the notice-prejudice rule, Farmers must prove that it suffered actual prejudice from the delayed notice of Carada’s disability, and Farmers failed to assert or prove it was prejudiced by the delayed notice. The court explained that if “Farmers had provided that benefit, Carada’s policy would have been in force at the time of her death. Indeed, the only reason Farmers terminated Carada’s policy was that it applied the deductions it had promised Carada it would waive.”

The court rejected Farmer’s analogy to claims-made policies, which are not subject to the notice-prejudice rule, stating that the insured’s policy “is an occurrence policy as to coverage for her disability as well as coverage for her death. Applying the notice-prejudice rule in this instance would not, therefore, transform a claims made and reported policy into an occurrence policy or … effectively rewrite the contract between the parties.” The court concluded that applying the rule would serve the purpose of preventing an insurance company from shielding itself from its contractual obligations through “a technical escape hatch.”

It is always best to provide notice of a claim or relevant event to an insurance company as soon as possible. However, it is not always possible for insureds to provide timely notice. The notice-prejudice rule allows insureds to fairly access their often much needed policy benefits in the face of insurer arguments that a technical violation of the notice requirements voids their claim where there exists no prejudice to them. The Lat case is thus a welcome addition to the notice-prejudice rule jurisprudence in California.

Robert J. McKennon is a shareholder of McKennon Law Group PC in its Newport Beach office. His practice specializes in representing policyholders in life, health and disability insurance, insurance bad faith, ERISA and unfair business practices litigation. He can be reached at (949) 387-9595 or rm@mckennonlawgroup.com. His firm’s California Insurance Litigation Blog can be found at mslawllp.com.

“Sole Cause” Provisions in Accidental Death and Dismemberment Policies: Are ERISA Claimants Getting a Fair Shake?

According to the Centers for Disease Control, unintentional injury is the leading cause of death among people ages 1 to 44. For this reason, Accidental Death and Dismemberment (“AD&D”) Insurance should be an essential component of insurance coverage for most families. As preventative care expands and baby boomers remain active, accidental deaths will likely continue to rise as the leading cause of death among individuals. While AD&D coverage is important to protect families from unforeseen injuries and death that can have severe financial repercussions, insurance companies do not like to pay these claims as they often attempt to limit the scenarios in which an insured can recover an AD&D benefit by placing “sole cause” provisions in AD&D policies. These provisions include restrictive language requiring that an insured’s loss be the direct result of accidental injury, independent of other causes. Using this language, insurance companies attempt to deny benefits on the basis that an illness or preexisting condition caused or contributed to an accident.

It should not be surprising that insurers interpret these “sole cause” provisions expansively in an attempt to deny AD&D benefits. We recently wrote here about the important and insured-friendly Ninth Circuit Court of Appeals decision in Dowdy v. Metro. Life Ins. Co., 890 F.3d 802 (9th Cir. 2018). In Dowdy, the court rejected an insurer’s claim denial and held that diabetes did not substantially contribute to amputation of beneficiary’s leg below the knee after he suffered a serious injury to his leg as a result of an automobile accident, and therefore loss was covered. The court further held that the exclusion for “any loss caused or contributed to by illness or infirmity” did not apply to the role that diabetes played in causing the amputation.

In Kellogg v. Metropolitan Life Insurance Co., 549 F.3d 818 (10th Cir. 2008), the Tenth Circuit addressed such a provision and looked at whether the insured’s death was caused by his purported seizure prior to car accident. Kellogg is recognized as one of the leading cases regarding accidental injury/losses involving pre-existing medical conditions and involved an AD&D claim governed by ERISA.

In Kellogg, a witness observed the insured experience an apparent seizure immediately before driving off the road and crashing into a tree. The insured later died of a brain hemorrhage resulting from injuries sustained in the crash. The insured was covered under a policy that provided benefits if the insured had an “accidental injury that is the Direct and Sole Cause of a Covered Loss.” The policy defined “Direct and Sole Cause” as a “direct” and “independent” cause of loss. The policy also contained an exclusionary clause exempting from coverage “any loss … caused or contributed to by … physical or mental illness or infirmity.” The insurer denied the claim for AD&D benefits, reasoning the accident would not have happened but for the insured’s illness. The Tenth Circuit rejected that rationale, concluding “the car crash—not the seizure—caused the loss at issue, i.e., [the insured’s] death, and therefore the exclusionary clause of the policy does not apply.” Id. at 831.

