Bad Faith Archives - Page 3 of 14

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).

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.”

Agents, Brokers and Rescission of Insurance Policies

Generally, an insurer need not investigate statements made in an application for insurance, subject to certain exceptions. Instead, the potential policyholder or applicant must fully disclose all known material information. If a potential insured does not correctly disclose information on an application (even innocently), the insurer may later try to rescind the insurance policy. When an insurer “rescinds” a policy, it renders the contract as if it never existed and frees both parties from their obligations under the contract. Practically, this means that the insurance company is no longer obligated to pay the claims for life insurance, accident insurance, health insurance, long-term care insurance or long-term disability insurance benefits and the policyholder no longer has to pay the policy’s premiums. Insurers often look for ways to rescind insurance policies so they can deny insurance claims.

When can an insurer rescind?
Under California law, an injured party is entitled to rescind an insurance policy where there has been concealment on the application, regardless of intent to deceive, including where a representation is false in a material point. Upon discovery of the material misstatement or nondisclosure on the application, the insurer can promptly rescind the policy. The rescinding insurer must also give notice to the policyholder and return any benefits gained under the contract, such as all premium payments paid to the insurer. For example, if an applicant for life or accidental death and dismemberment insurance failed to disclose a history of smoking on the application, and then later died of cancer, the insurer would likely attempt to rescind the policy. If the insurer successfully rescinds the policy, it must also return the premium payments to the insured, but is no longer obligated to pay the death benefits.

“But I told the insurance agent when I applied for the policy…”
Oftentimes, potential insureds apply for insurance with the help of a licensed insurance agent or broker. Although both an insurance agent and an insurance broker assist a potential policyholder in the application process, the primary distinction between the two is who each represents. An insurance agent represents the insurer; a broker does not. Although this distinction has important legal implications, courts sometimes use “agent” and “broker” interchangeably. This usage confuses terminology that already relies on an unpredictable, independent factual examination of the relationship on a case-by-case basis.

Regardless, in practice, the broker vs. insurance agent distinction becomes particularly important when an insurer attempts to rescind a policy based on a material misrepresentation on the initial application, i.e., a failure to disclose pertinent medical or lifestyle history. Occasionally, a potential insured will make accurate disclosures to the insurance 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 insurance agent is treated as an agent of the insurer, knowledge of the misrepresentation, and consequent liability, will be imputed differently.

O’Riordan v. Federal Kemper Life Assurance
In O’Riordan v. Federal Kemper Life Assur., 36 Cal.4th 281 (2005), the California Supreme Court discussed the importance of the distinction between an insurance agent and a broker when it comes to rescission. In O’Riordan, potential policyholder, Amy O’Riordan, applied for life insurance through an independent insurance agent, Robert Hoyme. The application for the life insurance policy asked the following two questions:

“Have you smoked cigarettes in the past 36 months?”

“Have you used tobacco in any other form in the past 36 months?”

Ms. O’Riordan answered “no” to both questions on the application, although she apparently told the insurance agent that she was a former smoker and “might have had a couple of cigarettes in the last couple of years.” In response, the insurance agent assured Ms. O’Riordan “[t]hat’s not really what they’re looking for. They’re looking for smokers.”

Several years later, Ms. O’Riordan died of breast cancer. When her husband attempted to collect the death benefits under the policy, the insurer attempted to rescind. The insurer conducted an investigation and found that Ms. O’Riordan’s physician, a year before she applied for the policy and within the thirty-six-month period, noted her request for a nicotine patch. The physician’s report said that, although she quit smoking years earlier, “recently due to some stressors, she did start to smoke a little bit again, but is not smoking as much as she smoked previously.” On this basis, the insurer rescinded the policy and refused to pay the death benefits to Mr. O’Riordan.

Mr. O’Riordan filed a lawsuit and the case made it all the way to the California Supreme Court. Ultimately, the Court determined that Ms. O’Riordan’s disclosure to the insurance agent raised an issue as to whether the insurer could rescind the policy. If the agent was acting as an agent of the insurer, then the agent’s knowledge of Ms. O’Riordan’s disclosures of a past history of smoking would be imputed to the insurer. In other words, because the agent knew, the insurance company had constructive knowledge of the disclosure. Thus, despite the fact that the agent had not actually communicated Ms. O’Riordan’s history of smoking to the insurer, the court still reversed the lower court opinion and allowed Mr. O’Riordan’s case to proceed since the insurer could not rescind the policy.

Insurers often use rescission of insurance policies to deny insurance claims, especially life, disability and health claims. Most policyholders do not understand their rights and assume insurers can rescind their policies. If you are a victim of an insurer’s attempt to rescind your life, health or disability insurance policy, do not cash the insurer’s check for premium refund until you call McKennon Law Group PC to assess your rights to fight this type of abusive insurance company practice. You may be able to sue your insurer for breach of contract and breach of the implied covenant of good faith and fair dealing (insurance bad faith) for attempting to rescind your valuable insurance policy.

