Category: Can They Do That?

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.

WA Appeals Court Confirms Insurers Can’t Make Coverage Denials A Moving Target

Insurers who deny coverage on an unreasonable basis and get sued by their insureds often try to retroactively change their basis for denying coverage. A recent Washington Court of Appeals decision illustrates why this strategy typically fails.

Nathaniel and Jennifer Cummings owned a home in Western Washington that they rented out. The Cummings purchased homeowners insurance for the property from USAA and continued to rent out the property. Because they lived out of state, the Cummings hired a property manager to handle leasing out the property.

In 2017, the Cummings discovered serious damage and an odd smell left behind when the most recent tenants vacated the property. These issues made it harder for the Cummings’ to sell the property. The Cummings suspected the damage was due to tenants producing methamphetamine in the property.

The Cummings made a claim with USAA and advised that they suspected their property manager had failed to effectively handle the tenants. The only investigation USAA performed was obtaining testing confirming methamphetamine residue in the property, but at levels below the Washington State limits for remediation. The Cummings told USAA they wanted to remediate the methamphetamine contamination anyway because even a small amount of contamination would make it harder to sell the property.

USAA denied the claim. The sole reason it gave was that the policy excluded damage from “pollutants.”

The Cummings filed suit and argued the loss was covered under the USAA insurance policy because the tenants’ meth operation was an act of vandalism. USAA defended its decision to deny coverage by raising new arguments not previously disclosed. It claimed the Cummings violated the policy by failing to disclose the tenants’ use of the property and that the methamphetamine contamination levels were too low to count as vandalism. USAA abandoned its initial reason for denying coverage.

The Cummings argued USAA could not raise new grounds for denying coverage in the lawsuit. The trial court agreed with USAA and dismissed the lawsuit. The Cummings appealed.

The Washington Court of Appeals reversed. Siding with the Cummings, the appellate court agreed that USAA could not raise new justifications for denying the claim after the Cummings filed suit.

The court applied the legal principle of equitable estoppel and relied on Washington State regulations requiring that insurers explain their basis for denying a claim. While insurers can modify the basis for denying coverage when they receive new information as part of a reasonable investigation, insurers cannot raise new grounds for denying coverage after the insured shows that the initial basis given for denying coverage is wrong where they could reasonably have given that bases in the original denial.

The Court of Appeals also agreed with the Cummings that the loss was covered under the policy’s vandalism coverages. The court applied the traditional rule that, where a loss occurs due to multiple causes, and one cause is covered while other causes are excluded, the policy covers whichever cause is the main reason for the damage. The court determined that a reasonable jury could find that the meth contamination qualified as vandalism and hence that USAA should have covered the loss. The appeals court determined the Cummings had the right to challenge USAA’s denial of their claim and sent the case back down to the lower court for trial.

The decision is unpublished, meaning it is not binding precedent, but serves as a good reminder that Washington law frowns on insurers’ efforts to retroactively change their basis for denying coverage after they get caught denying coverage without a reasonable basis.

Ninth Circuit Reiterates Insurers Can’t Re-Write Policies to Justify Denying Coverage

As we’ve often observed, insurance policy fine print matters. Insurers can only deny claims if the policy language excludes the claim from coverage. A recent decision from our local federal appeals court confirms insurers cannot re-write the policy after the fact to support denying coverage.

On February 18, 2020, the Ninth Circuit Court of Appeals, the federal appeals court with jurisdiction over Washington State, decided National Union Fire Insurance Company of Pittsburgh, PA v. Zillow, Inc. The court ruled Zillow could proceed with a lawsuit alleging its insurer improperly denied coverage for a lawsuit against Zillow for copyright infringement. The decision is unpublished, so it can be cited for persuasive value but lower courts are not required to follow the ruling.

The insurance claim arose because Zillow was sued for copyright infringement by VHT, Inc. Zillow made a claim under its professional liability insurance policy issued by National Union Fire Insurance Company.

The insurance policy only covered claims that were first made against Zillow during a specific time period (the “policy period”). VHT sued Zillow during the policy period. But, before the policy period began, VHT had sent Zillow a letter threatening to sue Zillow for the same copyright infringement alleged in the lawsuit. Accordingly, National Union argued there was no coverage because the claims alleged in the VHT lawsuit had been raised before the policy period.

The trial court agreed with VHT and ruled Zillow had no coverage for the VHT suit under its insurance policy. But the Ninth Circuit reversed, ruling the insurer should not have been allowed to stretch the policy language to support denying coverage.

The court of appeals examined the insurance policy language closely. For purposes of deciding whether a claim occurred during the policy period, the policy defined a “claim” as either a lawsuit or a demand letter. Since the VHT lawsuit was obviously a lawsuit, the court had no trouble deciding that the lawsuit was a claim arising during the policy period.

The court did not buy the insurer’s argument that VHT’s demand letter and VHT’s lawsuit should be treated as a single claim. The court emphasized that National Union could have added language to this effect to the insurance policy, but chose not to:

“[U]nlike a number of other claims-first-made policies cited by both parties, the Policy does not contain a provision expressly providing for the integration of factually related Claims. Had National Union wanted factually similar Claims to be integrated under the Policy’s coverage provision, it could have easily drafted the Policy to include such a requirement.”

