Monday, August 31, 2009

ERISA Wants Your Claim to be Denied – Part I

Breaching a contract seems to most people like a bad thing to do – after all, when you get right down to it a contract involves mutual promises: you pay me this much money, and I’ll do something for you in return. Breaching the contract, then, means breaking a promise. So breaching a contract is wrong, isn’t it?

Well as far as the law is concerned, the answer to that is “it depends.” There’s a theory, known among other things as the theory of “efficient breach,” which holds that not only is it not always wrong to breach a contract but that sometimes it’s the right thing to do; the law ought to encourage breaches of contracts where it is appropriate to do so; and on analysis it does.

The theory goes something like this. One: the law will not (and ought not) “punish” you for breaching a contract, it will only make sure that you fully compensate the other party if you do. Two: if it turns out that it would be more profitable for you to breach the contract and make the other party whole, then it is more economically efficient, and therefore a good thing, for you to go ahead and breach the contract.

A leading proponent of this theory is Judge Richard A. Posner of the Seventh Circuit Court of Appeals. In his book “Economic Analysis of Law,” Judge Posner gives the following example:

I sign a contract to deliver 100,000 custom-ground widgets at $.10 apiece to A, for use in his boiler factory. After I have delivered 10,000, B comes to me, explains that he desperately needs 25,000 custom-ground widgets at once since otherwise he will be forced to close his pianola factory at great cost, and offers me $.15 apiece for 25,000 widgets. I sell him the widgets and as a result do not complete timely delivery to A, who sustains $1000 in damages from my breach. Having obtained an additional profit of $1250 on the sale to B, I am better off even after reimbursing A for his loss. Society is also better off. Since B was willing to pay me $.15 per widget, it must mean that each widget was worth at least $.15 to him. But it was worth only $.14 to A – $.10, what he paid, plus $.04 ($1000 divided by 25,000), his expected profit. Thus the breach resulted in a transfer of the 25,000 widgets from a lower valued to a higher valued use.

OK, so here Judge Poser breached his contract with A, and everyone involved came out at least as well as if Judge Posner had performed. A still realized his expected $1000 profit, because Judge Posner had to compensate him in that amount as damages for his breach of contract. B is better off because he ended up with the widgets, and based on the price he was willing to pay for them he needed them more than A did –they were more valuable to him than they were to A. And Judge Posner came out $250 ahead (his $1250 profit on the deal with B less the $1000 he had to pay to A) because of B’s willingness to pay a higher price. And finally, according to economic theory, society is better off whenever an asset is dedicated to a more valuable use, which is the case here as measured by B’s willingness to pay more than A was.

Later this week we will explore how these concepts are turned on their head when it comes to a breach of an insurance contract by an ERISA insurer. For now remember the essence of an “efficient breach”: the breaching party makes a rational decision to breach a contract because even accounting for the liability it will incur by virtue of the breach, including the obligation to make the other party whole, the breaching party still comes out ahead.

Friday, August 28, 2009

The Rising Judicial Chorus: Judge Pickering

Charles W. Pickering served as Chairman of the Mississippi Republican Party from 1976 to 1978. In 1990 Bush the Elder appointed him United States District Court Judge for the Southern District of Mississippi. In 2001, Bush the Younger nominated him for a spot on the Fifth Circuit Court of Appeals, but the nomination was blocked by the Senate Judiciary Committee. Undaunted, President Bush reappointed him in 2003, and the Democrats filibustered the nomination. President Bush responded to that with a recess appointment in 2004, but Judge Pickering ultimately withdrew from consideration and retired in December 2004.

Clearly, Judge Pickering is no anti-corporate liberal loon. What does he think of ERISA? Here’s what he had to say in 1994:

There has not been a single case that has been filed before this Court by an employee coming into federal court saying, "I want to protect my pension or my benefits under the broad terms of ERISA." Every single case brought before this Court has involved insurance companies using ERISA as a shield to prevent employees from having the legal redress and remedies they would have had under long-standing state laws existing before the adoption of ERISA. It is indeed an anomaly that an act passed for the security of the employees should be used almost exclusively to defeat their security and leave them without remedies for fraud and overreaching conduct.

