Holiday break

As you can see from a quick look at this blog, I have taken the month of December off from blogging. A confluence of circumstances, and holiday madness, have taken all of my time and then some. After the new year we'll pick up again exploring the many, many ways in which ERISA ruins lives.

Fourth and long: ERISA beats the spread against NFL players too

Brent Boyd is a former professional football player. Big tough guy.

In a 1980 pre-season game Mr. Boyd took a serious hit and suffered a concussion. It ended his career and continues to have a very big and bad impact on his life.

Fortunately for Mr. Boyd, the NFL Players Association, when they struck their Collective Bargaining Agreement with the NFL, included a disability plan so that players who became disabled would have some protection against the resulting loss of income.

That hasn’t worked out so well:

Former NFL player Ben Lynch, who once played for the Cal Golden Bears, said he has also been disabled by recurrent head trauma and added that the NFL also did not cover his care.

"When you're playing football, the union tells you there is a safety net waiting to catch you if you fall," Lynch said. "It's not until you smack the ground that you realize that the safety net they told you about doesn't exist."

Mr. Boyd, however, figured he had legal rights, and he went to court to recover his wrongfully-denied disability benefits.

Whereupon he ran into the legal equivalent of the Fearsome Foursome, the Purple People Eaters, and the Steel Curtain all rolled into one: ERISA.

First, the Ninth Circuit observed that, since under ERISA we pretend insurance companies and plan administrators are Oliver Wendell Holmes, and that their motives are pure and pristine, we treat their decisions as if they were edicts from an Oracle on high:

The NFL Plan was established pursuant to collective bargaining and grants to the Retirement Board the full discretion to adjudicate claims and interpret the Plan. We review the Board's decision to deny Boyd's football degenerative disability benefits for an abuse of discretion.

In fact, as the Ninth Circuit added later in the same opinion, denial decisions under ERISA are so bulletproof that “even decisions directly contrary to evidence in the record do not necessarily amount to an abuse of discretion."

The outcome of Mr. Boyd’s suit for disability benefits was as preordained as if the Green Bay Packers were going to play my woefully bad high school football team: “The Retirement Board did not abuse its discretion in concluding that Boyd's disability did not arise from his League football activities.”

The Problem, redux

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 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.

Buy a vowel: ER_SA _nsurers l_e, cheat and steal

Pat Sajek, long-time host of Wheel of Fortune and occasional conservative political commentator, thinks we ought to consider limits on public employees’ ability to vote on ballot initiatives which would directly affect their personal self-interest. He backs up his thoughts with this rationale:

In nearly all private and public endeavors, there are occasions in which it's only fair and correct that a person or group be barred from participating because that party could directly and unevenly benefit from decisions made and policies adopted.

In the small world department, here we have Wheel of Fortune game show host (I once read an interview in an airplane magazine in which Vanna White said her primary occupational requirement was that “You have to know the entire alphabet”; I think she was kidding):





anyway where was I? Oh yes, game show host channels American icon James Madison in Federalist Paper 10: “No man is allowed to be a judge in his own cause, because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity.”

Well , we all know that ERISA insurers regularly make decisions, often ruining -- or ending -- the lives of real people, in matters where they “could directly or unevenly benefit from decisions made.” And yet we treat these biased decisions as if they came from an impartial judge who has no skin in the game. As we’ve discussed previously that doesn’t make any sense.

So to exasperated judges, academic experts, and James Madison, we can now add “game show host” to the ranks of anti-ERISA advocates.

The Problem, redux

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 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.

The rising judicial chorus goes to Washington: Senate Finance Committee to consider disability insurers’ conduct under ERISA [UPDATED]

Next week, the Senate Finance Committee is going to consider the manner in which ERISA affects the behavior of disability insurance companies. Since at least a few Senators will be paying at least some attention to the issue, this is a good time to make some noise. You can learn how to submit your comments for the record in the Senate hearings here.

