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In the November 19, 2019 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon. The article addresses a previous 2009 Daily Journal investigation that revealed insurers’ regular practice of improperly denying claims. Since 2009, recent regulations promulgated by the Department of Labor and recent court opinions have helped even the playing field for claimants. A full and fair review of a claim for benefits is required by statute and regulation, and helps prevent insurers from illicit claim denials as detailed in the Daily Journal investigation. However, it remains to be seen whether these recent regulations and court decisions will ultimately have the effect of evening the power imbalance insurers wield against vulnerable disability claimants. For a full view of the article, take a look at our blog, here.
Los Angeles Daily Journal Publishes Article on November 19, 2019 by Robert McKennon Entitled “Leveling the Field Between Insurers and Disability Claimants”
In the November 19, 2019 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon. The article addresses a previous 2009 Daily Journal investigation that revealed insurers’ regular practice of improperly denying claims. Since 2009, recent regulations promulgated by the Department of Labor and recent court opinions have helped even the playing field for claimants. A full and fair review of a claim for benefits is required by statute and regulation, and helps prevent insurers from illicit claim denials as detailed in the Daily Journal investigation. However, it remains to be seen whether these recent regulations and court decisions will ultimately have the effect of evening the power imbalance insurers wield against vulnerable disability claimants.
Leveling the Field Between Insurers and Disability Claimants
Every year, millions of Americans seek and obtain individual or group disability insurance, hoping to buy a safety net in case of an unexpected disability.
By Robert McKennon
Every year, millions of Americans seek and obtain individual or group disability insurance, hoping to buy a safety net in case of an unexpected disability. If they become sick or are injured and can no longer work, these disability policies promise to pay disability benefits to cover part of their salaries they may lose when they become disabled. Unfortunately, disability insurers often do not honor their promises. In a two-part series in 2009, the Daily Journal reviewed 576 lawsuits filed in federal court in California against seven of the largest disability insurers in the country. (“Ill Workers Denied Benefits Face Fight Alone,” Oct. 20, 2009, and “Doctors Paid To Aid In Disability Denials,” Oct. 21, 2009.) This investigation found that “insurance companies regularly deny, or terminate, benefits to people …. The companies hire contract doctors who routinely reject the opinion of treating physicians without ever having seen the patients.” The Daily Journal also found that some insurers provide incentives to their employees to deny and terminate disability insurance claims, tying performance evaluations to meeting money-saving goals.
When group disability insurance policies/plans are involved, they are governed by the federal Employee Retirement Income and Security Act of 1974. Under ERISA, a policyholder’s recourse against an insurer is constrained to filing a lawsuit in federal court, in which his or her damages are limited. Unlike state laws such as California’s that allows a policyholder to sue for contract and tort damages, including punitive damages, ERISA limits recovery to plan benefits, interest on the delay in paying these benefits, and attorney fees. And, even attorney fees can be avoided. This can be done if the insurer initially denies the disability claim, waits to see if the policyholder files a mandatory administrative appeal, and if he does, the insurer can pay the claim and avoid any liability for attorney fees. Under ERISA, a policyholder cannot recover attorney fees for work done in the administrative appeals process. If the policyholder does not appeal the wrongful denial, the insurer profits. This results in a system that often does not penalize insurers that deny much needed benefits of disabled workers. Despite the internal conflict of interest insurers have, where they tie denial of disability claims with profitability, insurers often escape any negative ramifications of their illicit claim denials.
Insurers even go so far as to reward employees who deny claims. The Daily Journal’s investigation found that one employee of The Hartford Financial Services Group’s claims department received high praise for work that saved over $4 million. This same employee was chastised for continuing the claim of a 35-year-old worker, rather than speculating the worker could have worked a sedentary desk job. Sun Life Financial sent a memorandum telling claims handlers to “kick it up a notch” because the insurer was behind on its goal to “achieve the planned terminations/denials of 271 by the end of the month.” The Daily Journal found this memo offered a $250 gift certificate lottery to meet the insurer’s bottom line financial results. In nearly half the cases reviewed by the Daily Journal that reached court, judges found that the insurance companies had no appropriate basis to deny benefits.
