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 The decision is unpublished, so it can be cited for persuasive value but lower courts are not required to follow the ruling.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 Plan Cannot Recover Overpayments Resulting From The Plan’s Own Mistake

Most employee benefit plans (e.g., employer-sponsored health or disability insurance) allow the plan to recover excess overpayments it provides the insured.  This typically occurs where the plan provides benefits that are duplicated by another source of funding.  For instance, most long-term disability plans provide that benefit payments are offset by amounts the insured receives from a Social Security Disability claim.  These provisions are generally enforceable.

The Ninth Circuit Court of Appeals recently refused to uphold the plan’s right to repayment where the overpayment was due to the plan’s own error.  In its unpublished decision in Mrkonjic v. Delta Family-Care and Survivorship Plan, the court held Delta’s employee benefit plan could not recover overpayments from Myrkonjic caused by Delta’s improper denial of Myrkonjic’s initial claim for benefits.

Myrkonjic became disabled following a work injury and applied for long-term disability (“LTD”) benefits from his employer Delta’s employee benefit plan.  Delta denied Myrkonjic’s claim.  During the ensuing thirteen-year lawsuit over Myrkonjic’s right to LTD benefits, Myrkonjic took early retirement under Delta’s retirement plan in order to provide a source of income during the period he could not work and was not receiving LTD payments.

After years of litigation, Delta agreed Myrkonjic was entitled to LTD benefits.  But Delta subtracted from Myrkonjic’s LTD payments amounts Delta had paid him in early retirement benefits, relying on language in the governing plan documents permitting Delta to make an offset accounting for duplicative benefits.  Delta’s calculation of Myrkonjic’s offsets differed from the manner in which Delta typically calculated offsets: “Normally…If the offsets exceed the benefit, the claimant receives nothing but does not owe excess offsets back to the Plans.  The Plans concede that they calculated Myrkonjic’s LTD benefits inconsistently with their normal method.”

The Ninth Circuit determined Delta’s offset calculation was improper.  Noting “Myrkonjic would up in federal court in the first place” and “was forced to elect early retirement” “because the Plans improperly refused to approve his LED application”, the court ruled the Plans should have resolved the offset “so as to leave Myrkonjic no worse off from their mistakes.”


Health Plans Can’t Discriminate Against Mental Health Treatment Says Ninth Circuit

Among the challenges of a mental health condition is the difficulty persuading health insurers to cover treatment.  Mental health conditions can be difficult to objectively diagnose and can require lengthy and expensive treatment often with little prospect of a conventional “cure.”  Hence, health plans have a powerful incentive to minimize coverage for mental health conditions to reduce costs.

In response, the federal government, as well as Washington and many other states, have enacted mental health parity laws.  In general, these laws prohibit health insurers and health plans from discriminating against mental health conditions by mandating mental health conditions be covered to the same degree as physical ailments.

On June 6, 2018, the Ninth Circuit Court of Appeals confirmed the federal Mental Health Parity Act prohibits health plans from discriminating against mental health conditions for the purposes of health insurance coverage. In Danny P. v. Catholic Health Initiatives, the court determined the health plan violated the law by denying the plaintiff’s claim for the cost of an inpatient stay at a residential mental health treatment facility.

In ruling for the plaintiffs, the court determined the Mental Health Parity Act required the health plan’s coverage of inpatient mental health treatment facilities be no more restrictive than coverage for stays at skilled nursing facilities.  Since the Act prohibited imposing more restrictive coverage requirements on mental health treatment than on treatment for physical conditions, the Act precluded the health plan from deciding to cover room and board at skilled nursing facilities for medical patients while refusing to provide the same coverage for mental health inpatient care.

The Danny P. decision is an important win for patients seeking mental health treatment and vindicates Congress’ intent in passing the Mental Health Parity Act that mental health patients be free from discrimination by their health plans.


Court of Appeals Clarifies Policy Causation Language In Favor Of The Insured

When language in one part of your ERISA policy says your claim is covered, can the company rely on language elsewhere in the policy to deny your claim?  The Ninth Circuit Court of Appeals recently answered “no.”  In Dowdy v. Metropolitan Life Ins. Co., the court ruled the conflicting language about what caused the insured’s loss did not  preclude coverage.

Mr. Dowdy’s leg was amputated following a car crash.  He made a claim under his ERISA-governed Accidental Death & Dismemberment insurance policy with MetLife, purchased through Mrs. Dowdy’s employer.

