McKean Evans

Court of Appeals Clarifies Policy Causation Language In Favor Of The Insured

When language in one part of your ERISA policy says your claim is covered, can the company rely on language elsewhere in the policy to deny your claim? The Ninth Circuit Court of Appeals recently answered “no.” In Dowdy v. Metropolitan Life Ins. Co., the court ruled the conflicting language about what caused the insured’s loss did not preclude coverage.

Mr. Dowdy’s leg was amputated following a car crash. He made a claim under his ERISA-governed Accidental Death & Dismemberment insurance policy with MetLife, purchased through Mrs. Dowdy’s employer.

MetLife denied coverage, claiming the amputation was excluded because it was complicated by Mr. Dowdy’s diabetes. MetLife relied on language in the policy requiring the loss to be the “direct result of the accidental injury, independent of other causes,” and excluding injuries for losses related to “illness or infirmity” or “infection occurring in an external accidental wound.” Under this language, MetLife claimed the right to deny coverage for any amputation “contributed to” or “complicated by” diabetes.

The court ruled the language could be read two ways, but that the Dowdys prevailed under either interpretation. Under one interpretation, coverage existed if the injury was the “predominate or proximate cause,” while under the more stringent interpretation, coverage was barred as long as the excluded condition (diabetes) “substantially contributed” to the loss.

While agreeing diabetes was “a factor” in the injury leading to the amputation, the court determined there was no evidence diabetes “substantially” contributed to the injury. The court relied on definitions of “substantial” requiring “a significant magnitude of causation” demonstrating the diabetes was “more than merely related to the injury.”

Since Mr. Dowdy’s medical records established only that diabetes “complicated” Mr. Dowdy’s wound, the court determined diabetes did not “substantially” contribute to the injury. The car crash caused a severe injury that nearly severed Mr. Dowdy’s leg. The subsequent infection and wound issues were complicated by diabetes, but did not cause Mr. Dowdy’s amputation.

Because this type of language frequently appears in Accidental Death & Dismemberment policies as well as health and disability policies, the Dowdy ruling is helpful for many ERISA participants seeking coverage.

Insurance Coverage Uncertain for Hawaii Homeowners After Volcanic Eruption

Hawaii homeowners who incurred damage or lost their homes entirely now face uncertainty over whether their insurance will cover the damage. The Seattle Times recently interviewed several Hawaii residents who expressed concern over whether they will have any coverage. The eruption has so far destroyed about two dozen homes on Hawaii’s Big Island. Authorities reported about 20 cracks in the ground spewing toxic gas and lava as of Tuesday.

Sea-stacks on Cape Alava, near Ozette, Washington.

Few insurers write policies covering structures in the area because the U.S. Geological Survey classifies it as a high lava risk. Homeowners may have been able to obtain coverage through the Hawaii Property Insurance Association, a nonprofit insurance group created by the state government to fill the gap in coverage for people living in lava risk areas.

Even people living outside the affected areas are questioning whether their policy covers lava damage. While fire insurance policies may cover lava, homeowner’s policies often have explicit exclusions for lava damage.

This can lead to complex coverage questions: if lava causes a forest fire and the fire, not the lava, burns your house down, can the insurer deny payment based on a lava exclusion? In Washington, the answer’s probably not. Washington applies the “efficient proximate cause” rule that can ultimately require the company to cover a loss if the causal chain of events includes a covered loss, despite the involvement of an excluded cause.

Ultimately, insurance coverage issues will cause at-risk homeowners to suffer significant uncertainty in addition to existing concerns about natural disasters.

Can The Company Deny Your ERISA Claim “Because We Said So?”

Who decides whether a person’s entitled to coverage under an ERISA plan? Given ERISA gives plan participants the right to take the company to court to dispute coverage denials, you might think the judge decides. But the answer’s not that simple. Often, the insurer itself can decide whether you’re covered under the terms of the plan, and the judge in a lawsuit is not always allowed to tell the company it was wrong.

Most ERISA benefit plans contain language in which the plan gives itself (or the administrator it hires) unlimited discretion to decide who’s entitled to benefits. These are called “discretionary clauses.” For example, employer-sponsored health coverage might only cover surgery or prescriptions that are “medically necessary” and give the plan itself the unlimited right to decide what is “medically necessary.” These provisions effectively allow your insurance plan to decide you aren’t entitled to coverage “because we said so,” even if a judge decides the weight of the evidence shows you’re entitled to coverage.

