ERISA - Fiduciary Duty Archives - Page 3 of 3

While this blog often discusses disability, life and health insurance/employee benefit decisions under the Employee Retirement Income Security Act of 1974 (“ERISA “), we rarely discuss federal circuit court of appeal decisions from outside the Ninth Circuit Court of Appeals (which governs California). We are making an exception here, as a recent case from the Sixth Circuit Court of Appeals really caught our attention. The case is Rochow v. Life Insurance Company of North America, __ F.3d ___ (6th Cir. December 6, 2013). It is a “game-changer” in the world of ERISA disability, life and health insurance/employee benefit litigation, and could fundamentally change the way in which ERISA remedies are discussed and how these cases are litigated. To say this is a “plaintiff friendly” case is probably to understate it.

The case otherwise involved a typical denial of disability insurance benefits matter under ERISA in which the amount of benefits owed was determined to be $910,629. Despite the large award, that was not actually the interesting part of the case. The much more interesting part of the case is the court’s ruling affirming an almost $3.8 million disgorgement of profits award.

Daniel Rochow sued for disability benefits under 29 U.S.C. section 1132 (a)(1)(B) of ERISA and also sought equitable accounting and disgorgement of profits as “appropriate equitable relief” under section under 29 U.S.C. section 1132(a)(3). The district court determined that Life Insurance Company of North America’s (LINA) benefit determination had been arbitrary and capricious, and the Sixth Circuit affirmed that decision. After the case was remanded to the district court, Rochow sought an accounting and disgorgement of profits under 29 U.S.C. section 1132(a)(3). The district court applied a return-on-equity (“ROE”) analysis to the disgorgement claim, and awarded an additional $3.8 million in disgorged profits against LINA.

LINA appealed the second district court decision as well, but in a 2-to-1 decision, the Sixth Circuit again affirmed the district court. The court addressed and upheld Rochow’s argument that ERISA allows separate claims for withheld benefits under 29 U.S.C. section 1132(a)(1)(B) and breach of fiduciary duty claims under 29 U.S.C. section 1132(a)(3). The majority held that because Rochow had sought the disgorgement remedy as a separate claim of relief, disgorgement was an appropriate remedy for the arbitrary and capricious benefit denial. This remedy was based on LINA’s ill-obtained earnings on the amount it did not pay Rochow but should have paid him. The court explained that “disgorgement does not result in double compensation, nor does it represent punishment.

The court rejected LINA’s argument that allowing Rochow to maintain a breach of fiduciary duty claim based on a denial of benefits would frustrate ERISA’s goal of providing an inexpensive and expeditious dispute resolution process, by explaining that “ERISA also has a goal of ensuring that plan fiduciaries act solely in the interest of the participants and for the exclusive purpose of providing benefits to their participants.” The majority also affirmed the district court’s application of a ROE method of calculating the disgorgement claim, rather than LINA’s analysis that equated disgorgement of profits to an award of prejudgment interest on the withheld benefits. The court, quoting the Ninth Circuit’s phraseology that the fundamental tenet of disgorgement is “if you take my money and make money with it, your profit belongs to me,” determined that the rationale for the more generous disgorgement award was the fact that LINA did not retain the unpaid benefits in a segregated account, but rather retained the money in its general assets.

The dissent echoed LINA’s positions, viewing the majority’s holding as shortsighted. It criticized the majority decision as “willfully blind to the negative repercussions that undoubtedly will ensue in ERISA benefits litigation,” with the dissent also stating:

Furthermore, disgorgement under the circumstances of this case fundamentally alters how denied disability-benefits claims are litigated, forcing district courts to wrestle with complex calculations of profits and raising the specter that any claimant who was arbitrarily and capriciously denied benefits would have a viable claim for disgorgement.

We expect to see a request for reconsideration and/or rehearing en banc. Although we would not be surprised if the decision survives circuit review, LINA will almost certainly seek relief in the United States Supreme Court as this decision has too many implications for LINA to let this ground-breaking decision remain good law. There can be little question that in the short term, this case will substantially alter ERISA litigation. As for this firm, we will attempt to use this decision to assist our plan participant/beneficiary clients, including amending some of our existing complaints to expand the relief we are requesting to include disgorgement claims. We look forward to seeing how this all unfolds. It will be very interesting for sure.

In an interesting opinion concerning a dispute over long-term disability (“LTD”) insurance benefits due under an ERISA plan, a District Court held that an ERISA administrator cannot rely on a contractual limitation period to defeat an insured’s claim where it failed to provide the insured with sufficient documentation and/or notice of the existence of the limitation period. The decision in Barnett v. California Edison Co. LTD Plan, U.S. Dist. LEXIS 71345 (E.D. Cal. May 20, 2013) emphasizes that administrators of ERISA-governed policies must first discharge their fiduciary duty to fully inform the insured of existing contractual limitation periods before attempting to enforce provisions to defeat a lawsuit initiated by a plan participant.

