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.

SCOTUS to Employers: ERISA Doesn’t Let You Sit On Your Hands While Your 401(K) Participants Get Price-Gouged

The United States Supreme Court’s first ERISA ruling since 2020 was a unanimous win for employees. In Hughes, et al. v. Northwestern University, the Court held that ERISA gives employees the right to sue their employer for overcharges on investments in the company’s retirement plan. This ruling means employers who offer their employees overpriced retirement plan investment options may violate their duties to their employees under ERISA. It is also a fascinating peek at how ordinary investors can get price-gouged with the assistance of the very fiduciaries who are supposed to be protecting them.

The plaintiffs worked for Northwestern University. Like many Americans, they had the option to invest pre-tax wages into a retirement account maintained by their employer (e.g., a 401(k)). Northwestern chose which funds the employees could invest in, but the employees were free to choose whichever investments they preferred from this “menu” prepared by Northwestern.

The plaintiffs sued Northwestern alleging some of these investment options were needlessly overpriced. In investment parlance, the funds had an unnecessarily high “expense ratio” because Northwestern offered the employees “retail” shares rather than the cheaper “institutional” shares.

This particular allegation is a big deal. Large employers like Northwestern have the leverage to offer their employees funds that are extra cheap. This is because you can get a better deal from a fund if you’re buying on behalf of a thousand investors rather than just yourself. Many mutual funds or ETFs are available to retail investors in the regular “retail” class with the typical expense ratio, but also available in the special “institutional” class with a much cheaper fee.

For a huge employer like Northwestern to say “hey Mr. Mutual Fund, we know we could get our employees the cheap funds because we’re a big bad university with lots of leverage, but go ahead and charge our employees extra” would be egregious. It’s like buying a thousand cars at the sticker price rather than negotiating a volume discount.

The lower courts had dismissed the case. Northwestern’s “menu” of investments included reasonably priced funds in addition to the overpriced funds. On the basis that the employees were free to choose not to be price-gouged on their investments (assuming they could figure out they were being overcharged), the lower courts reasoned that this amounted to “no harm, no foul”.

The Supreme Court disagreed. It criticized the lower courts for failing to consider Northwestern’s duty under ERISA to “monitor all plan investments and remove any imprudent ones.” ERISA requires that employers managing retirement plans act with “care, skill, prudence, and diligence” when handling their employees’ benefits. This basically means employers should treat their workers’ money with the same degree of care the employer would treat their own money.

Obviously, no prudent person would pay the retail price over the volume discount–unless they were paying with somebody else’s money.

The Hughes case is a good reminder that ERISA doesn’t let employers off the hook for price-gouging their workers’ retirement savings merely because the workers might have figured out that they were being price-gouged and chosen the cheaper investments.

Is Washington’s New Long Term Care Insurance Law Preempted by ERISA?

Washington State recently passed the Long Term Care Trust Act. The Act, approved by the legislature in 2019, sets up a state fund to pay for future long term care expenses like home nursing care, memory care, transportation, etc. The legislature passed the act to try to stave off a future crisis in which elderly or disabled folks in Washington won’t be able to afford these services. Currently, uninsured folks needing long term care typically fall back on state Medicaid benefits. There is concern that this will become unsustainable, particularly as more and more elderly folks need this care but can’t afford it.

The Long Term Care Act tries to cushion this blow by providing an employee-funded benefit to pay for future long term care. Starting January 1, 2022, employees in Washington State will pay a .58% payroll tax into the state long term care fund. Employers will be responsible for processing the tax and remitting the money to the fund.

This will probably lead to lawsuits challenging the Act as preempted by ERISA. ERISA generally prevents states from making their own laws regarding employee benefit plans. Whether this provision–known as “preemption”–applies to the Long Term Care Act will likely be whether the Act requires enough involvement by employers for courts to treat it as an employee benefit plan.

The Act’s critics say it obviously does. It can’t be disputed that long-term care insurance is an employee benefit that can be subject to ERISA if provided through an employee benefit plan. How, the critics say, could a law requiring employers to process payroll deductions for the purpose of providing benefits the employees only get because they’re working be anything but an employee benefit plan?

The answer might not be so simple. The U.S. Supreme Court has repeatedly held that ERISA does not preempt state laws requiring employers to provide benefits to their workers unless the law requires the employer to operate a so-called “administrative scheme.” For example, in the 1987 case Fort Halifax Packing Co. v. Coyne, the Supreme Court ruled that a Maine law mandating severance pay for workers fired during plant closures was not preempted by ERISA because it didn’t require the employer to do much more than write a check in an amount determined by the state. That decision explains that Congress’ purpose in stopping states from passing laws regulating employee benefit plans is to protect employers from burdensome state-law requirements that might discourage them from offering benefit plans to their employees. The Maine law didn’t do this because it didn’t require the employer to set up any kind of “administrative” scheme for the severance benefit but simply write a check when laying off workers: “To do little more than write a check hardly constitutes the operation of a benefit plan.”

