Firm News Archives - Page 9 of 76

If You Must Miss Work Two Days a Month Due to a Disabling Condition, Are You Precluded from Working in Any Occupation Under a LTD Policy?

Facing a long-term disability (“LTD”) claim, ERISA plan participants under LTD policies can count on the fact that insurance companies will search for ways to escape payment of the monthly LTD benefits they promised their insureds. These insurers often point out that insureds continue to work in their occupation between their initial diagnosis and the claim date, or that an insured’s job is sedentary and thus he or she is not precluded from performing light physical activities, or that an insured’s disabling condition is episodic and the symptoms do not render the insureds continuously disabled. Most disability claimants have days where symptoms are better than others and therefore they cannot work continuously in any given month, missing several days of work during the month. Most LTD policies contain a provision that after a certain amount of time (typically 24 months), the definition of “disabled” changes to an “any occupation” standard (e.g., must be unable to work in any occupation for which the insured is capable of performing given the insured’s education, training and experience). Insurers routinely deny LTD claims under the “any occupation” standard even when insureds cannot work with reasonable continuity during any given month. If an insured must miss work two or three times per month because of a medical condition, does the insured qualify for LTD benefits under the “any occupation” standard? As discussed below, the answer is “yes.”

This distinction was discussed in Delaney v. Prudential Insurance. Co. of America, 68 F.Supp.3d 1214 (D. Or. 2014) (“Delaney”). In Delaney, the District Court ruled that regular attendance at a job is requirement of virtually all jobs, and that being absent for at least two days of work precludes employment in any occupation. The plaintiff, Patricia Delaney, was an employee of Jeld-Wen Holding, Inc., and a participant in an employee benefits plan administered by Prudential Insurance Company of America (“Prudential”). Ms. Delaney worked as an escrow officer, involved in complex and sensitive real estate transactions on behalf of her employer.

In 2010, Ms. Delaney was diagnosed with Meniere’s disease in her left ear. Meniere’s disease creates problems in the inner ear that leads to bouts of dizziness, vertigo, nausea, vomiting and hearing problems. The affliction manifests itself in sudden attacks, of which Ms. Delaney had began to suffer. In the aftermath of the attacks, she was left exhausted, requiring tranquilizers to sleep for 4-6 hours before feeling better. The attacks themselves last for about an hour, and occur randomly.

After attempting to work around her attacks for almost two years, Ms. Delaney stopped working on March 12, 2012, as her attacks had become more frequent and debilitating. She reported 19 episodes in the month prior to her last day at work. With the problem diagnosed at “progressive and intractable” by her physician, she underwent surgery designed to stabilize her condition. Although she initially experienced some improvement, the episodes continued, leaving her, in her own words “pretty much house bound”; afraid to drive by herself, and suffering from unpredictable attacks with a distressing frequency. Id. at 1224.

Under the Plan with Prudential, a participant is considered “disabled” if she is “unable to perform the material and substantial duties of [her] regular occupation due to [her] sickness or injury. . . .” After 24 months of disability, a participant is “disabled” if “due to the same sickness or injury, [she is] unable to perform the duties of any gainful occupation for which [she is] reasonably fitted by education, training, or experience….” Id. at 1219.

In May of 2012, with no end to the attacks she was having in sight, Ms. Delaney applied for LTD benefits under her employer’s Plan with Prudential. After a denial of her claim for benefits, Ms. Delaney appealed Prudential’s decision twice, and sent updated medical records and witness statements attesting to the severity and frequency of her Meniere’s disease symptoms. Prudential denied both appeals, necessitating a lawsuit pursuant to the Employee Retirement Income Security Act of 1974 (“ERISA”) for the denial of her LTD benefit claim.

Reviewing the evidence on the record, the court found that the only reasonable conclusion was that Ms. Delaney was an unfortunate sufferer of Meniere’s disease’s persistent and intense symptoms. The court noted that Prudential steadfastly focused on the fact that Ms. Delaney’s job was not physically strenuous and that her symptoms affected her episodically, rather than continuously. The court found that Prudential applied the wrong standard under her Plan, as Ms. Delaney’s job required 40 hours of work per week and regular attendance. Since Ms. Delaney had already begun to exhaust her sick leave, this was a factor in the court’s finding that she was unable to perform her job duties despite her symptoms.

