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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).

Ninth Circuit Interprets the Health Parity Act in Favor of Insureds Seeking Health Insurance Benefits

Insurance companies often attempt to provide different levels of benefits for the treatment of physical injuries and mental health issues in the same policy. Mental health parity describes the equal treatment of mental health conditions and non-mental health conditions in insurance plans. When a plan or policy has parity, it means that if a covered person is provided unlimited doctor visits for a chronic condition like diabetes then that person must offer unlimited visits for a mental health condition, such as depression or schizophrenia. Under federal law, health insurance plans must have parity in benefits.

The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008, 29 U.S.C. § 1185a, requires that if a plan provides for “both [(a)] medical and surgical benefits and [(b)] mental health or substance use disorder benefits,” then the plan must not impose greater restrictions on the latter category of care. In particular, it states:

In the case of a group health plan (or health insurance coverage offered in connection with such a plan) that provides both medical and surgical benefits and mental health or substance use disorder benefits, such plan or coverage shall ensure that–

(i) the financial requirements applicable to such mental health or substance use disorder benefits are no more restrictive than the predominant financial requirements applied to substantially all medical and surgical benefits covered by the plan (or coverage), and there are no separate cost sharing requirements that are applicable only with respect to mental health or substance use disorder benefits; and

(ii) the treatment limitations applicable to such mental health or substance use disorder benefits are no more restrictive than the predominant treatment limitations applied to substantially all medical and surgical benefits covered by the plan (or coverage) and there are no separate treatment limitations that are applicable only with respect to mental health or substance use disorder benefits.

Even though the law is relatively clear as to what types of coverage limitations an insurance company can include in its policies, many insurers still attempt to include improper limitations that are applicable solely to mental health and/or substance abuse benefits. In a recent case, Danny P. v. Catholic Health Initiatives, No. 16-35609 (Ninth Cir. June 6, 2018), the Ninth Circuit Court of Appeals addressed a dispute involving such a self-funded group health benefit plan (“Plan”) governed by the Employee Retirement Income Security Act (“ERISA”).

In Danny P., Nicole B. and Danny P. (“Insureds”) were covered under the Plan provided by Catholic Health Initiatives and Catholic Health Initiatives Medical Plan – Blue Cross Blue Shield. The Plan provided “for coverage of ‘Mental Health Services,’ which included coverage for services related to ‘the diagnosis and/or treatment of an Illness Affecting Mental Health.’” Under the Plan, Nicole B. and Danny P. were entitled to “[b]ed, board, and general nursing care” in addition to “[a]ncillary services” in a skilled nursing facility, defined as “an institution or distinct part of an institution which is primarily engaged in providing comprehensive skilled services and rehabilitative Inpatient care.” The Plan also provided for coverage in “Residential Treatment Facilities,” licensed facilities that address mental health issues.

Nicole B. was admitted to an in-patient residential treatment program for approximately 11 months. The insureds filed a claim seeking to have the Plan cover the costs of Nicole B.’s room and board. The Plan denied the claim for the cost of this in-patient residential mental health treatment facility.

The Insureds pursued their administrative remedies. Again, their claim was denied. Insureds brought suit in federal court. “[T]he parties filed cross-motions for summary judgment and the district court granted summary judgment in favor of the Plan[.]” The district court determined that the Plan’s actions did not violate the Parity Act. The Insureds appealed to the Ninth Circuit and it reversed.

The Ninth Circuit began its analysis with the Parity Act itself noting that “it directs that benefits and treatment limitations for mental health problems shall be ‘no more restrictive’ than those for medical and surgical problems.”

