You won’t get a jury or a shot at punitive damages in an ERISA case, but there are many similarities to the ordinary bad-faith case
ERISA cases have much in common with regular insurance bad-faith cases, but there are also a lot of differences. Even though the coverage and policy-interpretation issues are nearly identical to those involved in an insurance bad-faith case, insurance claims under ERISA have their own unique procedural trajectory.
Here are ten things to bear in mind when handling an ERISA insurance case.
All non-government group life, health, and disability claims are subject to ERISA
In the 1970s, there was at least a perceived crisis regarding the state of pension plans. (See Ablamis v. Roper (9th Cir. 1991) 937 F.2d 1450, 1452-53.) Congress took up the problem and drafted a new act to protect employees for pension fraud and abuse: the Employee Retirement and Income Security Act (“ERISA”) of 1974, 29 U.S.C. § 1001.
ERISA was originally introduced to the House of Representatives on January 3, 1973, and despite the current commonly-held belief that insurance was included within its scope later as an afterthought, the original text of the bill did include insurance. (Subcommittee on Labor of the Committee on Labor and Public Welfare of the United States Senate, Legislative History of the Employee Retirement Income Security Act of 1974: Public Law 93-406, 93d Cong., 1st Sess. 6 (1976).)
It was not until 1987, however, that it became clear that not only was ERISA a remedial scheme that employees could use when their benefits had been denied, it was thereafter the only way to pursue such claims. In Pilot Life Insurance Co. v. Dedeaux (1987) 481 U.S. 41, the Court held that ERISA preempted state law on the subject. Plaintiffs could no longer sue in state court for bad faith for the denial of their group life, health, or disability benefits. After that decision, the landscape of insurance law changed forever. Group claims were almost entirely removed from the state-court system, and a new set of laws applied.
The first question is: what is an ERISA plan? An ERISA plan is not an insurance policy. An ERISA plan, named by ERISA in full as an “employee welfare benefit plan,” is a program designed by an employer to provide benefits to its employees as a group. The plan can be self-funded, or the employer can purchase an insurance policy whereby the employer is the insured or policyholder and the employees are the plan participants. Family members of the employee can also be beneficiaries of the plan, such as dependents if the plan provides health benefits.
If the plan is self-funded, an insurance company may still be involved as an administrator of the plan, processing claims and determining which benefits are payable. The employer, though, actually pays the benefits. Most plans, however, are not self-funded. Ordinarily, an insurance company issues the policy to the employer, administers all claims, and pays claims out of its own pocket.
The policy or “master policy” is a contract between the insurance company and the employer and is often not shared with the employees. Under ERISA, the plan must provide the employees with a Summary Plan Description (“SPD”), which outlines the benefits and any exclusions or limitations on coverage. The SPD is not the plan.
All denials by insurance companies of group health, life, and disability claims are subject to ERISA. The only exception is where the employer is a church or governmental entity.
All records must be sent to the insurance company before filing a lawsuit
One of the biggest pitfalls of ERISA is that with a few exceptions, all documents that you would want to use later on must appear in the insurance company’s file before filing the lawsuit. The rationale behind this rule is that the judge will simply be evaluating the propriety of the insurance company’s decision, and if the insurance company did not have a specific document in its file, then that document is not relevant for evaluating the insurance company’s decision.
The solution is to collect all of the evidence such as medical records, reports, opinions of doctors, medical literature, or anything else that might conceivably be helpful in proving your case and send it to the insurance company before filing a lawsuit. Ideally, these documents should be supplied to the insurance company as part of the ERISA-mandated appeal process.
The appeal process in ERISA is a condition precedent to filing a lawsuit. Under ERISA, once the insurance company denies the claim, the participant must then submit an appeal to the insurance company within a specified time period that varies depending on the type of claim involved. The regulations, 29 CFR § 2560.503-1, provide that at least 60 days must be provided for a participant to appeal. (29 CFR § 2560.503-1(h)(2)(i).) Depending on the type of coverage, the 60-day minimum is extended as follows for health and disability claims but not life claims, resulting in the following deadlines:
Health Claims: 180 Days (29 CFR § 2560.503-1(h)(3)(i)).