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

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.

Court Rejects Third Party Administrator’s Demurrer to Insurance Bad Faith Claim Based on Plaintiffs’ Theory of Joint Venture Liability

Implied in every insurance contract is a promise of “good faith and fair dealing,” which means that the insurer must not take unreasonable steps to prevent an insured’s right to receive benefits under the policy. To comply with its promise to act in good faith, the insurer must adhere to certain duties, such as the duty to adequately investigate a claim made by an insured. An insurer acts in bad faith when it fails to meet those duties unreasonably and without proper cause. Determining whether there has been bad faith conduct is important, in part, because it directly affects the insured’s potential recovery. If the insurer is found to have acted in bad faith, the insured may have access to a substantial additional recovery, including attorneys’ fees, emotional distress, consequential and punitive damages. An insured’s ability to sue for insurance bad faith is his or her most potent and effective legal weapon to wield against rogue insurance companies. It is common knowledge that a policyholder can assert a bad faith claim against an insurer. But what about an insured’s ability to sue a Third Party Administrator (“TPA”)?

TPAs are not insurers, although they typically perform some of the insurer’s functions: billing, recordkeeping and processing of life insurance, disability insurance and medical insurance claims. Many insurers “outsource” such claims processing tasks to TPAs and grant TPAs broad discretion to interpret policy provisions, investigate claims and deny or approve claims as they see fit. But, although TPAs often spend the most “face-time” with individual policyholders, their primary relationship is with the insurance company and not the insured. Even though TPAs may commit bad faith by making unreasonable claims decisions, most traditional legal theories immunize TPAs from liability for claims handling misconduct. Rather, the insurer is typically liable for any bad faith conduct by the TPAs. Consequently, TPAs may lack incentives, financial or otherwise, to properly handle and process an insured’s life, health or disability insurance claim.

However, new legal theories adopted by McKennon Law Group PC appear to be shifting the course on TPA accountability. One theory our firm has successfully utilized in several recent cases is joint venture liability. Under joint venture liability theory, the policyholder alleges that, unlike agents or employees of the insurer, the TPA entered into the business of insurance as a joint venture with the insurer. As such, both the TPA and the insurer may be held legally accountable for their bad faith conduct. In this article, we discuss TPAs, joint venture liability theory and the Firm’s recent success in alleging the joint venture liability of a TPA.

Third Party Administrators
In the insurance industry, it is commonplace for a TPA to provide claims handling services for an insurer. Typically, the insurer funds the insurance policy and pays the benefits, whereas the TPA interprets the policy provisions, handles the claims, and ultimately decides whether a claim should be paid. Customarily, the insurer’s agents and employees are exempt from liability for breach of contract and bad faith. In other words, if the insurer’s long-term disability claims specialist improperly denies your claim, he would be immunized from a lawsuit because he is not a party to the contract for insurance and he acted as an agent of the insurer. This agent-principal theory also shields TPAs from liability for breach of contract and bad faith, despite the fact that TPAs are distinct, sophisticated entities often independently exercising broad discretionary authority in the administration of claims under the policy.

TPAs and Joint Venture Liability Theory
Despite the more traditional law that immunizes TPAs from bad faith liability, non-insurer defendants may be held liable under insurance contracts if they jointly ventured with the insurer. In this instance they are not considered agents or employees of the insurer, but instead a partner of sorts, known as a joint venturer, engaged in a particular business venture with an insurer. Where there is a joint venture, all are liable for agreements entered into by the joint venturers in furtherance of the joint venture. To establish a joint venture requires (1) an intent to become partners; (2) a community of interest in the undertaking; (3) an understanding to share profits and losses; and (4) authority and right to direct and control the conduct of all co-venturers with respect to the joint venture.

In Forest v. Equitable Life Assurance Society of U.S., No. C99-5173 SI, 2001 WL 1338809, at *5 (N.D. Cal. June 12, 2001), the court allowed plaintiff’s theory for TPA liability based on a joint venture theory. Plaintiff alleged that the companies, including two acting TPAs, Paul Revere and Provident Life, and one acting insurer, Equitable, were joint-venturers who were all subject to bad faith under California law. The “joint venture” encompassed a series of agreements between Equitable, Paul Revere and Provident Life, with the latter two offering claims management services similar to what many other TPAs also provide. The agreements supported inferences that Paul Revere, Provident and Equitable shared a community of interest in the business of claims administration and shared profits and losses through an incentive fee scheme. In response to a legal challenge to this joint venture liability, the court found that the TPA “Paul Revere exercised broad discretion and control while Equitable retained final authority in most matters.” The court also noted that the parties shared a variety of resources, including information, bank accounts, human resources and joint marketing development. Based on these agreements, the court found that “it cannot be said as a matter of law that Paul Revere, Provident Life and Equitable were not in a joint venture for the business of offering and providing disability insurance policies such as plaintiff’s policy.” Thus, the court upheld the bad faith claims against the TPAs, Paul Revere and Provident Life.