The court stated:

Regular job attendance is a requirement of virtually all jobs, and certainly a requirement of those jobs which would provide the requisite income to disentitle Delaney to LTD benefits under the Plan if she could otherwise perform them. In the social security context, legions of cases rest in whole or in part on vocational expert testimony that missing two or more days of work per month renders a claimant unemployable. See, e.g., Ghanim v. Colvin, 763 F.3d 1154, 1159 (9th Cir. 2014) (missing two or more days per month would preclude work as a kitchen helper or commercial cleaner); Brewes v. Comm’r of Social Sec. Admin., 682 F.3d 1157, 1163 (9th Cir. 2012) (missing two or more days per month would make claimant unemployable as a photocopying machine operator, laundry worker, or janitor); Yurt v. Colvin, 758 F.3d 850, 855 (7th Cir.2014) (vocational expert testimony that “in competitive employment workers were expected to be on task 80 to 85 percent of the time and could not miss more than one or two days per month and up to approximately ten per year”); Garcia v. Colvin, 741 F.3d 758, 760 (7th Cir. 2013) (vocational expert testimony that “a worker who misses work more than one day a month (beyond sick days, vacation days, and other authorized leave) would ‘have difficulty sustaining competitive employment’ ”); Douglas v. Bowen, 836 F.2d 392, 396 (8th Cir. 1987) (vocational expert testimony that if the claimant “had more than two absences a month due to his impairments, he could not find work in the national economy”). Id. at 1229-1230.

Accordingly, the court held that the record conclusively established that Ms. Delaney would miss more than two days of work per month due to the severe attacks she regularly and unpredictably suffered. Importantly, the court also addressed the debilitating fatigue that accompanied her attacks: “Even assuming that Delaney could perform her job as an escrow officer in the days after such an attack, the episodes and their immediate aftermath are sufficiently severe and occur with sufficient regularity that she would be absent from work at least to days per month, which in and of itself precludes employment.” Id. at 1231 (emphasis added). The court also found that Ms. Delaney was unable, after the first 24 months of disability benefit payments, to perform the duties of any gainful occupation for which she was reasonably fitted and awarded her LTD benefits under both the “regular occupation” and the “any gainful occupation” provisions of Prudential’s policy. Id.

Conclusion

All too often we see cases where an insurer denies LTD benefits based on the reasoning that episodic disabling conditions do not preclude sedentary work. However, as any employee knows, regular, consistent job performance and attendance is a necessary requirement for all employment. Delaney stands for the reasoning that when a disability claimant suffers from disease or illness and is incapacitated on at least two days a month, but is non-episodic on others, a claimant is still entitled to LTD benefits.

Court Rules That an Insurer Failed to Use Proper “Reasonable Continuity” Standard in Evaluating a Preexisting Condition that Disabled the Claimant

Under many long-term disability insurance policies, the insured is considered disabled if he or she is unable to perform “with reasonable continuity” the important tasks, functions, and operations of his or her occupation for a specified period of time. If a plaintiff seeks long-term disability benefits based on a claim that the insured was disabled as a result of a condition that existed before the insured stopped working, must the plaintiff demonstrate a change in the insured’s circumstances, such as a significant worsening of the preexisting condition? In Lyttle v. United of Omaha Insurance Co., No. 17-cv-01361-WHO, 2018 WL 4519949 (N.D. Cal. Sept. 19, 2018) (“Lyttle”), the court held that the plaintiff, who was the insured’s surviving spouse, did not have to demonstrate a change in the insured’s circumstances; she only needed to demonstrate that, because of the insured’s condition, he could no longer continue in his occupation. The court also held that, based on the evidence in the administrative record, the insurer, United of Omaha Insurance Co. (“United”), had incorrectly denied long-term disability benefits.

The plaintiff’s late husband, Matthew Lyttle (“Lyttle”), had been a Vice-President of Chemistry, with job duties that included lifting and walking. In 2011, Lyttle was diagnosed with liver cancer. And, in 2014, it was confirmed that the cancer had spread outside his liver.

In 2014, one of the medications prescribed for Lyttle had an unfortunate side effect known as hand-foot syndrome. Lyttle’s hand-foot syndrome caused him to have persistent pain in his feet and blisters caused by walking around at work. Lyttle tried to manage the pain by taking Norco, an opioid pain medication, but that medication impaired his ability to perform the rigorous intellectual tasks his job required.

In 2015, Lyttle was absent from work 17% of the time. And, in an e-mail dated December 28, 2015, Lyttle told his doctor that “he would like to take disability starting in 2016 because his condition had not changed and he had persistent pain in his feet and blisters caused by walking around at work.” Id. at *3. Lyttle’s doctor placed him off work from January 5, 2016 through June 5, 2016.

Under the United long-term disability policy, Lyttle was considered totally disabled if he was “unable to perform with reasonable continuity the Substantial and Material Acts necessary to pursue [his] Usual Occupation.” Id. at *6. The policy also provided that Lyttle would receive benefits after an “Elimination Period” of 90 days of disability. Id. at *6.

In March 2016, Lyttle filed a claim for long-term disability benefits. United denied Lyttle’s claim, and Lyttle appealed. After United denied Lyttle’s appeal, his widow filed a lawsuit seeking review of United’s denial of benefits.