That’s because the U.S. Supreme Court decided, in the Firestone Tire & Rubber Co. v. Bruch case, that “discretionary clauses” mean the judge in an ERISA lawsuit must defer to the company’s decision – even if the judge decides the company was wrong – unless the decision was so badly made that it was “arbitrary and capricious.” For instance, if the company decides the surgery your doctor recommended isn’t “medically necessary,” even though six physicians say you need the surgery and only one says it’s unnecessary, the court can’t say the company got it wrong. Where there’s a discretionary clause, the court can only disagree with the company’s decision if the company’s decision was not just wrong but “arbitrary and capricious.”

Surprising nobody, after the Firestone decision, every ERISA plan promptly added discretionary clauses making it easier for the company to deny claims.

Fortunately for plan participants, voters in many states, including Washington State, responded by enacting legislation prohibiting discretionary clauses.

The upshot is plan participants in states like Washington where discretionary clauses are unlawful have a significantly better chance at obtaining coverage for surgery, prescriptions, disability benefits or other ERISA-governed benefits because the company can’t deny claims simply “because we said so.”

How Will Insurance Cover Self-Driving Cars?

Self-driving vehicles are already on roads in several cities and are predicted to become normal in the next few decades. How will your insurance cover you if you’re the operator of a self-driving car? If someone else’s self-driving car injures you or damages your property, will the owner have coverage for your loss?

: The Badlands, South Dakota.

First, it may be a moot point because self-driving cars could reduce accidents to the point where the cost of insurance coverage becomes nominal or coverage becomes totally unnecessary. Preventable human error – texting, adjusting the radio, hasty lane changes, etc. – is estimated to cause 94% of all motor vehicle collisions. One industry forecast projected widespread adoption of autonomous vehicles would reduce premiums by 80% and lead to a $25 billion loss for insurers by 2035 as reduced accidents reduce the need for coverage.

On the other hand, while autonomous cars may reduce the need for liability and collision insurance, they may require new forms of insurance such as cyber security coverage. Even existing conventional cars can be hacked, and self-driving cars are likely to grow more and more vulnerable to electronic intrusion. Imagine if your car were susceptible to the same malware, ransomware or other abuse as your computer or phone. It may ultimately be necessary to procure cyber security coverage for your autonomous vehicle.

One possible answer is manufacturers may simply assume all liability associated with their autonomous vehicles. Google, Volvo, and Mercedes-Benz already assume liability any time one of their vehicle’s self-driving system is at fault for a collision. Tesla has its own insurance program for owners of Tesla self-driving vehicles.

Another suggestion is future drivers may not need insurance because they may not own their cars. Self-driving vehicles may lead to widespread reliance on car sharing services. Unlike Lyft or Uber which rely on human operators, self-driving ride-share vehicles could operate around the clock at a much lower cost, making it practical for urban drivers to rely entirely on ride-sharing for daily transportation. Future autonomous vehicle ride-sharing fleets would likely self-insure, as Google’s subsidiary Waymo intends to do when it launches its self-driving ride-share service in the coming months.

Whatever the result, self-driving cars will ultimately present some form of risk, and manufactures, drivers, municipalities and insurers will have to decide how to allocate that risk among themselves.

Why Won’t Your Government-Mandated Flood Insurance Pay Your Claims?

CBS’ recent investigation found the federal National Flood Insurance Program (“NFIP”), intended to benefit homeowners caught in flood disasters, actually winds up paying most of its money to help insurers avoid paying claims.

The problem is NFIP doesn’t pay flood victims directly. Instead, NFIP collects premiums and taxpayer dollars, then turns the money over to private insurers with minimal oversight. Exacerbating the problem is most homeowners living in federally-designated “flood plains” are legally required to purchase flood coverage (sometimes by the government, sometimes by their mortgage lender).

A 2016 federal oversight report found NFIP often pays insurers more than it pays the homeowners it’s supposed to benefit. The report called out one example in which NFIP paid an insurer over $87,000 to defend a claim worth a maximum of $25,000. The report noted some insurance defense attorneys ran up the bill by, for instance, insisting on live, in-person testimony (typically including legal fees, court reporter fees, travel expenses and a conference room) just to verify receipts. Another problem is NFIP will automatically pay, without scrutiny, any insurer defense “expert” expense as long as it falls below $2,500.

The report emphasized many of these problems plagued the victims of 2012 Superstorm Sandy, which caused extensive flooding in New Jersey and other Mid-Atlantic areas. One estimate suggested Superstorm Sandy flood claims were underpaid by at least $189 million.

Part of the problem is the NFIP is essentially a risk-free investment for participating insurers, because any shortfalls are backed by taxpayer money. But after huge losses following Hurricane Katrina, Congress started to investigate the NFIP’s losses and suggested shuttering the program. That gives insurers in more recent disasters like Superstorm Sandy a huge incentive to lowball claims, keep NFIP’s losses low, and lower the risk Congress acts to reform or deactivate NFIP.