To assist in the wrongful denial of these claims, insurers often rely upon doctors they hire frequently to write reports on claims they do not want to pay. Insurers will send files to so-called “independent” medical reviewers. The doctors conduct “paper reviews” and render conclusory opinions without seeing or even talking the claimant or her doctors. The reviewers may receive hundreds of assignments per year in repeat business from these insurers and may be their only source of income. Shockingly, these reviewing physicians do not have to be part of an independent panel overseen by regulators. The firms that coordinate these reviews collect millions of dollars a year, sometimes from a single insurer, and aggressively market their services to insurers. The Daily Journal found that these firms coach their doctors to never use the word “disabled” in reports and to use strict medical definitions they provide to determine a person’s ability of work. In many instances, these reviewers are not provided all of the claimant’s medical records and are not even qualified to render opinions for the specialty needed.
The Daily Journal even found one doctor who specialized in reviewing disability cases, Suresh Mahawar, M.D., who “nearly never” disagreed with the insurer. In the 202 cases he was assigned to review for The Hartford Financial Services Group between 2005 and 2007, court records show he only found nine people who were so sick or injured they could not return to work. Dr. Mahawar opined that anybody can work a desk job regardless of reported pain and physical limitations. Another disability case reviewer, Amy Hopkins, M.D., was paid $493,832 for file reviews for just one firm from 2001 to 2004. In 2004, a federal judge in Pennsylvania described her work as a “pick and choose approach” that ignored evidence and “completely mischaracterized” a treating physician’s notes in order to deny a claim.
Regulatory oversight to protect policyholders is weak. While insurers are required to notify policyholders that the California Department of Insurance is available to assist them with claims they feel have been wrongfully denied or rejected, in practice, the department is ineffectual in successfully resolving these complaints. Typically, complaints are ignored or, if the department takes any action, they conduct a routine inquiry with the insurer and, once the insurer responds, they do not pursue the matter, requesting that the policyholder hire an attorney who specializes in insurance denials to pursue the disability insurance benefits. The Daily Journal observed that, “No regulatory agency has taken responsibility for these cases.” “The result is a rare and gaping absence of regulation in a private insurance market that insures nearly a third of the nation’s workforce,” the Daily Journal wrote.
However, recent regulations promulgated by the Department of Labor and recent court opinions may help mend this troubled history. Federal courts have pushed back on insurers who wrongfully deny claims, and have found that a full and fair review of a claim for benefits is required by statute and regulation. The 9th U.S. Circuit Court of Appeals in Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666, 669 (9th Cir. 2011), found that Life Insurance Company of North America unreasonably denied the plaintiff’s claim for disability benefits. The 9th Circuit determined that the insurer failed to properly conduct a full and fair review of the claim for benefits, “violated its procedural obligations and violated its substantive obligation by abusing its discretion and judging the disability claim arbitrarily and capriciously.” As explained by the Salomaa court, in order to “conform to the claim procedure required by statute and regulation,” Cigna was required to “explain, upon denial, any additional ‘information needed’” to support a claim for benefits. The Salomaa court concluded the insurer did not meet the requirement of meaningful dialogue under this standard. Id. at 680.
Insurers are required to give claimants a full and fair review by explaining specifically what additional information is needed to qualify for disability benefits. As such, insurers are prevented from playing “hide the ball” with claimants by failing to advise them of documents or information needed to obtain approval of a claim, and by failing to send forms to claimants or their doctors that would have elicited the information needed. Boyd v. Aetna Life Ins. Co., 438 F.Supp.2d 1134, 1153–54 (C.D. Cal. 2006); see also Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 870 (9th Cir. 2008); 29 CFR Section 2560.503–1(g).
