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March 2013

Insurance Law Quarterly Newsletter

Welcome to Gordon & Rees's Insurance Law Quarterly Newsletter. On a quarterly basis we provide important information about the latest legal developments affecting the ever-changing world of insurance law. Each issue focuses on one topic or area of insurance law through in-depth articles on current issues, combined with practical advice. We also keep you up-to-date on successful outcomes and some of the interesting cases that are being handled by our Insurance Group.

Last quarter, we reported on insurance coverage issues. This quarter, we focus on Life, Health and Disability coverage, including ERISA. Please click here for a description of our Life, Health and Disability coverage experience and here for our ERISA coverage experience. Next quarter, we will focus on first party property insurance issues.

If you have any questions about this issue of the Insurance Law Quarterly Newsletter, please contact:

Ronald K. Alberts

Ronald Alberts, Partner
Ph: (213) 576-5000
Email

 

Courtney Culwell Hill

Courtney Culwell Hill, Partner
Ph: (213) 576-5000
Email

 
Jordan Altura

Jordan Altura, Partner
Ph: (415) 986-5900
Email

 
TABLE OF CONTENTS

  1. About Gordon & Rees's Life, Health and Disability Practice

  2. Attorney-Client Privilege May Not Protect Communications Relating to ERISA Benefit Determinations Made Prior To Litigation Due to the Fiduciary Exception to the Privilege

  3. The Supreme Court To Decide Whether Equitable Defenses Can Preclude A Plan’s Recovery Under Section 502(a)(3) of Claim Overpayments Based on Plan Provisions Permitting Such Recovery

  4. Recent Developments in Life, Health and Disability Case Law

  5. Recent Successes

I. ABOUT GORDON & REES'S LIFE, HEALTH AND DISABILITY PRACTICE

 

Gordon & Rees counsels and defends a large number of insurers, employers, third-party administrators and employee benefit plans in suits and arbitrations involving breach of contract and bad faith claims arising out of life, health, disability and long term care insurance, as well as benefit claims and breach of fiduciary duty claims involving annuities, pension plans and retirement plans.

Gordon & Rees has a specialty practice group focused on ERISA disputes. The ERISA law team is part of our Insurance and Employment Practice groups, and has extensive experience handling disputes involving group life, health, and disability insurance, including annuities, pension plans, retirement plans, and long term care insurance. Our attorneys have comprehensive knowledge of ERISA substantive law and extensive experience litigating ERISA claims in the federal trial and appellate courts throughout the United States. Presently, we represent clients in ERISA matters in Arizona, California, Colorado, Hawaii, Illinois, Kansas, Missouri, Nevada, New Mexico, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming. Our ERISA experience involves not only claims for various employee benefits, but also complex breach of fiduciary duty claims against retirement and pension plan administrators. As ERISA litigation continues to increase, we have a team of experienced attorneys with substantial experience in the planning of ERISA litigation strategy and advising clients nationwide in the assessment of a wide range of risks.

Gordon & Rees's Health Insurance lawyers leverage the combination of specialty experience in health care contract litigation with extensive insurance coverage experience. We have resolved many contract claims brought by providers and members against payors, including insurers, HMOs, and self-insured plans.  We have handled claims ranging from benefit entitlement disputes and contract terms, to appropriate treatments and medical necessity determinations, to unbundling and usual and customary charges.  Most recently, we are pursuing claims by payors against health care providers involved in the fraudulent submissions of health claims. For more information on our practice, please click here.

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II. ATTORNEY-CLIENT PRIVILEGE MAY NOT PROTECT COMMUNICATIONS RELATING TO ERISA BENEFIT DETERMINATIONS MADE PRIOR TO LITIGATION DUE TO THE FIDUCIARY EXCEPTION TO THE PRIVILEGE

 

Jordan Altura


















 

Jordan Altura 
 
In Stephan v. Unum Life Ins. Co. of Am., 697 F.3d 917 (9th Cir. 2012), the Ninth Circuit Court of Appeals held that the "fiduciary exception" applies to attorney-client communications made prior to a decision on a claim. The "fiduciary exception" generally precludes an ERISA fiduciary from asserting the attorney-client privilege against plan beneficiaries on matters of plan administration. This decision, which resolved an issue of first impression in the Ninth Circuit, will require both in-house and outside counsel to carefully consider the scope of discussions with clients during the administration of ERISA claims.

