The Rising Judicial Chorus: Judge Karlton

The Honorable Lawrence K. Karlton is Senior District Judge for the Eastern District of California, which is based in Sacramento. Judge Karlton is a 1979 Carter appointee to the federal bench, and before that he was a Superior Court judge in Sacramento County. Earlier this year, on August 13, Judge Karlton issued a decision in a case called Duvall v. Reliance Standard Life Insurance Company. As is often the case in ERISAworld, the insurance company won after cheating the insured out of insurance benefits. That’s dog bites man stuff anymore. Along the way, though, Judge Karlton let it be known he was unhappy with the way ERISA cases are adjudicated.

Take for example the claim file on which Judge Karlton was obligated to base his decision. Because they like to pretend they are federal courts or administrative agencies, insurance companies never call a claim file a claim file. Instead, they like to call it the “administrative record,” because calling it a claim file makes it sound so insurance-y. Judge Karlton would have none of that:

The facts described herein derive from the lodged insurance company’s record (“ICR”). The court uses the phrase Insurance Companies’ Record, rather than Administrative Record, although Administrative Record has become customary in the field, because it suggests an independent record, which is false characterization of both the documents and their review.

So, Judge Kartlon saw through the “administrative record” scam. Later, in describing the procedural facts of the case, he mentioned how Reliance Standard had sent Ms. Duvall a letter describing the requirements for her to undertake an “administrative appeal,” another bogus phrase the insurance companies use to make themselves sound like something they’re not. Again Judge Karlton called them on it:

Once again, the use of appeal suggests an independent body reviewing the file, while in truth, of course, all that plaintiff would get was a reconsideration by the insurance company as to whether it should continue to pay benefits, and thus reduce its profits.

Next Judge Karlton turned to the question of whether Reliance Standard’s denial of benefits should be evaluated under a de novo standard, or “arbitrary and capricious” standard. Remember the de novo standard is the one which is supposed to be the usual one, and the "arbitrary and capricious" standard is to be used only in those exceptional cases where the plan sponsor really wanted the plan administrator to have discretion to use its own judgment in approving or denying claims. Lo and behold Reliance Standard had granted itself “discretion” in its insurance policy, so Judge Karlton had to go with the “arbitrary and capricious” non-standard, commenting courts “have not been stingy in our determinations that discretion is conferred upon plan administrators,” and adding:

Whether stingy or not, because it is in the plan’s interest to limit the scope of review, it is the court’s experience that the plan inevitably confers discretion on the administrator.

Finally, Judge Karlton turned to an examination of Reliance Standard’s approach to Ms. Duvall’s claim. He remarked:

The court does so with some distaste. Applying legal standards to what is clearly a stacked deck brings discredit to the legal process.

"Applying legal standards to what is clearly a stacked deck" -- with these words Judge Karlton has summed up ERISAworld about as well as can be done in ten words. But what's a little discredit to the legal process as long as it's efficient?

The case again is Duvall v. Reliance Standard Life Insurance Company, and the citation is – F.Supp.2d –, 2009 WL 2488179 (E.D.Cal.).

Pre-existing condition? We don’t need no stinkin’ pre-existing condition...

One of the major points advanced in favor of health insurance reform is that insurance companies abuse the privilege of refusing to cover you if they decide you have a pre-existing condition, or pulling the plug on coverage you already have if they decide you had one you didn’t tell them about when you applied for coverage. That’s a sad state of affairs, without question. As in other areas, of course, ERISA manages to make a bad situation worse. Much worse.

If you get your insurance through your employment, ERISA wipes out any state law protection you might have in this area, and health plans can simply change your “coverage” to exclude a condition you might develop, never mind whether it was pre-existing or not. Consider the sad case of John McGann, who discovered in December 1987 that he was afflicted with AIDS. At least, he thought, he was fortunate to have good insurance from his employer, H&H Music Company, which provided coverage for AIDS treatment up to a $1,000,000 lifetime limit.

