ERISA is the federal law governing employee benefits, like your health insurance. If you get your insurance through your employment, and if you think "insurance" is an enforceable contract that the insurer will cover what it says it will, then you don't have insurance at all -- you only think you do.
The Ninth Circuit today issued its opinion in Stephan v. UNUM, reversing a summary judgment in UNUM’s favor and sending the case back to the district court for further proceedings. Along the way the court described the sort of conduct UNUM has been engaging in, and the manner in which ERISA enables this unlawful behavior:
Numerous courts, including ours, have commented on Unum’s history “ ‘of erroneous and arbitrary benefits denials, bad faith contract misinterpretations, and other unscrupulous tactics,’ ” McCauley v. First Unum Life Ins. Co., 551 F.3d 126, 137 (2d Cir. 2008) (quoting Radford Trust v. First Unum Life Ins. Co., 321 F. Supp. 2d 226, 247 (D. Mass. 2004), rev’d on other grounds, 491 F.3d 21, 25 (1st Cir. 2007)). Indeed, in Saffon, we attributed the trend of state prohibitions on discretionary provisions in insurance contracts to “the cupidity of one particular insurer, Unum-Provident Corp., which boosted its profits by repeatedly denying benefits claims it knew to be valid. Unum-Provident’s internal memos revealed that the company’s senior officers relied on ERISA’s deferential standard of review to avoid detection and liability.” 522 F.3d at 867; see also Radford Trust, 321 F. Supp. 2d at 247 n.20 (collecting cases). Moreover, the CSA [California Settlement Agreement] notes that Unum was subject to “a multistate targeted examination” of its “claims handling practices,” which resulted in a settlement agreement similar to the CSA. And the CSA was the product of investigations by the State of California into Unum’s claims handling practices.
Erroneous and arbitrary benefits denials. Bad faith contract interpretations. Other unscrupulous tactics. Boosting profits by repeatedly denying claims it knew to be valid. All the while relying on ERISA’s deferential standard of review to avoid detection and liability. And these are the people we are supposed to trust because, after all, they are fiduciaries.
Well, it’s been about ten months since I posted something here. I offer no excuses. Indeed, what do I have to apologize for? After all, I have granted myself discretion to decide if or when to post something.
Anyway, to get this thing fired up again, herewith a slightly updated reprise of the Problem:
ERISA is the Employee Retirement Income Security Act, and it is codified in Title 29 of the United States Code, starting with section 1001. It's federal law, enacted in 1974, and it was supposed to protect employees' rights in connection with their pension plans and welfare benefit plans (health, disability, life insurance, that sort of thing). But it doesn't. Quite the contrary.
Way, way to the contrary.
This blog is dedicated to the ERISA problem.
What is that problem? It mainly concerns those welfare benefit plans (ERISA is actually not a bad law with respect to pension plans). Pension plans is what they had in mind when they enacted it -- welfare benefit plans were an afterthought.
And it shows. If your insurance company wrongfully denies your claim, you might figure you can always take them to court. You can do that (usually), but when you get there you'll find things don't make any sense:
If you get your insurance coverage through your employment, then in virtually every case ERISA preempts state law (meaning it cancels it out, eradicates it, takes its place). But, having gutted state law relating to insurance disputes, it fails to provide any reasonable substitute. The remedies it provides (i.e. what you get if you win a lawsuit) are very, very stingy, and in the vast majority of cases a successful claimant is not made whole; not even close. And ERISA severely compromises your ability to secure even the scant remedies it does provide.
1. Remedies. ERISA limits the recovery you might get to the benefits which should have been provided in the first place, and an award on account of attorney fees in the court’s discretion. Example: you have your disability benefits wrongfully denied. As a result, you have no income, your credit rating is trashed, you lose your home and you are driven into bankruptcy. You file your ERISA suit and against the odds, you win. What do you get? The benefits they should have been paying you back when it might have done you some good. That's all (you might -- might -- get something on account of your attorney fees too). The Supreme Court gives us some reason to hope for improvement here, but there's a long way to go.
Punitive or exemplary damages? Bupkis. ERISA does not allow for any recovery on account of these sorts of damages -- none. And this applies even if the insurance company committed outright fraud when it denied your claim. I find it quite difficult to understand why the insurance industry, uniquely among all industries in America, needs to have immunity from liability for fraud if it is to offer its services at a reasonable price. Anyway, this concern goes beyond making people whole; it also directly impacts the behavior of insurance companies.
