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Would You Believe that an Insurer’s Policy Violates the “Efficient Proximate Cause” Doctrine? Believe it!

A homeowners’ insurance policy does not always mean what it says. That is, in effect, what the California Court of Appeal recently concluded in Vardanyan v. AMCO Ins. Co., 243 Cal. App. 4th 779 (2015), a case involving the well-established “efficient proximate cause” doctrine. The insurer’s policy explicitly stated it did not cover property damage caused by collapse of a building unless the collapse was caused “only by” hidden decay, hidden insect damage or a couple other listed perils. Although the collapse was caused in part by non-listed perils that were excluded by the policy, the Court of Appeal still concluded the loss should be covered if the jury on remand decides one of the listed perils is the most important cause of the loss. It looked not just to the written contract language, though the claim would have been excluded if it did that, but to public policy as well. The court held the insurer’s collapse provision “is an unenforceable attempt to contract around the efficient proximate cause doctrine.”

In Vardanyan, Artyun Vardanyan sued his homeowners’ insurer, AMCO Insurance Company, alleging it breached their insurance contract and acted in bad faith by refusing to cover damage to his house when it partially collapsed. Mr. Vardanyan submitted a claim which resulted in numerous experts investigating what caused the collapse and, ultimately, in AMCO denying the claim. At trial, “The evidence presented by both sides indicated there were multiple causes of the damage to plaintiff’s house.” Mr. Vardanyan’s experts testified dry rot, decay, termite damage and water coming from behind the walls caused a bedroom and the living room to collapse (i.e. those floors sunk and were resting on the ground). AMCO’s experts testified that various sources of moisture—roof leaks, gutters and downspouts that did not channel the water away from the house, a faucet spraying water on the exterior of the house for a significant length of time, a leaking toilet and bathtub, and humidity—contributed to the collapse, along with poor construction, termite damage and decay.

The policy’s basic insuring provision stated it covered Mr. Vardanyan’s house “for risk of direct physical loss . . . except collapse other than as provided in Other Coverage 9 . . ..” Other Coverage 9, in turn, provided coverage for losses involving collapse of a building or part of a building “caused only by one or more” of a list of specific perils, including hidden decay, hidden insect or vermin damage, or “weight of contents, equipment, animals or people.” The “general exclusions” section of the policy contained exclusions for water damage, neglect by the insured, inadequate or defective design, workmanship, construction, remodeling, or materials, and inadequate or defective maintenance. In denying the claim, AMCO reasoned the damage to the home was not covered by many of these policy exclusions. The evidence at trial showed that both covered perils listed in the Other Coverage 9 collapse provision and non-listed, excluded perils jointly caused the home to partially collapse.

At trial, AMCO’s lawyers requested a special jury instruction based upon the collapse provision’s explicit language. Namely, AMCO’s proposed jury instruction read in pertinent part, “If you find that the property or a part of the property collapsed, Mr. Vardanyan bears the burden of proving that the collapse was caused only by one or more of the following: . . . hidden decay; hidden insect or vermin damage; weight of contents, equipment, animals or people; . . . . The insurance policy’s coverage for collapse does not apply if the cause of the collapse involved any cause other than those listed above.” Mr. Vardanyan, in contrast, requested the form jury instruction that is routinely given in homeowners’ property damage claims where there are multiple causes of the loss, CACI No. 2306, that is, where the “efficient proximate cause” doctrine applies. That doctrine was developed by California courts decades ago and applies where multiple perils cause a loss, at least one of which is covered by the insurance policy and one of which is not. The doctrine is that the most important cause of the loss or, stated another way, the predominant cause of the loss, also called the “efficient proximate cause,” dictates whether the loss is covered. In other words, if two perils caused the loss but the covered peril was its predominant cause, then the loss is covered despite that the excluded peril also contributed to the loss. Mr. Vardanyan’s proposed instruction followed that doctrine and stated in pertinent part, “You have heard evidence that the claimed loss was caused by a combination of covered and excluded risks under the insurance policy. When a loss is caused by a combination of covered and excluded risks under the policy, the loss is covered only if the most important or predominant cause is a covered risk.”