John McGann, unfortunately for him, failed to consider what ERISA was about to do to him.

Now, Mr. McGann had an insurance policy through his employment with H&H, already issued, already underwritten, premiums fully paid. There was absolutely no indication his AIDS was a pre-existing condition, and no one ever claimed it was.

But in 1988, when the insurance company, General American Life Insurance Company, got wind of his illness, all of a sudden things changed at H&H:

In July 1988, H&H Music informed its employees that, effective August 1, 1988, changes would be made in their insurance coverage. These changes included, but were not limited to, limitation of benefits payable for AIDS-related claims to a lifetime maximum of $5,000. No limitation was placed on any other catastrophic illness.

Now hold on a minute. John McGann had an insurance policy which said treatment for AIDS was covered up to $1,000,000. An insurance policy, which most people think of as a binding contract that the insurer will cover what it says it will. But H&H just canceled the policy and pulled it out from under Mr. McGann, replacing it with a self-insured plan with the aforementioned stingy AIDS benefit.

By the way, in court, H&H and General American proudly admitted:

the reduction was prompted by the knowledge of McGann’s illness, and that McGann was the only beneficiary then known to have AIDS.

The United States Fifth Circuit Court of Appeals reviewed ERISA, and concluded:

[ERISA] does not prohibit an employer from electing not to cover or continue to cover AIDS, while covering or continuing to cover other catastrophic illnesses, even though the employer’s decision in this respect may stem from some “prejudice” against AIDS or its victims generally.

It wasn’t even that hard, either. ERISA is pretty clear that your employer, if, say, the insurance company threatens to raise premiums in response to an employee coming down with a covered illness, can just cancel that part of the coverage and leave the sick employee, who didn't think they were in the ranks of the uninsured, high and dry. Indeed, never mind higher premiums, ERISA allows coverage to be precipitously canceled because of, say “some ‘prejudice’ against AIDS or its victims.”

That’s ERISA for you. If we don’t fix ERISA, now, then any “reform” we might achieve will be empty indeed.

The case is McGann v. H&H Music Co., and the citation is 946 F.2d 401 (5th Cir. 1991).

By the way, John McGann died in June 1991.

A basic primer on "de novo" versus "abuse of discretion" judicial analysis

We are exploring the “discretion” scam which infects ERISA law, and how it unduly stacks the deck in favor of insurance companies when you take them to court. I thought an illustration of how big a difference it makes might be useful here, so join me in a review of two recent cases from United States Circuit Courts of Appeal: the Seventh Circuit’s Krolnik v. Prudential Insurance Company of America, which is reported at 570 F.3d 841 (7th Cir. 2009), and the Eleventh Circuit’s Doyle v. Liberty Life Insurance Company of Boston, which is reported at 542 F.3d 1352 (11th Cir. 2008).

One of the big problems with ERISA exemplified by these cases is that the whole concept of a “standard of review,” which is what courts apply to decide whether to overturn the decision of some other body, is a complete mismatch when you’re talking about an insurance company denying your claim. Traditionally the “other body” is one of two things. They are either a lower court or administrative agency, which, say what you want about them, are at least conceptually impartial and have no direct, personal stake in the decision they are rendering. Or they are a trustee vested by a trustor with discretion to bring to bear their own judgment in making decisions about how trust assets are to be distributed. A classic trustee is also impartial, but sometimes trustees have conflicts of interest, which is legal as long as the trustor was OK with it, and which is taken into account by courts. More about that in a later post.

An insurance company, on the other hand, is a party to the insurance contract in question, which is accused of breaching that contract. In a breach of contract case, the court is supposed to decide for itself whether one of the parties is in breach, not have a thumb on the scale in favor of the breaching party as if it were itself a lower court which has already endorsed the decision it made.