Furthermore, a full and fair review takes on new significance under two new ERISA regulations, 29 C.F.R. Section 2560.503-1(h)(4)(i) and (ii). They require that if there is “any new or additional evidence considered” or if there is a “new or additional rationale” upon which the insurer intends to rely to deny the claim, the insurer must point out and provide this evidence or rationale to claimants, and they must have an opportunity to respond to the “new or additional evidence considered” or “new or additional rationale” before there is an adverse determination (i.e., a denial).
If, after reviewing the available evidence, an insurer still maintains that a claimant has not presented sufficient medical support for a claim, the insurer must provide a specific list of any tests and/or examination results that must be given and allow claimants an opportunity to meet that request. It is no longer sufficient for insurers to place the burden on claimants to guess which medical records will be found necessary, when they need to be submitted, and why they are necessary. This is particularly the case given the Department of Labor’s recent regulations codified at 29 C.F.R. Section 2560.503-1. The regulations clearly aim to minimize conflicts of interest and provide claimants with additional information, which the Department of Labor indicated was “necessary to ensure that disability claimants receive a full and fair review of their claims, as required by ERISA section 503.” It remains to be seen whether these recent regulations and court decisions will have the effect of evening the power imbalance insurers wield against vulnerable disability claimants.
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 (949) 387-9595 or rm@mckennonlawgroup.com. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.
The Basics of an ERISA Life, Health and Disability Insurance Claim – Part Seven: Wrongful Insurer Practices and Full and Fair Review Requirement
In this several-part blog series titled The Basics of an ERISA Life, Health and Disability Insurance Claim, we discuss the basics of an ERISA life, health, accidental death and dismemberment and disability claim, from navigating a claim, to handling a claim denial and through preparing a case for litigation. In Part Seven of this series, we discuss the full and fair review required under the Employee Retirement Income Security Act (“ERISA”), in contrast with the usual practices and power imbalance insurers employ to deny claims. Our focus in this article will be mostly on disability insurance claim denials.
Every year, millions of Americans seeking to buy a safety net for their middle-class lifestyles enroll in individual or group disability insurance. If they become sick or are injured badly enough that they cannot work, the disability insurers promise to pay disability benefits to cover part of their salaries they may lose upon becoming disabled. In a two-part Los Angeles Daily Journal series, published on October 20, 2009, a Daily Journal investigation examined practices by insurance companies which enable them to legally deny insurance claims. The investigation looked into paid opinions by doctors and found that insurances companies, “regularly deny, or terminate, benefits to people even after they are found disabled by the federal government and approved for Social Security checks. The companies hire contract doctors who routinely reject the opinion of treating physicians without ever having seen the patients.”
The Daily Journal also found that some insurers provide incentives to their employees to deny and terminate claims, tying performance evaluations to meeting money-saving goals. Despite this internal conflict of interest, insurance companies often escape regulation, as California Department of Insurance complaints are often ignored and the only thing the law provides is recourse in federal court. While insurers notify policyholders that the Consumer Communications Bureau with the California Department of Insurance is available to assist customers with claims they feel have been wrongfully denied or rejected and that they may call or write the Bureau to have claims reviewed, state government agencies rarely do much, if anything, for consumer policyholders. “The result is a rare and gaping absence of regulation in a private insurance market that insures nearly a third of the nation’s workforce,” the Daily Journal wrote. Indeed, because federal law does not allow for any damages, there is no peril for the insurance companies to repeatedly deny legitimate claims, aside from litigation. In nearly half the cases reviewed by the Daily Journal that reached court, judges found that the insurance companies had no appropriate basis to deny benefits. However, recent regulations from the Department of Labor and case law may have the impact of positively impacting this troubled history.
