Venue, Service of Process & Personal Jurisdiction Under ERISA

When Congress enacted ERISA it included specific direction about where a case could be filed and how and where a defendant could be served with process, i.e., given effective notice of suit that compels that defendant to either respond or have a default entered against them. Since ERISA is a statute designed to ensure uniform administration of pension and welfare benefit plans across the country, Congress provided quite a bit of flexibility for both venue, where the case could be filed, and service of process. 29 U.S.C. §1132(e)(2) states that a case can be filed in the district where the plan is administered, where the alleged breach of the plan or ERISA took place, or where a defendant resides or may be found. It goes on to say that service of process can take place where a defendant resides or may be found.

Many of the terms in §1132(e)(2) have legally specific and fairly technical meanings. Their practical effect shows up in a case we handled a few years ago, Peay v. BellSouth Medical Assistance Plan, 205 F.3d 1206 (10^th Cir. 2000), that you can read here in the library section of this website.

In Peay we represented two healthcare providers located in Utah and a patient residing in Tennessee. The two corporate defendants resided in Georgia and Alabama, respectively. We sued for unpaid medical expenses in Utah. The defendants argued that they did not have sufficient contacts to Utah to allow suit to go forward here and asked for dismissal of the case or that it be transferred to Georgia. The trial court agreed with BellSouth. We appealed. The Tenth Circuit reversed the trial court and allowed the case to go forward in Utah. To see the ins and outs of how the court interpreted ERISA’s venue, service of process and personal jurisdiction concepts, you’ll have to read the decision. I’d say it's pretty fascinating stuff but that would direct laughter, scorn and ridicule my way. 

The short version is that you can sue ERISA defendants, especially corporate defendants, just about anywhere in the U.S. of A. Only if the location a plaintiff chooses to sue would "make litigation so gravely difficult and inconvenient that . . . [the defendant] unfairly is at a severe disadvantage in comparison to his opponent" will the case be dismissed. That’s a tough burden for defendants to carry off.

For a different take on ERISA’s venue, service of process and personal jurisdiction principles, see Judge Easterbrook’s opinion in Board of Trustees v. Elite Erectors, Inc., 212 F.3d 1031 (7^th Cir. 2000). It’s an even more expansive view of ERISA’s venue provision than Peay.  Regardless of the topic, Easterbrook is an entertaining read.

Consideration of Denied Disability and Health Insurance Claims in One Case!

Thanks to Glenn Kantor and his excellent ERISA plaintiffs’ firm, we have a very interesting case that combines information about health insurance denials with a good spanking of a disability insurer. Lundquist v. Continental Casualty Co., 394 F.Supp.2d 1230 (C.D. Cal. 2005) involves a disability claim by a clinical research manager in the grievance and appeals department at Blue Cross of California. The disability insurer denied the claim but the trial court reversed that denial. The trial judge found a number of problems with the disability insurer’s handling of Ms. Lundquist’s claim. First, the insurer failed to fairly and completely consider the nature of her job responsibilities in evaluating whether she could perform her work.  You can't very well determine whether a person is disabled from their own occupation unless you are willing to find out about and fairly take into account what the job responsibilities of that person are. 

Second, the insurer selectively picked portions of a report it procured from a reviewing physician to support its denial of benefits. This violated ERISA’s fiduciary duty and claims procedure requirements. The court determined that the insurer acted unreasonably in denying the disability claim.

Another interesting aspect of the case is that it sheds light on the workload of a reviewer of denied health insurance claims. As part of her disability claim, Ms. Lundquist provided her disability insurer with a detailed description of her job responsibilities at Blue Cross of California as a clinical research manager reviewing appeals from healthcare providers and patients of denied medical claims. In a letter to the disability insurer in 2002 this is how she described these duties:

There’s a lot of information here to mull over. Even assuming that there are some clerical folks helping a reviewer manage this type of case load, it is pretty clear that any given appeal to this particular health insurer (Blue Cross of California is one of, if not the largest, health insurers in California) isn’t going to receive a lot of attention. Some appeals may not need a lot of energy or time to either reverse or maintain a denial. But a lot of healthcare appeals are complex and/or require careful review of a lot of technical information. It’s hard to believe that those appeals were being considered thoroughly and competently given this type of caseload. And think about the last sentence of Ms. Lundquist’s description. Amazing how this insurer can triple the efficiency of its reviewers in just five years!

I Love a Good Rescission Case!

Rescission claims are usually fun and interesting claims to litigate. Almost always a rescission is based on the insurer’s argument that the applicant/insured misrepresented their health history on the application for coverage. Knowing that the insurer’s temptation to claim misrepresentation and attempt to rescind may be strong, state legislatures and courts place the burden of showing that the facts exist to justify rescission in any particular case on the insurer. The burden of proof being on the insurer and the number of factual and legal prerequisites to carrying that burden are big reasons these cases are interesting and worthwhile.

Let me be clear: there’s no question that many situations exist in which insurers should be allowed to rescind. If someone knowingly lies about their health history on an insurance application to get coverage when they know they are uninsurable, rescission should be allowed. And I’m sure that happens. That is not the "good rescission case" I refer to in the title of this post.

