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In the October 9, 2017 Los Angeles Daily Journal, Robert J. McKennon and Stephanie L. Talavera of the McKennon Law Group PC published a column entitled “An Agent of the Insurer,” covering a very important new Ninth Circuit Court of Appeals case, Salyers v. Metro. Life Ins. Co., 2017 DJDAR 9291 (Sept. 20, 2017). The article details the case’s key holdings, as it establishes federal ERISA common law rules that follow California’s employer-friendly rules. The decision provides a solid foundation for future ERISA plan participants and beneficiaries to vigorously attack ERISA coverage denials on theories of estoppel, waiver and breach of fiduciary duty.
Plan Administrators Cannot Violate their Fiduciary Duties by Failing to Provide Proper Notice of Policy Amendments; ERISA Plan Exclusions/Limits May Not be Enforceable
In King v. Blue Cross and Blue Shield of Illinois UPS, No. 15-55880 (Ninth Cir. Sep. 8, 2017), Linda King, the wife of a retired UPS employee, participated in a welfare retiree-benefit plan sponsored and administered by Blue Cross and Blue Shield of Illinois (“Blue Cross”). After suffering from an infection requiring immediate surgery and lengthy care, Mrs. King filed a claim under the plan for medical benefits. Blue Cross subsequently denied her claim for benefits claiming the plan had a $500,000 lifetime benefit maximum and would not cover most of her medical expenses. The plan that covered retirees of UPS was governed by a SPD that was issued in 2006 and a series of 12 material modification summaries describing amendments to the plan that were adopted since 2006. This required Mrs. King to read the 2006 SPD and the summaries of plan modifications in order to determine the current language for each benefit provision. Also, Blue Cross claimed some of the provisions applied to the employee plan but did not apply to the retiree plan, although the language in the SPD and modification summaries did not make this clear.
While the SPD mentioned a $1 million lifetime maximum, a subsequent material modification in 2010 limited the lifetime maximum to $500,000. Later, yet another material modification eliminated the lifetime benefit cap, though it was unclear if the cap applied only to the employee plan or if it included the retiree plan. After Mrs. King incurred almost $950,000 in medical bills, Blue Cross sent her an explanation of benefits stating it would only pay a small fraction of her medical bills because she already reached the $500,000 lifetime benefit maximum. Mrs. King filed her first-level appeal with Blue Cross explaining that, among other things, she was previously assured by Blue Cross that her health benefits had no limit. After her appeal was denied by Blue Cross, Mrs. King filed a secondary appeal, this time submitting her appeal to the entity designated by the policy to review secondary appeals, UPS Claims Review Committee (“CRC”). The CRC subsequently denied Mrs. King’s secondary appeal emphasizing that the lifetime maximum was limited to $500,000. Mrs. King filed a lawsuit alleging that both Blue Cross and CRC breached their fiduciary duties in violation of ERISA by failing to reasonably appraise the average plan participant that the lifetime benefit maximum applies to the retiree plan. The district court granted summary judgment to Blue Cross and CRC, and Mrs. King appealed (Mrs. King died while the suit was pending).
On appeal, the Ninth Circuit reversed the decision of the district court. After determining that lifetime benefit maximums are not barred in retiree-only plans, the Ninth Circuit Court concluded that the SPD, as amended by the subsequent modifications, violates ERISA’s statutory and regulatory disclosure requirements because it did not reasonably apprise the average plan participant that the lifetime benefit maximum continued to apply to the retiree plan. The Ninth Circuit criticized the SPD and modification summaries because all of the material modifications would need to be read in conjunction with the SPD to determine available benefits instead of either an amended SPD, cumulative summaries of material modifications, or a comprehensive table of contents being issued allowing participants to verify which SPD terms were amended by the modifications being issued. The Court also criticized improper placement of provisions and font size in the SPD and material modifications.