The case was Suggs v. Pan American Life Ins. Co., and the citation is 847 F.Supp. 1324 (S.D.Miss. 1994).

Thursday, August 27, 2009

Thanks to Nicole Sandler and Air America for Taking On the Problem

[Edited to include a link to the audio...]

I ventured forth into the talk radio world last night, appearing on Nicole Sandler’s Air America talk show to discuss the Problem. Nicole conducted a polite debate between me and ERISA defense attorney Jeff Knapp of the Seattle office of Lane Powell, and I am hoping we were all able to shed some light on the subject from our respective points of reference. Jeff Knapp in particular deserves some props here, since he had to know he would be outnumbered (Nicole is definitively on our side on this one). Afterwards my colleague Jeff Metzger had a word with Nicole and reminded us that, for the time being at least, the Republicans are the ones who are on top of the ERISA issue. Jeff Metzger also appeared on Nicole's show last week to address the issue. Thanks to Nicole and to all who took part. The audio of the show is available here.

Wednesday, August 26, 2009

How They Hide the Ball: A story of compounding judicial error and the squelching of pre-trial discovery

Discovery, the pretrial measures whereby the parties obtain information from each other, is a critical part of the litigation process. Each party gets documents from the other; each gets to take depositions of the other’s witnesses; each can compel the other to answer written questions under oath. As Ninth Circuit Judge Carlos Bea said in a case called Rivera v. NIBCO, Inc., “the broad right of discovery is based on the general principle that litigants have a right to every man’s evidence, and that wide access to relevant facts serves the integrity and fairness of the judicial process by prompting the search for truth” (the citation for that is 5 F.3d 1289 (9th Cir. 1993)).

Now, with concepts such as “integrity," “fairness” and “truth” involved, as you may expect this doesn’t apply very much in an ERISA case. Instead, insurance companies argue, and judges often agree, that the only evidence a court may consider is the claim file assembled by the insurance company, and discovery into other evidence is not allowed, or is to be very severely restricted.

How did this come to pass? Back in the early 70's, when Congress was debating the law which was to become ERISA, they considered for a time an adjudicatory process, for disputed pension claims, which would bypass the courts entirely. What they had in mind was a streamlined administrative proceeding run by the Department of Labor. A House Report (No. 93-533, if you want to look it up) referred to that contemplated process as providing “an opportunity to resolve any controversy over ... retirement benefits under qualified plans in an inexpensive and expeditious manner.” Ultimately, that process was never enacted, and Congress decided that disputes should be resolved in the courts (where you get to, you know, conduct discovery) after all. But remember that phrase from the House Report: “inexpensive and expeditious.”

Fast forward to Perry v. Simplicity Engineering, which you can find at 900 F.2d 963 (6th Cir. 1990). The insurance company in that case argued that no evidence other than the claim file should be considered, because ERISA cases were supposed to be “inexpensive and expeditious,” conveniently failing to mention that the administrative process that goal referred to was never enacted. The Sixth Circuit fell for it, and stated “A primary goal of ERISA was to provide a method for workers and beneficiaries to resolve disputes over benefits inexpensively and expeditiously,” and that “permitting or requiring district courts to consider evidence from both parties that was not before the plan administrator would seriously impair the achievement of that goal.” The court went on to say, in a breathtaking non sequitur, “If district courts heard evidence not presented to plan administrators, employees and their beneficiaries would receive less protection than Congress intended.” (!)

Even though it was demonstrably incorrect about what “Congress intended,” other courts soon began taking Perry’s statement at face value, and uncritically stating as if it were beyond dispute that a “primary goal” of ERISA was this “inexpensive and expeditious” business, and that this was somehow more important than minor concerns like justice and accurate adjudications.

By 1997, the court in a case called Palmer v. University Medical Group (the citation is 973 F.Supp. 1179 (D.Oregon 1997)) was saying, in disallowing pretrial discovery, “The sums expended on attorney fees to conduct extensive discovery, litigate discovery disputes, and try the action could easily exceed the amount in dispute [as if in cases where that was true the parties themselves would not limit their own activities accordingly]. This vision of the future of ERISA litigation belies the Ninth Circuit’s admonition that a ‘primary goal of ERISA was to provide a method for workers and beneficiaries to resolve disputes over benefits inexpensively and expeditiously.’”

