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In the September 21, 2018 issue of the Los Angeles Daily Journal, the Daily Journal published a list of its top “Verdicts & Settlements,” which included the McKennon Law Group’s case of Brian Wright v. AON Hewitt Absence Management LLC, et al. The judgment in Mr. Wright’s favor was rated as the third highest award of damages for a plaintiff for the period of time covered. The McKennon Law Group PC represented Mr. Wright in a dispute over the payment of short-term and long-term disability benefits. We won this ERISA case at trial and our client was awarded all of his disability insurance benefits, attorney’s fees, costs and interest. The list includes a summary of the case. To review the article, take a look at the blog, here.
Attending Physician’s Certifications of Disability: How Important Are They for Disability Insurance Claims Under ERISA?
Many employees are covered by group short-term disability insurance and/or group long-term disability insurance. These plans provide benefits to employees who cannot return to work because of illness or injuries that prevent them from performing their work activities. The Employee Retirement Income Security Act of 1974 (“ERISA”) governs most of these insurance plans. Unfortunately, sometimes an insured becomes disabled and must support his claim for disability benefits. The insured’s attending physician typically has examined the insured and determines that he cannot return to work. The insured will want to use his physicians’ certification of disability to support his disability by submitting it to his insurer. A common question is: Must an insurance company accept the treating physician’s opinion regarding the insured’s disability?
The answer is: not necessarily. The insurance company need not always accept and give credence to the treating physician’s opinion. The Supreme Court of the United States addressed this issue in Black & Decker Disability Plan v. Nord, 538 U.S. 822 (2003). In Nord, Kenneth Nord worked for Black & Decker. Black & Decker had a disability plan that provided benefits when an employee suffered “the complete inability… of a Participant to engage in his regular occupation with” Black & Decker. Id. at 825. The disability plan was governed by ERISA. Nord developed degenerative disc disease, which was confirmed by a Magnetic Resonance Imaging scan. Nord consulted with an orthopedist. Both his primary treating physician and the orthopedist agreed that Nord was disabled.
Nord applied for disability benefits, but Black & Decker denied his initial claim. Nord filed an administrative appeal. Black & Decker then referred Nord to a neurologist for an independent medical examination. The neurologist determined that whereas Nord did suffer from degenerative disc disease, he could still work with minor accommodations and pain medication. Black & Decker denied Nord’s administrative appeal.
Nord sued in district court to enforce his rights under ERISA. Both parties filed motions for summary judgment. The district court granted summary judgment for Black & Decker. On appeal, the Ninth Circuit reversed the district court. The Ninth Circuit relied on Social Security Disability law in determining that the treating physician must be awarded special deference and, if a plan administrator disagreed with a treating physician’s opinion, the administrator must provide specific reasons for its decision. The Ninth Circuit held that the specific reasons must be supported by substantial evidence.
The Supreme Court reversed the Ninth Circuit’s ruling. The Supreme Court explained that nothing in ERISA mandated that a treating physician’s opinion receive special deference from an insurance company. On the other hand, in the Social Security context, regulations did in fact require such a result. The Supreme Court explained that determining whether a treating physician should receive such deference was a question best left to Congress or an administrative agency. The Supreme Court overturned the Ninth Circuit’s ruling and remanded the matter for further proceedings. See id. at 834.
Just because an insurer need not give special deference to a treating physician’s opinion, that does not mean that an insurer can ignore the opinion. The Supreme Court expressed sympathy for concerns that treating physicians, “as a rule, have a greater opportunity to know and observe the patient as an individual.” Id. at 832. The Supreme Court also did not question the “concern that physicians repeatedly retained by benefits plans may have an incentive to make a finding of not disabled in order to save their employers money and to preserve their own consulting arrangements.” Id. (internal quotations omitted). The Supreme Court emphasized that “Plan administrators, of course, may not arbitrarily refuse to credit a claimant’s reliable evidence, including the opinions of a treating physician.” Id. at 834. Nord makes clear that a treating physician’s opinion can serve as a significant piece of evidence, but the opinion may not, but often can, necessarily establish disability in of itself.
Courts have been critical of insurers that fail to adequately address a treating physician’s opinion. For example, in Yox v. Providence Health Plan, 659 F. App’x 941 (9th Cir. Sept. 9, 2016), the Ninth Circuit examined whether an insurer had abused its discretion in denying a claim for dental services under an ERISA plan. After the insurer denied the claim, the insured brought suit in district court. The district court found that the insurer had abused its discretion in denying the claim. The Ninth Circuit affirmed. The court based its holding on three grounds: failure to follow certain procedural requirements; failure to properly assess the substance of the insured’s claim, including the assessment of a treating physician; and the presence of a structural conflict of interest.
