ERISA Litigation Spawns Ninth Circuit Decision in Case of First Impression Regarding Excess Insurance Coverage

The Ninth Circuit Court of Appeals (the federal appellate court with jurisdiction over Washington and other western states) recently decided a novel question regarding so-called “excess” insurance coverage. Excess insurance exists where a person or entity has two layers of insurance: a “primary” insurer that provides coverage up to a specific dollar amount, and a second, “excess”, insurer that provides additional coverage above that amount. In its September 14, 2020 decision in AXIS Reinsurance Company v Northrop Grumman Corporation, the Ninth Circuit addressed the question whether an excess insurer can challenge the primary insurer’s decision to pay a claim and thereby trigger the excess insurer’s obligation to pay.

The dispute between AXIS and Northrop Grumman began with an ERISA lawsuit. The federal Department of Labor sued Northrop Grumman alleging Northrop acted improperly in handling its ERISA-governed employee savings and pension plans. Northrop paid a confidential amount to settle the DOL lawsuit. Northrop did not admit any wrongdoing, and the lawsuit never resulted in any findings about what specific allegations the settlement payment addressed.

A few months later, Northrop settled a second, unrelated, ERISA lawsuit brought on behalf of the Plan by a plaintiff named Grabek.

Northrop had insurance against these types of ERISA lawsuit through both primary and excess insurance carriers. Northrop’s primary insurer, National Union Fire Insurance Company of Pittsburgh, PA, and an initial excess insurer, Continental Casualty Company, provided coverage up to a total of $30 million. AXIS provided secondary excess coverage for losses over $30 million. In other words, AXIS only had to pay claims if Northrop’s loss exceeded the $30 million covered by the first two insurers.

The carriers covered Northrop’s settlement for the Department of Labor lawsuit. The primary insurer, National Union, and the first excess insurer, Continental, determined the DOL lawsuit was covered, and paid Northrop’s full loss out of their combined $30 million limit.

But Northrop ran into trouble getting coverage for the Grabek lawsuit. Having paid for the entire DOL settlement, National Union and Continental determined that all but about $7 million that Northrop had to pay in the Grabek lawsuit exceeded their combined $30 million coverage limits. Having exhausted its first layer of coverage, Northrop turned to its excess insurer AXIS to pay the remainder of the Grabek settlement.

AXIS refused to pay. It agreed there was coverage for the Grabek lawsuit, but it claimed that the first two insurers shouldn’t have paid the DOL settlement. AXIS claimed that the primary insurers’ policies excluded the DOL settlement. So, AXIS argued, since the first two carriers shouldn’t have paid for the DOL settlement, the first $30 million in coverage should never have been exhausted, and AXIS should never have been called upon to pay for the Grabek lawsuit. According to AXIS, this was an “improper erosion” of the initial $30 million in coverage. No federal appellate court had previously addressed AXIS’ “improper erosion” theory.

The Ninth Circuit disagreed. It determined that AXIS bore the risk that the primary insurers would exhaust their coverage limits by paying for losses that weren’t really covered. The court explained that excess insurers generally may not reduce their own obligation to pay a covered loss by claiming that the primary insurers shouldn’t have paid. The court emphasized that excess insurers generally have no right to second guess primary insurers’ coverage decisions. The excess insurer could avoid this outcome by including in their policy contracts a provision that improper payments by the primary insurers don’t count, but AXIS had no such language.

Ninth Circuit Confirms Attorneys’ Fee Awards to Successful ERISA Claimants Are Virtually Automatic

ERISA is a remedial law designed to make sure that employees receive the full benefits they earn under their employer’s benefit plans. Part of ERISA requires employee benefit plans that wrongfully withhold benefits and force employees to sue to recover those benefits to pay the employee’s attorney’s fees. Otherwise, the employee will not have received the full amount of benefits owed under the ERISA plan because they will have had to pay the enormous legal expenses involved in litigating an ERISA case. Without this guarantee, employees would often wind up with a legal bill that’s higher than the benefits they recovered.

The Ninth Circuit Court of Appeals recently re-affirmed that successful ERISA claimants should be awarded their attorneys’ fees virtually automatically in Herrman v. Lifemap Assurance Company, Case No. 19-35182 (June 25, 2020). Courts have recognized for many years that an employee who wins their ERISA case should recover attorneys’ fees absent “special circumstances” that would make a fee award “unjust.” In the Ninth Circuit, courts also look at several different sets of circumstances (called the “Hummell factors” after the name of the case where they originated) to decide whether to award attorneys’ fees to ERISA plaintiffs. The lower court in the Herrman case declined to award attorneys fees to the plaintiff even though she recovered benefits from her ERISA plan because the lower court believed the Hummell factors did not support awarding fees under the circumstances.