Funny thing about that “primary goal” – you can’t find it anywhere in the statute. The statute says the primary goal of ERISA is to “to protect ... the interests of participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.” That’s right there in section 1001 of Title 29 of the United States Code.

But, by quoting from a House Report about a proposed provision that was never enacted, the insurance industry convinced the courts that the “primary goal” was to always do things on the cheap, never mind justice, and to shield the conduct of insurance companies from the light of day.

And so it goes.

Monday, August 24, 2009

Timothy P. Carney in the Washington DC Examiner: health insurance reform omits ERISA reform

The Washington DC Examiner's Lobbying Editor, Timothy P. Carney, points out that current proposals for health insurance reform not only fail to reform ERISA, but explicitly preserve its perverse effect.

And you might think Democrats would tend to be on the side of the angels here and Republicans would tend to be in the insurance companies' thrall. Not necessarily. As Mr. Carney notes, Republican representative John Shadegg of Arizona has spoken up about this problem in the context of the pending reform efforts, so far to deaf ears adorning the heads of both parties.

Here's Representative Shadegg in action:

So: call, write, sound off, and support Representative Shadegg's efforts here!

No surrender!

If you’ve spent any time on this blawg, and you’ve experienced a denied insurance claim subject to ERISA, you may have developed a sense of hopelessness, not to mention frustration and outrage. All, in my opinion, very appropriate reactions. There’s no use soft-peddling the malignant effects of ERISA – it is very arguably the most unjust law on the books.

But the understandable reactions described above ought not lead to paralysis or inaction. To become passive and to simply yield to insurance company abuse only makes a bad situation worse, for yourself and for others in your unfortunate position.

The calculus ERISA presents to an insurance company goes something like this: we deny 100 claims which probably ought to be approved. Perhaps 20 of those people will even realize we have done something wrong, because we can write bogus denial letters that make it sound like the denial is proper even though we know it probably isn’t. Out of the 20 people who realize they’ve been screwed, perhaps 10 will contact a lawyer, and perhaps five will end up actually taking us to court. And once in court, since we get the benefit of the most absurd stacking of the legal deck known to the law, we can probably count on winning three of those cases, even assuming the claimant is right and we are wrong. So by denying 100 claims wrongfully, thanks to ERISA, we can probably reap the financial benefit of not having to pay 98 of them, and the two we might lose in court, even if we are ordered to pay attorney fees for the other side, won’t come close to canceling out that benefit (remember in no case can consequential or punitive damages be awarded, so we never have to worry about one big loss wiping out the benefit we derive from ripping off those original 100 people).

The only way to upset that calculus even a little bit is for people to stand up for their rights, take the insurers to court in appropriate cases, and make them explain themselves to a judge. The law provides meager rights indeed, but there are lawyers (I am one of them) who can and do go to court and enforce those rights at least. Given the state of the law, it is very, very unlikely we can make you whole, but we can often recover something, and in the process make the insurance companies explain their bad behavior. Gradually, gradually, their fraud and abuse is thereby exposed to the light of day.

So: if you think you’ve been ripped off by your ERISA insurance company, there is every likelihood that you have. Find a lawyer specializing in ERISA claims (this is pretty important because ERISA is arcane and a law unto itself; a generalist is swimming upstream in trying to deal with all the absurd and counterintuitive rules), and see if the lawyer can find a way to enforce what rights the law provides. Take a stand and make them explain themselves!

Thursday, August 20, 2009

The Rising Judicial Chorus: Judge Becker

It’s not just lawyers like myself, and ripped-off claimants, who are frustrated with ERISA’s patent unfairness. Many of the federal judges who are called upon to apply this unjust law have expressed their own frustration. Indeed, this outcry has been referred to more than once as the “rising judicial chorus” against ERISA and its malignant consequences.

Today we hear from the Honorable Edward Roy Becker of the Third Circuit Court of Appeals, who passed away in 2006. In 2003, Judge Becker issued a heartfelt concurrence in an ERISA case in which he made the following comments.