The Tenth Circuit further looked at the plain meaning of the ERISA Plan provisions and the inequality of bargaining position between insurance companies and insureds. The court found that these rules of construction, including contra proferentem, apply equally to ERISA cases governed by federal common law. The court noted that the “[t]he Plan does not contain an exclusion for losses due to accidents that were caused by physical illness, but rather excludes only losses caused by physical illness.” Id. at 832. Ultimately, the Court determined that a “reasonable policyholder would understand this language to refer to causes contributing to the death, not to the accident.” Id.

The Kellogg court explained that courts have long rejected attempts to preclude recovery on the basis that the accident would not have happened but for the insured’s illness. “As then-Judge Taft wrote in Manufacturers’ Accident Indemnity Co. v. Dorgan, 58 F.945, 954 (6th Cir. 1893), “if the deceased suffered death by drowning, no matter what was the cause of his falling into the water, whether disease or a slipping, the drowning, in such case, would be the proximate and sole cause of the disability or death, unless it appeared that death would have been the result, even had there been no water at hand to fall into. The disease would be but the condition; the drowning would be the moving, sole, and proximate cause.” Id. Yet, like those courts, the Kellogg court rejected MetLife’s denial decision, and remanded the matter to the district court “with directions to enter judgment in favor of Kellogg on the administrative record.” Kellogg, supra at 833.

Other courts following this analysis have come to the same conclusion. In Ferguson v. United of Omaha Life Insurance Co., 3 F.Supp.3d 474, 483 (D. Md. 2014), the District Court of Maryland applied the analysis of Kellogg where an insurance company denied AD&D benefits due to the insured’s medical insurance. In that case, the insured suffered from epilepsy that caused him to suffer an apparent seizure twice while swimming. The first incident, in February 2010, led to his near-drowning and a three-day hospitalization, and the second incident, on September 15, 2010, resulted in his death. The court considered whether there was substantial evidence that the insured actually suffered a seizure that caused him to drown on September 15, 2010, and thus, whether it was a seizure that caused him to drown.

The district court in Ferguson went on to opine that a provision that excludes sudden, unexpected, unforeseeable and unintended events that are independent of sickness and all other causes “would appear to eliminate the possibility of any event ever being considered an accident.” Id. at 486. The district court added, “If the insured slips and falls on an icy sidewalk, it would not be an accident under this language because the presence of ice on the sidewalk would be a cause of the event.” Id.

When taken literally, these “sole cause” provisions would exclude coverage for a number of common sense scenarios that would reasonably be labeled an accident. Following the analysis in Kellogg, courts have considered the cause of loss to be independent of the cause of the accident. These courts have denied coverage only when the disease or pre-existing condition was a cause of the death or injury, not when it was simply the cause of the accident that lead to a death or injury.

Conclusion

While AD&D insurance provides coverage for any accidental death or dismemberment, it is often difficult to separate pre-existing conditions and disorders that may have contributed to an accident from the accident itself. This complicates the coverage analysis in AD&D policies with “sole cause” provisions. For instance, it is plausible to surmise that an individual’s history of heart disease caused her to have a heart attack while driving, which then caused an accident resulting in death. An insurer will use the “sole cause” provision to argue that the heart attack caused or contributed to the accident. However, considering the analysis of Dowdy, Kellogg and opinions following these decisions, a court must separate the loss of the insured from the accident, and consider whether the insured would have suffered a loss but for the circumstances of the accident. Under this analysis, even when though a pre-existing condition or disease may have caused or contributed to an accident, recovery of AD&D benefits is likely.

Where Did My Long-Term Disability Benefits Go? Termination of Benefits Without Improvement of Insured’s Medical Condition

Many people purchase accidental death and dismemberment insurance or disability insurance to protect themselves should they ever become injured and unable to work. If they become injured, they file a claim with their insurance company, and, after a potentially lengthy process, the insurance company may start to pay disability or accidental death and dismemberment benefits. Sometimes, however, after initially paying disability benefits, an insurer will suddenly change its stance on the insured’s disability and terminate the benefits. But there is a problem: The insured has not recovered, and his medical condition has not become better. The insured still cannot return to work. If the insured was disabled, and nothing has changed, why the sudden termination of benefits? Thankfully, courts also question such a change of position.