The trial court refused Mr. Vardanyan’s jury instruction and concluded AMCO’s instruction should be read since it accurately reflected what the policy’s collapse provision stated. It decided the jury should be instructed “that plaintiff’s property damage loss was covered by his policy only if it was caused by perils specifically listed in the collapse coverage provision and no others.” Mr. Vardanyan conceded he could not prevail at trial under AMCO’s instruction because the evidence was clear that both covered perils listed in the policy’s collapse provision and uncovered, excluded perils not listed there jointly caused the loss. Consequently, the trial court granted AMCO’s motion for a directed verdict, and Mr. Vardanyan appealed. He contended his jury instruction should have been used because AMCO’s instruction ignored the “efficient proximate cause” doctrine.

The California Court of Appeal agreed with Mr. Vardanyan. It stated:

We conclude plaintiff’s interpretation of the Other Coverage 9 [collapse] provision is the correct interpretation, consistent with the efficient proximate cause doctrine. A policy cannot extend coverage for a specified peril, then exclude coverage for a loss caused by a combination of the covered peril and an excluded peril, without regard to whether the covered peril was the predominant or efficient proximate cause of the loss. Other Coverage 9 identifies the perils that are covered when the loss involves collapse. If any other peril contributes to the loss, whether the loss is covered or excluded depends upon which peril is the predominant cause of the loss. To the extent the term “caused only by one or more” of the listed perils can be construed to mean the contribution of any unlisted peril, in any way and to any degree, would result in the loss being excluded from coverage, the provision is an unenforceable attempt to contract around the efficient proximate cause doctrine.

The Court of Appeal also sided with the policyholder on the burden of proof. AMCO’s proposed jury instruction stated it was Mr. Vardanyan’s burden to prove his loss fell within the policy’s collapse provision instead of requiring AMCO to prove that the loss was excluded. But that instruction reverses the well-established rule that an insurer has the burden to prove an exclusion or other provision that limits coverage applies (once the policyholder first meets its initial burden of showing the loss comes within the policy’s basic insuring provision). The Court of Appeal reversed the directed verdict in favor of AMCO, remanded the case to the trial court for a new trial, and instructed it to read Mr. Vardanyan’s instruction to the jury instead of AMCO’s.

The Vardanyan case illustrates why it is critical that a homeowner retain an experienced insurance coverage lawyer before battling his insurance company. While the insurer may quote seemingly insurmountable exclusionary language from its policy, California courts may have interpreted the language differently in favor of policyholders or, as in the case of Vardanyan, held the policy provision is unenforceable because it contravenes well-established California law.

Group Life Insurer’s Literal Policy Interpretation Penalizing Insured for not working on Paid Holiday Rejected

Group life insurance policies often have confusing language about when they become effective. A trial court recently interpreted one to mean that the policy had not become effective to a full-time employee, though he was already eligible for the coverage, because he was not physically present at work when the policy was issued to his employer. Instead he was at home for a paid holiday and then in the hospital on sick-leave because of a sudden and fatal illness. The insurer and trial court penalized the employee for taking his paid holiday and sick-leave. They docked him the life insurance proceeds for which he had paid. The dispute centered around the policy’s “effective date of coverage” provision: whether being a full-time employee was enough to make the policy commence even if out for a sick-day. Or whether the employee had to be actively working in the employer’s building.

Fortunately for Michelle Sequeira, the California Court of Appeal, in Michelle Sequeira v. Lincoln National Life Ins. Co., — Cal. App. 4th — (Aug. 31, 2015), reversed the trial court’s draconian decision denying her life insurance benefits based on such a policy interpretation. The trial court had concluded Mrs. Sequeira was not entitled to receive the life insurance proceeds for which her husband had already paid premiums because the policy had not yet become “effective” when her husband died because he had yet to return to actual work from his paid holiday and sick-leave. The trial court got this wrong, buying the insurer’s literal interpretation of confusing policy language the insurer drafted. The Court of Appeal correctly noted that the trial court failed to interpret ambiguous policy language in favor of the insured, which has been the law in California for decades.

Mrs. Sequeira’s husband Donald Sequeira, like most of us, did not work on January 1, 2010 because it was a paid holiday. Tragically, he was hospitalized the next day, a Saturday, due to a sudden viral infection of his heart. He died four days later on Wednesday, January 6. He did not work during that period. But Mr. Sequeira had worked for his employer, the City of Vacaville since 1990. He had dutifully worked as a full-time employee for the City for two decades when his wife Michelle (the beneficiary of his group life insurance policy through the City) submitted a claim for his life insurance proceeds.

