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Ninth Circuit Affirms Rule that Ambiguous Policy Terms Must Be Construed Against Insurer in ERISA Disability Insurance Cases

The “reasonable expectations of the insured” doctrine has been around for decades in California. The state Supreme Court started toying with rules that became its foundation after the turn of the century. See Pac. Heating & Ventilating Co. v. Williamsburgh City Fire Ins. Co., 158 Cal. 367, 370 (1910) (“any ambiguity … must be resolved in favor of the insured”).

In the early 1990s, the California Supreme Court first articulated the modern version of the rule in cases like AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 822 (1990), and Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1265 (1992). Bank of the West explained that courts must interpret ambiguous policy provisions as the insurance company reasonably believed that the insured understood them when making the contract or, stated another way, in accord with “the objectively reasonable expectations of the insured” about what the policy covered.

Federal courts borrowed this insurance policy interpretation principle, highly favorable to policyholders, from state law, and also directly from federal common law. They have applied the doctrine in cases involving group insurance policies governed by ERISA, a federal law pertaining to employee benefits. Kunin v. Benefit Trust Life Ins. Co., 910 F.2d 534, 539-40 (9th Cir. 1990). That is very good news to claimants seeking benefits under their group disability, life or health insurance policies offered through their employers. Crafty ERISA lawyers are skilled at uncovering ambiguities in policy language that may help them win their claim.

The Ninth Circuit recently relied on this rule to award an ERISA policy claimant all of her disability benefits in Anderson v. Sun Life Assurance of Canada, et al., No. 13-17594 (9th Cir. Apr. 6, 2016) (unpublished). The appellate court reversed the district court’s finding that the claimant, registered nurse Diana Anderson, was not entitled to long-term disability insurance benefits. The Ninth Circuit quoted the rule that “ambiguous terms in an insurance policy governed by ERISA are interpreted in the insured’s favor.” It explained that because the policy was “fairly susceptible” to more than one interpretation, it was ambiguous and, therefore, the less restrictive interpretation favoring coverage must be adopted. It found that, although the insurer’s and district court’s interpretation of the “Partial Disability,” “Material and Substantial Duties” and “Own Occupation” definitions in the policy was a reasonable one, Ms. Anderson’s less restrictive interpretation was also reasonable and thus trumped.

Ms. Anderson became unable to perform her duties as a nurse in 2008, but she did not actually lose any income until 2009. The hospital that employed her allowed her to do other, easier jobs which she could perform at her full nurse’s salary, until 2009.

The insurer argued that the policy definitions required Ms. Anderson’s loss of income to occur simultaneously with the onset of her inability to perform the duties of her own occupation as a nurse in order to qualify for partial disability benefits. The Ninth Circuit disagreed. It found the policy definitions were ambiguous noting an “equally reasonable construction of the policy terms allows an employee to make a claim for long-term partial disability benefits even if the loss of income occurs after the onset of the inability to perform,” as in Ms. Anderson’s case. It held, “Because the Policy was ‘fairly susceptible’ of this interpretation, under which Anderson was eligible for benefits, the district court erred in adopting the more restrictive interpretation.” While the lower court awarded zero benefits, the Ninth Circuit identified an ambiguity in the policy which turned the entire case. It reversed and remanded with instructions to the district court to calculate and award Ms. Anderson all of her past and future disability benefits given that the ambiguous policy terms had to be interpreted in the insured’s favor.

If you are looking for more information on this policy interpretation doctrine, we discussed it in our September 22, 2015 article appearing in the Los Angeles Daily Journal entitled, “Examine the ‘reasonable expectations of the insured.” The article is re-published on our website at https://mslawllp.com/robert-mckennon-and-joe-mcmillen-publish-article-examine-the-reasonable-expectations-of-the-insured-2/.

The Anderson case illustrates why it is critical that an employee/insured plan participant who has a short-term disability claim or a long-term disability claim retain an experienced ERISA insurance coverage lawyer before battling his or her insurance company. While the insurer may quote seemingly insurmountable exclusionary language from its policy, federal courts may have interpreted the language differently in favor of policyholders or, as in the case of Anderson, held the policy provision is ambiguous and must be interpreted against the insurer and in favor of the insured.