Sharkh v. Continentale Krankenversicherung A.G.
In a recent ruling in Sharkh v. Continentale Krankenversicherung A.G., No. SC127208 (L.A. Super. Ct. Jan. 17, 2018), the court found in favor of Plaintiffs, rejecting a legal challenge to Plaintiffs’ causes of action for breach of contract and bad faith as to Defendant and TPA Global Medical Management, Inc., (“GMMI”). In this lawsuit, Plaintiffs, represented by Robert McKennon and Scott Calvert of the McKennon Law Group PC, filed an amended complaint against Defendants Continentale Krankenversicherung A.G. (“Continentale”) and GMMI. The amended complaint alleged liability on multiple theories, including joint venture liability against GMMI based on the Defendants’ denial of numerous health insurance claims without good cause relative to two sick young children, one of whom who is gravely ill. On December 11, 2017, GMMI demurred to Plaintiffs’ amended complaint on the grounds that the breach of contract and bad faith causes of action alleged were improper. Specifically, GMMI asserted that it could not be subject to causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing (bad faith) because it was not a party to the underlying insurance contract, acting only as a TPA.

On January 3, 2018, Plaintiffs, via counsel, responded, opposing GMMI’s demurrer. As the opposition explained, GMMI and Continentale co-ventured into the business of health insurance. Both parties shared a community interest in profits and losses, as well as the ability to independently exercise broad discretionary authority. The policy also reflected an intent to become partners, identifying GMMI as the claims administrator. Following briefing, the court issued an order in favor of Plaintiffs, finding that the amended complaint sufficiently alleged a theory of joint venture liability in the administration of the health insurance policy at issue by both the TPA, GMMI, and the insurer Continentale.

Ultimately, an insured’s ability to hold TPAs accountable is a good thing for insureds. Without some accountability, TPAs will exercise unbridled discretionary authority over the claims handling process without any liability whatsoever.

Does ERISA Apply to County and City of Los Angeles Employee Disability Benefit Plans? Why You Should Care

Do you have a long-term disability claim with the County of Los Angeles, City of Los Angeles or another Los Angeles government organization? If so, you might be wondering: do the limited remedies available under a federal law called the Employee Retirement Income Security Act of 1974 (“ERISA”) apply to your claim? It is crucial that you determine whether the specific Los Angeles or County of Los Angeles employee welfare benefit plan at issue is governed by California’s insurance bad faith laws, ERISA, or the Los Angeles County Code. The answer will dramatically affect your recoverable damages.

ERISA applies to most employer-sponsored disability, life, health, retirement and many other employee benefit plans. ERISA exempts only two types of employer plans (meaning that ERISA does not apply to them):

Government plans (see 29 U.S.C. § 1003); and
Church plans, unless the church employer elects under 26 U.S.C. section 410(d) to be subject to ERISA.

While the general rule of thumb is that a government plan is exempt from ERISA and therefore, by default, subject to California’s bad faith laws, that is not always the case. Be careful. This is a complex issue and likely requires retaining an experienced ERISA disability lawyer.

ERISA defines a government plan as, “a plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing.” 29 U.S.C. § 1002(32). ERISA does not define “political subdivision,” “agency,” or “instrumentality.” Federal courts have adopted complex tests to interpret these statutory terms. Some employers that look like government entities may not meet the tests and, therefore, are subject to ERISA (not exempt from it). Moreover, plans that involve both public and private employers may result in ERISA application to the entire plan, even as applied to the plan participant’s government employees. See, e.g., South Cent. Indiana Sch. Trust v. Poyner, 2007 WL 3102149, at *5 (S.D. Ind. Oct. 19, 2007).

Which law applies to the plan dictates the types of damages you can recover for an incorrectly denied claim. And there is a big difference, so, this is a critically important issue you do not want to overlook. If the plan is governed by California bad faith law (which is generally the case for government plans), the potential damages for a long-term disability claim denied in bad faith are by far the most expansive. They include: (1) the employee’s past-due disability benefits; (2) prejudgment interest on those benefits at the California rate of 10% per annum; (3) future disability benefits that will become due under the plan; (4) attorneys’ fees incurred to recover the employee’s disability benefits; (5) compensation for the emotional distress caused to the employee by the unreasonable denial or delay in paying the benefits; (6) all other damages proximately caused by the bad faith conduct; and (7) punitive damages in the case of oppressive, malicious or fraudulent misconduct.

