Firm News Archives - Page 37 of 76

Third-Party ERISA Administrator Abused Discretion by Denying Medical Coverage: A Tale of What Not to Do

Sometimes an administrator so unashamedly abuses its discretion in handling an insurance claim that its actions constitute a textbook example of “what not to do” for other administrators and the ensuing decision provides a clear illustration of how courts apply an abuse of discretion standard of review under the Employee Retirement Income Security Act (“ERISA”). Indeed, a recent case clarified that plan administrators and third-party claims administrators alike are held to comparable standards when issuing claims decisions. In Pacific Shores Hospital v. United Behavioral Health, 2014 WL 4086784; 2014 U.S. App. LEXIS 16062 (9th Cir. Cal. Aug. 20, 2014) (“Pacific Shores”) the Ninth Circuit Court of Appeal reversed the district court, finding the third-party administrator acted improperly by denying the insured’s claim based on clear factual errors. Pacific Shores provides a clear example of how courts review a decision for an abuse of discretion, and shows that even third-party administrators, who purportedly have no conflict of interest with the insured, are still held to have the same duties in handling claims and must follow appropriate procedures.

Pacific Shores involved a Wells Fargo & Company (“Wells Fargo”) employee, dubbed “Jane Jones” by the court, covered under the employer’s health plan (“Plan”), governed by ERISA and administered by United Behavioral Health (“UBH”), a third-party claims administrator. Jones was admitted to the Pacific Shores Hospital (“PSH”) for inpatient treatment for severe anorexia nervosa and major depression with suicide attempts. During her inpatient stay, Jones submitted a claim to UBH for the costs of treatment, but UBH refused to pay for more than three weeks of treatment. PSH continued to treat Jones following UBH’s refusal, and subsequently Jones assigned her rights to payment under the Plan to PSH. PSH sued UBH and the Plan seeking payment for the additional days of inpatient treatment. The district court ruled in favor of UBH, finding that Jones’ administrative record provided a reasonable basis for UBH’s denial decision.

On appeal, PSH conceded the Plan granted discretion to the administrator, but advanced three arguments for the court to adopt a less deferential review of UBH’s decision. First PSH argued UBH’s claims administration contained procedural irregularities such that the denial should be reviewed de novo. Based on its review of the case, the court agreed, stating it was “painfully apparent” that UBH did not follow appropriate procedures in reaching its denial. For instance, although UBH maintained Jones’ case required medical evaluation due to its “‘medical and psychiatric complexity,’” UBH’s decision was based almost entirely on telephone conversations and voicemail messages. Indeed, Jones’ claim file was remarkably devoid of any hospital records or independent examination results. Moreover, UBH’s physician evaluations contained “obvious factual errors could easily have been corrected” if UHB consulted the PSH records or its own administrative record.

Second, PSH argued the court should consider materials outside Jones’ administrative record to review UBH’s denial decision. The district court declined to consider documents beyond the administrative record, as is typical in cases where a court is reviewing for abuse of discretion. However, the Court of Appeal explained when the administrator’s decision contains procedural irregularities, courts may consider extrinsic evidence to review the impacts of the irregularity. In the instant case, the administrator issued its decision based solely on telephone conversations and conflicting information despite the “medical and psychiatric complexity” involved in Jones’ case. The court determined that a review of the medical files would be helpful in establishing the accuracy of medical facts and Jones’ condition, and therefore it was appropriate to consider extrinsic evidence.

Next, PSH argued that even though UBH was third-party administrator, it was operating under a conflict of interest based on a desire for a continued relationship with Wells Fargo, and the court should consider these factors deciding whether UBH abused its discretion. The court declined to rule on this matter, stating that based on the record UBH reviewed before issuing its decision, UBH improperly denied Jones’ benefits. Indeed, even absent this analysis, the court found that there was sufficient information to conclude UBH acted improperly.

