This newsletter highlights circuit court opinions reported during December 2008, including McCauley v. First Unum Life Ins. Co., a post-Glenn case in which the Second Circuit reassesses the standard of review to be applied where there is a conflict of interest. We also want to share with you an article, "ERISA Litigation: Back to Basics," that our ERISA team recently published in The Federal Lawyer. If you have any questions on either the content of this newsletter or the article, please contact us. Article printed with permission.
McCauley v. First Unum Life Ins. Co., 2008 WL 5377680 (2d Cir. Dec. 24, 2008):Plan participant, McCauley, appealed from a grant of summary judgment in favor of First Unum on his claim for long term disability benefits. The Second Circuit determined that it was necessary to review the district courts decision applying Metropolitan Life Ins. Co. v. Glenn since Glenn was decided after the district court had made its decision that First Unum had not abused its discretion in denying McCauley's application for benefits.
The Second Circuit stated that its "current standard of review allow[ed] a court to review de novo the administrator's decision when it [was] shown that a conflict of interest actually influenced that decision." The Court abandoned that standard as inconsistent with Glenn and, instead, held that a conflict of interest is to be weighed as a factor in determining whether there was an abuse of discretion.
After the Court clarified the appropriate standard, it reviewed First Unum's denial of benefits and found that it had abused its discretion. The Court concluded that (1) First Unum operated under a conflict of interest, (2) it was unreasonable for First Unum to rely on one report without further investigation into a contradictory report, (3) it was unreasonable for First Unum not to receive a physician's recommendation, (4) First Unum had a "well-documented history of abusive claims processing," and (5) these factors taken together show that First Unum was affected by its conflict of interest. The Court vacated the judgment of the district court and entered judgment in favor of McCauley.
* This case is significant for its reassessment of the standard of review applied in the Second Circuit, post Glenn, in cases involving a conflict of interest.
Dieffenbach v. Cigna, Inc., 2009 WL 27426 (3d Cir. Jan. 6, 2009): Plaintiff filed the underlying action in state court against his former employer, Cigna, asserting claims for age discrimination and seeking invalidation of the general liability waiver Cigna required in exchange for severance benefits. Cigna removed the action to federal court and the district court disposed of the case in favor of Cigna on res judicata grounds. On appeal, one issue raised, among others, was whether the district court properly exercised jurisdiction over Plaintiff's removed case. Cigna alleged that Plaintiff's second claim (invalidation of the liability waiver required in exchange for severance benefits) was preempted by ERISA, therefore the district court had jurisdiction. The Third Circuit disagreed. It found that Plaintiff's claim did not fall within ERISA's civil enforcement scheme because he sought a declaration that the liability release violated state public policy and did not seek benefits under the plan or claim that Cigna improperly processed his claim for benefits. Since Plaintiff's second claim was not preempted, the district court did not have federal question jurisdiction. The case was remanded to the district court with instructions to remand the case to state court.
*This decision illustrates that while "ERISA's preemptive scope may be broad," it does not necessarily "reach claims that do not involve the administration of plans, even though the plan may be a party to the suit or the claim relies on the details of the plan."
Love v. Dell, Inc., 2008 WL 5064742 (5th Cir. Dec. 2, 2008): In this case, a 17-year old dependent beneficiary under an ERISA-governed benefit plan challenged administrator's denial of benefits for inpatient treatment at two mental health facilities on the basis that the more intensive and expensive, residential treatment (as opposed to intensive outpatient treatment only) was not medically necessary as required by the Plan.
In affirming the District Court's award of summary judgment to Defendants, Court rejected Plaintiff's argument that the administrator should have deferred to the opinions of treating physicians who argued that the more intensive treatment was medically necessary. In doing so, the Court explained: "ERISA does not require the opinions of treating physicians to be preferred over those of other physicians reviewing a file; ERISA merely requires that the opinions of treating physicians, as with all evidence submitted by the claimant, actually be taken in account in an administrator's determination."
The Court also found that it was not an abuse of discretion for the administrator to evaluate the necessity of treatment against the adult criteria, rather than the adolescent criteria, where the criteria allowed for some flexibility "on a case-by-case basis," the program was considered an adult program by the facility at which treatment was provided and the program "was oriented toward adult outcomes, such as independent living."