Federal courts have pushed back on insurance companies wrongfully denying claims, and have found that a full and fair review of a claim for benefits is required by statute and regulation. The Ninth Circuit in Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666, 669 (9th Cir. 2011), found that Life Insurance Company of North America (“LINA”) unreasonably denied the plaintiff’s claim for disability benefits. The Ninth Circuit determined that LINA failed to properly conduct a full and fair review of the claim for benefits, “violated its procedural obligations and violated its substantive obligation by abusing its discretion and judging the disability claim arbitrarily and capriciously.” As explained by the Salomaa court, in order to “conform to the claim procedure required by statute and regulation,” Cigna was required to “explain, upon denial, any additional ‘information needed’” to support a claim for benefits. The Salomaa court concluded:
The administrator’s procedural violations are similar to those in Saffon v. Wells Fargo & Company Long Term Disability Plan and Booton v. Lockheed Medical Benefit Plan. There, as here, the administrator did not provide material sufficient to meet the requirement of “meaningful dialogue.” We held in those cases, where the denials were based on absence of some sort of medical evidence or explanation, that the administrator was obligated to say in plain language what additional evidence it needed and what questions it needed answered in time so that the additional material could be provided. An administrator does not do its duty under the statute and regulations by saying merely “we are not persuaded” or “your evidence is insufficient.” Nor does it do its duty by elaborating upon its negative answer with meaningless medical mumbo jumbo. In this case, the skeptical look required by us in a case of a conflicted administrator requires us to conclude that the administrator acted arbitrarily and capriciously, both procedurally and substantively, thereby abusing its discretion in the denial of Salomaa’s claim.
Id. at 680.
Insurance companies are required to give claimants a full and fair review by explaining specifically what additional information is needed. As such, insurers are prevented from playing “hide the ball” with claimants by failing to advise them of documents or information needed to obtain approval of a claim, and by failing to send forms to claimants or their doctors that would have elicited the information needed. Boyd v. Aetna Life Ins. Co., 438 F.Supp.2d 1134, 1153–54 (C.D. Cal. 2006); see also Saffon, supra, 522 F.3d at 870; 29 CFR § 2560.503–1(g).
Furthermore, a full and fair review takes on new significance under two new regulations, 29 C.F.R. Section 2560.503-1(h)(4)(i) and (ii). They state:
(4) Plans providing disability benefits. The claims procedures of a plan providing disability benefits will not, with respect to claims for such benefits, be deemed to provide a claimant with a reasonable opportunity for a full and fair review of a claim and adverse benefit determination unless, in addition to complying with the requirements of paragraphs (h)(2)(ii) through (iv) and (h)(3)(i) through (v) of this section, the claims procedures –
(i) Provide that before the plan can issue an adverse benefit determination on review on a disability benefit claim, the plan administrator shall provide the claimant, free of charge, with any new or additional evidence considered, relied upon, or generated by the plan, insurer, or other person making the benefit determination (or at the direction of the plan, insurer or such other person) 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 benefit determination on review is required to be provided under paragraph (i) of this section to give the claimant a reasonable opportunity to respond prior to that date; and
(ii) Provide that, before the plan can issue an adverse benefit determination on review on a disability benefit claim based on a new or additional rationale, the plan administrator shall provide the claimant, free of charge, with the rationale; the rationale must be provided as soon as possible and sufficiently in advance of the date on which the notice of adverse benefit determination on review is required to be provided under paragraph (i) of this section to give the claimant a reasonable opportunity to respond prior to that date. (Emphasis added).
This means that if there is “any new or additional evidence considered” or if there is a “new or additional rationale” upon which the insurer intends to rely to deny the claim, the insurer must point out and provide this evidence or rationale to claimants, and they must have an opportunity to respond to the “new or additional evidence considered” or “new or additional rationale” before there is an adverse determination (i.e., a denial).
If, after reviewing the available evidence, insurers still maintain that claimants have not presented sufficient medical support for a claim, insurers must provide a specific list of any tests and/or examination results that must be given and allow claimants an opportunity to meet that request. It is no longer sufficient for insurers to place the burden on claimants to guess which medical records will be found necessary, when they need to be submitted, and why they are necessary. This is particularly the case given the Department of Labor’s recent regulations codified at 29 C.F.R. Section 2560.503-1. The regulations clearly aim to minimize conflicts of interest and provide claimants with additional information, which the Department of Labor indicated was “necessary to ensure that disability claimants receive a full and fair review of their claims, as required by ERISA section 503.” Hopefully, these recent regulations will have the effect of evening the power imbalance insurance companies wield against vulnerable disability claimants.