The court then explained the abuse of discretion standard entails a review of all the surrounding circumstances for “‘any reasonable basis’” to support an administrator’s decision. An administrator abuses its discretion if the administrator rendered its decision without any explanation, construed plan provisions in a way that conflicts with the plain language of the plan, fails to develop necessary facts for its determination or relies on clearly erroneous facts. In Jones’ case, the Plan documents represented an insured was eligible for coverage if any one of six state criteria was met, including having a “serious medical condition” requiring “24-hour management.” UBH authorized coverage for three weeks of inpatient treatment for Jones after finding this criteria applied. The Plan further also explains a plan member is eligible for continued coverage based on ten listed criteria involving a continuing condition and active participation in treatment. UBH, based on its physician evaluations, determined that Jones failed three of the ten criteria, as she did not meet the required level of care, she was not in danger of deterioration if transitioned into a lower level of care, and she was effectively recovering, as determined by UBH’s physician evaluations. The court first noted that in cases where residential care was required, the requirement necessarily satisfied the ten criteria regarding level of care and participation in treatment. The physician evaluations contained critical factual errors which downplayed Jones’ condition. Ultimately, the court held UBH breached its fiduciary duty to discharge its duties with “‘care, skill, prudence, and diligence” and solely in the interest of the Jones by employing and relying on three physician evaluators who made critical factual errors supporting UBH’s denial decision, and its denial was improper under the plan.

Pacific Shores clearly shows third-party administrators are held to the same fiduciary duties as first party plan administrators to act in the insured’s interests when administering claims. The case also provides support for allowing extrinsic documents in ERISA cases where the administrative record is inadequate. Although Pacific Shores leaves open the question of whether a third-party administrator may be acting under a conflict of interest with the insureds, for now, third party-administrators are not spared from federal ERISA laws applicable to plan administrators.

Case highlights importance of agent-broker distinction. Daily Journal Publishes McKennon Law Group PC Article.

The September 11, 2014 edition of the Los Angeles Daily Journal featured Robert McKennon’s article entitled: “Case highlights importance of agent-broker distinction.” In it, Mr. McKennon discusses a new case, Douglas v. Fidelity National Insurance Co., 2014 DJDAR 12127 (Aug. 29, 2014), which highlights the critical importance in insurance coverage cases, especially disability insurance and life insurance cases, of the legal distinction between agents and brokers. Mr. McKennon explains why this distinction can alter the outcome of a case or insurance claim. The article is posted below with the permission of the Daily Journal.

Case highlights importance of agent-broker distinction

Insurance agent or insurance broker? In everyday parlance these two terms are often used interchangeably to mean a salesperson who obtains and sells insurance policies to consumers. However, the distinction between an agent and a broker can have serious implications regarding whether the insured or the insurer bears responsibility for any misrepresentations made by an individual or company acting as go-between in the process of applying for an insurance policy. This point was clearly illustrated by the California Court of Appeal inDouglas v. Fidelity National Insurance Co., 2014 DJDAR 12127 (Aug. 29, 2014).

InDouglas, the court reversed a verdict in favor of the insured, finding that the trial court improperly failed to provide the jury with instructions allowing it to find that the insurance “agent” was actually a “broker,” and that misrepresentations made in the insurance application process should be imputed to the insured, not the insurer.

The case involved plaintiffs who went to an insurance services company, InsZone, and met with their employee who assisted the plaintiffs in obtaining a homeowner’s insurance policy issued by Fidelity National Insurance Company. InsZone submitted applications to Fidelity through an online process. A few months after the policy was issued, the plaintiffs’ house was damaged in a fire and the plaintiffs filed a claim with Fidelity. After investigating the claim, Fidelity alleged that, contrary to representations made in their applications, the plaintiffs did not actually live in the house; rather, they used it as a residential care facility. Fidelity rescinded the policy based on several alleged material representations in the insurance applications concerning how the house was being used, claiming that it would not have issued the policy had it known about the misrepresentations.

The plaintiffs sued both Fidelity and InsZone, claiming that Fidelity wrongfully denied their benefits. They argued that they did not make any misrepresentations, and any false information was provided by InsZone acting as Fidelity’s agent. The jury ultimately sided with the plaintiffs.