“Congress enacted ERISA in 1974 ‘to promote the interest of employees and their beneficiaries in employee benefit plans.’ ... However, with the rise of managed care and the Supreme Court's series of decisions holding preempted any action for damages against HMOs, ERISA has evolved into a shield that insulates HMOs from liability for even the most egregious acts of dereliction committed against plan beneficiaries, a state of affairs that I view as directly contrary to the intent of Congress. Indeed, existing ERISA jurisprudence creates a monetary incentive for HMOs to mistreat those beneficiaries, who are often in the throes of medical crises and entirely unable to assert what meager rights they possess.

“ERISA generally, and § 514(a) particularly, have become virtually impenetrable shields that insulate plan sponsors from any meaningful liability for negligent or malfeasant acts committed against plan beneficiaries in all too many cases. This has unfolded in a line of Supreme Court cases that have created a ‘regulatory vacuum’ in which virtually all state law remedies are preempted but very few federal substitutes are provided.

“ the same time as ERISA makes it inordinately difficult to bring an injunction to enforce a participant's rights, it creates strong incentives for HMOs to deny claims in bad faith or otherwise ‘stiff’ participants. ERISA preempts the state tort of bad-faith claim denial, ... so that 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. Not only is there an incentive for an HMO to deny any particular claim, but to the extent that this practice becomes widespread, it creates a ‘race to the bottom’ in which, all else being equal, the most profitable HMOs will be those that deny claims most frequently.”

The case is DiFelice v. Aetna U.S. Healthcare, et al., and the citation is 346 F.3d 442 (3rd Cir. 2003).

Wednesday, August 19, 2009

Discretion and Its Many Abuses – Part III

Yesterday we took a look at some of the factors which help keep trustees, with all their discretionary powers, in line. First, a classic trustee has no personal interest in his decisions. Second, he is held to the “highest duty known to law” – a fiduciary duty. Third, he cannot unilaterally assume his discretionary powers; they must be conferred on him by the trustor.

Now, under ERISA we very often pretend insurance companies are trustees, and we give their decisions to approve or deny claims the same sort of deference we give to decisions by trustees. Does that make any sense?

Well, no. There are very material differences between trustees and insurance companies.

First, insurance companies have an obvious and profound conflict of interest when they decide whether to approve an insurance claim. The money involved is not in some trust, but in the insurance company’s own bank account. That’s a big conflict of interest, and I’ll do a post soon about how that is handled.

Second, insurers are supposedly subject to fiduciary duties under the ERISA statute. But, remember they get to be Goofus while we all have to be Gallant. And indeed, although the label “fiduciary” is applied to ERISA insurers, the conduct ERISA allows is way, way short of anything a real fiduciary would even think about trying to do.

Finally, insurance companies routinely confer discretion on themselves by just putting a couple of lines of boilerplate into the insurance policies they peddle. The employer who buys the policy for its employees is supposed to be the trustor here, and yet the insurance company, the supposed “trustee,” is the source of the language giving it all that power to ruin lives.

As we continue we’ll have more occasion to explore the manners in which these supposed “fiduciaries,” these supposed “trustees,” act for their own benefit above all else, which is the antithesis of a fiduciary’s job. As the Eleventh Circuit Court of Appeals has observed, “it is difficult to understand why any plan would give discretionary authority to an insurance company from whom had been purchased a fixed-premium policy. ... The basis for the deferential standard of review in the first place was the trust nature of most ERISA plans. ... The insurance company here could hardly be regarded as a trustee for the insured.” The case is Moon v. American Home Assur. Co., and the citation is 888 F.2d 86 (11th Cir. 1989). You can look it up.

Tuesday, August 18, 2009

Discretion and Its Many Abuses – Part II

Yesterday I discussed some basics about how trusts and trustees operate. Trustees have a lot of power when the trust instrument gives them discretion to apply their own judgment about what’s the best thing to do with trust property, so much power that a judge will defer to the trustee’s judgment unless an “abuse of discretion” can be proven.

Think about that – a judge in a courtroom, whose job it is to, well, judge things, will defer to the judgment of someone else. If he disagrees with the trustee’s judgment, the judge is to actually disregard his own judgment about what is best under the circumstances in favor of the trustee’s – again, unless the judge can be persuaded the trustee’s decision was so crazy that an abuse of discretion has occurred.