A "good" rescission case from my perspective is one where the insurer is out on a limb in proving the elements of rescission to sustain their burden of proof. That’s often the case in my experience. For example, before it will be allowed to rescind coverage an insurer must prove that a misstatement on an insurance application was "material." The failure to disclose the existence of a visit to a podiatrist to treat athlete’s foot in the three years before applying for coverage will not justify rescission of the policy when a month after it goes into effect the applicant has a stroke and spends six weeks in intensive care. Likewise, in many jurisdictions, if an applicant makes a purely innocent misstatement of her health history, this does not provide the insurer with a basis to rescind. Derbidge v. Mutual Protective Ins. Co, 963 P.2d 788 (Utah App. 1998). In addition, there are often short time frames within which, after it obtains information to provide the basis for rescinding, an insurer must give notice of its intent to rescind. If it blows the time frames, it can’t rescind.

In addition, usually you will want to get the insurer’s underwriting guidelines. How can you know if the misstatement was "material" if the insurer won’t produce its underwriting guidelines to verify that contention? Insurers fight against disclosing them; they argue the underwriting guidelines are confidential and proprietary. But unless there is an obviously material misstatement, there is little question that when you are appealing a rescission you are entitled to review the underwriting guidelines to independently determine whether they support the insurer’s argument that the misstatement was material. And the usual stonewalling that precedes getting those guidelines (insurers, get a clue: resistence is futile) often provides ammunition in asking the court to award attorneys fees.

A good rescission case is kind of like getting that pair of pants you haven't worn in a few months out of the closet, putting them on and finding a $20 in the pocket. 

Requiring Proof of Disability Based On Objective Evidence

A recent case from the federal district court of Minnesota, Payzant v. UNUM Life Ins. Co. of America, 402 F.Supp.2d 1053 (D. Minn. 2005), features an issue that comes up occasionally in ERISA disability cases. In Payzant the plaintiff suffered from fibromyalgia, a debilitating disease that is notoriously difficult to diagnose and treat. UNUM denied her claim, in large part because it claimed Payzant had not submitted objective medical evidence of the disease. In court Payzant argued that the language of the disability policy didn’t require this type of proof and that, even if it did, she had presented objective medical evidence. The court agreed with Payzant on both counts.

In light of the absence of policy language requiring objective evidence and the fact that the diagnosis of fibromyalgia is primarily based on subjective reporting of symptoms, the judge held that UNUM's requirement of objective evidence was a "procedural irregularity." The court also ruled that UNUM's actions constituted a "serious breach of fiduciary duty" that justified reversing its denial of Payzant's claim. For good measure, the court also determined that even if objective evidence were required by the policy language, Payzant’s physicians had supplied that type of evidence in their medical records.

Insurers who try to rely on extra-contractual requirements or limitations to coverage are on thin ice.   

Seventh Circuit to ERISA Claimants: "We Leave You Now to the Tender Mercies of Your Insurer"

The Seventh Circuit Court of Appeals issued a decision yesterday, Semien v. LINA, 436 F.3d 805 (7th Cir. 2006), that is an awful joke. It affirms the denial of a long term disability claim, a not infrequent occurrence in our federal courts. The troubling thing about the decision is the court’s contention that Congress intended to restrict the ability of federal judges to review insurers’ and self funded plans’ denials of ERISA claims: "Congress has not provided [the federal judiciary] with the statutory authority, nor the judicial resources, to engage in a full review of the motivations behind every plan administrator’s discretionary decisions" Slip opinion, P.17. Going further, the court states that it will have no part in a "costly system" in which federal judges "conduct wholesale reevaluations of ERISA claims." Pp. 17-18. The court wrings its hands about the possibility that giving claims denials anything more than a cursory review will "tax the judicial resource of the district courts and magistrate judges beyond the breaking point." P. 13.

What authority does the court provide to warrant this abdication of judicial responsibility? None. There are no meaningful citations to language in the statute or legislative authority. ERISA does specifically address the rights of insureds to obtain review of a claim denial in federal court at 29 U.S.C. §1001(b). But the court doesn’t cite to this. It’s difficult to know whether the omission is due to ignorance or conscious disregard. Regardless, the language from the statute undermines the court’s argument. It states that one of ERISA’s primary purposes is to provide plan participants and beneficiaries "appropriate remedies, sanctions, and ready access to federal courts" in the event a claim is denied.

That is not all. The decision effectively bars any opportunity for discovery in all but the most clear cut cases of conflict of interest or procedural irregularity. P. 17. Basically, the court will perform a quick review of the prelitigation record to simply assure itself that an insurer’s or self-funded plan’s decision is not patently unreasonable. Unless there has been self-evident and significant overreaching by the insurer or employer, the court will not overturn the denial. And the court assures us that we need not worry that its unwillingness to meaningfully review insurer or employer decisions will end up hurting employees. After all, there is no reason to think that the benefits staff of an insurer or employer "is any more ‘partial’ against applicants than are federal judges when deciding income tax cases." P. 16. I want to emit a loud guffaw when I see these words.  Reading pap like this makes me wonder what planet the author comes from.  Let me put it this way. If our federal judges hold themselves to standards of fairness and impartiality that are no higher than insurers or employers whose decisions to approve benefits directly affect their bottom lines, we’re all in trouble.

