Baby Steps: Two Recent Court of Appeal Decisions Move Deferential Judicial Analysis in the Right Direction

I used to tell clients that, if their case is subject to ERISA’s absurd abuse-of-discretion, insurer-can’t-lose burden of proof (I refuse to call it “standard of review” as many do, ‘cause that’s bogus IMO) they need to win the ball game 10-0; if they only win 9-1 then they lose. That’s because many courts effectively held that no matter how strongly the evidence supported the claimant, if the insurer could point to even one flimsy piece of evidence in its favor, that’s good enough for the insurer to prevail.

Which is, of course, absurd.

Two courts of appeal, however, have now issued opinions which indicate that, maybe just maybe, my clients will only need to win the game 9-1 (or, dare I hope, maybe even 8-2) in order to overcome the abuse-of-discretion burden.

First, the Ninth Circuit, in Pacific Shores Hospital v. United Behavioral Health et al., addressed the canard that an insurer’s decision just has to be upheld if it supported by any reasonable basis, and said that no longer holds water:

We wrote twenty-three years ago in Horan v. Kaiser Steel Retirement Plan, 947 F.2d 1412 (9th Cir. 1991), that we will uphold a plan administrator’s decision if it is grounded in “any reasonable basis.” Id. at 1417 (internal quotation marks omitted); see also Sznewajs v. U.S. Bancorp Amended & Restated Supplemental Benefits Plan, 572 F.3d 727, 734–35 (9th Cir. 2009). This language in Horan could be read to mean that we should make an “any reasonable basis” determination without looking at all the circumstances of the case. To take a simple example, factors favoring discharge from the hospital might provide reasonable bases if considered in isolation. A patient might be eating well, have proper blood sugar levels, have no infections, and have a supportive family. Those factors, considered in isolation, would support discharge. But if the reason for the patient’s hospitalization is severe congestive heart failure, those factors would not be reasonable bases to support discharge. In the wake of Glenn, we have recognized that this unrealistic reading of the any-reasonable-basis test is not “good law when . . . an administrator operates under a structural conflict of interest.” Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666, 674 (9th Cir. 2011). It is also not “good law” even when an administrator is not operating under a conflict of interest and we are performing a “straightforward abuse of discretion analysis.” See Abatie, 458 F.3d at 968; cf. Conkright v. Frommert, 559 U.S. 506, 521 (2010) (“Applying a deferential standard of review does not mean that the plan administrator will prevail on the merits. It means only that the plan administrator’s interpretation will not be disturbed if reasonable.” (internal quotation marks omitted)). In all abuse-of-discretion review, whether or not an administrator’s conflict of interest is a factor, a reviewing court should consider “all the circumstances before it,” Abatie, 458 F.3d at 968, in assessing a denial of benefits under an ERISA plan.

That’s better, at least a little bit better.

Then, the Sixth Circuit issued Butler v. United Healthcare, and addressed United’s argument, which we see all the time, that its denial of benefits could not possibly have been an abuse of discretion because it had paid several doctors to opine that the medical care in question wasn’t medically necessary. The court held that just because you can gin up a few pieces of evidence by paying some doctor to say what you want them to say, you might still lose:

United adds that the decision to deny benefits cannot be arbitrary and capricious because five reviewing physicians agreed with it.  That reviewing physicians paid by or contracted with the insurer agree with its decision, though, does not prove that the insurer reached a reasoned decision supported by substantial evidence.  The physicians’ opinions carry weight only to the extent they provide a fair opinion applying the standard for granting benefits to the facts of the case.  Elliott, 473 F.3d at 619.   The reviewing physicians did not do that.  They misstated or omitted the key fact of Janie’s prior failed outpatient treatment and ignored United’s guideline
that allowed residential rehabilitation where outpatient treatment had not worked in the past. This argument, too, proves too much.  If a decision to deny benefits could never be arbitrary and
capricious when backed by the insurer’s reviewing physicians, court review would be for naught. The insurer would invariably prevail so long as the insurer had physicians on its staff willing to confirm its coverage rulings. That also does not make sense.

