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.

Court Ruling Illustrates The Limits ERISA Places On Insurers’ Discretion To Decide Claims

Many ERISA plans give the claims administrator (often an insurance company) discretionary authority to interpret the evidence and the terms of the employee benefit plan in deciding claims. This discretionary authority makes it difficult for claimants to overturn claim denials because court defer to decisions made using this authority.

But ERISA recognizes that claims administrators have an incentive to abuse this discretionary authority and limits it in important ways. Where the facts of a particular claim suggest the insurance company or other claims administrator is abusing its authority, courts are required to view the administrator’s handling of the claim with skepticism.

The Ninth Circuit Court of Appeals’ recent decision in Gary v. Unum is a reminder of the importance that this skepticism has in ERISA disputes. Allison Gary had a medical condition called Ehlers-Danlos Syndrome (EDS). She had disability insurance through Unum as part of her employer’s benefit plan and made a claim. Unum denied her claim and she filed a lawsuit seeking benefits under ERISA.

The lower court sided with Unum and upheld the denial. The Ninth Circuit Court of Appeals reversed.

The Ninth Circuit determined the lower court failed to properly scrutinize Unum’s evaluation of the medical evidence about Gary’s condition. The ERISA plan at issue gave Unum discretion to interpret this evidence. But the Ninth Circuit emphasized that, even where ERISA plan administrators have that discretion, it is checked by common-sense limitations that prevent insurers like Unum from denying claims out of self interest.

The Ninth Circuit held that the facts of Unum’s handling of the claim should have led the lower court to view Unum’s exercise of its discretionary authority to interpret the evidence with skepticism. First and foremost, the Ninth Circuit emphasized that an insurer who, like Unum, is responsible for paying disability claims as well as investigating the claimant’s entitlement to benefits has a perverse incentive to save itself money by looking for evidence to deny claims while ignoring evidence that would support paying benefits. The court emphasized this structural conflict of interest should have been considered.

Second, the appellate court was concerned by Unum’s practice of “cherry picking” certain observations from medical records, i.e., ignoring evidence of Allen’s disability while focusing on evidence that would support denying her claim.

Third, Unum failed to have Gary examined by an EDS specialist. Fourth, Unum cut off Gary’s benefits after exactly six months, an arbitrary measure that was disconnected from the medical evidence.

The Gary decision is unpublished, meaning it is not binding authority but may be relied on at the discretion of lower courts to the extent a judge believes the ruling is helpful.

ERISA at the Supreme Court: How Will Amy Coney Barrett’s Confirmation Shape the Legacy Left By Justice Ginsburg’s Seminal ERISA Opinions?

Amy Coney Barrett was recently confirmed to replace Ruth Bader Ginsburg on the U.S. Supreme Court. Justice Ginsburg is remembered as a champion of civil rights and gender justice. But Ginsburg is also responsible for some of the Court’s most important ERISA decisions. This invites us to look back on some of Justice Ginsburg’s most important ERISA decisions and speculate about how Justice Barrett might decide future ERISA cases.

Justice Ginsburg wrote the seminal opinion in Black & Decker Disability Plan v. Nord, 538 U.S. 822 (2003), the decision that set the standard for how ERISA Plans and ERISA-governed insurance companies must weigh the opinions of the claimant’s treating doctors. Nord rejected the rule that ERISA plans must defer to the claimant’s doctor’s opinions about the claimant’s medical condition in a disability insurance claim. But Ginsburg emphasized, and the other justices agreed, that ERISA Plans must give fair weight to claimants’ doctors’ opinions. Her opinions emphasizes: “Plan administrators, of course, may not arbitrarily refuse to credit a claimant’s reliable evidence, including the opinions of a treating physician.” Nord protects ERISA claimants’ right to rely on their treating doctors in claiming benefits–a right that is particularly critical since claimants can rarely afford to hire a consulting physician for the purposes of an insurance claim.

A more technical but still important decision by Justice Ginsburg was UNUM Life Insurance v. Ward, 526 U.S. 358 (1999). Ward concerns the extent to which ERISA preempts (i.e., overrules) state laws that regulate insurance policies. Justice Ginsburg wrote the Court’s unanimous opinion finding that ERISA does not stop states from regulating insurance policies that are issued under employee benefit plans. This means that important state-law consumer protections for insurance policies still apply when the insurance policy is sponsored by an employer.