A few witnesses have already submitted written testimony ahead of time. One of them is United States District Court Senior Judge William M. Acker, Jr., of the Northern District of Alabama. Judge Acker’s testimony focuses on the “discretion” scam, in which insurers confer upon themselves “discretion” in their insurance policies and then use that as a shield to keep judges from reversing their improper claim denials. A few highlights from Judge Acker:

I am not saying that the courts, including the Supreme Court, have not tried to make sense of ERISA, and to make it workable, but in truth, the situation is worse in 2010 than it was in 1998, and getting worse every day.

The language [Congress] chose in 1974, if it had not, over time, been altered or obliterated by the courts, would provide for de novo consideration by a court of all denials of ERISA benefits. ERISA’s Section 502(a)(1)(B) straightforwardly provides that any beneficiary of a plan governed by ERISA can bring a “civil action ... to recover benefits due him under the terms of his plan”. Rule 2 of the Federal Rules of Procedure provides: “There is one form of action – the civil action”. This language recognizes nothing less than an independent consideration by the court, a “trial on the merits”. The procedure concocted by the courts in the years since 1974, now called “judicial review”, based on an examination of the administrative record, while giving deference to the conflicted decision-maker who has already denied the claim, simply does not fit the scheme that Congress contemplated.

ERISA jurisprudence will stay as messed up as it is, unless Congress reworks it. The courts have not rescued ERISA, and cannot be expected to do so. The most important legislative change that I implore you to make is to make it clear that when Congress says “civil action”, as it did in 1974, it means what it said, “civil action” and not “judicial review”.

Here’s Judge Acker’s testimony in its entirety; it is definitely worth a read:

Testimony by Judge William Acker to Senate Finance Committee re ERISA


You'll be able to access the testimony of other witnesses here.

It is never a bad time to do so, but now is a particularly good time to make some noise to your Congressional representatives.

UPDATE (9/28/2010): You can watch the hearing in its entirety here.

Reader’s Corner: A review by an ERISA drone of an ABA book about the legal rights of the mentally disabled

The American Bar Association, aside from looking out for the interests of lawyers, conducting professional educational get-togethers, and weighing in on the occasional Supreme Court appointee, also publishes a lot of professional literature. They’ve been kind enough to provide me a copy of one such work, entitled Civil Mental Disability Law, Evidence and Testimony, edited by John Parry, J.D., so I can give it a look and review it here for both of you who read this blog. The ABA provided it free of charge, but with no strings about what I might have to say about it, so I consider this to be a pretty impartial overview.

Civil Mental Disability Law to begin with, is a thick book, and it weighs enough that it maxed out my little postage scale here in the office. That’s not because there’s lots of pretty pictures or oversized type. It is comprehensive, and provides an overview at least of a great many areas which can and do impact on the legal rights of the disabled. The topics covered include such things as abuse and neglect; discrimination in employment, housing and public accommodations; social security disability; and of course our favorite law, ERISA, insofar as it impacts things like ERISA-governed disability insurance. A complete table of contents is here.

While the coverage is comprehensive, the other side of that coin is that the discussion of particular topics (if the ERISA section is indicative anyway) is less detailed than it could be if a work were devoted to that topic alone (and they are all deserving of such treatment). The ERISA discussion certainly provides a good basic overview, but for a practitioner it would be a starting point for research; it wouldn’t constitute comprehensive research in itself. Its treatment of what is, in my opinion, the most important “feature” of ERISA – the fact that insurers are immune from any meaningful liability no matter how badly they act – is really a single sentence: “One threshold problem has been the negative impact of federal preemption on state insurance laws that might otherwise protect persons with mental disabilities from discrimination.” That’s certainly true, but it either soft-peddles or fails to mention the overriding problem of the bulletproof insurer: the ERISA problem isn’t limited to discrimination; it permeates the insurer-insured relationship and renders entire insurance policies effectively illusory.

All that said, I don’t consider it a criticism so much as an observation, because the book does not pretend to be anything other than what it is: a comprehensive overview of a variety of topics impacting the legal rights of the mentally disabled. And an overview is quite useful to someone, like me, who starts out being unfamiliar with the subject matter. Civil Mental Disability Law covers the issues which might arise and provides a good succinct introduction to each, and for that, as a lawyer, I’m quite grateful.