With respect to the insured’s treating physician’s clinical evaluation, the court stated that, “Moreover, [insurer] arbitrarily refused to address the clinical evaluation submitted by Yox’s treating dentist. When [insurer] did address the evaluation provided by another dentist, it discounted the dentist’s opinion as ‘insufficient’ without further explanation. [Insurer’s] conclusory opinion does not satisfy its duty under ERISA.” Id. at 944.
Other circuits have also expressed skepticism and criticized plan administrators that fail to give the proper weight to the opinions of treating physicians. See Evans v. Unum Provident Corp., 434 F.3d 866, 877 (6th Cir. 2006) (“The Supreme Court nonetheless admonished that plan administrators many not arbitrarily refuse to credit a claimant’s reliable evidence, including the opinions of a treating physician.”) (internal quotations omitted); Michaels v. The Equitable Life Assurance Soc’y of the United States Employees, Managers, and Agents Long-Term Disability Plan, 305 F. App’x 896 (3d Cir. 2009) (overturning a district court’s ruling in part for failing to credit evidence from a treating physician). Insurers cannot rely upon conclusory statements when addressing a treating physician’s assessment. The insurer generally must provide a more thorough and reasoned opinion as to why it will discount the treating physician’s opinion.
In fact, it is incumbent on an insurer’s reviewing doctors explain why his or her opinions differ from the physicians who actually examined the insured. If this is not done, the opinion should carry little weight with a court. See Carrier v. Aetna Life, 116 F. Supp. 3d 1067, 1081-1083 (C.D. Cal. 2015) (An insurer’s reliance on peer reviewers who present their opinions in a conclusory fashion, making it unclear how they reached contrasting opinions from those of the insured’s attending physicians, is improper, and such conclusions should not be relied upon over the opinions of the insured’s physicians).
Courts tend to give a great deal of respect to a treating physician’s opinions and without them, a disability claim may be denied. Having a strong certification letter from a physician can be very helpful, if not critical, to a disability insurance claim. If all of an insured’s doctors are in agreement that the claimant is disabled, then a court will likely be critical in its assessment of an insurer who denies that claim.
Where Did My Long-Term Disability Benefits Go? Termination of Benefits Without Improvement of Insured’s Medical Condition
Many people purchase accidental death and dismemberment insurance or disability insurance to protect themselves should they ever become injured and unable to work. If they become injured, they file a claim with their insurance company, and, after a potentially lengthy process, the insurance company may start to pay disability or accidental death and dismemberment benefits. Sometimes, however, after initially paying disability benefits, an insurer will suddenly change its stance on the insured’s disability and terminate the benefits. But there is a problem: The insured has not recovered, and his medical condition has not become better. The insured still cannot return to work. If the insured was disabled, and nothing has changed, why the sudden termination of benefits? Thankfully, courts also question such a change of position.
Many courts have questioned an insurers’ termination of benefits when the insurer lacks evidence that the insured’s health has improved. For example, the Ninth Circuit Court of Appeals has criticized a termination of benefits because the benefits had already been paid for a year and the insurer lacked evidence that the insured’s health had improved. See Saffon v. Wells Fargo & Co. Long-Term Disability Plan, 522 F.3d 863, 871 (9th Cir. 2008) (“After all, MetLife had been paying Saffon long-term disability benefits for a year, which suggests that she was already disabled. In order to find her no longer disabled, one would expect the MRIs to show an improvement, not a lack of degeneration.”) (emphasis in original). The Eighth Circuit also criticized an insurer for similar conduct. In that case, the Eighth Circuit noted that “[n]othing in the claims record justified [the administrator’s] decision that a change of circumstances warranted termination of the benefits it initially granted.” Walke v. Group Long-Term Disability Ins., 256 F.3d 835, 840 (8th Cir. 2001).
Courts view the failure to establish improvement as a factor in a larger assessment of whether the insurance company improperly terminated the insured’s benefits. The case of Backman v. Unum Life Insurance Company of America, 191 F.Supp.3d 1053 (N.D. Cal. 2016), provides a good example of this analysis. In Backman, Crosscheck, Inc. employed Janet Backman as an accounting manager. Crosscheck, Inc. purchased a long-term disability plan with Unum Life Insurance Company of America. The Employee Retirement Income Security Act of 1974 (“ERISA”) governed the plan. Ms. Backman, who was covered under the plan, developed lower back pain and pain in her right leg. The pain became so significant that she ceased working. On February 16, 2012, she applied for long-term disability benefits. In April 2012, Unum approved the claim based on Ms. Backman’s medical records, claim information and conversations with her doctors. Ms. Backman also applied for Social Security Disability Insurance (“SSDI”) benefits. The Social Security Administration awarded her SSDI benefits in November 2012.
