Firm News Archives - Page 64 of 76

McKennon Law Group PC Client Awarded $543,612.62 in Damages in Investment Loss Case – the First of its Kind in Hundreds of Pending Medical Capital Cases

In what appears to be the first FINRA arbitration award of its kind in the pending Medical Capital cases, McKennon│Schindler LLP client Eric Anderson was awarded $543,612.62 in damages (the full amount of his investment losses) for his massive losses caused by his financial advisor firm’s negligence and breach of fiduciary duties owed to Mr. Anderson.

Mr. Anderson looked forward to relaxing with his family and enjoying a well deserved retirement. After years of hard work and saving, Mr. Anderson had accumulated a sizable retirement fund which he intended to live off of for the rest of his life. These funds were entrusted with Cullum & Burks Securities, who managed both his finances and 401(k) retirement accounts. A Cullum & Burks’ agent and representative, Robert Clark took advantage of Mr. Anderson’s ignorance and pressured him into moving the entirety of his retirement funds into an extremely risky investment fund by Medical Capital Holdings. Clark ignored Mr. Anderson’s fragile financial situation and made this recommendation despite being told that this money was the sole means of support for him and his wife.

It turned out that Medical Capital Holdings, which provided financing to healthcare providers by purchasing the providers’ accounts receivables and making loans to those providers, was almost certainly a fraudulent ponzi scheme. The accounts receivables allegedly were packaged into notes and sold through private placements to investors. Approximately 20,000 investors purchased $2.2 billion in Medical Capital notes. Approximately $1 billion of the notes are in default, leaving investors like Mr. Anderson with massive investment losses. According to the SEC’s investigation, Medical Capital and its officers used the accounts as their personal piggy banks, improperly requesting and obtaining investor funds to pay themselves massive “administrative fees” of nearly $325 million which they used to purchase lavish personal perquisites, Medical Capital and its affiliates also invested in an array of non-medical projects that were placed under the personal supervision of Lampariello, including mobile phone and movie ventures, and commingled investor funds. Despite controlling hundreds of millions of dollars, the SEC and an appointed Receiver found that the Medical Capital entities operated without financial or accounting controls, failed to prepare financial statements in accordance with GAAP, failed to use audited financial statements, failed to perform annual appraisals of assets, and repeatedly obtained the Trustees’ permission to pay themselves fees based on a formula.

Ultimately, Mr. Anderson lost his entire life savings. What was initially touted by Clark as a “safe” investment was wiped out in a little over a year. The loss was so complete that Mr. Anderson, at age 68, was forced to study for and obtain his insurance license in order to start working again so that he could support his family. His dream of a leisurely retirement had been shattered.

MCKENNON LAW GROUP PC LLP filed an action on behalf of Mr. Anderson with the Financial Industry Regulation Authority (“FINRA”) against Cullum & Burks Securities and Robert J. Clark his financial advisors. MCKENNON LAW GROUP PC LLP, on behalf of Mr. Anderson, asserted claims for breach of fiduciary duty, unsuitability, failure to supervise, professional negligence, unjust enrichment, negligent and intentional misrepresentation, elder abuse, and violation of California Corporate Code section 25401. After a hearing and arbitration, the FINRA panel awarded Mr. Anderson the full amount of compensatory damages plus interest requested in the amount of $543,612.62. According to Robert McKennon, the lead attorney on the case, “this is the first of what is expected to be several other FINRA awards against financial advisors who sold Medical Capital investments to unsuspecting and vulnerable clients.”

Under ERISA , Procedural Deficiencies Not Considered When the Standard of Review is De Novo

Litigation pursuant to the Employee Retirement Income Security Act (“ERISA”) is rather unique. Unlike most cases, ERISA disputes are based on a limited scope of permissible evidence. The range of that scope is ultimately dependent on which standard of review is employed by the courts. Typically, when the standard of review is abuse of discretion, the scope of admissible evidence is limited to what was before the claims administrator when the claims decision was made, i.e. the “administrative record.” The reason for this limited subset of evidence is based on the sole question before the court, namely “Did the claim administrative abuse its discretion in rendering its decision?” Obviously, evidence discovered or submitted after the claims decision was made would be irrelevant to that question, hence the narrow scope. However, when the standard of review is de novo, the question before the court changes to whether or not the claimant is entitled to benefits. In other words, it is simply whether or not the claimant is disabled. Consequently, this change in question also alters the realm of admissible evidence.