The court concluded that the Parity Act did not allow the Plan to provide room and board reimbursements “at licensed skilled nursing facilities for medical and surgical patients, but [] not provide room and board reimbursement at residential treatment facilities for mental health patients.” The Ninth Circuit did not conclude its analysis with a reading of the plain language of the Plan and Parity Act though. It next looked to various government agencies’ interpretations of the Parity Act. No agency had directly addressed the issue before the Court, but “[the agencies] did indicate that mental and medical/surgical benefits must be congruent, and that limiting the former while not placing a similar limitation on the latter would be improper.” As the court noted, the regulations state that:

Although the interim final regulations did not define the scope of the six classifications of benefits, they directed that plans and issuers assign mental health and substance use disorder benefits and medical/surgical benefits to these classifications in a consistent manner. This general rule also applies to intermediate services provided under the plan or coverage. Plans and issuers must assign covered intermediate mental health and substance use disorder benefits to the existing six benefit classifications in the same way that they assign comparable intermediate medical/surgical benefits to these classifications. For example, if a plan or issuer classifies care in skilled nursing facilities or rehabilitation hospitals as inpatient benefits, then the plan or issuer must likewise treat any covered care in residential treatment facilities for mental health or substance user disorders as an inpatient benefit.

Finding no authority contrary to its interpretation, and finding some indirect support for it, the Ninth Circuit reversed the district court’s ruling. The Plan was required to provide the benefits the insureds sought.

Insurance companies often attempt to provide inferior benefits for the treatment of mental health conditions than for the treatment of regular physical injuries. The lack of a physical sign of the condition often drives the insurance companies to fail to appreciate just how serious a mental health condition can be. Insureds are well served by the ruling in Danny P. It is a clear signal to insurance companies that the courts will honor both the letter and the spirit of the Parity Act. Insurance companies cannot attempt to draft their plans or administer their claims in such a manner as to provide for unequal treatment between mental health problems and issues of a non-mental health variety.

Los Angeles Daily Journal Publishes Article on May 24, 2018 by Robert McKennon Entitled “Preexisting Condition Doesn’t Preclude Coverage”

In the May 24, 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 Ninth Circuit Court of Appeals, which held that if an insured with a preexisting medical condition suffers from an accidental injury, the insured is not precluded from recovery under an accidental death and dismemberment policy if the preexisting condition did not substantially contribute to the injury. Insurers often attempt to use preexisting conditions as an excuse to deny payment under AD&D policies. This recent Ninth Circuit opinion helps insureds by making it clear that a preexisting condition’s slight contribution to an injury is insufficient to bar compensation.

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

Preexisting Condition Doesn’t Preclude Coverage

The 9^th Circuit ruled that if an insured with a preexisting medical condition gets in an accident, but the condition does not substantially contribute to the injury, the insured can recover.

By Robert J. McKennon

Insurance policies providing accidental death and dismemberment benefits are fairly common. Many employers provide this important insurance for their employees. These policies are often governed by the Employee Retirement Income Security Act of 1974. A large percentage of AD&D policies exclude coverage for accidental injuries “caused or contributed by” a preexisting medical condition. If a preexisting condition led to the injury, even in a small way, most insurers will deny an AD&D claim. Many people have preexisting conditions that they have managed for years that could be relevant to AD&D coverage. Conditions such as diabetes, for example, can prevent wounds caused by an accident from healing properly, potentially leading to dismemberment.

If an insured with a preexisting medical condition gets in an accident, but the condition does not substantially cause or contribute to the dismembering injury, does the preexisting condition bar an AD&D claim? The 9th Circuit Court of Appeals in a recently published case, Dowdy v. Metro. Life Ins. Co., 2018 DJDAR 4576 (9th Cir. May 16, 2018), answered this question in the negative and explained that such insureds are not necessarily barred from obtaining payment under an AD&D policy. Tommy Dowdy suffered from diabetes. Unfortunately, Dowdy was in a car accident in which his car rolled off California State Route 4. He suffered extensive injuries, including a “semi-amputated left ankle.” Dowdy was hospitalized and discharged after a month-long stay. However, his ankle failed to improve in part because of his diabetes and because he suffered from a persistent leg infection. Five months after the accident, Dowdy’s left leg was amputated below the knee.