Disability Claims: 180 Days (29 CFR § 2560.503-1(h)(4)).
Life Claims: 60 Days (29 CFR § 2560.503-1(h)(2)(i)).
The Ninth Circuit has recently stated that if the deadline falls on a weekend or holiday, the deadline is extended to the next business day. (LeGras v. Aetna Life Ins. Co. (9th Cir. 2015) 786 F.3d 1233.)
In disability cases, future benefits cannot be awarded
In cases involving life insurance and health insurance, the insured’s claims under the policy are generally for events that have already taken place (for example, a surgery, or the named insured’s death) and have been concluded. In disability cases, however, the benefits often will extend every month going forward and are essentially a series of claims that accrue each month. If one is successful in litigating a disability case under ERISA, the court will not award future disability benefits. If the case is not subject to ERISA, future disability benefits are recoverable if the insurance company has unreasonably denied the claim. (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 830 n.7.)
There is no jury trial, no punitive damages, and no emotional distress damages
Some of the other repercussions of ERISA preempting state law is that there is no entitlement to a jury trial and because the only relief is that specified within ERISA itself, there is no entitlement to punitive damages, Mertens v. Hewitt Associates (1993) 508 U.S. 248, 255, or emotional distress damages, Bast v. Prudential Ins. Co. of Am. (9th Cir. 1998) 150 F.3d 1003, 1009.) Attorneys’ fees and costs, however, are recoverable. 29 U.S.C. § 1132(g)(1).
ERISA cases are deemed to arise under federal law, and therefore will support venue in federal court, either for initial filing or by removal. Federal jurisdiction is not, however, exclusive. State courts do have concurrent jurisdiction over ERISA claims, and ERISA cases can and have been litigated in state court. Most defendants who have a chance to remove to federal court do take that opportunity, however.
The statute of limitations might be four years, three years, or less than one year
If the participant is timely with respect to the above deadlines in filing an appeal of the denial, the participant must be timely again in filing a lawsuit. Until recently, the participant always had four years to file an ERISA lawsuit. Now, the deadline is much less clear.
ERISA itself does not contain a statute of limitations. In 1994, the Ninth Circuit imposed the three-year deadline that the California Insurance Code applies to disability claims:
California has a limitations statute specifically for disability policies. Section 10350.11, entitled “Limitation of actions on policy,” provides:
A disability policy shall contain a provision which shall be in the form set forth herein.
Legal Actions: No action at law or in equity shall be brought to recover on this policy . . . . after the expiration of three years after the time written proof of loss is required to be furnished. (Nikaido v. Centennial Life Ins. Co. (9th Cir. 1994) 42 F.3d 557, 559.)
The start of the time period was the point in time when proof of the claim was required to be submitted by the participant. (Id. at 560.)
In 2000, the Ninth Circuit decided to revisit the issue and decided that the four-year breach of contract statute of limitations would be more appropriate. (Wetzel v. Lou Ehlers Cadillac Grp. Long Term Disability Ins. Program (9th Cir. 2000) 222 F.3d 643, 648.)
In 2013, the United States Supreme Court addressed the issue and held that a limitations period in the plan itself would be enforceable so long as (1) it is reasonable, and (2) there is no statute that contradicts the limitations period: “We must give effect to the Plan’s limitations provision unless we determine either that the period is unreasonably short, or that a ‘controlling statute’ prevents the limitations provision from taking effect.” (Heimeshoff v. Hartford Life & Acc. Ins. Co. (2013) __ U.S. __, 134 S. Ct. 604, 612.)
In that case, the plan stated that the statute of limitations was three years and began on the date when the claim should have been submitted. The Court does not mention what happens when the claim is paid for more than three years and is then denied. Presumably, the period is refreshed every thirty days and commences with the month in which benefits are not paid. The Court also does not address what it meant by the phrase “controlling statute.” Since state procedural laws are preempted by ERISA, the four-year statute of limitations would not apply. For disability claims, though, California Insurance Code § 10350.11 should apply and override the limitations period set forth in the plan if it is shorter than three years because it is a state law that regulates the business of insurance. All state laws that regulate the business of insurance are exempt from preemption, unless they purport to provide a remedy that ERISA itself does not provide. (15 U.S.C. § 1012.)
