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Top 5 Ways Insurance Companies Commit Insurance Bad Faith

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

If you purchased an individual disability insurance policy, the Employee Retirement Income Security Act (“ERISA”) will not apply to your claim. Instead, separate principles of contract law govern your claim, which includes what is often referred to as “insurance bad faith.” Litigation of an insurance bad faith claim, as opposed to an ERISA claim, is different in part because it may allow the insured to recover damages beyond policy benefits, such as emotional distress damages. This article briefly explains “insurance bad faith,” before discussing the top five ways insurance companies commit insurance bad faith: unreasonable delay, cherry-picking evidence, dishonest selection of experts, failing to fully inquire into all bases for coverage and engaging in coercive claims handling practices.

What is Insurance Bad Faith?

In California, every contract contains an implied promise of “good faith and fair dealing.” In the insurance context, this means that the insurer must not injure the insured’s rights to receive benefits under the insurance policy. To comply with its promise to act in good faith, the insurer must adhere to its duties despite its position of power over the insured. This entails a duty to conduct a thorough, unbiased investigation of the insured’s claim. It also includes a duty to properly inform the insured, through accurate and reasonable communication. An insurer acts in bad faith when it unreasonably and without proper cause fails to meet its obligations. Because of bad faith conduct, the insurer may be liable for additional damages beyond past-due and future benefits. Depending on the nature of the conduct, the insurer may also be liable for punitive, financial or emotional distress damages exceeding the amount of the disability benefits alone.

1) Unreasonable Delay

After an insured makes a claim for disability insurance, the insurer will begin its own investigation into the claim. At this point, the insurer may request medical records, review occupational requirements, conduct surveillance or hire additional physicians to review the claim. On one hand, the insurer must comply with its duty to conduct a thorough review of the claim, and of course, this takes a considerable amount of time. On the other, the insurer must not unreasonably delay in reviewing a claim, as doing so gives rise to bad faith liability. An insurer’s delay is reasonable if it is due to the existence of a “genuine dispute” as to coverage or the amount of coverage, but the insurer must reach this position reasonably and in good faith. Arguably, the insurer has not engaged in reasonable delay where the delay results from “doctor shopping,” or cycling through experts to get an opinion that supports denial of disability benefits.

2) Cherry-Picking Evidence

Likewise, hiring an expert will not automatically insulate an insurer from a bad faith claim based on a biased investigation. One common way an insurer may act in bad faith in handling a disability insurance claim is by “cherry-picking” the medical evidence in a way that favors the interests of the insurer over the interests of the insured. For example, let’s say that an insurance company hired five doctors to examine the insured and/or review his or her medical records, some of who are employed by the insurer. Then, say, four of the doctors support the insured’s claim for disability and one does not. If an insurer “cherry-picks” the evidence and relies on the single outlier over the four other opinions in support of the insured’s claim for disability, the insurance company may have acted in bad faith.

3) Relying on Biased or Unreasonable Peer Reviews

An insurer may also act in bad faith by dishonestly selecting experts or when the insurer’s experts were, themselves, unreasonable. Often, an insurer will employ a physician to do a paper, not in-person, review of the insured’s disability. After a review of the medical records, the paid “peer review” physician will render an opinion on whether the insured’s disability prevents the insured from performing the duties of his or her occupation. However, while the insurer may represent these peer review physicians as “independent medical examiners” that is usually only technically true, as the person is not an insurance company employee. However, typically, peer review physicians have a history of working with the insurer, which suggests that the physician may be inclined to render an opinion in favor of the insurer over the insured. That way the insurance company will continue to hire that physician to perform “independent” reviews. In other cases, the insurer’s experts may be, themselves, unreasonable, which can occur in situations where the opinion itself was unnecessarily limited or based on an incomplete review of the medical evidence.