Dowdy and his wife were covered by an AD&D policy provided by Metropolitan Life Insurance Company. The policy was governed by ERISA. The policy stated in the Coverage Provision that:

If You or a Dependent sustain an accidental injury that is the Direct and Sole Cause of a Covered Loss described in the SCHEDULE OF BENEFITS, Proof of the accidental injury and Covered Loss must be sent to Us. When We receive such Proof We will review the claim and, if We approve it, will pay the insurance in effect on the date of the injury.

Direct and Sole Cause means that the Covered Loss occurs within 12 months of the date of the accidental injury and was a direct result of the accidental injury, independent of other causes[.]

The policy also included an exclusion which stated that MetLife would not pay “for any loss caused or contributed to by . . . physical . . . illness or infirmity, or the diagnosis or treatment of such illness or infirmity[.]”

Dowdy filed a claim under his AD&D policy with MetLife. MetLife denied the claim on the basis that Dowdy’s diabetes contributed to the medical problems that resulted in the amputation. Dowdy then filed an administrative appeal with MetLife challenging the claim denial. MetLife upheld its denial determination, concluding that the accident was not the “direct and sole cause” of the amputation “independent of other causes” as set forth in the Coverage Provision, and that the policy’s Illness or Infirmity Exclusion applied because Dowdy’s diabetes contributed to the loss.

Dowdy then sued MetLife. Both parties filed cross-motions for judgment under Federal Rule of Civil Procedure 52. The district court found that diabetes caused or contributed to the need for amputation, affirmed the denial of benefits and entered judgment in favor of MetLife. Dowdy appealed to the 9th Circuit.

The court reversed the district court, first reviewing its holding in McClure v. Life Ins. Co. of N. Am., 84 F.3d 1129 (9th Cir. 1996). There, the court determined that where the applicable plan language is inconspicuous, the “policyholder reasonably would expect coverage if the accident were the predominant or proximate cause of the disability.” If, however, the applicable language is conspicuous, recovery could be barred if a preexisting condition substantially contributed to the loss, “even though the claimed injury was the predominant or proximate cause of the disability.”

It was undisputed that Dowdy’s diabetes condition contributed to the complications with his wounds and thus to his leg amputation. MetLife therefore argued that the accident was not the “direct and sole cause of the loss,” which was not a covered loss. The court rejected this contention, explaining that “[i]n order to be considered a substantial contributing factor for the purpose of a provision restricting coverage to direct and sole causes of injury, a pre-existing condition must be more than merely a contributing factor.” (Emphasis original).

The court looked to a variety of sources to determine what should be deemed to be “a substantial cause.” For example, one respected source explained that the word “substantial” denotes that the conduct had an effect strong enough that it would lead “reasonable [people] to regard it as a cause” in the more concrete sense and not just in some “philosophic sense.” Ultimately, the court held that there must be evidence showing that the preexisting ailment contributed a “significant magnitude of causation.” The preexisting condition cannot “merely [be] related to the injury[.]”

The 9th Circuit ruled that there was no evidence in the administrative record that Dowdy’s diabetes substantially caused or contributed to the amputation of his leg. Thus, under the policy’s Coverage Provision, Dowdy was eligible to collect policy benefits.

The court also rejected MetLife’s position that the exclusion applied since Dowdy’s diabetes condition was a “cause” of or “contributed to” the amputation, noting that exclusions are narrowly construed and that the “substantial contribution” standard applied in interpreting the exclusion. Because there was no evidence that Dowdy’s diabetes condition substantially caused the amputation, the court reversed the district court, finding that Dowdy was entitled to payment under the policy.