Most health insurance policies fall under the classification of disability insurance in California and are thus also subject to the three-year limitations period. (Cal. Ins. Code § 106.) The California Insurance Code does not include a mandatory statute of limitations provision for life insurance policies, so the four-year period referenced in Wetzel should apply unless a different period is set forth in the plan, which would then control.
The standard of review
Whether the court reviews a case under the “de novo” or “abuse of discretion” standard of review can make or break the case, although the issue is now largely moot, because the de novo standard is almost certain to apply now.
De novo review now applies because a California law that regulates the business of insurance does not permit discretionary clauses in life and disability insurance policies. California Insurance Code § 10110.6 mandates that de novo review now applies in California as of claims that commence in 2012 or later. Section 10110.6 provides in part:
(a) If a policy, contract, certificate, or agreement offered, issued, delivered, or renewed, whether or not in California, that provides or funds life insurance or disability insurance coverage for any California resident contains a provision that reserves discretionary authority to the insurer, or an agent of the insurer, to determine eligibility for benefits or coverage, to interpret the terms of the policy, contract, certificate, or agreement, . . . that provision is void and unenforceable.
(b) For purposes of this section, “renewed” means continued in force on or after the policy’s anniversary date.
(c) For purposes of this section, the term “discretionary authority” means a policy provision that has the effect of conferring discretion on an insurer or other claim administrator to determine entitlement to benefits or interpret policy language that, in turn, could lead to a deferential standard of review by any reviewing court.
The district courts have consistently held that this provision voids any discretionary language in an ERISA policy in effect after January 1, 2012. (See .e.g., Curran v. United of Omaha Life Ins. Co. (S.D. Cal. 2014) 38 F. Supp. 3d 1184, 1189-1191.)
The court in Jahn-Derian v. Metropolitan Life Insurance Co. (C.D. Cal. 2015) 2015 WL 900717 *4, granted a participant’s motion to impose the de novo standard in an ERISA case pursuant to § 10110.6:
Under 29 U.S.C. § 1144(a), ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” However, 29 U.S.C. § 1144(b)(2) saves from preemption “any law of any State which regulates insurance, banking, or securities.” To fall under the savings clause, a state law (1) “must be specifically directed toward entities engaged in insurance,” and (2) “must substantially affect the risk pooling arrangement between the insurer and the insured.”
Section 10110.6 meets the first requirement, as it is “specifically directed toward” the insurance industry. See Standard Ins. Co. v. Morrison, 584 F.3d 837, 842 (9th Cir. 2009) (“ERISA plans are a form of insurance, and the practice regulates insurance companies by limiting what they can and cannot include in their insurance policies”). Second, the practice “substantially affects” the pooling of risk. See id. at 844-45 (discretionary clause “substantially affects” pooling of risk, for instance, because it impacts “[t]he scope of permissible bargains between insurers and insureds.”). Finally, since Morrison, numerous district courts have held that ERISA does not preempt § 10110.6. See Snyder, 2014 WL 7734715, at *10 (collecting § 10110.6 preemption cases).
Last year, Judge O’Connell wrote:
The Court agrees with the reasoning in Gonda, Rapolla, and Polnicky. As in Gonda, both the LTD Policy and SPD contain discretionary clauses giving Defendant wide authority to determine long term disability claims eligibility. Section 10110.6 clearly voids this language in the insurance policy. To find the SPD’s discretionary language remains valid, despite section 10110.6’s clear command, would eviscerate the statute’s protections and render it meaningless. (Snyder v. Unum Life Ins. Co. of America (C.D. Cal. 2014) 2014 WL 7734715 *9.)
Therefore, since de novo review applies, no deference is given to the insurance company’s denial. (Firestone Tire & Rubber Co. v. Bruch (1989) 489 U.S. 101, 114-15.)
The issue is then not whether the insurance company’s decision was unreasonable or arbitrary or capricious: “The court simply proceeds to evaluate whether the plan administrator correctly or incorrectly denied benefits, without reference to whether the administrator operated under a conflict of interest.” (Abatie v. Alta Health & Life Ins. Co. (9th Cir. 2006) 458 F.3d 955, 986.)
