Ninth Circuit: ERISA insurer “relied on ERISA’s deferential standard of review to avoid detection and liability”

The Ninth Circuit today issued its opinion in Stephan v. UNUM, reversing a summary judgment in UNUM’s favor and sending the case back to the district court for further proceedings.  Along the way the court described the sort of conduct UNUM has been engaging in, and the manner in which ERISA enables this unlawful behavior:

Numerous courts, including ours, have commented on
Unum’s history “ ‘of erroneous and arbitrary benefits denials,
bad faith contract misinterpretations, and other unscrupulous
tactics,’ ” McCauley v. First Unum Life Ins. Co., 551 F.3d
126, 137 (2d Cir. 2008) (quoting Radford Trust v. First Unum
Life Ins. Co., 321 F. Supp. 2d 226, 247 (D. Mass. 2004), rev’d
on other grounds, 491 F.3d 21, 25 (1st Cir. 2007)). Indeed, in
Saffon, we attributed the trend of state prohibitions on discretionary
provisions in insurance contracts to “the cupidity of
one particular insurer, Unum-Provident Corp., which boosted
its profits by repeatedly denying benefits claims it knew to be
valid. Unum-Provident’s internal memos revealed that the
company’s senior officers relied on ERISA’s deferential standard
of review to avoid detection and liability.” 522 F.3d at
867; see also Radford Trust, 321 F. Supp. 2d at 247 n.20 (collecting
cases). Moreover, the CSA [California Settlement Agreement] notes that Unum was subject to “a multistate targeted examination” of its “claims handling practices,” which resulted in a settlement agreement similar to the CSA. And the CSA was the product of investigations by the State of California into Unum’s claims handling
practices.

Erroneous and arbitrary benefits denials.  Bad faith contract interpretations.  Other unscrupulous tactics.  Boosting profits by repeatedly denying claims it knew to be valid.  All the while relying on ERISA’s deferential standard of review to avoid detection and liability.  And these are the people we are supposed to trust because, after all, they are fiduciaries.

Back from a brief discretionary hiatus...

Well, it’s been about ten months since I posted something here.  I offer no excuses.  Indeed, what do I have to apologize for?  After all, I have granted myself discretion to decide if or when to post something.

Anyway, to get this thing fired up again, herewith a slightly updated reprise of the Problem:

ERISA is the Employee Retirement Income Security Act, and it is codified in Title 29 of the United States Code, starting with section 1001. It's federal law, enacted in 1974, and it was supposed to protect employees' rights in connection with their pension plans and welfare benefit plans (health, disability, life insurance, that sort of thing). But it doesn't. Quite the contrary.

Way, way to the contrary.

This blog is dedicated to the ERISA problem.

What is that problem? It mainly concerns those welfare benefit plans (ERISA is actually not a bad law with respect to pension plans). Pension plans is what they had in mind when they enacted it -- welfare benefit plans were an afterthought.

And it shows. If your insurance company wrongfully denies your claim, you might figure you can always take them to court. You can do that (usually), but when you get there you'll find things don't make any sense:

If you get your insurance coverage through your employment, then in virtually every case ERISA preempts state law (meaning it cancels it out, eradicates it, takes its place).  But, having gutted state law relating to insurance disputes, it fails to provide any reasonable substitute. The remedies it provides (i.e. what you get if you win a lawsuit) are very, very stingy, and in the vast majority of cases a successful claimant is not made whole; not even close. And ERISA severely compromises your ability to secure even the scant remedies it does provide.

1. Remedies. ERISA limits the recovery you might get to the benefits which should have been provided in the first place, and an award on account of attorney fees in the court’s discretion. Example: you have your disability benefits wrongfully denied. As a result, you have no income, your credit rating is trashed, you lose your home and you are driven into bankruptcy. You file your ERISA suit and against the odds, you win. What do you get? The benefits they should have been paying you back when it might have done you some good. That's all (you might -- might -- get something on account of your attorney fees too).  The Supreme Court gives us some reason to hope for improvement here, but there's a long way to go.

Punitive or exemplary damages? Bupkis. ERISA does not allow for any recovery on account of these sorts of damages -- none. And this applies even if the insurance company committed outright fraud when it denied your claim. I find it quite difficult to understand why the insurance industry, uniquely among all industries in America, needs to have immunity from liability for fraud if it is to offer its services at a reasonable price. Anyway, this concern goes beyond making people whole; it also directly impacts the behavior of insurance companies.

As of now we have a situation where the law tells insurers they face no meaningful consequences if they deny care improperly or even commit outright fraud. As one federal judge has commented, "if an HMO wrongly denies a participant's claim even in bad faith, the greatest cost it could face is being compelled to cover the procedure, the very cost it would have faced had it acted in good faith. Any rational HMO will recognize that if it acts in good faith, it will pay for far more procedures than if it acts otherwise, and punitive damages, which might otherwise guard against such profiteering, are no obstacle at all." Insurance companies, of course, are not charities, but corporations; their boards are subject to a fiduciary duty to maximize shareholder value. If it is possible to accomplish this by mistreating insureds, and ERISA says there is no meaningful consequence for that, then it follows that's what insurers will do.


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 generally limited to that which the insurer unilaterally decided to include within its claim file; 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.

The Supreme Court appears poised to strike down the Affordable Care Act.  If that happens, then the least we could do is to ensure that those people who are fortunate enough to have insurance at least have some meaningful ability to enforce insurers' promises in court.

But never mind the ACA; ERISA matters a lot anyway.  If you get your insurance through your employment, then -- thanks to ERISA -- consider yourself to be uninsured. If by "insurance" you mean something like an enforceable promise by an insurance company that it will pay for what it says it will, what you have doesn't qualify. What you have is a piece of paper saying some company will pay your claim if it feels like it. You don't have insurance at all -- you only think you do.