As of now we have a situation where the law tells insurers they face no meaningful consequences if they deny care improperly or even commit outright fraud. As one federal judge has commented, "if an HMO wrongly denies a participant's claim even in bad faith, the greatest cost it could face is being compelled to cover the procedure, the very cost it would have faced had it acted in good faith. Any rational HMO will recognize that if it acts in good faith, it will pay for far more procedures than if it acts otherwise, and punitive damages, which might otherwise guard against such profiteering, are no obstacle at all." Insurance companies, of course, are not charities, but corporations; their boards are subject to a fiduciary duty to maximize shareholder value. If it is possible to accomplish this by mistreating insureds, and ERISA says there is no meaningful consequence for that, then it follows that's what insurers will do.
The Supreme Court appears poised to strike down the Affordable Care Act. If that happens, then the least we could do is to ensure that those people who are fortunate enough to have insurance at least have some meaningful ability to enforce insurers' promises in court.
But never mind the ACA; ERISA matters a lot anyway. If you get your insurance through your employment, then -- thanks to ERISA -- consider yourself to be uninsured. If by "insurance" you mean something like an enforceable promise by an insurance company that it will pay for what it says it will, what you have doesn't qualify. What you have is a piece of paper saying some company will pay your claim if it feels like it. You don't have insurance at all -- you only think you do.
Got summoned to jury service yesterday. Because no one wants a lawyer on their jury, I was unceremoniously dismissed during jury selection.
Along the way the good folks at Sonoma County Superior Court told all the prospective jurors what a valuable service they were providing. They stressed, for example, that the denial of a right to a jury trial was one of the grievances listed in the Declaration of Independence as a reason to separate from Britain. And they told us Thomas Jefferson stressed how important a right to a jury was:
"I consider trial by jury as the only anchor ever yet imagined by man, by which a government can be held to the principles of its constitution"
Compare and contrast:
Additionally, all eleven Circuit Courts that have reviewed the issue of whether there is a right to a jury trial under § 502(a) of ERISA have concluded that there is no such right. See Hampers v. W.R. Grace & Co., Inc., 202 F.3d 44, 54 (1st Cir.2000); Sullivan v. LTV Aerospace and Defense Co., 82 F.3d 1251, 1258 (2nd Cir.1996); Pane v. RCA Corp., 868 F.2d 631, 636 (3rd Cir.1989); Berry v. CIBA–GEIGY Corp., 761 F.2d 1003, 1007 (4th Cir.1985); Borst v. Chevron Corp., 36 F.3d 1308, 1323–24 (5th Cir.1994); Bittinger v. Tecumseh Prod. Co., 123 F.3d 877, 883 (6th Cir.1997); Wardle v. Central States, S.E. and S. W. Areas Pension Fund, 627 F.2d 820, 829 (7th Cir.1980); In re Vorpahl, 695 F.2d 318, 322 (8th Cir.1982); Thomas v. Oregon Fruit Prod. Co., 228 F.3d 991, 996 (9th Cir.2000); Adams v. Cyprus AMAX Minerals Co., 149 F.3d 1156, 1161–62 (10th Cir.1998); Blake v. UnionMutual Stock Life Ins. Co. of Am., 906 F.2d 1525, 1526 (11th Cir.1990).
I’ve discussed before the absurdity of allowing an ERISA “insurer” to be judge and jury about its own contractual obligation to, well, provide insurance. Recently we took a look at one judge’s opinion it’s not such a problem after all, because ERISA imposes supposedly sky-high fiduciary duties protecting beneficiaries from insurer abuse.
Would that it worked that way. That it doesn’t is demonstrated by this week’s Eleventh Circuit opinion in Blankenship v. MetLife. Blankenship illustrates perfectly how allowing ERISA “insurers” to exercise “discretion” over their own contractual obligations leads to disaster for claimants who deserve better.
Frank Blankenship was diagnosed with coronary artery disease, and suffered a heart attack, in 2003. Because his job as manager of a Sears Roebuck store was so stressful, and because his physicians concluded stress would very likely exacerbate his coronary condition, Mr, Blankenship submitted a disability claim to Sears’ ERISA disability “insurer,” MetLife. MetLife paid benefits for a time, and then cut them off, based on opinions it commissioned from its paid physician consultants (none of whom, by the way, ever so much as met Mr. Blankenship).
The trial judge, William M. Acker, Jr. (whose work we have enjoyed before on this blog), issued an order in January 2010 overturning MetLife’s termination of benefits. MetLife appealed, leading to the Eleventh Circuit debacle this week.