The Seventh Circuit covers Illinois, Indiana and Wisconsin. This case is binding precedent for the folks who live in those states. Semien is fortunate to have Mark DeBofsky, as fine a plaintiffs’ ERISA lawyer as there is in the country, for her counsel. Whether Mark petitions for rehearing, rehearing en banc or petitions for a writ of certiorari from the Supreme Court, I’m confident he will not accept such a misguided decision lying down.

Who Do I Sue?

ERISA is not as clear as it could be about who can and must be included as a defendant when suit is brought under the statute. The statute states that an ERISA plan is an entity that can sue or be sued in its own name. 29 U.S.C. §1132(d). However, an ERISA plan is often not something an employer thinks of as being separate from itself. When a small business buys a group health, disability or life plan for its employees, it does not generally consider that it has established a distinct legal entity that can sue or be sued. But it has. Larger employers or trust funds established under collective bargaining agreements between unions and employers are more likely to understand the significance of the legal reality that an ERISA plan is separate from the entities that fund those benefits.

Building on this principle, some courts have ruled that when a claim is brought under ERISA for payment of denied benefits, claimants must sue the "plan" rather than just the employer or the insurer paying the benefits. Indeed, the U.S. Court of Appeals for the Ninth Circuit has gone so far as to say that the plan is the only proper party when a claim for unpaid benefits is brought. Everhart v. Allmerica Fin. Life Ins. Co., 275 F.3d 751 (9^th Cir. 2001); Ford v. MCI Comm. Corp. Health & Welfare Plan, 399 F.3d 1076 (9^th Cir. 2005).

These holdings are pretty clearly wrong IMHO. It may be true that because the ERISA plan is a separate entity that can sue or be sued, it must be named as a defendant in a suit for unpaid benefits. But there is no language in the statute to support the idea that an insurer cannot be named as a defendant in a claim for unpaid benefits. On the contrary, numerous provisions of ERISA go to the heart of insurers’ inter-plan activities. The Ninth Circuit rulings in Everhart and Ford suggest that there is no way to effectively obtain any remedy for an insurer’s systematic breaches of ERISA’s disclosure, fiduciary duty or claims procedure requirements that cross plan boundaries.

This is a significant defect in the case law of the Ninth Circuit.  It is all the more pernicious because the Ninth Circuit is, by far, the largest in the country both in geography and population. It covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington.

Every Circuit in the country has its poorly reasoned and deficient case law regarding ERISA and just about every other area of law. But this Ninth Circuit precedent is a glaring deformity.

The Supreme Court countermands the Seventh Circuit

Last week I fulminated about the Seventh Circuit's Semien decision.  Among other things, I was troubled by the language in that case suggesting that the federal judiciary did not have the ability to meaningfully review denials of ERISA claims by insurers or self funded plans.  As the Semien court states: "Congress has not provided [the federal judiciary] with the statutory authority, nor the judicial resources, to engage in a full review of the motivations behind every plan administrator’s discretionary decisions."  Slip opinion, p. 17.

I said, with some indignation, that this was nonsense and was contrary to the language of the statute.  Since then I've come across a statement from the Supreme Court that puts the matter to rest.  In Rush Prudential HMO v. Moran, the Supreme Court states:

"Whatever the standards for reviewing benefit denials may be, they cannot conflict with anything in the text of the statute, which we have read to require a uniform judicial regime of categories of relief and standards of primary conduct, not a uniformly lenient regime of reviewing benefit determinations.

. . . Not only is there no ERISA provision directly providing a lenient standard for judicial review of benefit denials, but there is no requirement necessarily entailing such an effect even indirectly. " 

You can't reconcile the language of the Seventh Circuit in Semien with the language of the Supreme Court in Rush Prudential.  And we all know which Court is preeminent.  

Contract Law vs. Trust Law

Last week the Seventh Circuit U.S. Court of Appeals issued a decision, Rud v. Liberty Life Ass. Co. Of Boston, written by Judge Richard Posner. Judge Posner is a prolific author and commentator on various topics, a real renaissance man. He writes well and because he avoids legalese and is very much a "cut to the chase" kind of thinker, his decisions usually make for interesting reading. Rud is no exception. Among other things, the case deals with how the language of an ERISA plan should be interpreted and enforced.

Most insurance companies place a boilerplate clause in their policies along the lines of this: "the insurer has the discretion to interpret the terms of this policy and determine eligibility for benefits. The insurer’s decisions shall be binding on the parties." Over 15 years ago, in Firestone Tire & Rubber v. Bruch, the U.S. Supreme Court held that this type of discretion granting language limits the ability of judges to reverse an ERISA plan’s denial to situations where the decision-maker was arbitrary and capricious. Thus, so long as the decision-maker is not completely unreasonable, federal judges will generally not reverse its denial of a claim. However, in Bruch the Supreme Court also stated that if the decision-maker has a conflict of interest, that conflict requires a judge to scrutinize the insurer’s decision more carefully and skeptically than they otherwise would under an arbitrary and capricious standard of review.