Krolnik discusses “de novo” review, where the court does not grant “deference” to the insurance company, and describes the problem with “standards of review” as applied to an insurance company:

Then there is a dispute about whether Krolnik can work even with all of his physical and mental problems. Some physicians say yes, others no. If judicial review were deferential, then Prudential’s decision would be sustained easily. But the court must make an independent decision. To do this, the finder of fact must weigh all of the medical evidence. ... If a paper record contains a material dispute, a trial is essential. And at trial Krolnik would be free to offer medical evidence of his own and cross-examine the physicians who produced the reports that underlie Prudential’s decision. ....

All in all, it would be best for judges and lawyers to stop thinking about “de novo review” – with the implication that the judge is “reviewing” someone else’s action – and start thinking about independent decision....

So that’s how at least one court thinks a so-called “de novo review” should proceed: it’s not a “review” at all, in the sense that some other impartial body has made a decision; it’s a wholly independent decision by a judge in the first instance.

But of course that’s not how ERISA generally works. For a flavor of that, let’s take a look at Doyle, in which the Eleventh Circuit described how so-called “abuse of discretion review” works. In pertinent part:

(1) Apply the de novo standard to determine whether the claim administrator’s benefits-denial decision is “wrong" (i.e. the court disagrees with the administrator’s decision); if it is not, then end the inquiry and affirm the decision.

OK, so the Eleventh Circuit asks whether the insurance company was wrong to deny benefits. If the insurance company was right, it wins. Fair enough. But does it lose if it was wrong? You would think so, but not necessarily:

(2) If the administrator’s decision is in fact “de novo wrong,” then determine whether he was vested with discretion in reviewing claims, if not, end judicial inquiry and reverse the decision.

Well, at least as long as the insurance company was not “vested with discretion,” then if it is wrong it loses. So far so good. But as we have seen insurance companies almost always vest themselves with discretion when they write their ERISA policies, so we go to the next stage, which is where things get screwy:

(3) If the administrator’s decision is “de novo wrong” and he was vested with discretion in reviewing claims, then determine whether “reasonable” grounds supported it (hence, review his decision under the more deferential arbitrary and capricious standard).

Wait ... what was that? If the decision was wrong then do what? After paying some lip service to the effect of a conflict on interest on the insurance company’s part (more on that later), the Eleventh Circuit goes on to say a decision which was, you know, wrong is nonetheless to be upheld if it was “reasonable.”

And when we get to a discussion a bit later on of what it takes to be considered reasonable “reasonable,” your head might really explode.

And you may very well have a very difficult time getting your insurance company to pay for the repair work.

How We Got Here – the “Abuse of Discretion” Scam, Part II

Earlier we started a discussion about the “abuse of discretion” scam. In a nutshell, the so-called “standard of review” a court employs in evaluating an insurance company’s decision to deny your claim is very often, in and of itself, outcome-determinative. Given that a great many insurance company denials are, shall we say, questionable, if the court uses a de novo analysis you’ve got a good chance of winning, and thereby securing the very stingy remedies ERISA allows to aggrieved claimants. But if the court uses a deferential analysis, then it becomes much more difficult – it is no exaggeration to say often impossible – to get that denial turned around by a judge.

Who in their right minds would design a judicial system this way?

To answer that we need to consider a Supreme Court case called Firestone Tire & Rubber Co. v. Bruch. If you’d like to look up the case the citation is 489 U.S. 101 (1989). In Firestone the Court considered what the “standard of review” ought to be for claims under ERISA. Right from the get-go the insurance industry won a big victory there, as talking about a “standard of review” instead of, say, a “burden of proof” implies we are looking at the decision of some sort of impartial administrative agency instead of an insurance company alleged to have breached its contract. We’ll address that problem in a future post.

Anyway, the Firestone Court observed that ERISA is based to a large extent on trust law, which it undeniably is. That’s because when ERISA was enacted its primary focus was on pension plans, not things like health insurance policies, and pension plans do actually, sorta kinda, resemble trusts: the employer sets aside a pile of money to fund retired employees’ pension benefits.

