McKean Evans

Ninth Circuit Establishes Pro-Employee Test for Releasing ERISA Rights

The Ninth Circuit Court of Appeals recently decided the question of whether and how employees can be induced to give up their right to sue under ERISA.

In Schuman v. Microchip Technology, Inc., the Ninth Circuit (the court that hears appeals from federal trial courts in Washington and the west coast) reversed the trial court’s dismissal of ERISA claims by two employees who participated in the defendant’s ERISA plan.

The ERISA plan was unusual. Most employees who participate in ERISA plans receive what we think of as the “normal” benefits of employment: health insurance, disability or life insurance, etc.

The Plan in Schuman was created especially for the purpose of providing severance benefits to employees who might be laid off following an anticipated merger. One employer was about to merge with another, and wanted to offer the understandably anxious employees some reassurance about their job security. If an employee was deemed redundant after the merger, they would receive severance benefits from the ERISA plan.

Or so the employees thought. Unsurprisingly, this became a point of contention when the merger was consummated and layoffs ensued without the promised severance.

Schuman was fired without cause by the new employer shortly after the merger. Like most layoffs, Schuman’s involved an offer of some cash (much less than the ERISA plan had promised) in exchange for signing a standard severance agreement releasing all of Schuman’s claims against the company.

Critically, the employer told Schuman and others that the benefits promised under the ERISA plan were no longer available, claiming the plan had “expired.” Confronted with this all-or-nothing proposition, Schuman signed the release.

Schuman and other employees later filed a class action lawsuit. They alleged that the employers violated ERISA by, basically, lying to them about the availability of severance benefits under the ERISA plan to induce them to sign a release that gave up those benefits in favor of substantially smaller severance payments. The lawsuit sought benefits under the ERISA plan for severance. It also sought to void the releases signed by Schuman and other workers.

The trial court held the releases were valid. It dismissed the lawsuit.

The Ninth Circuit reversed. First, the appellate court established the test for whether an ERISA plan participant’s release of claims is valid.

Such a release, the court said, is valid only if it survives “special scrutiny.” That is because Congress enacted ERISA for the special purpose of protecting employees’ benefits. Employers are “fiduciaries” under ERISA. They have to put the interests of their plan participants first.

The appellate court therefore stated that the test for whether a release of claims under an ERISA plan is valid depends on the “totality of the circumstances” including, importantly, whether the company that procured the release is accused of improper conduct. The court listed the circumstances that should be considered as part of this decision, including the employee’s sophistication and knowledge of their rights, how the payment for the release compares to the value of the benefits the employee is giving up by signing, and whether the employer improperly induced the employee to sign.

Having formulated this test, the Ninth Circuit sent the case back to the lower court to apply it.

This recognizes the reality that allowing employers to seduce their workers into signing away their rights under the employer’s ERISA plan is like letting the fox guard the henhouse. The Ninth Circuit’s test helps ensure that employers cannot deceive their workers into releasing claims under the statute designed to protect them from just this sort of manipulation.

Health Plan Must Pay For Child’s Medically Necessary Mental Health Treatment, Says Ninth Circuit

Health insurance coverage for mental health treatment is contentious. Insurers historically resist covering these diganoses. Their treatment can be expensive and protracted. Legislation here in Washington State and federally has tried to push back on this, but the problem of getting insurers to cover mental health treatment remains.

A recent Washington Supreme Court ruling compounded the problem by limiting claimants’ ability to rely on legislation that was intended to improve access to coverage for mental health treatment. There’s still a lot of work to be done legislatively to give people tangible, systemic protections for mental health coverage.

Until that happens, most people faced with their health plan’s denial of critical mental health treatment will have no choice but to go to court. That’s what happened to the family of a nine-year-old child known in court filings as “R.C.” (Court filings typically use initials, rather than full names, in cases involving minor children in order to protect the family’s privacy).

In a May 14, 2025 decision, the Ninth Circuit Court of Appeals upheld R.C.’s success in a lawsuit against his health insurance plan.

R.C.’s parents sued their health plan after it denied coverage for his residential mental health treatment. R.C. had serious behavioral health problems. He threatened to hurt or kill others. He wielded objects like weapons. It’s easy to imagine that his parents wanted to provide him with effective treatment.

But the health plan claimed residential treatment wasn’t “medically necessary.” The court had two problems with this claim.

First, the court found that the treatment was “medically necessary” under the health plan’s own criteria. This boiled down to the plan’s claim that R.C. wasn’t a danger to himself or others. The court listed examples, including: stabbing his own mouth, threatening to kill other children, describing in detail how he intended to use household objects to murder others, and starting fistfights.