In Rud, Judge Posner rationalizes away the conflict of interest language of Bruch by stating that every contract involves a conflict of interest because "each party wants to get as much out of the contract as possible." However, in the case of a health or disability insurance company, there is tremendous opportunity to make sure the insurer gets more than its fair share of benefit out of a policy. Insurance companies draft their policies with little or no input from the insured person, unilaterally determine the premium they will charge and make the ultimate decision about whether a particular claim will be paid or denied. In addition, insurance is very complex and confusing. As a practical matter, there is little opportunity or ability for an insured person to challenge anything but the most obvious error an insurer makes in denying a claim.

Despite the degree to which the insurer and Joe Lunchbucket are unequal in their ability to protect their respective financial interests, Judge Posner goes on to state: "it is hard to see why, if the plan unequivocally authorizes the insurance company to make the conclusive determination of eligibility, the courts should rewrite the provision." Relying on the importance of preserving the right parties have to contract freely about whatever they want, Rud holds that even when there is a conflict of interest, courts should be reluctant to second guess the terms parties place in their contract. It’s a very laissez-faire approach to the issue, consistent with Judge Posner’s reputation as a scholar heavily influenced by free market thinking and economic analysis. This approach to interpretation and enforcement of contracts has been around for quite awhile--as long, in fact, as judges have been around to settle disputes between contracting parties.

However, there is another school of thought on how contracts should be interpreted and enforced. Rather than simply require parties to a contract to live with the literal contract terms down to the last jot and tittle, no matter how one sided they may be, some judges faced with deciding how a contract should be enforced consider the circumstances surrounding how the contract came to be, the relative knowledge and sophistication of the parties, and the economic balance, or lack of it, between them. It’s not hard to think of examples where a judge should do exactly that. If a father of a 16 year old girl decides to supplement the family income by selling his daughter into prostitution, no court will rule in favor of the pimp who sues to enforce the contract when dad later reneges on the deal. Whether to enforce that contract isn’t a close call because the contract between dad and pimp was illegal in the first place. But there will be closer calls about enforcing contracts involving situations that do not involve illegality and about which reasonable minds may disagree.

So what does ERISA have to say about the relationship between insurers and employers on the one hand and employees and their dependents on the other?  ERISA was passed to protect employees and their dependents from losing pension and other fringe benefits. To put these protections in place, Congress relied heavily on principles of trust law to supplement and modify the law of contracts. Trust law applies to protect the interests of a party who is vulnerable to being abused, deceived or is otherwise incapable of protecting their interests. The prototypical trust law scenario is where assets are being held for minors or otherwise incompetent individuals.

In the years leading up to 1974 when ERISA was passed, several things occurred that caused Congress to act. The Studebaker corporation went bankrupt and left thousands of employees with pennies on the dollar for pension benefits the employees had negotiated and helped fund over their working careers. In addition, several unions were involved in stealing the pension funds of their members. So Congress imported a number of trust law principles into ERISA. For example, insurers and ERISA plan administrators have a fiduciary relationship with employees and their dependents. These fiduciaries hold ERISA plan assets in trust for the employees and their dependents. 29 U.S.C. §1103. If there is a denial of benefits that an employee believes is wrong, the statute is designed to provide "ready access to Federal courts." 29 U.S.C. §1001(b). In its role as an ERISA fiduciary, an insurer must act solely in the interest of the employees and their dependents and for the exclusive purposes of providing them benefits. 29 U.S.C. §1104(a)(1)(A). An ERISA fiduciary must be completely loyal to the economic interests of the employees and their dependents. That is why the Supreme Court referred in Bruch to the need for judges to take into account any conflict of interest an ERISA fiduciary has. 

ERISA's fiduciary duty standards sound inconsistent with an insurer’s profit making purpose don’t they? In fact, the tension between ERISA’s trust law principles and the reality of relying on profit making entities to carry out ERISA’s fiduciary duties is very significant. It generates a lot of litigation.

The problem I have with Judge Posner’s analysis in Rud is that it almost completely ignores ERISA’s trust law component. This is no small error. ERISA’s trust law principles undermine the heart of Judge Posner’s rationale for why federal courts should not second guess the way in which an insurance company sometimes deals with the people it insures. Unfortunately, my experience is that Judge Posner’s pro-insurer, pro-employer result is much more common than it should be among the federal judiciary deciding ERISA cases. When the economic interests of an insurer or employer conflict with its fiduciary duties under ERISA, many judges are too quick to simply ignore the latter and gut ERISA’s fiduciary protections in the process.