Again, baby steps. But they represent a movement from insurer-can’t-lose to insurer-might-just-possibly-lose-once-in-awhile, and that’s a good thing. Of course, that still doesn’t explain why an insurer shouldn’t lose if it’s just, you know, wrong.

Eighth Circuit: “Discretion” means insurers can retroactively change policy terms to defeat coverage

The Eighth Circuit today issued Kutten v. Sun Life Assurance Co. of Canada,an ERISA disability case about whether a pre-existing-condition exclusion in Sun Life’s disability policy precluded Mr. Kutten from receiving benefits he would otherwise have realized. Under the Sun LIfe policy, Mr. Kutten was eligible for the benefits. Under the re-writing interpretation offered by Sun Life and approved by the Eighth Circuit, not so much.

Mr. Kutten was diagnosed with retinitis pigmentosa (RP) in 1994, and at his doctor’s suggestion took a Vitamin A supplement, over-the-counter, no prescription required, which, it was thought,might slow the disease’s progression. The RP eventually forced him to stop working in September 2010. Sun Life’s ERISA “insurance” policy, which had become effective starting in June 2010, had an exclusion for pre-existing conditions, contractually defined as “during the 3 months prior to the Employee’s Effective Date of Insurance the Employee received medical treatment, care or services, including diagnostic measures, or took prescribed drugs or medicines for the disabling condition.”

The only thing Mr. Kutten did for his RP in the three months prior to his Effective Date of Insurance was to take these vitamin A supplements. Sun Life, of course, said this so-called “medical treatment” meant his condition was pre-existing.

Sun Life had a problem here, though. The contract said a pre-existing condition was one for which “medical treatment” or  “drugs or medicines” were received during the critical three-month period. But a stinking vitamin supplement isn’t a drug or medicine, and if it’s going to count as “medical treatment” then, necessarily, so would any actual drug or medicine, and that interpretation means the entirely distinct reference to “drugs or medicines” is utterly meaningless. The court described the argument thusly:

Kutten urges us to adopt the district court’s rationale, that because the Pre-Existing Condition clause separates “medical treatment” from “prescribed drugs or medicines” with the conjunction “or,” Sun Life intended to exclude all “drugs or medicines” from the phrase “medical treatment.” Kutten argues if “prescribed drugs or medicines” are excluded from the phrase “medical treatment,” then vitamin A supplements must be excluded from the phrase as well because vitamin supplements require even less medical intervention than “prescribed drugs or medicines.” To construe the phrase “medical treatment” to include vitamin supplements but exclude “prescribed drugs or medicines” would create an internal inconsistency in the Pre-Existing Condition clause, and to construe the phrase “medical treatment” as broad enough to encompass both “prescribed drugs or medicines” and vitamin supplements would render the phrase “prescribed drugs or medicines” meaningless.

That’s pretty persuasive stuff; one of  the most basic rules if you’re interpreting a contract is that you don’t adopt an interpretation which would render one or more words or phrases meaningless – if at all possible every word should have some meaning and some effect.

Unfortunately for Mr. Kutten, Sun Life had conferred discretion upon itself when it issued its policy, and we know what that means. As the Eight Circuit allowed, the exclusion did not “neatly fit Kutten’s course of treatment,” but hey, where an ERISA “insurer” has “offered a reasonable interpretation of disputed provisions, courts may not replace it with an interpretation of their own.” (Internal punctuation and citations omitted). We certainly can’t have courts interpreting contracts, after all.

 

Score one for our side: Supremes get it right in Fifth Third Bancorp

It’s not very often we get a favorable decision from the Supreme Court these days, particularly a unanimous one, but that happened today in Fifth Third Bancorp v. Dudenhoffer. This ERISA pension case involved ESOPs – Employee Stock Ownership Programs – and something called a “presumption of prudence” a lot of courts were invoking. Not unlike the absurd deferential level of analysis applied in the majority of ERISA benefits cases, the presumption was a big thumb on the scale in favor of pension plan administrators who bought and held stock in their own company while it went down in flames, gutting the retirement security of the company’s pensioners.