Insurers often attempt to use preexisting conditions to deny payment under AD&D policies. Given how common chronic conditions are in modern life, it is not surprising that insurers often have numerous arguments as to why they should not be forced to pay under these policies. However, the 9th Circuit’s decision gives effect to “the policy of [ERISA] to protect . . . the interests of participants in employee benefit plans and their beneficiaries” and to “increase the likelihood that participants and beneficiaries . . . receive their full benefits.” 29 U.S.C. Sections 1001(b), 1001b(c)(3). Insureds reasonably expect that simply having a preexisting condition that is somewhat related to the injury is not sufficient to deny an accident claim under an AD&D policy. Whether it is diabetes or countless other conditions, persons with a preexisting condition may still have the right to collect under an AD&D policy as long as the preexisting condition is not a substantial cause of the injury. Plan participants are well served under Dowdy now that insurers like MetLife cannot argue that inconsequential preexisting conditions bar coverage for policy benefits that they desperately need.

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 www.californiainsurancelitigation.com.

Los Angeles Daily Journal Publishes Small Firm Profile on the McKennon Law Group PC Entitled “Shifting Allegiance: No Longer Insurers’ Advocates, McKennon Law Group Attorneys Stand Up for Policyholders”

In the May 7, 2018 issue of the Los Angeles Daily Journal, Daily Journal Staff Writer Melanie Brisbon authored a “small firm profile” article on the McKennon Law Group PC. The article covers the firm’s path to success, starting with its unconventional background: several of the firm’s attorneys left established careers defending insurance companies before “shifting allegiance” to represent insureds, policyholders and claimants. The firm started with three lawyers, including founding partner Robert J. McKennon and senior associate Scott E. Calvert. Now, the firm consists of five attorneys and has a thriving practice in insurance litigation representing policyholders, especially involving life, health and disability insurance cases governed by insurance bad faith or ERISA. The text portion of the profile is reprinted in full below.

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

Shifting Allegiance

No longer insurers’ advocates, McKennon Law Group attorneys stand up for policyholders.

By Melanie Brisbon

Daily Journal Staff Writer

Insurance policyholders throughout the country call McKennon Law Group PC for counsel in complex conflicts with their insurers.

The five-attorney outfit in Newport Beach has secured many favorable results for its clients through settlements, trials and alternative dispute resolution.

“Our specialty is bad faith insurance litigation and [Employee Retirement Income Security Act] litigation involving insurance and pension issues, focused mostly on disability insurance, health insurance and life insurance claims,” said Robert J. McKennon, the firm’s founding and name partner.

Complex legal issues with insurers don’t intimidate McKennon Law Group. In fact, three of the firm’s lawyers, including its founding partner, used to advocate for the insurers. McKennon defended insurance companies for nearly 25 years as an attorney and partner at Barger & Wolen LLP. He changed sides in 2010 and created McKennon Law Group two years later.

“My heart was always sort of with claimants and policyholders because I saw a lot of claimants and policyholders when I was on the defense side getting poor representation by plaintiffs lawyers,” McKennon said.

“Secondly, I was hired by a few insurance companies in difficult bad faith cases while I was on the defense side and they asked me to get involved in mock trials as a plaintiff’s attorney in bad faith disability insurance cases,” he added. “In every mock trial that I did, I ended up winning substantial damages and it whet my appetite to start to work on the plaintiff’s side doing policyholder litigation.”

Challenges arose when McKennon decided to represent plaintiffs instead of insurance companies. For starters, he was known as a lawyer who represented insurance companies.

“One of my biggest challenges was getting my name out there to prospective insureds who I would now represent and also to lawyers letting them know I was now representing policyholders against insurance companies in primarily life, health and disability matters,” McKennon said. “The way I did that was communicating with a number of lawyers that I knew in Orange County especially, letting them know that I was now suing insurance companies.”

Marketing strategies also helped McKennon overcome the challenges.

“I developed a very strong and vibrant website and insurance litigation blog,” he said. “I started doing a lot of blogging and my lawyers do a lot of writing and blogging.”

The firm started with three lawyers, including associate Scott E. Calvert, who McKennon hired at Barger & Wolen.

“He hired me for my first job out of law school,” Calvert said. “Talking to him and seeing the fulfillment he got in working for policyholders made me think that might be something I would want to do too.”

More business started coming in and the firm added more lawyers—Joseph S. McMillen, David S. Rankin and Stephanie L. Talavera.