The insurer, Lincoln National Life Insurance Company denied the claim on a technicality. It argued under convoluted policy language that because Mr. Sequeira was not physically present at work on the day the policy incepted and he became eligible for coverage (nor any time before he died), the group policy was not yet effective as to him. Even though he was eligible for coverage, had paid premiums for the policy and had been a full-time employee for years before he died, the insurer still denied the claim contending the policy was not yet effective to him. Thankfully the appellate court rejected National Life’s and the trial court’s non-sensical, though technically feasible, policy interpretation. It just doesn’t make any common sense that a full-time employee eligible for group life insurance through his employer should be penalized because he did not work on a paid holiday or during his paid sick-leave.

Under the policy’s language, Mr. Sequeira became “eligible” for coverage on January 1, 2010 when the policy was issued by Lincoln National to his employer, the City. But the policy limited his “effective date of coverage” until “the day you resume Active Work, if you are not Actively at Work on the day you become eligible.” The policy defined “Active Work” and “Actively at Work” as “the full-time performance of all customary duties of an employee’s occupation at the EMPLOYER’S place of business . . .” Thus, Mr. Sequeira’s “effective date of coverage” was when he resumed performing his job-duties full-time at the City if he was not performing them full-time on January 1, 2010, the day he became “eligible” for coverage (or January 1 if he was performing his job duties full-time for the City on that date).

The insurer (and the trial court) determined the policy’s definition of Active Work unambiguously meant Mr. Sequeira had to be physically present at the City’s office building actually working on or after his date of eligibility for the insurance to kick-in, rather than merely having the status of a full-time employee like he did. Since Mr. Sequeira was not physically at the City’s office building working on January 1, 2010 and did not come back to work before he died, the trial court held the policy was not yet “effective” to him.

The Court of Appeal soundly rejected the trial court’s interpretation of the policy. It concluded the policy language was ambiguous, meaning it was susceptible to at least two reasonable interpretations and, therefore, under long-standing California law, had to be strictly interpreted against the insurer and in accordance with the insured’s reasonable expectations of coverage. The appellate court had no trouble at all finding what the insured would have reasonably expected:

We have no trouble determining that Sequeira reasonably expected that the supplemental policy was effective before his death. He enrolled in coverage in October 2009 and made premium payments for coverage later that year. Lincoln then issued a policy on January 1, 2010. Sequeira could reasonably expect that the supplemental policy was effective on January 1, 2010, and he certainly would not expect that the coverage he paid for would be ineffective because he took New Year’s Day off from work and became ill the next day. “An employee reasonably would expect his coverage to extend beyond the time periods that he is physically at work and to cover those hours and days when he is out of the plant due to an illness.” “Surely, employees are entitled to take their sick leave, vacations, and holidays without losing their status as full-time workers.” [Citations omitted].

The Court of Appeal concluded the policy’s definition of “Active Work” had two reasonable interpretations, the one advanced by the trial court and also the one advanced by Mrs. Sequeira, i.e. her husband only had to be a full-time employee to be considered “Actively at Work,” not actually perform his job duties while physically present at the City’s building. The Court looked at other parts of the policy to construe the phrase “full-time performance” in the “Active Work” definition in the context of the entire policy, as it must under the law. It noted the policy defined “full-time employee” to mean a worker that is permanent, not a temporary worker that has another job and regularly works limited hours for the City. Because that definition did not depend on the employee being physically present on the job at a given moment in time but on his employment status, the Court reasoned a reasonable insured could interpret “full-time performance” in the definition of “Active Work” to also refer to employment status.

The Court of Appeal also examined out-of-jurisdiction decisions that reached the same conclusion when interpreting similar policy provisions. And it applied the insurer’s interpretation of “Active Work” to other policy provisions that used the same policy definition. It concluded the insurer’s interpretation led to bizarre meanings to those provisions but the insured’s to far more sensible results. For example, the policy had a waiting period requiring “30 days of continuous Active Work.” Under the insurer’s interpretation of “Active Work,” an insured employee would have to actually work thirty days continuously including weekends and holidays to be eligible for coverage under the policy. The Court found that was a strained interpretation of the waiting period provision “as a matter of common sense.” It would cause an insured to jeopardize coverage by not working on a weekend or calling in sick, an absurd result not in accord with an insured’s reasonable expectations.

