The LHD/ERISA Advisor – June 2020 Edition
Hinshaw Newsletter | 10+ min read
Jun 3, 2020
Welcome to The LHD/ERISA Advisor, a Hinshaw newsletter focusing on legal developments in the life, health, and disability areas. The Advisor provides an analysis of the most current cases and trends on both ERISA-governed and individual policy claims. We intend to provide you with useful context and support for your litigation and claim decisions.
Editors Peter Felsenfeld and Misty Murray welcome your comments and suggestions about how we can tailor The Advisor to best meet your needs. Our goal is to provide the most practical information possible, so please let us know what would be helpful to you.
- U.S. Supreme Court Issues Ruling on 'Actual Knowledge' Required to Trigger ERISA's Limitations Period
- Ninth Circuit Affirms Judgment for Unum Life In ERISA Disability Benefits Case
- Eighth Circuit Upholds Payment for Out-of-Network Air Ambulance Flight at 150 Percent Medicare Rates
- Ninth Circuit Affirms $6.5 Million Bad Faith Verdict Against Disability Insurer
- First Circuit Affirms Offset of Claimant's LTD Benefits By Amount of his VA Benefits
- First Circuit Holds Decision to Deny Accidental Death and Dismemberment Benefits Not an Abuse of Discretion
- New York District Court Rejects Claim that Health Insurer Violated the Mental Health Parity Act
- Ninth Circuit Rules Coverage Under ERISA Disability Plan Excluded Due to Underlying Medical Condition
- District Court Holds that Plan Administrator Was ERISA Fiduciary
- Eleventh Circuit Rules Against Insurer in LTD Case
- Court Applies "Reasoned Approach" in Upholding Insurer's Denial of LTD Claim
U.S. Supreme Court Issues Ruling on 'Actual Knowledge' Required to Trigger ERISA's Limitations Period
On February 26, 2020, the Supreme Court issued its decision in Intel Corp. Inv. Policy Comm. v. Sulyma, __. U.S. __, 140 S. Ct. 768 (2020). The Court unanimously held that Christopher Sulyma ("Sulyma") did not necessarily have "actual knowledge" under 29 U.S.C. § 1113(2) of the information contained in the disclosures that he received, because he did not read, or could not recall reading, the disclosures. Rather, to meet § 1113(2)s "actual knowledge" requirement, the Court held that Sulyma must in fact have become aware of the information in the disclosures sent to him.
Sulyma was employed by Intel Corporation ("Intel") from 2010 through 2012 and participated in two of Intel's ERISA-governed retirement plans. Intel's investment committee disclosed its investment decisions to participants through various documents available on Intel's website. The documents disclosed, among other things, the committee's decision to participate in alternative investments, such as hedge funds and private equity. While Sulyma accessed the Intel website, he testified that he did not recall reading the disclosures regarding his investments while working at Intel, and was not aware of the alternative investments and the impact on his retirement accounts until October 2015. He filed his lawsuit on behalf of himself and others similarly situated more than three years after the disclosures were made available to him.
The issue presented to the Court was whether the three-year limitations period in 29 U.S.C. § 1113(2), which runs from "the earliest date on which the plaintiff had actual knowledge of the breach or violation," barred Sulyma's lawsuit.
While ERISA does not define the phrase "actual knowledge" in the statute, the Court found that its meaning is plain and that to have "actual knowledge" of a piece of information, one must in fact be aware of it. The Court found support for this interpretation in dictionaries, as well as congressional intent drawing the distinction between actual knowledge and constructive knowledge in other provisions of ERISA.
The Court noted, however, that the disclosures to Sulyma were "no doubt relevant in judging whether he gained knowledge of that information." The Court further stated that its decision did not foreclose "any of the 'usual ways' to prove actual knowledge at any stage in the litigation," such as by "inference from circumstantial evidence." For example, if electronic records showed that a plaintiff viewed the relevant disclosures and evidence suggested that the plaintiff took action in response, actual knowledge could be established. Additionally, the Court stated that its opinion also did not preclude defendants from contending that evidence of "willful blindness" supports a finding of "actual knowledge."