The Problem, redux

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 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.

Department of Smoking Guns: insurance executive salivates over ERISA’s largess to “insurance” industry

We’ve talked at some length about how unfair ERISA is and about how it stacks the deck in favor of the “insurance” industry. We’ve heard not only from lawyers but from judges, academics, and “insured” people who’ve had their claims unjustly denied. Now, let’s hear from an insurance executive.


Jeff McCall was a big muckety-muck for Provident, which merged with UNUM, the largest disability “insurance” company on earth, in 1998. In 1995 he authored a “Privileged Provident Internal Memorandum” – need-to-know stuff – about ERISA.

ERISA, recall, was originally intended to protect the interests of employees, not insurance companies. It was supposed to "protect ... the interests of participants in employee benefit plans and their beneficiaries."

As Mr. McCall joyfully wrote, it didn’t exactly work out that way:

A task force has recently been established to promote the identification of policies covered by ERISA and to initiate active measures to get new and existing policies covered by ERISA. The advantages of ERISA coverage in litigious situations are enormous: state law is preempted by federal law, there are no jury trials, there are no compensatory or punitive damages, relief is usually limited to the amount of benefit in question, and claims administrators may receive a deferential standard of review. The economic impact on Provident from having policies covered by ERISA could be significant. As an example, Glenn Felton identified 12 claim situations where we settled for $7.8 million in the aggregate. If these 12 cases had been covered by ERISA, our liability would have been between zero and $0.5 million.

How does this translate into your “insurance” claim being denied? Here’s Mr. McCall again:

While it is our objective to pay all valid claims and deny invalid claims, there are gray areas, and ERISA applicability may influence our course of action.

Oh, it influences their course of action, all right.

Here's a look at Mr. McCall's memorandum:

Insurance executive memo on "benefits" of ERISA

You may think this has no relevance now, in 2010, since Mr. McCall penned his master work in 1995. But it’s still indicative of the “insurance” industry mind set, as discussed in this judicial opinion issued on July 30, 2010, at footnote number 3:

Federal judge describes bad effects of ERISA

The Problem, redux

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 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.

Don’t you just hate it when judicial activists rewrite the law?

Let us consider the definition of “judicial activism,” as described by the good people at Wikipedia:

Black's Law Dictionary defines judicial activism as a "philosophy of judicial decision-making whereby judges allow their personal views about public policy, among other factors, to guide their decisions."

Indeed it is quite frustrating when unelected judges, based on their own views of wise public policy, presume to overturn the considered judgments of a popularly-elected legislature.

ERISA law is the way it is today as a result of rampant and repeated judicial activism. With ths post we begin a series of examinations of the various ways in which Congress’ initial intent behind ERISA has been not only disregarded but corrupted by activist judges.

For starters, let’s begin with a big whopper: the idea that ERISA was primarily intended to induce employers to offer benefits, any benefits, to employees -- by making those benefits dirt cheap. This rationale has been used as a justification for everything from denying discovery, to using an absurd “standard of review,” to denying any sort of meaningful relief for aggrieved beneficiaries of ERISA plans.

It’s a lie.

How do we figure out what Congress was trying to do when it enacted ERISA? That would require a lot of research and digging, but for the fact Congress was kind enough to tell us, in the very first section of ERISA, 29 USC §1001. Congress said it passed ERISA because:

...the growth in size, scope, and numbers of employee benefit plans in recent years has been rapid and substantial; ... that the continued well-being and security of millions of employees and their dependents are directly affected by these plans; ... that owing to the lack of employee information and adequate safeguards concerning their operation, it is desirable in the interests of employees and their beneficiaries, and to provide for the general welfare and the free flow of commerce, that disclosure be made and safeguards be provided with respect to the establishment, operation, and administration of such plans; ... that despite the enormous growth in such plans many employees with long years of employment are losing anticipated retirement benefits owing to the lack of vesting provisions in such plans; that owing to the inadequacy of current minimum standards, the soundness and stability of plans with respect to adequate funds to pay promised benefits may be endangered; that owing to the termination of plans before requisite funds have been accumulated, employees and their beneficiaries have been deprived of anticipated benefits; and that it is therefore desirable in the interests of employees and their beneficiaries, for the protection of the revenue of the United States, and to provide for the free flow of commerce, that minimum standards be provided assuring the equitable character of such plans and their financial soundness.