Update on Attempts to Amend ERISA

I posted here, here, here, here and here last month about an attempt in Congress to amend ERISA to eviscerate the doctrine of equitable subrogation. Since then several things have happened. The Association of Trial Lawyers of America has come out in opposition to the change. Kevin Drum, a high profile political blogger, had a comment about it. There is a letter writing campaign by a number of prominent attorneys and law professors to oppose the amendment.

I don’t believe the members of the conference committee have yet been appointed to integrate the differences between the House and the Senate versions of the bill. It is in the conference committee that we’ll find out whether the change the House inserted at the last minute will make it through the reconciliation process. I’ll update more on the status of that process as I get it.

Yesterday's Association Health Plan is Today's Small Business Health Plan

Senator Michael Enzi from Wyoming has long worked to pass legislation that provides a more affordable health plan alternative to small businesses. In previous years he sponsored legislation to allow small employers to band together and form self funded Association Health Plans (AHP). But he ran into opposition from consumer groups and the insurance industry that felt his proposal was not giving consumers adequate protection. Self funded plans are beyond the scope of state insurance regulation under ERISA’s preemption provisions found at 29 USC §1144(b)(2)(B). Some folks rightly felt that encouraging small employers to set up self funded plans was unwise.

I agree that fostering self funded plans for small employers, even when they group together as AHPs, is a very bad concept. I’ve dealt with a disproportionate share of inadequately funded and incompetently administered small self funded plans. AHPs were sheep waiting to be sheared by unscrupulous third party administrators, fiduciaries and stop loss insurers. Of course, the real losers in that situation would have been the employees and their family members who would have counted on receiving health benefits only to be left holding the bag. ERISA, standing alone, without the additional help of state insurance regulations and case law, gives consumers who are cheated out of their benefits by unscrupulous plan fiduciaries about as much protection as an umbrella in a hurricane.

So Senator Enzi retooled. A couple of days ago he unveiled the Health Insurance Marketplace Modernization Act of 2006 that contains the Small Business Health Plan (SBHP) initiative. This proposed bill addresses some of the concerns of consumer and insurance groups about the old AHPs. It requires that small businesses who form health benefit plans under the bill do so only by purchasing group coverage through licensed insurers, thus subjecting the SBHP to state insurance regulation. To provide cost savings, it allows SBHPs to slide around some of the mandated benefits that various states require of insurers and that, to some degree, increase the expense of health insurance. It requires insurers of SBHPs to accept all applicants regardless of health history and caps the amount the insurers can write up the premiums to levels set by the National Association of Insurance Commissioners, 25% above the base rate for the initial year and 15% per year after that. Finally, it establishes a "harmonization" board that will work to create greater uniformity among the various state’s rate structures and form filing procedures.

It’s an interesting concept and what little information I have about it is that Senator Enzi has worked to accommodate the primary interests of the parties that have been at odds in past years. Will it get through Congress? Time will tell. I’ll post updates as they become available.

A Procrustean Statute

A case from the U.S. District Court for the Eastern District of Michigan from earlier this week, The Regents of the University of Michigan v. Otis Spunkmeyer, Inc., case # 03-72985, illustrates the effect of ERISA’s reliance on the letter of the law. A hospital, as assignee, sued an ERISA plan to recover the medical expenses related to a premature baby’s medical treatment. The plan required that in order to obtain coverage for newborns, the infant had to be enrolled as a beneficiary of the plan within 31 days after birth. However, neither the hospital nor the baby’s parents got around to filling out and submitting the necessary paperwork during that time frame. The medical expenses were nearly $650,000.

The court made short work of the situation. The plan required enrollment within 31 days and that didn’t occur. Result: the plan is off the hook and the hospital has to either write off the bill or collect from the parents. There’s not much question about which route the hospital will end up taking.

Relying on the technical details of the language of ERISA plan documents to dispose of claims, even when the result seems to cause tremendous hardship, is very common. And it doesn’t always work to the detriment of the plan participants and beneficiaries or to the benefit of the insurer or plan sponsor. But it is an odd thing to see how ERISA, a statute filled with language about the need to utilize equitable principles involving fairness, flexibility, trust law and fashioning appropriate remedies to address the specific needs of the situation at hand, has been interpreted over time to be so unforgiving of deviation from the language of the plan documents. Those plan documents are invariably complex and filled with detailed requirements, stipulations, exceptions, conditions, limitations, exclusions, contingencies and provisos. They are almost always drafted by insurers and the businesses sponsoring the ERISA plan. As a result, the loss associated with failing to dot the i’s and cross the t’s seems to always fall hardest on the unsophisticated, unrepresented and unmonied.

The Sixth Circuit Strikes Again

The U. S. Court of Appeals for the Sixth Circuit has issued a number of encouraging decisions recently, at least from the perspective of plaintiffs’ lawyers. And really, what other perspective matters?  Evans v. UNUMProvident Corp., 434 F.3d 866 (6th Circuit 2006) deals with a denied disability claim being reviewed under an arbitrary and capricious standard of review.  This is the most deferential review courts provide when asked to take a look at the decisions ERISA plans and their insurers and fiduciaries make.  Despite such significant deference, the decision reverses the denial and orders payment of benefits. 