Luckily the Court of Appeal took a common sense approach when interpreting the policy. Had it not, employees purchasing group life insurance policies would be severely penalized for taking a vacation or not working on a paid holiday. That is just not the American way. The trial court even commented, “Although sympathetic to Plaintiff, the court cannot redraft this insurance contract.” Apparently the court was not well versed in the “black letter” insurance law that ambiguous policy provisions must be strictly construed against the insurer. That a policy provision must be interpreted in the context of the policy as a whole. And that a policy cannot be interpreted in a way that leads to absurd or unreasonable results. The Court of Appeal applied each of these well-known policy interpretation rules and arrived at the only sensible result.

By: Joe McMillen
McKennon Law Group PC
20321 SW Birch Street, Suite 200
Newport Beach, California 92660
877-MSLAW20
(877) 675-2920

The California Insurance and Life, Health, Disability Blog at www.californiainsurancelitigation.com and at www.mckennonlawgroup.com
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ERISA Insurers’ Conclusory Medical Opinions Regarding Disability Status Will Not Carry the Day

An individual suffering from a disabling condition undoubtedly has many concerns. In addition to dealing with physical pain and emotional distress, there is always the thought of how to pay for medical bills and living expenses if the disability prevents the person from continuing work.

It can be stressful and time consuming for a disabled claimant to fight for long-term disability benefits (“LTD”) provided under an ERISA-governed employee benefit plan. However, a recent District Court case, Carrier v. Aetna Life Insurance Company, 2015 WL 4511620 (C.D. Cal. July 24, 2015), may help insureds by making it more difficult for insurance companies/claim administrators to summarily deny an insured’s claim without proof of specific findings and details as to how and why they reached their conclusion to deny benefits.

Gloria Carrier was employed by Bank of America as a Credit Administrator. Her job duties included clearly communicating risk analysis, identifying problems on credit-related issues, guidelines and policies, performing research on closed loans and supervising between twenty and 100 people across multiple states. After being diagnosed with uterine cancer, she had to have her uterus removed and subsequently underwent three cycles of chemotherapy. After her surgery and chemotherapy, her cognitive abilities were severely affected and, according to her treating physician, she suffered from severe depression and suicidal thoughts.

Carrier initially received short-term disability (“STD”) benefits under her employee benefit plan issued by Aetna Life Insurance Company. After the expiration of her STD benefits, she applied for LTD benefits under the plan. Although Carrier was initially awarded LTD benefits, Aetna decided to terminate them a few months later “based on its determination that she no longer met the definition of disability,” despite her treating physician’s opinion that she continued to suffer from major depression and cognitive disorder that prevented her from performing her normal job duties. Aetna’s decision was based on peer evaluations conducted by three Aetna retained doctors of the plaintiff’s treating physician’s records and office notes. Aetna then upheld the denial decision on appeal.

During litigation, the district court conducted a de novo review of the claim decision, and determined that Carrier’s benefits were improperly terminated. In finding that plaintiff’s claim for LTD benefits was wrongfully terminated, the court found that the opinions of Aetna’s physicians were “presented in a conclusory fashion, making it unclear how they reached such starkly contrasting results from those of [plaintiff’s treating physician], despite reviewing the same materials.” The court found the opinions of plaintiff’s treating physician that she suffered from severe depression and cognitive disabilities that prevented her from performing her job under the “own occupation” definition of “disability” to be more compelling. Although it indicated that there was no legal deference to the treating physician’s opinion, the court’s ruling demonstrates that insurance companies who rely upon peer-to-peer evaluations in evaluating and potentially denying a LTD claim must ensure that a detailed analysis has been conducted, rather than a simple blanket/conclusory conclusion made without meeting or treating the insured.

The court awarded Carrier LTD benefits for a portion of the period she was wrongfully denied benefits and remanded the action to the plan administrator to resolve a secondary issue regarding a change in the policy’s language from “own occupation” to “any occupation” that went into effect while the initial dispute was being litigated.

Ninth Circuit Severely Limits Known-Loss Doctrine in Insurance Cases

Have you ever wondered whether the liability policy you purchased covers losses you already knew about before you bought the policy? How much do you have to know? What if you knew about certain property damage at a construction project you caused but not about other related damage your policy would otherwise cover? A recent case from the Ninth Circuit sheds light on these issues, and it is good news for policyholders.