Under an ERISA plan, the damages for an incorrectly denied claim are far more limited: (1) the employee’s past-due disability benefits through the date of the ERISA trial; (2) prejudgment interest on those benefits, generally limited to the federal rate (a very low rate); and (3) attorneys’ fees incurred in the ERISA action (but not pre-litigation attorneys’ fees incurred for the employee’s administrative appeal). The employee cannot recover future disability benefits, emotional distress, any other type of “tort” damage, nor punitive damages.

Los Angeles County and City Disability Plans
We have represented claimants employed by the County of Los Angeles and the City of Los Angeles (such as LAPD officers) to recover their wrongfully denied long-term disability benefits. We obtained extremely successful results for both County and City employees. See https://mslawllp.com/success-stories/. These County and City employees were not covered by the same disability plan, not even the same type of disability plan. The plans were not subject to the same laws. The City’s plan in our client’s case was exempt from ERISA (and governed by California’s bad faith laws) as a government plan. The insurer argued it was not because its group policy funding the LAPD officers’ benefits was issued to “The RSL Group and Blanket Insurance Trust” rather than the City of Los Angeles. But the insurer paid a handsome settlement including bad faith damages.

Neither ERISA nor California’s bad faith laws applied to the County’s plan in our client’s case. Indeed, some LA County government disability plans are their own distinct animal. The County of Los Angeles’ Long-Term Disability and Survivor Benefit Plan is governed by Chapter 5.38 of the Los Angeles County Code, not ERISA and not bad faith laws. The available damages when the County or its claims administrator, Sedgwick Claims Management Services, incorrectly denies an employee’s long-term disability benefits claim include: the employee’s past-due disability benefits. That’s it! The employee cannot recover prejudgment interest, attorneys’ fees (with one possible exception mentioned below), emotional distress, or any other type of bad faith or punitive damages.

There are other issues peculiar to Los Angeles County’s Long-Term Disability and Survivor Benefit Plan, codified at County Code, Chapter 5.38.

The Plan has an “own position” disability standard for the first 24 months of benefit payments and, thereafter, converts to the standard used by the Social Security Administration to decide if an applicant is disabled.
The employee must exhaust administrative remedies before filing a lawsuit by submitting a written appeal to the claim administrator within 60 days of the benefits denial (unlike ERISA’s 180-day appeal requirement).
If the appeal is denied, the employee must request an evidentiary hearing within 60 days (which is not required for ERISA plans). It takes place before a hearing officer appointed by the County. It is similar to a Social Security disability benefits hearing before an administrative law judge, where witness testimony can be presented. The hearing officer’s decision exhausts administrative remedies.
If the County/Sedgwick’s benefits decision is upheld at the administrative hearing, the employee’s remedy is to file a petition for writ of mandamus in the California Superior Court under California Code of Civil Procedure section 1094.5 asking the trial court to reverse the administrative decision, not a bad faith action.
The trial court on a petition for writ of mandamus reviews the administrative hearing officer’s decision to see if he abused his discretion. The standard to reverse the hearing officer is very difficult per the California Supreme Court, Fukuda v. City of Angels, 20 Cal. 4th 805, 817 (1999) (“In exercising its independent judgment, a trial court must afford a strong presumption of correctness concerning the administrative findings, and the party challenging the administrative decision bears the burden of convincing the court that the administrative findings are contrary to the weight of the evidence.”)
If an employee prevails in the mandamus action and proves that the findings in the administrative proceedings were “the result of arbitrary or capricious action or conduct by a public entity,” he can recover at most $7,500 in attorneys’ fees computed at $100 per hour (far less than in ERISA or bad faith actions where recoverable fees can amount to hundreds of thousands of dollars). See Cal. Government Code § 800.
However, it is unclear whether this section applies to LA County’s self-funded long-term disability Plan since, under section 800(c), the refusal by a public entity “to admit liability pursuant to a contract of insurance shall not be considered arbitrary or capricious action within the meaning of this section.”

Key Take Away
If your claim for disability benefits has been denied by what appears to be a government entity, you should hire an experienced ERISA lawyer to assess your claim and potential damages. Some employers that look like government entities may not be for purposes of ERISA. Whether your employer has a “government plan” in place will dictate the type of damages you can recover for an incorrect benefits decision. Generally, breach of a government disability benefits plan will allow you to recover substantially more damages than a private employer plan, including bad faith and punitive damages in the right case. Your remedies, however, will be limited by ERISA for private-sector employer plans and even further in the case of some LA County plans.

If your claim for short-term disability, long-term disability, life, retirement or health benefits has been denied, you can call (949) 387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling both ERISA insurance claims and non-ERISA California insurance bad faith claims.

Shifting Allegiance

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

Get the Answers and Assistance You Need