Why did the Eleventh Circuit reverse Judge Acker’s conclusion MetLife had been not only incorrect but absurdly incorrect in terminating benefits? Because MetLife had granted itself discretion in its “insurance” policy, and therefore mere federal judges could not question the decision of the MetLife Oracle:
We see nothing in the record that would lead us to conclude that MetLife did not act reasonably in relying on the independent medical opinions or in crediting those opinions over the opinions of Blankenship’s doctors.
Never mind that Mr. Blankenship’s physicians had, you know, seen him on occasion and had, you know, examined him personally. The Eleventh Circuit then moved on to conclude MetLife had no meaningful conflict of interest when it saved itself over $500,000 by terminating Mr. Blankenship’s claim:
Even if the potential claim at issue “involves over $510,000, not including future benefits,” as the district court stated, Blankenship, 686 F. Supp. 2d at 1236, the size of the award is not enough to be the dispositive factor in this case. Even half a million dollars -- a large sum, to be sure -- is a relative amount when the plan administrator is a global, Fortune 100 company with annual revenues exceeding $50 billion.
Wow. Looks like it would take a hell of a claim to convince the Eleventh Circuit MetLife operated under a meaningful conflict of interest. Of course any one claim is just a rounding error, if that, on MetLife’s books. But it is undeniable that ERISA “insurers” like MetLife spare themselves very significant costs through denying and terminating valid claims in general; this particular claim was an example of that. By requiring that the stakes in an individual claim be high enough, by themselves, to directly impact a “Fortune 100 company with annual revenues exceeding $50 billion,” the Eleventh Circuit has effectively eliminated any real impact a conflict of interest might otherwise have – and it is supposed to have an impact, as the Supreme Court has quite distinctly directed.
Read Judge Acker’s discussion of the facts, and then read the Eleventh Circuit’s views on just how flimsy a claim denial can be and still qualify as “reasonable.” And then ask yourself whether ERISA’s supposed fiduciary duties offer any real protection at all.
The Supremes issued a very, very nice opinion today in CIGNA Corp. v. Amara. CIGNA had played fast and loose with its workers' pensions, unilaterally changing its pension plan to shortchange the workers without telling them about the negative effects of the change. This all gets pretty arcane, because the claimants had prevailed before the Second Circuit, and the Supremes reversed, which is what CIGNA wanted.
But CIGNA should be careful what it asks for, because the reason they reversed was nothing but bad news for CIGNA and good news for the claimants.
The claimants had based their case on 29 USC section 1132(a)(1)(B), which allows courts to award aggrieved claimants the benefits due under the terms of their benefit plan. The trouble has been that no recovery beyond that has been available, other than -- maybe -- something on account of attorney fees. To get there the lower courts, based on CIGNA's lies about the terms of the replacement pension plan, ordered that the plan be "reformed": that it be amended so that it reads consistently with what CIGNA's promises to its workers had been. And then based on the terms of the plan as the court had amended it, an award of benefits to the claimants followed.
So CIGNA appealed to the Supreme Court. The Supreme Court agreed today with CIGNA that the lower courts had incorrectly used section (a)(1)(B) to reform CIGNA's benefit plan. So CIGNA won that battle.
But CIGNA lost the war, because the Court went on to hold the plan could be reformed under a different subsection of the same statute, subsection (a)(3). AND... under section (a)(3) it said a court could do a lot of other stuff too, most notably imposing a surcharge against CIGNA.
This surcharge concept is very important, because up until now the remedies available under ERISA have been severely limited. A surcharge, though, allows claimants to recover for any actual out-of-pocket losses an ERISA insurer's bad acts cause, not limited to the amount of benefits due. So, after the Amara opinion, if an ERISA insurer denies your disability benefits and causes, for example, damage to your credit rating because you can't pay your bills, and that means your cost of credit is all of a sudden higher than it had been, you can be made whole (what a concept!) for that. If an ERISA health insurer wrongfully denies your claim and you have to foot the medical bill in question, now you can probably recover for that. The precise parameters will be determined through future cases, but at long, long last the absolute bar to any compensation beyond the amount of benefits in question has been significantly weakened.
So that's a big win for claimants no matter how you look at it.
WASHINGTON BUREAU -- The U.S. Supreme Court has significantly narrowed the grounds an employee can use to sue for additional pension benefits based on errors in a plan’s summary plan description (SPD).
The court ruled 8-0 in favor of the plan sponsor, CIGNA Corp., Philadelphia (NYSE:CI), in CIGNA Corp. v. Amara, No. 09-804, a 2001 class-action case triggered by CIGNA's move to turn a traditional defined benefit pension plan into a cash balance plan in 1998.