Second, the court found that the health plan failed to tell R.C.’s parents what they had to prove in order for the plan to cover residential treatment. Before the court, the plan claimed that R.C.’s parents failed to prove that outpatient treatment had been tried and failed, but the plan never told R.C.’s parents that this was a requirement when it was handling the claim.

In other words, the plan’s denial was wrong on the merits (R.C.’s treatment really was medically necessary) and procedurally unfair (the plan didn’t give the parents a fair shake at proving the treatment was needed). So the parents won. The health plan will have to pay for R.C.’s treatment. That’s a win, right?

Not exactly. The tail of the Ninth Circuit’s ruling declined to award R.C.’s parents any relief beyond the belated reimbursement for his treatment. The court ruled that R.C. could not force the plan to change its practices to make sure that the erroneous denial of benefits wasn’t repeated with other people with similar health claims.

This underscores the systemic problem. It took R.C.’s parents almost five years to get this ruling. During that time, they presumably had to pay for R.C.’s treatment out of pocket. And they had to hire lawyers and deal with the emotional rollercoaster of litigation. They received no compensation for this. It’s easy to imagine that many people with health insurance claims won’t have that kind of time or resources.

Unfortunately, absent sytemic reform, health insurance plans will remain incentivized to wrongfully deny claims with little reprecussion.

Washington Court of Appeals Enforces Insurance Protections for Domestic Violence Victims

Since 1998, Washington State has had legislation on the books protecting the rights of domestic violence victims when it comes to insurance. Among other things, the law prohibits insurers from excluding coverage for losses based on intentional or fraudulent acts that result from domestic violence. Intentional acts exclusions are common in insurance.

For example, most homeowner’s insurance would be unlikely to cover a fire intentionally started by the insured. Given the interpersonal dynamic of domestic abuse, restricting the insurance company’s ability to exclude losses from coverage because they arose from an abusive family member’s actions is necessary to prevent domestic abuse from becoming an unfair limitation on insurance coverage.

Washington’s Court of Appeals applied this law in its September 3, 2024 ruling in Welch v. PEMCO Mutual Insurance Company.

In that case, Welch had been married to her husband Morgan and owned a home together. When they divorced, the court awarded the family home to Morgan and the two shared custody of their child.

After the divorce, Morgan attacked Welch when she arrived at the family home to collect their child. During the attack, Morgan set the home on fire. The house was destroyed. A jury later found Morgan guilty of attempted murder and arson.

Welch still owned part of the home at the time of the attack because the couple was still in the process of untangling their assets following the divorce. The home was covered under property insurance issued by PEMCO. Welch and Morgan were both named as insureds.

PEMCO denied coverage. It pointed to the insurance policy’s exclusion for any loss caused by intentional acts, which included Morgan’s arson.

As required by law, the insurance policy stated that the intentional acts exclusion did not apply to losses resulting from acts of domestic violence by family members. But PEMCO claimed that this did not apply. Since Welch and Morgan had been divorced, they were no longer married and not “family.” (The legislature has since amended the law to provide that domestic violence among any intimate partner cannot be excluded from insurance coverage by “intentional acts” exclusions).

The Court of Appeals ruled for Welch. It agreed that the historical definition of “family” did not apply. Welch and Morgan were divorced, and Welch lived with a new partner at the time of the attack.

But the court held that the more modern definition of “family” was more appropriate. Recognizing changing times, modern dictionaries define “family” to include two parents rearing children together even if not married.

Under that definition, the court had little trouble determining that the rule limiting insurance exclusions for domestic violence victims applied, and that PEMCO could not exclude the loss.

The ruling is “unpublished,” meaning it is not binding precedent. But it is a good illustration of the impact of Washington State’s protections for insurance policyholders who are victims of domestic violence.

Washington Court of Appeals Emphasizes Distinction Between “Replacement Cost” and “Actual Cash Value” in Homeowners’ Insurance Coverage

Fine print is tedious, but it matters. That’s the takeaway from the Washington Court of Appeals July 30, 2024 ruling in McKay v. PEMCO Mutual Insurance Company.

We’ve blogged before about the distinction between “actual cash value” and “replacement cost” coverage. These are two types of coverage that basically decide when and how much you get reimbursed if your house is damaged.

The distinction has to do with how you define value. Let’s say your house burns down and your insurance policy says the insurance company will reimburse you for the home’s value. What was it worth? What does “value” mean? This is the kind of question generally pondered only by philosophy undergraduates and insurance lawyers.

One perspective is: “things are worth whatever someone would pay for them.” Under this theory, your house is worth whatever you could have sold it for on the open market the day before it burned down. This (basically) is “actual cash value.”