In a nutshell (if it isn’t already too late for that) ERISA imposes a duty of prudence on all ERISA administrators, which essentially requires that they behave like a reasonably prudent person would under the circumstances. The “presumption of prudence” posited that, in buying and holding their own company’s stock for their ESOP plans, administrators were presumed to act prudently, and you had to move heaven and earth to overcome the presumption. The Supremes today said that the ERISA statute requires prudence, and just because an ESOP is involved doesn’t mean we change the rules. The ruling, however, promises to have effects on all sorts of ERISA claims and ERISA fiduciaries, as suggested by this:

Consider the statute’s requirement that fiduciaries act “in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter.” [Citation omitted]. This provision makes clear that the duty of prudence trumps the instructions of a plan document such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary. See also §1110(a) (With irrelevant exceptions, “any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility . . . for any . . . duty under this part shall be void as against public policy”). This rule would make little sense if, as petitioners argue, the duty of prudence is defined by the aims of the particular plan as set out in the plan documents, since in that case the duty of prudence could never conflict with a plan document.

And this:

[Fifth Third’s] argument fails, however, in light of this Court’s holding that, by contrast to the rule at common law, “trust documents cannot excuse trustees from their duties under ERISA.” Central States, Southeast & Southwest Areas Pension Fund, 472 U. S., at 568; see also 29 U. S. C. §§1104(a)(1)(D), 1110(a).

Now, in English: the ERISA statute applies to all ERISA fiduciaries, and they are required to comply with it, and they can’t get around that with some phoney-baloney provision in a plan document (which they themselves usually draft in the first place) providing otherwise. It’s a rather sad commentary that a Supreme Court decision requiring these people to, you know, obey the law seems so earthshaking, but there you go.

We’ll see how this one plays out.

Judge Acker: the hits just keep on coming

Somewhere in judicial heaven there has to be an abundant bounty set aside for U.S. District Judge William M. Acker, Jr., whose work we've enjoyed many, many, times before. His latest single to go platinum for the Rising Judicial Chorus is a little number we like to call Criss v. Union Security Insurance Company, released just this year. Time to stand aside and let the lead singer have the stage:

This court devoutly wishes that the Supreme Court of the United States had not blindly stumbled off on the wrong foot and in the wrong direction when it handed down Firestone Tire & Rubber Co. v. Bruch, 49 U.S. 101 (1989), the case in which it invented a strange quasi-administrative regime for court review of denials of ERISA benefits claims. It inexplicably substituted a procedure borrowed from administrative law for the clear congressional mandate that the filing of a “civil action” (a simple, straight-forward, garden-variety suit for breach of contract) is the only means for challenging such denial decisions. In the amicus curiae brief filed by the Solicitor General in Bruch,he did his best to keep the Supreme Court from wandering off track and ignoring Congress. The Solicitor General, who was representing both Congress and the persons whom Congress intended to benefit from ERISA, failed to talk the Supreme Court out of its misguided step, a misstep that has led to a series of further judicial glosses, distillations, penumbras, and emanations, eventuating in the sad state of affairs now faced by ERISA claimants and by the courts who have to deal with ERISA benefits claims.

If Congress itself had enacted the weird scheme created by the Bruch court out of whole cloth, ERISA would have been promptly and successfully attacked for its patent unconstitutionality as a violation of “due process”. A quick application of the universally recognized legal maxim, nemo judex in causa sua, would have kept any such statute off the statute books. Chief Justice Sir Edward Coke in Dr. Bonham's Case, 8 Co. Rep. 107a, 77 Eng. Rep. 638 (C.P.1610), carved in granite for all time this fundamental jurisprudential principle when he said, using the vernacular: “No man should be a judge in his own case.”

