Apr 23, 2019

Rochow v. LINA: Common Sense Prevails

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Brian S. King
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Another recent disability case out of the Sixth Circuit warrants notice. The case, Rochow v. Life Ins. Co. of North America, ___ F.3d ___, 2007 U.S. App. LEXIS 7599 (6th Cir. 2007) involves a high level executive of a company who, over the course of a few months, developed debilitating cognitive loss. LINA, the insurer, denied his disability claim. The trial court reversed that denial, granted Rochow benefits and the Sixth Circuit affirmed that decision. The case shows that insurers may not ignore common sense in enforcing the terms of a disability policy. The backdrop is a sad fact scenario but one that also illustrates the quirks of disability insurance. Rochow was President of Arthur J. Gallagher & Co. for ten years. Suddenly, in 2001, within a period of a little over six months, he was demoted from President to sales executive-account manager and then terminated because of poor performance. A few weeks after being terminated he was involuntarily committed to a psychiatric hospital and was finally diagnosed with HSV-Encephalitis, an extremely rare form of herpes that can cause brain damage similar to that associated with strokes or traumatic brain injuries. Rochow, through a personal representative, filed a disability claim about a year after losing his job. LINA, the insurer, denied it for a couple of different reasons. First, the policy indicated that disability coverage ended as of the date the employee was no longer in “active service” with the company. In addition, a claimant qualified for disability benefits if they were unable to perform the regular duties of their own occupation or a qualified alternative. LINA pointed out that Rochow had worked up to the date of his termination and did not file a disability claim until many months after he lost his job. LINA reasoned that if he was working with the company in one capacity or the other until his last day on the job, how could he have been disabled at any time when he was in active service? No denying there is some superficial appeal to the argument. As the second basis for denial, LINA asserted that Rochow failed to submit sufficient medical evidence to establish that he could not perform the regular duties of his own occupation. Finally, LINA relied heavily on the old deferential standard of review, asserting that unless its denial was arbitrary and capricious, the court should not disturb its decision. The trial court disagreed. The problem for LINA was that the employer had made clear through its actions that Rochow couldn’t perform the regular duties of his job either as President or as sales executive-account manager. The fact that he was collecting pay and was on the job until termination didn’t address the critical issue of whether he could adequately perform the duties of his job. On the latter point, the trial court felt Rochow had clearly presented adequate evidence to carry his burden of proof. The Sixth Circuit affirmed the trial court ruling that LINA had been arbitrary and capricious:”the fact that Rochow remained on the payroll [until he was terminated] . . . is not determinative as to whether or not he was disabled during that time; there is no ‘logical incompatibility between working full time and being disabled from working full time’” (citing Hawkins v. First Union Corp LTD Plan, 326 F.3d 914, 918 (7th Cir. 2003). While Rochow was not diagnosed with the illness that caused his cognitive loss until after his employment terminated, the evidence of the incapacitating effects of that illness at the time he was terminated was very clear. The Sixth Circuit also noted that under ERISA, 29 U.S.C. §1104(a)(1)(A), the statute’s fiduciary duty of loyalty, LINA was obligated to act solely in the interest of its insureds and for the exclusive purpose of providing them benefits. In its succinct conclusion, the court states that “the entire record, viewed in perspective,” indicates that LINA was arbitrary and capricious in denying benefits, that its decision was unsupported by substantial evidence, that the process by which the decision was reached was not the result of deliberate and principled reasoning and that LINA violated ERISA’s duty of loyalty when it denied Rochow’s claim.

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5 Comments to "Rochow v. LINA: Common Sense Prevails"

I looked up 29USC, Ch. 18, Sec. 1104 : Fiduciary Duties.
Insurers are not expressly listed as a fiduciary, so I don't know where the judge got that impression.
If you really want to have an insurer who is more, legally, beholden to its policyholders, consider a partially self insured Voluntary Employees' Beneficiary Association (VEBA). Maybe we can get one started for the attorneys in Utah!
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
The insurer would owe fiduciary-type loyalty, if, indeed, it was a fiduciary.
There is a difference between the loyalty of a fiduciary, and acting in "good faith" and analyzing with "reasonable care."
Corrado Bros. v Twin City Fire, 562 A.2d 1188, 1192 (Del. 1989) sums this up well.
"The concept of a fiduciary relationship, which derives from the law of trusts, is more aptly applied in legal relationships where the interests of the fiduciary and the beneficiary incline toward a common goal and in which the fiduciary is required to pursue solely the interests of the beneficiary in the property. The relationship of insurer and insured, however, arises contractually with each party reserving certain rights under the contract, the resolution of which often leads to litigation."
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
Thanks for providing this case.
I agree with everything the court said, except for the part regarding the insurer's fiduciary responsibility.
I am under the impression that the insurer has a fiduciary responsibility to all its insureds, which is primary to its responsibility to a particular group, or even an individual claimant.
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
Thank you Don! Your cite provides a helpful explicit recognition by a court that ERISA's fiduciary duties are higher than those traditionally associated with the insurer/insured relationship. The degree to which courts are paternalistic in protecting the "weaker" party to economic transactions ranges from not at all (when dealing with two relatively sophisticated and equal parties transacting at arm's length) to completely paternalistic in the trust relationship with fiduciary duties attached. I agree with the cite you provide from the Delaware case that, traditionally, courts have viewed the insurer/insured relationship as falling between these two ends of the spectrum.

But where does that leave us? When ERISA explicitly states that there is a fiduciary status imposed on insurers, as opposed to the historically less protective insurer/insured status, absent some exception for insurers, shouldn't courts be honoring express Congressional intent in holding insurers to a fiduciary standard of conduct?
Posted by Brian S. King on November 17, 2008 at 01:47 PM
Don, you are correct that the fiduciary duty is owed to all participants and beneficiaries of a particular plan rather than just to one person in the plan making a claim at any given time. Insurers have made the same point in various cases and courts have agreed. I don't have a quarrel with that idea. But I don't really think it advances the analysis much. In making this point is the idea that insurers should never pay today's claim because it must always preserve its assets for a potential flood of claims tomorrow? Taking the rationale to its logical extreme, this is the implied result. Of course, no one believes that is a justifiable approach to insurance claims processing.

The reason the court's discussion of the fiduciary duty aspect of insured plans under ERISA is noteworthy is that, even assuming ERISA's fiduciary duty of loyalty relates to all the plan's participants and beneficiaries (in this case the insured individuals under this particular group policy), the court is saying the insurer needs to place the claimants' interests under the policy above its own pecuniary interests. That is a pretty radical concept to inject into an insurer's business mindset. In my experience it is usually not taken seriously by insurers. And usually the federal judiciary, like the insurers, refuses to take the insurers' fiduciary duty of loyalty seriously in their analysis of ERISA. But, as the Rochow court points out, ERISA is unambiguous on this issue of an insurer's fiduciary duty of loyalty. If courts were more diligent about enforcing the plain language of ERISA's fiduciary duty of loyalty, we would see different behavior from insurers. But they don't and we don't. And that irritates me a great deal.
Posted by Brian S. King on November 17, 2008 at 01:47 PM

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