In Kaady v. Mid-Continent Casualty Co., 2015 WL 3894394 (9th Cir. June 25, 2015), the Ninth Circuit, applying Oregon law, strictly construed the known-loss provision in a commercial general liability policy in favor of the insured. Despite that the insured subcontractor knew about property damage to his work before he purchased a policy to cover it, the Court held the provision did not preclude coverage. Namely, it did not preclude coverage for different property damage to the work of others the insured did not know about, though the damage resulted from the insured’s work.

In Kaady, the insured, a masonry subcontractor, was sued in a construction defect action because the wall sheathing and deck posts behind the manufactured stone he installed over them had deteriorated. He did not install the underlying wall sheathing and posts, which were installed by other subcontractors. He was sued in the construction defect case for wall and post deterioration caused by his defective masonry work.

The insured settled the construction defect case and then tendered to his commercial general liability insurer seeking coverage for the settlement. He claimed the wall and post deterioration of which he settled was “property damage” covered under his policy, defined as “physical injury to tangible property . . . .” The insurer denied his claim and the insured sued for breach of the policy.

The insurer argued the insured’s claim was barred because he purchased the policy after he already knew about the “property damage.” More specifically, the insurer contended the insured’s settlement of the construction defect case was not covered based on the policy’s known-loss provision. That provision states the policy “applies to ․.. ‘property damage’ only if ․.. no insured ․.. knew that the ․.. ‘property damage’ had occurred, in whole or in part.” The insurer argued that the manufactured stone and underlying structural components are the same “property” and part of the same structure, and, “so long as the insured knew about any damage to a structure, the known-loss provision bars coverage of any other damage to the same structure.”

There was undisputed evidence that the insured knew about some cracks in the manufactured stone he had installed. But he did not know about any of the property damage for which he sought coverage: the damage to the wall sheathing and deck posts behind the stone facade.

The insurer prevailed on summary judgment but the Ninth Circuit reversed. It rejected the insurer’s argument that it should treat components the insured provided and components provided by others as the same “property.” The Court reasoned that a commercial general liability policy, in the construction defect context, necessarily distinguishes between the two in every other policy provision and therefore should also in the known-loss provision.

Mid–Continent has offered no reason to treat the insured’s work and the work of others as different property in every provision of the policy except the known-loss provision. Thus, we conclude that the known-loss provision also distinguishes between them. The insured’s knowledge of damage to his own work doesn’t automatically constitute knowledge of damage to the components of the structure furnished by others.

The Ninth Circuit then soundly rejected the insurer’s next argument. Even if the insured’s masonry stone and the underlying walls and deck posts (furnished by others) were considered the same “property,” the Court concluded the known-loss provision still did not preclude coverage. It reasoned the provision does not preclude coverage for a different type of “property damage” than the type the insured knew about when he bought the policy, even if both types of damage were to the same “property.” In other words, the insured only knew about the cracks in the stone, not about the deteriorated walls and posts, which is a completely different type of “property damage.” Since the policy’s known-loss provision bars coverage for “property damage” if the insured “knew that the . . . ‘property damage’ had occurred,” the Court reasoned use of the definite article “the” particularizes the subject which it precedes and indicates “that the claimed damage must be the same as the known damage.”

The Court went on to explain that the insurer’s interpretation of the policy would eviscerate the known-loss provision’s “continuing property damage” language, which states that if the insured “knew, prior to the policy period, that the ․.. ‘property damage’ occurred, then any continuation, change or resumption of such ․.. ‘property damage’ during or after the policy period will be deemed to have been known prior to the policy period.” The Court correctly reasoned that “if the insured’s knowledge of any damage to any part of the structure automatically barred coverage of all damage to that structure, it wouldn’t matter whether the claimed damage was a ‘continuation, change or resumption’ of the known damage,” rendering that policy provision meaningless.

The Court summarized its holding as follows:

Applying our interpretation of the policy to [the insured’s] claim, we conclude that [the insured’s] knowledge of the cracks in the masonry before he bought the policy doesn’t constitute knowledge of the claimed “property damage” to the structural components. Not only are the wooden deck posts and wall sheathing different “property” than the manufactured stone . . ., the claimed damage is of a different type. We don’t think that the ordinary purchaser of the policy would interpret the known-loss provision as broadly as [the insurer] advocates.

Lastly, the Court concluded the insured’s knowledge of one type of “property damage” when purchasing the policy would only preclude coverage for different, unknown “property damage” under the known-loss provision if the latter was a continuation of the former. It stated,

the correct inquiry is whether the claimed damage to the structural components was a ‘continuation, change or resumption’ of the cracks. If it was, [the insured’s] knowledge of the cracks would bar coverage of the claimed damage; if not, his knowledge of the cracks wouldn’t bar coverage.