Many courts have questioned an insurers’ termination of benefits when the insurer lacks evidence that the insured’s health has improved. For example, the Ninth Circuit Court of Appeals has criticized a termination of benefits because the benefits had already been paid for a year and the insurer lacked evidence that the insured’s health had improved. See Saffon v. Wells Fargo & Co. Long-Term Disability Plan, 522 F.3d 863, 871 (9th Cir. 2008) (“After all, MetLife had been paying Saffon long-term disability benefits for a year, which suggests that she was already disabled. In order to find her no longer disabled, one would expect the MRIs to show an improvement, not a lack of degeneration.”) (emphasis in original). The Eighth Circuit also criticized an insurer for similar conduct. In that case, the Eighth Circuit noted that “[n]othing in the claims record justified [the administrator’s] decision that a change of circumstances warranted termination of the benefits it initially granted.” Walke v. Group Long-Term Disability Ins., 256 F.3d 835, 840 (8th Cir. 2001).

Courts view the failure to establish improvement as a factor in a larger assessment of whether the insurance company improperly terminated the insured’s benefits. The case of Backman v. Unum Life Insurance Company of America, 191 F.Supp.3d 1053 (N.D. Cal. 2016), provides a good example of this analysis. In Backman, Crosscheck, Inc. employed Janet Backman as an accounting manager. Crosscheck, Inc. purchased a long-term disability plan with Unum Life Insurance Company of America. The Employee Retirement Income Security Act of 1974 (“ERISA”) governed the plan. Ms. Backman, who was covered under the plan, developed lower back pain and pain in her right leg. The pain became so significant that she ceased working. On February 16, 2012, she applied for long-term disability benefits. In April 2012, Unum approved the claim based on Ms. Backman’s medical records, claim information and conversations with her doctors. Ms. Backman also applied for Social Security Disability Insurance (“SSDI”) benefits. The Social Security Administration awarded her SSDI benefits in November 2012.

After Unum terminated Ms. Backman’s benefits, Ms. Backman filed an administrative appeal with Unum. Unum denied the appeal, concluding that her “report of pain and its limiting effects on [her] functional capacity [is] out of proportion to the clinical/diagnostic findings.” Id. at 1057. During the administrative appeal process, Unum’s medical examiners reviewed Ms. Backman’s medical records and concluded that she could return to work. When denying the appeal, Unum placed heavy emphasis on its own medical consultants and gave little weight to the opinions of Ms. Backman’s treating physicians. Unum also placed little weight on Ms. Backman’s subjective reports of pain. Ms. Backman sued Unum in the Northern District of California.

The court ruled that Ms. Backman “continued to be disabled within the meaning of the LTD Plan as of December 2013, and was entitled to have the Plan disability benefits continue.” The court based its ruling on a number of factors. The court disapproved of Unum’s favoring of its experts over Ms. Backman’s treating physicians, the discounting of the award of SSDI benefits and the failure to place any significant weight on Ms. Backman’s subjective reports of pain.

In its analysis, the court also emphasized the “lack of evidence of a change in condition.” Id. at 1070. The court stated:

Unum’s justification for the 2013 termination of Backman’s benefits is further undermined by its initial 2012 disability determination, which included subjective reports of pain that were essentially unchanged at the time of the termination . . . the Plan here paid benefits for two years before determining that plaintiff was no longer disabled by her radiculopathy and back pain . . . [Another courts has] concluded it was not proper for [a] Plan to find the medical evidence was sufficiently objective proof for an initial award of benefits only to require “more objective” evidence of pain to avoid termination of those benefits. [Here] the Plan’s termination of benefits appears particularly inappropriate given the lack of evidence suggesting that the claimant’s pain had improved or her admittedly degenerative condition had reversed course. Though there are conclusory statements in the Unum consultants’ notes to the effect that Backman’s condition had improved since the disability determination, the Court’s review of the evidence does not support that conclusion. While Unum is not held to a particular standard to show changed conditions, the credibility of its consultants’ conclusions to terminate benefits are undermined when there is no evidence of improvement. (internal citations omitted)

As Backman shows, courts look to a variety of factors to determine whether an insurer has properly terminated an insured’s benefits. The lack of evidence of improvement is one of those factors. When an insurer terminates benefits without signs of the insured’s improvement, there are often other improprieties that, when viewed as a whole, will compel a court to reverse a termination of benefits.

The Latest Frontier for Forum Selection Clauses: ERISA Policies

Letters denying an insured’s claim often end by listing what steps an insured can take to challenge an unfavorable determination. Assuming all administrative appeals have been exhausted, this generally involves filing a lawsuit. Depending on the language in the underlying insurance policy, the denial letter may state that if an insured wishes to bring suit, they must bring suit in a specific court in a particular state that could be on the other side of the country. Clauses in contracts, such as insurance policies, that require filing suit in a particular jurisdiction are called “forum selection clauses.”