Blue Cross argued that it did not qualify as a fiduciary under ERISA, since UPS retained the exclusive right and discretion to interpret the terms and conditions of the plan. The Court noted that this argument rested on a misunderstanding of the fiduciary designation in ERISA which includes any person who exercises any discretionary authority or control respecting management or administration of a plan. Since Blue Cross processes and pays claims to plan participants and conducts a first-level appeal for benefit denials, it is required to interpret the plan to determine whether to pay claims a or uphold benefit denials, and any one of these abilities confers fiduciary status under ERISA. It is certain that on remand, Mrs. King (via her estate) will argue that the lifetime cap is not enforceable. The Court’s opinion suggests that this is a viable theory because of the problems with the SPD.
While many ERISA governed plans may be confusing, plan participants should be able to rely upon plan administrators to provide them with accurate information concerning their ERISA benefit plan. This case further confirms that entities rendering decisions on the provision of plan benefits need to assure that plan documents and modifications thereto are easily understood by the average plan participant and cannot escape liability for providing confusing modifications or misinformation by attempting to layer the decision-making responsibility.
Ninth Circuit Grants a Small Reprieve to the Abuse of Discretion Standard of Review, Ruling That Discretionary Language Provisions in Self-Funded ERISA Will Apply
When litigating ERISA-governed short-term disability, long-term disability, life and medical insurance claims, a major consideration is which “standard of review” will apply to the Court’s review of the insurer’s decision – abuse of discretion or de novo. The de novo standard of review is more claimant friendly. When applying the abuse of discretion standard of review, the Court is required to give some deference to the insurer’s decision. Under the de novo standard of review, the Court does not give any deference to the insurer’s decision, but simply makes a determination as to whether available evidence establishes that the insured was disabled under the terms of the Plan.
The abuse of discretion standard of review, which is friendlier to insurers, only applies if the ERISA plan contains “discretionary language” generally stating that the insurer has total discretion to interpret the terms of the Plan and decide whether the claimant is entitled to policy benefits. However, in 2011, California enacted Insurance Code section 10110.6, which banned discretionary clauses in ERISA plans issued or renewed on or after January 1, 2012. Since that time, District Courts in California and the Ninth Circuit have repeatedly ruled that Insurance Code section 10110.6 was valid and enforceable, most recently in Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, 856 F.3d 686 (9th Cir. 2017). See our article on this case here. Unfortunately, with this ruling, the Ninth Circuit opened the door for the abuse of discretion standard of review to apply in a limited number of cases where employers provide group disability insurance and life insurance coverage which they fund.
Williby v. Aetna Life Insurance Co., 2017 WL 3482390 (9th Cir. August 15, 2017) involved a claim for short-term disability benefits made under a self-funded group short-term disability insurance plan. “Self-funded” means that the employer (here, Boeing) did not purchase an insurance policy to cover its plan obligations, instead committing to pay any benefits “from its own coffers.”
After Williby’s STD claim was denied, she filed a lawsuit seeking past-due benefits. At trial, the District Court Judge ruled that Insurance Code section 10110.6 invalidated the discretionary language in the STD Plan, and applied the de novo standard of review when ruling that Williby was entitled to STD benefits.
Aetna, the company Boeing hired to administer the ERISA plan, appealed the District Court’s decision, arguing that ERISA preempted the application of Section 10110.6 to self-funded plans. In considering Aetna’s argument, the Ninth Circuit offered a brief discussion of three interrelated ERISA provisions governing the preemption of state law – the “preemption clause,” the “saving clause,” and the “deemer clause” – before indicating that the issue would turn on the “presence or absence of traditional insurance.”
Specifically, the Court noted that in FMC Corp. v. Holliday, 498 U.S. 52 (1990), the Supreme Court set forth a “simple, bright-line rule: ‘if a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer’s insurance contracts; if the plan is uninsured, the State may not regulate it.’” Thus, because the Boeing Plan was self-funded and not insured, state insurance regulations operating on a self-funded plan – like Section 10110.6 – are preempted. The Court accordingly ruled that the District Court applied the incorrect standard of review, and remanded the case back to the District Court for further consideration.