Barnett involves a Plaintiff who was an employee of Southern California Edison and a participant in Edison’s long-term disability insurance plan (“Plan”). Significantly, the Plan contained a contractual limitation period requiring that a plan participant institute legal action no later than 180 days after a final decision is rendered on his or her appeal. The Plaintiff applied for disability benefits under the Plan and was initially approved. However, Plaintiff’s LTD benefits were terminated following an independent medical examination after the examining physician opined that he was no longer disabled under the terms of the Plan. The Plaintiff appealed the decision twice, and but the administrator upheld the original denial decision both times.

The Plaintiff then filed a lawsuit against the Plan alleging three causes of action. However, the Plaintiff’s complaint was filed after the expiration of the 180-day contractual limitation period. The parties filed cross Motions for Summary Judgment. The Plaintiff sought a declaratory judgment barring the Plan from relying on the 180-day contractual limitations period. The Plan’s opposition and counter-motion argued that the Plaintiff was time barred by the contractual limitation.

The relevant portion of the policy provides:

If your appeal is denied, in whole or in part, you may bring a civil action in federal court. However, no action may be brought . . . until you have exhausted the claim and appeal procedures in this Handbook. Further, no legal action may be brought . . . more than 180 days after the final decision has been rendered . . . on the appeal of your claims for benefits under the terms of the respective plans.

The Court first focused on the issue of the Plan’s fiduciary duty toward the Plaintiff. The Court cited to 29 U.S.C. section 1004(a)(1) and found that the Plan had a fiduciary duty under ERISA to deal with plan participants “fairly and honestly.” The Court then addressed a specific request made by the Plaintiff to the Plan, following the denial of his appeal, for all documents relevant to his claim for benefits including “the plan, with all amendments and the Summary Plan Description and all amendments.”

In response to the Plaintiff’s demand, the Plan’s contract administrator, Jacobs, sent a letter to Plaintiff stating that “enclosed you will find copies of Your Benefits Handbook for the Plan, accompanying plan change notices, and the applicable LTD trust documents. There are no . . . separate documents in relation to the LTD Plan.” However, what Jacobs sent to the Plaintiff was only a thirteen-page excerpt from a much larger Plan document which did not contain the limitation period clause that was in the larger document. As such, not only did the Plan fail to provide Plaintiff with notice of the limitation period clause, but also misrepresented the terms of the Plan by stating that the excerpt constituted the entire Plan document.

The Plan raised two arguments in support of its contention that had not breached its fiduciary duty. First, it argued that the summary Jacobs provided referenced the larger Plan document and thus Plaintiff was on notice that there was a larger Plan document. The Court found this argument to be unpersuasive because, the reference to the larger document does not overcome Jacobs’ blatant misrepresentation that the summary was the complete Plan document. Second, the Plan argued that Plaintiff had access to the complete Plan because it was available online and that a summary of the Plan was distributed to all plan participants. The Court found these arguments to be equally unpersuasive because online access does not overcome Jacobs’ misrepresentation and the fact that a summary was distributed to all plan participants is irrelevant because the summary did not contain the limitation period clause.

Based on all of the above, the Court held that the Plan breached its fiduciary duty by providing the Plaintiff with a thirteen-page summary the Plan document while representing that it was the complete document. As a result, the Court enjoined the Plan from relying on the 180-day contractual limitations period.

The Court’s decision in Barnett is significant in that it increases the burden on insurers and other ERISA administrators to fully disclose and inform insureds of contractual limitation periods and other important provisions in ERISA-governed plans before relying on them to prevent insureds from pursuing and prevailing in legal actions. Moreover, the Court in Barnett emphasized that insurers cannot excuse misrepresentations made by its agents and employees with regard to the contents of a Plan document by asserting that the information is available to the insured elsewhere.

Can a plan participant sue for breach of fiduciary duty when his individual account is diminished by a failure of the administrator to follow his investment instructions? The U.S. Supreme Court answered this important question in the affirmative in James LaRue v. DeWolff, Boberg & Associates Inc., 128 S. Ct. 1020 (2008). LaRue filed an action under ERISA alleging that his employer (also the plan administrator) breached its fiduciary duty with regards to an ERISA-regulated 401(k) retirement savings plan by failing to follow his investment instructions. Relying on the Supreme Court’s ruling in Massachusetts Mutual Life Insurance Co. v. Russell that a participant could not bring a suit to recover consequential damages resulting from the processing of a claim under a plan that paid a fixed level of benefits, the Fourth Circuit Court of Appeals affirmed the district court’s grant of summary judgment in favor of the plan on the grounds that section 502(a)(2) did not provide a remedy for LaRue’s “individual injury.” The Supreme Court disagreed.

In an opinion written by Justice Stevens, the Court held that “although § 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of the plan assets in a participant’s individual account.” The Court reasoned that in the context of defined contribution plans, the misconduct did not need to threaten the solvency of the entire plan in order for section 409 (which provides remedies for breach of fiduciary duty) to apply. Rather, the legislative history and plain language of the statute authorizes a participant to enforce fiduciary obligations under ERISA, and the administrator’s failure to follow the LaRue’sinvestment instructions could qualify as a breach of those duties.

Rochow v. LINA: A Game-Changer in ERISA Disability Benefits Litigation

Get the Answers and Assistance You Need