After Unum terminated Ms. Backman’s benefits, Ms. Backman filed an administrative appeal with Unum. Unum denied the appeal, concluding that her “report of pain and its limiting effects on [her] functional capacity [is] out of proportion to the clinical/diagnostic findings.” Id. at 1057. During the administrative appeal process, Unum’s medical examiners reviewed Ms. Backman’s medical records and concluded that she could return to work. When denying the appeal, Unum placed heavy emphasis on its own medical consultants and gave little weight to the opinions of Ms. Backman’s treating physicians. Unum also placed little weight on Ms. Backman’s subjective reports of pain. Ms. Backman sued Unum in the Northern District of California.
The court ruled that Ms. Backman “continued to be disabled within the meaning of the LTD Plan as of December 2013, and was entitled to have the Plan disability benefits continue.” The court based its ruling on a number of factors. The court disapproved of Unum’s favoring of its experts over Ms. Backman’s treating physicians, the discounting of the award of SSDI benefits and the failure to place any significant weight on Ms. Backman’s subjective reports of pain.
In its analysis, the court also emphasized the “lack of evidence of a change in condition.” Id. at 1070. The court stated:
Unum’s justification for the 2013 termination of Backman’s benefits is further undermined by its initial 2012 disability determination, which included subjective reports of pain that were essentially unchanged at the time of the termination . . . the Plan here paid benefits for two years before determining that plaintiff was no longer disabled by her radiculopathy and back pain . . . [Another courts has] concluded it was not proper for [a] Plan to find the medical evidence was sufficiently objective proof for an initial award of benefits only to require “more objective” evidence of pain to avoid termination of those benefits. [Here] the Plan’s termination of benefits appears particularly inappropriate given the lack of evidence suggesting that the claimant’s pain had improved or her admittedly degenerative condition had reversed course. Though there are conclusory statements in the Unum consultants’ notes to the effect that Backman’s condition had improved since the disability determination, the Court’s review of the evidence does not support that conclusion. While Unum is not held to a particular standard to show changed conditions, the credibility of its consultants’ conclusions to terminate benefits are undermined when there is no evidence of improvement. (internal citations omitted)
As Backman shows, courts look to a variety of factors to determine whether an insurer has properly terminated an insured’s benefits. The lack of evidence of improvement is one of those factors. When an insurer terminates benefits without signs of the insured’s improvement, there are often other improprieties that, when viewed as a whole, will compel a court to reverse a termination of benefits.
Sitting: If you are Unable to do it, are you Totally Disabled Under a Long-Term Disability Policy?
While most people tend to have a common-sense view of what it means to be disabled, under long-term disability (“LTD”) policies, an insured must satisfy the terms of a disability policy and its specific definitions of “disability” to receive LTD benefits. Within the first two years of a disability claim, “disability” in a policy is normally defined as the inability to perform the essential duties of one’s own job. Thereafter, “disability” is usually defined as being prevented from performing one or more essential duties of any occupation for which an insured is qualified by education, training and experience. This “own occupation” versus “any occupation” analysis is the source of a substantial amount of judicial opinion.
Insurance companies typically argue that even if an insured is unable to perform the essential duties of a job, an insured can perform some type of sedentary desk job, where sitting is a large component of the workday. The battle usually turns to whether a disabled employee can perform full-time work where sitting is a large component of the workday.
In a recent case in the Western District of Washington, the court in Reetz v. Hartford Life and Accident Ins. Co., 294 F.Supp.3d 1068 (W.D. Wa. 2018) addressed this analysis as it related to a sedentary occupation. In Reetz, the court considered whether the claimant Kirsten Reetz (“Ms. Reetz”) was disabled under the plan’s “own occupation” standard and “any occupation” standard, where she was only able to sit for 30 minutes at a time for a total of six hours a day.
Ms. Reetz began working at Byram Health Care, Inc. (“Byram”) as a senior customer service representative in October 1999. As described by Byram, the position was a sedentary level occupation, requiring six hours of sitting at a time, for a total of seven hours of sitting per day. Alternating sitting and standing as needed was not allowed. There would be a 30-minute break during the eight-hour work day, and a typical work-week consisted of 40 total work hours, with 35 of those hours spent sitting.