Now with all that power the trust instruments can give them, you might think there should be some built-in safeguards so that trustees behave themselves. And, indeed, there are.

First, in a classic trust situation, the trustee does not stand to personally benefit from his decisions. He’s managing money that isn’t his, for the benefit of someone else, and he gets the same fee for his services regardless of what his decisions are. In that way, the trustee is able to bring to bear his own unfettered judgment about what the best thing to do is, and not be influenced by any concerns about personal gain.

Second, the law imposes upon trustees what has been called the highest duty known to the law – a fiduciary duty. That has varying definitions in varying situations, but basically it means the trustee has to put someone’s else’s interests first, ahead of his own or anyone else’s. If you hire a lawyer, for example, the lawyer has a fiduciary duty to you regarding the representation: your interests come first, including at the expense of your lawyer’s own interests. The same thing applies to a trustee: the trust beneficiary’s best interests is all that is supposed to matter, and the trustee is supposed to disregard anything other than that in making his discretionary judgments.

Third, the trustee only has all this power in the first place because someone else – the trustor or settlor of the trust – wanted him to. The trustor is the person who originally created the trust, contributed some money or other property to the trust, and authored or approved the terms of the trust instrument, including the terms giving the trustee all that power. In other words, when your rich-and-dead parents funded a trust fund for you, they were the ones who decided to confer all that discretionary power in the trustee – the trustee didn’t just unilaterally assume that power.

Now, under ERISA your health insurance company is all too often treated as if it is a trustee, and the insurance company’s decisions are all too often given the same sort of deference. But as you might gather from the foregoing, there are some very significant differences between an insurance company and a classic trustee. Next we’ll take a look at whether it makes any sense to overlook those differences and pretend an insurance company is a trustee. Here’s some foreshadowing: it doesn’t.

Monday, August 17, 2009

Discretion and Its Many Abuses – Part I

Here’s a pleasant thought experiment: imagine you are a trust-fund baby. Very rich (and dearly departed) parents have provided for you with a generous trust fund. You are set for life!

The trust fund, however, is not just a pile of money you can play with at your whim. In fact, the whole point of a trust fund is that your parents didn’t give you the money at all, they gave it to a trustee whom they have directed to manage and distribute the funds for your benefit. The trustee’s directions are set forth in a document – the trust instrument – which tells the trustee how to go about his job.

The trust instrument might, for example, instruct the trustee to never touch the principal and to apply interest income to your educational and medical expenses, and that’s all. So, if you want some of the money to buy a fancy new car, the answer will be no, because the trustee has his marching orders, and he can’t write you that check.

Many trust instruments, though, give the trustee discretion: they direct the trustee to use his own good judgment to manage the funds for your benefit. Now, if you want that new car, the trustee will decide whether you get it based on his own judgment about what’s best, not on any explicit terms in the trust instrument. That’s the way your rich-and-dead parents wanted it to be.

Let’s say the trustee says no, and you decide to sue - you want the damn money for that car! You are going to have a difficult time winning that one.

That’s because rich-and-dead made the decision (back when they were rich-and-alive) to leave it up to the trustee – that’s the point of giving the trustee discretion in the first place. So a judge would say, I personally might not have made the same decision, but rich-and-dead wanted the trustee’s judgment, not mine, to be the one that counted.

Therefore getting a judge to merely disagree with the trustee’s decision won’t get you that car – you have to show the trustee was not just incorrect but that he somehow went beyond the bounds of reason in making his decision, so that even though he is the one with the discretion his decision can’t be upheld. In other words, sure rich-and-dead conferred upon him discretion, but here his decision was so out-of-bounds, so crazy, that we can say he abused that discretion. That’s what you have to prove to get that car.

I’ll post further on this later this week, but for now just know this: under ERISA, insurance companies are very, very often treated like trustees, not like insurance companies. As I’ll discuss further, that is what’s crazy.

Friday, August 14, 2009

News from Inside the Beltway

The Washington Examiner gets it:

"Most shocking to the conscience, however, might be the special protection big government provides for insurers covering patients through employer-sponsored plans: even if an insurance company's negligent denial of coverage causes harm or death, federal law protects insurers from legal liability."