While this ruling does give limited life to the abuse of discretion standard in some California-litigated ERISA cases, in reality, the McKennon Law Group does not believe this will significantly harm insureds’ ability to successfully recover ERISA benefits through litigation. First, only a small number of group insurance plans are self-funded, so the reach of this ruling will be small. More importantly, we believe that, in practice, there is not much difference between the two different standards of review. Not only does the abuse of discretion standard of review gives claimants the ability to obtain helpful information through discovery, but we believe that if judges are convinced that a claimant is really totally disabled, they will rule in favor of the claimant no matter the standard.
Summary Plan Descriptions Under ERISA May Do More Than Summarize Your Benefit Plan
When individuals are enrolled in a group benefit plans, they are typically provided with a “Summary Plan Description” (“SPD”) which is a document that communicates plan rights and obligations to participants and beneficiaries under their ERISA plan. While the actual Benefit Plan Trust Agreement, which contains the formal provisions that make up a benefit plan, is usually made available to participants, the separate SPD is traditionally provided in order to summarize the material provisions of a Benefit Plan documents in a way that can be understood by an average benefit plan participant, as the actual Benefit Plan document can be extremely lengthy and complex. However, sometimes the provisions in the SPD can differ from those in the Benefit Plan or can contain provisions that are not found in the Benefit Plan. The United States Supreme Court determined that if the terms of a SPD differ from those contained within the ERISA plan documents, the provisions in the ERISA plan documents control (See CIGNA Corp. v. Amara, 563 U.S. 421 (2011)). A recent decision by the Ninth Circuit Court of Appeals, however, determined that a SPD may in fact constitute a formal Plan document, and its provisions may be enforced, when it adds provisions required by ERISA but does not conflict with the Benefit Plan.
In Mull v. Motion Picture Industry Health Plan, No. 15-56246 (9th Cir. Aug. 1, 2017), the plaintiff was injured in a car accident and her health insurance plan (the “Plan”) extended $147,948.38 in benefits for the treatment of her injuries. The plaintiff subsequently recovered $100,000.00 from the third party that was responsible for the car accident, and the Plan sought reimbursement from future payments pursuant to the overpayment provision contained in the SPD. The plaintiff sued the Plan seeking (1) a declaration prohibiting the health insurance plan from offsetting future benefits pursuant to the reimbursement provision, (2) reimbursement for offsets that were taken, and (3) recovery of future benefits. The district court granted summary judgment in favor of plaintiff, holding that because the reimbursement provisions the Plan sought to enforce were found only in the SPD and not within the Plan, the provisions were not legally enforceable under ERISA.
The Ninth Circuit Court of Appeals reversed the decision holding that because the Plan did not provide a basis on which payments were to be made to and from the Plan, but the SPD provided the basis for payments in great detail, the SPD constituted a Plan document. Therefore the ERISA Plan included the SPD. The Court determined that its decision did not conflict with the Supreme Court’s decision in Amara, as that decision only addressed the circumstance where both a governing plan document and a SPD existed and a plan administrator seeks to enforce a provision in the SPD over the terms found in a governing plan document. Here, the Court determined the SPD is a part of the plan itself as it provided for the basis on which payments were to be made and it did not conflict with the Plan.
This decision is important because it clarifies that a SPD may constitute a substantive plan document rather than merely a summary of the provisions contained in the Benefit Plan. The court in Mull found significant importance in the fact that the SPD at issue was clearly designed to constitute part of the Plan, and the court also found it important that the SPD contained a provision required by ERISA that was not contained within the other documents in the Plan. Therefore, the extent to which a SPD can be considered part of a plan’s controlling documents remains somewhat ambiguous. Nevertheless, the Mull decision clarifies that the SPD can be a substantive plan document, at least when it is clearly intended to be a substantive plan document and it adds a provision to a plan that is required by ERISA that is not contained within the other plan documents.