If writing a check to your employee for an amount the state tells you isn’t an administrative scheme, it wouldn’t be hard for a court to rule that deducting money from their paychecks in an amount determined by the state isn’t one either.

It’s been a while since the U.S. Supreme Court has weighed in on a similar issue, so the Ninth Circuit Court of Appeals (the federal appellate court where any challenge to the Long Term Care Act is likely to wind up), will probably follow the Fort Halifax case. That’s what the Ninth Circuit did in deciding challenges to similar laws over the last few years.

For instance, in 2008, the Ninth Circuit found ERISA did not preempt a San Francisco ordinance requiring employers to pay for employee health care in Golden Gate Restaurant Association v. City and County of San Francisco. The court relied on the Fort Halifax case to determine the ordinance did not require employers to create an employee benefit plan. The court emphasized that an ERISA plan is not created by legislation that merely requires employers to pay money based on the number of hours worked by their employees.

More recently, earlier in 2021, the Ninth Circuit applied the same reasoning to hold a Seattle ordinance requiring employers to pay for employee health care was not preempted by ERISA in ERISA Industry Committee v. City of Seattle. The court relied on Fort Halifax as well as Golden Gate Restaurant Association. That decision was short, terse, and unpublished (meaning it lacks precedential value, an indication the court considered the issue largely settled by prior caselaw and not deserving of significant thought).

This suggests the courts will probably consider the Washington Long Term Care Trust Act along similar lines. Applying the Fort Halifax and Golden Gate Restaurant Association tests may make challenges to the Act difficult. After all, these cases arguably say Washington State could require employers to pay directly for employee benefits so long as the state is doing the math on the amount of the contributions. The main difference between these laws and the Act is that it’s the employees paying for the benefits provided by the Act rather than the employers. Since the employers just have to collect the money from their employees, it will be easy for a court to apply the Supreme Court’s reasoning from the Fort Halifax case that “To do little more than write a check hardly constitutes the operation of a benefit plan.”

Court of Appeals Clarifies Standard for Determining Exhaustion of Primary Insurance Coverage in Long-Term Losses

A recent Washington Court of Appeals decision helps clear up the obligations of excess insurers for losses occurring over many years when multiple insurance policies were in effect. Many businesses have two layers of insurance: “primary” insurance, which pays for losses up to a certain dollar amount, and then “excess” insurance, which kicks in if losses are so great that the primary insurance coverage amount is exhausted before the insured is fully compensated for the loss.

But what happens where the loss occurs over a decade during which the insured had multiple different primary and excess insurance policies–does the insured need to exhaust its primary coverage in each policy year in order to access the excess coverage?

The Court of Appeals’ August 23, 2021 ruling in Gull Industries v. Granite State Insurance Company answered that question “no”. This was a lawsuit brought by a gas station operator, Gull Industries, against multiple insurance companies seeking coverage for environmental contamination caused at 200 gas stations over 50 years. The spillage occurred gradually in the normal course of running the gas stations: customers spilled gas while filling their cars, supply trucks spilled gas while filling up storage tanks, and storage tanks gradually seeped gas into the ground. The company faced liability for the environmental contamination including lawsuits at 24 sites and regulatory action at 19 sites.

A main issue in the case was when and if Gull’s excess insurer, Granite State Insurance Company, had to start paying for the environmental contamination. That depended on when Granite State’s primary insurance was considered to have been exhausted. Gull argued this should be viewed for each policy year individually; in other words, as soon as one policy year’s worth of primary coverage was exhausted, Granite State’s excess obligation kicked in regardless of whether there was primary coverage in other policy years.

Granite State disagreed, claiming that its excess coverage was not in play until all of the first level coverage in every policy year of the many decades of contamination was exhausted. The trial court agreed with Granite State. Gull appealed.

The Court of Appeals ruled that the trial court erred when it accepted Granite State’s argument that Gull had to exhaust its primary coverage in every year before Granite State had any excess insurance obligations. The court noted the absence of Washington State caselaw on this question. But it relied on a California Supreme Court ruling that decided the issue using the same rules of insurance policy interpretation applied in Washington State.

The California Supreme Court found that the most natural reading of similar insurance policy language means that the excess coverage kicks in whenever the primary coverage is exhausted in the same policy year, regardless of what happened in other coverage periods. The court also pointed out that requiring an insured to prove it exhausted primary coverage in multiple policy years creates unreasonable obstacles to an insured seeking coverage and undermine the insured’s reasonable expectations.

The Court of Appeals found this reasoning persuasive. It emphasized the importance of the reasonable expectations of the insured in interpreting insurance policies. It also noted that requiring the insured to prove it exhausted the primary limits of every policy period of a multi-decade loss would unreasonably require the insured to sue over coverage obligations of different primary policies that was not anticipated when it purchased the excess policy.

This ruling is a good reminder that Washington State courts will interpret insurance policies to give effect to reasonable expectations of coverage over impractical and overly technical readings of the policy fine print.