And trust law, as we have seen, does indeed treat the decisions of a trustee with deference if the trust instrument confers discretion on the trustee. So the Firestone Court just went ahead and applied the general rule of trust law: if a trustee is not granted discretion in a trust instrument, then a court considers the decision de novo. If the trust instrument does confer discretion on the trustee, then a court has to find an abuse of discretion before it can rule against the trustee.

Now, the Supreme Court apparently thought it was issuing a decision generally favorable to claimants. Firestone argued that, never mind what the terms of the benefit plan in question might say, denials of benefits under ERISA should always be analyzed under an “abuse of discretion” standard (ERISA defendants are nothing if not brazen in making incredibly self-serving arguments). This the Supreme Court rejected, because “adopting Firestone's reading of ERISA would require us to impose a standard of review that would afford less protection to employees and their beneficiaries than they enjoyed before ERISA was enacted,” and God knows we don’t want to be doing that. So the Supreme Court said the general rule is de novo analysis, and only in those rare circumstances where the plan sponsor decides it wants the insurance company to have discretionary authority will deferential analysis be used.

Well, once Firestone came out it took about five minutes before insurance companies started putting language in their insurance policies by which they granted discretion to themselves – the employer purchasing the policy had no role in creating this language, and in the vast majority of cases didn’t even know it was there.

And the courts, regrettably, gave effect to this self-conferred “discretion.”

That’s the start of how we got to this state of affairs. More soon about the implications.

They aren’t pretty.

"As any teacher of insurance law knows," ERISA stinks

We’ve heard so far from me, a frustrated lawyer who’s seen too many clients cheated by insurers and ERISA, and from several frustrated federal judges who’ve grown weary of having to apply this most unjust law. Today academia enters the fray. Professor Tony Sebok of the Benjamin N. Cardozo School of Law blogs today at TortsProf Blog about ERISA and its malignant effects:

As any teacher of insurance law knows, ERISA—the Employee Retirement Income Security Act of 1974 (29 U.S.C. § 1001 et seq.)—has been interpreted by the Supreme Court to provide complete preemption of all state contract and tort remedies relating to the interpretation of employer-provided health insurance plans. These plans, of course, sit exactly at the center of the current debate over healthcare reform. In his speech last week, President Obama promised “[a]s soon as I sign this bill, it will be against the law for insurance companies to drop your coverage when you get sick or water it down when you need it the most.”

This is a wonderful claim, except that the federal government, through ERISA, preempted the state law remedies that would have allowed disappointed policyholders who got their coverage through their employers to sue when companies “drop[ped their] coverage” when they got sick or “water[ed] it down” when they needed it the most. To get a sense of how much damage the federal government has already done, one only has to read the angry pleas to Congress to remove this preemption from judges like Federal District Court Judge William Young in Andrews-Clarke v. Travelers Ins. Co., 984 F. Supp. 49, 50 (D. Mass. 1997) who wrote, “ERISA has evolved into a shield of immunity that protects health insurers, utilization review providers, and other managed care entities from potential liability for the consequences of their wrongful denial of health benefits.”

One simple reform to the healthcare system which would be simple, budget-neutral and actually conservative would be to repeal the part of ERISA that immunizes health insurance providers from state common law actions in tort and contract. I honestly do not know whether the plans being considered by the Congress would provide this repeal, or whether they simply maintain the federal preemption but provide for federal remedies with more teeth than the current system. The current federal remedies—reimbursement of out-of-pocket expenses by a victorious beneficiary or injunctive relief—are useless for most people, and certainly lack the deterrent effect of state tort and even contract remedies.

If anyone knows whether Obamacare will finally get rid of ERISA preemption, please let me know.

We know that the most-discussed proposal to date, HR 3200, would not only not eliminate ERISA preemption but would expressly continue it, so Professor Sebok would be disappointed about that, as would we all. But HR 3200 is only one bill; there are others and there more to come, so now is the time to write your Congressional representative.

A Modest Proposal: Make Some Noise!