Recently, the court in Ermovick vs. Mitchell, Silberberg & Knump LLP Long Term Disability Plan, 2010 WL 3956819 (Decided October 8, 2010), addressed the question of whether evidence of procedural deficiencies should be considered in the context of a de novo review. The facts are relatively straight forward. James Ermovick worked as a word processor at the law firm of Mitchell, Silberberg & Knump. His claim for disability benefits was based on depression, anxiety and pain radiating in his back and neck due to myeloradiculopathy. Ermovick claimed to be totally disabled from any occupation while Prudential, the claims administrator, believed his disability to be temporary and therefore denied his benefits claim.

Eventually, the case found its way the U.S. District Court for the Central District of California. There, the court held that the proper standard of review was de novo and sought to address the case on the merits. Ermovick sought to offer evidence of certain procedural deficiencies. Specifically, Ermovick alleged that Prudential failed to conduct any meaningful review of the evidence and arbitrarily denied his claim without a proper review. He further argued that Prudential denied his claim based on a lack of information while at the same time failing to tell him what information was missing. Normally, this type of evidence is highly relevant because it can, if true, show that the claim administrator violated its duty to make a proper and informed claims decision. More importantly, it undermines the arguments and credibility of the claims administrator.

The problem the court faced was that the evidence, although relevant to the issue of Prudential’s credibility, was ultimately irrelevant on the narrow issue of whether Ermovick was disabled. Not to be deterred, Ermovick cited to the 10th Circuit case of Niles v. American Airlines, Inc., 269 Fed. Appx. 827, 833 (10th Cir.2008), which held that “[a] showing that the administrator failed to follow ERISA procedures therefore provides a basis for reversal separate from that provided by de novo review of the merits of the claim.” There, the court in Niles concluded that such procedural deficiencies effectively created an independent basis for reversal of a claims administrator’s decision. However, not every circuit believed this to be the case. For example, the Sixth Circuit took a more hard-line view. In Wilkins v. Baptist Healthcare System, Inc., 150 F.3d 609, 613 (6th Cir.1998), the court found that analysis of procedural deficiencies were not necessary under a de novo review provided that the denial of benefits was correct. If the decision made by the claims administrator was ultimately the right one, then the convoluted manner in which it reached that conclusion was irrelevant.

Since existing case law in the Ninth Circuit did not provide clear guidance, the court in Ermovick came to the conclusion that it should follow the Sixth Circuit rational based on Abatie v. Alta Health & Life Ins. Co., 458 F. 3d 955 (9th Cir. 2006). In Abatie, the Ninth Circuit held that “even in instances of wholesale and flagrant violations of the procedural requirements of ERISA, the Court’s remedy is to accord no deference to the Plan and review the record de novo.” By according no deference, the Ninth Circuit left no room for an independent basis for reversal. The Ermovick court interpreted this holding to mean that to give “no deference” also equates to providing to no weight to procedural deficiencies. There was, of course, one exception to this rule. Where the procedural deficiencies caused the record itself to be incomplete, then the court may supplement the administrative record with additional evidence.

In Ermovick, since neither party asked to supplement the record, the court reasoned that the administrative record was complete. As a result, the court held that evidence of procedural deficiencies was not necessary when the standard of review was de novo. On that basis, the court proceeded to conduct its own independent review of the record which revealed that despite the errors in handling the case, Prudential’s decision to terminate benefits was correct.

Assuming the Ninth Circuit doesn’t reverse this decision on appeal, it seems clear that when the standard of review is de novo, the court will not consider procedural deficiencies in ERISA cases.

The Reasonable Expectations Doctrine Finds a New Ground in the Realm of Title Insurance

The “reasonable expectations of the insured” doctrine continues to weave its way into all types of insurance coverage cases. This time, it thrust itself into a title insurance case. In Karen Lee v. Fidelity National Title Insurance Company,__Cal. App. 4th__ (September 16, 2010), the First Appellate District of the California Court of Appeal found coverage under this doctrine.