Intel did not argue that "actual knowledge" was established in any of these ways, it only argued that it need not offer any such proof in light of the disclosures provided. Viewing the facts in the light most favorable to Sulyma, there was a genuine dispute as to his actual knowledge, precluding summary judgment in Intel's favor.
Ninth Circuit Affirms Judgment for Unum Life In ERISA Disability Benefits Case
In Western v. Unum Life Insurance Company of America, 798 F.App'x 154, 2020 U.S. App. LEXIS 8362 (9th Cir. March 17, 2020), the Ninth Circuit affirmed Unum Life's determination that an aerospace engineer diagnosed with chronic fatigue syndrome was not disabled under the terms of a group long-term disability policy.
Disclaimer: Hinshaw represented Unum Life in all phases of the ERISA litigation.
Plaintiff Lonny Western ("Western"), an engineer for The Aerospace Company, was a participant in his employer's LTD plan, which was funded by a group insurance policy issued by Unum Life. Western stopped working in 2010 and subsequently submitted a claim for LTD benefits based on a diagnosis of chronic fatigue syndrome ("CFS").
After initially approving Western's LTD claim based on his subjective reports of impairment, Unum Life investigated and evaluated Western's claim. Despite the diagnosis of CFS reported by his doctor, Western did not mention fatigue when Unum Life asked him why he could not return to work throughout the course of his claim. Instead, Western repeatedly reported he was unable to return to work because of purported cognitive deficits, which he attributed to recurring fevers and CFS. Accordingly, Unum Life focused its evaluation on Western's functional capacity, rather than the validity of his CFS diagnosis, and concluded that the available medical information established that Western was not cognitively impaired. During the claim review process, two separate neuropsychological evaluations (one arranged by Western, one arranged by Unum Life) each confirmed that Western was not cognitively impaired, despite his assertions to the contrary. Unum Life also arranged for several of its medical consultants (including an infectious disease specialist, an internal medicine physician and a neuropsychologist) to review Western's medical information. Based on the findings and opinions of those medical consultants and the neuropsychologists who evaluated Western, Unum Life determined that Western was not entitled to benefits under the LTD Plan.
Western filed suit against Unum Life seeking not only to recover the LTD benefits in dispute, but also seeking equitable relief pursuant to 29 U.S.C. § 1132(a)(3). The district court reviewed Unum Life's claim decision de novo and affirmed the decision. Following a bench trial, the court concluded that Western "failed to demonstrate that he is disabled as that term is defined in the LTD Policy." The court also found that Western's breach of fiduciary duty claim was "barred because it is redundant of his claim for benefits."
Western appealed to the Ninth Circuit. He argued, inter alia, that the district court applied a "de facto" deferential review favoring Unum Life's evidence, and should have focused its review on the validity of his CFS diagnosis and the "evidence relevant to the time period of the termination of benefits and afterwards."
A panel of three Ninth Circuit judges affirmed the district court's decision. The Ninth Circuit held that the court correctly applied a de novo standard of review and did not err in finding that Western was no longer disabled as of March 12, 2015. The panel noted that the court "appropriately focused its analysis on whether Western was disabled by cognitive deficits," and concluded that "the record supported its finding that he was not." The Ninth circuit also held that the court did not err by dismissing Western's claim for breach of fiduciary duty.
Eighth Circuit Upholds Payment for Out-of-Network Air Ambulance Flight at 150 Percent of Medicare Rates
In Mitchell v. Blue Cross Blue Shield of N.D., 2020 U.S. App. LEXIS 8818 (8th Cir. Mar. 20, 2020), the Eighth Circuit upheld the payment of 150% of Medicare rates for an out-of-network air ambulance flight, although the patient's health plan did not expressly provide for the use of such rates.
On January 15, 2014, Valley Medical Flight transported the patient via fixed-wing air ambulance when she presented to a rural medical center with an emergency cardiac condition that required treatment at a larger hospital. The patient was covered under a benefit plan (the "Plan") sponsored by her husband's employer and issued by Blue Cross Blue Shield North Dakota ("BCBSND"). The ambulance provider billed BCBSND $33,200, which included a $21,500 charge for the ambulance base rate (HCPCS A0430), an $11,250 mileage charge for the 90-mile flight (HCPCS A0435), and a $450 charge for IV fluids (A0398). In March 2014, BCBSND partially allowed the claim and paid a total of $6,759.98, leaving the patient and her husband responsible for the remainder. BCBSND based the payment amount on 150% of the 2013 Medicare rates for rural air ambulance. In addition, BCBSND denied the separate $450 charge for IV fluids because it was included in the "payment made for a related procedure," namely the air ambulance base rate.