On appeal, Fidelity argued that the trial court erred in refusing to provide jury instructions and verdict forms that would allow the jury to decide whether InsZone was the plaintiffs’ broker, thus rendering plaintiffs responsible for the misrepresentations. The Court of Appeal agreed, finding that there was undisputed evidence that an employee of InsZone had provided false information in the plaintiffs’ insurance policy applications. As such, the court explained, the issue of whether InsZone was the plaintiffs’ broker was significant because, if the jury found that InsZone was the plaintiffs’ broker, it “would have allowed the jury to hold plaintiffs responsible for any misrepresentations in the insurance applications, whether attributable to them directly or indirectly through [Inszone’s] conduct.”

The court specifically distinguished an “insurance broker” from an “insurance agent,” in that a broker acts as a middleman between the insured and the insurer and is not employed by any insurance company, whereas an agent represents and is employed by the insurer. The court explained that although both brokers and agents must be licensed by the California Department of Insurance, “a person may not act as an insurance agent without a notice of the agent’s appointment by the insurer to transact business on its behalf filed with the DOI.” In other words, the person must be appointed by the insurer as an agent.

Because it was unclear whether InsZone was appointed by Fidelity, and because the producer agreement specifically stated that InsZone was “‘never’ to be deemed Fidelity’s agent, except as ‘required by law,’” the court found that there was substantial evidence supporting a jury finding that InsZone was acting as a broker and not an agent. Interestingly, the court explained that the language in the independent producer agreement and the compensation schedule between InsZone and Fidelity did not automatically confer “agent” status. The agreement stated: “Producer has no authority to bind Company or Insurance Company on any insurance policy except as otherwise stated in the underwriting guidelines for the territories and lines of business set forth on Compensation Schedule.” The schedule provided that InsZone was authorized “to bind policies for the lines of business listed below and the Company shall pay Producer a commission based on the following table.” Thus, the court concluded, the jury should have been given the opportunity to determine whether InsZone was acting as the plaintiffs’ broker.

The court found that the trial court erred in refusing to allow the jury to consider the import of any unintentional material misrepresentations in the insurance applications because an insurer can rescind a policy based on unintentional material representations. Additionally, the court found that the trial court erroneously refused to include jury instructions that would have allowed the jury to consider whether InsZone provided false information in the insurance applications since the jury could find that InsZone was the plaintiffs’ broker whose misrepresentations can be imputed to the plaintiffs for purposes of determining whether a basis for rescission exists. Finally, the court held that the jury instructions improperly limited the jury to consideration of misrepresentations made in only one of the insurance applications submitted.

Douglasprovides several highly significant takeaways for an insured faced with a rescission issue. First, insurers may rescind an insurance policy based on a material misrepresentation provided in an insurance application, even if the false information was provided by his broker, and even if the insured was not at fault. Second, an insurer may rescind a policy even if the misrepresentation was unintentional. In this regard, it is important for the insured to determine if a notice of agent appointment is on file with the insurance commissioner as required by law. If one exists, the insurance producer will be deemed an agent of the insurer as a matter of law.

Had a notice of appointment existed inDouglas, the outcome would have been different. That’s because the agent’s actions would have been imputed to the insurer, who would have been estopped from seeking rescission of the policy. However, asDouglasinstructs, an insurer’s failure to file a notice of appointment with the Department of Insurance does not necessarily preclude a finding that an insurance producer was the insurer’s agent. See alsoChicago Title Ins. Co. v. AMZ Ins. Services Inc., 188 Cal. App. 4th 401, 425-26 (2010). An insured would then be well advised to scrutinize applications and agreements to search for any language supporting an argument that the producer is an agent who has the ability to bind the insurer.

Douglasagain illustrates that it is often crucial to the outcome of a rescission case to correctly distinguish between an insurance producer’s status as either an agent or a broker, as that distinction may well mean the difference between a claim being fully covered and the insured legally having no effective policy.

Recent Federal Court Decisions Give Teeth to California’s Ban on Discretionary Clauses in ERISA Plans

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.