Karen and Terry Lee (“Lees”) purchased property in Solano County in 1990. The purchased property was covered by a policy issued by Fidelity National Title Insurance Co. (“Fidelity”). Fidelity’s preliminary report of the purchased property identified two parcel numbers, APN 09 and APN 22. Although Fidelity’s policy did not incorporate parcel APN 09 and APN 22, it did have attached to it a map indicating parcels APN 09 and APN 22. It was not until 2006 when the Lees were selling their property did they discover they only in fact owned one parcel and not the two parcels as they originally thought they had purchased.

The Lees made a claim under the Fidelity policy, but Fidelity denied coverage based upon the description within the policy. Lee sued Fidelity for breach of contract, bad faith, and declatory relief but the trial court granted a summary judgment in favor of Fidelity because the causes of action were time barred. On appeal the Court reversed. The Court found the “legal description was ambiguous. Further ambiguity was created by the attachment of the assessor’s parcel map that, on one hand, was said to be excluded from the policy, but on the other hand had an arrow pointing at APN 22 as a parcel in the policy.” The court of appeal then discussed the reasonable expectation of the insured doctrine as follows:

That reasonable expectation informs interpretation of the policy’s coverage. As our Supreme Court stated in White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 881 (White), “ ’In determining what benefits or duties an insurer owes his insured pursuant to a contract of title insurance, the court may not look to the words of the policy alone, but must also consider the reasonable expectations of the public and the insured as to the type of service which the insurance entity holds itself out as ready to offer. [Citation.] Stated in another fashion, the provisions of the policy must be construed so as to give the insured the protection which he reasonably had a right to expect…. [Italics in original.] [Citation.]’ The White court rejected the insurer’s argument that the plaintiffs in that case could not be deemed to have relied upon the title policies in question when they purchased their lands because the policies “were issued only when the sale was consummated.”

* * *

While an “ordinary reading” of the legal description of the land insured in Havstad precluded any reasonable expectation of coverage in that case, the same cannot be said here. “[T]he words in an insurance policy are to be interpreted according to the plain meaning which a layman, not an attorney or insurance expert, would ordinarily attach to the words’ ”[Citation omitted] and laypersons like plaintiffs would have no way of knowing from the surveyor’s metes and bounds description of the land in their title policy whether APN 22 was covered. In the context of the coverage issue in this case, the legal description was ambiguous. (See Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, [¶] 4:300, p. 4-43 [“an ambiguity may arise where a policy uses terms beyond the working vocabulary of a person of ordinary intelligence”].) Further ambiguity was created by the attachment of the assessor’s parcel map that, on the one hand, was said to be excluded from the policy, but on the other hand had an arrow pointing to APN 22 as a parcel in the policy.

The court found that the Lees had an objectively reasonable expectation of coverage because they purchased both parcels of land in 1990 given the circumstances surrounding the issuance of the title insurance policy. Therefore, the court concluded that Fidelity’s denial of coverage was erroneous.

Governor Schwarzenegger Vetoes AB 1868 That Would Have Banned Discretionary Clauses in Group Insurance Policies

Today Governor Schwarzenegger vetoed AB 1868 that would have banned discretionary clauses in group insurance policies. This is a disappointment to consumer groups but not to insurers who rely on them. Currently, the Department of Insurance bans them in group policies anyway. Here are the Governor’s comments on why it was vetoed:

To the Members of the California State Assembly:

I am returning Assembly Bill 1868 without my signature.

This bill would prohibit the Insurance Commissioner from approving any disability or

life insurance policy if it includes a provision that would reserve discretionary authority

to the insurer to determine eligibility for benefits, and voids certain provisions of a policy

or agreement if it provides or funds life insurance or disability insurance coverage.

This bill is unnecessary, as the Insurance Commissioner already has the authority to

prohibit the use of discretionary clauses.

For this reason I cannot sign this bill.

