Court of Appeals Clarifies Standard for Determining Exhaustion of Primary Insurance Coverage in Long-Term Losses

A recent Washington Court of Appeals decision helps clear up the obligations of excess insurers for losses occurring over many years when multiple insurance policies were in effect. Many businesses have two layers of insurance: “primary” insurance, which pays for losses up to a certain dollar amount, and then “excess” insurance, which kicks in if losses are so great that the primary insurance coverage amount is exhausted before the insured is fully compensated for the loss.

But what happens where the loss occurs over a decade during which the insured had multiple different primary and excess insurance policies–does the insured need to exhaust its primary coverage in each policy year in order to access the excess coverage?

The Court of Appeals’ August 23, 2021 ruling in Gull Industries v. Granite State Insurance Company answered that question “no”. This was a lawsuit brought by a gas station operator, Gull Industries, against multiple insurance companies seeking coverage for environmental contamination caused at 200 gas stations over 50 years. The spillage occurred gradually in the normal course of running the gas stations: customers spilled gas while filling their cars, supply trucks spilled gas while filling up storage tanks, and storage tanks gradually seeped gas into the ground. The company faced liability for the environmental contamination including lawsuits at 24 sites and regulatory action at 19 sites.

A main issue in the case was when and if Gull’s excess insurer, Granite State Insurance Company, had to start paying for the environmental contamination. That depended on when Granite State’s primary insurance was considered to have been exhausted. Gull argued this should be viewed for each policy year individually; in other words, as soon as one policy year’s worth of primary coverage was exhausted, Granite State’s excess obligation kicked in regardless of whether there was primary coverage in other policy years.

Granite State disagreed, claiming that its excess coverage was not in play until all of the first level coverage in every policy year of the many decades of contamination was exhausted. The trial court agreed with Granite State. Gull appealed.

The Court of Appeals ruled that the trial court erred when it accepted Granite State’s argument that Gull had to exhaust its primary coverage in every year before Granite State had any excess insurance obligations. The court noted the absence of Washington State caselaw on this question. But it relied on a California Supreme Court ruling that decided the issue using the same rules of insurance policy interpretation applied in Washington State.

The California Supreme Court found that the most natural reading of similar insurance policy language means that the excess coverage kicks in whenever the primary coverage is exhausted in the same policy year, regardless of what happened in other coverage periods. The court also pointed out that requiring an insured to prove it exhausted primary coverage in multiple policy years creates unreasonable obstacles to an insured seeking coverage and undermine the insured’s reasonable expectations.

The Court of Appeals found this reasoning persuasive. It emphasized the importance of the reasonable expectations of the insured in interpreting insurance policies. It also noted that requiring the insured to prove it exhausted the primary limits of every policy period of a multi-decade loss would unreasonably require the insured to sue over coverage obligations of different primary policies that was not anticipated when it purchased the excess policy.

This ruling is a good reminder that Washington State courts will interpret insurance policies to give effect to reasonable expectations of coverage over impractical and overly technical readings of the policy fine print.

Department of Labor Sues United Healthcare for Violating ERISA and Mental Health Parity Law

The federal Department of Labor (DoL) has sued UnitedHealthCare for alleged discrimination against patients seeking mental health treatment. DoL contends that UnitedHealthCare, one of the country’s largest health insurers, systematically imposes illegal limitations on coverage for mental health and substance abuse disorder treatment. The August 11, 2021 lawsuit alleges these practices violate ERISA. DoL also asserts UnitedHealthCare is violating the Mental Health Parity Act, a federal law prohibiting discrimination against people with mental health conditions:

Basically, DoL alleges UnitedHealthCare did this in two different ways: (1) paying less for out-of-network mental health treatment than it pays for out-of-network medical and surgical care; and (2) singling out mental health treatment for a special “review program” that limited these benefits in a way that was not applied to similar non-mental health treatment. This is alleged to have happened as far back as 2013.