While at Byram, Ms. Reetz participated in an LTD benefit plan (“Plan”) administered by Hartford Life and Accident Insurance Company (“Hartford”). The Plan “offers benefits for the 90-day elimination period and two years following that period if the claimant cannot perform the essential duties of his or her own occupation. But after those two years, the Plan will only pay benefits if the claimant is unable to perform the essential duties of any occupation for which he or she is qualified.” Id. at 1072.
Ms. Reetz worked at Byram until March 2014, when she took leave due to persistent pain resulting from fibromyalgia, a musculoskeletal pain disorder, and spondyloarthropathy, a form of inflammatory arthritis. Ms. Reetz submitted a claim for benefits on March 10, 2014, and Hartford paid her benefits from March 7, 2014 to June 5, 2014. Hartford initially approved LTD benefits on June 23, 2014 and paid LTD benefits to Ms. Reetz through April 2016. Due to her spondyloarthropathy, lumbar back pain and fibromyalgia, Ms. Reetz’s treating physician noted that Ms. Reetz could only sit for 30 minutes at a time, for a total of four to six hours a day.
Utilizing a vocational case manager, Hartford identified ten occupations it believed Ms. Reetz could perform. The identified occupations were sedentary occupations that involved sitting and clerical work. With this information, Hartford determined Ms. Reetz was no longer disabled as defined in its Plan and terminated Ms. Reetz’s benefits by an April 28, 2016 letter. Hartford concluded that since Ms. Reetz’s job required her to sit most of the time and Ms. Reetz was limited to sitting for 30 minutes at a time for a total of six hours a day, she was able to perform the essential duties of her own occupation. Hartford further concluded that there were several sedentary occupations for which she was qualified that were within her physical capabilities. Thus, Hartford deemed Ms. Reetz capable of performing the essential duties of her own occupation or any occupation.
Ms. Reetz appealed the LTD denial decision, but Hartford upheld its determination. Ms. Reetz subsequently filed suit under ERISA, which sets minimum standards for many LTD plans and serves to provide protection for individuals in these plans. ERISA allows employees like Ms. Reetz to recover benefits under a covered plan, like the Plan with Hartford.
The federal court looked at the requirements of Ms. Reetz’s job and the medical record to determine whether Ms. Reetz had established by a preponderance of the evidence that a sickness prevented her from performing the essential duties of her own job. The court found that evidence that Ms. Reetz could only sit for 30 minutes at a time for a total of no more than six hours per day was persuasive that Ms. Reetz could not perform her own occupation. The court also found there to be no evidence of improvement in Ms. Reetz’s condition and found her award of Social Security Disability benefits constituted evidence of her disability. The court also gave weight to Ms. Reetz’s treating physicians over Hartford’s independent reviewing physicians, as Hartford’s doctors did not examine Ms. Reetz in person.
The court then considered whether Ms. Reetz established by a preponderance of the evidence that a sickness prevented her from performing the essential duties of any occupation for which she was qualified. In assessing this, the court reviewed the Ninth Circuit opinion, Armani v. Northwestern Mutual Life Insurance Co., 840 F.3d 1159 (9th Cir. 2016). In Armani, the Ninth Circuit held that where the claimant’s attending physicians agreed he could sit at most four hours per an eight-hour workday, he was unequivocally disabled from performing his own sedentary occupation as a full-time controller and disabled from any other sedentary occupation, because sedentary jobs require mostly sitting and generally at least six hours per day. Id. at 1163-64.
In light of the Armani opinion, the court accorded significant weight to the evaluation of her treating physicians, who concluded that Ms. Reetz could sit for only 30 minutes at a time for a total of less than six hours a day. Because Ms. Reetz could only sit for half-an-hour at a time for, at most, six hours a day, the court found she could not perform any sedentary occupation. The court added that even if Ms. Reetz were able to sit for more than six hours per day, she would need the significant accommodation of taking breaks every half hour. This supported the finding that she was disabled from “any occupation.”
Conclusion
Many disability insurance claimants suffer a debilitating disease or condition that makes sitting painful or requires them to stand or walk around frequently to manage pain. The Reetz court provides guidance for insureds who are unable to sit for long periods of time, especially when insureds are limited to sitting for only 30 minutes at a time. Although many courts and the federal government’s Dictionary of Occupational Titles define sedentary jobs as requiring sitting for six hours per day, the Reetz opinion looked not at the total time sitting, but the restrictions of periods of time a person is able to sit. Importantly, the court noted that even if an insured can sit for more than six hours per day, taking breaks every half hour would be a significant accommodation to support a finding of disability. Thus, this opinion helps to expand the extent to which an insured may claim disability benefits due to difficulty sitting for long periods of time.