If you are an employee covered under your employer’s group short-term disability, long-term disability, life insurance or health insurance policy and had your claim denied, do not give up. Insurance companies count on their policyholders doing just that, even for legitimate claims. You should immediately contact the McKennon Law Group PC, a law firm specializing in ERISA insurance and employee benefits litigation. Let us decide whether your claim was wrongfully denied and let us see if we can assist you.

Ruling Limits Insurance Company’s Ability to Collect SSDI Overpayments

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.

“9th Circuit OKs Multiple Claims for Relief under ERISA.”

The June 8, 2016 edition of the Los Angeles Daily Journal features an article written by Robert McKennon of the McKennon Law Group entitled: “9th Circuit OKs Multiple Claims for Relief under ERISA.” In the article, Mr. McKennon discusses an important decision from the U.S. Court of Appeals for the Ninth Circuit, Moyle v. Liberty Mut. Retirement Ben. Plan, 2016 DJDAR 4747 (9th Cir. May 20, 2016), in which the Ninth Circuit Court of Appeals allowed Insureds/plan participants to sue an insurer simultaneously for benefits due under an ERISA plan (such as a short-term or long-term disability insurance policy) and also for equitable relief, thus expanding the remedies available to them.

The article is posted below with the permission of the Los Angeles Daily Journal.

9th Circuit OKs Multiple Claims for Relief under ERISA

By Robert J. McKennon

One of the most significant developments in the law concerning the Employee Retirement Income Security Act of 1974 (ERISA) in the last four years has been the expansion in the availability of claims for equitable remedies, including equitable estoppel, restitution and surcharge.

In its landmark 2011 decision in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), the U.S. Supreme Court signaled a broad expansion of the availability of equitable remedies to plan participants. Amara was followed by similar rulings in McCravy v. Metropolitan Life Insurance Co., 690 F.3d 176 (4th Cir. 2012) and Kenseth v. Dean Health Plan Inc., 722 F.3d 869 (7th Cir. 2013). These cases create an important new avenue for ERISA plan participants and beneficiaries to obtain redress for ERISA violations by claim fiduciaries, such as insurance companies.

Despite Amara and the other circuit court rulings, many district courts have mistakenly ruled that if plan participants seek legal relief to recover plan benefits, enforce their rights under a plan, or clarify their rights under a plan, they are prohibited from alternatively seeking equitable relief. Thankfully, the 9th U.S. Circuit Court of Appeals, in Moyle v. Liberty Mut. Retirement Ben. Plan, 2016 DJDAR 4747 (9th Cir. May 20, 2016), recently clarified that plan participants may plead multiple, alternative, claims for relief, both legal and equitable, as available remedies under ERISA. These legal and equitable claims may proceed simultaneously, even if the equitable relief sought takes a monetary form.

The plaintiffs and appellants in Moyle were former employees of Old Golden Eagle Insurance Company, an entity purchased by Liberty Mutual Insurance Company in 1997 through a conservatorship proceeding. In order to win a bidding war for the acquisition of Golden Eagle and secure the court’s approval of the sale, Liberty’s bid included a retirement plan for Golden Eagle’s former employees. Liberty represented that the Golden Eagle employees would receive a credit for their past service with Golden Eagle that would count for the purposes of eligibility, vesting, early retirement and spousal benefits under Liberty’s retirement benefit plan.

According to the appellants, presenters at a series of benefit enrollment meetings hosted by Liberty represented that the Golden Eagle employees would receive pension benefits for their time worked at Golden Eagle. Liberty’s Retirement Plan and Summary Plan Description were amended in 2002 to state that Golden Eagle employees would be “credited for eligibility, vesting, early retirement and spouse’s benefits.” After Liberty Mutual purchased Golden Eagle, Liberty Mutual denied the appellants’ claims for past service credit. Liberty Mutual argued that it never made any representation to the appellants that they would receive past service credit for their time with Golden Eagle. Liberty Mutual also argued that under the terms of the retirement plan, the appellants were entitled only to past service credit for purposes of eligibility, vesting, early retirement and spousal benefits, and not for retirement benefits accrual. Thus, the administrator denied the Golden Eagle employees’ claims for past service credit.