The Ninth Circuit also emphasized that insurance policies must be read as they are written, criticizing the trial court for reading the word “or” out of the definition of “claim”. The court emphasized that Washington State law requires ambiguous insurance policy language, i.e., language that could arguably be read in two different ways, be interpreted in favor of the insured. The court sent the case back down to the trial court to reconsider whether Zillow had insurance coverage under the correct reading of the policy.

The Zillow decision is an important reminder that insurance policy fine print matters. Insurers, after all, are the ones writing their insurance policies. The insurer has the opportunity to draft exclusions into the policy before they sell it. They can’t add new exclusions to the insurance policy after the fact. And, if the policy is so poorly written that it could be read multiple ways, the proverbial tie-breaker goes to the insured.

ERISA Insurer’s Hiding Doctor’s Opinions Results in Appellate Win for Claimant

On December 11, 2019, the Ninth Circuit Court of Appeals (the federal appeals court with jurisdiction over Washington and other coastal and western states) decided Wagenstein v. Cigna Life Insurance Company. The decision is unpublished, meaning it is not binding on lower courts but may still be used as persuasive authority.

Lea Wagenstein sued to challenge Cigna’s termination of her long-term disability benefits under an ERISA-governed insurance policy. The district court dismissed Wagenstein’s case, agreeing with Cigna’s decision to terminate benefits.

The Ninth Circuit reversed the district court. The court emphasized that even Cigna’s own consultant, hired to examine Wagenstein at Cigna’s behest, determined Wagenstein’s disability precluded her from sitting more than 2.5 hours per day. As such, the Ninth Circuit noted that report showed Wagenstein could not perform sedentary work requiring sitting for most of an 8 hour workday.

The Ninth Circuit noted Cigna possessed a report from another consultant, hired by Cigna, who determined Wagenstein could actually sit for a full workday and thus could perform two sedentary jobs. Cigna relied on this report in concluding Wagenstein was not disabled. But Cigna hid the report from Wagenstein until Cigna’s final denial of her appeal of the termination of her benefits. That deprived Wagenstein of the opportunity to provide a response from her treating physicians, who agreed Wagenstein was disabled. Failing to provide Wagenstein the report violated ERISA’s rules requiring full and fair review of claims.

Because Cigna violated ERISA by withholding its physician’s report, the Ninth Circuit remanded the case back to the lower court with instructions to allow Wagenstein to submit statements from her doctors rebutting Cigna’s consultant in determining whether Wagenstein remained entitled to disability insurance benefits.

The Wagenstein decision, while not binding precedent, remains an important reminder that, where the insurer relies on consultants’ opinions in denying claims or terminating benefits, ERISA protects the claimant’s right to rebut the insurer’s evidence.

 

WA Supreme Court Confirms Insurers Must Follow Their Agents’ Promises

Let’s say you go to an insurance agent to buy an insurance policy. You tell the agent you want coverage for something specific, for example, fire damage to your boat. The agent sells you a policy the agent tells you covers fire damage to your boat. The agent gives you some documents summarizing the policy that say fire damage to your boat is covered. Then your boat catches fire and you make a claim, but the insurer denies coverage. The insurer says the policy fine print excludes fire damage, even though the agent said it was covered.

Can they do that?

The answer is no, according to the Washington Supreme Court. On October 10, 2019, the Washington Supreme Court decided T-Mobile v. Selective Insurance Company. The decision confirms insurance companies may be bound by statements their agents make when selling insurance policies.

In this case, T-Mobile hired a contractor to build a cell phone tower. T-Mobile required the contractor to obtain insurance coverage protecting T-Mobile. The contractor’s insurance policy only covered a small T-Mobile subsidiary, not T-Mobile itself. But the insurance company’s agent issued a series of insurance certificates stating that T-Mobile itself was covered in addition to the subsidiary.

T-Mobile was sued over the cell tower construction project and made a claim under the policy. The insurer denied coverage on the basis the policy did not name T-Mobile as an insured. 

In the resulting lawsuit, the insurance company argued T-Mobile should not have relied on the insurance agent’s representations that T-Mobile was covered. The insurer said T-Mobile should have read the policy and seen that T-Mobile was not covered.

The Washington Supreme Court disagreed. The Court determined T-Mobile was justified in believing that the insurance company’s agent was authorized to speak on behalf of the insurer.  The court found the agent’s specific statements that T-Mobile was covered overcame boilerplate disclaimers the insurer had made.

The court also emphasized the importance of holding insurers to their agents’ promises. Without that rule, the court noted, insurers would have no incentive to make sure their agents’ statements to people buying insurance were true. The court observed that allowing insurance companies to ignore their agents’ statements was important because “Otherwise, an insurance company’s representations would be meaningless and it could mislead without consequence.”

This ruling is important. Many folks buy insurance after discussing with their agent, reading brochures, or browsing the internet. They rarely read the policy fine print. Even T-Mobile, a huge corporation presumably represented by a team of insurance lawyers, relied on the insurance agent’s representations without noticing the policy fine print. If insurance companies could let their agents sell policies promising coverage that didn’t exist, consumers would pay for coverage they never received and would have little recourse.