Insurers’ Ability to Deny Claims “Because We Said So” Limited in Proposed Amendment to ERISA

One question that’s important in deciding an ERISA-governed insurance claim is: who decides? ERISA plans typically provide an employee or beneficiary receives a benefit under certain criteria. For instance, a health plan might provide for payment of medical bills if the treatment was “medically necessary,” a disability benefit plan might pay a portion of an employee’s wages if she can’t perform the “material and substantial” duties of her job, and so on.

Where a dispute arises over whether the plan should have paid these benefits, who decides whether these criteria are satisfied?

Since ERISA provides employees with a right to file a lawsuit in federal court to recover their benefits, you might assume the judge decides. But that’s often not the case.

A 1989 U.S. Supreme Court decision interpreted ERISA as allowing employee benefit plans to provide discretion to the plan’s decision-makers. This means that an employee benefit plan can empower itself or its agents with “discretion” to determine facts and interpret the terms of the plan. Where the plan’s decision-maker has discretion, federal courts often are not allowed to overrule them.

In other worse, these types of discretionary provisions in ERISA plans invite the decision-maker to deny claims for benefits based on little more than “because we said so.” And when the employee sues to get their benefits, the federal court is often not allowed to say that the decision-maker got their facts wrong or misread the benefit criteria. The judge can often do little more than send the case back to the same decision makers for another look.

Because many employee benefits are funded through an insurance policy, the person with this discretion is often an insurance company. Insurance companies, as the late Justice Scalia aptly observed, have a powerful incentive to abuse this discretion because they profit with every claim they reject.

New legislation was recently proposed to change this. The “Employee and Retiree Access to Justice Act of 2022” would amend ERISA to forbid this kind of “discretionary” language in ERISA plans. It would require insurers and other decision-makers who deny claims for benefits under ERISA plans to defend their decisions in court on the merits. They would no longer be able to point to their “discretion” and argue that the judge is forbidden from disagreeing with their decision.

WA Long Term Care Tax Not Preempted By ERISA, Says Federal Court

We previously blogged about the questions whether the Washington State Long Term Care Act is preempted by ERISA. On April 25, 2022, the U.S. District Court for the Western District of Washington dismissed a lawsuit challenging the law on the basis of, among other things, ERISA preemption. The federal court held the law is not preempted by ERISA.

Most Washingtonians are by now familiar with the Washington State Long Term Care Act. The law deducts a percentage of employees’ wages to pay for future state long-term care benefits. The question at issue in the lawsuit was whether this arrangement violates ERISA, which generally prevents states from regulating employee benefit plans.

The court ruled that it does not. The ruling emphasizes that ERISA applies only to benefits “established or maintained” by employers. But the law “is a creation of the Washington Legislature, which, in this context, is neither an employer nor an employee organization as defined by ERISA” according to the court.

After finding ERISA did not apply, the court remanded the case to the Washington State courts to decide the plaintiffs’ other challenges to the law because, with ERISA off the table, there was no basis for the lawsuit to be in federal court.

Don’t Assume All Employer-Adjacent Insurance is ERISA-governed, Says Ninth Circuit

There’s often an erroneous assumption that any insurance a person buys in connection with their employment is automatically subject to ERISA. But ERISA does not regulate all employer-adjacent insurance. ERISA only applies to employee benefit “plans.” Whether an ERISA “plan” exists can be complex, but without one, an insurance policy will not be subject to ERISA even if an employer was involved in its purchase.

A recent Ninth Circuit decision is a good reminder of this. In Steiglemann v. Symetra Life Ins. Co., the appellate court determined that an insurance policy purchased in connection with the plaintiff’s employment was not subject to ERISA because the requirements for an employee benefit “plan” were not met. The decision is unpublished, meaning it may be persuasive to lower courts but is not binding.

Jill Steiglemann bought a disability insurance policy from Symetra Life Insurance Company. She had access to the policy through her membership in a trade association for insurance agents. Her company paid for the insurance. The lower court held that the policy was part of an employee benefit plan and subject to ERISA.

The Ninth Circuit Court of Appeals reversed the lower court and held that the policy was not governed by ERISA. Even though Steiglemann’s employer arranged for the option for her to buy coverage and paid premiums, this was not enough to show the employer established an ERISA plan.

The employer never contracted to provide for coverage. It never promised to act as an administrator for the insurance. And it never took the steps necessary to maintain an ERISA plan, like recordkeeping and filing returns with the Department of Labor.

Steiglemann’s trade association also did not do the things necessary to create an ERISA plan. The association did not function for the main purpose of representing employees against their employer.

There was therefore no evidence that Steiglemann’s insurance policy was part of an employee benefit plan. And without a plan, the policy was not subject to ERISA.

This decision is a helpful reminder not to assume that ERISA applies to all employer-adjacent insurance.