4) Failing to Fully Inquire into Possible Bases for Coverage

As noted above, the insurer must conduct a thorough and balanced investigation, but this investigation should not (as it often appears) be considering possible bases to deny coverage. Instead, the investigation should be focused on possible bases for coverage. Accordingly, an insurer may act in bad faith by failing to properly investigate the insured’s claim, which may result from a failure to adequately inquire into all possible bases to support coverage. Once such a situation is when the insured suffers from several disabling conditions, but the insurer fails to consider one entirely. For example, the insured may suffer from a debilitating neurological disorder, but also have degenerative disc disease. Under these circumstances, if the insurer denied disability benefits based solely on the neurological disorder, then it may have acted in bad faith for failing to investigate degenerative disc disease as another potential source for coverage.

5) Coercive Claims Handling Practices

In some, more extreme cases, courts find bad faith where the insurer engages in other types of coercive claims handling practices, such as threatening to rescind a policy or threatening insurance fraud without evidence to back up the claim. For example, if the insurer threatens to rescind a policy without grounds for doing so to coerce the insured to accept a disadvantageous settlement, the insurer has acted in bad faith. Fletcher v. Western National Life Ins. Co., 10 Cal.App. 3d 376, 392 (1970). Similarly, accusing the insured of insurance fraud without evidence to back up the charge constitutes bad faith. Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 575–576 (1973).

If your claim is governed by insurance bad faith, you may be entitled to substantial, additional compensation for suffering caused by a wrongful denial. Having an experienced disability, health and life insurance attorney matters to the success of your insurance matter. 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 insurance claims.

Plaintiff Recovers $750,000 Based on Plan Administrator’s Breach of Fiduciary Duty

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

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

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

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

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

When the Price is Right: Types of Attorneys’ Fee Arrangements For Handling Long-Term Disability ERISA Claims

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

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

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

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

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

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

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

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

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

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

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

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

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

Beware! An Employment Lawsuit Can Keep You From Receiving Your Long-Term Disability Insurance Benefits

Have you ever considered filing a disability insurance claim and an employment action against your employer at the same time? If you are considering it, you will want to read this article. There could be big trouble ahead if you are not careful.

When a physical or mental illness strikes, preventing an employee from fully performing the duties of his or her occupation, employers typically respond in one of two ways. Some employers are helpful and understanding, and provide support while the employee and his or her doctors try to assess whether the employee will be able to continue to work. Unfortunately, some employers react in the completely opposite manner, harassing the employee until he or she quits or stops working due to the disability, or even firing the employee outright. Sometimes it is the employer’s behavior that actually causes the disability. In those situations, employees who have coverage under a short-term disability and/or long-term disability insurance policy can file a claim for disability benefits with the insurer. If the insurer properly evaluates and pays the claim, the employee can use the benefits to pay for life expenses.

Understandably, after being mistreated by their employers, especially in their time of need, many employees want to pursue an employment lawsuit against their former employer. While the desire to “punish” the employer may be strong, pursuing an employment lawsuit may not always be in the best interest of the employee and disability claimant. The reason: the filing of an employment lawsuit can prevent a disability claimant from receiving disability benefits. This is because one of the elements required in many employment law claims is that the person must be capable of adequately performing his or her job at the time he or she left employment. This includes claims for discrimination, wrongful termination, retaliation and harassment.

To adequately plead and prove these causes of action, the employee must assert that he or she was capable of performing the duties of the job. However, in order to assert a claim for disability income insurance benefits, claimants must prove the opposite: that their physical or mental condition prevents them from performing the material and substantial duties of their occupation. These two positions are in conflict, and applying the legal concept of judicial estoppel, courts have ruled that asserting the ability to perform one’s job duties in an employment law action as a matter of law prevents the employee from also claiming to be disabled.