Here’s another way to look at it: “a thing is worth whatever you’d pay to get a new one.” Under this theory, your house is worth what it would cost to rebuild it. This (basically) is “replacement cost.”

The difference matters in a big way. As anyone who’s tried to hire a contractor in the last few years knows, building new is almost always going to cost more than what you could list the property for on the open market.

So, the difference between “replacement cost” and “actual cash value” becomes pretty relevant as soon as your house gets damaged and you need to make an insurance claim.

Back to McKay: Tina McKay’s house caught fire. Luckily, she had homeowner’s insurance. It would pay the full “replacement cost.”

But, like most homeowners’ insurance, the policy said McKay had to fix the damage from the fire before the insurance company was responsible for paying the replacement cost. (This makes sense, from a certain point of view, because how would we know what it cost to replace the home until the owner hires a contractor who completes the work and presents the final bill?).

Before the insured rebuilt the home, the insurance policy stated PEMCO would pay only the “actual cash value.” When PEMCO paid that amount, it did not reimburse McKay for the full amount of sales tax on the cost to restore the home and replace her belongings.

McKay sued. She alleged that sales tax should be included in the “actual cash value” even if she never collected the “replacement cost.” She relied on a Washington Supreme Court case from 2010 finding that insurers must pay the full cost of sales tax on the cost to repair a home after a loss.

The Court of Appeals saw it differently. It agreed with McKay that the 2010 Supreme Court case entitled her to be reimbursed for the full sales tax in the abstract.

But the court ruled that McKay couldn’t recover the full sales tax amount until she completed restoration and collected the “replacement cost.” The court reasoned that “actual cash value” is the equivalent of fair market value for used goods or property, and that, when you buy used goods, you pay sales tax on the secondhand price rather than the price you would have paid to buy new.

This case is a good example of how fine print and abstract ideas about the meaning of “value” can have a real-world impact for insurance coverage.

Washington Supreme Court Emphasizes Power of Ensuing Loss Clauses to Preserve Insurance Coverage

The Washington Supreme Court recently upheld a broad reading of so-called “ensuing loss” insurance policy language in The Gardens Condominium v. Farmers Insurance Exchange.

In that case, Farmers sold an insurance policy to The Gardens Condominium. The policy covered any direct physical loss to the condominium building.

This type of coverage is common. It’s known as “all-risk” coverage. All-risk insurance covers basically any loss that isn’t excluded. This puts the onus on the insurance company to draft specific exclusions for losses they don’t want to cover.

In the insurance policy it sold to Gardens, Farmers included some exclusions but went a step further. It added a provision that losses caused by an excluded cause of loss are excluded even if they set off a chain of events that results in a covered cause of loss. In other words, if any exclusion played any role in the loss at all, the entire loss would not be covered.

The Gardens’ insurance policy also included an “ensuing loss clause.” This is another common insurance policy term. It provides that if an excluded event caused a covered cause of loss, that loss (i.e., the ensuing loss) would be covered.

In Gardens’ case, that ensuing loss clause applied specifically to an exclusion for “faulty workmanship.” Thus, the policy said that losses caused by faulty workmanship wouldn’t be covered; but if faulty workmanship led to another covered cause of loss, that loss would be covered.

Why did this matter? It spelled the difference between coverage or no coverage for a huge loss.

In 2019, Gardens discovered damage to its building. The roof was built without proper venting. This allowed water to condense inside the roof.

Over time, that water did extensive damage to the structure. Gardens made a claim under its Farmers insurance policy.

Farmers denied the claim. It determined the faulty workmanship exclusion applied.

Gardens filed suit. It argued that the cause of the loss was the condensation, not the faulty roof directly. Condensation was a covered cause of loss.

Thus, while acknowledging that there would be no coverage for replacing the faulty roof itself because of the exclusion, Gardens asserted that the ensuing loss clause meant there was covered for the damaged caused by the condensation.

The case made its way up to the Washington Supreme Court. The court acknowledged that neither party disputed the faulty workmanship exclusion applied. The only question was whether the ensuing loss clause provided coverage as an exception to that exclusion.

The court held that it did. Farmers argued that there was no real ensuing loss. It characterized the condensation as a natural consequence of the faulty workmanship of the roof; not its own separate cause of loss.

The court disagreed. It held that Farmers’ reasoning would render the ensuing loss clause meaningless. The whole point of that clause, said the court, is to provide coverage for secondary consequences of an excluded loss.

Emphasizing that Farmers could have chosen to sell the insurance policy without the ensuing loss clause, the court stated that it would not re-write the policy after the fact.

This case is a good reminder of the strength Washington law gives to coverage language in insurance policies. Insurers selling all-risk coverage must carefully draft exclusions for specific events they don’t want to cover.