Sincerely,

Arnold Schwarzenegger

Certain Health Insurance Reforms Go Into Effect as of September 23

On September 23, 2010, the Patient Protection and Affordable Care Act, part of the recently enacted health care reform law, went into effect for insurance plans that begin on or after this date. Health care reforms beginning Sept. 23, 2010 include:

No pre-existing condition exclusions for children under age 19: requires insurers to cover children of insured patients. “Grandfathered health plans” established before March 23, 2010, may continue their existing policy until 2014, at which time all health insurance discrimination based on pre-existing conditions are prohibited.
No arbitrary rescissions of health insurance: insurers cannot rescind policies except in cases of patient fraud or intentional misrepresentation. All health insurers are subject to this new rule.
No lifetime limits on health insurance coverage: The new provision prohibits lifetime limits on any plan issued or renewed after Sept. 23.
No annual limits on coverage: Similarly, annual limits will be gradually phased out. Initially, health insurance plans will not be able to set annual limits lower than $750,000 per year. That minimum limit rises to $1,250,000 next year on Sept. 23, 2011, and $2,000,000 the following year. Beginning Jan 1, 2014, annual limits will be prohibited for most health plans.
Protecting choice of health care provider: Patients will have the option to select and keep a primary care doctor from among the insurance company’s participating provider network.
Adult children covered to age 26. Children will have extended access to health insurance coverage under their parents’ health insurance plan until age 26, unless they qualify for health insurance through their employer.

Other reforms gradually become effective until 2014 when all provisions of the new health care act go into effect. Last week, Insurance Commissioner Poizner shared useful tips and information with consumers about the impact of the Patient Protection and Affordable Care Act provisions. Here it is:

Commissioner Poizner Offers Tips to Consumers About the Impact
of Federal Health Care Provisions Going Into Effect Today

Insurance Commissioner Poizner today shared useful tips and information with consumers about the impact of the most recent Patient Protection and Affordable Care Act (PPACA) provisions which go into effect today.

“There are many new provisions of the federally-passed health care reform bill, and they can be difficult to interpret,” said Commissioner Poizner. “Here are some tips and guidelines to help consumers understand how this federal legislation will directly impact them. And if anyone has a question about their health insurance, they can call our Consumer Hotline at 800-927-HELP.”

Commissioner Poizner offered the following tips to California consumers:

Coverage Changes

Annual and Lifetime Limits – At the new plan year, plans may not contain lifetime limits on essential benefits. This provision applies to all plans. Annual limits will be phased out through 2014 for most plans. Check with your insurance company to see if this applies to your policy before you renew.

Rescissions – Rescission is when an insurance company retroactively cancels your policy. The PPACA bans rescissions except in cases of fraud or intentional misrepresentation of material fact. You must be notified prior to the cancellation. This provision applies to all types of health insurance plans.

Preventive Health Services – A wide range of preventive care including immunizations, well baby and child screenings, and well women exams must be covered without cost-sharing. For an exact list of what preventive services are available without cost-sharing, contact your insurance company.

Adult Dependent Coverage – Plans that cover dependent children must extend coverage until the child’s 26th birthday. This applies to all types of plans, however before 2014, group health plans will be required to cover adult children only if the adult child is not eligible for employer-sponsored coverage. Adult children cannot be charged more than any other dependent.

Preexisting Condition Exclusions – Beginning Sept. 23, 2010, children under 19 years of age cannot be denied coverage or benefits based on medical status or past illnesses. This applies to most plans including individual plans.

Consumer Protection Changes

Primary Care/Preapproval -Plans must:

Allow you the choice of any primary care provider available (if you are required to designate a primary care physician).

Provide covered emergency services without prior approval, regardless of whether the provider is in-network.

Limit cost-sharing on emergency services by nonparticipating providers to the same amount as that of a participating provider.

Allow female patients to receive obstetric or gynecological care from a participating provider and treat their authorizations the same as that of a primary care provider.

Allow children to receive care from a participating pediatrician and treat their authorizations the same as that of a primary care provider.

Effective Date

The changes beginning Sept. 23 include expanded coverage and new consumer protections. If they are not spelled out in the documentation you receive from your insurance provider or employer, talk with your employer’s plan administrator or your health insurance company about how these protections will apply to your coverage and what new options you may have.

If you have health insurance coverage through an employer, these new benefits and protections will be added to your policy at the next policy renewal after Sept. 23.