When Guarding the Henhouse, Some Foxes Go Rogue: When an Insurer’s Conflict of Interest Factors into Administrating Group Long-Term Disability ERISA Plans
In Nichols v. Reliance Standard Life Insurance Co., 2018 WL 3213618 (S.D. Miss. June 29, 2018), the court considered the actions of Reliance Standard Insurance Company (“Reliance”), one of the country’s largest disability insurers. The court addressed whether Reliance’s denial of disability benefits to the claimant Juanita Nichols (“Ms. Nichols”) was an abuse of discretion. In its ruling, the court discovered a decades-long pattern of arbitrary claim denials and other misdeeds, a pattern the court considered when assessing Reliance’s actions.
Ms. Nichols was a 62-year-old employee of Peco Foods’ (“Peco”) chicken processing factory in Sebastopol, Mississippi. Ms. Nichols’ duties included spending a minimum of twenty percent of her work day in processing areas, where temperatures at the factory were kept at eight degrees above freezing. After being diagnosed with circulatory system disorders that were exacerbated in cold environments, her doctors concluded that exposure to the cold could give her serious circulatory problems, including gangrene. As a result, Ms. Nichols stopped working at Peco, as she spent much of her day in near-freezing conditions.
Ms. Nichols applied for long-term disability benefits through the group insurance plan administered by Reliance. Reliance admitted that Ms. Nichols’ medical conditions prevented her from working in cold temperatures yet determined that Ms. Nichols’ occupation as it was performed in the national economy was “sanitarian,” an occupation with duties that do not require exposure to cold temperatures. Based on this determination, Reliance denied Ms. Nichols’ application for disability benefits. After a subsequent appeal of the claim denial that Reliance upheld, Ms. Nichols filed a lawsuit against Reliance to challenge her denial under ERISA. ERISA’s purpose is, in part, to protect workers by establishing standards of conduct for those who manage their benefit plans. ERISA allows employees to recover benefits due under a covered plan, like Pecos’ plan with Reliance.
The Nichols court considered whether Reliance based its denial of Ms. Nichols’ claim on substantial evidence. The court responded in the negative, finding that it was unreasonable for a vocational expert to define occupational duties by relying exclusively on a single Dictionary of Occupational Titles description that does not refer to important job duties.
The court also considered whether Reliance had a conflict of interest. As Reliance admitted, it “potentially benefits from every denied claim,” and therefore was operating under a conflict of interest. Id. at *5. The Supreme Court has held that, when an insurer is “operating under a conflict of interest,” that conflict “must be weighed as a factor in determining whether there is an abuse of discretion.” Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105, 117 (2008) (emphasis added). Such circumstances include when there is evidence that an insurer has a “history of biased claims administration.” Id. The question turned, however, to how much weight the court should give to Reliance’s conflict of interest. Glenn held that this evidence “can take many forms,” and “may be shown by a pattern or practice of unreasonably denying meritorious claims.” Id. at 123.
The court considered an approach delineated by the United States District Court for the District of Massachusetts in Radford Trust v. First Unum Life Ins. Co. of Am., 321 F.Supp.2d 226, 247 (D. Mass. 2004), which revealed a disturbing pattern of erroneous and arbitrary benefits denials, bad faith contract misinterpretations, and other unscrupulous tactics.
In its review addressing Reliance’s behavior in disability cases, the court found over 100 opinions in the last 21 years criticizing Reliance’s disability decisions, including over 60 opinions reversing a decision as an abuse of discretion or as arbitrary and capricious. The court found that judges describe the behavior underlying Reliance’s claims administration as “arbitrary,” “blind,” “conclusory,” “extreme,” “flawed,” “fraught,” “illogical,” “inadequate,” “inappropriate,” “incomplete,” “indifferent,” “lax,” “misguided,” “opportunisti[c],” “precursory,” “questionable,” “remarkable,” “selective,” “self-serving,” “skewed,” “tainted,” “troubling,” “unfair,” “unreasonable,” and “unreliable.” Nichols, 2018 WL 3213618 at *7.