This isn’t the first time UnitedHealthCare has found itself in court over mental health coverage. A prior lawsuit by made similar allegations, resulting in a ruling that the insurance company had illegally discriminated against mental health patients through secret internal guidelines making it harder to access mental health treatment in order to boost corporate profits.

But the fact that these practices have drawn the ire of federal regulators is significant. DoL is charged with enforcing violations of ERISA. But most federal regulators lack the resources to pursue any but the worst and most systemic violations. DoL’s choice to pursue this particular suit suggests the agency considers these practices to be especially egregious, particularly given the company has already been sued by private insureds.

Hopefully, this signals a pattern of more proactive ERISA enforcement by regulators.

How do I know if the insurance policy I got through my employer is subject to ERISA?

ERISA governs most insurance employees receive through their employers. But there are exceptions. Determining whether insurance a person gets through their employer is governed by ERISA can be complicated.

This is important because whether ERISA applies to an insurance policy determines the insured’s rights and the insurer’s obligations. If ERISA applies, the insurer must follow specific rules requiring the insurer to promptly decide claims, fairly consider all the evidence, perform a reasonable investigation, and communicate transparently with the claimant. Similarly, ERISA imposes important duties on the claimant, including the obligation to go through the insurer’s informal administrative process before bringing a lawsuit to recover insurance benefits if a claim is denied.

In general, ERISA applies to insurance an employer provides for its employees through an employee benefit plan. Factors that might show the insurance is part of an ERISA plan include: the employer pays for the benefits, the employer investigates claims, the employer decides which claims to pay, or the employer requires all employees to participate.

But employers often arrange for their employees to obtain insurance outside of an ERISA plan. This exception to ERISA coverage exists because, in passing ERISA, Congress wanted employers to be free to offer their employees insurance without creating an ERISA plan and subjecting themselves to ERISA’s complicated rules. One of the goals of ERISA is to increase the benefits available to employees by making it easier to offer employees benefits.

Accordingly, ERISA allows employers to offer their employees attractive insurance coverage without making the insurance part of an ERISA plan as long as the employer limits its involvement in the policy. Congress reasoned that if the employer’s involvement is limited, ERISA’s concern with protecting employee benefits from employers’ mismanagement or embezzlement is not in play.

Insurance that falls within this exception often has these attributes:

  • the insurance is advertised separately from the employer’s benefit plan;
  • the employee pays for the insurance (often through deductions from their paycheck);
  • the employer leaves it up to the employee to decide whether to buy the insurance;
  • the employee can take the coverage with them when they leave the employer; and
  • the employer isn’t involved in claims under the policy.

As with everything insurance-related, whether ERISA applies to a particular policy is complicated and depends on the details. Consult a qualified attorney if you have questions about whether specific benefits are governed by ERISA.

ERISA Plan Administrators Can Be Sued Under State Law Where Performing Non-Fiduciary Functions Says Ninth Circuit

Suppose a person is ready to retire but wants to make sure they’ll be financially secure in their retirement before they stop working. Calculating their pension benefits is confusing and arcane. Luckily, their employer’s pension plan website has a benefit calculator. This person plugs in their information and is told they’ll receive $2,000 a month in pension benefits if they retire tomorrow. They retire, depending on this income, only to be told later that the website was faulty and they’ll only receive $800 a month.

Does our hypothetical retiree have recourse when the rug is pulled out from under them like this? Yes, according to the Ninth Circuit Court of Appeals (the federal appellate court with jurisdiction over Washington and other Western states).

In Bafford v. Northrop Grumman Corporation, et al, the Ninth Circuit recently ruled that employees harmed by misrepresentations about their benefits have relief under state law even when ERISA provides no recourse.

Bafford worked for Northrop Grumman and participated in Northrop’s pension plan. Anticipating retirement, he requested pension benefit estimates from the pension plan’s website. The website was run by a third party company named Hewitt, who had been hired by the pension plan to perform administrative services.