Courts often enforce forum selection clauses. When determining whether to enforce a forum selection clause, a court will ask if the forum selection clause is “fundamentally unfair.” Many people would question the fairness of forcing a Californian to bring suit in Vermont or Connecticut in order to vindicate their rights under an insurance policy bought in California. Unfortunately for insureds, courts make the question of fundamental fairness rather complicated. To make the determination, courts consider three factors: “(1) whether the forum selection clause was motivated by bad faith; (2) whether accession to the forum selection clause was obtained by fraud or overreaching; and (3) whether a plaintiff was ‘given notice of the forum provision and, therefore, presumably retained the option of rejecting the contract with impunity.’” Laasko v. Xerox Corp., 566 F.Supp.2d 1018, 1024 (C.D. Cal. 2008) (quoting in part Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 595 (1991)). The Supreme Court stated that “forum-selection clauses should control except in unusual cases.” Atlantic Marine Construction Co. v. U.S. District Court for Western District of Texas, 571 U.S. 49, 64 (2013).

A further complication arises when the Employee Retirement Income Security Act of 1974 (“ERISA”) governs a policy or plan with a forum selection clause. ERISA provides a systematic framework for the determination of an insured’s rights under many insurance policies. ERISA governs numerous life, accidental death and dismemberment, health and disability insurance policies. When drafting ERISA, Congress attempted to protect the rights of insureds so that venue of an ERISA lawsuit is in a location that is typically close in proximity to the insured. ERISA provides that:

Where an action under this subchapter is brought in a district court of the United States, it may be brought in the district where the plan is administered, where the breach took place, or where a defendant resides or may be found, and process may be served in any other district where a defendant resides or may be found.

29 U.S.C. § 1132.

ERISA provides for a wide variety of locations where an insured may file a lawsuit to vindicate their rights. If a policy governed by ERISA includes a forum selection clause, can an insurer require that a matter be venued in a particular court thousands of miles away from the insured? Most appellate courts have yet to rule on this issue. However, all appellate courts to have addressed the issue agree that courts should enforce forum selection clauses in policies governed by ERISA if the clauses are not “fundamentally unfair.” In the ERISA context, courts look to the same factors previously listed.

To date, only two appellate courts have addressed this issue. The Sixth Circuit Court of Appeals addressed the issue in Smith v. Aegon Companies Pension Plan, 769 F.3d 922 (6th Cir. 2014). The Seventh Circuit Court of Appeals addressed the issue in In re Mathias, 867 F.3d 727 (7th Cir. 2017). Both courts upheld the enforcement of the forum selection clauses in their respective cases. Both courts reasoned that 29 U.S.C. section 1132 speaks in terms of permission. See, e.g., Smith, 769 F.3d at 932 (“ERISA’s venue provision is permissive: suit ‘may be brought’ in one of several districts.”). The courts noted that no language in 29 U.S.C. section 1132 contains a command. The courts further emphasized that because courts have a strong tendency to honor forum selection clauses in contracts, and here the statute does not clearly prohibit forum selection clauses, ERISA does not deny an insurer the right to have a forum selection clause in a plan.

In each appellate opinion, one of the three judges dissented. The dissenting judges presented largely identical arguments. The dissenters focused on how ERISA was meant to guarantee that insureds had ready access to a convenient court where the insured could bring suit. The dissenters reasoned that Congress intended for insureds to have the chance to conveniently vindicate their rights in court. Furthermore, unlike other forum selection clauses, insurance companies and employers negotiate the contents of ERISA policies. The insured/plan participant almost never takes part in those negotiations and thus has no chance to advocate for a plan that does not have a forum selection clause. A forum selection clause, so the dissenting judges reasoned, denies insureds some of the very rights Congress intended to establish and protect.

The Secretary of Labor also addressed the applicability of ERISA to forum selection clauses. The Secretary argued as amicus curiae in several cases, including Mathias and Smith. The Secretary consistently argues that ERISA supersedes forum selection clauses. For example, in Mathias, the Secretary argued “that the statute ought to be read to protect . . . the interests of participants in employee benefit plans . . . by providing for appropriate remedies, sanctions, and ready access to the Federal courts[.]” Mathias, 867 F.3d at 735 (internal quotations omitted). The Secretary concludes that such a reading of ERISA results in the invalidation of forum selection clauses. To date, the Secretary has had little success in persuading courts not to honor the clauses.

A majority of appellate courts have yet to address this issue. Possibly, other circuits will rule contrary to their already decided sister courts. To date, only a handful of district courts have struck down forum selection clauses in insurance plans governed by ERISA. McKennon Law Group PC will soon be briefing this issue in an ERISA pension case advocating for a district court in Orange County, California to reject the application of a forum selection clause in an ERISA plan.