Courts regularly interpret policy provisions in favor of coverage, particularly where they are ambiguous or involve an exclusion. This case is no different. The Court looked at the policy and interpreted it as written, rejecting the insurer’s extremely broad reading of a provision limiting coverage. Just because an insured knows some facts about a potential loss when he buys a policy does not necessarily mean there is no coverage.

For ERISA Disability Insurance Appeals, A Claimant Who is a Day Late May Not Be a Dollar Short

Under most long-term disability insurance plans governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), a claimant must appeal the denial of any claim for benefits within 180 days of the denial letter. Unless the appeal is made within that strict 180-day period, the claimant may forfeit the right to any short-term disability benefits or long-term disability benefits available under the plan. At least, that was the law until a recent ruling by the United States Court of Appeals for the Ninth Circuit cracked open the window for a timely appeal.

In LeGras v. Aetna Life Insurance Company, __ F.3d __, 2015 WL 3406182, 2015 DJDAR 5798, (9th Cir. May 28, 2015), the Ninth Circuit ruled that when the 180-day deadline falls on a weekend or holiday, the claimant has until the next business day to appeal a denial decision.

After injuring himself while working for Federal Express Corporation, LeGras filed a claim for long-term disability insurance benefits under the employee welfare benefit plan administered by Aetna. After initially approving LeGras’ disability claim, on April 18, 2011, Aetna denied his claim for ongoing benefits, and informed him that he could “file a request to appeal this decision within 180 days of receipt of this notice.” That 180-day period ended on October 15, 2011, a Saturday. However, because LeGras mailed his appeal letter on the following Monday, Aetna denied the appeal as untimely.

LeGras sued Aetna for long-term disability benefits, but the district court judge granted Aetna’s motion for judgment on the pleadings, on the grounds that LeGras failed exhaust his administrative remedies because he mailed his appeal letter after the end of 180-day period. LeGras appealed the district court’s ruling.

In considering the appeal, the Ninth Circuit noted that:

LeGras faces the possibility of losing his long-term disability benefits because of a two-day difference in the computation of the time period to pursue an administrative appeal. Although the stricter time-computation method may be convenient for AETNA’s purposes, it would be contrary to the purposes of ERISA to adopt a method that is decidedly protective of plan administrators, not plan participants.

The Ninth Circuit noted that, in enacting ERISA, Congress empowered the courts to develop federal common law governing employee welfare benefits plans. The Court then noted that federal common law has developed to protect and further the interests of plan participants, such as LeGras.

Next, the Ninth Circuit explained that “[t]here is nothing novel about the principle” of extending a deadline to the next business day, when that deadline falls on a weekend or holiday. The Ninth Circuit also noted that not only have numerous courts, including the United States Supreme Court, enforced this concept, but this rule is codified in Rule 6 of the Federal Rule of Civil Procedure.

In light of this precedent, and to further the interests of claimants such as LeGras, the Ninth Circuit explained that:

Therefore, we hold that, where the deadline for an internal administrative appeal under an ERISA-governed insurance contract falls on a Saturday, Sunday, or legal holiday, the period continues to run until the next day that is not a Saturday, Sunday, or legal holiday.

With this ruling, ERISA claimants will no longer be denied the opportunity to appeal their claim for benefits when the deadline falls on a weekend or holiday, simply because they mailed their appeal on the next business day. This case highlights the importance of having competent and experienced ERISA counsel assisting claimants who are working on appeals. There are indeed many traps for the unwary.

Insurers Do Not Have Discretionary Authority, Absent Clear Language in Official Plan Documents

In actions brought under the Employee Retirement Income Security Act of 1974 (“ERISA”), two roads diverge in federal court—and the court’s choice regarding the applicable standard of review can make all the difference in the scope of permissible evidence. If the court applies the abuse of discretion standard of review, the court more typically (but not always) only considers evidence received by the insurer in time for its decision and limits its review to the “administrative record” to determine whether the insurer’s denial was an abuse of discretion. Alternatively, the court may review a case “de novo,” and may consider documents not previously provided to the insurer to determine whether the insured is entitled to benefits.