The Basics of an ERISA Life, Health and Disability Insurance Claim – Part Six: Independent Medical Evaluations and Peer Reviews
In this several-part blog series titled The Basics of an ERISA Life, Health and Disability Insurance Claim, we discuss the basics of an ERISA life, health, accidental death and dismemberment and disability claim, from navigating a claim, to handling a claim denial and through preparing a case for litigation. In Part Six of this series, we discuss Independent Medical Evaluations and Peer Reviews. Our focus in this article will be mostly on disability insurance claim denials.
When an insurer examines a disability claim or appeal, it has the medical records examined by medical evaluators, typically a nurse or doctor. In theory, this allows the insurer to determine whether the claim has merit. In practice, it is typically a way for an insurer to set up a claim denial by having medical and other records evaluated by biased medical personnel.
ERISA regulations require that “the appropriate named fiduciary shall consult with a health care professional who has appropriate training and experience in the field of medicine involved in the medical judgment.” 29 C.F.R. § 2560.503-1(h)(3)(iii); § 2650.503-1(h)(4).
Sometimes, insurance companies rely on their own employees to perform such evaluations. The employee may be referred to as a “Medical Director,” “Medical Consultant” or some other similar title. Of course, this individual is paid by the very insurer with a financial interest in denying claims. Consequently, courts often look with disfavor upon such medical opinions. The Eighth Circuit has noted that “the administrator’s use of an in-house physician rather than a specialist to review a disability claim involving an uncommon disease can be a serious procedural irregularity affecting the administrator’s decision.” Morgan v. UNUM Life Ins. Co. of Am., 346 F.3d 1173, 1177 (8th Cir. 2003). In Morgan, the court found that the insurer’s decision to deny benefits was not supported by substantial evidence, in part because “[n]othing in the record show[ed] that [the insurer’s in-house physician] had any expertise or experience whatsoever in dealing with [the claimant’s disease].” Id. at 1177-78.
An entire industry has arisen that consists of supposedly “independent” medical evaluators, typically doctors, who examine medical records for insurance companies to render opinions on medical conditions and restrictions and limitations caused by these medical conditions. Oftentimes, as noted above, these medical evaluators are not independent because they are beholden to the insurer who hired them and the insurance industry for whom they work most of the time and from whom they derive most of their income. Courts are often wary of opinions given by these doctors because of the obvious potential bias. See Demer v. IBM, 835 F.3d 893, 901-03 (9th Cir. 2016).
A disability-claim review that consists of only a review of medical records is often referred to as a “peer review” or, somewhat derogatorily, as a “paper review.” Courts often criticize reliance on these reviews over the opinions of treating physicians. See Montour v. Hartford Life & Accident, 588 F.3d 623, 630 (9th Cir. 2009); see also Schramm v. CNA Fin. Corp. Insured Grp. Ben. Program, 718 F.Supp.2d 1151, 1164 (N.D. Cal. 2010) (“The Court likewise gives little weight to the opinions of Drs. Marion and Fuchs [the paper reviewers]. Although they reviewed plaintiff’s medical records, they did not examine her in person.”). Furthermore, these reviewers often make careless mistakes which make courts view them even more harshly. For example, it is common for a reviewer to not consider all of the disabling conditions and, instead, to focus on only one or two conditions. A court may take note of such an error and conclude that it renders the reviewing opinion unreliable. See, e.g., Cushman v. Motor Car Dealers Servs., Inc., 652 F.Supp.2d 1122, 1133 (C.D. Cal. 2009). Another common problem is that insurers often use doctors who are not qualified to discuss the claimant’s particular condition, which is also in violation of ERISA. See 29 C.F.R. § 2560.503-1(h)(3)(iii); § 2650.503-1(h)(4).