When Guarding the Henhouse, Some Foxes Go Rogue: When an Insurer’s Conflict of Interest Factors into Administrating Group Long-Term Disability ERISA Plans

Few Americans can retire on their savings alone. Many workers participate in an employee benefits plans, which serve to provide financial security in case of disability or retirement. In the case of insurers that decide who qualifies for life, health and disability insurance benefits, there exists a major concern about the significant conflict of interest that exists when these insurers make these decisions and also pay for these benefits. Will these insurers exalt their own interests of bottom line profitability over the interests of ERISA plan participants and beneficiaries who file claims for life, health and disability benefits? It is not a leap of logic that this conflict of interest results in insurance companies wrongfully denying ERISA benefit claims.

In Nichols v. Reliance Standard Life Insurance Co., 2018 WL 3213618 (S.D. Miss. June 29, 2018), the court considered the actions of Reliance Standard Insurance Company (“Reliance”), one of the country’s largest disability insurers. The court addressed whether Reliance’s denial of disability benefits to the claimant Juanita Nichols (“Ms. Nichols”) was an abuse of discretion. In its ruling, the court discovered a decades-long pattern of arbitrary claim denials and other misdeeds, a pattern the court considered when assessing Reliance’s actions.

Ms. Nichols was a 62-year-old employee of Peco Foods’ (“Peco”) chicken processing factory in Sebastopol, Mississippi. Ms. Nichols’ duties included spending a minimum of twenty percent of her work day in processing areas, where temperatures at the factory were kept at eight degrees above freezing. After being diagnosed with circulatory system disorders that were exacerbated in cold environments, her doctors concluded that exposure to the cold could give her serious circulatory problems, including gangrene. As a result, Ms. Nichols stopped working at Peco, as she spent much of her day in near-freezing conditions.

Ms. Nichols applied for long-term disability benefits through the group insurance plan administered by Reliance. Reliance admitted that Ms. Nichols’ medical conditions prevented her from working in cold temperatures yet determined that Ms. Nichols’ occupation as it was performed in the national economy was “sanitarian,” an occupation with duties that do not require exposure to cold temperatures. Based on this determination, Reliance denied Ms. Nichols’ application for disability benefits. After a subsequent appeal of the claim denial that Reliance upheld, Ms. Nichols filed a lawsuit against Reliance to challenge her denial under ERISA. ERISA’s purpose is, in part, to protect workers by establishing standards of conduct for those who manage their benefit plans. ERISA allows employees to recover benefits due under a covered plan, like Pecos’ plan with Reliance.

The Nichols court considered whether Reliance based its denial of Ms. Nichols’ claim on substantial evidence. The court responded in the negative, finding that it was unreasonable for a vocational expert to define occupational duties by relying exclusively on a single Dictionary of Occupational Titles description that does not refer to important job duties.

The court also considered whether Reliance had a conflict of interest. As Reliance admitted, it “potentially benefits from every denied claim,” and therefore was operating under a conflict of interest. Id. at *5. The Supreme Court has held that, when an insurer is “operating under a conflict of interest,” that conflict “must be weighed as a factor in determining whether there is an abuse of discretion.” Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105, 117 (2008) (emphasis added). Such circumstances include when there is evidence that an insurer has a “history of biased claims administration.” Id. The question turned, however, to how much weight the court should give to Reliance’s conflict of interest. Glenn held that this evidence “can take many forms,” and “may be shown by a pattern or practice of unreasonably denying meritorious claims.” Id. at 123.

The court considered an approach delineated by the United States District Court for the District of Massachusetts in Radford Trust v. First Unum Life Ins. Co. of Am., 321 F.Supp.2d 226, 247 (D. Mass. 2004), which revealed a disturbing pattern of erroneous and arbitrary benefits denials, bad faith contract misinterpretations, and other unscrupulous tactics.

In its review addressing Reliance’s behavior in disability cases, the court found over 100 opinions in the last 21 years criticizing Reliance’s disability decisions, including over 60 opinions reversing a decision as an abuse of discretion or as arbitrary and capricious. The court found that judges describe the behavior underlying Reliance’s claims administration as “arbitrary,” “blind,” “conclusory,” “extreme,” “flawed,” “fraught,” “illogical,” “inadequate,” “inappropriate,” “incomplete,” “indifferent,” “lax,” “misguided,” “opportunisti[c],” “precursory,” “questionable,” “remarkable,” “selective,” “self-serving,” “skewed,” “tainted,” “troubling,” “unfair,” “unreasonable,” and “unreliable.” Nichols, 2018 WL 3213618 at *7.