Yeah, they significantly narrowed the grounds all right -- it narrows down to "CIGNA loses."
As you might expect the insurance industry will immediately start misrepresenting the meaning of the Amara case to courts all over the map, and they may well succeed in persuading some judges that Amara doesn't stand for what I say it does. But those on my side will be working equally hard to make sure Amara has the effect it should.
This is a very good day for workers, retirees, and the disabled and sick. It's a bad day for fraud and bad faith. But we need to keep working so we'll have more good days in the future, because Amara is really the first small step on a long, long road back to achieving anything approaching justice in ERISA world.
UPDATE: Roy Harmon III has posted a good discussion at his Health Plan Law blog.
Around the first day of each month I'll be posting a reprise of the first post on this blog, which contains an overview of the Problem. It'll be updated and edited as we go along. But I'd like to have a summary of the Problem available frequently, hence the monthly repeat and update. So off we go...
ERISA is the Employee Retirement Income Security Act, and it is codified in Title 29 of the United States Code, starting with section 1001. It's federal law, enacted in 1974, and it was supposed to protect employees' rights in connection with their pension plans and welfare benefit plans (health, disability, life insurance, that sort of thing). But it doesn't. Quite the contrary.
Way, way to the contrary.
This blog is dedicated to the ERISA problem.
What is that problem? It mainly concerns those welfare benefit plans (ERISA is actually not a bad law with respect to pension plans). Pension plans is what they had in mind when they enacted it -- welfare benefit plans were an afterthought.
And it shows. If your insurance company wrongfully denies your claim, you might figure you can always take them to court. You can do that (usually), but when you get there you'll find things don't make any sense:
If you get your insurance coverage through your employment, then in virtually every case ERISA preempts state law (meaning it cancels it out, eradicates it, takes its place). But, having gutted state law relating to insurance disputes, it fails to provide any reasonable substitute. The remedies it provides (i.e. what you get if you win a lawsuit) are very, very stingy, and in the vast majority of cases a successful claimant is not made whole; not even close. And ERISA severely compromises your ability to secure even the scant remedies it does provide.
1. Remedies. ERISA limits the recovery you might get to the benefits which should have been provided in the first place, and an award on account of attorney fees in the court’s discretion. Example: you have your disability benefits wrongfully denied. As a result, you have no income, your credit rating is trashed, you lose your home and you are driven into bankruptcy. You file your ERISA suit and against the odds, you win. What do you get? The benefits they should have been paying you back when it might have done you some good. That's all (you might -- might -- get something on account of your attorney fees too).
The trashed credit, the lost home, the bankruptcy, the ruined life? Bupkis. ERISA does not allow for any recovery on account of these sorts of consequential damages -- none. And this applies even if the insurance company committed outright fraud when it denied your claim. I find it quite difficult to understand why the insurance industry, uniquely among all industries in America, needs to have immunity from liability for fraud if it is to offer its services at a reasonable price. Anyway, this concern goes beyond making people whole; it also directly impacts the behavior of insurance companies.
As of now we have a situation where the law tells insurers they face no meaningful consequences if they deny care improperly or even commit outright fraud. As one federal judge has commented, "if an HMO wrongly denies a participant's claim even in bad faith, the greatest cost it could face is being compelled to cover the procedure, the very cost it would have faced had it acted in good faith. Any rational HMO will recognize that if it acts in good faith, it will pay for far more procedures than if it acts otherwise, and punitive damages, which might otherwise guard against such profiteering, are no obstacle at all." Insurance companies, of course, are not charities, but corporations; their boards are subject to a fiduciary duty to maximize shareholder value. If it is possible to accomplish this by mistreating insureds, and ERISA says there is no meaningful consequence for that, then it follows that's what insurers will do.
The Republicans are gearing up to take a shot at repealing Obamacare. If that happens, then the least we could do is to ensure that those people who are fortunate enough to have insurance at least have some meaningful ability to enforce insurers' promises in court.
But never mind Obamacare; ERISA matters a lot anyway. If you get your insurance through your employment, then -- thanks to ERISA -- consider yourself to be uninsured. If by "insurance" you mean something like an enforceable promise by an insurance company that it will pay for what it says it will, what you have doesn't qualify. What you have is a piece of paper saying some company will pay your claim if it feels like it. You don't have insurance at all -- you only think you do.
There's a Ninth Circuit case familiar to all ERISA litigators: Kearney v. Standard Insurance Company. Indeed it's quite interesting if you're an ERISA litigator; otherwise not so much.