Whereas paper reviews are often shallow and problematic, there is a second more thorough form of medical review, the so-called independent medical examination (“IME”). These medical opinions are often given more weight by courts than simple paper reviews. See Shaw v. AT&T, 795 F.3d 538, 550 (6th Cir. 2015). In an IME, a physician chosen by the insurer examines the claimant. The physician then attempts to determine whether the claimant is disabled. A well-reasoned IME report concluding that the claimant is not disabled can seriously harm the claim. A well-reasoned IME report concluding that the claimant is disabled often results in the insurance company agreeing to pay the claim.
As a general rule, the type of medical review shows how seriously the insurer is considering paying the claim. A claim it does not take as seriously will often be decided with a paper review. Often, if the insurer believes the claim is otherwise weak, it will be willing to take that risk to save money. If the claim is stronger, it may seek to have the claim evaluated by an outside doctor, but not be willing to pay for a more expensive IME. In particularly difficult cases, the insurer is more likely to request an IME. Of course, some claimants are clearly disabled, and the insurer simply pays the claim because it knows it cannot avoid payment.
If a claimant attends an IME and the results are unfavorable, the claimant should strongly consider pursuing a second IME or at least having one her attending physicians review it and critique it. If the second IME is more favorable, that can greatly help the claimant. Even a strong rebuttal to the IME conclusions can be very effective. This is especially true for mental health claims, which can be difficult to evaluate.
There has long been a duty for an insurer to engage in a full and fair dialogue with a claimant about the claim. One thing a claimant should be aware of, however, is that under new regulations, an insurance company must give the claimant an opportunity to respond to “new evidence.” 29 C.F.R. Section 2560.503-1(4)(i) and (ii) “Provide that before the plan can issue an adverse benefit determination on review on a disability benefit claim, the plan administrator shall provide the claimant, free of charge, with any new or additional evidence considered, relied upon, or generated by the plan, insurer, or other person making the benefit determination (or at the direction of the plan, insurer or such other person) in connection with the claim[.]” The results of an IME or peer review are considered new or additional evidence. As such, a claimant is entitled to be notified of any such opinions. A peer review or IME may be particularly biased. These regulations guarantee that a claimant has a chance to challenge such bias. The claimant may demand to have a new evaluation. And, as noted above, the claimant can also seek to have his own doctor respond to the new medical opinion and point out its flaws. Claimants are now guaranteed an opportunity to address any perceived bias. However, if the bias is particularly severe and overly blatant, then it may be prudent to do nothing further. This will leave an avenue to discredit the reviewing doctor and the insurer for relying on the clearly erroneous opinion.
Los Angeles Daily Journal Publishes Article by Robert J. McKennon Entitled “Ruling Could Send Shock Waves Through ERISA Claims Industry”
On August 28, 2019, the Los Angeles Daily Journal published an article written by Robert J. McKennon of the McKennon Law Group PC. The article addresses a recent case by the Ninth Circuit Court of Appeals, Dorman v. Charles Schwab, which overruled the Ninth Circuit precedent Amaro v. Continental Can Co. and enforced an arbitration clause in a pension plan on the basis that Supreme Court precedent had impliedly overruled its ruling in Amaro. Given the expansive reading of arbitration clauses by the Supreme Court and now the Ninth Circuit, it is likely that more ERISA pension claims will be litigated on an individualized basis and will be litigated in arbitration proceedings. For a full view of the article, take a look at our blog, here.
Los Angeles Daily Journal Publishes Article on August 28, 2019 by Robert McKennon Entitled “Ruling Could Send Shock Waves Through ERISA Claims Industry”
In the August 28, 2019 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon. The article addresses a recent case by the Ninth Circuit Court of Appeals, Dorman v. Charles Schwab, which overruled the Ninth Circuit precedent Amaro v. Continental Can Co. and enforced an arbitration clause in a pension plan on the basis that Supreme Court precedent had impliedly overruled its opinion in Amaro. Given the expansive reading of arbitration clauses by the Supreme Court and now the Ninth Circuit, it is likely that more ERISA pension claims will be litigated on an individualized basis and will be litigated in arbitration proceedings.