Now, I left out some language, indicated by the ellipses, so that this blog post doesn’t become more lengthy than my usual verbose legal briefs. But you can check it against the full version; there’s not a word in there which indicates any Congressional concern with making employee benefits cheap for employers to provide, regardless of how illusory those benefits may be, and certainly nothing about a concern for poor little insurance companies who are haled into court when they defraud someone. Later in the same statute Congress tells us it is enacting ERISA:

...to protect interstate commerce and 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.

So we know what Congress was trying to do, and we know what concerns were behind its enacting ERISA.

Now fast-forward to 2010, and the Supreme Court’s recent decision in Conkright v. Frommert:

Congress enacted ERISA to ensure that employees would receive the benefits they had earned, but Congress did not require employers to establish benefit plans in the first place. Lockheed Corp. v. Spink, 517 U.S. 882, 887, 116 S.Ct. 1783, 135 L.Ed.2d 153 (1996). We have therefore recognized that ERISA represents a "`careful balancing' between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans." Aetna Health Inc. v. Davila, 542 U.S. 200, 215, 124 S.Ct. 2488, 159 L.Ed.2d 312 (2004) (quoting Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987)). Congress sought "to create a system that is [not] so complex that administrative costs, or litigation expenses, unduly discourage employers from offering [ERISA] plans in the first place." Varity Corp., supra, at 497, 116 S.Ct. 1065. ERISA "induc[es] employers to offer benefits by assuring a predictable set of liabilities, under uniform standards of primary conduct and a uniform regime of ultimate remedial orders and awards when a violation has occurred." Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 379, 122 S.Ct. 2151, 153 L.Ed.2d 375 (2002).

That’s Chief Justice Roberts writing, there, for a 5-3 majority (Justice Sotomayor didn’t participate in this case).

Notice how, for every proposition about ERISA being supposedly concerned with “administrative costs,” or “litigation expenses,” or “a predictable set of liabilities,” he is able to cite to previous cases which said those things. So Chief Justice Roberts isn’t alone in this, although he sure seems like a true believer.

Notice, though, what's missing? Chief Justice Roberts is able to offer not a single citation to the ERISA statute, as passed by Congress, to support this passage. This stuff is all judge-made baloney.

Now, no one pretends administrative and litigation expenses and such are not important in themselves. But the fact is that Congress did not mention them, at all, when it described its reasons for enacting ERISA. And, important as these things are, it is judicial activism, pure and simple, to decide they trump what Congress was trying to do: protect beneficiaries and participants in employee benefit plans.

More later...

Health insurance scammers overlook the low hanging fruit

The Insurance Journal reports:

Bob Harper thought he'd found a better health-insurance deal. The Oklahoma man bought coverage from an outfit called American Trade Association (ATA). The price seemed affordable, and he thought he'd save decent money while maintaining a solid healthcare safety net.

Harper's heart then went bad. His strength fading, he urgently needed a pacemaker. But he discovered too late that ATA was fake. Trying to find legitimate health protection he was having trouble convincing insurers to cover him because of his pre-existing condition.

A Colorado man was gravely hurt in a hit-and-run accident. His hospital bills soared to $43,000 before he died. His so-called health plan, the National Trade Business Alliance, paid out just $250, the insurance department says.

More victims like these are showing up as fake health plans operate widely around the United States over the last two and a half years, exploiting people's anxiety over finding affordable coverage amid rising premiums, mounting layoffs and general financial distress in a downturned economy.

These guys are missing their prime target demographic. Instead of defrauding people one at a time, they could defraud entire groups of people by just going into the ERISA insurance business. The Insurance Journal goes on to report:

Bogus health plans can take blindingly diverse and complex forms, often deliberately to camouflage their illicit operations from regulators. But basically, most promise full-benefit coverage yet deliver lesser products such as:

• Fake coverage that's a worthless piece of paper

(emphasis added). Heck, that’s the working definition of an ERISA “insurance” policy right there! And they could do it with immunity from legal liability for fraud.