Insurers Still Breaking Mental Health Coverage Rules Says Department of Labor

The 2022 report to Congress from the Department of Labor (DoL) on compliance by group health plans with the federal mental health parity laws identifies numerous instances of continued discrimination in coverage for treatment of mental health diagnoses.

Federal law generally prohibits insurers from discriminating against people who need coverage for treatment of mental health conditions. Basically, health insurers cannot have limitations that are more restrictive of treatment for a mental health condition than for other conditions. These rules have only become more important since the COVID-19 pandemic contributed to mental health issues for many Americans; for instance, the CDC noted a 30% increase of overdose deaths since the pandemic.

In large part for this reason, DoL has made enforcement of the mental health parity rules a priority in recent years. One new enforcement tool is a 2021 rule passed by Congress requiring health plans to provide DoL with a comparative analysis of treatment limitations for mental health conditions to help DoL ensure these practices follow the law.

DoL’s report identified many problems with health plans’ reporting about mental health parity. For instance:

  • Failure to document comparisons of treatment limitations for mental health limitations before implementing those limitations;
  • Lack of evidence or explanation for their assertions; and
  • Failure to identify the specific benefits affected by mental health limitations.

DoL also noted that enforcing these reporting rules had led to the removal of several widespread insurer practices that violated the mental health parity rules.

For example, one major insurer was found to routinely deny certain behavioral health treatment for children with Autism Spectrum Disorder. This resulted in denying early intervention that could have lifelong results for autistic children. DoL found over 18,000 insureds affected by this exclusion.

Another example involved the systemic denial of treatment used in combatting the opioid epidemic. New research has found that combining therapy with medication can be more effective for treating opioid addiction than medication alone. DoL found a large health plan excluded coverage for this therapy in violation of the mental health parity rules.

Other treatments DoL’s report identified as being denied on a widespread basis in violation of the law included counseling to treat eating disorders, drug testing to treat addiction, and burdensome pre-certification requirements for mental health benefits.

DoL’s report is a reminder that discrimination on the basis of mental health related disabilities remains a part of the insurance business despite years of federal legislation to the contrary.

Washington’s Strong Policy in Favor of Environmental Cleanup Leads Court to Void Insurance Settlements

Washington law generally bars insurers and policyholders from agreeing to cancel liability insurance retroactively after a claim. Liability insurance covers the policyholder for claims another person brings against them. The insurance company defends the policyholder against the third party in court and pays any judgment up to the policy limits.

The Washington Court of Appeals recently applied this rule in the context of Washington’s interest in environmental cleanup to void agreements settling insurance coverage for lumber mill pollution.

In Pope Resources v. Certain Underwriters at Lloyd’s, London, the Washington Court of Appeals considered ten different insurance policies covering a sawmill in Port Gamble, Washington. The mill operated since 1853 and was covered by numerous liability insurance policies. The mill was shut down due to severe environmental contamination in 1995. It is listed as a hazardous waste site by the Washington State Department of Ecology with an estimated $22 million price tag to clean up.

In 1997, the mill’s owner, Pope Resources, signed a contract with its corporate affiliate, Pope & Talbot, stating that Pope & Talbot would take responsibility for cleaning up the contamination. Pope & Talbot then filed suit against ten different insurance companies who had provided liability insurance for the mill, asking the court to find that the insurers had to cover the cleanup. The case resulted in ten different settlement agreements between Pope & Talbot and the ten insurance companies.

In 2015, Pope Resources filed its own lawsuit asking for cleanup costs from Pope & Talbot and the ten insurers. The lower court decided that the settlement agreements between Pope & Talbot and the insurance companies was void because the settlements retroactively canceled the liability insurance coverage that was supposed to cover claims against Pope & Talbot for the environmental damage.

The Court of Appeals found this decision was correct and affirmed the ruling. It first emphasized Washington’s significant interest in making sure that the contaminated sawmill was cleaned up. The state’s interested in fixing environmental contamination is “paramount” according to the court.

The court first found that this interest was critical to the insurance policies at issue because liability insurance often provides money to pay for the agonizingly expensive cleanup of industrial contamination.

Next, the court determined that the settlement agreements between Pope & Talbot and the ten insurance companies improperly let the insurers off the hook for the environmental contamination they had agreed to cover. This was true even though some settlement agreements only applied to the Port Gamble mill and did not nullify Pope & Talbot’s entire insurance policy. The court emphasized that the insurers were free to cancel or buy out Pope & Talbot’s coverage for future environmental damage. But they could not do so retroactively for contamination that had already happened.

The case is interesting because of its application of the strong public policy favoring environmental contamination. The ruling suggests that absent the prospect of leaving no funds to remediate the contaminated sawmill (i.e., leaving the residents of Port Gamble holding the bag) the result might have been different.