Plaintiff was a participant in a long-term disability plan (the "Plan") insured by Unum Life Insurance Company ("Unum"). Unum determined to pay benefits to plaintiff based on permanent disability arising from a spinal injury, but plaintiff disputed Unum’s calculation of his pre-disability earnings, which did not include his annual bonus. Plaintiff sought the production of communications between Unum’s claims analyst and its in-house counsel regarding the claim and the determination of pre-disability earnings. Plaintiff argued the "fiduciary exception" permitted discovery of the otherwise privileged communications, on the grounds Unum is a Plan fiduciary.

To view the full article, please click here.

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III. THE SUPREME COURT TO DECIDE WHETHER EQUITABLE DEFENSES CAN PRECLUDE A PLAN’S RECOVERY UNDER SECTION 502(a)(3) OF CLAIM OVERPAYMENTS BASED ON PLAN PROVISIONS PERMITTING SUCH RECOVERY

 

Courtney Hill



















 

Courtney Hill

The Supreme Court recently heard oral argument in U.S. Airways, Inc. v. McCutchen, which will hopefully resolve a current Circuit Court split on the issue of whether plan administrators may recover wrongful payments under ERISA § 502(a)(3) in reliance on plan terms allowing for such recoveries.

In McCutchen, the US Airways medical benefits plan had paid medical expenses for McCutchen as a result of injuries he has sustained in an automobile accident.  After McCutchen recovered money from third parties as a result of the accident, the plan sought subrogation of the amounts it had paid to McCutchen.  The District Court granted summary judgment to US Airways based on language in the plan allowing full reimbursement of any amounts recovered by the participant. The Third Circuit overturned the District Court’s decision, holding that "Congress intended to limit the equitable relief available under § 502(a)(3) through the application of equitable defense and principles that were typically available in equity despite the negation of such defenses and principles in an ERISA plan.”  666 F.3d 671, 676 (3d Cir. 2011).

To view the full article, please click here.

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IV. RECENT DEVELOPMENTS IN LIFE, HEALTH AND DISABILITY CASE LAW


Plaintiff Prevailed In Remanding Long Term Disability Benefits Case To State Court U.S. Supreme Court Eliminates Loophole Plaintiffs Use to Avoid Federal Court

In this most recent case by the Eastern District of California, the Court remanded to state court what would appear to be a straight-forward ERISA complaint.  However, due to an exclusivity provision under ERISA and an artfully pled complaint, the Plaintiff was successful in having the case remanded to state court.

Plaintiff, an employee of the City of Bakersfield, filed a Complaint in state court alleging claims of breach of contract, fraud, negligence, and breach of implied covenant of good faith and fair dealing arising out of Unum Life Insurance Company’s termination of her long term disability benefits.  Plaintiff also named as a defendant the Insurance Broker who sold to the City the long term disability plan with Unum. Unum and the Insurance Broker removed the case to federal court on the basis of federal question asserting that the claims were ERISA based and preempted the state law claims.  The defendants also asserted that the Insurance Broker was fraudulently joined for the sole purpose of defeating diversity.  The Court disagreed and remanded the case back to state court.

To view the full article, please click here.


U.S. Supreme Court Eliminates Loophole Plaintiffs Use to Avoid Federal Court

On March 19, the U.S. Supreme Court held a class action plaintiff cannot stipulate prior to class certification that the plaintiff and the proposed class will not seek damages that exceed $5 million in total. The opinion closes a loophole that allowed plaintiffs to avoid federal jurisdiction under the Class Action Fairness Act (CAFA). 

CAFA provides a federal district court with original jurisdiction over a civil class action lawsuit if, among other things, the matter in controversy exceeds the sum or value of $5 million.  In determining whether the matter exceeds that sum, the claims of the individual class members are aggregated.

To view the full article, please click here


Payroll Practice Exists Even When An Employee Exercises A “Buy-up” Option

Courts have long held that when an employee is on disability leave and the employee’s normal compensation is paid out of the employer’s general assets, a payroll practice exists, and it is not subject to ERISA.  In a recent decision, the United States District Court, Northern District of Utah further clarified the payroll practice issue as it relates to “buy-up” options.

Plaintiff was on short term disability leave for an illness.  The Plan covered 80% of his pre-disability income, and was paid from the employer’s general assets.  The employee also purchased a “buy-up,” or self-insurance coverage, for the remaining 20% of his pre-disability income.  Plaintiff was denied his short term disability benefits and he brought a claim in state court.  The Defendants removed the case to federal court on the basis that the claims at issue were preempted by ERISA.  Plaintiff filed a motion to remand asserting that the Plan was exempt from ERISA because it was a payroll practice.

To view the full article, please click here.


Injunctive Relief Claims Dismissed Because Duplicative of Benefits Claim and Preempted by ERISA

In a case involving a claim for long term disability benefits from an insurer of an ERISA governed plan, the United States District Court for Northern California dismissed Plaintiff’s claims for injunctive relief.