[Updated 8/20/2009 to include quote from article].

Goofus Wins

If you are around my age you probably remember cooling your heels in the pediatrician’s waiting room (this was before ERISA so we had real insurance in those days), passing the time reading Highlights magazine. Highlights featured Goofus and Gallant, two characters depicting basic moral dichotomies. Goofus broke the rules; Gallant obeyed. But they never told us who came out on top.

Now we know, at least in ERISAworld. Goofus in a landslide.

ERISA imposes rules on both claimants and insurers. Claimants, for example, in response to a denied claim, generally have to appeal the denial back to the insurer within 180 days (often called an “administrative appeal”). Insurers, on the other hand, are required by statute and regulation to, among other things: either approve or deny a claim within a fixed time period; either approve or deny an administrative appeal within another fixed time period; and, when they deny either a claim or an appeal, tell you all the reasons and all the policy provisions the denial is based on.

If you don’t follow the “administrative appeal” procedure you probably can’t even get in the door at court; your case is over before it begins. And “don’t follow the procedure” doesn’t just include not doing it at all, it includes doing it even one day late. If you get your appeal in on day number 181, chances are you are out of luck from the get-go. You’d better be Gallant.

The insurers, on the other hand, get to blow deadlines and violate the rules with virtually no consequence. If they blow their deadlines, they just deny the claim or appeal late, and it usually doesn’t make the slightest difference. They can deny your claim for one reason, and then in court when it turns out that reason is bogus, they can just make up another one that they never mentioned before (nowhere does it approach actual fairness, but this does vary somewhat depending on what part of the country – what federal Circuit – you happen to live in, as the way the rules are applied varies some from Circuit to Circuit). They get to be Goofus.

And what Highlights magazine never told us is that it pays to be Goofus.

At least in ERISAworld.

Thursday, August 13, 2009

There’s No Remedy if your Insurance Company Kills You

In December 1990, Rhonda Bast was diagnosed with cancer. At least she was not among the uninsured: she had health insurance, provided by her employer. When her doctor requested approval for a procedure which might save her life, Prudential Insurance Company said no. After Ms. Bast got lawyered up, Prudential changed its mind a few weeks later, but by then it was too late – Rhonda Bast died in January 1993.

So her family sued Prudential, claiming that if Prudential had not improperly delayed its approval for her therapy she would still be alive. The Northwest Women’s Law Center submitted a brief in the case, explaining “if insurance companies are not forced to disgorge the unjust enrichment that they gain by such bad faith denials, they will have no incentive to honor legitimate requests from their beneficiaries,” and that instead, insurance companies would “deny expensive treatments hoping that the beneficiary would not sue, or if she or her estate did, they would be left without a remedy.”

Thanks to ERISA, the Basts were indeed left without a remedy: the Ninth Circuit Court of Appeals said “Although moved by the tragic circumstances of this case and the seemingly needless loss of life that resulted, we conclude the law gives us no choice”; the “Basts’ state law claims are preempted by ERISA, and ERISA provides no remedy. Unfortunately, without action by Congress, there is nothing we can do to help the Basts and others who may find themselves in this same unfortunate situation.”

That was in 1998. We are still waiting for action by Congress.

The case is Bast v. Prudential Insurance Company of America, and the citation is 150 F.3d 1003 (9th Cir. 1998). You can look it up.

Wednesday, August 12, 2009

Nine out of Ten!

The Wall Street Journal makes the point that "nine out of 10 people under 65 are covered by their employers." Ninety percent of the under-65 population thinks they have insurance, except they don't.

Tuesday, August 11, 2009

We have met the enemy and it isn't us

It is them. Write your congressman! There's still time to have an impact and maybe get some consideration of tweaking ERISA into a health care bill. As long as the insurance industry (appropriately) is wearing the black hat now is the time to move.

Especially if the public option is defeated, then we'll need another way to "keep the insurance companies honest." So let's gear up for an attack on their absurd immunity from liability for bad faith and fraud.