Before the court, United pointed out that there was “no evidence . . . that Lyttle’s hand-foot syndrome became significantly worse or that that there was a sudden impairment in his intellectual functioning that necessitated his going on disability as of January 2016.” Id. at *8. And United argued that, “[a]bsent a change in circumstances, such as a significant worsening of his conditions, . . . its determination that Lyttle was not totally disabled during the Elimination Period and after must be upheld.” Id.

The court disagreed with United. It stated that the determinative question was whether, during and after the Elimination Period, Lyttle could “perform his job with ‘reasonable continuity.’” Id. at *9.

The plaintiff argued “that Lyttle was essentially barely performing his job and could not continue his actual occupation with ‘reasonable continuity’ given the record and the subjective evidence from Lyttle that his pain conditions had become worse during 2015, that his employer could not provide further accommodations for him, and that he used extensive vacation and sick leave in 2015.” Id. at *10.

In its ruling on cross-motions for summary judgment, the court noted the following language from Hawkins v. First Union Corp. Long-Term Disability Plan, 326 F.3d 914, 918 (7th Cir. 2003):

A desperate person might force himself to work despite an illness that everyone agreed was totally disabling . . . . Yet even a desperate person might not be able to maintain the necessary level of effort indefinitely. Hawkins may have forced himself to continue in his job for years despite severe pain and fatigue and finally have found it too much and given it up even though his condition had not worsened. A disabled person should not be punished for heroic efforts to work by being held to have forfeited his entitlement to disability benefits should he stop working.

The court determined that United had not asked its reviewers and examiners the proper question, which was “whether as of the end of December 2015 Lyttle was able to continue in his high-demands job with ‘reasonable continuity.’” Lyttle at *11. The court also noted that United had failed to: (a) analyze the significant subjective evidence of Lyttle’s pain and cognitive impairments; and (b) “consider that Lyttle was only able to continue in his job for as long as he did with the pain level he had through using leave time and, in the end, was not able to continue given his chronic, ongoing pain despite the lack of evidence of a ‘significant change’ in [Lyttle’s] condition.” Id.

Conclusion

Too many courts forget to apply the “reasonable continuity” standard when addressing whether an ERISA plan participant can collect his or her disability insurance benefits. This Court did so correctly, explaining that after working for a while despite suffering from a chronic condition, an insured who is ultimately unable to continue performing his or her job with “reasonable continuity” is entitled to disability benefits, even if his or her chronic condition does not significantly worsen.

Breach of Fiduciary Duty under ERISA: Making the Insurer or Plan Administrator Responsible for their actions towards a Plan’s Participants and Beneficiaries

In a previous blog, we addressed the doctrines of equitable estoppel and waiver when the Employee Retirement Income Security Act of 1974 (“ERISA”) governs their insurance or pension plan. As we explained, both doctrines provide an insured with methods of forcing an insurance company to honor its word and previous conduct. However, insureds often have difficulty invoking the doctrines. ERISA governs a wide variety of plans that provide life insurance, disability insurance, accidental death and dismemberment insurance and pension benefits. Given the challenges of invoking equitable estoppel and waiver in the ERISA context, do plan participants and their beneficiaries have other ERISA specific tools to force insurers to honor their word and previous conduct? Luckily, they do. A lawsuit for breach of fiduciary duty can sometimes achieve nearly identical results as waiver and equitable estoppel, but with less difficulty.

ERISA provides for various equitable remedies, including surcharge. See CIGNA Corp. v. Amara, 563 U.S. 421, 441 (2011). Section 502(a)(3) of ERISA authorizes plan participants and beneficiaries to seek equitable relief for ERISA violations. The Supreme Court examined this provision in Amara, supra. The Amara court’s interpretation of Section 502(a)(3) provides courts with broad powers to help insureds with problematic plan and claims administrators (normally employers and insurers).

In Amara, several CIGNA employees sued CIGNA for altering the CIGNA Pension Plan. Before the alteration, the pension plan had provided employees with a calculated annuity based on preretirement salary and length of service. The new pension plan provided a lump sum cash balance based on a defined annual contribution from CIGNA. The employees claimed that the new plan provided them with less generous benefits. They also asserted that CIGNA had not given them proper notice of the changes.

CIGNA first notified the employees of the change to the pension plan in a November 1997 newsletter. In the newsletter, CIGNA explained that the new plan would be an account balance system. The newsletter stated that CIGNA would explain the new plan at some undetermined date in 1998, but that the new plan would take effect on January 1, 1998. To employees who were already entitled to pension benefits, the new plan gave the employees a lump sum value for their years of service, discounted to its present value.