The Ninth Circuit reversed the lower court. The Ninth Circuit emphasized that:

“the presumption in favor of fees in such cases [i.e., where an ERISA plaintiff successfully recovers benefits] means that the district court need not discuss the Hummell factors before granting the motion [for attorneys’ fees].”

Thus, the court concluded that judges may not deny attorneys’ fees to successful ERISA plaintiffs–even if the Hummell factors suggest fees should not be awarded–without identifying “special circumstances” that would render a fee award unjust.

The Hermann decision is a helpful reminder that Congress’ guarantee in enacting ERISA that employees receive the full amount of their benefits requires that employees not have to pay thousands of dollars in legal fees to obtain those benefits.

ERISA Claim Deadlines Extended Due to COVID-19

ERISA-governed insurance claims are subject to specific deadlines that claimants have to meet in order to protect their rights. Normally, the consequences of missing a deadline are draconian. For instance, appealing an ERISA claim denial even one day late can irrevocably waive the right to dispute the denial, no matter the reason for the delay.

The good news is that these deadlines have been relaxed in light of the COVID-19 pandemic. The Department of Labor, the federal agency responsible for overseeing ERISA-governed employee benefit plans, has issued an order extending certain ERISA claim deadlines due to the COVID-19 pandemic. This order comes pursuant to authority granted by Congress in the Coronavirus Aid, Relief, and Economic Security Act (a/k/a the “CARES” Act).

DOL is extending these deadlines so that plan participants, beneficiaries, and employers have additional time to make critical coverage and other benefit decisions during the pandemic. The upshot is:

  • Disability insurance claimants have additional time to submit claims and appeal denied claims. These deadlines do not run during the period from March 1, 2020, until 60 days after the federal government announces the end of the current COVID-19 national emergency. That means an appeal that would normally be due next week might not be due until 60 days after the federal government announces the end of the national pandemic emergency.
  • Group health plans have additional time to comply with COBRA continuation coverage deadlines. This is critical for employees recently laid off and looking for answers about continued health insurance coverage.
  • Group health plans also have extra time to determine benefit claims; and
  • ERISA plans have extra time to provide disclosures and notices required by ERISA, provided the plan acts in good faith and furnishes the disclosure or notice as soon as practicable under the circumstances, including through electronic means.

The Department of Labor has FAQs for ERISA claimants and participants regarding the deadline extensions.

These extensions will help employees and plan participants effectively safeguard their rights during the pandemic.

Coronavirus Insurance Issues

The COVID-19 pandemic is causing many types of insurance questions. Below is an FAQ on some insurance issues people may be dealing with during the pandemic. As always, it’s important to keep in mind that the specific facts and insurance policy language will vary from case to case. An FAQ can’t take the place of legal advice from consulting with an attorney directly. But hopefully this will help point you in the right direction.

Health Insurance

Typical health insurance covers COVID-19 treatment just the same as any other illness. Washington’s Affordable Care Act (a/k/a Obamacare) exchange platform is allowing a special open enrollment period for qualified uninsured individuals to buy insurance on the state Exchange through April 8, 2020. This is an exception to the normal rule that you can only buy Exchange coverage during special periods.

There are also special rules for COVID-19 testing. The federal government designated COVID-19 testing as an essential health benefit, meaning that Medicaid and Medicare plans should cover testing. Washington’s Office of the Insurance Commissioner has ordered health insurers to cover COVID-19 testing without deductibles or cost-sharing. Also, insurers have to allow patients to refill necessary prescriptions regardless of the normal waiting periods.

Disability Insurance

Employees unable to work due to COVID-19 might have recourse under disability insurance policies.  Disability coverage should provide benefits for folks who can’t work because they are sick. But, as always, the fine print matters. Many policies have waiting periods or other detailed rules for paying benefits. The specific rules will also depend on how you obtained coverage. Most folks get disability insurance from their employer, and will have to navigate the special claims procedures under ERISA. For folks who bought their policies themselves, claims will be governed by Washington State law which is generally more policyholder-friendly.

Business Loss Insurance

Businesses who close or lose revenue because of the pandemic or the state-ordered lockdown might have claims for business interruption coverage. This coverage is often provided by standard commercial insurance policies. These claims depend heavily on the specific policy language and facts. For example, some policies require actual physical damage to property before paying business interruption benefits. Other policies might require the business be closed by the authorities. It is also important to be able to document the specific losses incurred under business interruption coverage.

Know Your Rights

Anyone who thinks they have insurance coverage related to COVID-19 should be on top of their rights. In disasters like this pandemic, insurers often cut corners or underpay claims. Washington State insurance policyholders have important rights, including the right to a full, fair, and prompt investigation of their claim at the insurer’s expense. Insurers also have a duty to fully disclose all the potential coverage that you might have.

Finally, here are some resources for non-insurance issues relating to the pandemic:

 

 

 

 

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.