MetLife denied coverage, claiming the amputation was excluded because it was complicated by Mr. Dowdy’s diabetes.  MetLife relied on language in the policy requiring the loss to be the “direct result of the accidental injury, independent of other causes,” and excluding injuries for losses related to “illness or infirmity” or “infection occurring in an external accidental wound.”  Under this language, MetLife claimed the right to deny coverage for any amputation “contributed to” or “complicated by” diabetes.

The court ruled the language could be read two ways, but that the Dowdys prevailed under either interpretation.  Under one interpretation, coverage existed if the injury was the “predominate or proximate cause,” while under the more stringent interpretation, coverage was barred as long as the excluded condition (diabetes) “substantially contributed” to the loss.

While agreeing diabetes was “a factor” in the injury leading to the amputation, the court determined there was no evidence diabetes “substantially” contributed to the injury.  The court relied on definitions of “substantial” requiring “a significant magnitude of causation” demonstrating the diabetes was “more than merely related to the injury.”

Since Mr. Dowdy’s medical records established only that diabetes “complicated” Mr. Dowdy’s wound, the court determined diabetes did not “substantially” contribute to the injury. The car crash caused a severe injury that nearly severed Mr. Dowdy’s leg.  The subsequent infection and wound issues were complicated by diabetes, but did not cause Mr. Dowdy’s amputation.

Because this type of language frequently appears in Accidental Death & Dismemberment policies as well as health and disability policies, the Dowdy ruling is helpful for many ERISA participants seeking coverage.


Ninth Circuit Decision Shows Life Insurance Pitfalls for Policyholders; Clarifies Jurisdiction in Insurance Disputes

The Ninth Circuit’s recent ruling in Elhouty v. Lincoln Benefit Life, Case No. 15-16740 (March 27, 2018) is notable for two reasons.  It illustrates the pitfalls of certain life insurance policies that supposedly pay for themselves, and it clarifies the jurisdictional standard governing when insurance disputes can be litigated in federal as opposed to state courts.

Elhouty purchased a flexible premium adjustable life insurance policy from Lincoln Benefit Life Company with a $2 million face value.  Adjustable life policies are often marketed as giving the policyholder all the advantages of death benefit protection, an interest-bearing account for investment purposes, and flexibility as to how premiums are paid.  The policies often come with a sales pitch that the policy’s investment component will effectively pay off the future premiums, without mentioning that the investment returns are often inadequate to cover future premium increases.

Elhouty’s case illustrates this pitfall: for years, Elhouty arranged for his premiums to be IMG_1030paid directly out of the policy’s net surrender value, but failed to notice when the net surrender value was exhausted and he was sent a bill for $55,061.49 to keep the policy in force.  Since Elhouty never paid the additional premium, Lincoln Benefit claimed the policy lapsed.  Elhouty disputed Lincoln Benefit properly notified him of the additional premium he owed, and filed a lawsuit seeking a court declaration that the policy remained in force.

Elhouty sued in state court, and Lincoln Benefit removed the action to federal court (conventional wisdom holds federal courts are more insurer-friendly than state courts).  To properly remove the action, Lincoln Benefit was required to establish that the amount of money at issue in the lawsuit exceeded $75,000.00.  Lincoln Benefit argued the amount at issue was the full $2 million policy face value; Elhouty claimed it was only the $55,880.08 in premiums he allegedly owed Lincoln Benefit.

On the jurisdictional issue, the Ninth Circuit agreed with Lincoln Benefit.  The court determined the unpaid premiums were not in dispute because Lincoln Benefit did not seek to recover them from Elhouty.  Elhouty had had the option to pay $55,880.08 to keep the policy in force, but the real dispute in the lawsuit was the policy’s validity.  The court clarified that, in cases where the “controversy relates to the validity of the policy and not merely to liability for benefits accrued,” the policy’s face value is the amount in controversy for jurisdictional purposes.  Thus, the court ruled the amount in controversy was $2 million and federal courts had jurisdiction.

The court also agreed with Lincoln Benefit on the merits of the dispute.  Elhouty argued Lincoln Benefit’s policy termination notice for unpaid premiums was defective because Elhouty never received notice.  But the court ruled that the language of the policy and applicable state law required only that the notice be mailed, not that the policyholder actually receive it.

For insurance lawyers, Elhouty is useful for its clarification of the jurisdictional standard. For policyholders, Elhouty is a reminder of the importance of keeping your premium payments up to date and not taking the insurer’s promotional materials at face value.