The employees sued CIGNA. The district court determined that the initial descriptions of the new plan misled CIGNA’s employees and was incomplete. The November 1997 statement claimed that the new plan would “significantly enhance” the retirement benefits program and would improve retirement benefits. The plan was to provide the “same benefit security” but with “steadier benefit growth.” Id. at 428. CIGNA also claimed that it would not benefit from any savings by implementing the new plan. The district court found all of these statements to be false and violations of provisions of ERISA that require a plan administrator to provide accurate and comprehensive statements such that the average plan participant understands their rights under a plan.

The district court held that ERISA Section 502(a)(1)(B) provided it with the legal authority to reform the plan for the benefit of the employees. Section 502(a)(1)(B) provides that a plan participant can bring an action to recover benefits due under an ERISA plan. The district court modified various portions of CIGNA’s new pension plan to provide the employees with the benefits to which it held they were entitled.

The court considered relying upon ERISA Section 502(a)(3) for its authority to modify the pension plan, but concluded that, under then Supreme Court precedent, Section 502(a)(3) did not provide the necessary authority. Section 502(a)(3) explains that a claim may be brought:

by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.

CIGNA appealed the district court’s ruling. The Second Circuit affirmed the ruling in a summary opinion. CIGNA petitioned the Supreme Court, and the Supreme Court agreed to hear the petition.

The Supreme Court first analyzed Section 502(a)(1)(B). It determined that, in fact, Section 502(a)(1)(B) did not provide a district court with the authority to alter a plan. However, the Supreme Court determined that section 502(a)(3) provided the necessary authority. The Supreme Court explained that, “appropriate equitable relief” means the traditional equitable powers of a court. Courts’ traditional equitable powers included special remedies against trust fiduciaries who fail to properly administer a trust. ERISA plans are treated as trusts. As such, the current matter before the Supreme Court was one that traditionally involved an equitable suit against a trust’s administrator. A court’s equitable powers include such remedies as injunctions, reformation of contracts, equitable estoppel and equitable surcharge. Surcharge is the “power to provide relief in the form of monetary ‘compensation’ for a loss resulting from a trustee’s breach of duty, or to prevent the trustee’s unjust enrichment.” Id. at 441. The Supreme Court concluded that section 502(a)(3) provided the necessary authority for the district court’s actions. See id. at 441-42.

The Supreme Court then addressed what standard would apply to a district court’s invocation of its equitable powers. ERISA does not provide a standard. The Supreme Court noted that only certain remedies traditionally required detrimental reliance, the reliance on a party’s assertions to the suing party’s detriment. For example, detrimental reliance is an element of equitable estoppel, but not the reformation of a contract or surcharge.

The Supreme Court determined that to establish surcharge, a party need establish, by a preponderance of the evidence, that the plan beneficiary suffered actual harm due to a fiduciary’s breach of their duties. The Supreme Court remanded the matter for further proceedings.

As we previously noted, insureds have difficulty invoking the doctrines of equitable estoppel and waiver. However, that does not mean that insureds lack recourse against an insurer’s misconduct. An insurer’s actions may constitute a breach of fiduciary duty. If so, the insured may have a much simpler time establishing the insurer’s impropriety in court via a breach of fiduciary duty claim.

Los Angeles Daily Journal Publishes Article by Robert J. McKennon Entitled “Court says insurer can’t dodge coverage through ‘technical escape hatch’”

On October 26, 2018, the Los Angeles Daily Journal published an article written by Robert J. McKennon of the McKennon Law Group PC. The article examines a recent case by the California Court of Appeal, which held that the notice-prejudice rule precluded the denial of life insurance benefits based upon the insured’s failure to give timely notice of disability as required under a disability premium waiver provision in the life insurance policy. Insurers often attempt to argue that a technical violation of the notice requirements voids their claim where there exists no prejudice to them. This recent opinion helps to reinforce the notice-prejudice rule in California and helps to protect insureds. For a full view of the article, read here.

Los Angeles Daily Journal Publishes Article on October 26, 2018 by Robert McKennon Entitled “Court says insurer can’t dodge coverage through ‘technical escape hatch’”

In the October 26, 2018 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group’s Robert J. McKennon. The article addresses a recent case by the California Court of Appeal, which held that the notice-prejudice rule precluded the denial of life insurance benefits based upon the insured’s failure to give timely notice of disability as required under a disability premium waiver provision in the life insurance policy. Insurers often attempt to argue that a technical violation of the notice requirements voids their claim where there exists no prejudice to them. This recent opinion helps to reinforce the notice-prejudice rule in California and helps to protect insureds.

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

Court says insurer can’t dodge coverage through ‘technical escape hatch’

A recent Court of Appeal opinion said the notice-prejudice rule precluded the denial of life insurance benefits based upon the insured’s failure to give timely notice of disability as required under a disability premium waiver provision in the life insurance policy.