For example, in Rissetto v. Plumbers & Steamfitters Local 343, 94 F.3d 597 (9th Cir. Cal. 1996), the plaintiff filed a Workers’ Compensation claim in which she asserted she was disabled from performing her work. After settling that claim with the insurer, she brought an employment action against her employer alleging that her termination constituted age discrimination. The dispute ended up before the Ninth Circuit, which reviewed whether a claimant was judicially estopped from asserting both a disability claim and a discrimination claim covering the same period of time.

After noting than a disability claim rests on an “inability to work,” the Court observed that the employment law claim rests on the position that Rissetto was capable of adequately performing her job at the time she was terminated. The Ninth Circuit then explained that because these two claims are in direct conflict, the later-asserted employment law claims were precluded under the concept of judicial estoppel, which “precludes a party from gaining an advantage by taking one position, and then seeking a second advantage by taking an incompatible position.” See also Kovaco v. Rockbestos‐Surprenant Cable Corp., 834 F.3d 128 (2d Cir. 2016).

The California Court of Appeal similarly ruled that a plaintiff was judicially estopped from asserting a claim for racial discrimination after being out on disability leave for six months prior to termination, as the Court noted that he could not be able to perform his job and disabled from it at the same time. Where the plaintiff claimed “total inability to perform any of his job functions or any other occupation” due to disability, plaintiff could not tell another court that he had been qualified to perform his job and had been wrongfully terminated. See Drain v. Betz Laboratories, Inc., 69 Cal. App. 4th 950, 960 (1999); see also King v. Herbert J. Thomas Memorial. Hospital, 159 F.3d 192, 194 (4th Cir. 1998); McClaren v. Morrison Management Specialists, Inc., 420 F.3d 457, 458 (5th Cir. 2005)

Thus, a person who intends to file a claim for long-term disability benefits under a disability insurance policy must be very careful about asserting employment law claims against his or her employer. Often, employees do not understand and are not told that asserting employment claims can preclude disability insurance claims, so they do file such claims. Such claims are often in direct conflict with filing a disability insurance claim, and could cost the insured years of disability insurance benefits to which he or she would be otherwise entitled. Indeed, a disability insurance claim could be worth hundreds of thousands of dollars, perhaps even millions of dollars, and an unsuspecting disability insurance claimant could end up losing this valuable disability insurance claim. This is especially true if a disability insurance claimant has state law available to him or her and could otherwise pursue a broad range of damages by proving insurance bad faith, including punitive damages. This is why it is very important to make sure you consult with highly experienced disability insurance claims attorneys when considering which legal courses of action to follow.

New Ninth Circuit Case Limits Standing of ERISA “Plan Beneficiaries” to Exclude Healthcare Providers

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

Who can sue under the Employment Retirement Income Security Act, otherwise known as “ERISA?” This continues to be a contested question under ERISA and cases are still grappling with this issue. Typically, only certain individuals and entities may bring an action to enforce ERISA protections. As frequently discussed on this blog, ERISA provides procedural and fiduciary protections that govern employer-sponsored health insurance, disability insurance, life insurance and retirement plans. However, if you want to sue under ERISA, you first must qualify for its protection as a plan “participant” or “beneficiary,” as defined in the relevant provisions of ERISA. See ERISA § 502(a), 29 U.S.C. § 1132. On March 22, 2017, the Ninth Circuit narrowed the term ERISA plan “beneficiaries” to exclude healthcare providers, eliminating their right to sue under ERISA in most situations. See DB Healthcare, LLC v. Blue Cross Blue Shield of Ariz., Inc., No. 14-16518 (9th Cir. March 22, 2017).

This article details the facts and holding of DB Healthcare, and the potential impact it may have on plan participants and beneficiaries, including individuals insured under ERISA-governed employment insurance plans. First, we provide a brief background on ERISA’s definition of an employment plan “participant” and “beneficiary” and why that is an important matter in ERISA litigation. Next, we briefly discuss the case before the Ninth Circuit, including the details of its decision, the factual history, the Ninth Circuit’s rationale and its ultimate ruling. Finally, we briefly discuss the potential impact that this case may have on healthcare providers, as well as other potential avenues for recovery under state law.