Ruling Could Send Shock Waves Through ERISA Claims Industry
A 9th Circuit ruling will have the effect of limiting claimants’ much-needed access to the federal courts and class actions.
By Robert J. McKennon
The Employee Retirement Income Security Act of 1974 was the largest statute ever passed by Congress at the time it was enacted. ERISA established pension and employee benefit plan standards for private employers. As the number of retirees and employees covered by ERISA retirement and benefit plans continued to grow, many found that their plan fiduciaries, including former employers and their insurers, were not meeting their obligations with respect to their retirement and other employee benefits. Thus, the last two decades have seen a significant rise in class action litigation involving fiduciaries of 401(k) and pension plans under various legal theories. These class actions typically allege some type of wrongful conduct by plan fiduciaries that resulted in the reduction of plan assets, usually because of excessive fees charged and/or some type of imprudent investment activity.
These actions have been almost exclusively litigated in the federal courts. This is because in the 9th Circuit, plan participants and their beneficiaries were protected from being forced into arbitrating these claims by Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984), in which the 9th U.S. Circuit Court of Appeals held that ERISA claims were not arbitrable. The Amaro court based its decision in large part on the premise that arbitrators “lack the competence of courts to interpret and apply statutes as Congress intended.” Amaro was widely seen as rejecting binding arbitration in the ERISA context.
Since the Amaro decision, the U.S. Supreme Court has pushed back on its past criticism of arbitration clauses. In AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 345 (2010), ideologically split justices ruled 5-to-4 that an arbitration provision in consumer contracts requiring individual arbitration and preventing class actions or class-wide arbitration was enforceable. The Supreme Court noted that Congress enacted the Federal Arbitration Act in response to widespread judicial hostility to arbitration and that the principal purpose of the FAA is to ensure that private agreements are enforced according to their terms. Id. at 339. In American Exp. Co. v. Italian Colors Restaurant, 570 U.S. 228, 238 n.5 (2013), the Supreme Court ruled that arbitrators are competent to interpret and apply federal statutes and dismissed the interest in ensuring the prosecution of low-value claims in favor of arbitration, permitting the waiver of the class action procedure.
In a momentous decision in Dorman v. Charles Schwab Corp., 2019 DJDAR 7932 (9th Cir. Aug. 20, 2019), the 9th Circuit overruled Amaro and enforced an arbitration clause in a pension plan on the basis that Supreme Court precedent in cases such as American Exp. Co. had impliedly overruled its ruling in Amaro.
Michael Dorman was employed at Schwab from February 2009 to October 2015. Dorman joined the Schwab Retirement Savings and Investment Plan, and voluntarily contributed to his retirement account through payroll deductions until he left Schwab. In December 2014, the plan was amended to add an arbitration provision, which states that “[a]ny claim, dispute or breach arising out of or in any way related to the Plan shall be settled by binding arbitration.” The arbitration provision includes a waiver of class or collective action that requires individual arbitrations, even if, absent the waiver, Dorman could have represented the interests of other plan participants.
In 2017, Dorman filed a class action suit in district court alleging that the defendants violated ERISA and breached their fiduciary duties by including Schwab-affiliated investment funds in the plan, despite the funds’ poor performance, to generate fees for Schwab and its affiliates. In response to his complaint, the defendants moved to compel individual arbitration of the asserted claims pursuant to the arbitration provision in the plan. The district court denied Defendants’ motion.