By Robert J. McKennon

Most first-party insurance policies, including life insurance, disability insurance, property insurance and liability insurance policies, require that an insured policyholder provide notice of a claim within a specified period of time, typically, “as soon as practicable,” “during the Elimination Period” or a similar formulation. See e.g. Ins. Code Section 10350.7 (requirement in disability policies). With respect to liability insurance policies, notice of a claim is required in both claims-made and occurrence policies. Notice generally must be given within a “reasonable time” or within a specified period. Insurance policies often specify that timely reporting of claims is a condition precedent to coverage.

In the case of claims-made policies, the requirement is considered a fundamental element of the insurance contract, and it typically is included in the policy’s insuring agreement. Failure to provide timely notice — especially failure to provide notice within the policy period or grace period of a claims-made policy — can result in a loss of coverage regardless of whether the insurer is prejudiced by the delay in giving notice.

This rule is different in occurrence policies and life and disability insurance policies. But even where a policy specifies that timely notice is a condition precedent to coverage, a policyholder-friendly rule known as the “notice-prejudice rule” has been adopted by the California courts. The rule provides that unless an insurer can demonstrate actual, substantial prejudice from late notice of a claim, the insured’s failure to provide timely notice will not defeat coverage. See, e.g., Northwestern Title Security Co. v. Flack, 6 Cal. App. 3d 134, 141-43 (1970); Scottsdale Insurance Co. v. Essex Insurance Co., 98 Cal. App. 4th 86, 97 (2002); Root v. American Equity Specialty Insurance Co., 130 Cal. App. 4th 926, 936 (2005).

In both first- and third-party cases, in the absence of prejudice from the delay, an insurer generally may not refuse a claim solely because of delayed notice from the insured: “(T)hough an insurer may assert a defense based upon an alleged breach of the notice requirements of the policy, the breach cannot be a valid defense unless the insurer was substantially prejudiced thereby.” See Downey Saving & Loan Ass’n v. Ohio Casualty. Insurance Co., 189 Cal. App. 3d 1072, 1089 (1987) (emphasis added).

Further, the burden is on the insurer to prove actual and substantial prejudice: “An insured’s failure to comply with the notice or claims provisions in an insurance policy will not excuse the insurer’s obligations under the policy unless the insurer proves it was substantially prejudiced by the late notice …. Prejudice is not presumed from delayed notice alone …. The insurer must show actual prejudice, not the mere possibility of prejudice.” See Safeco Insurance Co. of America v. Parks, 170 Cal. App. 4th 992, 1003-1004 (2009) (internal quotes and citations omitted).

In Lat v. Farmers New World Life Ins. Co., 2018 DJDAR 10235 (Oct. 18, 2018), the California Court of Appeal held that the notice-prejudice rule precluded the denial of life insurance benefits based upon the insured’s failure to give timely notice of disability as required under a disability premium waiver provision in the life insurance policy.

In December 1993, Maria Carada purchased an “occurrence” flexible premium universal life insurance policy from Farmers. The policy contained a “Waiver of Deduction Rider” under which Farmers agreed “waive the monthly deductions due after the start of and during [Carada’s] continued total disability,” if she provided Farmers with timely written notice and proof of her disability. The rider provided that Farmers needed to receive written notice of disability during the period of disability “unless it can be shown that notice was given as soon as reasonably possible.” The rider “will end when,” among other events, “the policy ends.”

In August 2012, Carada was diagnosed with cancer and became disabled. Carada did not pay the premiums due under the policy while she was disabled. On July 23, 2013, Farmers informed her that the policy had lapsed due to her failure to pay premiums. In August 2013, Carada contacted the insurance agent who had sold her the policy and advised the agent of her illness and disability and asked if the policy could be reinstated. The agent informed a Farmers representative that Carada was dying of cancer and asked if the policy could be reinstated. The representative told the agent that the policy had lapsed and could not be reinstated. The agent relayed this information to Carada. Carada died on Sept. 23, 2013.

Thereafter, the beneficiaries under the policy contacted Farmers to file a claim for the policy’s death benefits. Farmers told the beneficiaries they were not entitled to receive death benefits due to the lapse of the policy. The beneficiaries then sued Farmers alleging causes of action against Farmers for breach of contract, breach of the implied covenant of good faith and fair dealing, and vicarious liability for the alleged negligence of its agent.