If your claim for life, retirement, health, short-term disability or long-term disability benefits has been denied, you can call (949) 387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling both ERISA insurance claims and non-ERISA state law insurance bad faith claims.
ERISA Preempts State Community Property Laws for Spouse’s Interest
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 life insurance lawyer at the McKennon Law Group PC, call (714)406-5582 for a free consultation or go to our website at mslawllp.com and complete our free consultation form today.
Has your spouse designated you as the beneficiary under his or her life insurance policy? This is critically important, especially if his insurance is through his work. Group policies issued to employers for the benefit of their employees are, with few exceptions, governed by a federal law called the Employee Retirement Income Security Act of 1974 (“ERISA”). Section 514(a) of that law provides that ERISA “supersede[s] any and all State laws insofar as they may … relate to any employee benefit plan.” Thus, your spouse’s life insurance obtained as an employee benefit from his or her work is governed by federal ERISA law, not state law.
Why is this important? Many states, including California, have community property laws that protect a surviving spouse’s interest in the deceased spouse’s life insurance policy. Under California State law, specifically its community property laws, a surviving wife, for example, may give a community property right up to half of his or her spouse’s life insurance proceeds even if the surviving spouse is not designated as the beneficiary. There is no such right, however, if the subject life insurance policy is governed by federal ERISA law. Under ERISA, all of a current or former spouse’s life insurance benefits go to the person who is designated as the beneficiary in accordance with the employer’s plan requirements – which usually means filling out the beneficiary form, signing it and returning it to the employer. So, for example, if your husband forgot to switch the beneficiary from his ex-wife to you, you are out of luck. Or, if your spouse designated his or her children as beneficiaries, the children are likely entitled to all his life insurance benefits. California’s community property laws will not help you. In other words, if you are not the named beneficiary under an employer-sponsored ERISA plan, you have no right to the proceeds (unless perhaps you can show the beneficiary waived his/her rights to the benefits after the designation or if you can show the beneficiary exercised undue influence). While that seems harsh for a spouse that simply forgot to make the switch on the employer’s beneficiary form, community property rights will not supersede the beneficiary designation under ERISA.
This is because ERISA preempts state community property laws, including California’s laws. The Ninth Circuit and its federal district courts agree that when a beneficiary has been identified in an ERISA-regulated life insurance plan, a state does not have the authority to supersede the designated beneficiary of the proceeds through community property laws. Instead, under federal ERISA law, the life insurance proceeds must be paid to the designated beneficiary. See Orr v. Prudential Ins. Co. of America, 2012 WL 2122157 (D. Idaho, June 12, 2012). Relying upon the United States Supreme Court’s decision in Egelhoff v. Egelhoff, 532 U.S. 141 (2001), the Orr court held: “In accordance with Egelhoff, the Court finds that ERISA preempts Idaho community property laws when such laws require an ERISA plan administrator to pay ERISA life insurance proceeds to someone other than the designated beneficiary.” Orr at *2. The Ninth Circuit Court of Appeals agrees. See Carmona v. Carmona, 603 F.3d 1041, 1062 (9th Cir. 2010).
In Orr, the insured decedent/employee named his minor son as the beneficiary of his group life insurance policy provided by his employer. Upon the decedent’s death, his surviving spouse sought the proceeds of the group life insurance policy on the basis that Idaho’s community property laws entitled her to a one-half interest in those life insurance proceeds. The Orr court, however, held that the surviving spouse’s state law arguments were completely preempted by ERISA and, under the provisions of ERISA, the proceeds were to be paid to the named beneficiary (the minor son) and not to the unnamed surviving spouse. Id. at *2.
The lesson learned from Orr is that, if a spouse is enrolled in a group life insurance plan governed by ERISA, that spouse must properly designate you as the beneficiary in accord with the plan’s requirements.