* In addition to affirming the rule that an ERISA administrator is not required to give deference to the opinions of a treating physician over that of a reviewing physician, the Court gives broad discretion to the administrator's case-by-case approach to determining medical necessity.
Medical Mutual of Ohio v. K. Amalia Enterprises Inc., 2008 WL 5060320 (6th Cir. Dec. 2, 2008): Insurer sued insureds and employer representatives under a group health insurance policy for claims arising out of insured's failure to disclose pre-existing medical condition. The Court ruled that claims were time-barred by the contractual limitations provision, notwithstanding delayed discovery by the insurer of the insured's fraudulent failure to disclose.
On October 14, 2001, the employee/insured and her husband completed and signed a "Health and Life Application/Policy Change" form indicating that neither the employee nor her dependents had any of the medical conditions listed on the form, including hemophilia. The insurer paid approximately $525,000 for claims related to treatment of one of the employee's dependent's diagnosis of hemophilia beginning on or before February 1, 2002. In August 2004, the insurer conducted an audit which revealed that the dependent son's hemophilia was a pre-existing condition that should have been disclosed on the October 2001 application. On April 14, 2005, the insurer filed suit for breach of the insurance contract, negligent misrepresentation, and fraudulent behavior.
The policy at issue contained the following contractual limitations provision:
No action at law or in equity...shall be brought after the expiration of three (3) years after the time written proof of loss is required to be furnished. In the case of legal action other than those to recover benefits, no action may be brought more than two (2) years from the date the cause of action arises.
The Court reasoned that regardless of whether the 2 or 3 year limitation applied, the action was time-barred by the contractual limitations provision because "under the general formulation of the discovery rule [as interpreted by federal common law], a claim accrues...when the plaintiff discovers, or in the exercise of due diligence should have discovered, the injury which forms the basis for the claim." And, "[i]n the context of fraud, we have 'imposed upon the plaintiff a positive duty to use diligence in the discovering the existence of the cause of action.'" Because the insurer had access to information more than three years prior to the lawsuit, in the exercise of due diligence, it should have discovered that the dependent insured had a pre-existing condition and, therefore, the insurer's claims were barred and the district court's entry of judgment in favor of the defendants was appropriate.
* This is a harsh result - it rewards the plaintiff's misrepresentation and bars application of the Plan's pre-existing condition exclusion, notwithstanding the fact that in general, ERISA plan terms and provisions should be applied and enforced. Insurers faced with claims for illnesses diagnosed for the first time so close to the application date (in this case the diagnosis was reached only 4 months after the application was signed) should investigate those claims promptly.
Carter v. Hewlett Packard Co. Income Protection Plan, 2008 WL 5157635 (9th Cir. Dec. 9, 2008): Carter, an employee of HP, was a participant in an LTD plan established by HP and administered by Voluntary Plan Administrators ("VPA"). Carter applied for LTD benefits and her claim was denied. Thereafter, she filed suit seeking benefits against the plan. The district court granted summary judgment in favor of the plan. On appeal, the Ninth Circuit first addressed the appropriate standard of review. The Court stated that since the plan unambiguously conferred discretion on VPA, the denial should be reviewed for abuse of discretion unless the administrator "engage[d] in wholesale and flagrant violations of the procedural requirements of ERISA." The Court found that VPA violated the procedural requirements of ERISA by not providing an explanation of the materials necessary for Carter to perfect her claim for benefits -- it was insufficient to merely state that there was insufficient objective evidence. The Court "review[ed] VPA's decision for an abuse of discretion with skepticism."
The Court also found that there was a discrepancy between the policy and the SPD with respect to whether mental illness should be considered when making a disability determination. The Court stated that when there is discrepancy, the Court's interpretation must favor the employee. Thus, it found that VPA abused it discretion because it refused to consider Carter's mental illness in its disability determination. The Court reversed and remanded with instructions to remand the case to VPA for a new disability determination.