Farmers moved for summary judgment, claiming that once the policy lapsed, the rider ended and could not be invoked by the policy’s beneficiaries. The trial court granted Farmers’ motion for summary judgment, and the beneficiaries appealed the ruling. The Court of Appeal reversed, holding that Farmers was not entitled to judgment as a matter of law and the trial court erred in granting the motion for summary judgment. The court found Farmers’ argument, that a lapse of the policy terminated the rider and termination of the rider precluded the beneficiaries’ claim, to be circular. The court determined that under application of the notice-prejudice rule, Farmers must prove that it suffered actual prejudice from the delayed notice of Carada’s disability, and Farmers failed to assert or prove it was prejudiced by the delayed notice. The court explained that if “Farmers had provided that benefit, Carada’s policy would have been in force at the time of her death. Indeed, the only reason Farmers terminated Carada’s policy was that it applied the deductions it had promised Carada it would waive.”

The court rejected Farmer’s analogy to claims-made policies, which are not subject to the notice-prejudice rule, stating that the insured’s policy “is an occurrence policy as to coverage for her disability as well as coverage for her death. Applying the notice-prejudice rule in this instance would not, therefore, transform a claims made and reported policy into an occurrence policy or … effectively rewrite the contract between the parties.” The court concluded that applying the rule would serve the purpose of preventing an insurance company from shielding itself from its contractual obligations through “a technical escape hatch.”

It is always best to provide notice of a claim or relevant event to an insurance company as soon as possible. However, it is not always possible for insureds to provide timely notice. The notice-prejudice rule allows insureds to fairly access their often much needed policy benefits in the face of insurer arguments that a technical violation of the notice requirements voids their claim where there exists no prejudice to them. The Lat case is thus a welcome addition to the notice-prejudice rule jurisprudence in California.

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 mslawllp.com.

Waiver and Estoppel in the Ninth Circuit Post Salyers v. Metropolitan Life Ins. Co.

Waiver and equitable estoppel serve as some of the legal systems’ fundamental checks on the fairness of a party’s actions. Both doctrines serve to prevent an individuals and insurers from performing actions contradictory to what they have previously guaranteed or established via their conduct. “A waiver occurs when a party intentionally relinquishes a right or when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” Salyers v. Metro. Life Ins. Co., 871 F.3d 934, 938 (9th Cir. 2017) (internal quotations omitted). Equitable estoppel “holds the [individual] to what it had promised and operates to place the person entitled to its benefit in the same position he would have been in had the representations been true.” Gabriel v. Alaska Elec. Pension Fund, 773 F.3d 945, 955 (9th Cir. 2014) (internal quotations omitted). Often times, an insurer makes a declaration to an insured only for the insurer to then change its position to the insured’s detriment. This occurs in a variety of contexts such as life insurance, accidental death or dismemberment insurance and disability insurance. In Salyers v. Metro. Life Ins. Co., 871 F.3d 934 (9th Cir. 2017), the Ninth Circuit Court of Appeals addressed waiver in the context of the Employee Retirement Income Security Act of 1974 (“ERISA”) and it has become one of the most important cases dealing with waiver and estoppel issues in ERISA employee benefit area.

In Salyers, the Ninth Circuit found an insurer liable for a $250,000 life insurance policy, despite the insured’s failure to provide evidence of insurability to the insurer, as required by the policy. Susan Salyers worked as a nurse at Providence Health & Services. Providence provided life insurance to its employees through a plan sponsored by MetLife. The insurance was governed by ERISA. MetLife’s Summary Plan Description provided that, for a dependent to be eligible for life insurance coverage, the dependent must submit evidence of insurability in the form of a “Statement of Health” for elected coverage over $50,000. In 2013, Ms. Salyers elected a total of $40,000 in coverage, $20,000 for herself and $20,000 for her dependent. As the result of an administrative error, Providence’s internal records showed Ms. Salyers and her dependent as having coverage of $500,000. Neither Metlife nor Providence corrected the error or requested a statement of health. Providence deducted premiums for $500,000 in coverage. In the 2014 open enrollment period, Ms. Salyers elected $250,000 in coverage for her dependent, and, again, neither Providence nor MetLife requested a Statement of Health.

Ms. Salyers’ dependent passed away. MetLife processed the claim but issued only $30,000 in death benefits. It asserted that Ms. Salyers never submitted a “Statement of Health” and, therefore, Ms. Salyers could only receive the lesser amount. On administrative appeal, MetLife continued to deny coverage asserting that “its receipt of premiums did not create coverage” under the plan. Id. at 937.