Hewitt sent Bafford statements representing he would receive about $2,000 per month in retirement benefits. After he retired and began receiving monthly benefits, Hewitt discovered it had made a mistake in calculating the $2,000 monthly amount. Hewitt notified Bafford that his benefits were really only about $800 per month.

Bafford sued Hewitt, Northrop, and other entities involved in the mistake, asserting several different legal theories. The federal District Court dismissed the entire action, and Bafford appealed.

The Ninth Circuit reversed the District Court and ruled that Bafford had at least some recourse for Hewitt’s misstatement of the amount of his retirement benefits. The Ninth Circuit looked at Bafford’s claims under two different avenues: first, whether Bafford could sue under ERISA, and, second, whether he could sue under state law.

The Court of Appeals found that ERISA provided Bafford no relief. Bafford could not bring ERISA claims against Northrop, Hewitt and the other entities involved in administering the benefit plan because they were not acting as “fiduciaries” under ERISA. An ERISA “fiduciary” owes a serious duty to employees participating in the benefit plan, and has to keep the employee/participants’ interests upmost in mind when making decisions about the benefit plan. But the court found that Northrop, Hewitt, and their associates were not acting as “fiduciaries” as ERISA uses that term; they merely applied benefit calculation formulas without exercising any discretion. In other words, they acted as little more than calculators.

But the appellate court found that state law provided Bafford relief. ERISA normally pre-empts state laws regarding employee benefits, meaning employees typically cannot bring state law claims in disputes about pensions and other benefits. But having determined that ERISA provided Bafford no relief from pension calculation errors that harmed him and were clearly the Plan’s fault, the Ninth Circuit found that the normal pre-emption rule did not apply:

Holding both that Hewitt’s calculations were not a fiduciary function and that state-law claims are preempted would deprive Plaintiffs of a remedy for the wrong they allege without examination of the merits of their claim. Broadly, this would be inconsistent with ERISA’s purpose.

Since Hewitt’s calculation of Bafford’s benefits was not a fiduciary function under ERISA, he was allowed to seek relief under state law.

Washington State Insurance News Roundup: Credit Scores, Surprise Medical Billing, and Vaccines

Washington State’s Office of the Insurance Commissioner (“OIC”) has had a busy March. The OIC, Washington State’s regulator responsible for overseeing insurance sold in Washington, issued several orders regarding discriminatory insurance pricing and the COVID pandemic.

First, the OIC banned insurers from using credit scores to price insurance. The insurance commissioner found the ban necessary to prevent discriminatory pricing in auto, renters, and homeowners insurance. Using credit scores to price insurance has been criticized as discriminatory because the practice results in low-income policyholders and people of color paying more for insurance. Auto insurance companies, for example, charge good drivers with low credit scores nearly 80% more for state-mandated auto coverage. This practice is anticipated to become even more egregious as COVID emergency protections expire this year, causing people who experienced financial hardship due to the pandemic to pay more for insurance merely because their credit scores have dropped. The insurance commissioner acted after legislation banning credit scores in insurance pricing failed to advance through the Washington State legislature.

Second, OIC extended certain emergency orders regarding COVID. These orders require health insurance companies to waive cost-sharing and protect consumers from surprise bills for COVID testing. The orders also require insurers to allow out-of-network providers to treat or test for COVID if the insurer lacks sufficient in-network providers. These orders were originally entered last year and are now extended to April 18, 2021. OIC also extended the requirement that insurers cover telehealth services.

Third, OIC responded to COVID vaccine misinformation. False reports have percolated that getting the COVID vaccine can void life insurance coverage or affect premiums or benefits. The OIC clarified that COVID vaccination will not harm your insurance eligibility.

Lastly, OIC gave an update on the effect of the American Rescue Plan Act on health insurance premiums for policies purchased on the Exchange (a/k/a “Obamacare” policies). OIC explained that the revisions in the new law reduces the percentage of income that people must pay for health coverage on an Exchange policy. The new law also increases subsidies for people receiving unemployment benefits and covers COBRA premiums for people who lost their job but want to keep their employer-sponsored coverage.