The appellants filed a class action against Liberty for ERISA violations, seeking legal relief for past service credits under 29 U.S.C. Section 1132(a)(1)(B) and, alternatively, seeking equitable relief under Section 1132(a)(3) for reformation (modification of the plan to reflect the past service credits), estoppel and surcharge (monetary relief for losses suffered). The district court granted Liberty’s motion for summary judgment on all claims and held that the Golden Eagle employees were not entitled to past service credit under the terms of the plan, and they could not prove harm or detrimental reliance on Liberty’s failure to disclose information about the past service credit in the plan.

The district court also held that participants could not simultaneously seek benefits under Section 1132(a)(1)(B) and equitable relief under Section 1132(a)(3) pursuant to the Supreme Court’s decision in Varity Corp. v. Howe., 516 U.S. 489 (1996). In Varity, the court described Section 1132(a)(3) as a “‘catchall’ provision that acts as a safety net, offering appropriate equitable relief for injuries caused by violations that [Section 1132] does not elsewhere adequately remedy.” The district court followed the lead of other lower courts to rule that equitable relief under Section 1132(a)(3) is not available if Section 1132(a)(1)(B) provides an adequate remedy. The district court concluded that Appellants’ claim for surcharge, estoppel, and restitution were, in essence, monetary relief “couched in terms of equitable of relief,” and therefore could not be claimed as an equitable remedy.

The 9th Circuit reversed the district court, but only as to the issue of whether the appellants may pursue simultaneous claims for legal relief under Section 1132(a)(1)(B) and equitable relief under Section 1132(a)(3). As to the district court’s reliance on Varity, the 9th Circuit explained that the case did not explicitly prohibit a plaintiff from pursuing simultaneous claims under Section 1132(a)(3) and Section 1132(a)(1)(B), but rather prohibited duplicate recoveries when a more specific section of the statute [Section 1132(a)(1)(B)] provides a similar remedy to that which a plaintiff seeks under the catchall provision, Section 1132(a)(3). The court pointed out that the district court gave short shrift to Amara, which specifically held that Section 1132(a)(3) authorized equitable relief in the form of plan reformation, even though the plaintiffs also sought legal relief under Section 1132(a)(1)(B).

The court relied heavily on an analysis of Amara by the 8th Circuit in Silva v. Metro. Life Ins. Co., 762 F.3d 711 (8th Cir. 2014), to determine that a plaintiff can seek legal and equitable relief under Section 1132 since the Supreme Court did not say the appellants in that case would be barred from bringing a claim for equitable relief under the Section 1132(a)(3) simply because they already brought a claim for legal relief under the more specific provision, Section 1132(a)(1)(B). The court clarified that allowing plaintiffs to bring simultaneous claims not only adheres to Federal Rule of Civil Procedure 8(a)(3) which states that a pleading must contain “a demand for the relief sought, which may include relief in the alternative or different types of relief,” but it also is consistent with ERISA’s intended purpose of protecting participant’s and beneficiaries’ interests. See, e.g., 29 U.S.C. Section 1001; see also Varity, 516 U.S. at 513 (“ERISA’s basic purposes favor a reading … that provides the plaintiffs with a remedy.”) Thus, the court concluded that those cases holding to the contrary are now “clearly irreconcilable” with Amara and are no longer binding. The court noted that Amara makes it very clear that remedies such as reformation, surcharge, estoppel and restitution are traditionally equitable remedies, and the fact that they take a monetary form does not alter this classification.

The 9th Circuit then found that the district court improperly granted summary judgment on the equitable relief claim, stating that “the instant case turns on a factual determination of whether Liberty Mutual breached its fiduciary duty by failing to inform Golden Eagle employees that past service credit for the purpose of benefit accrual did not include the period prior to October 1, 1997, when they were first employed by Golden Eagle.” Because the court found triable issues of fact, it concluded that the district court erred in granting summary judgment on this claim.

Now that the 9th Circuit has interpreted Amara in the appropriately broad manner that the Supreme Court intended, we can expect the district courts in California will now be much more willing to allow equitable remedies in cases involving ERISA. This is welcome news to ERISA plan participants and beneficiaries.

Robert J. McKennon is a shareholder of McKennon Law Group PC in its Newport Beach office. His practice specializes in representing policyholders in life, health and disability insurance, insurance bad faith, ERISA and unfair business practices litigation. He can be reached at (714) 330-0474 or rm@mckennonlawgroup.com. His firm’s California Insurance Litigation Blog can be found at mslawllp.com/news-blog.

