Category: ERISA

Ninth Circuit Ruling Elevates Hidden Fine Print to Reduce ERISA Plan Benefit

If you were to poll the public on why lawyers or the legal system get a bad rap, the experience of getting surprised by something sneaky the other party buried in the fine print might rank high on the list. That was the outcome in Haddad v. SMG Long Term Disability Plan, decided February 10, 2023. There, the Ninth Circuit ruled that an ERISA plan could reduce a former employee’s benefit payments based on inconspicuous language hidden in the benefit plan documents.

Mr. Haddad, like many folks, had long-term disability coverage through his employer’s benefit plan. He became disabled and the plan paid him the benefits.

But the plan reduced his benefits. The insurance company administering the plan decided Mr. Haddad’s settlement with a third party amounted to “lost wages.” The terms of the benefit plan allowed disability benefits to be reduced if the disabled employee had been compensated for lost wages.

Mr. Haddad sued. He argued that the “lost wages” reduction was hidden in the benefit plan documents’ fine print. He pointed to earlier Ninth Circuit rulings that any limitations should be conspicuous and that employees shouldn’t “have to hunt for exclusions or limitations in the policy.”

The Ninth Circuit said this rule didn’t apply to Mr. Haddad. It ruled that reductions in benefit payments on the basis of an “offset” were different from reduced payments due to an “exclusion” or “limitation.” The opinion does not elaborate on whether the average non-lawyer would find the distinction meaningful.

The ruling is “unpublished”, meaning it shouldn’t be relied on as binding precedent for lower courts.

Ninth Circuit Considers When Death By Drunk Driving Is “Accidental”

Is death “accidental” when a person gets in a fatal car crash while over the legal alcohol limit? Courts have had a hard time answering this question. A recent Ninth Circuit ruling provides some clarity.

In Wolf v. Life Insurance Company of North America, the Ninth Circuit held that death resulting from drunk driving was “accidental” for purposes of insurance policy coverage.

In that case, the insured died after driving 65 miles per hour going the wrong way on a one-way road with a 10 mile per hour speed limit. An autopsy found he had a blood-alcohol level of 0.20%.

His family made an insurance claim with Life Insurance Company of North America (LINA). LINA had sold the deceased an insurance policy covering “accidental” death.

LINA denied the claim. It determined that death under these circumstances was not “accidental” because it was foreseeable that driving with a 0.20% blood-alcohol level would result in death or serious injury.

The family filed a lawsuit contesting the denial under ERISA. The Seattle federal court sided with the family. The court ruled that the decedent’s behavior was “extremely reckless” but did not make death so certain as to render it not “accidental”. LINA appealed to the Ninth Circuit Court of Appeals.

The Ninth Circuit agreed with the lower court. It acknowledged that courts have applied different tests to determine whether death under these circumstances is “accidental.” It decided that the most appropriate question is whether death was “substantially certain” to occur: if death is substantially certain, it can’t be accidental.

Applying that test, the Ninth Circuit agreed that death was accidental. Although the insured’s behavior was reckless, it did not make death substantially certain. The court emphasized: “there is no doubt that drunk driving is ill-advised, dangerous, and easily avoidable.” But death was still accidental.

The court concluded with the truism that insurers who don’t want to cover death resulting from drunk driving should just add an explicit exclusion to their policies:

The solution for insurance companies like [LINA] is
simple: add an express exclusion in policies covering
accidental injuries for driving while under the influence of
alcohol, or for any other risky activity that the company
wishes to exclude….This would allow policyholders to form reasonable expectations about what type of coverage they are purchasing without having to make sense of conflicting bodies of caselaw that deal with obscure issues of contractual interpretation.

Summer News Roundup: Bans on Credit Scoring, Bertha the Tunnel Machine, Bargains for Arbitration in ERISA Plans, and Benefit Managers

Courts had a busy summer on insurance and ERISA issues.

A Washington State judge struck down the Washington Insurance Commissioner’s ban on using credit scores to price insurance. The judge acknowledged that using credit scores (which are a proxy for poverty) has a discriminatory impact. Insureds with low credit scores pay more for insurance even if they present a low risk to the insurer. But the judge found that the legislature, not the Insurance Commissioner, has the authority to ban the practice.

The Washington Supreme Court held that there was no insurance coverage for damage to the machine used to bore the tunnel for the replacement of the Alaskan Way Viaduct in Seattle (affectionately nicknamed “Bertha” after Seattle’s former mayor). The machine broke down during the project in 2013. It was determined the machine suffered from a design defect. The Supreme Court held that the design defect fell within the scope of an exclusion in the applicable insurance policy for “machinery breakdown.”

Employers asked the U.S. Supreme Court to rule that ERISA disputes should go to arbitration. Several courts have decided that certain types of lawsuits alleging violations of ERISA’s fiduciary duties cannot be forced into arbitration. The reason is that the plaintiff in these cases sues on behalf of the governing employee benefit plan. ERISA treats such a plan as a separate legal entity. Therefore, an individual employee’s signature on an employment contract with an arbitration clause in the fine print does not bar that employee from suing on behalf of the ERISA plan–at least according to these courts. If the Supreme Court steps in, that could change.

The Supreme Court declined to revisit a case holding that ERISA allows health plans to pay high prescription drug prices. The plaintiffs argued that their health plan’s administrator (called a Pharmacy Benefit Manager) acted as a fiduciary under ERISA when it set the prices the health plan and its participating employees paid for prescription drugs. As an ERISA fiduciary, the administrator would have an obligation to act in the best interest of the participating employees when setting drug prices. The Supreme Court’s decision not to take up the case leaves in place the lower court’s ruling that these administrators were not subject to ERISA’s fiduciary duties.

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.