Plaintiff, through the sponsorship of her employer, was enrolled in a long term disability plan (“the Plan”) administered by Defendant United of Omaha Life Insurance Company (“United of Omaha”).  She made a claim for long term disability benefits on the basis she was unable to perform her job duties due to symptoms of Multiple Sclerosis.  United of Omaha denied Plaintiff’s claim and her appeal, which prompted Plaintiff to file a complaint against United of Omaha.

To view the full article, please click here.


ERISA Plans Not Preempted By State Community Property Law

In a case involving competing claims for life insurance benefits that was governed under an ERISA regulated plan, the United States District Court in Idaho recently held that the state’s community property law did not preempt the terms of the ERISA regulated life insurance plan.  

Plaintiff, the deceased’s wife, was seeking one-half interest in her husband’s life insurance proceeds under Idaho’s community property law.  Under the ERISA regulated life insurance plan, the deceased husband had identified their minor son as the sole designated beneficiary.  The plaintiff argued that the state community property law preempts the terms of the life insurance plan.  The representative for the minor son argued that ERISA preempted those laws that would require the ERISA plan administrator to pay benefits to someone other than the designated beneficiary. 

 To view the full article, please click here.


Health Insurer Required Under California’s Mental Health Parity Act to Pay Costs of Residential Treatment for Anorexia

Appellant received intensive outpatient treatment for anorexia nervosa, which was covered by her employer’s Blue Shield health insurance plan (“Plan”). Appellant then registered at Castlewood, a residential treatment facility specializing in eating disorders, after her doctors advised her that she needed a higher level of care.  Blue Shield denied Appellant’s claim for the residential care because its Plan did not provide coverage for residential care.

The district court granted Blue Shield’s motion for summary judgment on the grounds the Plan unambiguously excluded coverage for residential care and Castlewood did not qualify as a Skilled Nursing Facility.  The district court did not address whether California’s Mental Health Parity Act (“Parity Act”) required coverage for residential care.

To view the full article, please click here.

 


Dishonest Acts Impact Liability Insurance Coverage

On May 22, 2012, the California Court of Appeal, Second Appellate District, Division Three held that where a health insurer is contractually obligated to pay claims and fails to do so, in part because of its own dishonest act, there is no coverage for unpaid claims through the health insurer’s own liability insurance coverage.

In the underlying case, plan participants Zev and Linda Watchel, on behalf of their minor son Tory, filed a class action lawsuit against Health Net, Inc. and various subsidiaries in New Jersey federal court alleging Tory had incurred over $42,000 in medical bills, but was only reimbursed $14,000.  Plaintiffs alleged Health Net failed to use the Ingenix database and instead used outdated databases to calculate the reimbursement.  The Plaintiffs asserted causes of action for failure to pay claims owed, breach of fiduciary duty, breach of contract pursuant to the Employee Retirement Income Security Act of 1974, as well as other causes of action.  A second class action was filed by Renee McCoy alleging the currently used databases were systematically flawed.  These cases were consolidated for trial.  While the lawsuits were pending, the New Jersey Department of Banking and Insurance conducted an investigation and concluded that Health Net used outdated databases and concealed its use of these databases from the investigators.

To view the full article, please click here.


U.S. District Court Affirms Denial of Claimant’s Disability Benefits

A recently published case out of the Central District of California serves as a reminder to claims and plan administrators of the importance of keeping up with the ever changing laws governing ERISA, and that when administrators take all of the appropriate steps to protect the interest of the claimant, a decision to deny benefits will more than likely be upheld. 

In Salz v. Standard Insurance Co., the Central District of California affirmed the denial of long term disability benefits to the claimant who requested benefits due to a back and neck condition and chronic pain.  The claimant appealed the denial to the Ninth Circuit who then remanded the case back to the Central District of California instructing the district court to apply the structural conflicts framework set forth in Montour v. Hartford Life & Accident Insurance, a case decided after the district court’s findings for Standard.  In doing so, the district court was to consider the “non-exhaustive facts and circumstances” identified by the Ninth Circuit as (1) Standard’s failure to analyze the distinctions between the Social Security award; and (2) Standard’s failure to reasonably consider Plaintiff’s actual job duties.   In a carefully crafted and detailed analysis, the district court summarized the current status of case law governing ERISA’s conflict issues, and applied the Montour factors to the facts of this case. Ultimately, the district court reached the same conclusion as it did earlier finding that Standard did not improperly deny the claimant his long term disability benefits.

To view the full article, please click here.