In a federal court case, McKennon Law Group represented a former lawyer who sought long-term disability benefits under his employer’s welfare benefit plan based on a “mental breakdown,” according to court documents.

The plan was funded by an insurance policy which set forth the eligibility requirements for receipt of benefits. The insurer denied the benefit claim after concluding that McKennon Law Group’s client was not totally disability during the entire period set forth in the eligibility requirements, court documents say.

“The insurer felt that he was able to work, and after we won the case at trial, they found some records that he actually represented himself in his own divorce proceeding and in a post-trial proceeding. They tried to use that against him saying he wasn’t disabled,” McKennon said. “We were able to convince the court to disregard that evidence.”

The insurer appealed the judgment to the 9th U.S. Circuit Court of Appeals, which upheld the lower court’s decision and awarded attorney fees.

In another case, McKennon Law Group represented a plaintiff who sued his health insurer, claiming his daughter was covered under an ERISA-governed health plan issued by a large insurance company.

The plaintiff alleged the child required residential rehabilitation substance abuse treatment for a variety of problems. The insurer denied the claim, saying additional residential treatment was not medically necessary under the plan, according to court documents.

The court found in favor of the firm’s client and awarded him $113,000 plus prejudgment interest, along with substantial attorney fees and costs.

“We obviously have to look at and provide sufficient medical information that our client is disabled, but we also have to prove that our client is disabled under a particular definition under a particular contract,” McKennon said. “Depending on whether we are litigating an ERISA-governed insurance policy, versus a policy that is governed by California law or some other state law, the legal proof will differ.”

“We have to be comfortable with laws of various states in order to litigate disability, life or health insurance issues in California and in other states.”

Business litigation is also one of the firm’s practice areas.

Erwin J. Shustak, managing partner of Shustak Reynolds & Partners PC, first met McKennon as opposing counsel.

“Robert McKennon was an adversary of mine probably six years ago in a large arbitration dispute,” Shustak said. “He won the case and did an excellent job for his client. I was so impressed with him that years later I hired him to represent me in a personal matter.”

Bad Faith Claims Handling: California Department of Insurance Investigates Aetna’s Health Claim Denials

On our blog, we frequently discuss the improper tactics insurers use to deny legitimate claims for life, health, disability and other forms of insurance. For our latest article on the pervasive problem in health insurance claims denials, see https://mslawllp.com/la-times-report-pervasive-problem-of-improper-health-insurance-denials/. Mckennon Law Group PC has had much experience litigating against health insurers who deny legitimate medical claims. We know this is a rampant problem. So, it was not shocking to us that at least one very large health insurer, Aetna, took highly improper actions to deny medical insurance claims.

On February 12, 2018, the California Department of Insurance (“CDI”) issued a press release confirming its investigation of Aetna, one of the largest health insurance providers in the U.S. California Insurance Commissioner Dave Jones directed an investigation into Aetna’s claims handling practices for potential misconduct. Specifically, Aetna’s determinations to deny coverage without a physician’s review of the medical records. The Commissioner expressed his concern over Aetna’s reviewing practices as follows:

I have directed the California Department of Insurance to open an investigation of allegations regarding Aetna’s practices in denying claims and requests for prior authorization for care. The department is also investigating Aetna’s utilization review process. If a health insurer is making decisions to deny coverage without a physician ever reviewing medical records that is a significant concern and could be a violation of the law. The department is seeking more information from Aetna about their claims denial process and I would encourage any Californians who are concerned that they might have been affected to contact the California Department of Insurance at 1-800-927-4357.

CDI’s announcement follows from a report on the topic by CNN, focusing on several troubling admissions made by Aetna’s former medical director for southern California, Dr. Jay Ken Iinuma. Reportedly, Dr. Iinuma admitted that he did not review patients’ medical records firsthand. As a matter of practice, he instead relied on nurses’ secondhand reporting of pertinent information in the medical records.

