When and under what circumstances an insurer paying long-term disability benefits may collect retroactive benefits paid to an ERISA plan participant under the Social Security Act has been the source of conflicting opinions over the years. The most recent pronouncement: a long-term disability plan administrators must “specifically identify a particular fund” from which it will be reimbursed in order to seek to recover of alleged overpayment of disability benefits. So held the Southern District of California in its recent plaintiff-friendly decision in Wong v. Aetna Life Insurance Company, 2014 U.S. Dist. LEXIS 135661 (S.D. Cal. 2014). Through its decision in Wong, the district court reaffirmed that simply because an ERISA governed long-term disability plan’s language provides for recovery of an award of back-dated SSDI benefits does not mean that an insurance company may seek reimbursement from an insured’s general assets. Instead, the onus is on the insurer to specifically identify specific funds, separate from a plan participant’s general assets, on which it may place an attachment.

In Wong, the plan a participant was initially granted benefits under her ERISA governed long-term disability plan. However, the plan administrator, Aetna, repeatedly denied and then reinstated her benefits. After the third denial, the plan participant filed an appeal with Aetna, which was subsequently denied. However, while she was still on claim, Aetna had advised her to apply for Social Security benefits, which was eventually approved and the Social Security Administration also agreed to back-date her award for over a year. However, very soon after being approved for the award, Aetna contacted the plan participant and asserted that it was entitled to reimbursement of the retroactive SSDI benefits she received.

Following Aetna’s demand for reimbursement, the plan participant filed an ERISA action seeking benefits owed to her. Aetna in turn filed a counterclaim seeking recovery for the retroactive social security benefits received by the plan participant. First, as to the plan participant’s claim, the court concluded that it was unreasonable and an abuse of discretion for Aetna to terminate the plan participant’s benefits. Second, and more significantly, the court held that Aetna may not retroactively attach the plan participant’s social security benefits because it failed to meet the necessary criteria for seeking overpayment. In reaching its holding, the court explained that there are “at least three criteria” that a plan administrator must satisfy in order to recover the overpayment:

First, there must be a promise by the beneficiary to reimburse the fiduciary for benefits paid under the plan in the event of a recovery from a third party. Second, the reimbursement agreement must specifically identify a particular fund, distinct from the beneficiary’s general assets, from which the fiduciary will be reimbursed. Third, the funds specifically identified by the fiduciary must be within the possession and control of the [beneficiary]. (internal quotations omitted).

Here, as in most plans, the first criteria is satisfied because, as the plan participant did not dispute that she contracted to reimburse overpayment of benefits to Aetna. However, the court held that Aetna did not satisfy second criteria. The court focused on the fact that the Social Security Act provides that “none of the moneys paid or payable or rights existing under this [Social Security] subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process.” As such, although Aetna attempted to do so, the court found that Aetna could not identify the SSDI benefits as themselves a particular fund because they had already been paid. Furthermore, Aetna did not dispute that the long-term disability benefits had already been spent by the plan participant. As such, the court held that Aetna is not permitted to attach the plan participant’s SSDI benefits because it could not identify a fund distinct from her general assets that permits such an attachment.

This decision demonstrates that simply because a plan participant contracted to reimburse an insurer for an overpayment does not mean that the plan has an unfettered ability to seek recovery of overpaid benefits. Indeed, especially in the case of retroactive social security benefits, the insurance company may well be unable to meet its burden of identifying particular fund from which it can properly be reimbursed. Plan participants and beneficiaries can take some solace from this decision.

A virtually insurmountable concrete wall was once an apt analogy for the effect of discretionary clauses in ERISA Plans on claimants attempting to challenge a plan administrator’s unreasonable interpretation of policy terms.  A valid discretionary clause gave insurance companies power to construe the terms of ERISA- governed group insurance policies based on their own interpretation, which could only be overturned by courts if it were “illogical, implausible or without support in inferences drawn from the facts in the record.”  Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666 (2011).  In order to counteract the discretion these clauses provided to plan administrators/insurers, California enacted Insurance Code section 10110.6, which placed a ban on such discretionary clauses.  After the enactment of this new statute, questions regarding how courts would interpret and enforce it lingered.  However, recent decisions in California strongly suggests that courts will give full force to the California statute and apply de novo review of claim denials rather than the abuse of discretion standard to claims denied on or after January 1, 2012.

California Insurance Code section 10110.6 provides in pertinent part:

(a) If a policy, contract, certificate, or agreement offered, issued, delivered, or renewed, whether or not in California, that provides or funds life insurance or disability insurance coverage for any California resident contains a provision that reserves discretionary authority to the insurer, or an agent of the insurer, to determine eligibility for benefits or coverage, to interpret the terms of the policy, contract, certificate, or agreement, or to provide standards of interpretation or review that are inconsistent with the laws of this state, that provision is void and unenforceable.

(b) For purposes of this section, “renewed” means continued in force on or after the policy’s anniversary date.

The statute applies to life and disability insurance policies issued, delivered or renewed on or after January 1, 2012 in California.  One of the key questions that remained after the enactment of the statute was whether, and under what circumstances, it applies to policies that were in effect prior to the enactment of the statute.  This question appears to have been answered in two recent Northern District of California decisions finding that the statute applies even to policies that were issued or had an effective date prior to January 1, 2012 where it is renewed annually and the relevant claim is denied after January 1, 2012.

In Polnicky v. Liberty Life Assurance Company of Boston, 2013 U.S. Dist. LEXIS 163915 (N.D. Cal. Nov. 18, 2013) the court interpreted section 10110.6 and concluded that the policy which controlled in that case was the one in effect at the time the claim was denied, after the enactment of section 10110.6, even though the policy had an effective date of January 1, 2010 (before the statute became effective).  In Polnicky, the relevant policy was renewed annually on January 1.  In March 2010, the plaintiff submitted a claim for short-term disability benefits under his ERISA-governed disability policy, which was denied in June 1, 2012.  The plaintiff’s subsequent appeal was then denied in February 2013.  The insurer argued that the abuse of discretion standard should be applied given the express grant of discretion authority in the policy.  On the other hand, the plaintiff argued that any grant of discretion was void and unenforceable under section 10110.6.  The court ultimately held that, because the policy was renewed and continued after its January 1, 2012 anniversary date, any provision in the policy attempting to confer discretionary authority was rendered void and unenforceable.

Recently, in Gonda v. Permanente Med. Group, Inc., 2014 U.S. Dist. LEXIS 5981, 2014 WL 186354 (N.D. Cal. Jan. 16, 2014), the court reaffirmed its prior holding in Polnicky and held that section 10110.6 made void any grant of discretionary authority in ERISA plans even if the plan was issued prior to when the statute came into effect because the policy in question renewed annually and became effective January 1, 2013, prior the final denial of the plaintiff’s claim in May 2013.

As Polnicky and Gonda demonstrate, courts will likely find discretionary clauses invalid and void where the policy is renewed after January 1, 2010, even if it became effective prior to the enact of section 10110.6.