Who is an ERISA Plan “Participant” or “Beneficiary”?

As noted above, and in several of our other blog articles on this topic, ERISA provides foundational procedural and fiduciary protections for individuals insured under employer-sponsored health, disability and retirement plans. However, not all employer-sponsored insurance plans are subject to ERISA and not all individuals have the right to sue under ERISA. This is true even if the plan is considered an “ERISA” plan, i.e., the health insurance, disability insurance or retirement plan is sponsored by a nongovernment employer.

ERISA outlines who can sue to vindicate a claim under ERISA as “participants” and “beneficiaries” under section 502(a). ERISA defines “beneficiary” as “a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder.” 29 U.S.C. § 1002(8). However, as the Ninth Circuit noted in DB Healthcare, ERISA does little to define “benefit.” But, given the use of benefit in other contexts in ERISA, the courts have determined “benefit” to include only services received by plan participants and beneficiaries, and not the cost of those services provided by medical providers. The term “benefit” refers to the specific advantages provided to covered employees, as a consequence of their employment, for particular purposes connected to alleviating various life contingencies.

DB Healthcare, LLC v. Blue Cross Blue Shield of Ariz., Inc.

In DB Healthcare, the Ninth Circuit decided two similar cases together, as both addressed the same central issue: whether a healthcare provider (the doctor or hospital that provides healthcare) designated to receive direct payment from a health plan administrator for medical services is authorized to sue under ERISA. Ultimately, the Ninth Circuit answered “no” under two separate bases for such authority under ERISA: direct statutory authority and derivative statutory authority through assignment.

The Plaintiffs in DB Healthcare included twelve medical facilities in Arizona, ten nurse practitioner employees and a medical facility in Bakersfield, California (collectively “Healthcare Providers”). The defendants, the administrators for the relevant ERISA governed employee benefit plans, were Blue Cross Blue Shield of Arizona, Inc. and Anthem Blue Cross Life and Health Insurance Company (collectively “ERISA Plan Administrators”). The two parties were engaged in a reimbursement dispute from 2010 and 2011. The Healthcare Providers performed blood tests and other services for the individual patients subscribed to an employer-sponsored plan. Initially, the ERISA Plan Administrators reimbursed the Healthcare Providers, but later changed course and decided the Healthcare Providers were not actually entitled to reimbursement and demanded repayments totaling $270,00 and $295,912.87. The Healthcare Providers refused to return the money and the legal battle in DB Healthcare ensued. In general, the Healthcare Providers alleged that the ERISA Plan Administrators violated ERISA’s protections when they unilaterally determined that the blood tests and other services performed were not reimbursable. The Healthcare Providers then filed lawsuits against the ERISA Plan Administrators. The Healthcare Providers alleged two claims under ERISA in their complaint. First, they sought injunctive relief regarding Blue Cross’s refusal to credential nurse-practitioners and its threat to cancel provider agreements, alleging that Blue Cross violated ERISA’s prohibition against retaliation for the exercise of rights guaranteed by employee benefit plans. See 29 U.S.C. § 1140. Second, they sought a declaratory judgment that Blue Cross’s recoupment efforts violate the ERISA Claims Procedure, 29 U.S.C. § 1133, and the ERISA Claims Procedure regulation, 29 C.F.R. § 2560.503-1, which provide procedural protections for ERISA claimants.

The Ninth Circuit affirmed the district court judgments dismissing the actions.

First, consistent with several other circuits, the Ninth Circuit found that the Healthcare Providers were not “beneficiaries” within the meaning of ERISA’s enforcement provisions and could not bring claims directly under ERISA. The Court’s rationale was that reimbursement for healthcare services is not a “benefit” within the meaning of the ERISA. Given that ERISA’s definition of “beneficiary” is based on whether the person is entitled to receive benefits, Healthcare Providers cannot be deemed a beneficiary under ERISA because they are only entitled to reimbursement and not the actual medical, surgical or other “benefits” provided.