Self-funded plans, however, are most likely exempt as the California Insurance Code does not apply to them. (FMC Corp. v. Holliday (1990) 498 U.S. 52, 61.) Hence, if these plans confer discretion on the plan administrator, the abuse of discretion standard would still apply.
Discovery is very limited
As discussed above, evidence that was not before the insurance company when it denied the claim or denied the appeal is generally not admissible, even if de novo review applies. Thus, depositions are essentially out of the question and written discovery generally requires a court order beforehand and is very limited even if granted. The scope of such discovery has generally been to address the conflict of interest that an insurance company has in both making decisions to pay benefits and actually having to pay those benefits out of its own pocket. If a court is persuaded by such evidence, the standard might shift from an abuse of discretion standard to a de novo standard.
California Insurance Code § 10110.6, however, now makes the purpose of such discovery less clear. Since de novo review should now already apply in most cases, what would be the purpose of discovery? It could be argued that evidence of the bias of the insurance company’s medical reviewers in health and particularly disability cases might still make such discovery warranted. If, for example, the insurance company in a disability case denied a claim based on the report of its doctor, it could go to the credibility of such a doctor’s report if that doctor only worked for that insurance company writing such reports and in fact had never found any participant to ever be disabled. Discovery would be necessary to obtain such information.
The administrative record must also include the master policy and any claims manuals
If discovery is not generally available, what evidence is presented to the district court? The claim file, known as the “administrative record” must be produced by the insurance company. The insurance company must also produce the master policy and the summary plan description. The insurance company must also produce any manuals or guidelines that it relied upon in making its claims determination:
If an internal rule, guideline, protocol, or other similar criterion was relied upon in making the adverse determination, either the specific rule, guideline, protocol, or other similar criterion; or a statement that such a rule, guideline, protocol, or other similar criterion was relied upon in making the adverse determination and that a copy of such rule, guideline, protocol, or other criterion will be provided free of charge to the participant upon request. (29 CFR § 2560.503-1(g)(1)(v)(A).)
The participant need not produce any documents, but it is always advisable to do so in the event that documents provided to the insurance company have been omitted from what is produced as the administrative record.
Disability cases: calculating benefits and offsets
In disability cases, it can be complicated to calculate the actual benefits owed. Most plans pay 60% of pre-disability income as a benefit. This amount, however is reduced by other benefits. Workers compensation, state disability (“SDI”), and Social Security Disability (“SSDI”) benefits are all an offset, but they only offset benefits for the same period in which the insurance company under ERISA owes benefits. Also, any cost of living increase to the other benefits is not included as an offset.
Regardless of the amount of the offsets, however, the monthly benefit cannot fall under $100. (Cal. Ins. Code § 10291.5; Cal. Admin. Code, Title X, § 2220.11.)
Health cases: calculating deductibles, co-pays, and annual out-of-pocket maximums
In health-insurance cases, the calculation of what is owed if the claim is covered can also be rather complicated. Generally, the participant must exhaust their deductible (if any) before any benefits are payable under the plan. After that, a co-pay may be required where the participant will pay a percentage of the cost of the medical provider’s bill. The percentage may change if the care occurs out of network under a PPO plan, and may not be covered at all under an EPO or HMO plan (unless the care is emergency care which is always covered regardless of network status).
The co-payment percentage is, however, capped each year by the annual out-of-pocket maximum, a sometimes misunderstood concept.
The annual out-of-pocket maximum is considerably more important than the deductible or co-payment amount because it puts a cap on the amount that the employee has to pay. There used to also be a cap on the amount that the insurance company had to pay, but those caps known as the lifetime maximum have been removed by the Affordable Care Act. Previously, most health insurance policies had a $1 million or $3 million lifetime limit.
The annual out-of-pocket maximum is vitally important for consumers, though, because it puts a cap on the amount that the employee has to pay for health care each calendar year. Once the amount stated in the plan for the annual out-of-pocket maximum has been met, the insurance company is required to pay 100% of covered medical expenses for the remainder of the year.
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