The court noted these opinions revealed that Reliance takes a range of extraordinary steps to deny claims for disability benefits. Reliance makes “unreasonable” interpretations of benefit plan language, going so far as to “misconstru[e] the concept of occupational disability.” Reliance “selectively interpret[s]” evidence so it can “opportunistically deny [a] claim” for “selfserving reasons,” creating a “skewed administrative record discounting all of the substantial evidence of … disability.” Reliance’s denials are “overwhelmingly outweighed by evidence to the contrary,” “fraught with procedural irregularities,” and “blind or indifferent.” Those denials “rel[y] upon mere assumptions” and “demonstrate a pattern of arbitrary and capricious decision making.” Reliance uses “obfuscation and delay tactics,” “fail[s] to engage in ongoing communications with [claimants] to keep [them] informed of the process,” makes “misstatement[s]” to claimants, “miscalculate[s] the amount owed,” and generally exhibits behavior that “reeks of bad faith.” Reliance “regularly retain[s]” experts with “an incentive to [make] outcomes in [their] favor,” and uses expert reports that “betray a palpable bias in favor of rejecting the claim.” Despite being “[put] on notice of this bias issue” by “prior judicial criticism,” Reliance still tells courts that “it does not choose … third-party contractor[s] based on the outcomes.” Courts often conclude that Reliance’s denials are “greatly impacted” by “self-interest,” making it “clear that Reliance put[s] its own financial interest above its fiduciary duty.” Id.
The court went on to criticize the way Reliance used the Department of Labor’s Dictionary of Occupational Titles to ignore the actual duties of a claimant’s job. Further, the court criticized the vocational expert involved in Ms. Nichols’ appeal for her cursory methodology and paper reviews of claimant files. Ultimately, the court held that Reliance’s long past of biased and wrongful claims denials supported the court’s finding that the decision to deny Ms. Nichols’ claim was an abuse of discretion. Further, in deciding to award attorney’s fees to Ms. Nichols, the court found that Reliance had a severe degree of culpability and hoped that such an award would have some deterrent effect on Reliance and other insurers.
Conclusion
Opinions like Nichols give hope to victims of wrongful claim denials that the courts will seek justice in viewing the actions of insurance companies. Nichols highlights the inherent conflict of interest between insurance companies and insureds, as insurance companies decide when claimants receive benefits, and at the same time, benefit financially when benefit claims are denied. While Reliance was singled out by the court’s opinion, denials like these by insurance companies are a logical result of situations where “foxes guard the henhouse.” Hopefully this opinion evidences a trend of scrutiny toward insurance companies that also act as plan administrators.
Determining whether an insurance company wrongfully denied a benefit claim is a difficult task for most insureds. A claim denial can be an especially traumatic experience when an insured expects a life and disability insurance company like Reliance to provide benefits in a time of need. McKennon Law Group PC has extensive experience determining whether an insurer improperly denied a life, health or disability insurance claim. If you believe your insurer improperly denied your life, health or disability insurance claim, call us for a free consultation.
Orange County Lawyer Publishes Article in July 2018 edition by Robert J. McKennon Entitled “Insurers’ Intermediaries: The Implications of Actions Taken by Agents, Employers, and Third-Party Administrators”
In July 2018, The Orange County Bar Association published an article written by Robert J. McKennon and Stephanie L. Talavera of the McKennon Law Group PC in the Orange County Lawyer. The article addresses the liability implications of the relationship between insurers and various types of intermediaries. As the article explains, depending on the nature of the relationship between the insurer and others involved in the process, the insurer may be held liable for the actions of those who act as its intermediaries. The article gives tips on how to make an insurer vicariously liable for the acts of those functioning as intermediaries in the insurance process.
Insurers’ Intermediaries: The Implications of Actions Taken by Agents, Employers and Third-Party Administrators[1]
By Robert J. McKennon & Stephanie L. Talavera[2]
Those engaged in the business of insurance often act through intermediaries: agents, brokers, third-party administrators (“TPAs”) and employers. For example, an appointed insurance agent may sell an insurance policy and a TPA might handle the policyholder’s claim for benefits. In the context of employer-sponsored, group insurance plans, an employer may act on behalf of an insurer in collecting premiums via payroll deductions or investigating eligibility, temporarily transmuting the employer-employee relationship. Occasionally, the employer may, itself, act as the insurer, providing benefits through a self-funded plan (typically with the help of a TPA). It goes without saying that how an intermediary relates to each party imports different contours of liability. In this article, we explore some of those theories as they relate to insurance agents, brokers, TPAs and employers, as a good insurance litigator must be able to use all available theories of liability.