Get with it, guys!

The Problem, redux

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 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.

A word from an industry insider makes the case against ERISA

Wendell Potter is a former “insurance” industry bigwig; he worked at Cigna Corporation, most recently as head of corporate communications and as the company's chief corporate spokesman. Before that he was with Humana, a major health “insurer.”

Mr. Potter had the unenviable job of serving as Cigna’s corporate spokesman following its decision to let Nataline Sarkisyan die and its too-little-too-late decision to cover its tracks. That’s no job for someone with a conscience, and Mr. Potter soon thereafter resigned his position. This is worth watching and listening to in full:




Mr. Potter now maintains a blog, and his most recent post is also worth a look. He describes how Health Care Reform did precious little to rein in the “insurance” industry, since they can still lie, cheat and steal with no legal consequence. The whole thing is compelling; here’s a taste:

While the motivation of Congress was to protect employer-sponsored pension plans when it passed the Employee Retirement Income Security Act (ERISA) in 1974, the federal courts over the years have interpreted the law to apply to all employee benefits, including health care benefits. Because it is a federal law, it preempts state laws, meaning that the 130 million Americans enrolled in employer-sponsored ERISA-protected plans cannot sue their insurance companies (or their employers) in state court if they have been denied coverage for a treatment or procedure. The can try to sue in federal court, but even if they succeed, they can only recover the value of the denied treatment or procedure. Federal courts, unlike state courts, cannot require defendants to compensate plaintiffs for pain and suffering or lost wages. The monetary awards to plaintiffs who win their lawsuits are typically so small that few lawyers are willing to represent patients in federal courts.

And...

Insurers and big employers argue that ERISA allows them to offer benefits to their employees more efficiently because it exempts them from what they pejoratively call a patchwork of state regulations. That’s true, but many consumer advocates, health policy experts, jurists and regulators believe that the ERISA preemption of state laws does more harm than good. As the National Association of Insurance Commissioners noted in a comprehensive report on the often harmful consequences of ERISA’s preemption of state laws: “ERISA provides few rights to consumers and, more significantly, it is used as a weapon to block the states’ implementation of health care consumer rights.”

So while Obama’s Patients’ Bill of Rights represents an important step forward, much more reform is needed if the United States is ever to have a health care system that benefits its citizens more than profit-driven health insurance companies.

Kudos to Mr. Potter for his good work.

Let's get scholarly: A good summary of the academic case against ERISA -- "denying benefits is all potential economic gain with no downside risk."

I don't know Andrew Stumpff, but I sure do like his recent piece which is soon to published in the St. Thomas Law Review and which you can download now from SSRN.

The paper, entitled "Darkness at Noon," is a pretty succinct discussion of ERISA and its malignant effects on American workers. Go read the whole thing; here's a taste (with some gratuitous self-serving links inserted by yours truly):

Imagine a participant whose employer has denied the participant's claim for plan benefits. Together with the Firestone decision, the exhaustion of administrative remedies requirement presents the participant with the following prospect, if she wants to reverse the denial: First the participant must appeal the denial to the employer itself or the the employer's agent, according to procedures and under a deadline prescribed by the employer itself. The employer, let us remind ourselves, is a party whose economic interest is directly adverse to that of the participant, and who has already ruled against her. If the appeal results in continued denial of the claim, the participant will finally gain access to the courts; but the courts will reverse the employer's denial only if the denial was "arbitrary and capricious." All this inferred by courts from -- nowhere expressly provided by -- a statute whose motivation was to protect plan participants.

Meanwhile, with no possibility for consequential or punitive damages, the employer will have had very little disincentive to deny benefits in the first place. If the employer decides not to pay, the worst potential consequence (from the employer's perspective) is that a court might later disagree, in which case all the employer will have to do is pay the claimed amount. From the employer's perspective, denying benefits is all potential economic gain with no downside risk. Furthermore the parties' positions are unequal: The employer is likely in a much stronger position to bear the cost of litigation than the employee (and will also likely have more economic incentive to do so, given the possibility of similar claims by other participants).