From the president’s speech last night:

“More and more Americans pay their premiums, only to discover that their insurance company has dropped their coverage when they get sick, or won't pay the full cost of care. It happens every day.”

“As soon as I sign this bill, it will be against the law for insurance companies to drop your coverage when you get sick or water it down when you need it most.”

“Insurance executives don't do this because they are bad people. They do it because it's profitable. As one former insurance executive testified before Congress, insurance companies are not only encouraged to find reasons to drop the seriously ill; they are rewarded for it.”

“Now, I have no interest in putting insurance companies out of business. They provide a legitimate service, and employ a lot of our friends and neighbors. I just want to hold them accountable.”

Gee, I have an idea about what law needs to be amended to accomplish that.

This is the time to get the word out and to be heard. The president also said: “If you come to me with a serious set of proposals, I will be there to listen. My door is always open.” Hold him to his promise! Call, write, agitate, contact your Congressional representatives and the White House.

Here are some tips for doing so effectively, shamelessly plagarized from “How to Lobby Your Member of Congress,” Amnesty International, www.amnesty.usa.org; and “How to Lobby Your Member of Congress,” American Civil Liberties Union, www.aclu.org:

Members of Congress rarely hear from their constituents on most issues. Sometimes hearing from a handful of concerned citizens will cause a Senator or Representative to pay attention to a particular issue and encourage him or her to vote the right way.

In general the more personal your lobbying contact is, the more effective it will be. While a personal discussion with a Member of Congress is most effective, a meeting or telephone conversation with one of his or her assistants is almost as good.

You do not need to be an expert on the issue to call or write your Member of Congress’ office. All you need to communicate is that you want the member to support or oppose a particular measure. When you call a Member’s office give your name and address and ask whomever takes your call to let the Member of Congress know that you favor or oppose something.

It is very important that you lobby both Members of Congress who may support your views and those who may not. Lobbying can change votes so it is critically important that you lobby those who disagree with you. Lobbying supporters provides them with evidence of support for their position and allows them to be more active in support of that position.


Remember that all contact is good! Start small, and then increase your activism as you gain experience.

• Write a letter. Letters are an important and effective way to introduce yourself and your purpose. A personal letter is much more effective than a form letter or postcard. Short handwritten letters are best, and always remember to be specific about the action you want your Member of Congress to take. Make sure to include your full address so they know you live in the district. Avoid petitions, as they are not as effective.

• Make a phone call. You can call your U.S. senator or representative by contacting the Capitol Hill switchboard at 1-202-224-3121. Once you are connected to the right office, ask to speak with the staff member who handles labor issues, and/or employee pension and benefits regulation. Clearly have in mind a specific request of your representative. If you are planning a visit, this is also the time to set up a meeting to discuss your request.

No surrender! -- redux

This blog is all doom and gloom, and for good reason: ERISA stinks! But that ought not stop us from doing what the little the law allows to try to right these wrongs. Therefore, a periodic call to arms seems appropriate. Herewith, consequently, a reprise:

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!

How We Got Here – the “Abuse of Discretion” Scam

As we have seen one of the many problems with ERISA is that we pretend insurance companies are something other than what they really are. What they are is private corporations seeking to maximize shareholder value by turning a profit. Nothing wrong with that, at all. But along with that perfectly legitimate status usually goes corresponding responsibilities, including having to defend in court against claims of breach of contract, and having to make aggrieved parties whole when a court determines a contract has been breached.

What they are not is a trustee. Trustees are supposed to put the interests of the trust beneficiaries ahead of everything else, including the trustee’s own interest. Trustees are not supposed to allow a profit motive, or a desire to maximize shareholder value, or any other consideration, to affect their judgment in exercising their discretionary powers under a trust instrument.

But, of course, we all too often treat insurance companies as if they were trustees, which renders insurance contracts unduly difficult to enforce in court and malignantly affects the behavior of insurance companies.

So how did we get here?