There are many good bits of language and analysis in the court's ruling. For example, the court states that even though an insurer's denial will be sustained unless it is arbitrary and capricious, "it is not, however, without some teeth. . . merely because our review must be deferential does not mean our review must be inconsequential. . . the federal courts do not sit in review of the administrator's decision only for the purpose of rubber stamping those decisions."

The decision then refers to the inherent conflict of interest UNUMProvident has in acting both as the ERISA fiduciary obligated to make decisions solely in the interest of ERISA participants and for the exclusive purpose of providing them benefits while at the same time acting as a profit making company that incurs a direct expense as a result of any decision it makes to pay benefits.  After reviewing various legal principles from prior Sixth Circuit decisions, the court applies them to the facts of the case to conclude, 1) the insurer unreasonably discounted the opinions of the applicant's treating physicians that the applicant was disabled, 2) the insurer improperly focused on the relatively non-taxing physical demands of the applicant's job while ignoring the more significant mental and emotional demands of the job, and 3) the internal communications of the insurer made it clear that, as the court puts it, "the defendant's conflict of interest unduly influenced its evaluation of plaintiff's claim." 

AARP Weighs in on Small Business Health Plans

Department of Labor Investigating Northwest Air's Pension Fund

Yesterday's New York Times has a story about the Department of Labor investigating Northwest Airline for coordinating the timing of its bankruptcy to get maximum benefit of transfering its unfunded pension plan obligations to the federal Pension Benefit Guaranty Corporation.  As the article puts it, the investigation suggests "the Labor Department is looking for a way to breach an entrenched pattern, in which distressed companies quietly deplete their pension funds over a number of years, then declare bankruptcy and transfer huge obligations to the federal government." 

The DOL working to put more teeth into ERISA's fiduciary duty language?  Great idea!  

ERISA & Class Actions

Because it establishes standards that must be followed by employee pension and welfare benefit plans across the country, ERISA is well suited to serve as a vehicle for class actions. However, one fly in the class action ointment is the requirement imposed by the federal judiciary that an individual bringing a claim for benefits must exhaust prelitigation appeals to the plan and its fiduciaries. Defendants in ERISA class actions routinely argue that all members of an ERISA plan must exhaust their prelitigation appeals before they can be part of the class. Adopting that argument would, as a practical matter, eliminate the possibility of bringing class actions in ERISA cases. Fortunately, most courts that have considered this argument have rejected it and allowed the case to go forward as a class action as long as the class representatives, as opposed to all class members, have exhausted their prelitigation appeals.

That position was strengthened considerably by an opinion from the U.S. Seventh Circuit Court of Appeals yesterday, In Re Household International Tax Reduction Plan, 2006 U.S. App. LEXIS 6821. Judge Richard Posner wrote the decision. I’ve blogged about Judge Posner before. He wrote the short decision for the panel specifically holding that so long as the class representative's claims fairly present the issue to be adjudicated to the ERISA fiduciary and that fiduciary has an opportunity to consider the class representative's claims, further exhaustion by other class members "would merely produce an avalanche of duplicative proceedings and accidental forfeitures, and so is not required."

Judge Posner is a very influential jurist.  This opinion will carry some weight among his federal courtmates

More Litigation Follies

I ran across another illustration of a provider getting kicked around in litigation because of poor legal representation this week. A federal district court dismissed a case for unpaid medical expenses brought by a large urban hospital. Reading the case it became painfully obvious to me that the attorney for the hospital simply didn’t have a clue about how to even begin to pursue the claim with any likelihood of success. No reason to disclose the name of the case or the hospital’s counsel. But here are some problems with the hospital’s handling of the case that jumped out.

First sign that the hospital’s attorney is out of his element: he files a case against a very large self funded medical plan sponsored by the mother of all retailers in state court. This is a case that is clearly governed by ERISA. It is permissible under ERISA for benefit recovery cases to be filed in state rather than federal court. But there was no mention of ERISA in the complaint. The case was brought for recovery under an open account theory. Sorry, but that will never fly in an ERISA case. That claim is simply not available. The judge dismisses it immediately.

Next, the hospital’s counsel has no clear idea about how to handle the fact that the hospital has claims both under a preferred provider contract AND under the patient’s ERISA plan. Those two separate rights require different and very careful analyses. It’s a good thing to have both rights. But sometimes a hospital will want to ignore one right and focus on the other. Sometimes it will want to ignore both and see if facts exist to assert state law tort claims that are, yet again, distinct from either the PPO or the ERISA claim. It all depends on the circumstances of the case. And unless an ERISA plaintiff's lawyer recognizes what facts to look for and why they matter, he really has little hope for a good outcome.

Finally, the court decision notes the failure of the hospital’s counsel to include documents to support the hospital’s claims and failure to file timely responses to motions before the court.

Pursuing claims for health care providers and their patients in court against commercial payors absolutely requires high levels of skill and expertise. This area of litigation is not for the inexperienced attorney. And having incompetent counsel working cases for ERISA plaintiffs makes bad law that then haunts future litigants.