In sum, the employer's calculus in deciding whether to pay benefits under an ERISA plan is now roughly the following: On the one hand, pay the benefits. On the other hand, don't, with as consequence only the remote chance the participant will decide to incur the time, cost and effort to exhaust his administrative appeals to the employer or its agent, and then take the case to court; and that the denial will be eventually judicially reversed as "arbitrary and capricious" -- in which case the employer will merely have to pay what it would have owed in any event.

What's striking is not just that this can hardly be viewed as a regime "protective of plan participants." What's striking is that this regime is distinctly less protective that would have been the case under ordinary principles of common law, and that it was established by judges in the name of a law expressly intended to expand participant protection beyond those available under common law.

I think the whole thing stinks even more if you substitute the words "insurance company" for "employer" in the foregoing, which is all too often the case. Then even the meager argument supporting ERISA -- that it encourages employers to create employee benefit plans in the first place -- withers on the vine.

Hat tips to Carol Cachey and Brian King.

The Problem, redux

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 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.

An ERISA defense firm lets the cat out of the bag; so-called "fiduciary" ERISA insurers put their bottom line ahead of the interests of ERISA participants and beneficiaries

McDermott Will & Emery (MWE), among other things, represents ERISA insurers when they get sued. Given the absurd legal rules favoring MWE’s clients, this is roughly as difficult as coaching the Soviet Olympic basketball team.

Last week the Supreme Court issued its decision in Hardt v. Reliance Standard Life Insurance Company, which involved the circumstances under which an ERISA claimant might be eligible for an award on account of his attorney fees.

ERISA is incredibly stingy when it comes to the remedies successful claimant can recover, such that they cannot realistically expect to be made whole for what they’ve lost, never mind recovering any sort of extra award for things like emotional distress, out of pocket losses or punitive damages. So when they have to pay their own attorney out of the meager recovery ERISA allows, that only further diminishes the net compensation they can realize after being defrauded by an ERISA insurer.

The section of ERISA providing for a fee recovery (look for subsection (g)) does not expressly provide, as most other such provisions do, that only a “prevailing party” can recover fees; the judge is allowed to award fees to “either party,” although practically speaking if you lose in court (which is the way to bet) you’re not going to see any fee award. In Hardt the claimant sorta-kinda won, and the court determined Reliance Standard had indeed wrongfully denied Hardt’s disability insurance benefits. You would think that’d be the end of it, but in yet another breathtaking injustice of the sort only ERISA can create the court sent the case back to Reliance Standard to take another look at it. This time (with a pretty good nudge by the judge) Reliance Standard approved the claim and Hardt got the benefits which had been wrongfully withheld.

So Hardt asked for attorney fees, and Reliance Standard argued that all Hardt had been able to do in court was to get a remand, with no actual order that benefits be paid – that Reliance Standard did out of the goodness of its heart of course. The Supremes said Hardt had achieved “some success on the merits,” and that was good enough to allow the court to award fees.

WME represents ERISA insurers, who are supposedly subject to a so-called “fiduciary” duty that they’ll put the interests of ERISA participants and beneficiaries first. So what lesson does WME draw from Hardt? Why, its “fiduciary” clients are going to become more reluctant to award benefits, because if they do they might have to write a check for the claimant’s fees:

The Supreme Court’s decision could also serve as a disincentive for plan administrators to grant benefits voluntarily on remand in the absence of clear language that the reviewing court finds the determination incorrect on the merits.

Yabbut that is not supposed to be any disincentive for these fine upstanding "fiduciaries" who hold the interests of ERISA participants and beneficiaries paramount, is it? I mean if that mattered to them then they’d just be plain old insurance companies who are subject to liability for things like fraud and wrongful death. As it is they’re so squeaky-clean, so pure in their motives, that they’re above the sort of self-interested profit motives which might influence the rest of us mere mortals.