Robert J. McKennon to Present Life Insurance Seminar for OCBA on August 27, 2014

McKennon Law Group PC founding partner Robert J. McKennon will speak on an MCLE panel for the Orange County Bar Association Insurance Law Section on August 27, 2014 discussing “Recent Developments and Interesting Issues in Life Insurance Law.” Mr. McKennon, an attorney who currently represents insurance claimants after over two decades representing insurers, and Laura K. Kim, an attorney who currently represents insurance companies, agents and brokers in insurance litigation, will provide information to help litigators assess the issues associated with life insurance litigation to ensure that counsel for both parties are able to properly represent their clients. The MCLE event is scheduled to take place at the OCBA headquarters from 12:30 PM – 1:30 PM and registered attendees will receive 1.0 hour of MCLE credits.

Robert J. McKennon Invited to Host MCLE Event for OCBA

McKennon Law Group PC founding partner Robert J. McKennon will speak on an MCLE panel for the Orange County Bar Association Insurance Law Section on August 27, 2014 discussing “Recent Developments and Interesting Issues in Life Insurance Law.” Mr. McKennon, an attorney who currently represents insurance claimants after over two decades representing insurers, and Laura K. Kim, an attorney who currently represents insurance companies, agents and brokers in insurance litigation will provide information to help litigators assess the issues associated with life insurance litigation to ensure that counsel for both parties are able to properly represent their clients. The MCLE event is scheduled to take place at the OCBA headquarters from 12:00 PM – 1:30 PM and registered attendees will receive 1.0 hour of MCLE credits

Should You Hire an Attorney to Assist You with Your ERISA Disability Appeal?

If your disability policy was issued and paid for by your employer, it is likely governed by the Employee Retirement Income Security Act of 1974, commonly referred to as ERISA. ERISA is a complex statute that even scares off many experienced insurance attorneys. If your claim for disability benefits, made under an ERISA plan, is denied, you are not allowed to immediately file a lawsuit to collect your past due benefits. If you do, the court will dismiss your claim. Instead, you are required to appeal that claim decision to the very company that denied your claim in the first instance.

When appealing the denial of a short-term disability or long-term disability claim, many claimants make the mistake of handling the appeal without the assistance of an attorney. This can be a costly mistake, as the appeal is the most important part an ERISA claim because it likely represents a claimant’s final opportunity to present evidence to support his or her claim. Further, claimants who try to handle their own appeal often harm their claim.

One reason for this is that when you appeal the denial of your claim for benefits, the insurance company NEVER TELLS YOU that, if your case goes to trial, you will likely not be allowed to offer new medical records or other evidence to support your claim. Instead, you will be limited to the documents already in the insurance company’s file, called the Administrative Record. Thus, the worst thing you can do is simply tell the insurance company that you disagree with their decision and would like to appeal without offering any new evidence or arguments for disability. Such appeals are doomed to fail. You will need to offer new evidence and/or information, not only to support your appeal, but also to use later in court.

Also, you usually only have 180 days after the denial to appeal the claim. The sooner you contact an attorney to assist you, the sooner that attorney can obtain your file, see what is missing and work with you to ensure that the Administrative Record contains sufficient medical evidence to support your claim. An attorney can also ensure that you file your appeal in a timely manner. A failure to complete your appeal in time could mean that you waived your right to bring a lawsuit challenging the claim decision.

An experienced ERISA attorney can also help identify problems with the insurance company’s decision, and raise those issues with the insurance company. That way, at trial, the Court will see that the insurance company was made aware of its errors, but failed to correct them. In addition, when confronted with the arguments of experienced ERISA attorneys such as those from McKennon Law Group PC, the insurer or administrator will often reverse itself and approve the claim for benefits.

Accordingly, when appealing a claim decision under a short-term disability insurance policy, long-term disability insurance policy or life insurance policy or plan governed by ERISA, the best thing you can do to increase your chances on appeal is to immediately hire an experienced ERISA attorney to help you fight for your benefits.

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