The members then sued BCBSND under ERISA, contending that the payment was arbitrary and capricious, because the Plan did not state that out-of-network services would be reimbursed at 150% of Medicare rates, and that the rate of payment was so low as to violate BCBSND's fiduciary duty to act in the interest of plan members. With regard to out-of-network reimbursement, the plan simply provided that the "allowance" or "allowed charge" was the "maximum dollar amount that payment for a procedure" was based on "as determined by BCBSND." Because the plan did not contain express language calling for the use of Medicare rates on air-ambulance claims, BCBSND relied on a 2014 letter, which had been sent to participating providers, but not plan members. The letter stated that BCBSND would cover air ambulance base rates and mileage charges at 150% of the 2013 Medicare rural air ambulance rate.
The district court affirmed BCBSND's payment of Medicare rates for the base rate and air mileage charges, but overturned BCBSND's denial of the $450 charge for IV fluids, finding that BCBSND's position was an improper post-hoc rationale. The members appealed.
The Eighth Circuit concluded that BCBSND had acted reasonably in basing the ambulance provider's payment on 150% of Medicare rates. First, the plan granted BCBSND discretion, and payment of 150% Medicare rates did not contravene any plan language or render any of its terms superfluous. Second, although BCBSND had not provided the plaintiffs advance notice that payment would be based on 150% of Medicare rates, it ultimately disclosed the basis for the payment during the claim review process. Third, the use of the Medicare rates did not amount to a prohibited post-hoc rationale because those rates had been set forth in the letter BCBSND sent to participating providers just two days before the flight. Fourth, while the plaintiffs contended that BCBSND's payment rate subjected them to excessive balance bill liability—in violation of BCBSND's duty to act for the exclusive purpose of providing benefits to plan members—no rule prohibited the plan sponsor from granting BCBSND broad discretion to determine the allowed amount for the flight. Setting air ambulance reimbursement in accordance with an objective external standard, namely Medicare rates, did not violate any duty BCBSND had to act in the members' interests. The court found that indexing the allowed amount to an external benchmark, such as the "usual and customary amount," or Medicare rates, permits a court to evaluate the reasonableness of the claims administrator's payment decisions.
The court then reversed the district court's determination that BCBSND had adopted a prohibited post-hoc rationale for its denial of the separate charge for IV fluids administered during the flight. After Valley Medical Flight initially submitted its claim, BCBSND issued an EOB explaining that the plan did not cover the separate medical supply charge because it was included in the base rate for air ambulance services. BCBSND therefore had not raised this ground for the denial for the first time in the litigation, and the basis for the denial was consistent with the plan's definition of ambulance services.
This case can be cited for the proposition that a health plan's claims administrator may validly exercise its discretion to base reimbursement for out-of-network services on Medicare rates, even when the plan does not call for the application of such rates, at least when the claims administrator has previously notified participating providers that such rates will be used.
Ninth Circuit Affirms $6.5 Million Bad Faith Verdict Against Disability Insurer
In McClure v. Country Life Ins. Co., 795 Fed. Appx. 548 (9th Cir. 2020), the Ninth Circuit affirmed a $6.5 million bad faith verdict against a disability insurer that included a $1.29 million award for emotional distress damages even though the plaintiff had provided no medical evidence demonstrating emotional trauma.
In this case, plaintiff Benjamin McClure ("McClure") sought benefits under an individual disability income policy issued by County Life Insurance Company ("Country Life") after suffering a head injury. McClure claimed that post-concussive syndrome prevented him from performing the material duties of his profession as the manager of an insurance company call center. In addition, McClure claimed that he suffered from a history of depression, which rendered him vulnerable to emotional injury.