First we need to consider “standards of review.” That’s a phrase which refers to the amount of scrutiny, or the amount of skepticism, a court will apply when considering the decision of some other entity. It’s generally a critical consideration, and very often is in itself determinative of the outcome of a judicial dispute.

In broad strokes, and as relevant here, there are two “standards of review” in play. First is “de novo” review – that’s when a court essentially makes its own independent decision about a question, and the fact that someone else previously made a decision on the same question doesn’t matter at all – it’s as if that first decision never happened, and the court just goes ahead and decides the question based on its own evaluation of the evidence and its own good judgment.

Then there’s deferential review, usually called either “abuse of discretion” or “arbitrary and capricious” review. In this sort of review that previous decision matters a lot. A court will not make its own independent decision on the question, but instead will look to see if there’s any good reason to overturn the decision that other party already made. If the party contesting the decision can’t come up with a damn good reason to overturn it, then the court will simply default to the previous decision, even if it would have decided the matter differently left to its own devices.

Here’s an example. Say you’ve lost a case before a trial court, and you decide to take it up on appeal. Generally, the court of appeal will apply different standards of review based on what sort of question it is looking at.

If you are saying, for example, that the trial court made mistakes in the way it evaluated the evidence – it believed the testimony of Smith and you think Smith was lying, say – then the court of appeal will apply a deferential standard of review to that question. The trial court, after all, was the one which actually heard the testimony in question and had the opportunity to observe Smith testifying. Indeed a primary function of trial courts is to determine which of two competing versions of the facts is the right one. So a court of appeal is not going to reverse a trial court’s evaluation of the evidence unless it is very clear the trial court committed a gross error, that the trial court’s conclusion was absurd or ridiculous. And that is the case even if the court of appeal would have evaluated the evidence differently given the opportunity. That’s deferential review.

Now let’s say your argument to the court of appeal is that the trial court erroneously interpreted some legal principle which affected the outcome of the case. You’re not haggling over the facts, but you’re saying the trial court applied the law incorrectly. Now the court of appeal is going to apply de novo review: it is going to make its own decision about what the proper legal principles are, and if it disagrees with the trial court, it will reverse the trial court’s decision. The court of appeal’s job is to figure out what the proper legal principles are, and it is doesn’t need to have heard the witnesses testify or make its own factual findings in order to do so. So all it takes for a reversal to happen is that the court of appeal decides the trial court was incorrect – that’s all, just incorrect. And that is the case even if the trial court’‘s legal interpretation, albeit incorrect according to the court of appeal, was perfectly reasonable and understandable.

So here’s the analogy: if you could appeal an umpire’s call in a baseball game, the Court of Baseball Appeals isn’t likely to reverse a decision that a particular pitch was in the strike zone: you aren’t going to get far saying that pitch was a ball, not a strike. That’s because the umpire is the one who actually saw the pitch, and it’s his job to decide whether it was within the strike zone or not. But if the umpire decides that it takes four strikes instead of three to constitute a strikeout, now you are going to get a reversal just by convincing the Court of Baseball Appeals that the umpire got the rules themselves wrong, and the umpire’s own decision gets no weight in that decision.

When we continue we’ll take a look at a couple of things. First, to even think about a “standard of review” when you’re considering whether an insurance company breached its contract is a mismatch from the get-go. Second, to pretend an insurance company is the sort of entity which ought to ever have its claim denials subject to deferential review is crazy. But that’s exactly what we do.

The Rising Judicial Chorus: Judge Young

William G. Young is a judge for the United States District Court for the District of Massachusetts; he was a 1986 Reagan appointee and served as chief judge from 1999 to 2005.

In 1997 Judge Young issued an opinion in a case called Andrews-Clarke v. Travelers Insurance Company. In a nutshell, Richard Clarke drank too much, and sought treatment for his alcoholism, which was a covered benefit under his ERISA-governed Travelers insurance policy. Travelers and its utilization review contractor, Greenspring, refused to authorize the in-patient stay requested by his doctors, and Mr. Clarke was released ahead of schedule. He tried to commit suicide, was readmitted to a detoxification facility, and was again released ahead of schedule due to Travelers’ and Greenspring’s refusal to authorize the requested length of stay.