Department of Labor Proposes New, Claimant-Friendly ERISA Regulations for Disability Insurance Claims

From time to time, the U.S. Department of Labor promulgates new regulations governing disability insurance benefit claims and health insurance benefit claims that are governed by the Employee Retirement Income Security Act of 1974, commonly referred to as ERISA. The regulations must be followed by plan administrators and claim administrators when reviewing disability insurance and health insurance benefit claims submitted by claimants. Recently, the Department of Labor proposed changes to the regulations governing long-term disability insurance benefit claims and short-term disability insurance benefit claims.

The proposed regulations, if approved, will benefit a claimant by providing greater access to information during the claims review process and requiring administrators to explain why their claim decision differs from State or Federal agencies that considered the claimant disabled and unable to return to work.

The stated purpose of the proposed new regulations, which can be found here, is to provide “procedural fairness” to claimants, as well as to adopt procedural protections and safeguards that are currently applicable to group health plans under the Affordable Care Act.

One of the changes is that a claims administrator would be required to “[a]llow a claimant to review the claim file and to present evidence and testimony as part of the disability benefit claims and appeals process.” In addition, the new regulations would:

Provide that, before an adverse determination on review is made, the plan administrator shall provide the claimant, free of charge, with any new or additional evidence considered, relied upon, or generated by the plan (or at the direction of the plan) in connection with the claim. Such evidence must be provided as soon as possible and sufficiently in advance of the date on which the notice of adverse determination on review is given, in order to give the claimant a reasonable opportunity to respond before that date.

Currently, until an adverse decision is made, the claims administrator is entitled to withhold from the claimant the entirety of the claim file. This allows the claim administrator to withhold opinions and reports regarding disability offered by paid physicians, who typically never examine the claimant, and any other evidence in the claim file. Refusing to allow the claimant access to the claim file while the claim is open forces the claimant to operate without a full and complete understanding of the opinions that the insurance company may be relying on in reviewing the claim. This makes it unnecessarily difficult for a claimant to know what information the insurer might deem important and sufficient to support the claim for disability insurance benefits.

Another important change is that denial letters must include “the basis for disagreeing with the views or decisions of any treating health care professionals or other payers of benefits who granted the claimant’s similar claims (including disability determinations by the SSA).” Recently, some district courts have ruled that a failure to distinguish contrary disability determinations, whether related to Workers’ Compensation Benefits, State disability insurance benefits or Social Security disability insurance benefits, will result in a reduction in the amount of discretion afforded to the administrator in abuse of discretion cases. This new regulation would codify this requirement nationwide and expand it, as it would force the administrator to explain in all claim denials why its opinion that a claimant is not disabled differs from conclusions reached by other entities after evaluating the same disabling conditions, medical evidence and job duties.

Finally, a failure by the administrator to follow these and other requirements will allow a claimant to consider the claim to be “deemed denied.” This would allow a claimant to be “deemed to have exhausted the administrative remedies under the Plan,” and proceed to litigation without the necessity of an appeal. However, the regulations also note that if a court finds the violation to be “de minimus,” then the matter would be remanded back to the plan administrator for further review. Given the risk of remand and resulting delay, a claimant might be reluctant to exercise this option.

As a whole, these regulations, if enacted, would greatly benefit claimants and should make it easier from them to understand the claim review process, the reasons for denial and easier to provide their administrators with documents to support their claims. Indeed, these proposed regulations would “give some teeth” to the requirement that insurers engage in a “meaningful dialogue” with the claimant.

Mistreated by Your Insurer? Insurers May Not Be Able to Hide Behind ERISA Preemption to Defeat Claims for Intentional Infliction of Emotional Distress

Insureds obligingly pay premiums on their life, health and disability insurance policies and dutifully provide updated information upon request by their insurers, but often do not enjoy the same courtesy when they file an insurance claim. In extreme cases, antagonistic insurers engage in a host of tactics, including appointing claims examiners who refuse to return phone calls, conducting intrusive surveillance, accusing insureds of filing false claims or inundating the insured’s employer and treating doctors with document demands—only to deny the insured’s claim. Astonished by this treatment, many insureds wonder if they can sue them for emotional distress damages. The short answer is yes—but there are hurdles.

