THE GAVEL. litigating employee benefit insurance claims [page 14]

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1 OCTLA THE GAVEL A QUARTERLY PUBLICATION of the Orange County Trial Lawyers Association Nuts & Bolts post-mortem detection of thc proving financial condition the impact of impact make em answer on being a lawyer: tommy litigating employee benefit insurance claims [page 14] In-Depth Analysis the case against dispositive motions in limine: part 2 erisa insurance claims: beware! VOLUME 15, NUMBER 1 WINTER 2012

2 ERISA Insurance Claims: Beware! Most disability, medical, and accidental death insurance claims arise under coverage obtained by the insured through his or her employment. The vast majority of these claims are governed by the Employment Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.S 1001 et seq, because they relate to an employee benefit plan offered by their employer. As such, claim denial cases must be pursued under the regulatory scheme of the statute and its accompanying Department of Labor regulations. Failure to do so will prevent recovery for an improperly denied claim. The substantive and procedural differences between a claim governed under state law and one preempted by ERISA are stark. Under California law, an insured may sue for common law breach of contract to recover benefits, and for breach of the implied covenant of good faith and fair dealing (bad faith) to recover tort and punitive damages. The usual litigation procedures of discovery, calling witnesses, and the right to a jury trial exist. Conversely, ERISA ERISA requires the exhaustion of administrative remedies before bringing suit, different (and often shortened) time requirements, and litigation that is a review of the administrative record, with limited discovery, no right to a jury trial, and remedies that are almost always restricted to contractual benefits and attorneys fees. ERISA was enacted as a law to protect employees from having their pension plans In-Depth Analysis Jeffrey C. Metzger, esq. looted. (See Massachusetts v. Morash (1989) 490 U.S. 107, 115, 109 S.Ct. 1668, 1673.) It was never contemplated to apply to insurance claims, as the statute expressly saves state laws regulating insurance from preemption. But as the United States Supreme Court has taken a narrow view as to what constitutes a law regulating insurance, interpreting it the same as in the McCarran-Ferguson Act (see Unum Life Ins. Co. v. Ward, 526 U.S. 358, 267, 119 St. Ct (1999)), the procedures and remedies of state law applicable to bad faith cases are preempted. This judicial hijacking of the original purpose of the legislation has turned what was supposed to be a consumer protection bill into a windfall for insurance companies. (See, e.g., Bast v. Prudential Ins. Co. of America (9th Cir. 1998) 150 F.3d 1003, where the insurer reversed a previous denial of a bone marrow transplant to treat the insured s breast cancer, but only after the cancer had metastasized to the insured s brain. She died shortly thereafter, but under ERISA her heirs were unable to 14 recover for the consequences of the insurer s wrongful denial.) However, there have been a few important inroads into addressing this imbalance with recent Ninth Circuit Court of Appeals decisions, and the passage last month of a new law in California. This article will discuss those recent developments in the context of three important aspects of handling ERISA benefit cases: 1) whether the claim is preempted, 2) the requirement to exhaust administrative remedies, and 3) the key issues in litigation. Each of these areas provides numerous traps for the unwary. Is a Claim Governed by State Law or Preempted by ERISA? ERISA applies to all claims for benefits under an employee welfare benefit plan. Defined at 29 U.S.C. Section 1002(1), such a plan consists of the following elements: i) a plan, fund or program, ii) established or maintained, iii) by an employer or by an employee organization, or both, iv) for the was enacted as a law to protect employees from having their pension plans looted. purpose of providing certain types of benefits, most prominently medical, surgical, hospital, sickness, accident, disability, or death, iv) to the participants or their beneficiaries. The statute excepts, however, church plans and government plans. Claims arising from these types of plans may be pursued under state law. An additional exception is found in the safe harbor provisions of the Department of Labor Regulations (29 C.F.R (j)). A plan in which: i) no contributions (i.e., premiums) are made by the employer; ii) participation of the program is voluntary for employees; iii) the employer does not endorse the program, but merely collects premiums; and iv) the employer receives