Ms. Salyers filed suit arguing that MetLife was estopped from contesting coverage and, in the alternative, had waived the evidence of insurability requirement. The district court found in favor of MetLife, determining that Ms. Salyers had failed to meet the burden of establishing coverage via evidence of insurability. Ms. Salyers appealed and the Ninth Circuit reversed based on MetLife’s waiver through acceptance of premium payments by Providence, acting as MetLife’s agent in “collecting, tracking and identifying inconsistencies with the evidence of insurability requirement.” Id. at 941. The Ninth Circuit explained that “Courts have applied the waiver doctrine in ERISA cases when an insurer accepted premium payments with knowledge that the insured did not meet certain requirements of the insurance policy.” Id. at 939. MetLife was liable because of Providence’s apparent and implied authority to collect evidence of insurability on MetLife’s behalf. Because Providence failed to properly collect evidence of insurability for Ms. Salyers’ dependent, MetLife waived the right to enforce the Statement of Health requirement. Id. at 938-41. In footnote 5, the Salyers court noted that:

Generally, “[t]he doctrine of waiver looks to the act, or the consequences of the act, of one side only, in contrast to the doctrine of estoppel, which is applicable where the conduct of one side has induced the other to take such a position that it would be injured if the first should be permitted to repudiate its acts.” Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d 1551, 1559 (9th Cir. 1991)(internal citations and quotation marks omitted). We are mindful, however, of our previous statement that “in the insurance context, the distinction between waiver and estoppel has been blurred . . . . [I]t is consistent with ERISA to require an element of detrimental reliance or some misconduct on the part of the insurance plan before finding that it has affirmatively waived a limitation defense.” Gordon v. Deloitte & Touche, LLP Grp. Long Term Disability Plan, 749 F.3d 746, 752-53 (9th Cir. 2014)(internal citations and quotation marks omitted). Assuming, without deciding, that our holding inGordonapplies beyond the waiver of a statute of limitations defense at issue in that case, the record reflects that Salyers detrimentally relied on Providence and MetLife’s conduct, presumably by not buying other insurance. In a letter to Salyers, MetLife admits that “it appears that Ms. Salyers detrimentally relied on having Dependent Life Insurance great[er] than $30,000.”

Id. at 941, n.5.

Since Salyers, district courts do not appear to have placed much emphasis on footnote 5. For example, in Cohorst v. Anthem Health Plans of Kentucky, Inc., 2017 WL 6343592 (C.D. Cal. Dec. 12, 2017), a case which cited to Salyers, Aubrey Cohorst brought an action under ERISA against Anthem Health Plans of Kentucky, Inc. (“Anthem”). The underlying dispute involved Anthem’s denial of coverage for Ms. Cohorst’s artificial disc replacement surgery, which required the use of a “Mobi-C” device. Ms. Cohorst’s doctor determined that the surgery was medically necessary and sought Anthem’s prior approval. In the initial approval process, Anthem confirmed its approval of the surgery, but did not specify the medical device that would be used. Anthem’s internal documents mirrored its initial approval, describing the surgery as “medical necessary” and meeting “criteria guidelines.” See id. at *1-3.

When Ms. Cohorst’s physician contacted Anthem to confirm which medical device had been approved for surgery, Anthem told the doctor it approved the “Pro Disc-C” and not the “Mobi-C.” Shortly after this conversation, Anthem created a new reference number allegedly based on the request to use the “Mobi-C” device and overturned its original approval, finding the procedure to be “Experimental” or “Investigative” and thus not medically necessary under the terms of the plan. Ultimately, Ms. Cohorst underwent the surgery and Anthem refused to cover its costs.

Ms. Cohorst sued Anthem. Under a de novo standard of review, the court evaluated the plan and the relevant exclusionary language. The court determined that the procedure fell within the exclusion. Despite this, the District Court still found in favor of Ms. Cohorst based on a theory of waiver. Id. at *10. Emphasizing Anthem’s inconsistent behavior, the court held that Anthem waived its right to assert the exclusion when it first approved the surgery as medically necessary. Id. The court explained that Anthem had waived its right to deny Ms. Cohort’s claim because it initially approved her surgery, albeit with a “Pro Disc-C” device. The court explained that waiver occurs when “a party intentionally relinquishes a right” or “when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” Id. (citing Salyers, 871 F.3d at 938). The court reasoned that Anthem was fully aware of Ms. Cohorst’s medical condition when it initially approved the surgery and it was only after Dr. Bray appealed Anthem’s decision regarding the type of device to be used in the surgery that Anthem suddenly decided to completely reverse its prior authorization and deny Ms. Cohorst’s entire claim. The court found that because there was no new information regarding Plaintiff’s prior condition or any change in its medical policy, Anthem waived its right to rely on the exclusion that was available to it when it provided its initial approval. Id. at 10.

Of interest, the court did not analyze the case in terms of detrimental reliance. Instead, the court performed a standard waiver analysis, like it would for a case not involving ERISA.

Footnote 5 of Salyers raises another question. Has there been any change in how courts apply promissory estoppel in the ERISA context? Salyers is only a year old, but it appears that Salyers has not significantly altered how district courts in the Ninth Circuit apply the doctrine of promissory estoppel.