The court in Dorman addressed these Supreme Court rulings and reasoned further that in Comer v. Micor, Inc., 436 F.3d 1098 (9th Cir. 2006), the 9th Circuit acknowledged in dicta that its past “expressed skepticism about the arbitrability of ERISA claims … seem[ed] to have been put to rest by the Supreme Court’s opinions.” The Dorman court further noted that in American Exp. Co., the Supreme Court expressed that arbitrators are competent to interpret and apply federal statutes and that its opinion in Amaro was thus no longer valid.
The 9th Circuit reasoned that while a three-judge panel may generally not overrule a prior decision of the court, if an intervening Supreme Court decision undermines an existing precedent of the 9th Circuit, the three-judge panel may then overrule prior circuit authority. The court found that the holding in American Exp. Co. that federal statutory claims are generally arbitrable and arbitrators can competently interpret and apply federal statutes constitutes intervening Supreme Court authority that is irreconcilable with Amaro. The court thus reversed and remanded the district court’s ruling. Id.
In an accompanying unpublished order, the same panel enforced the arbitration clause in the plan document, finding that Dorman was bound by the plan’s arbitration provision, that the dispute fell within the scope of the arbitration provision, and that the claims challenging the use of Schwab’s proprietary funds were subject to arbitration and had to be arbitrated on an individual rather than a class basis, with recovery limited to the individual plaintiff’s damages.
To be contrasted with Dorman is the 9th Circuit’s ruling in Munro v. University of Southern California, 896 F.3d 1088 (9th Cir. 2018), which recently addressed a situation where an employee sued his employer not on his own behalf, but on behalf of another entity for claims that the employee cannot bring in his individual capacity. In Munro, nine current and former employees of the University of Southern California brought suit against their employer for breach of fiduciary responsibility in the administration of two ERISA plans offered by the employer. The relief sought by the plaintiffs included the following: a determination as to the method of calculating losses, removal of breaching fiduciaries, a full accounting of plan losses, reformation of the plans and an order regarding appropriate future investments.
Since the plaintiffs all signed arbitration agreements as part of their employment contracts, USC filed a motion to compel arbitration. The district court denied USC’s motion and ruled that the arbitration agreements, which the employees entered into in their individual capacities, do not bind the plans because the plans did not themselves consent to arbitration of the claims. The 9th Circuit upheld the district court’s ruling, finding that the claims for breach of fiduciary duty fell outside the scope of the arbitration agreements. In reaching its decision, the court turned to the language of the arbitration agreements, which state that the parties agreed to arbitrate “all claims … that Employee may have against the University or any of its related entities … and all claims that the University may have against Employee.” The court noted that this language does not extend to claims that other entities have against the university.
The Munro court concluded that the ERISA claims for breach of fiduciary duty were not claims that the “Employee may have against the University or any of its related entities.” Rather, the employees brought the claims on behalf of the plans, and, since the plans never consented to arbitration of the claims, the arbitration provision did not apply in this instance. Specifically, the court noted that the ERISA plaintiffs did not seek relief for themselves, but rather sought recovery for injury done to the plans.
Unlike Munro, in Dorman, the arbitration provision was contained in the plan document itself and thus the plan is deemed to consent by virtue of the arbitration provision. Considering the expansive potential reading of the arbitration provision in Dorman and location in the plan document, a claim on behalf of the plan for breach of fiduciary duties under ERISA could reasonably be considered as falling under the purview of the clause.
Dorman has the potential to send shockwaves through ERISA claims industry and will have the effect of limiting claimants’ much-needed access to the federal courts and class actions. Dorman and the above-cited Supreme Court cases appear to stand for the proposition that many types of ERISA claims will be subject to arbitration if the plan documents are drafted properly. Expect that following the Dorman decision, arbitration and class action waiver clauses will become more prevalent in ERISA plans. Given the expansive reading of arbitration clauses by the Supreme Court and now the 9th Circuit, it is likely that more ERISA claims will be litigated on an individualized basis and will be litigated in arbitration proceedings. It remains to be seen whether employers and plans will benefit by this trend.
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 (949) 387-9595 or rm@mckennonlawgroup.com. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.