3 no consideration in connection with the program, is not considered an employee welfare benefit plan. (Id.) However, all four elements must be met. (Stuart v. Unum Life Ins. Co. (9th Cir. 2000) 217 F3d 1145, 1153.) Employee benefit plans may be insured or self-insured. The latter does not constitute insurance by legal definition, so state laws regulating insurance that would otherwise survive preemption are nevertheless inapplicable. (29 USC 1144(b)(2)(B).) Exhausting Administrative Remedies ERISA requires that a Plan adopt claim procedures in accordance with regulations of the Secretary of Labor. (29 U.S.C ) Those procedures must provide adequate notice in writing to any participant or beneficiary whose claim has been denied, setting forth the specific reasons for such 15 denial, written in a manner calculated to be understood by the participant, and afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim. (Id.) The ERISA regulation regarding the required claims procedure is found at 29 C.F.R Its purpose is to set forth the minimum requirements for employee benefit plan procedures pertaining to claims for benefits. (29 CFR (a).) The procedures and applicable time frames must be described as part of a summary plan description, and must contain safeguards designed to ensure and to verify that benefit claim determinations are made in accordance with governing plan documents. (29 CFR (b)(2) & (b)(5).) Time of Notification of Claim Denial Generally, a plan administrator (generally, the insurer, and for purposes of this article, the terms will be used interchangeably) must notify the claimant of a denial (referred to as an adverse benefit determination ) within 90 days of the claim being submitted, unless special circumstances require an extension, in which case an additional 90 day period is allowed. (29 CFR (f)(1).) For disability claims, the claim decision must be within 45 days, with the insurer entitled to a 30 day extension if special circumstances exist. (29 CFR (f)(3).) For group health claims, in certain situations these periods are greatly shortened. For example, urgent care claims require notification within 72 hours after submission and pre-service claims must be decided within 15 days. (29 CFR (f) (2)(i) and (f)(2) (iii)(a).) Extensions not only require the existence of special circumstances, but notification of the extension, so long as the claimant is notified prior to the end of the initial period (Continued, see ERISA, page 16)

4 ERISA of those circumstances and the date in which the plan expects to decide. What the Denial Must Contain When a claim is denied, the claimant must be informed of the specific reason for the decision, referred to the specific plan/insurance policy provision on which the determination is based, given a description of additional material or information necessary for the claimant to perfect the claim and told why such information is necessary, and given a description of the plan s procedures for reviewing a claimant s challenge to the denial. (29 CFR (g)(1).) In addition, the claimant must be notified of the right to receive all relevant documents upon which the claim was denied, free of charge. (Id.) This refers, generally, to the insurer s claim file. The denial letter will usually generally satisfy these requirements, but the practitioner is urged to assert that strict compliance with the regulations is required, such that if any of the insurer s notifications are missing or deficient, the requirement of a full and fair review has not been met, and the time requirements for the claimant s appeal to the denial do not commence. Right and Requirement of Claimant to Appeal Denial In order to properly exhaust administrative remedies, the claim denial must be internally appealed to the plan administrator (or, a designated claim administrator), and it must be done so timely. In the case of health and disability claims, the claimant must be given at least 180 days to submit an appeal. (29 CFR (h)(3).) In other types of claims, at least 60 days from the denial must be given. (29 CFR (h)(2).) The first task in appealing the denial is to obtain the insurer s claim file. This is usually what is provided when requesting the relevant documents, upon which the denial is based, although claim manuals should be requested as well. (29 CFR (m)(8).) In the case of disability claims, if the company based its denial on surveillance videos, those must be included in what is produced. Of particular importance are the medical reviews that formed the basis for the denial. These are usually conducted by either an in-house medical doctor, or some outside service that performs such reviews in bulk and retains the reviewing doctor. Only very occasionally in ERISA disability claims are there actual Independent Medical Examinations, such that the denial is usually based only on a paper review of medical records. (Continued, see ERISA, page 44) 16