California law imposes in every insurance contract a covenant of good faith and fair dealing, and a wrongful denial may be in “bad faith.” The bad faith claim potentially allows the insured to seek emotional distress damages. However, there may be another approach: sue the insurer for intentional infliction of emotional distress. To succeed on such a claim, insureds must establish: (1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff’s severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the defendant’s outrageous conduct.

Policies governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) present additional hurdles. First, Section 514(a) provides that the ERISA federal statutes “supersede[s] any and all State laws insofar as they may … relate to any employee benefit plan.” Second, ERISA does not contain a comparable statutory recourse for bad faith by an insurer. Accordingly, insurers routinely defeat emotional distress claims and insurance bad faith claims by asserting that ERISA preempts these state law claims, as such claims directly relate to the insured’s denial of benefits. However, a relatively unsung line of cases show that in cases where the insurer’s actions are so far removed from the claims handling function, an insured may escape ERISA preemption and seek damages typically available under California, but not federal, law.

In his recent Order, United States District Judge William Alsup ruled that ERISA does not preempt (or, in other words, defeat) an insured’s claim for intentional infliction of emotional distress in certain cases, even though the insurance policy is otherwise governed by ERISA. Daie v. The Reed Grp., Ltd., No. C 15-03813 WHA, 2015 WL 6954915 (N.D. Cal. Nov. 10, 2015). After Aetna denied his claim for disability benefits and appeal under an employer-sponsored plan, Plaintiff filed suit asserting only one cause of action for intentional infliction of emotional distress. Plaintiff’s complaint alleged, among other things, that Defendants accused Plaintiff of lying about and exaggerating his condition, pressured him to take experimental medications and forced him to undergo rigorous medical examinations without considering the results.

Defendants moved to dismiss the claim based on federal preemption under ERISA. Judge Alsup denied the motion, explaining that ERISA completely preempts a state-law only if: (1) an individual at some point could have brought the claim under ERISA Section 502(a)(1)(B), which allows an ERISA “participant or beneficiary” to bring a civil action to recover benefits due, enforce his rights, or clarify his rights under the plan and (2) no other independent legal duty is implicated. Here, neither prong was satisfied. First, Plaintiff’s claim hinged on the Defendants’ harassing and oppressive conduct unrelated to the claims handling function. Second, Defendants had a duty not to engage in tortious conduct, which was independent of the Defendants’ duties under ERISA. Judge Alsup further noted that absent the denial of benefits, Daie would still have a claim for intentional infliction of emotional distress.

Other cases offer insight as to what type of actions by insurers may survive ERISA preemption. One example involves an insurance company who engaged in surveillance tactics, including falsely impersonating a bank lender to obtain personal information about a plaintiff (Dishman v. Unum Life Insurance Co. of America, 269 F.3d 974 (9th Cir. 2001)). Sarkisyan v. CIGNA Healthcare of California, Inc., 613 F. Supp. 2d 1199, 1208-09 (C.D. Cal. 2009) distinguishes what claims may, or may not be, preempted. In Sarkisyan, CIGNA denied authorization for a liver transplant for Plaintiff’s daughter, upheld the denial, and the girl passed away days later. The grief-stricken parents brought suit alleging several causes of action, including intentional infliction of emotional distress. CIGNA removed the case to federal court, then filed a motion to dismiss, contending Plaintiffs’ claims were expressly preempted by ERISA. The District Court ruled that Plaintiff’s state law claims for intentional infliction of emotional distress based on wrongful denial of coverage under their CIGNA health insurance plan related directly to CIGNA’s denial of benefits, and thus were preempted by ERISA. However, Plaintiffs’ state law claim for intentional infliction of emotional distress based on the verbal abuse, heckling, and “lewd hand gesture” by CIGNA employees was not preempted, because the claim was based on events occurring after the coverage decision, and thus did not directly relate to the claim decision.

These cases demonstrate that where a plaintiff’s allegations of intentional infliction of emotional distress clearly implicate an independent legal duty owed by the insurer, distinct from actions directly related to the claim for benefits, ERISA preemption does not defeat the claim. Indeed, these holdings are consistent with public policy concerns and serve as a disincentive to insurers who mistreat their insureds, or risk liability in the form of extra-contractual damages for intentional infliction of emotional distress.