As explained in Gabriel v. Alaska Electrical Pension Fund, 773 F.3d 945, 955 (9th Cir. 2014), a Ninth Circuit case that predates Salyers, to establish equitable estoppel, a party must establish “(1) the party to be estopped must know the facts; (2) he must intend that his conduct shall be acted on or must so act that the party asserting the estoppel has a right to believe it is so intended; (3) the latter must be ignorant of the true facts; and (4) he must rely on the former’s conduct to his injury.” To assert a claim for equitable estoppel under ERISA, additional requirements must be met. “Accordingly, to maintain a federal equitable estoppel claim in the ERISA context, the party asserting estoppel must not only meet the traditional equitable estoppel requirements, but must also allege: (1) extraordinary circumstances; (2) that the provisions of the plan at issue were ambiguous such that reasonable persons could disagree as to their meaning or effect; and (3) that the representations made about the plan were an interpretation of the plan, not an amendment or modification of the plan.” Id. at 956 (internal quotations omitted).

Post Salyers, some district courts in the Ninth Circuit still use this same test listed in Gabriel. See Spies v. Life Ins. Co. of N.A., 312 F.Supp.3d 805, 812-13 (N.D. Cal. 2018); Meakin v. California Field Ironworkers Pension Trust, 2018 WL 405009, at *7 (N.D. Cal. Jan. 12, 2018); O’Rouke v. Northern California Elec. Workers Pension Plan, 2017 WL 5000335, at *15 (N.D. Cal. Nov. 2, 2017); Polevich v. Tokio Marine Pac. Ins. Ltd., 2018 WL 4356583, at *9-10 (D. Guam Sept. 13, 2018); Berman v. Microchip Tech. Inc., 2018 WL 732667, at *14 (N.D. Cal. Feb. 6, 2018).

Berman v. Microchip Technology Inc., 2018 WL 732667 (N.D. Cal. Feb. 6, 2018), provides a good example of how estoppel can apply in the ERISA context. In Berman, a group of former Atmel employees sued their employer over alleged violations of a severance benefits plan arising under ERISA. The employer created the severance benefits plan due to uncertainty surrounding the employer’s future and its attempts to secure a merger partner. The plan was outlined in a series of letters to the employees. The letters explained that the plan would terminate on November 1, 2015 “unless an Initial Triggering Event . . . occurred prior to November 1, 2015, in which event the [Atmel Plan] will remain in effect for 18 (eighteen) months following that Initial Triggering Event.” Id. at *1. Initial triggering event was defined as “enter[ing] into a definitive agreement . . . on or before November 1, 2015, that will result in a Change of Control of the Company.” The plan benefits would only be provided if a change of control occurred and the employees were terminated without cause within 18 months of the triggering event.

Atmel and a company called Dialog Semiconductor PLC executed and announced a formal merger agreement before November 1, 2015. Before the closing date of the Dialog merger, Atmel and Microchip entered into merger negotiations. Atmel withdrew from the agreement with Dialog and entered into an agreement with and became a wholly owned subsidiary of Microchip. When communicating with its employees, Atmel and Microchip explained that the plan would still apply even if the deal with Microchip, as opposed to Dialog, was completed.

Subsequently, Microchip failed to honor the plan. Several terminated employees sued to obtain their severance benefits under the plan. Microchip moved to dismiss the complaint. One of the plaintiffs’ arguments relied on equitable estoppel. The court relied on the standard Gabriel test. See id. at *14. Defendants argued that the plan was not ambiguous and the circumstances failed the extraordinary circumstances prong of the test. The court did not agree with the defendants. It stated:

First, the Court is satisfied, notwithstanding Plaintiffs’ assertions that the provisions of the Atmel Plan are unambiguous, that reasonable parties could disagree as to whether the Plan required the Initial Triggering Event and the Change of Control to involve the same merger partner—particularly at the motion to dismiss stage, and particularly since that interpretation is one of the primary disputes in this case. Second, Plaintiffs sufficiently allege detrimental reliance on an oral, material misrepresentation of that ambiguity by Defendants.

Id. at *15. The court denied Microchip’s motion insofar as it related to the employees’ claim for equitable estoppel. See id.

In the ERISA context, the doctrines of waiver and estoppel can be difficult to invoke. However, sometimes, an insurer makes a critical mistake and must honor its word. Whereas Salyers may be an indication of a gradual change in the doctrine, the change has not yet been firmly established. District courts still rely on the traditional forms of waiver and equitable estoppel. It is quite possible that the foundation for a shift in the doctrines is being laid, but only time will tell if that is the case.

In the next article, we will discuss the similar claims for breach of fiduciary duty and surcharge, which are often easier to prove and prove similar and very satisfying remedies for an ERISA plaintiff/claimant.

Get the Answers and Assistance You Need