U.S. Supreme Court Upholds Church Plan ERISA Exemption
The Employment Retirement Income Security Act of 1974, otherwise known as ERISA, protects employees from unanticipated losses in retirement or pension plans. As we have discussed in several articles on the topic, ERISA safeguards such plans by establishing strict protections and requirements on the administration of most employer-sponsored health, disability, life, retirement and other employee benefits plans. However, ERISA does not govern all employer-sponsored benefit plans. In general, ERISA carves out exemptions for those plans established or maintained by a government or church entity.
Just a few days ago, in Advocate Health Care Network v. Stapleton, the United States Supreme Court determined a significant question affecting pension plans run by church-affiliated hospitals. As we predicted months ago, the Supreme Court reversed, applying the ERISA exemption to pension plans maintained by a church-affiliated organization, regardless of who established the plan. In this article, we briefly cover the Supreme Court’s decision, including the issue the Court addressed, the basic facts underlying the lawsuit, its procedural history and the Court’s rationale in its decision.
Advocate Health Care Network v. Stapleton
As noted above, ERISA’s protections do not apply to all employers and it specifically exempts “church plans” as those established or maintained by a church or church-affiliated organization. Initially, ERISA only exempted those employer-sponsored plans that were both established and maintained by a church. Later, Congress changed the definition of what qualified as a “church plan” to include plans maintained by a church or church-affiliated organization whose principal-purpose was to administer a plan for the employees of a church (referred to as a “principal purpose organization”). In the Supreme Court’s recent decision, the Court addressed just that issue: whether the entity’s religious affiliation qualified it as a church plan exempt from ERISA.
The lawsuit began when plaintiffs sued their former employer, Advocate Health Care Network (“Advocate”), on the basis that it breached a fiduciary duty under ERISA. By way of brief background, Advocate operates several hospitals and treatment centers across northern Illinois and has a history as a religiously affiliated organization. Advocate began as the result of a merger between two religious-affiliated hospital systems and, post-merger, Advocate continued its religious affiliation through contracts with the church and its affirmation of the church’s ministry. Accordingly, Advocate argued that, because of its religious affiliation, it qualified as a church organization. Thus, the pension plan it offered its employees was not subject to ERISA’s requirements.
The trial court found in favor of plaintiffs, determining that the pension plan did not fall within the exemption for “church plans” under ERISA, in part, because Advocate did not qualify as a church-affiliated organization. On appeal, the U.S. Court of Appeals for the Seventh Circuit agreed. Similar decisions from the Ninth and Third Circuits were consolidated before the Supreme Court in Advocate Health Care Network v. Stapeleton. The Supreme Court reversed and in a unanimous opinion decided that Advocate qualified as a church-affiliated organization exempt from ERISA.
In explaining the rationale supporting its decision, the Court relied on consistent interpretations made by the three federal agencies responsible for ensuring compliance with ERISA: the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation. Those agencies interpreted the change in ERISA to include any plan maintained by a principal purpose organization, regardless of whether the plan was originally established by a church. The Court also pointed out that, such an interpretation of the amended statute was consistent with ERISA’s plain language and general principles of logic. Ultimately, the Court used these, and other principles, to determine that a “church plan” includes those maintained by a principal purpose organization, regardless of whether a church originally established the plan.
The decision was unanimous absent newly-appointed Justice Neil Gorsuch, who did not participate in the decision-making because he was not present when the decision was argued before the Court. However, while Justice Sonia Sotomayor agreed, she wrote a separate opinion to express concern that the interpretation was made based on such a limited legislative record. In this concurrence, Justice Sotomayor noted that, despite their relationship to churches, several of these organizations operate for-profit subsidiaries that employ thousands of employees, earn billions of dollars in revenue and compete in a market with companies that must bear the cost of complying with ERISA. Accordingly, these organizations may not be the organizations Congress originally envisioned when it amended ERISA in 1980.
Of course, determining whether ERISA applies to a claim is a significant first step in pursuing a wrongfully denied claim. As the above suggests, it can be a complex issue and having an experienced attorney matters. If your claim for retirement, health, life, short-term disability or long-term disability benefits has been denied, you can call (949)387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and Non-ERISA insurance claims.