If you purchased an individual health insurance policy on your own, the effective date is a bit more complicated. If your insurer has specified a “policy year” for your coverage, the new provisions will become effective on that date. Otherwise, the new benefits and protections will be added on the date when annual deductibles and annual limits reset each year. If your policy does not have an annual deductible or annual limit, these changes will become effective on Jan. 1, 2011. If you have questions about when these provisions will become effective for your policy, contact your insurance company.

You can also find more information about the PPACA and how it will affect you today and in the future on the National Association of Insurance Commissioners website by going to the special health reform section at the NAIC website. Here you’ll find the latest information on the PPACA implementation; an FAQ for consumers, employers and seniors on the health care reform; timelines for implementation and much more.

Disability Policy Discretionary Clauses Come Under Congressional Attack

Policyholder/Employee groups who have group disability insurance coverage through their employers and who find themselves operating in the byzantine world of ERISA have long criticized discretionary clauses contained in such ERISA policies. These often have the effect of giving insurance companies firmer ground to support claim denials because the “abuse of discretion” standard of review typically applies. This higher standard of review makes it more difficult for policyholders/employees to challenge disability claim denials.

California Governor Arnold Schwarzenegger has the opportunity to sign California Assembly Bill 1868 (“AB 1868”) and to prohibit these discretionary clauses. In the recent case of Standard Insurance Company v. Morrison, the Ninth Circuit Court of Appeals ruled that the California Insurance Commissioner has the authority to disapprove any disability insurance policies that contain discretionary clauses.

Arthur Postal of National Underwriter writes about such clauses in an article entitled “Disability Policy Discretionary Clauses Come Under Fire.” Here is a reprint of it:

WASHINGTON BUREAU — The long-term disability insurance (LTD) industry took a licking today during a Senate Finance Committee hearing.

Senate Finance Committee Chairman Max Baucus, D-Mont., said LTD insurers have doctors with conflicts of interest review claims.

“Many of these doctors are employed either by the insurance company or by companies that do a lot of business with the insurance company,” Baucus said. “These arrangements make it far too easy for the doctors to deny claims, terminate claims, or reject appeals.”

Ronald Leebove, a rehabilitation counselor who appeared for the American Board of Forensic Counselors, Springfield, Mo., said private group LTD policies fail to provide the protection insurers promise.

“There are many tricks and tactics used by the insurance companies to deny claims,” Leebove said.

Several witnesses talked about employers’ and insurers’ use of Employee Retirement Income Security Act (ERISA) provisions to give plan administrators’ discretion over LTD benefits decisions, and to ward off challenges of benefits determinations.

Mark DeBofsky, a partner at Daley, DeBofsky & Bryant, Chicago, a law firm, said the courts have gone against legislative intent and transformed ERISA into “a shield that protects insurance companies from having to face the consequences of unprincipled benefit denials and other breaches of fiduciary duty.”

In most cases involving LTD claim disputes, there is not even a trial, DeBofsky said.

“Instead,” DeBofsky said, “courts conduct reviews of claim records assembled and shaped by self-serving insurance companies without hearing any testimony whatsoever, under a procedure that gives more deference to the insurance company than a court would give a Social Security administrative law judge in its review of a Social Security disability benefit claim denial.”

Judge William Acker Jr., a senior district court judge in northern Alabama, testified that the “courts have not rescued ERISA” in its handling of long-term disability cases. “If anything, they have dug the ERISA hole deeper,” Acker said. “ERISA jurisprudence will stay as messed up as it is unless Congress reworks it.”

Paul Graham, a senior vice president at the American Council of Life Insurers (ACLI), Washington, defended disability insurers.

Disability insurance can be susceptible to fraud and abuse, and many states have passed regulations that require short-term disability (STD) insurance and long-term disability disability insurance companies to report instances of suspected fraud, Graham said.

“While fulfilling their contractual and regulatory responsibilities, insurers need to remain attentive to potentially fraudulent claims,” Graham said.

Therefore, he said, an eligibility determination, whether made by the insurance carrier or other fiduciary, is only valid for the information at that point in time and must be periodically re-evaluated to account for changes in the claimant’s condition.

Graham said a 2008 industry study that included a majority of group disability carriers found that 79% of submitted claims were approved.

Of those claims not approved, over 25% were not paid because the claimant recovered too quickly to collect benefits, Graham testified.

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