With Discretionary Language Even Barred in Self-Funded ERISA Plans, is This the Death of The Abuse of Discretion Standard of Review In California?

Recently, we explained that District Courts within the state of California, applying California Insurance Code section 10110.6, ruled that, even if an insurance Plan contains language giving discretion to a claim administrator, that language is unenforceable, and de novo is the proper standard of review. See The Death of the Abuse of Discretion Standard of Review in ERISA Disability Insurance Cases in California. A recent ruling expanded the application of California’s anti-discretionary language statute to self-funded plans, further signaling the end of the abuse of discretion standard of review in California Federal Courts.

In Williby v. Aetna Life Insurance Company, 2015 WL 5145499 (C.D. Cal. August 31, 2015), the plaintiff initiated the lawsuit after Aetna denied her claim for short-term disability (“STD”) benefits. The facts of the benefits dispute are fairly straightforward, and the District Court eventually ruled that Aetna’s decision to deny the plaintiff’s claim for STD benefits was improper, regardless of the standard of review. What is unique about the ruling is the District Court’s application of California Insurance Code section 10110.6.

The ERISA Plan in Williby was a self-funded plan. This means that the employer, not Aetna, was responsible for paying any disability benefits due under the Plan. Aetna argued that Insurance Code section 10110.6 did not apply to self-funded plans, but only insured plans (where the claims administrator/insurer, not the employer, is responsible for any benefits payable under the Plan). This argument was based on the language in the statute that bars provisions which “reserve[] discretionary authority to the insurer.” See Insurance Code section 10110.6(a). The Court disagreed with Aetna’s interpretation of the statute, instead holding that the California State Legislature intended for the statute to apply, not only to insurance policies, but also insurance contracts. Specifically, the Court explained:

[P]rovisions that reserve discretionary authority to insurers to determine eligibility for benefits in contracts or policies in effect after January 1, 2012, are void and unenforceable under California Insurance Code § 10110.6.

…

Defendant argues that the insurance code does not apply because (1) the STD benefits are self-funded by Boeing, and (2) Aetna is granted discretion by the Plan, which is not an insurance policy, and thus, not regulated by the insurance code. Several district courts have found, although not in the context of self-funded plans, that Section 10110.6 applies to ERISA plan documents because the statute expressly applies to contracts and insurance policies. A federal court interpreting a state statute gives the language of the statute its “usual, ordinary import,” but if the statute’s wording is ambiguous, it may consider extrinsic evidence of legislative intent. In re First T.D. & Inv., Inc., 253 F.3d 520, 527 (9th Cir. 2001). Section 10110.6 by its plain language applies to any insurance policy, contract, certificate or agreement, and “an ERISA plan is a contract.”Harlick v. Blue Shield of Cal., 686 F.3d 699, 708 (9th Cir. 2012). The statute’s legislative history reinforces its application to employer-sponsored ERISA plans. A report from a June 22, 2011, hearing refers to an opinion letter from the Insurance Commissioner’s counsel that explained: “in group, employer-sponsored disability contracts that are governed by ERISA, the presence of a discretionary clause has the legal effect of limiting judicial review of a denial of benefits to a review for abuse of discretion. . . .[t]his standard of review deprives California insureds of the benefits for which they bargained, access to the protections of the Insurance Code[,] and other protections in California law.” See June 22, 2011, Senate Bill No. 621. The Court finds that the provisions conferring discretionary authority to Aetna are void and unenforceable pursuant to Cal. Ins. Code § 10110.6. Because the Court finds the provisions conferring discretionary authority to Aetna are void and unenforceable, the Court reviews whether Aetna correctly or incorrectly denied benefits de novo. See Firestone, 489 U.S. at 957; see also Abatie, 458 F.3d at 963. (Emphasis added.)

This ruling is further proof that the abuse of discretion standard of review will no longer apply in a vast majority of the ERISA cases filed in Federal Courts in California.

If your claim for short-term disability insurance or long-term disability insurance was denied, you can call (949) 387-9595 for a free consultation with the attorneys of the McKennon Law Group, several of whom previously represented insurance companies, who are exceptionally experienced in handling ERISA short-term and long-term disability insurance litigation.

9th Circuit OKs Multiple Claims for Relief under ERISA

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