Disability Insurer Hit With Bad Faith in Indiana

Via Bridget O'Ryan, ERISA plaintiff's attorney in Indiana, we receive word of a large verdict against Lumbermens Mutual Casualty Co., which is a part of Kemper Insurance.  You can read about the verdict here in the Indianapolis Star.   

The plaintiff, Donna Combs, suffered from myelodysplastic syndrome (a form of cancer) and rheumatoid arthritis.  She was paid disability benefits for two years and then was terminated wrongfully by the insurer.  With the claims file there was a note from the claims administrator stating that termination of the claim had resulted in a savings to the insurer of $356,000. 

Combs' counsel asked the jury to award three times the $356,000 to reflect compensation for Combs' financial and emotional distress.  But Bridget, who was co-counsel on the case, tells me that members of the jury added some onto that to make sure Ms. Combs expenses were covered.  

Mandated Insurance Benefits

Early in the evolution of the case law that defines ERISA, the Supreme Court ruled that insured ERISA plans must comply with state law requirements for mandated benefits. Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985) prevented Met Life from using ERISA’s preemption clause to ignore a mandated mental health benefit Massachusetts required all insurers doing business in that state to provide to its citizens.

Knowing about mandated benefits ensures that patients are in a better position to get their full measure of benefits from insured ERISA plans. For example, many states have mental health parity statutes. The statutes differ a great deal from state to state but many require insurers to provide mental health benefits at the same coverage levels as they provide for physical illnesses or injuries. If an insurer in such a state limits payment of inpatient mental health care to 10 days per year and provides a more generous coverage level for treatment of physical conditions, the mental health limitation is invalid and the patient can get the insurer’s denial based on the 10 day per year limitation overturned.

States have passed many different types of mandated benefits in the past two or three decades. For example, you can review a summary of Wisconsin’s mandated benefits here. The legislative decision to require insurers to provide certain benefits to their insureds is controversial because it raises the costs of insurance. But most people feel there should be a basic level of coverage that health insurers marketing comprehensive health insurance coverage simply must provide.

Frank Comments

It's not that common to see federal judges really speak their mind in frank language.  A March 29, 2006, Memorandum and Order in Wilson v. Life Ins. Co. of North America, case no. 4:05cv3133 out of the federal district court of Nebraska, has some unusually pointed language about an insurer's actions.  Judge Richard G. Kopf was evaluating whether a disability insurer was correct in denying a claimant's disability application. 

Mr. Wilson worked as a telephone cable repairer.  He had suffered a heart attack that required two stents, a stroke resulting from coronary artery disease, loss of vision in the right side of each eye as a result of the stroke, poorly controlled diabetes and peripheral vascular disease that caused severe leg pain.  He qualified for Social Security disability benefits.  The insurer, LINA, said that while he couldn't work as a telephone cable repairer anymore, he could be a maintenance scheduler or a service dispatcher. 

Judge Kopf started his analysis of Wilson's claim in this way.  "Frankly, it is hard to know where to begin.  How LINA could conclude that a heart attack and stroke victim in his early fifties could work full-time even at seated work, when he was literally half blind, had serious vascular problems, and suffered severe pain that deprived him of normal sleep, is beyond me.  That said, here are four points that highlight why I think Wilson made his case (and then some) . . . "   

Mr. Wilson got his benefits.

Like Crack Cocaine to a Drug Addict

Recently the largest health insurer in California, Blue Cross of California, was sued in a series of ten separate lawsuits. The allegations are that Blue Cross systematically reviews large claims submitted shortly after a policy goes into effect and then rescinds those policies for no good reason other than to get out of paying the submitted claims. I’ve commented before on some of the unique aspects of rescission cases.

I’m litigating two separate rescission cases right now that make me pretty sure the cases I’ve linked to in the L.A. Times story have some merit. In both of my cases the health insurers retrospectively reviewed my clients’ applications based on claims that were submitted within three or four months after the policies went into effect. In each case the insurers found relatively minor discrepancies between the answers on the insurance application and my clients’ health histories. In neither case did the alleged misstatement or omission have anything to do with the claims that were submitted by my clients after their policies went into effect. And once we got hold of the insurers’ underwriting guidelines it became clear that the "misstatements" my clients supposedly made were insignificant and wouldn’t have called for the insurers to decline coverage even if they had been disclosed.

Every time I have a person call about a rescission claim I take a hard look at it. In my experience, insurers often rescind policies for very flimsy reasons. When big claims come in shortly after a policy goes into effect, insurers often look hard at whether they can rescind the policy to get out of paying those claims. In fairness to insurers, when large claims come in soon after coverage goes into effect it is sometimes true that a person has lied during the application process in order to get coverage for a serious medical condition that presents the need for immediate treatment. If a person is willing to knowingly misrepresent their health history about a serious medical condition to get coverage and that medical condition thereafter results in significant expense, the insurer should be able to rescind. But insurers use rescission as a strategy to avoid paying valid claims far more often than in that limited situation. The availability of rescission can act on an insurer like crack to a drug addict.