These admissions appear during the former medical director’s video-taped deposition in an ongoing lawsuit for breach of insurance contract and bad faith. In the lawsuit, Plaintiff Gillen Washington alleges that his health insurer, Aetna, improperly denied preauthorization coverage of his monthly infusion of intravenous immunoglobulin, an otherwise regular treatment for his rare immune disorder. Although Dr. Iinuma authorized the denial as not medically necessary, the deposition transcript revealed his limited knowledge of Washington’s rare disease and its necessary treatment.

Whereas CNN described Dr. Iinuma’s admissions as “stunning,” the use of underqualified consultants to support a denial of coverage is more common than some might think. At the McKennon Law Group PC, we frequently see improper claims denials supported in this manner, through a nurse consultant’s review of the medical records and not a physician’s review of the same. Even more shocking, the insurer often relies on the unqualified consultant’s opinion over that of the insured’s treating physician. We regularly see this in the handling of long-term disability insurance claims, short-term disability insurance claims and health insurance claims.

Similarly, an insurer may attempt to support an improper denial of coverage by using a non-specialist physician. This can be problematic in instances like the above because, as Dr. Iinuma also admitted in his deposition, he had little experience treating those with the rare immunological disorder Washington suffers from, and thus, he knew little about its necessary treatment. We can also surmise that the Aetna nurse who had reviewed his medical records also had little experience treating those with immunological disorders. Yet, he still authorized denial of coverage for the treatment as not medically necessary. More troubling still, lurking behind these issues of qualification are issues of bias. Often, the unqualified consultants work on-site, essentially acting as employees of the insurer, which in turn, renders them more likely to provide an opinion in favor of a claim denial.

Having an experienced long-term disability, individual disability, health and life insurance attorney matters to the success of your insurance claim, particularly where the denial of coverage relies on the opinion of an unqualified consultant or non-specialist peer review physician. If your claim for health, life, short-term disability or long-term disability insurance has been denied, 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 disability and medical insurance claims.

Fee-Shifting: When are Attorneys’ Fees Recoverable in ERISA Cases?

Challenging a wrongfully denied claim for life, health, long-term disability or accidental death and dismemberment benefits can be a very time-consuming endeavor for law firms handling these types of cases. The resources required to fight a sophisticated insurer can quickly become very expensive. Without the ability to collect attorney’s fees, many wrongfully denied insurance claims would go unchallenged, not for lack of merit, but due to a lack of economic viability. Fortunately, the Employee Retirement Income Security Act of 1974, or ERISA, allows for recovery of attorneys’ fees upon a showing of some degree of success on the merits. In other words, a meritorious lawsuit under ERISA will almost certainly result in making the culpable party (usually the insurer who denied the claim) foot the bill. Without this key incentive, insureds and their attorneys would be hard-pressed to pursue a wrongfully denied claim for benefits. Although not the subject of this article, attorney’s fees may also be obtained in non-ERISA state court insurance bad faith cases too.

In this article, we focus on the importance of ERISA’s fee-shifting provisions and some of the contours of that statutory remedy. First, we provide a brief background on attorneys’ fees in our legal system, largely governed by the “American Rule.” Next, we discuss ERISA’s fee-shifting provision as a statutory exception to that rule and as applied by the Ninth Circuit in Dishman v. UNUM Life Ins. Co. of Am., 269 F.3d 974 (9th Cir. 2001).

The “American Rule”
In the U.S., our legal system largely allocates responsibility for attorneys’ fees in accordance with the American Rule. Unlike the English Rule, its American counterpart assigns each party responsibility for his or her own attorneys’ fees, unless a statute or contract provides otherwise. This responsibility applies even if the other party is at fault. The American Rule contrasts with the English Rule in that the latter awards attorneys’ fees to the winner as an element of damages, i.e., the loser pays. Many believe the English Rule is a fairer approach, although it may unfairly penalize parties for defending or pursuing an action where the legal outcome is uncertain.