Prior case law holds a district court must review a plan administrator’s decision de novo, “unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits.” Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). The Ninth Circuit Court of Appeals expanded upon this holding, by defining what constitutes the “benefit plan.” The Ninth Circuit clarified that where a Summary Plan Description (“SPD”) which was not defined as an official plan document unambiguously granted discretionary authority to a plan administrator to decide claims, but an insurance certificate, an official plan document, did not grant discretionary authority, the official plan document governed. Because the governing plan document, the insurance certificate, did not grant the insurer discretionary authority, the district court was required to review the case de novo. Prichard v. Metropolitan Life Ins. Co., 2015 U.S. App. LEXIS 6553 (9th Cir. Apr. 21, 2015). Prichard is significant as the de novo standard is arguably more favorable to insureds, because it not only provides a less deferential standard of review, but insureds may be able to conduct discovery and supplement the administrative record to offer evidence that administrators acted with bias or to bring in additional medical evidence to support a disability.

Prichard involved a fairly standard ERISA claim by Matthew Prichard, an insured, against Metropolitan Life Insurance Company (“MetLife”) for his long-term disability insurance benefits. Prichard’s policy contained a 24-month benefits period for mental limitations. Prichard filed for, and received, benefits for his psychiatric disability for a period just shy of 24 months. Subsequently, MetLife requested additional information demonstrating Prichard was disabled due to non-limited conditions, received his updated medical records and decided there was insufficient medical evidence to support his claim. Prichard appealed unsuccessfully, then brought suit for a continuation of his ERISA benefits under 29 U.S.C. section 1132(a)(1)(B).

The district court addressed whether the applicable standard of review was de novo or abuse of discretion. MetLife pointed to unambiguous language in its SPD granting the plan fiduciary “discretionary authority to interpret the terms of the Plan,” and argued for the abuse of discretion standard of review. Prichard argued the Supreme Court holding in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011) stating the terms of plan summaries may not be enforced as the plan itself precluded MetLife from asserting that the SPD language was the Plan language. Prichard further argued that no other plan documents conferred discretionary authority on MetLife, and therefore the district court should review the case de novo. The district court found the SPD was a governing plan document which unambiguously granted MetLife discretionary authority to determine claims and benefit eligibility. Applying an abuse of discretion standard of review, the district court held that MetLife did not abuse its discretion in denying Prichard disability benefits. Prichard timely appealed.

The Ninth Circuit Court of Appeals reversed, explaining that a district court must review a plan administrator’s denial of benefits de novo, unless the benefit plan gave the administrator discretionary duty to determine eligibility for benefits. The Court noted that Amara involved a dispute in which there was an SPD and a written plan instrument, and the plan administrator sought to enforce the SPD’s terms over those of the plan instrument. MetLife sought to enforce the SPD as the one and only formal plan document. It argued that previous federal court decisions have accepted the SPD as the formal plan document where the terms of the SPD did not add to, or contradict, the terms of existing Plan documents. In light of these decisions, the Court explained that the SPD terms do not govern if they conflict with governing plan documents, and similarly, the SPD cannot create terms beyond those in the governing plan documents. However, the Court rejected MetLife’s argument that the SPD and the plan “are one and the same.” The Court determined that the SPD clearly stated the only plan documents are 1) a Group Policy (including the certificate), 2) IBM’s application and 3) any amendments or endorsements to the Group Policy. The Court noted that while the insurance certificate was plainly listed as a plan document, “[c]onspicuously absent from this exclusive list was the SPD.” Further, MetLife carried the burden of providing other official plan documents, such as a document containing the discretionary language, but failed to do so. As such, the SPD was the only plan document provided to the Court, and it did not grant discretionary authority to MetLife. The court also noted that “the SPD itself declares ‘official plan documents. . . remain the final authority’ and ‘shall govern’” if the SPD terms conflict with official plan documents. Finally, the Court of Appeal stated:

Because the official insurance certificate contains no discretion-granting terms, we will not, consistent with Amara, hold that the SPD’s grant of discretion constitutes an additional term of the Plan.

Accordingly, the Court held the district court erred in reviewing MetLife’s denial under the abuse of discretion standard of review, and remanded for a de novo review.

While Prichard turned on a technical distinction—what constitutes an official plan document, it affirms the idea that an insurer does not have discretionary authority absent clear language in official plan documents. Therefore, unless an insurer establishes it has discretionary authority under such documents, a court must apply a de novo standard of review. This de novo standard can be outcome determinative.

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