The court noted these opinions revealed that Reliance takes a range of extraordinary steps to deny claims for disability benefits. Reliance makes “unreasonable” interpretations of benefit plan language, going so far as to “misconstru[e] the concept of occupational disability.” Reliance “selectively interpret[s]” evidence so it can “opportunistically deny [a] claim” for “selfserving reasons,” creating a “skewed administrative record discounting all of the substantial evidence of … disability.” Reliance’s denials are “overwhelmingly outweighed by evidence to the contrary,” “fraught with procedural irregularities,” and “blind or indifferent.” Those denials “rel[y] upon mere assumptions” and “demonstrate a pattern of arbitrary and capricious decision making.” Reliance uses “obfuscation and delay tactics,” “fail[s] to engage in ongoing communications with [claimants] to keep [them] informed of the process,” makes “misstatement[s]” to claimants, “miscalculate[s] the amount owed,” and generally exhibits behavior that “reeks of bad faith.” Reliance “regularly retain[s]” experts with “an incentive to [make] outcomes in [their] favor,” and uses expert reports that “betray a palpable bias in favor of rejecting the claim.” Despite being “[put] on notice of this bias issue” by “prior judicial criticism,” Reliance still tells courts that “it does not choose … third-party contractor[s] based on the outcomes.” Courts often conclude that Reliance’s denials are “greatly impacted” by “self-interest,” making it “clear that Reliance put[s] its own financial interest above its fiduciary duty.” Id.

The court went on to criticize the way Reliance used the Department of Labor’s Dictionary of Occupational Titles to ignore the actual duties of a claimant’s job. Further, the court criticized the vocational expert involved in Ms. Nichols’ appeal for her cursory methodology and paper reviews of claimant files. Ultimately, the court held that Reliance’s long past of biased and wrongful claims denials supported the court’s finding that the decision to deny Ms. Nichols’ claim was an abuse of discretion. Further, in deciding to award attorney’s fees to Ms. Nichols, the court found that Reliance had a severe degree of culpability and hoped that such an award would have some deterrent effect on Reliance and other insurers.

Conclusion

Opinions like Nichols give hope to victims of wrongful claim denials that the courts will seek justice in viewing the actions of insurance companies. Nichols highlights the inherent conflict of interest between insurance companies and insureds, as insurance companies decide when claimants receive benefits, and at the same time, benefit financially when benefit claims are denied. While Reliance was singled out by the court’s opinion, denials like these by insurance companies are a logical result of situations where “foxes guard the henhouse.” Hopefully this opinion evidences a trend of scrutiny toward insurance companies that also act as plan administrators.

Determining whether an insurance company wrongfully denied a benefit claim is a difficult task for most insureds. A claim denial can be an especially traumatic experience when an insured expects a life and disability insurance company like Reliance to provide benefits in a time of need. McKennon Law Group PC has extensive experience determining whether an insurer improperly denied a life, health or disability insurance claim. If you believe your insurer improperly denied your life, health or disability insurance claim, call us for a free consultation.

Orange County Lawyer Publishes Article in July 2018 edition by Robert J. McKennon Entitled “Insurers’ Intermediaries: The Implications of Actions Taken by Agents, Employers, and Third-Party Administrators”

In July 2018, The Orange County Bar Association published an article written by Robert J. McKennon and Stephanie L. Talavera of the McKennon Law Group PC in the Orange County Lawyer. The article addresses the liability implications of the relationship between insurers and various types of intermediaries. As the article explains, depending on the nature of the relationship between the insurer and others involved in the process, the insurer may be held liable for the actions of those who act as its intermediaries. The article gives tips on how to make an insurer vicariously liable for the acts of those functioning as intermediaries in the insurance process.

Insurers’ Intermediaries: The Implications of Actions Taken by Agents, Employers and Third-Party Administrators[1]

By Robert J. McKennon & Stephanie L. Talavera[2]

Those engaged in the business of insurance often act through intermediaries: agents, brokers, third-party administrators (“TPAs”) and employers. For example, an appointed insurance agent may sell an insurance policy and a TPA might handle the policyholder’s claim for benefits. In the context of employer-sponsored, group insurance plans, an employer may act on behalf of an insurer in collecting premiums via payroll deductions or investigating eligibility, temporarily transmuting the employer-employee relationship. Occasionally, the employer may, itself, act as the insurer, providing benefits through a self-funded plan (typically with the help of a TPA). It goes without saying that how an intermediary relates to each party imports different contours of liability. In this article, we explore some of those theories as they relate to insurance agents, brokers, TPAs and employers, as a good insurance litigator must be able to use all available theories of liability.