Agents of the Insurer
In assessing an insurer’s liability, or an employer stepping into the role of an insurer, it is critical to first identify the various parties involved in the insurance procurement and claims process. Once identified, you must determine when each party acts on behalf of the insurer, so as to render the insurer vicariously liable for the actions of its agents. The most important parties to the insurance procurement and claims process are discussed below, and at least include insurance agents, insurance brokers, TPAs and employers.
Insurance Agents vs. Brokers
Courts sometimes use “agent” and “broker” interchangeably. This inconsistent usage confuses terminology that already relies on an unpredictable, independent factual examination of the relationship on a case-by-case basis. But, the primary distinction between an insurance agent and broker is who each represents.
An “insurance agent” is “a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance.” Cal. Ins. Code § 31. A life agent is a person authorized by and on behalf of a life, disability, or life and disability insurance company to transact life and disability insurance. Cal. Ins. Code §§ 32, 1622. An appointed life insurance agent is always at least the agent of the insurer. See Loehr v. Great Republic Ins. Co., 226 Cal.App.3d 727 (1995). “The most definitive characteristic of an insurance agent is his ability to bind his principal, the insurer.” Marsh & McLennan v. City of Los Angeles, 62 Cal.App.3d 108, 117 (1976). An agent may bind the insurer by “acts, agreements, or representations within the ordinary scope and limits of the insurance business entrusted to him … even if the agent’s actions violate private restrictions on his or her authority.” Troost v. Estate of DeBoer, 155 Cal.App.3d 289, 298 (1984).
In contrast, “‘[i]nsurance broker’ means a person who, for compensation and on behalf of another person, transacts insurance other than life, disability, or health with, but not on behalf of, an insurer.” Cal. Ins. Code § 33; Krumme v. Mercury Ins. Co., 123 Cal.App.4th 924, 929 (2004). Brokers represent potential insureds or policyholders in purchasing insurance and typically act independently, working with several insurance companies. Id. at 929. Thus, a broker acts only on behalf of the client, the potential insured or policyholder, and not the insurer. Carlton v. St. Paul Mercury Ins. Co., 30 Cal.App.4th 1450, 1457 (1994).
Employers
Much of the insurance in force in the United States is placed through employers in the form of employee benefits, such as long-term disability insurance, short-term disability insurance, life insurance and health insurance. Employers play a vital role as plan sponsors and plan administrators of these group insurance policies, and are often responsible for enrolling new members, collecting premium contributions via payroll deductions and submitting claims for policy benefits on behalf of the insurer.
Although the Employee Retirement Income Security Act of 1974 (“ERISA”) governs many of these employer-sponsored plans, occasionally, employers “self-fund” such plans and qualify for an exemption from ERISA on that basis. When a plan is self-funded, the employer steps into the role of the insurer. Because the employer is not routinely engaged in the business of insurance, it may hire a TPA to handle the group policy’s administration. Under this arrangement, an employer begins to look even more like an insurer, using a TPA’s insurance expertise while retaining the benefits of having a self-funded plan.
TPAs
Sometimes referred to as the “downstream” intermediaries, TPAs play an important, but different, role in the insurance process. TPAs handle the rote tasks that keep the insurance industry moving, such as recordkeeping, policy administration, underwriting, investigating and claims handling. TPAs are not typically involved with individual policies, but increasingly play a key role in employer-sponsored group policies, where they assist employers in all aspects of plan administration.
Insurers’ Vicarious Liability Based on Actions of Insurance Agents, Employers and TPAs
The most complicated of the third-party relationships is the agent vs. broker distinction, which becomes particularly important concerning which actions will be imputed to the insurer. Generally, an agent’s actions are imputed to the insurer, but a broker’s do not, and only the former renders the insurer vicariously liable. See LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co., 156 Cal.App.4th 1259 (2007). This distinction is often important in insurer rescission matters, based on an alleged misrepresentation in an application for the insurance policy. Frequently, a potential insured will make accurate disclosures to the agent or broker as part of the application process, but the agent or broker will tell the potential insured that such disclosure on the application is unnecessary. Depending on whether the agent is treated as an agent of the insurer or an agent of the insured (a broker), knowledge of the misrepresentation, and consequent liability, will be imputed differently. If an agent is responsible for the alleged material misrepresentation, the insured may argue that the insurer is responsible for the misrepresentation and thus cannot rescind the policy regardless of whether the disclosure was actually communicated to the insurer. See e.g., O’Riordan v. Federal Kemper Life Assur., 36 Cal.4th 281 (2005) (imputing agent’s knowledge despite agent’s failure to actually communicate insured’s history of smoking).