 


Summary Judgment Granted to Insurer for Plaintiff’s Failure to Exhaust Administrative Remedies

Cathy Sayles made a claim for benefits under her employer's group long term disability insurance plan (“the LTD plan”) administered by Continental Casualty Company.  Sayles sued Continental in 2009 for past and future benefits sought in 2001.  The United States District Court for the Western District of Missouri granted Continental’s motion for summary judgment on the ground that Sayles failed to exhaust her administrative remedies.  The court rejected Sayles’ contention that Continental was estopped from asserting an exhaustion defense because it had not advised her of her rights to administrative and federal court review, finding Sayles had abandoned her claim.

To view the full article, please click here.

Please click here to view more summaries of recent significant case law

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V. RECENT SUCCESSES

 

Gordon & Rees partner Margie Lariviere of San Francisco and Chicago partner Ryan Brown successfully moved for summary judgment in a life insurance rescission matter.  In granting the motion for summary judgment, the Court determined that the insurer was entitled rescind a $250,000 life insurance policy based on the applicant's material misrepresentation in an amendment to the insurance application.
 

To view full summary of this result, please click here.



Gordon & Rees partner Jordan Altura of San Francisco successfully moved for summary judgment on plaintiff’s claims that the insurer of a long-term disability plan improperly calculated benefits under the Plan and was not entitled to apply offsets based on plaintiff's receipt of a social security award.  The Court ruled that the insurer properly calculated benefits and offsets consistent with the language of the Plan and dismissed Plaintiff's action in its entirety. 
 


Gordon & Rees partner Courtney C. Hill of Los Angeles and senior counsel Christina McCracken of Dallas successfully moved for summary judgment in an ERISA life insurance benefits action.  The Court held that the insurer had correctly denied benefits as the coverage had terminated under the terms of the plan and the participant failed to convert to an individual policy.   As a result, the Court entered judgment in the insurer’s favor.


Gordon & Rees partner Ronald K. Alberts and senior counsel Jennifer L. Ghozland of Los Angeles successfully moved for partial summary judgment to eliminate a plaintiff’s claim for severance benefits. The elimination of this claim removed all uninsured damage exposure to the employer, a charitable, eleemosynary institution charged with fundraising.

To view full summary of this result, please click here.


Los Angeles senior counsel Jennifer L. Ghozland obtained a second successive win to dismiss certain causes of action from plaintiff's complaint that would allow for alternative theories of recovery for life insurance benefits, including equitable estoppel and surcharge.  The Southern District of California agreed with defendant's argument, under well established case law, that a plaintiff seeking benefits under an ERISA plan is not entitled to any other theory of recovery, where a claim for benefits exists.
 
This case derives from a widower's claim that he is entitled to life insurance benefits and severance pay from his deceased wife's employer.  In addition to life insurance benefits and severance pay, plaintiff originally also brought claims for breach of fiduciary duty, interference with protected rights, fraud and negligent misrepresentation.  On March 22, 2010, Gordon & Rees, on behalf of the employer, moved to dismiss each of the later enumerated causes of action, sought dismissal of an individually named defendant and asked the court to strike plaintiff's claims for economic and punitive damages, as well as plaintiff's request for a jury trial.  Over a year and a half later, on November 16, 2011, Honorable Anthony J. Battaglia granted the Motion in its entirety, finding that all the later enumerated claims were preempted by ERISA.

To view full summary of this result, please click here.


Phoenix partner John Condrey obtained dismissal of an insurance bad faith claim through summary judgment.  The client, an insurance company, was accused of bad faith in denying a life insurance claim when the policy had not been paid for and issued prior to the death of the Plaintiff's husband.  The Plaintiff claimed her son, who was an agent of the insurance company, sent the check for the policy premium prior to her husband's death and that "delivery" of the policy was not required for it to be in force.  Through discovery it was revealed that the Plaintiff's son had mailed the premium check within hours of learning of his father's hospitalization and also made several other misrepresentations.  The Federal District Court for the District of Arizona found that no policy was in place as of the date of death and granted summary judgment on behalf of the insurance company, dismissing the complaint.

To view full summary of this result, please click here.
 


Los Angeles senior counsel Michelle L. Steinhardt prevailed on a motion to dismiss in favor of Defendants The Rawlings Company LLC and Rawlings Financial Services, LLC in an Employee Retirement Income Security Act of 1974 (“ERISA”) health benefits case.  Judge Gary Klausner of the United States District Court for the Central District of California held that Plaintiffs’ state law claims related to the alleged interference and seizure of settlement payments are preempted by ERISA.

To view full summary of this result, please click here.

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