Monday, January 12, 2015

ERISA insurers subject to punitive damages? Yes, says New York federal court

Not much time today, and I'll follow up on this later on, but this is a potentially big deal (indeed it will be a very big deal if it catches on).

Back in 2011 the Supreme Court opened the door to the possibility of aggrieved ERISA claimants seeking "make-whole" relief for breaches of duty by their ERISA "insurers," as compared to the regime in place up to that time, which allowed for extraordinary stingy recoveries which didn't impact the insurers' behavior in the least.

We've slowly been making inroads here, and recently in a case of mine the U.S. District Court for the Northern District of California held a compensatory, consequential-damages recovery, a "surcharge" in ERISA parlance, might be available in an appropriate case.

Then, the day after Christmas, the Eastern District of New York issued a decision which, with any luck, will be the first in a series of cases to hold that, at long last, punitive damages might be available against "insurers" who commit fraud as part of their business plan. This is from D'iorio v. Winebow, Inc.:

However, the Supreme Court in Cigna suggested that "surcharge" was a remedy intended to provide all manner of compensatory damages to a plaintiff at equity and was not, as the Defendant contends, limited to a "make-whole remedy" — "[e]quity courts possessed the power to provide relief in the form of monetary `compensation' for a loss resulting from a trustee's breach of duty, or to prevent the trustee's unjust enrichment." CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1880, 179 L. Ed. 2d 843 (2011) (citation omitted). Indeed, the sources relied on by the Supreme Court also suggest that equity courts awarded compensatory damages to plaintiffs for losses that may have occurred beyond restitution. For example the Restatement (Third) of Trusts, which the Supreme Court relied on, states, "[i]f a breach of trust causes a loss . . . the beneficiaries are entitled to restitution and may have the trustee surcharged for the amount necessary to compensate fully for the consequences of the breach." Restatement (Third) of Trusts § 95 (2012) (emphasis added); see also G. Bogert & G. Bogert, Trusts and Trustees § 862 ("In suits to collect money from a trustee for breach of trust, the direct damages will usually be measured by the difference between the value of the beneficiary's rights to principal and income before and after the breach, but consequential damages may also be awarded, and exemplary or punitive damages may be awarded where malice or fraud is involved.") (emphasis added); John H. Langbein, What ERISA Means by "Equitable": The Supreme Court's Trail of Error in Russell, Mertens, and Great-West, 103 Colum. L. Rev. 1317, 1337 (2003) ("Cases awarding money damages for consequential injury, either to the trust or to the beneficiary, exist in profusion in trust remedy law.").
Therefore, the Court concludes that, as a matter of law, the Plaintiff is entitled under a surcharge theory to consequential damages, exemplary, or punitive damages in limited circumstances where malice or fraud is involved. Cf. McCravy v. Metro. Life Ins. Co., 690 F.3d 176, 181 (4th Cir. 2012) ("We therefore agree with [the plaintiff] that her potential recovery in this case is not limited, as a matter of law, to a premium refund.").

Punitive damages in an ERISA case? We have not dared to even dream of such things. If this takes hold then at long last ERISA "insurers" will have to start behaving themselves -- or face some real consequences if they don't.