Country Life initially accepted McClure's claim and paid benefits for approximately 13 months, but then terminated benefits upon finding that McClure was no longer totally disabled under the subject policy. McClure sued Country Life and its affiliate CC Services, Inc., ("CCS") (collectively "Defendants") in Arizona District Court, alleging causes of action for breach of contract and bad faith. McClure claimed at trial that Defendants denied his claim without reviewing his most recent medical records, including records from the physicians who had attested to his disability.
A federal jury returned a verdict in favor of McClure on both causes of action. On the bad faith allegations, the jury found that CCS employees were compensated, in part, based on the profitability of CCS, which in turn depended on the decisions those employees made concerning disability benefits.
The jury ultimately awarded McClure approximately $200,000 in past and future disability benefits and $2,500,000 in punitive damages against each defendant. In addition, the jury awarded $1,290,000 in damages for emotional distress—even though McClure provided no medical records or medical testimony establishing that the denial of benefits caused his allegedly worsening mental health condition.
The district court, in denying Defendants' motion for a new trial, held that proof of causation did not require such evidence. In addition, the court held that the award was appropriate in light of a jury instruction stating that McClure was entitled to emotional distress damages if the adverse benefits decision exacerbated a pre-existing mental condition. In sum, the evidence at trial "painted a picture of emotional pain brought on by the uncertainties of the family finances and of their future, resulting from the termination and the coverage battle with Defendants, all of which came at a time when McClure was vulnerable and experiencing severe depression."
The Ninth Circuit affirmed every aspect of the ruling, finding there was sufficient evidence to support the jury's conclusions. The McClure case is a cautionary tale for insurers, as it indicates Ninth Circuit courts may allow a jury to infer significant emotional distress damages where there is scant evidentiary support.
First Circuit Affirms Offset of Claimant's LTD Benefits by Amount of His VA Benefits
The claimant, Martinez, was a disabled veteran who suffered from multiple sclerosis. In September 2010, Martinez became a participant in his employer's group LTD benefits plan (the "Plan"). When his health deteriorated in November 2012, Martinez submitted a claim for LTD benefits, which were insured by Sun Life. Under the Plan, Martinez was entitled to monthly benefit payments, less any "Other Income Benefits." While on claim, Martinez applied for and was awarded VA Benefits under the Veterans' Benefits Act. Martinez notified Sun Life of the award of VA Benefits. Thereafter, Sun Life informed Martinez that his VA Benefits were considered "Other Income Benefits" subject to offset under the Plan. Sun Life cited the entire "Other Income Benefits" provision, highlighting two specific sections: "The amount the Employee is eligible for under any other act or law of like intent" and "Disability or retirement benefits under the United States Social Security Act, or any similar plan or act . . . ."
Martinez appealed Sun Life's decision, asserting various reasons for the exclusion of VA Benefits as "Other Income Benefits" under the Plan, including that such benefits were not "compulsory" under the "Other Income Benefits" provision relating to "[t]he amount the Employee is eligible for under Compulsory Benefit Act or Law." In its letter denying Martinez's appeal, Sun Life cited a number of federal cases supporting its decision, including a Tenth Circuit decision which held that service-connected disability benefits are awarded under a "Compulsory Benefit Act or Law" pursuant to the same policy language as set forth in the Plan. Martinez then filed suit in Massachusetts District Court, asserting, inter alia, a claim for benefits under ERISA § 1132(a)(1)(B).
Following summary judgment in favor of Sun Life, Martinez appealed to the First Circuit. On appeal, the First Circuit reviewed, inter alia, whether Sun Life's alleged failure to clearly disclose at the administrative level that it was relying upon the "Compulsory Benefit Act or Law" provision for the offset, now precluded it from relying on this rationale in litigation. This argument was premised on ERISA's statutory notice provision, which requires that an insurer "provide adequate notice in writing to any participant or beneficiary whose claim for benefits under the plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant." 29 U.S.C. § 1133(1).
The First Circuit held that Sun Life's communications to Martinez during the administrative process complied with this mandate. In so holding, the First Circuit reasoned that although Sun Life highlighted other rationales for the offset in its letters, the "Compulsory Benefit Act or Law" provision was included, albeit not emphasized, in Sun Life's communications to Martinez. This included Sun Life's appeal denial letter, which featured a lengthy discussion of the Tenth Circuit's decision in Holbrooks v. Sun Life Assurance Co. of Canada, 570 F. App'x 831 (10th Cir. 2014), which relied on the "Compulsory Benefit Act or Law" provision to offset VA Benefits.