Here’s what happened next, as described by Judge Young:

By now, it was tragically apparent to everyone but Travelers and its agent, Greenspring, that Clarke was a danger to himself and perhaps others. After conducting a commitment hearing, the Haverhill District Court so found, and ordered Clarke committed to a thirty-day detoxification and rehabilitation program. The court referred the issue of Clarke's placement to the Court Clinic, which in turn sought Greenspring's approval for an insured admission to a private hospital. When Greenspring - despite the fact that enrollment in a thirty-day inpatient detoxification program is a defined benefit of the Travelers insurance policy - incredibly refused to authorize such a private admission, the court ordered Clarke committed to the Southeastern Correctional Center at Bridgewater for his detoxification and rehabilitation.

Clarke's life now spiralled inexorably down and out of control. While a patient at Bridgewater, he was forcibly raped and sodomized by another inmate in his unit. He received little in the way of therapy or treatment. After his release from Bridgewater on October 25, 1994, he made his way back to Haverhill where his wife and four minor children still lived. Diane Andrews-Clarke told Clarke that he could return to the marital home only if he remained sober. Unable to do so without hospitalization, Clarke began a three-week drinking binge.

Richard Clarke, age 41, committed suicide on November 12, 1994. His wife, Ms. Andrews-Clarke, sued Travelers for wrongful death, and the case ended up before Judge Young. We’ll let him take it from there (I have omitted footnotes, but you can find them in the original case report; the citation is below):

Travelers and Greenspring promptly removed her case to this Court and then, just as promptly, asked this Court to throw her out without hearing the merits of her claim.

This, of course, is ridiculous. The tragic events set forth in Diane Andrews-Clarke's Complaint cry out for relief. Clarke was the named beneficiary of a health insurance policy offered through an employee benefit plan. That policy expressly provided coverage for certain medical and psychiatric treatments, including enrollment in a thirty-day inpatient alcohol detoxification and rehabilitation program. Doctors at several hospitals, and even the courts of the Commonwealth of Massachusetts, determined that Clarke was in need of such treatment, but the insurer and its agent, the utilization review provider, repeatedly and arbitrarily refused to authorize it. As a consequence of their failure to pre-approve - whether willful, or the result of negligent medical decisions made during the course of utilization review - Clarke never received the treatment he so desperately required, suffered horribly, and ultimately died needlessly at age forty-one.

Under traditional notions of justice, the harms alleged - if true - should entitle Diane Andrews-Clarke to some legal remedy on behalf of herself and her children against Travelers and Greenspring. Consider just one of her claims-breach of contract. This cause of action - that contractual promises can be enforced in the courts - pre-dates Magna Carta. It is the very bedrock of our notion of individual autonomy and property rights. It was among the first precepts of the common law to be recognized in the courts of the Commonwealth and has been zealously guarded by the state judiciary from that day to this. Our entire capitalist structure depends on it.

Nevertheless, this Court had no choice but to pluck Diane Andrews-Clarke's case out of the state court in which she sought redress (and where relief to other litigants is available) and then, at the behest of Travelers and Greenspring, to slam the courthouse doors in her face and leave her without any remedy.

This case, thus, becomes yet another illustration of the glaring need for Congress to amend ERISA to account for the changing realities of the modern health care system. Enacted to safeguard the interests of employees and their beneficiaries, ERISA has evolved into a shield of immunity that protects health insurers, utilization review providers, and other managed care entities from potential liability for the consequences of their wrongful denial of health benefits.

***

Does anyone care?

Do you?

The case again is Andrews-Clarke v. Travelers Insurance Company, and the citation is 984 F.Supp. 49 (D.Mass. 1997).