Justice Ginsburg also wrote the opinion in Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1 (2004) which confirmed ERISA can apply to a small business owner who participates in their own company’s benefit plan. Many small business owners are familiar with the frustrations of falling into a grey area where they lack the protections of status as an employee but also lack the advantages of being a large business. For ERISA benefits at least, this “worst of both worlds” scenario is less of a concern. The Yates decision held that the owner of a small business can participate in the business’ ERISA plan and thereby obtain the protections and favorable tax treatment that ERISA affords to plan participants.

These decisions reflect a legacy of implementing Congress’ intention in enacting ERISA of providing real protections to people who earn insurance and other benefits through their employment.

Justice Barrett’s record suggests she is likely to continue that legacy. Justice Barrett decided one important ERISA case during her tenure on the Seventh Circuit Court of Appeals (the federal court that hears appeals from Illinois and other midwestern states). In Fessenden v. Reliance Standard Life Ins. Co., 927 F.3d 998, 999 (7th Cir. 2019), then-Circuit Judge Barrett determined that ERISA plans, and ERISA-governed insurance companies, must strictly comply with ERISA’s rules requiring full, fair, and prompt review of insurance claims.

In that case, Donald Fessenden made a claim for disability insurance benefits through an insurance policy issued by Reliance through his employer’s benefit plan. Reliance denied his claim and Fessenden appealed the denial using the Plan’s internal administrative procedures. Reliance failed to decide the appeal within the deadline imposed by ERISA. That violation of ERISA had consequences that made it easier for Fessenden to pursue his benefits claim.

Reliance asked the Seventh Circuit to let it off the hook. Reliance argued its violation was “relatively minor” and the court should excuse the violation “because it was only a little bit late.” It characterized the ERISA deadline as a “technical rule.”

Then-Circuit Judge Barrett declined. Her ruling emphasized that ERISA deadlines matter to plan participants:

After all, the administrator’s interests are not the only ones at stake; delaying payment of a claim imposes financial pressure on the claimant. That pressure is particularly acute for a disability claimant, who applies for disability benefits because she is unable to work and therefore unable to generate income. Given the seriousness of that burden, the new regulations single out disability claims for quicker review than other kinds of claims.

Her decision also emphasizes that courts have repeatedly required strict compliance with deadlines by claimants, often at the urging of insurance companies. In requiring the same level of exactitude by ERISA plans and insurers, she observed: “What’s good for the goose is good for the gander.”

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.

Court Ruling Emphasizes Importance of Reading the Insurance Policy as a Whole

Insurance policies contain technical language that often varies from its everyday meaning. When a case depends on the meaning of the insurance policy fine print, how you interpret these technical terms can decide the outcome of a case.

One way to define insurance policy terms is to see how those terms are used elsewhere in the insurance policy. The Ninth Circuit Court of Appeals’ August 17, 2020 ruling in Engineered Structures, Inc. v. Travelers Property Casualty Company of America is a good illustration.

Engineered Structures, Inc. (ESI) was a construction firm that purchased a “builder’s risk policy” from Travelers insurance. The policy covered risks of damage when ESI was building a Fred Meyer gas station in Portland, Oregon.

ESI made a claim under the policy when an underground fuel storage tank ESI’s subcontractor was installing was improperly placed in the ground. The tank was loaded with inadequate ballast. After a rainstorm, the tank floated in the excavation hole, causing damages.

Travelers denied coverage under a policy exclusion for “faulty, inadequate or defective workmanship or construction”. ESI sued Travelers claiming the denial violated the policy and was made in bad faith. The issue depended on what the word “construction” in the exclusion meant. ESI said “construction” meant the finished product it was building, so the exclusion only applied for defects in the finished product.

Certain rules come into play when an insurance term of art is ambiguous, but the court determined those rules didn’t apply because it could understand the term “construction” by reading other language in the policy.  The court examined other language in the insurance policy that treated “construction” as referring to the process of building the gas station. The policy defined certain “construction activities” in terms of the actions taken in the course of constructing the gas station. The court interpreted the word “construction” in the exclusion as referring to the process of constructing the gas station, as opposed to the final product that was built.

This emphasizes the principle that insurance policy language must be read in the context of the entire insurance policy. Where the policy uses technical language in one place, it can often be understood only by reviewing similar language elsewhere in the policy. A few other references to a disputed term elsewhere in the policy can decide insurance coverage for a huge loss.