The court further stated that despite Martinez's argument that Sun Life failed to include the rationale at the administrative level, Martinez clearly understood that the "Compulsory Benefit Act or Law" provision was pertinent, because he addressed the alleged non-compulsory nature of VA Benefits explicitly in his appeal letter.
The First Circuit further explained that even if Sun Life had not adequately disclosed its rationale to Martinez, barring the company from raising the "Compulsory Benefit Act or Law" provision during litigation would not be the proper remedy. Typically, a plan is barred from asserting defenses to coverage not articulated to the insured only when the lack of notice results in prejudice to the insured. Given that this case was strictly one of contract interpretation—a question of law—and Martinez had a full opportunity to present his arguments on the construction of the Plan's provisions, the court found no prejudice to Martinez. Accordingly, the First Circuit agreed with the district court's decision to entertain Sun Life's arguments premised on the "Compulsory Benefit Act or Law" provision.
Finally, after thorough analysis on the issue of whether the term "Compulsory Benefit Act or Law" was ambiguous, the First Circuit held it was not and that VA Benefits, being compulsory benefits under the Veterans' Benefits Act once eligibility is established, were properly offset under the "Compulsory Benefit Act or Law" section of the Plan's "Other Income Benefits" provision.
First Circuit Holds Decision to Deny Accidental Death and Dismemberment Benefits Not an Abuse of Discretion
In Arruda v. Zurich Am. Ins. Co., 951 F.3d 12, 13 (1st Cir. 2020), the First Circuit held that a claims administrator's decision to deny accidental death and dismemberment benefits was not an abuse of discretion where substantial evidence in the record indicated that the participant's pre-existing medical condition caused and/or contributed to the motor vehicle accident which led to his death.
The now-deceased Joseph Arruda ("decedent") was a covered participant in an ERISA-governed Plan established by his former employer, which provided basic life and accidental death and dismemberment ("AD&D") insurance benefits. The decedent's wife, Denise Arruda ("Arruda"), was the designated beneficiary for any death benefits.
On May 22, 2014, the decedent was driving to work when his car crossed all lanes of traffic, collided with an oncoming car, and rolled over. Decedent briefly survived the accident, but succumbed to his significant injuries and was pronounced dead at the scene.
Arruda submitted a claim for AD&D benefits to Zurich American Life Insurance Company ("Zurich"), the insurer and claims administrator for the Plan with discretionary authority "to determine eligibility for benefits and to construe the terms of the plan."
The Plan provided AD&D benefits "[i]f an Insured suffers a loss of life as a result of a Covered Injury." The Plan defined Covered Injury to mean "an Injury directly caused by accidental means which is independent of all other causes." The Plan, however, expressly excluded a Covered Loss that "is caused by, contributed to, or results from . . . illness or disease, regardless of how contracted, medical or surgical treatment of illness or disease; or complications following the surgical treatment of illness or disease . . . ."
Zurich obtained Decedent's medical records, which revealed that Decedent had a medical history related to heart disease, as well as several other conditions. About four months prior to the accident, the decedent had an implantable cardioverter defibrillator ("ICD") placed in his chest to monitor his heart rate and rhythm. The Chief Medical Examiner's report concluded that the primary cause of death was hypertensive heart disease, with contributing factors of an upper cervical spine fracture due to blunt impact. The death certificate also listed the primary cause of death as "hypertensive heart disease." The State Police report concluded that the decedent "had suffered a catastrophic medical event which caused him to be unable to control his vehicle."
Two independent medical doctors retained by Zurich reviewed the records and concluded that the decedent's heart condition caused or contributed to his losing control of his vehicle and the fatal crash.
Based on all this information, Zurich denied Arruda's claim stating, first, that the decedent's death was not "independent of all other causes," and second, that the death was excluded from coverage because it was "caused by, contributed to, or results from" an "illness or disease."