The justices of the Supreme Court, including some who decided Bruch, routinely recuse themselves when there is even the slightest hint of any possible self-interest by the recusing justice. And yet, today, clearly conflicted ERISA plan administrators and insurers, when granted by the plan document that they drafted full discretion to interpret their plans and to decide the ultimate issue of entitlement, are routinely allowed, even required, to rule on their own cases. Not surprisingly, this court has not found a single case in which an insurance company has recused itself in an ERISA case under the rule of nemo judex in causa sua. There is no scheme remotely like the one created byBruch in the annals of Anglo–American jurisprudence. Chief Justice Coke is uncomfortable in his crypt.

Justice Coke ain't the only one. Thanks, Judge Acker. 

Three things to add to Market Intelligence Center’s Guide to Understanding Long-Term Disability Insurance

Joseph Favorito, a Certified Financial Planner, has an article up over at Market Intelligence Center entitled A guide to understanding long-term disability insurance. I think it's a quite decent overview, and Mr. Favorito certainly does touch on the obstacles ERISA imposes on folks who are trying to secure long-term disability benefits under a group plan with their employer. There are, however, a few things to add in order to make the story complete.

First, Mr. Favorito indicates "a large number of employers provide LTD insurance for free as a benefit for their employees." If you ask me, no employer anywhere provides anything to any employee free; everything you get from your employer, from wages to fringe benefits to insurance coverage to haircuts is something you earn with your labor. None of this stuff falls out of the sky for "free"; it is provided only after you contribute your own blood, sweat and tears to maximize your employer’s profits. There's absolutely nothing wrong with that, but it is simply inaccurate to say that LTD insurance, or any other benefit of employment, is provided for "free." And, because these are things you have earned, the courts should not treat LTD these benefits as some sort of windfall.

Apropos of that, Mr. Favorito also provides a generally accurate account of what you have to go through once an ERISA "insurer" denies your claim; he discusses the fact you have 180 days to file an internal appeal with the same insurance company who just denied your claim, so that they can determine whether they want to pay benefits, and thus reduce their profits (spoiler alert unnecessary). And he indicates the insurance company can then wait another 90 days to respond, and while this process plays out, "you are potentially without income as you are unable to work." This apparent 90-day time limit supposedly imposed on these "insurers," however, is most often a completely toothless requirement: they can blow through that deadline with no meaningful consequence whatsoever. You, on the other hand, who are given 180 days to submit this "appeal," are going to be held to very strict compliance, to the point where if you are so much as one day late your claim is foreclosed for all time. On top of that, the information you submit along with this "appeal" is, in all likelihood, the only information a court would ever consider if you end up in litigation over your claim. Most folks do not realize, and the "insurance" companies certainly do not go out of their way to tell them, that when they are submitting an informal, internal “appeal,” they are actually assembling all the evidence they will ever be able to admit in court – and all too often without the assistance of a knowledgeable attorney.

Finally, Mr. Favorito notes accurately that a long-term disability plan is not the only potential source of benefits. As he says, you can certainly apply for Social Security Disability Insurance (SSDI) benefits, and see if you can get a claim (eventually) approved that way. Mr. Favorito notes that "should you qualify for SSDI, you can be almost assured that your claim against a long-term disability policy will be approved."

Would that it were true. While the law has changed favorably in recent years, and ERISA "insurance" carriers are generally required to pretend to consider what the Social Security Administration might have had to say about a claimant’s disability, the fact remains they are in no sense required to follow the determination by the Social Security Administration, and in a great many cases choose simply to ignore it (more about the impact of SSDI decisions on ERISA claims here soon, so you have that going for you). And, of course, in cases where ERISA applies, they all too often get away with it.

None of this is intended to criticize Mr. Favorito’s article, which provides a quite accurate overview of the issues surrounding long-term disability insurance and the impact ERISA has on your rights. As with all things pertaining to ERISA, however, what might appear to be the case on the surface very often obscures the ugly truth hidden underneath  this most unjust of laws.