5 ERISA The appeal should include everything that the lawyer plans on arguing to the court, because, with limited exceptions, at trial the evidence will be limited to that which was developed during the administrative appeal process. (Opeta v. Northwest Airlines Pension Plan (9th Cir. 2007) 484 F3d 1211, 1217.) The exceptions are generally limited to evidence establishing the insurer s conflict of interest, in the case of abuse of discretion review. Under de novo review, the court has discretion to consider anything necessary for a proper review, but counsel should not count on new medical evidence being admitted that was not submitted to the insurer during the administrative appeal. Lawyers should think expansively in presenting appeals. Rules of evidence do not apply. Anything that bears on the disputed issue may be submitted. In the case of disability claims, this should include updated medical records, narrative replies from the treating doctors to the insurance doctor s reviews, and vocational evaluations. In a medical claim, if denial is based on lack of medical necessity or that the treatment is experimental, narrative statements from the treating doctors and relevant research should be included. For an accidental death claim in which the denial is based on the occurrence not constituting an accident, police reports, witness statements, and any other evidence proving how the accident occurred, is important to provide. Litigation to Recover Benefits Upon exhaustion of the administrative remedies, the claimant may proceed to file suit to recover benefits. (29 USC 1132.) Jurisdiction is concurrent between federal and state courts, although it is more than probable that an action filed in state court will be removed by the defendant. (29 USC 1132(e)(1); Metropolitan Life Ins. Co. v. Taylor (1987) 481 US 58, ) The two main issues to be decided in litigation on an ERISA benefits claim are: i) what is the applicable standard of review of the plan administrator s decision; and ii) whether the plaintiff is entitled to benefits under that standard. Standard of Review The default standard of review is de novo. (Firestone Tire & Rubber Co. v. Bruch (1989) 489 U.S. 101, ). Review will generally be limited to the administrative record, although the court has discretion to admit extrinsic evidence when circumstances clearly establish that additional evidence is necessary to conduct an adequate de novo review of the benefit decision. (Opeta, supra, 484 F.3d at 1217.) (Emphasis included in original.) However, if the applicable plan unambiguously confers discretion to the plan admin- 44

6 istrator (or, another fiduciary properly designated, e.g., the insurer) to determine eligibility for benefits, the applicable standard of review will be abuse of discretion. (Firestone Tire & Rubber, supra, 489 US at ) That is, at least for the time being. In October, California was added to the growing number of states prohibiting such discretionary clauses in life insurance or disability insurance policies. Governor Brown signed SB 621 into law, rendering void and unenforceable any policy that contains a provision that reserves discretionary authority to the insurer, or the agent of the insurer, to determine eligibility for benefits or coverage, or to interpret the terms of the policy, contract, certificate, or agreement. (California Insurance Code ) The statute applies to any policy offered, issued, delivered, or renewed, after the statute takes affect. (Id.) Thus, discretionary language in claims brought under existing policies will continue to apply. Under the abuse of discretion standard, the courts must give deference to the administrator s determination, and will be overturned only if arbitrary. Previously in this Circuit, a decision is not arbitrary unless it is not ground on any reasonable basis. (Sznewajs v. U.S. Bancorp (9th Cir. 2009) 472 F.3d 727.) However, the any reasonable basis test is no longer good law. Earlier this year, in Salomaa v. Honda Long Term Disability Plan, 637 F.3d 958 (9th Cir. 2011), the court held that the test for abuse of discretion is whether we are left with a definite and firm conviction that a mistake has been committed, (Id. citing United States v. Hinkson (9th Cir. 2009) 585 F.3d 1247 (en banc).) To do so, we consider whether application of a correct legal standard was (1) illogical, (2) implausible, or (3) without support in inferences that may be drawn from the facts in the record. (Id.) Proving Abuse of Discretion The decision in Salomaa and the 2009 decision in Montour v. Hartford 582 F.3d 933 express a growing awareness in this Circuit of the unfairness of many of the insurers tactics. The court found the insurer to have abused its discretion in both cases, citing the following conduct: i) selectivity on the part of the insurer s retained reviewers of what evidence regarding the insured s capabilities, or lack thereof, on which to rely; ii) conducting pure paper medical reviews, iii) ignoring favorable Social Security disability determinations; iv) ignoring fact that every doctor who had personally examined the plaintiff had found him disabled, v) demanding objective tests to establish a condition for which there are no objective tests, and vi) failing to engage in a required meaningful dialogue with the claimant about what was required to establish his disability. While ERISA benefits cases are decided on a case-by-case basis, the conduct in these two cases is so typical of what is often seen in long-term disability claims, they provide 45 a fertile road map in many cases. Conclusion Under ERISA, there are no consequences to insurance companies for unfair claims practices. If they are found to have been wrong, they merely pay what they owe and nothing more. And, indeed, under abuse of discretion review, they can be wrong and still not have to pay if their conduct is not held to be arbitrary. This translates to a certain level of arrogance in how insurers handle claims, particularly disability claims. Because of that, with careful and persistent attention to the facts, plaintiff s counsel has the opportunity to prove a claimant s entitlement to benefits, even under the stricter standard. However, this requires an understanding of the unique aspects of ERISA claims, particularly in building the administrative record, as such is required to make a persuasive and winning presentation to the court.