Like insurance agents, traditional theories of agency and contractual privity immunize TPAs from independent liability for their claims handling misconduct.[3] TPAs act as the principal’s disclosed agents and lack contractual relationships with the insureds. So, a TPA is not typically liable for its bad faith claims handling conduct, even if its sole responsibility is to handle claims. See Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 576 (1973).
When it comes to group policies, California law treats employers as agents of the insurer. The rationale behind this application of liability is that when an employer administers an insurance policy on behalf of the insurer, it acts as its TPA and thus its agent. Accordingly, an employer’s conduct is attributable to the insurer. See McCormick v. Sentinel Life Ins. Co., 153 Cal.App.3d 1030 (1984); Elfstrom v. New York Life Ins. Co., 67 Cal.2d 503 (1967). But, as noted above, ERISA governs many group policies offered through employer-sponsored plans and consequently, preempts state laws that would otherwise determine the agent relationship and vicarious liability. See UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358 (1999). For some time, the question remained as to whether employers also acted as agents of the insurer when administering a group policy governed by ERISA. Recently, in Salyers v. Metro. Life Ins. Co., 871 F.3d 934 (9th Cir. 2017), the Ninth Circuit squarely addressed this issue, ultimately applying California’s rule on employers as agents. As a result, when employers collect premiums, enroll individual plan members and otherwise administer claims, they act as agents of the insurer. Accordingly, the knowledge and conduct of the employer may be imputed to the insurer, even if it was not communicated to the insurer directly.
Employers Treated as Insurers
In some situations, there may not be an insurance company involved in the traditional sense. Instead, an employer or some other entity not typically engaged in the business of insurance may act as the functional equivalent of an insurer. This may arise when an employer self-funds or self-insures a group policy covering its employees that qualifies for an exemption under ERISA. Whether the entity is acting as an “insurer” is important because the special relationship involved in an insurance contract may give rise to a cause of action for insurance bad faith–allowing the individual to pursue extra-contractual recovery against the employer, such as emotional distress damages, attorney’s fees and punitive damages.
Although ERISA traditionally preempts state law causes of action for breach of contract and insurance bad faith, when the group policy is exempt from ERISA, traditional preemption principles will not apply. Accordingly, the question then becomes whether an employer, when it self-funds a plan exempt from ERISA, may be liable for extra-contractual remedies where it has tortuously breached the implied covenant of good faith and fair dealing.
The Ninth Circuit Court of Appeals effectively addressed whether an employer acts as an “insurer” when administering a plan that may be exempt from ERISA in Williby v. Aetna Life Ins. Co., 867 F.3d 1129 (9th Cir. 2017). The Court found that the employer’s self-funded disability plan met both elements of the broad definition of “insurance” under California Insurance Code section 22 because: (1) it shifted one party’s risk of loss to another and (2) distributed that risk among similarly situated persons. Id. at 1134. Although the underlying plan in Williby was actually governed by ERISA, thus preempting the state bad faith claim, it could have qualified under the pay practices exemption to ERISA. As the Court noted, the plan could have met the requirements for the pay practices exemption (and, therefore, California law would have applied), but the argument was rejected because it was raised for the first time on appeal. See Id. at 1136–37. If the plaintiff had argued for the exemption earlier in the case, it is likely that the employer, having issued disability “insurance” to its employees, could have been successfully sued for insurance bad faith. This situation gives employees a powerful procedural tool to fight their employer’s insurance claims denials.
Conclusion
The ultimate success of an insurance litigation matter may turn on whether an insurer is vicariously liable for the actions of a third-party intermediary. How an intermediary relates to the insurer and the insured has important legal implications. Understanding how these relationships operate in various circumstances could have an important impact on the outcome of your next insurance litigation matter.
[1] This article was first published as Insurers’ Intermediaries: The Implications of Actions Taken by Agents, Employers and Third-Party Administrators, Robert J. McKennon and Stephanie L. Talavera, Orange County Lawyer, July 2018 (Vol. 60 No. 7), p. 42.
[2] The views expressed herein are those of the Authors. They do not necessarily represent the views of the Orange County Lawyer magazine, the Orange County Bar Association, The Orange County Bar Association Charitable Fund, or their staffs, contributors, or advertisers. All legal and other issues must be independently researched.
[3] Jeffrey W. Stempel, The “Other” Intermediaries: The Increasingly Anachronistic Immunity of Managing General Agents and Independent Claims Adjusters, 15 Conn. Ins. L. J. 599 (2009).