Arruda submitted an appeal and the opinion of her own medical expert that the decedent did not experience "a natural death at the wheel" as he was briefly alive after the accident; the decedent's death was due to neck injuries and blunt force trauma; the "exact reason [decedent] traveled across several traffic lanes and into the other vehicle is unclear"; and that the ICD "showed no abnormal heart rhythms recorded prior to the collision."
Zurich retained a third independent medical expert who ruled out several other possible causes of decedent's loss of control of the vehicle and opined that the "accident was caused by several possible pre-existing illnesses or diseases, singly or in combination," including, but not limited to, the decedent's "cardiac arrhythmia resulting from pre-existing heart disease."
Arruda filed a lawsuit seeking benefits under 29 U.S.C. 1132 (a)(1)(B). The district court entered summary judgment in Arruda's favor. The First Circuit reversed.
The First Circuit found that evidence and reports in the record "were all consistent that [decedent's] crash was caused, at least in part, or was contributed to by his pre-existing medical conditions." The court further found that the contrary opinions of Arruda's expert did not render Zurich's decision arbitrary or capricious.
Finally, the First Circuit held that Zurich's interpretation of the Plan language was reasonable. While the court noted that other circuits—namely the Fourth and Ninth Circuits—have chosen to adopt a "substantial factor" test to aid their interpretation of whether a pre-existing illness cause or "contributed to" a covered loss under an insurance policy, because the standard of review was for discretionary, the court found the substantial factor test to be "in tension with our circuit law on the abuse of discretion test." In that regard, the court noted that under the abuse of discretion standard of review, the courts do not determine "best reading" of the ERISA plan, but rather whether the administrator's interpretation was reasonable.
New York Court Rejects Claim that Health Insurer Violated the Parity Act
In Julie L. v. Excellus Health Plan, Inc., 2020 U.S. Dist. LEXIS 47734 (W.D.N.Y. March 19, 2020), a New York district court rejected the plaintiff's claims that a health insurer improperly imposed stricter medical necessity requirements for treatment at residential mental health centers than for stays at inpatient skilled nursing facilities.
The case arose under the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act (the "Parity Act") (29 U.S. C. § 1185a), which seeks to eliminate disparities in health insurance coverage for mental health as compared to other medical or surgical conditions. The Parity Act requires group health plans to provide the same aggregate benefits for mental healthcare and substance abuse treatment as they do for medical and surgical benefits.
The Parity Act technically amended ERISA, and is enforced by seeking equitable relief through 29 U.S.C. § 1132(a)(3).
In recent years, several claimants have alleged that plans violated the Parity Act by applying more stringent medical necessity criteria when evaluating claims for mental health/substance abuse treatments than they would for medical/surgical treatments. A cluster of recent lawsuits has alleged that plans denied benefits for intermediate level treatment at residential mental health treatment facilities based on criteria that applies to acute-level medical care, and further, that the plans would not apply those same standards when evaluating coverage for subacute treatment in the medical/surgical context.
That was the case in Julie L., where the plaintiff's parents sued a group health plan (the "Plan") on behalf of their minor child, who had a history of mental health problems, after the plan denied coverage for her treatment at two wilderness therapy programs in Idaho. The parents alleged, inter alia, that the Plan covered skilled nursing facilities in the medical context for "subacute" symptoms, but in the mental health context the Plan covered analogous residential treatment facilities only for more serious "acute" symptoms—often involving the serious risk of harm to self or others—in violation of the Parity Act.
The court disagreed that the Plan imposed stricter requirements for residential mental health treatment. In so holding, the court analyzed the specific Plan language and noted that it required all benefits to be "medically necessary," and further, it imposed the same set of medical necessity criteria to both mental health residential treatment programs and skilled nursing facilities. Critical to the coverage determination for both was whether the patient's symptoms could be treated in a less intensive setting.
In addition, the court noted that the Plan imposed neutral requirements for the types of mental health and skilled nursing facilities that would be covered. Residential treatment facilities must be defined under New York's Mental Hygiene Law, while skilled nursing facilities must be accredited by a national accrediting agency or Medicare.
"In light of the above, there is no evidence that the Plan, on its face, imposes more stringent requirements on admission to residential treatment facilities in comparison to [skilled nursing facilities]," the court concluded in granting the Plan's motion for summary judgment.
The Julie L. case demonstrates that Parity Ac