Second, the Ninth Circuit held that the Healthcare Providers could not bring their claims under derivative authority, through assignment by individual employee beneficiaries. In determining that the Healthcare Providers were not entitled to reimbursement, the Ninth Circuit reviewed the several contracts that governed the relationships between the parties. The Court took specific note of the non-assignment clauses in the governing employee benefit plans.

As a general matter, such “non-assignment” clauses prohibit the insured individuals from assigning any of their rights under the plan to third parties. For example, the non-assignment clause from DB Healthcare read as follows: “The benefits contained in this plan, and any right to reimbursement or payment arising out of such benefits, are not assignable or transferable, in whole or in part, in any manner or to any extent, to any person or entity. . . .” What this means is that the “benefits” of the insurance policy protections extend only to the individual employee and he cannot transfer that right to someone else. Thus, although the patients signed forms to the Healthcare Provider that stated “I Hereby Authorize My Insurance Benefits to Be Paid Directly to the Physician,” the court held that those forms did not actually give the Healthcare Providers the right to reimbursement because the assignment language referred only to direct payment of insurance benefits to the Healthcare Providers, with no reference to broader rights. The rights to declaratory and injunctive relief or to sue for breach of fiduciary duty were not within the scope of the assignment.

What does this mean moving forward?

While this case limits the possibilities for reimbursement for some healthcare providers, it does not entirely foreclose recovery. There is no reason that the Healthcare Providers in DB Healthcare could not have brought their claims in state court as ERISA would not have preempted them. See Blue Cross of Cal. v. Anesthesia Care Ass’n,, 187 F.3d 1045, 1050–52 (9th Cir. 1999). Moreover, if medical providers cannot sue under ERISA because of an existing anti-assignment clause in the ERISA plan document, it is possible that they may still be able to bring an action against a claims or plan administrator for breach of oral contract, equitable or promissory estoppel and other theories for recovery under state law if the claims or plan administrator pre-authorized coverage of the claim directly with the medical provider. See Morris B. Silver M.D., Inc., v. Int’l Longshore & Warehouse Union Pac. Maritime Ass’n Welfare Plan, 2 Cal.App.5th 793 (2016) (holding that ERISA did not preempt provider’s claims for breach of oral contract, quantum meruit and promissory estoppel).

Having an experienced disability, health and life insurance attorney matters to the success of your insurance matter, particularly when complicated issues like the above apply to your claim. If your claim for health, life, short-term disability or long-term disability insurance has been denied, you can call (949)387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and Non-ERISA insurance claims.

When Does ERISA Apply to a “Continued” or “Converted” Group 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 with a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949)387-9595 for a free consultation or go to our website at mslawllp.com and complete our free consultation form today.

Do you have an employer-sponsored group long-term disability insurance policy, a group life insurance policy or a group medical insurance policy? What do you do when your employer-sponsored group plan is terminated and you have the option to continue or convert the policy? Should you choose to continue or convert your life, health or disability insurance plan, what law governs any claims you make under the new policy? As we have discussed in previous articles on this blog in depth, the Employment Retirement Income Security Act of 1974, otherwise known as ERISA, governs most employer-sponsored benefit plans, including long term disability insurance, life insurance, health insurance and retirement plans. ERISA was enacted to protect employees from abuse of those employer-sponsored benefits plans and requires that the plan and claim administrators, usually the employer and the insurance company, adhere to strict fiduciary standards when resolving disputes that fall under ERISA. However, not all insurance policies fall under ERISA, even if the policy was originally part of an employer-sponsored plan.