* In the Ninth Circuit, when there is a discrepancy between the SPD and the Plan, the Court's interpretation will favor the employee. In other circuits the SPD will control only after the participant shows reliance on the inconsistent SPD provision.
Kellog v. Metropolitan Life Ins. Co., 2008 WL 5095965 (10th Cir. Dec. 4, 2008): In this case, a surviving spouse was denied accidental death benefits on the basis that the decedent/plan participant's death, which resulted from a skull fracture following a single-car accident, was caused or contributed to by physical illness because a witness stated that it appeared he was having a seizure immediately prior to the crash. The Tenth Circuit ruled that a de novo standard of review applied because MetLife failed to respond to plaintiff's counsel's letter appealing the benefits and requesting copies of the claim file, plan documents and additional time to submit a complete appeal package. The Court abstained from deciding whether its former application of the "substantial compliance rule" regarding a plan administrator's procedural delays applied because it found there was no compliance at all on the part of MetLife.
Under the de novo standard, the Court declined to consider MetLife's alternative position that the decedent's death was not the result of an accident reasoning that the sole basis of the denial as explained in MetLife's letter to plaintiff was that the decedent's "physical illness, the seizure, was the cause of the crash." The Court ultimately held that the provision, which excluded coverage for losses "caused or contributed to by a physical illness," when interpreted consistent with the expectations of a reasonable policyholder, meant that a loss was excluded only if the physical injury contributed to the decedent's death - not the accident that caused his death. The Court explained that even if the decedent suffered a seizure prior to the accident, the seizure contributed to the car accident, but the accident itself was the sole cause of death. Therefore, benefits were payable under the policy.
*The Court found insufficient evidence to support MetLife's conclusion that the insured suffered a seizure prior to the accident. Rather than award benefits on that basis, however, the Court instead ruled that even if he had suffered a seizure, the seizure was not the direct cause of death, so the loss was not subject to the physical illness exclusion. In reaching this conclusion, the Court gives no weight to the "contributed to" language contained in the limitation provision and, instead, tortures that language to reach the result here. This interpretation should trigger concern on the part of insurers and plans dealing with similar AD&D claims.
Distinguishing SSA's Determination of Disability Post-Glenn Brown v. Hartford Life Ins. Co., 2008 WL 5102279 (10th Cir. Dec. 5, 2008): In this case, the district court, applying a de novo standard of review, upheld Hartford's termination of long term disability benefits test change set forth in the Plan, notwithstanding determinations by the Oklahoma Workers Compensation Commission ("OWCC") and the Social Security Administration ("SSA") that the insured was totally disabled. The Tenth Circuit reversed and remanded the matter after concluding that the district court incorrectly applied a de novo standard of review and failed to consider Hartford's conflict of interest as a factor in its determination.
The Tenth Circuit held that the Plan language conferred discretion on Hartford. Therefore, "the district court should have applied an arbitrary and capricious standard to Hartford's decision to deny benefits."
The Court then explained that although it might seem that the more deferential standard presented a greater hurdle to the insured, it could not uphold the district court's determination given its failure to expressly consider the additional factor of Hartford's conflict of interest. Specifically, the district court did not consider whether Hartford's financial interest played a role in its decision to ignore the SSA and WCC's determinations that the insured was disabled. Interestingly, in its termination letter, Hartford advised that it considered the fact that the insured was approved for SSDI benefits but did not consider the determination binding as it was required to administer the claim based on the policy language contained in the Plan. The Court criticized this statement as conclusory because it failed to distinguish the rationale for the SSA's decision or the evidence considered by the SSA. The Court held that, on remand, the district court "should be careful to appropriately weigh...Hartford's summary rejection of the decisions of the SSA and the OWCC finding Mr. Brown disabled, considering the differing standards applied by the governmental agencies but also considering any financial benefit Hartford derived from those determinations..."
* Since Glenn, numerous courts have suggested that an administrator's failure to distinguish its decision from that of the Social Security Administration (or a state agency) may evidence an abuse of discretion. Claim analysts should ensure that the record reflects a distinction between the applicable standards and, specifically, any differences in evidence considered and relied upon in reaching the contrary decision.