ERISA Wants Your Claim to be Denied – Part III

This week we’ve been considering the theory of “efficient breach,” which holds that it’s a fine thing to do to breach a contract so long as everyone comes out even or ahead. A critical aspect of this theory is that the breaching party has to make the other party whole, and if it can incur that expense and still come out ahead then giddyup.

So a party thinking about breaching a contract has to figure out what that expense is likely to be – how much is it likely to cost to make the other party whole? Only then will the breaching party have a number to compare to the gain he expects to realize from breaching.

Now consider Deny-Em-All Insurance Company (“DIC”) doing this calculus under the influence of ERISA. Let’s see, says DIC, since we have granted ourselves “discretion” in the policy and therefore can only be liable if it can be shown we were “arbitrary and capricious,” there’s a good chance that we won’t be liable at all and the cost of "making the other party whole" will be ... zero!

Then there’s this: in the unlikely event we have to pay something to the other party, thanks to ERISA in no event will we have to actually make them whole, as we would if justice and fairness were involved here.

So ERISA says to the DICs of the world, go ahead and breach! The cost of making the other party whole (i.e. the artificially low remedy ERISA allows, discounted further because there is likely to be no liability at all thanks to the “discretion” scam) almost has to be less than the cost of, you know, living up to your contractual obligations.

Therefore, under an “efficient breach” approach, not only do the DICs breach contracts with no fear of any meaningful consequence, they do so with the affirmative blessing of the law.

Meanwhile, real people go without. But providing them (as the insurance contract promises) with medical care, or disability benefits, isn’t “efficient,” according to ERISA.

ERISA: 35 years old and still incorrigible

xtremErisa notes that this month marks the 35th anniversary of ERISA’s enactment, and notes some of the good things about ERISA, of which there are a few. The xtremErisa blog is an entertaining read overall, and offers a more balanced view of ERISA’s good and bad points than you will get here (here we are concerned with keeping insurance companies honest, and there the focus is expanded beyond that to pension regulation and such). You’ll also get some amusing pop culture references there (I’d do some of that here too, except once I exhausted the possibilities offered by Jimmy Buffett, Travis McGee and Fernwood Tonight I’d be out of ammo).

Anyway, OK, I’ll say it. ERISA, happy birthday.

Now please go away.

ERISA Wants Your Claim to be Denied – Part II

The other day we considered the legal theory of “efficient breach” – the idea that breaching a contract is actually a good thing to do provided doing so is “economically efficient.” It is a bit of an oversimplification, but “economically efficient” essentially means that everyone involved comes out at least as well as they would have if the contract had not been breached, and the breach causes assets to be devoted to their most valuable use.

So, if a party can breach a contract, make the other party to the contract whole by paying them damages, and still come out ahead, then “efficient breach” theory wants that party to breach the contract. By recovering damages for the breach, the other party will end up in the same position as if the contract had been performed, and if the breaching party can pay those damages and still come out ahead because of, say, a better deal which comes along, then theoretically at least the asset in question is being devoted to a more valuable use.

Let’s take a closer look at the calculation to be undertaken by the party thinking about breaching a contract. There are two numbers that party has to compare to each other: the amount of damages it is likely to have to pay the other party, against the gain it stands to realize, by virtue of the breach. According to “efficient breach” theory, if the former is smaller than the latter then the party should breach the contract.

It follows, therefore, that if you make the former number (the cost of breaching) smaller, or the latter number (the benefit derived from breaching) larger, then you are going to see more breaches of contracts.

Tomorrow we’ll close the loop by examining how ERISA affects this calculation. Here’s a hint: it makes that first number – the cost of breaching – artificially low, and therefore it causes more contracts to be breached (i.e. more valid insurance claims to be denied). And this from a law that was supposed to “protect ... the interests of participants in employee benefit plans.”

The Problem, redux

On 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 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 (ERISA is actually not a bad law with respect to pension plans). 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:

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 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. 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. 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, then it follows insurers will do precisely that (and believe me, they do).


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 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.