In this article, we address the first step in assessing an insurance claim that may or may not be governed by ERISA, with a focus on whether ERISA applies to your continued or converted long term disability insurance, life insurance or health insurance policy. In general, for ERISA to apply, the employer-sponsored plan must meet certain requirements and must not be established or maintained by a church or government entity. However, sometimes ERISA may apply to a policy that is no longer sponsored by your employer, which may depend on whether the policy is considered a “continued” or a “converted” policy. This article discusses this nuance in depth, first outlining the difference between a “continued” and a “converted” insurance policy and then discussing when ERISA may apply to each.

What is a “Continued” Insurance Policy and When does ERISA Apply?

A “continued” insurance policy arises where the terms and conditions of the group policy allow the employee an option to continue the policy, exactly as it is, for a certain period of time regardless of separation from the employer that originally provided the plan. Because a continued policy remains the same as the original employer-sponsored policy, ERISA typically continues to govern those claims. For example, in Alexander v. Provident Life & Acc. Ins. Co., 663 F.Supp.2d 627 (E.D. Tenn. 2009), the plaintiff’s employer sponsored a disability insurance policy. Plaintiff’s employment terminated, but the policy had a provision that allowed for continued coverage within a certain period of time, regardless of employment. Specifically, the provision stated that it was “non-cancellable and guaranteed continuable at guaranteed premiums to [the policyholder’s] 65^th birthday, or five years, whichever is later.” Under the terms of this policy, the plaintiff was free to continue the policy at the guaranteed premiums, regardless of whether he was still employed by the employer that brokered the original deal to get that policy. In this case, the plaintiff elected to continue coverage under the same policy number and under express language that the policy “continued.” In this case, the court found that ERISA still governed this policy because the same considerations existed under ERISA and there was no change in the terms or conditions of the policy, as it just “continued” from the original employer-sponsored plan.

What is a “Converted” Policy and When does ERISA Apply?

In contrast, a “converted” policy is one where the right to convert from a group policy to an individual policy typically arises after the group policy has terminated and the group policy provides for a right of conversion. When a plan is considered “converted” the ERISA analysis becomes more difficult than a continued policy. Under a converted policy, if the issue is whether the policyholder has a right to convert the policy and that right is governed by an ERISA plan, then the courts will typically find that ERISA governs that dispute. However, if the policyholder has already exercised his or her individual right to convert the policy, and maintains an otherwise individual plan based on the provision arising in an ERISA policy, the determination becomes more complicated.

In some circuits, because the converted policy arose out of an ERISA governed policy, it is considered indelibly tied to the ERISA governed policy. As such, in those circuits, a policy that arises from a conversion provision in an originally ERISA governed plan will continue to be governed by ERISA. However, in other circuits the term “conversion” is taken in a more literal sense. In those circuits, when a policy converts from a group to an individual policy it is considered entirely converted for the purposes of ERISA. What this means is that once a policy becomes an individual policy no longer governed under the terms of the group-sponsored plan, the plan is no longer governed by the terms of ERISA because it is no longer established or maintained by your employer.

For example, in Arancio v. Prudential Ins. Co. of America, 247 F.Supp.2d 333 (S.D.N.Y. 2002), the Plaintiff Arancio had exercised his right to convert his group disability insurance policy into an individual disability insurance policy. Although the right to convert originated with his former employer, Riverbay, after conversion, Plaintiff Arancio held the policy the same as any other individual. The Policy named Prudential, and not the employer, as the administrator. Further, Riverbay no longer financed the policy and instead Arancio paid the premiums. The court also noted that, under the converted policy, all communication regarding the claim were directly between Plaintiff Arancio and Prudential, without involving Arancio’s former employer. In effect, Plaintiff Arancio converted his formerly group plan into an individual policy directly with Prudential and the court found that, as such, his disability insurance policy had the requisite independent relationship to remove it from ERISA.

Determining whether a converted policy is governed by ERISA can be a complex undertaking and the above are just a few considerations to keep in mind when a continued or converted policy may or may not still be subject to ERISA.