I bring it up today to focus on a dissent in that case, written by Judge Ferdinand Fernandez, who is among other things very very smart, so I am being either brave or foolhardy because I am about to disagree with him. His Kearney dissent touches on one of the most basic dilemmas about ERISA insurers: why should we treat them as something they are not -- impartial trustees -- instead of what they are -- insurance companies looking out for their own bottom line?
Judge Fernandez thinks I am all worked up over very little:
While I see no particular point in disputing the majority's determination that this case must be remanded to the district court, I do not concur with its rationale, reasoning or result. Hence I dissent because, as I see it, the keystone of the approach favored of the majority is undue caution about treating administrator authority under an ERISA plan different from insurance company authority in the non-ERISA insurance world. However, because that keystone is defective, the whole arch of the opinion must collapse. There are two major fractures in that most important voussoir.
The first fracture exists because there is no need for such great caution. This case does not involve a mere contract; it involves an ERISA plan. The difference is exceedingly important and imposes both benefits and burdens upon any entity which is acting as an administrator of a plan. For Standard, and for all other similarly situated companies, the fiduciary nature of the duties can be a double-edged sword to say the least.
The double-edged sword Judge Fernandez percieves is that, whereas insurers under state law are allowed to pursue their own selfish interests so long as they keep to the terms of the contract, under ERISA it's different:
When it comes to ERISA, however, we cannot simply apply the same premises, even when an insurance company is involved. The whole arrangement is quite different when a company undertakes to act as a plan administrator. It, then, is not a mere contracting party; it is a fiduciary. See 29 U.S.C. §§ 1002(16)(A), 1002(21)(A). In effect, the entity creating the plan is a trustor, the administering company is a trustee, and the claimant is a beneficiary of that trust. Therefore, even though it does insure a benefit, an insurance company must act as a fiduciary must act. That actually imposes a higher duty upon it than it would undertake were it in a mere contractual relationship. It cannot simply act as a self-interested party that need only avoid violating the legal floor created by the covenant of good faith and fair dealing. It must reach much higher; it must act with the very punctilio of fairness. 1102*1102 See 29 U.S.C. § 1104(a)(1) ("[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries. . . ."); NLRB v. Amax Coal Co., 453 U.S. 322, 329, 101 S.Ct. 2789, 2794, 69 L.Ed.2d 672 (1981) ("[A] trustee bears an unwavering duty of complete loyalty to the beneficiary of the trust, to the exclusion of the interests of all other parties."); Blau v. Del Monte Corp., 748 F.2d 1348, 1353 (9th Cir.1984) ("The administrator of an employee welfare benefit plan . . . has no discretion . . . to flout the . . . fiduciary obligations imposed by ERISA, or to deny benefits in contravention of the plan's plain terms."); Restatement (Second) of Trusts § 170(1)(1959) ("The trustee is under a duty to the beneficiary to administer the trust solely in the interest of the beneficiary."); Restatement (Second) of Trusts § 183 (1959) ("When there are two or more beneficiaries of a trust, the trustee is under a duty to deal impartially with them."); cf. Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir.1996) (The administrator's "duties are the `highest known to the law.'").
And, adds Judge Fernandez, the principles of trust law are there to protect us:
...while it might seem a bit jarring to interpret ordinary contract language in a way that confers discretion, where one party must depend on the mere good faith of the other, it is not at all surprising to find discretionary language in an ERISA plan, where the beneficiary can insist on fiduciary behavior. In the former case, the conferral of discretion may seem downright scary; in the latter, the principles of trust law act as an anodyne for undue fears. It is true that when there is discretion courts will only review the administrator's actions for an abuse of that discretion. See Restatement (Second) of Trusts § 187 (1959). However, the high principles and standards of trust law do protect the beneficiary. No fiduciary, not even an insurance company, can draw much comfort from the fact that discretion is conferred upon it, if it acts in a lax, conflicted, arbitrary, capricious, or abusive manner toward the beneficiary.
The problem with this is that these high standards of behavior we supposedly expect from ERISA insurers have no teeth. Under ordinary insurance law an insurer may -- conceptually -- have a greater ability to look out for its own selfish interests, but if it does cross the line there can be hell to pay. If an ERISA insurer acts as Judge Fernandez supposes -- in a lax, conflicted, arbitrary, capricious, or abusive manner -- we may well wag our finger, but there are no real-world, meaningful consequences imposed on it. It's just business as usual.
Judge Fernandez would be quite correct, IMO, if there were consequences.
