Waiver & Estoppel Archives - Page 2 of 2

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.

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.

Opportunistic Rescission: When Do Insurers Waive their Right to Rescind an Insurance Policy?

All too often, we see insurance companies deny insurance claims by attempting to opportunistically rescind insurance policies. This practice has become more prevalent in recent years as insurers look for ways to deny insurance claims.

Anyone who has purchased a disability, life or health insurance policy is likely familiar with the significant paperwork involved in the insurance application process. The paperwork includes policy notices, policy applications, supplemental policy applications, personal history questionnaires, policy warnings, medical examination documents, etc. These will include numerous and detailed questions relevant (and often not so relevant) to the risk being insured. An insurance agent or broker will ask questions on the policy application and often additional questions not on the application. Only after the applicant has answered countless questions, will the insurance company decide whether to issue the policy. Many applicants do not appreciate why insurance companies go to such great lengths before issuing a policy. The answer: they want to evaluate the risk that the applicant poses to them. If there exists too much risk of a payout under the policy, they will not underwrite that risk by issuing a policy. Throughout the application process, like the claims process, insurers often have a duty to investigate the information contained on the application. The failure to engage in such an investigation may result in the insurer being precluded under the law from later rescinding a policy that it decided to issue.

When insureds file claims under their policies, insurers often first look to determine if they can rescind the policy, asserting that the policy should be considered null and void as if it was never issued in the first place. As we explained in a previous blog article, rescission legally renders the contract as if it never existed and releases both parties from their obligations under the contract. An insurance company is often allowed to rescind a contract when there is a material misrepresentation on the insurance application. Many times, the omission was an honest mistake or it was excused by the broker or agent as immaterial. Regardless of the purposefulness of the omission, the insurance company may still have the right to rescind the contract.

There are exceptions however. One involves the insurer’s duty to investigate the information on the application at the time the application is submitted and its duty to investigate the possible basis for rescission when handling the claim. If there is an implication that the application was not completely accurate, and the insurer fails to investigate, then the insurer may have waived the right to rescind the policy. For example, the applicant fails to state that she had seen a doctor in the last five years, yet the application reveals she is on several prescription medications. Or, the evidence may arise from an outside source. For example, the insured may submit a claim for a treatment which strongly implies that the applicant had a non-disclosed pre-existing condition at the time the application was submitted. Insurance companies have a duty to explore such information or they may lose the right to rescind the policy. As one court stated, an insurance company “may not blindly ignore evidence of misrepresentation, collect premiums, and then opportunistically rescind once a claim is filed.” Star Insurance Co. v. Sunwest Metals, Inc., 691 F.App’x 358, 360 (9th Cir. 2017). The issue is not just whether the insurer had actual knowledge of the material misrepresentation, but also whether the insurer could have or would have obtained the information if it had exercised reasonable diligence in investigating the claim.

In DuBeck v. California Physicians’ Service, 234 Cal.App.4th 1254 (2015), the California Court of Appeal addressed an insurance company’s failure to diligently investigate an application. Bonnie DuBeck submitted an application for health insurance to California Physicians’ Service, doing business as Blue Shield of California. In her application, she failed to disclose that she had recently visited a doctor to have a lump in her breast examined. DuBeck’s application was approved. Five days after Blue Shield issued the policy, DuBeck underwent breast cancer surgery. She submitted bills for her treatments to Blue Cross. Blue Cross became suspicious that, given the timing of the billings, the condition had arisen before DuBeck’s enrollment. “Yet by its own admission Blue Shield neither commenced an investigation nor obtained records confirming the date of appellant’s first breast cancer-related procedure for another year.” Id. at 1268. By the time Blue Cross had started its investigation, DuBeck had been diagnosed with leukemia. During that time, DuBeck submitted various bills to Blue Cross, some of which Blue Cross refused to pay. Ultimately, Blue Cross cancelled the policy. Of note is that Blue Cross did not rescind the policy – it only cancelled the policy. Two years after Blue Cross canceled the policy, DuBeck sued Blue Cross to force payment of the unpaid medical bills.

In the trial court, Blue Cross moved for summary judgment. It argued that it had the right to rescind the insurance contract because DuBeck had lied on the application. The trial court granted Blue Cross’s motion. DuBeck appealed.

The court of appeals reversed the trial court on several different grounds. One of those grounds was that Blue Cross failed to properly and promptly investigate the information in the application once it received information putting it on notice that DuBeck had omitted information from her application, thus waiving its right to rescind the policy. As the court of appeals explained:

By ignoring information that would have resolved the truthfulness of the representations in appellant’s application at an early stage and determining at that time whether to continue as her insurer, Blue Shield allowed appellant to incur substantial medical expenses and dissuaded her from investigating the availability of government assistance. Blue Shield’s lack of diligence in the early months of the policy and the apparent prejudice to appellant provide a second and independent basis for rejecting its claimed right to rescind. Id.

Insurance companies have an affirmative duty to investigate the applications submitted to them. If they have failed to do so, then they may lose the right to rescind a contract that was less than complete. Insurers will still often attempt to rescind a policy, sometimes years after they had evidence that something was amiss. Determining whether an insurance company can properly rescind a policy is a difficult task for most insureds. McKennon Law Group PC has extensive experience determining whether an insurer can deny your life, health or disability insurance claim by rescinding your policy. Some of the issues we examine: was there actually a misrepresentation? Was the misrepresentation innocent or intentional? Was it material and how can the insurer prove it was material? What did the agent/broker know or say in the application process? Was there some information in the claim file that should have led the insurer to suspect a material misrepresentation? We expertly determine and often are able to successfully challenge an insurer’s attempted rescission. If you have a denied life, health or disability insurance claim that is the subject of an attempted rescission, call us for a free consultation.

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