MWE is exactly right, of course: their ERISA insurer clients will be incentivized to screw people to protect their own bottom line. That’s how they roll.

And MWE has simply, if inadvertently, confirmed it.

If they’re going to lie cheat and steal when they consider your insurance claim, you really think they’d be straight about what the law is?

A few weeks ago the Supreme Court issued its opinion in Conkright v. Frommert, and told us that if an ERISA administrator has phony-baloney discretion, a “single honest mistake” will not cause a loss of that absurd advantage in court and make it so they lose the case if they’re, you know, wrong.

Conkright was, of course, a win for the dark side, since now, despite a screw-up they still get the judge’s thumb on the scale in their favor.

But that wasn’t good enough for them, no sir. So they’ve been running around saying Conkright did way more than it actually did.

A bit of background: The Supreme Court first addressed this “discretion” nonsense in Firestone v. Bruch, in 1989. Then, in the 2008 case of MetLife v. Glenn, the Court talked further about how a court should conduct its analysis when an administrator has that phony-baloney “discretion.”

Glenn set the ground rules. And now in Conkright the Court has said those Glenn ground rules continue to apply even if the administrator commits a “single honest mistake.” The Court could not have been more clear about that; they said in words even an ERISA insurer could understand that, despite the “single honest mistake” which occurred in Conkright, “the lower courts should have applied the standard established in Firestone and Glenn."

The ERISA mob, though, has been arguing that Conkright actually changed “the standard applied in Firestone and Glenn,” and that after Conkright it is now even easier for them to win despite being wrong. Take for example this take on Conkright, published by the ERISA defense firm of Sonnenschein Nath & Rosenthal LLP. According to these guys, “the Supreme Court's reading of Glenn in Conkright may make those courts more reluctant to rely on Glenn to overturn plan administrator decisions in conflict situations.” Not only that, “the same considerations the Supreme Court marshaled to reject a ‘prior wrong decision‘ exception to judicial deference can be -- and may well be -- applied to virtually any other attempt to override a plan administrator decision, making all such decisions harder to overturn.”

Oh hell yes let’s make ERISA claim denials even harder to overturn, since they’ve been so easy to overturn for all these years.

So here’s how it’s supposed to work according to the ERISA mob:




Oops! What the hell, the wrong team won! That’s OK, “single honest mistake,” right? Time for a do-over:




Damn. Still no good. But let’s use our phony-baloney "discretion" to clean up our mess:



There. That’s more like it.

It’s not fair, it’s not just, and it ruins the lives of real innocent people. But we must preserve phony-baloney “discretion” at all costs. Discretion uber alles!

The Problem, redux

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 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.

A voice of reason

Marc Machiz of the BNA Pension and Benefits Blog says it very very well. My hat is off to him.

Supreme Court: ERISA administrators get one free so-called “honest” mistake before losing phony-baloney discretion

The Supreme Court today issued its opinion in Conkwright v. Frommert. It’s a complicated pension case under ERISA, and the good guys lost. Not that that’s any news.

The impact of this decision, of course, remains to be seen, but summing up the good guys argued that once an ERISA plan administrator screws up a decision, no further phony-baloney “deference” should be given its subsequent decisions on the same subject. The Court, however, said essentially that “one honest mistake” should not be enough to foreclose deferential analysis after the administrator gets its second bite at the apple (you read that right; often an ERISA administrator who screws up a decision doesn't lose the case but gets another chance to deny the claim all over again. More on that in a future post).

This doesn’t worry me all that much because I have seen precious few “honest mistakes” out of ERISA insurers and plenty of fraudulent self-serving lying cheating stealing outrages.

We’ll probably spend a lot of time going forward litigating how “honest” a “mistake” was.

Bring it on.

New York to join the roster of states outlawing phony-baloney discretion?

Colleague Scott Reimer reports that New York is considering the prohibition of "discretionary" language in insurance policies. These things are poison to any notion of fairness and justice when dealing with an ERISA insurer, and some states are getting with the program already. It certainly can't hurt to see if your state is on the right side of this and to make some noise if it isn't.

The Problem, redux

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 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.