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.

Ninth Circuit Confirms ERISA Plans Cannot Assert New Rationales for Denying Benefits After They Get Sued

I’ve previously blogged about cases in which insurers were limited from raising new reasons to deny coverage after the fact. Whether an insurer can do so is a complex question that depends on the facts of the specific case. It also depends on what law applies. A recent ruling from the Ninth Circuit Court of Appeals confirms that, if ERISA applies, the rule is clear: ERISA-governed benefit plans cannot raise new reasons for denying benefits after they get sued.

In Beverly Oaks v. Blue Cross & Blue Shield, doctors at the Beverly Oaks clinic sued Blue Cross & Blue Shield (BCBS) claiming that BCBS should have paid for the treatment of certain patients of the clinic who had health insurance coverage from BCBS under their ERISA plans. The doctors relied on agreements the patients signed promising that the doctors could sue the insurance plan directly to pay their treatment bills. These agreements are known as an “assignment of benefits.’

No one disputed that the ERISA plans at issue banned the patients from signing the “assignment of benefits” forms. The plan documents repeatedly stated that benefits could not be assigned to third parties like the doctors.

But BCBS failed to invoke the assignment ban in response to the doctors’ claims. Instead, BCBS processed the claims on the merits, mostly denying them for reasons unrelated to the assignment of benefits. At the end of the day, BCBS paid the doctors only $130,000 out of $1.4 million in medical bills.

BCBS raised the ban on assigning benefits only after the doctors filed a lawsuit under ERISA seeking to overturn BCBS’ denial of the claims on the merits. BCBS told the federal District Court that the doctors had no right to sue on behalf of their patients because the assignment of benefits agreements were not allowed under the terms of the ERISA plans. The District Court agreed and dismissed the case.

But the Ninth Circuit reversed and allowed the doctors’ suit to proceed. That court emphasized that ERISA requires employee benefit plans (including their agents like BCBS) to state all of the reasons for denying a claim in the first instance. Allowing plan administrators to keep arguments for denying claims in their proverbial “back pockets” until litigation invites abuses and cuts against claimants’ right to respond to the basis for any claim denials:

“ERISA and its implementing regulations are undermined where plan administrators have available sufficient information to assert a basis for denial of benefits, but choose to hold that basis in reserve rather than communicate it to the beneficiary.”

The Court of Appeals also relied on the fact that BCBS representatives repeatedly told the doctors that they could seek reimbursement for medical bills on their patients’ behalf–before the doctors provided treatment–without mentioning the ban on assignments of benefits.

Bicyclists Covered Under Insurance Policies That Cover “Pedestrians” Says Washington Supreme Court

Technical terms in the fine print of an insurance policy are often critical to understanding the insured’s rights. These terms often have definitions that differ from the normal dictionary definition. In one case, for instance, a court ruled that school busses are not automobiles under a particular insurance policy. The recent ruling in McLaughlin v. Travelers Commercial Insurance Company is such a case.

In McLaughlin, the Washington State Supreme Court ruled that a bicyclist was a “pedestrian” under McLaughlin’s insurance policy. McLaughlin was riding his bicycle in downtown Seattle when a motorist opened the door of a parked vehicle and hit McLaughlin. McLaughlin made a claim under his Travelers car insurance policy. The policy provided benefits if McLaughlin was struck by a vehicle “as a pedestrian.”

Travelers denied coverage. It argued that McLaughlin was not a “pedestrian” because he was riding his bike. The lower courts agreed with Travelers, relying on the dictionary definition of “pedestrian” as excluding bicyclists.

The Washington State Supreme Court held that McLaughlin had coverage. The court relied on an insurance statute in which the Washington legislature defined a “pedestrian” as any person “not occupying a motor vehicle…” Since McLaughlin was riding a bike and not a motor vehicle when he was injured, he was a “pedestrian”.

The court emphasized that the relevant statutes are read into insurance contracts automatically. Because the legislature has the power to regulate insurance, a valid statute becomes part of the insurance policy. The statutory definition of “pedestrian” therefore became a part of McLaughlin’s insurance policy just as if Travelers had copied the statute into the policy documents.

This conclusion was reinforced by traditional insurance law principles that insurance policy language should be read consistent with the expectations of the average insurance purchaser. The court had no trouble concluding that the average person buying this MedPay coverage would expect to be covered when injured by a car.

Another twist is that the Court applied Washington law even though McLaughlin bought the policy in California. Because he had moved to Washington, the Court determined that he was entitled to all the protections of Washington law. Washington courts have a long history of applying Washington law to any insurance policy protecting a Washington resident.

In sum, the McLaughlin case is a strong reminder that Washington State’s insurance laws and regulations will be enforced regardless of the insurance policy fine print.