Concerns About HIMMA

Last month I wrote about the Health Insurance Marketplace Modernization Act (HIMMA), a new bill introduced by Senator Enzi to increase accessibility to health insurance for small businesses. The American Association of Retired Persons weighed in almost immediately here. Other reviews are coming in from insurers and state insurance departments and they seem to be unfavorable for the most part. As an example I’ve posted in the library a copy of a letter the Attorney General for the State of Illinois, Lisa Madigan, wrote to Senators Durbin and Obama outlining her concerns.

The Latest on Attempts to Eliminate Equitable Subrogation

Here's the latest on Congress's attempts to amend ERISA to eliminate the made whole rule and give insurers carte blanche to be reimbursed their medical expenses regardless of how complete the compensation is from the negligent third party for the victim.  The legislation's sponsors wanted to get all the changes in place before the Spring break that began a couple of weeks ago but ran into problems.  The time frame for hammering out the differences between the House and Senate versions of the Pension Protection Act is now set for May or later. 

In the meantime, voices opposing the efforts to get rid of equitable subrogation, the idea that a personal injury plaintiff should be completely compensated for his injuries from a negligent third party before health insurers or medical benefit plans can be reimbursed, are starting to rise.  I've posted in the Library an Op-Ed piece I sent to my local paper, the Salt Lake Tribune.  I'll let you know if it gets published.  It tells the story of Karl Sweat, a good illustration of why this legislation is such a bad idea.  It also borrows extensively from information provided by the Association of Trial Lawyers of America to its members about the need to apply pressure to have the language emasculating the made whole rule removed from the Pension Protection Act. 

Also, over 150 attorneys and law professors have signed a letter to the members of the conference committee detailing their concerns about the bill, specifically the fact that the bill as drafted creates a one way street that favors insurer interests and provides no protection to ERISA participants and beneficiaries.  You can find the letter here in the Library.   Other comments I've made about this legislation can be found here, here, here, here, here and here. 

How Much Would Disability Insurers Have to Raise Their Premiums If Discretionary Clauses Were Prohibited?

In the News section of this website I’ve posted an article about discretionary clauses in insurance policies and how they create an unfair advantage for insurers by encouraging them to deny claims that should be paid. Briefly, under ERISA, clauses in insurance policies that give insurers discretion to interpret the terms of the policy and determine eligibility for benefits are enforceable and prevent judges from reversing an insurer’s denial of benefits unless the consumer can show that the insurer was arbitrary and capricious. That’s a tough standard for consumers to satisfy.

Insurers argue that these clauses aren’t bad because they result in a lower cost insurance product for consumers. This assumes that the money insurers save from denying claims based on the existence of discretionary clauses that would otherwise be paid to a claimant flows through to consumers in the form of lower premiums. It’s difficult to know the degree to which that is true but let’s assume, for the purposes of argument, that these savings do flow through to consumers to a significant degree. So, by how much are insurance premiums lower due to use of discretionary clauses than they would be if these clauses were prohibited?

Milliman, Inc., a national business consulting and actuarial firm, released a report about six months ago that analyzes that question in the context of disability policies. I’ve put a copy of it in the library section of the website and you can read it here. Milliman’s conclusion is that eliminating discretionary clauses would have the effect of increasing disability insurance premiums from 3 to 4%. The analysis and conclusions about discretionary clauses (as opposed to other modifications to disability insurance policies) are found in the first eleven pages of the 26 page PDF document.

Shernoff's Lawsuits Trigger California State Investigations

A couple of weeks ago I commented on a series of lawsuits filed by William Shernoff, a well known plaintiff’s lawyer in Southern California, against Blue Cross of California. He alleges that Blue Cross of California makes it a regular practice to rescind coverage on individual insurance policies where large medical expenses are incurred shortly after the policies go into effect. When that occurs, Blue Cross makes it a practice to go through an insured’s medical records looking for any discrepancy between the representations made by the insured in the application and their medical history. If there are any misstatements, omissions, or inconsistencies at all, Blue Cross rescinds. The L.A. Times has an article in today’s paper discussing the cases Shernoff has filed. Those cases have prompted the California state departments of insurance and managed healthcare to open investigations of Blue Cross of California.

Blue Cross’ actions violate California state insurance law. According to the article, insurers in that state may rescind only if they can show a misstatement on an application was made with some intent to deceive the insurer. Not all states are like California. In some, an insurer is allowed to rescind if there is any material misstatement made in the application, regardless of whether the applicant intended to deceive the insurer or even knew that the statement in the application was inaccurate.

Opposition to HIMMA Grows

I've commented on the Health Insurance Marketplace Modernization and Affordability Act here, here and here.  This week come two more comments against HIMMA.  First, a letter to Senator Obama from the Illinois Division of Insurance that you can find in the library of this website.  The letter raises a number of well founded concerns including preemption of state statutes and protection of consumer rights. 

Second, the National Association of Attorneys General sent a letter to all Senators last week basically arguing that HIMMA will substitute weak federal regulations for strong state consumer protections that are currently in place.