The Rising Judicial Chorus: Judge Karlton

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By the way, John McGann died in June 1991.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

They aren’t pretty.

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

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

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

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

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

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

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

A Modest Proposal: Make Some Noise!

From the president’s speech last night:

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

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

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

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

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

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

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

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

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

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

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


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

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

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

No surrender! -- redux

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

If you’ve spent any time on this blawg, and you’ve experienced a denied insurance claim subject to ERISA, you may have developed a sense of hopelessness, not to mention frustration and outrage. All, in my opinion, very appropriate reactions. There’s no use soft-peddling the malignant effects of ERISA – it is very arguably the most unjust law on the books.

But the understandable reactions described above ought not lead to paralysis or inaction. To become passive and to simply yield to insurance company abuse only makes a bad situation worse, for yourself and for others in your unfortunate position.

The calculus ERISA presents to an insurance company goes something like this: we deny 100 claims which probably ought to be approved. Perhaps 20 of those people will even realize we have done something wrong, because we can write bogus denial letters that make it sound like the denial is proper even though we know it probably isn’t. Out of the 20 people who realize they’ve been screwed, perhaps 10 will contact a lawyer, and perhaps five will end up actually taking us to court. And once in court, since we get the benefit of the most absurd stacking of the legal deck known to the law, we can probably count on winning three of those cases, even assuming the claimant is right and we are wrong. So by denying 100 claims wrongfully, thanks to ERISA, we can probably reap the financial benefit of not having to pay 98 of them, and the two we might lose in court, even if we are ordered to pay attorney fees for the other side, won’t come close to canceling out that benefit (remember in no case can consequential or punitive damages be awarded, so we never have to worry about one big loss wiping out the benefit we derive from ripping off those original 100 people).

The only way to upset that calculus even a little bit is for people to stand up for their rights, take the insurers to court in appropriate cases, and make them explain themselves to a judge. The law provides meager rights indeed, but there are lawyers (I am one of them) who can and do go to court and enforce those rights at least. Given the state of the law, it is very, very unlikely we can make you whole, but we can often recover something, and in the process make the insurance companies explain their bad behavior. Gradually, gradually, their fraud and abuse is thereby exposed to the light of day.

So: if you think you’ve been ripped off by your ERISA insurance company, there is every likelihood that you have. Find a lawyer specializing in ERISA claims (this is pretty important because ERISA is arcane and a law unto itself; a generalist is swimming upstream in trying to deal with all the absurd and counterintuitive rules), and see if the lawyer can find a way to enforce what rights the law provides. Take a stand and make them explain themselves!