Agents of the Insurer

In assessing an insurer’s liability, or an employer stepping into the role of an insurer, it is critical to first identify the various parties involved in the insurance procurement and claims process. Once identified, you must determine when each party acts on behalf of the insurer, so as to render the insurer vicariously liable for the actions of its agents. The most important parties to the insurance procurement and claims process are discussed below, and at least include insurance agents, insurance brokers, TPAs and employers.

Insurance Agents vs. Brokers

Courts sometimes use “agent” and “broker” interchangeably. This inconsistent usage confuses terminology that already relies on an unpredictable, independent factual examination of the relationship on a case-by-case basis. But, the primary distinction between an insurance agent and broker is who each represents.

An “insurance agent” is “a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance.” Cal. Ins. Code § 31. A life agent is a person authorized by and on behalf of a life, disability, or life and disability insurance company to transact life and disability insurance. Cal. Ins. Code §§ 32, 1622. An appointed life insurance agent is always at least the agent of the insurer. See Loehr v. Great Republic Ins. Co., 226 Cal.App.3d 727 (1995). “The most definitive characteristic of an insurance agent is his ability to bind his principal, the insurer.” Marsh & McLennan v. City of Los Angeles, 62 Cal.App.3d 108, 117 (1976). An agent may bind the insurer by “acts, agreements, or representations within the ordinary scope and limits of the insurance business entrusted to him … even if the agent’s actions violate private restrictions on his or her authority.” Troost v. Estate of DeBoer, 155 Cal.App.3d 289, 298 (1984).

In contrast, “‘[i]nsurance broker’ means a person who, for compensation and on behalf of another person, transacts insurance other than life, disability, or health with, but not on behalf of, an insurer.” Cal. Ins. Code § 33; Krumme v. Mercury Ins. Co., 123 Cal.App.4th 924, 929 (2004). Brokers represent potential insureds or policyholders in purchasing insurance and typically act independently, working with several insurance companies. Id. at 929. Thus, a broker acts only on behalf of the client, the potential insured or policyholder, and not the insurer. Carlton v. St. Paul Mercury Ins. Co., 30 Cal.App.4th 1450, 1457 (1994).

Employers

Much of the insurance in force in the United States is placed through employers in the form of employee benefits, such as long-term disability insurance, short-term disability insurance, life insurance and health insurance. Employers play a vital role as plan sponsors and plan administrators of these group insurance policies, and are often responsible for enrolling new members, collecting premium contributions via payroll deductions and submitting claims for policy benefits on behalf of the insurer.

Although the Employee Retirement Income Security Act of 1974 (“ERISA”) governs many of these employer-sponsored plans, occasionally, employers “self-fund” such plans and qualify for an exemption from ERISA on that basis. When a plan is self-funded, the employer steps into the role of the insurer. Because the employer is not routinely engaged in the business of insurance, it may hire a TPA to handle the group policy’s administration. Under this arrangement, an employer begins to look even more like an insurer, using a TPA’s insurance expertise while retaining the benefits of having a self-funded plan.

TPAs

Sometimes referred to as the “downstream” intermediaries, TPAs play an important, but different, role in the insurance process. TPAs handle the rote tasks that keep the insurance industry moving, such as recordkeeping, policy administration, underwriting, investigating and claims handling. TPAs are not typically involved with individual policies, but increasingly play a key role in employer-sponsored group policies, where they assist employers in all aspects of plan administration.

Insurers’ Vicarious Liability Based on Actions of Insurance Agents, Employers and TPAs

The most complicated of the third-party relationships is the agent vs. broker distinction, which becomes particularly important concerning which actions will be imputed to the insurer. Generally, an agent’s actions are imputed to the insurer, but a broker’s do not, and only the former renders the insurer vicariously liable. See LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co., 156 Cal.App.4th 1259 (2007). This distinction is often important in insurer rescission matters, based on an alleged misrepresentation in an application for the insurance policy. Frequently, a potential insured will make accurate disclosures to the agent or broker as part of the application process, but the agent or broker will tell the potential insured that such disclosure on the application is unnecessary. Depending on whether the agent is treated as an agent of the insurer or an agent of the insured (a broker), knowledge of the misrepresentation, and consequent liability, will be imputed differently. If an agent is responsible for the alleged material misrepresentation, the insured may argue that the insurer is responsible for the misrepresentation and thus cannot rescind the policy regardless of whether the disclosure was actually communicated to the insurer. See e.g., O’Riordan v. Federal Kemper Life Assur., 36 Cal.4th 281 (2005) (imputing agent’s knowledge despite agent’s failure to actually communicate insured’s history of smoking).