Your New Car

Earlier I described some of the effects ERISA has on your ability to take your insurance company to court if it wrongfully denies your claim. That may not seem like such a big deal; after all, no one plans on going (or wants to go) to court at all, and it seems way, way down the road when you’re looking at your shiny new health insurance policy from your employer. But it matters, a lot.

Imagine you’re buying a car. You’ve picked out a make and model, and you’re happy with the price. It’s time to close the deal.

DEALER: OK, here’s the sales contract; there a just a few stipulations and the car is yours.


DEALER: First we have to talk about what happens if you ever take us to court. Of course we know you’ll never have to, because you can trust us to do the right thing. But just in case...

First, we require that you agree you’ll have no right to a jury.

And you’ll have to give up all that silly pre-trial discovery, so we won’t be wasting our time with you asking a bunch of questions about what happened if, say, your brakes fail. But don’t worry, we’ll assemble some information on our own and give it to you, and the court can look at that.

And we’d like you to agree that we still win in court if, say, you prove our brakes were defective and it was our fault. But we are willing to say you can win if you prove the brakes were not only defective but that we screwed up really really badly, like we had the technicians drunk or asleep on the job or something like that. Of course, you'd have to find that evidence in the information we assemble ourselves, like we just talked about, 'cause we aren't going to do any pre-trial discovery, remember?

YOU: But if I can prove the brakes you made were defective it seems to me that ought to be enough to...

DEALER: Hang on. Not done yet. Now, the other thing is that if you do take us to court and win, our liability would be limited to the cost of replacing the brakes.

YOU: But what if your defective brakes kill or maim somebody? What about wrongful death, or medical bills, or lost earning capacity...

DEALER: That would be unfortunate. But if you can beat us in court we are willing to pay for replacement brakes. That’s not bad! We might even throw a little something your way to help you pay your lawyer (but only if the judge makes us).

YOU: I’m not sure about this. I mean replacement brakes wouldn’t mean much if someone has been killed or maimed or ...

DEALER: One more thing. We can only do this deal if you agree that you can’t sue us for, you know, fraud.

You still want to buy that car?

That nice insurance policy your employer bought for you almost certainly has the same exciting features. Now don’t you feel all safe and snuggly?

And here’s a thought experiment: if the car dealer knows its sales contracts have these sorts of terms, how careful do think he’ll be when he manufactures his brakes (or is tempted to commit fraud)? And how motivated is your health insurance company to do the right thing when it knows these types of rules apply?

Monday, August 10, 2009

The Problem

First post -- welcome!

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 benefit plans (health, disability, life insurance, that sort of thing). But it doesn't. Quite the contrary.

This blog is dedicated to the ERISA problem.

What is that problem? It mainly concerns those benefit plans, as it is actually not a bad law with respect to pension plans. And pension plans is what they had in mind when they enacted it -- 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. We'll go into the particulars soon, but for now:

ERISA preempts state law (meaning it cancels it out, eradicates it, takes its place), and its preemptive reach is so expansive that it has been judicially described as “virtually unique.” 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 ERISA severely compromises the ability of insureds 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. Incidentally, 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. Meanwhile, they 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, then it follows insurers will do precisely that (and believe me, they do).

And by the way, punitive damages for really bad fraud? Forget it. Not allowed.

2. Procedure. In ERISA litigation, courts have determined among other things that there is no right to a jury; that discovery (the pre-trial process where you obtain the other side's documents, take depositions and such) is to be significantly abridged; that the evidence which may be introduced at trial is limited to that which the insurer deigned to assemble during its claims evaluation process; and that, when the policy contains language vesting "discretion" in the insurer, if you prove the insurance company was wrong -- you lose. In order to win, you must prove the denial was "arbitrary and capricious" -- that is to say, ridiculous, absurd, unintelligible, crazy. And lo and behold, the insurance companies grant themselves "discretion" when they write their policies. In this way we treat insurance companies as if they were federal judges. But Learned Hand they are not.

These days we're all debating health care reform and what to do about the uninsured. ERISA matters a lot here, because if you get your insurance through your employment, then consider yourself to be in that group. If by "insurance" you mean something like an enforceable promise by an insurance company that it will pay for your medical care or provide disability benefits, 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.

ERISA is indeed the problem.