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August 2010

Mitchell v. Metropolitan Life Insurance ? Insurer Abused Discretion By Basing Denial Of Benefits On Narrower "Disability" Definition Among Policy's Conflicting Definitions

Insurer Abused Its Discretion By Basing Denial Of Disability Benefits On Narrower "Disability" Definition Among Policy's Conflicting, Broader Definitions Where Claimant Qualified Under The Broader Definitions

(9th Cir. July 2010); Case No. 08-55277

The Ninth Circuit Court of Appeals affirmed a California Central District Court's conclusion that Metropolitan Life Insurance Company ("MetLife") abused its discretion by denying long-term disability benefits based on a narrower definition among three conflicting definitions of "disability" in MetLife's policy, when the insured was disabled under the broader definitions in the policy.  The Court of Appeals held that, because the policy did not contain an exclusion for disabilities beginning before the coverage effective date, MetLife could not deny coverage on that basis.  The Ninth Circuit also concluded MetLife waived its indemnity claim against the preceding insurer, Unum Life Insurance Company of America ("Unum"), by failing to raise it as a compulsory cross-claim in the action.

Plaintiff Michael Mitchell worked as a commercial real estate broker for CB Richard Ellis.  From 2000 through 2003, Unum was the LTD provider for CB Richard Ellis.  MetLife replaced Unum on January 1, 2004.  In October 2003, Mitchell was diagnosed with major depression, chronic fatigue syndrome and restless leg syndrome among other conditions.  Mitchell continued to work until March 2004, when his physical condition deteriorated to the point he could no longer effectively produce sales.  As a result, his commission-based compensation decreased substantially over time as his disability worsened: he earned $179,678 in 2001 and $243,857 in 2002, but only $29,329 in 2003 and $12,585 in 2004.

In April 2004, Mitchell filed a claim with MetLife for LTD benefits.  On his claim request form, Mitchell reported the onset and first treatment dates for his disability as October 2003.  For "Date last worked," Mitchell reported, "still working."

MetLife's policy documents contained three different definitions of "disability."  The policy's Certificate of Insurance defined disability as the inability, due to sickness or injury, to earn more than 80% of predisability earnings in one's own occupation during the elimination period and the subsequent 24 months.  The definition also required the insured receive appropriate care for his disability.

MetLife's summary plan provided two additional definitions.  The summary plan's "Plan Benefits" defined disability as the inability to perform one's "regular job functions due to" sickness or injury and required the insured be receiving appropriate care.  The summary plan's "Definitions" defined disability as the inability to perform "the material and substantial duties" of one's "regular occupation due to illness or injury."

MetLife denied Mitchell's claim on the ground he was not disabled as defined in the Certificate of Insurance because, according to his request form and his attending physician's statement, Mitchell was still working, and was capable of performing his job as VP of sales, which was a sedentary position.  Mitchell appealed the decision.

In January 2005, MetLife upheld its denial, this time on the ground Mitchell was not disabled as defined in the summary plan because, according to an independent physician review of Mitchell's records, Mitchell's condition was not severe enough to prevent him from performing the "material and substantial duties" of his occupation.

Mitchell sued MetLife in February 2005 for wrongful denial of benefits.  In its answer, MetLife for the first time asserted the coverage defense that it was not the LTD provider at the onset of Mitchell's disability.  In October 2005, Mitchell filed an administrative claim with Unum.  Unum denied the claim in November 2006, citing, among other reasons, prejudice due to Mitchell's delay in filing his claim with Unum.  Mitchell appealed and Unum upheld its denial in January 2007.

Mitchell amended his complaint to name Unum as an additional defendant in the suit.  Unum filed a cross-complaint, requesting a declaratory judgment that it did not owe benefits to Mitchell, and seeking indemnification from MetLife. 

The district court held Mitchell was entitled to benefits because he was disabled as defined in MetLife's Certificate of Insurance.  The court ordered MetLife to pay Mitchell past benefits, costs and interest, and attorneys' fees, and to consider Mitchell's claim for continued benefits under the plan.  The court also granted Unum's request for declaratory relief, finding Unum was not responsible to Mitchell for past benefits.  The court concluded Unum's indemnity claim against MetLife was thus moot.  MetLife appealed.

The Ninth Circuit affirmed the district court's judgments and awards in favor of Mitchell and Unum, concluding the district court correctly found Mitchell was disabled as defined in MetLife's Certificate of Insurance.  The record showed Mitchell was receiving appropriate care for disability, and was earning less than 80% of his predisability earnings during the elimination period and the following 24 months.  His capacity to work was impaired, despite working full-time.

The Ninth Circuit agreed with the district court's holding that MetLife's policy documents contained conflicting definitions of disability, and that MetLife abused its discretion in denying Mitchell's claim.  MetLife chose to apply the more limiting definition of "disability" in the summary plan on review, though it had initially denied Mitchell's claim based on the definition in the Certificate of Insurance.  MetLife's denial on review also added, as a further justification, that Mitchell's claim lacked objective evidence that his medical condition was severe enough to warrant a finding of disability, though this standard was not included in the policy.

The Ninth Circuit agreed also rejected MetLife's defense that Mitchell's onset of disability predated the date of coverage.  MetLife's policy did not contain an exclusion for disability predating coverage.  MetLife could only point to a clause in its policy which stated, "If you become Disabled while insured," in support of its argument that the "onset" of a disability must occur after the plan's effective date.  The complete sentence stated, "If you become Disabled while insured, proof of disability must be sent to Us."  The Court of Appeals found this clause, when read in context, did not limit coverage for disabilities beginning after the effective date.  Instead, the clause merely required an insured submit a claim if she or he becomes disabled while insured.  The Court of Appeals also questioned whether MetLife specified the date of disability as a reason for its denial during the administrative review process.

The Court of Appeals also rejected MetLife's argument that coverage did not take effect for Mitchell because he was not "actively at work" on the replacement date, and never returned to work.  MetLife's Certificate of Insurance provided that, for those insured under the prior plan (via Unum) on the day before the January 1, 2004 replacement date, coverage would take effect on the replacement date if the insured was "Actively at Work" on the day before the replacement date; otherwise, coverage would take effect the date the insured returned to "Active Work."  MetLife's policy provided two different definitions for "Actively at Work."  The Certificate of Insurance defined the phrase to mean the insured was performing all of the "usual and customary duties" of his job on a full-time basis.  The summary plan defined the phrase to mean "[b]eing on the job as required of" a CB Richard Ellis employee.

The Court of Appeals held Mitchell was "actively at work" as defined  in MetLife's policy because, as Mitchell's employer reported and confirmed, Mitchell was never placed on leave and never stopped working as a full-time employee.

MetLife failed to assert a cross-claim against Unum for indemnification, thus, the district court did not err by failing to address it.  Under FRCP 13(a), MetLife's indemnity claim against Unum was a compulsory cross claim and should have been asserted in the same action because it arose out of the same transaction giving rise to the dispute, and did not require bringing in additional parties who were outside of the court's jurisdiction.  Thus, MetLife waived this claim against Unum.

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This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the United States Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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