Like insurance agents, traditional theories of agency and contractual privity immunize TPAs from independent liability for their claims handling misconduct.[3] TPAs act as the principal’s disclosed agents and lack contractual relationships with the insureds. So, a TPA is not typically liable for its bad faith claims handling conduct, even if its sole responsibility is to handle claims. See Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 576 (1973).

When it comes to group policies, California law treats employers as agents of the insurer. The rationale behind this application of liability is that when an employer administers an insurance policy on behalf of the insurer, it acts as its TPA and thus its agent. Accordingly, an employer’s conduct is attributable to the insurer. See McCormick v. Sentinel Life Ins. Co., 153 Cal.App.3d 1030 (1984); Elfstrom v. New York Life Ins. Co., 67 Cal.2d 503 (1967). But, as noted above, ERISA governs many group policies offered through employer-sponsored plans and consequently, preempts state laws that would otherwise determine the agent relationship and vicarious liability. See UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358 (1999). For some time, the question remained as to whether employers also acted as agents of the insurer when administering a group policy governed by ERISA. Recently, in Salyers v. Metro. Life Ins. Co., 871 F.3d 934 (9th Cir. 2017), the Ninth Circuit squarely addressed this issue, ultimately applying California’s rule on employers as agents. As a result, when employers collect premiums, enroll individual plan members and otherwise administer claims, they act as agents of the insurer. Accordingly, the knowledge and conduct of the employer may be imputed to the insurer, even if it was not communicated to the insurer directly.

Employers Treated as Insurers

In some situations, there may not be an insurance company involved in the traditional sense. Instead, an employer or some other entity not typically engaged in the business of insurance may act as the functional equivalent of an insurer. This may arise when an employer self-funds or self-insures a group policy covering its employees that qualifies for an exemption under ERISA. Whether the entity is acting as an “insurer” is important because the special relationship involved in an insurance contract may give rise to a cause of action for insurance bad faith–allowing the individual to pursue extra-contractual recovery against the employer, such as emotional distress damages, attorney’s fees and punitive damages.

Although ERISA traditionally preempts state law causes of action for breach of contract and insurance bad faith, when the group policy is exempt from ERISA, traditional preemption principles will not apply. Accordingly, the question then becomes whether an employer, when it self-funds a plan exempt from ERISA, may be liable for extra-contractual remedies where it has tortuously breached the implied covenant of good faith and fair dealing.

The Ninth Circuit Court of Appeals effectively addressed whether an employer acts as an “insurer” when administering a plan that may be exempt from ERISA in Williby v. Aetna Life Ins. Co., 867 F.3d 1129 (9th Cir. 2017). The Court found that the employer’s self-funded disability plan met both elements of the broad definition of “insurance” under California Insurance Code section 22 because: (1) it shifted one party’s risk of loss to another and (2) distributed that risk among similarly situated persons. Id. at 1134. Although the underlying plan in Williby was actually governed by ERISA, thus preempting the state bad faith claim, it could have qualified under the pay practices exemption to ERISA. As the Court noted, the plan could have met the requirements for the pay practices exemption (and, therefore, California law would have applied), but the argument was rejected because it was raised for the first time on appeal. See Id. at 1136–37. If the plaintiff had argued for the exemption earlier in the case, it is likely that the employer, having issued disability “insurance” to its employees, could have been successfully sued for insurance bad faith. This situation gives employees a powerful procedural tool to fight their employer’s insurance claims denials.

Conclusion

The ultimate success of an insurance litigation matter may turn on whether an insurer is vicariously liable for the actions of a third-party intermediary. How an intermediary relates to the insurer and the insured has important legal implications. Understanding how these relationships operate in various circumstances could have an important impact on the outcome of your next insurance litigation matter.

[1] This article was first published as Insurers’ Intermediaries: The Implications of Actions Taken by Agents, Employers and Third-Party Administrators, Robert J. McKennon and Stephanie L. Talavera, Orange County Lawyer, July 2018 (Vol. 60 No. 7), p. 42.

[2] The views expressed herein are those of the Authors. They do not necessarily represent the views of the Orange County Lawyer magazine, the Orange County Bar Association, The Orange County Bar Association Charitable Fund, or their staffs, contributors, or advertisers. All legal and other issues must be independently researched.

[3] Jeffrey W. Stempel, The “Other” Intermediaries: The Increasingly Anachronistic Immunity of Managing General Agents and Independent Claims Adjusters, 15 Conn. Ins. L. J. 599 (2009).

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