ERISA’s Fee-Shifting Provision
ERISA provides a “fee-shifting,” statutory exception to the American Rule. See 29 U.S.C. § 1132(g)(1). More like the English Rule’s loser-pays regime, this provision grants the court discretion to award reasonable attorneys’ fees and costs in an ERISA action. ERISA’s generous fee-shifting provision does not even require that the party prevail to be entitled to attorneys’ fees. As the U.S. Supreme Court declared in Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242 (2010), under ERISA, the court may award attorneys’ fees based solely on a showing of some degree of success on the merits.

When Does ERISA’s Fee-Shifting Provision Apply?
As discussed in various other blogs on the subject, employee benefits governed by ERISA typically require at least one mandatory internal appeal to the insurer (if the Policy has such a provision, which they typically do). Thus, if you have a long-term disability policy through your employer, and the governing policy or plan document requires appeal of any denial or termination of benefits, one would have to exhaust that internal appeal before he could file a lawsuit. Failure to do so may prevent the participant from filing a lawsuit in the future.

ERISA’s fee-shifting provision applies only to those fees incurred in preparation of litigation and not typically in the requisite administrative appeals process. However, there are exceptions to this rule. One case that discusses such an exception is Dishman v. UNUM Life Ins. Co. of Am., 269 F.3d 974 (9th Cir. 2001), in which the Ninth Circuit Court of Appeals approved an award of attorneys’ fees for work that would otherwise be considered part of the administrative process. In Dishman, the court approved plaintiff’s attorneys’ fees because it found that there was nothing to pare off, as the insurer did not make an adequate administrative remedy available to plaintiff.

The plaintiff, Mr. Dishman, struggled with disabling migraines for many years before he could no longer work. Unum accepted Mr. Dishman’s claim; however, after a few years, Unum assigned Mr. Dishman’s claim to its Complex Claim Unit and hired several private investigators. Instead of conducting medical evaluations, Unum’s investigation focused on Mr. Dishman’s potential affiliation with a Colorado company. Based on this information, Unum called Mr. Dishman and cancelled his benefits, later retracting the cancellation, calling it a “suspension.”

The correspondence that followed appear as attempts to engage in the administrative appeals process under ERISA. Mr. Dishman’s attorney corresponded with Unum on his behalf, proposing that Mr. Dishman be examined by a neutral neurologist. Unum declined and requested further information related to Mr. Dishman’s potential employment in Colorado. Mr. Dishman attempted to comply with Unum’s requests for some time, but when Mr. Dishman’s attorney requested a copy of Unum’s claim procedure, his first request was ignored. As to his second request, Unum responded only that it “does not have a Claims Procedure with regard to the suspension or termination of benefits.”

Although this back-and-forth looks akin to an attempted administrative process, the court determined that Unum’s conduct communicated to Mr. Dishman that he had no administrative recourse. Accordingly, the Court upheld the District Court’s exception to the exhaustion requirement because Unum gave Mr. Dishman inadequate notice of the denial and available appeals procedure. Further, the court also largely agreed with the District Court’s award of all Mr. Dishman’s attorneys’ fees (absent interest thereon) because:

[T]here was nothing to pare off […] none of the claimed hours were expended in connection with the exhaustion of administrative procedures, inasmuch as Unum did not make any administrative remedy available to the plaintiff.

In sum, the courts have long-acknowledged the importance of this recovery provision in achieving the fundamental goals of ERISA. It provides a financial incentive for attorneys to represent plan participants, beneficiaries or fiduciaries with wrongfully denied claims for benefits. It also penalizes administrators for claims handling misconduct by forcing them to internalize those costs. Along with other statutory incentives, the threat of looming attorneys’ fees gives real teeth to ERISA’s procedural protections, increasing the cost of failure to comply with these ERISA protections. McKennon Law Group PC has recovered significant attorney’s fees in many of the bad faith and ERISA insurance matters it has handled for our clients. This has allowed our clients in those cases to keep all or most of their disability, life, accidental death and long-term care benefits.

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