Below is Kantor & Kantor LLP’s summary of this past week’s notable ERISA decisions.
Retained Asset Accounts to Pay Death Benefits
In Merrimon v. Unum Life Ins. Co. of Am., 13-2128, 2014 WL 2960024 (1st Cir. July 2, 2014), the 1st Circuit Court of Appeals held that Unum’s use of Retained Asset Accounts (RAAs) as a method of paying life insurance benefits on behalf of ERISA-governed benefit plans did not constitute self-dealing in plan assets in violation of ERISA section 406(b) or offend Unum’s duty of loyalty toward the class of beneficiaries in violation of ERISA section 404(a). Unum had retained the credited funds in its general account and paid the plaintiffs interest at a rate of one percent (substantially less, the plaintiffs alleged, than the return Unum earned on its portfolio). The district court determined that Unum’s use of RAAs did not constitute self-dealing but awarded class-wide relief totaling more than $12,000,000 after finding the use of RAAs as a breach of the duty of loyalty. The 1st Circuit Court of appeals reversed the district court on the latter determination.
Coordination of Benefits
In Cent. States, Se. & Sw. Areas Health & Welfare Fund v. First Agency, Inc., 13-2077, 2014 WL 2933225 (6th Cir. July 1, 2014), the 6th Circuit resolved a “coordination of benefits” dispute in favor of an ERISA-governed medical plan, based on the “rule of legal etiquette” that when an ERISA plan and an insurance policy contain conflicting coordination of benefits clauses, then as a matter of federal common law the terms of the ERISA plan must be given full effect. In this case, Central States and Guarantee Trust both issued insurance coverage for the same claims. Central States’ contract says that it will pay only if Guarantee Trust does not. Guarantee Trust’s contract insists that it will pay only if Central States does not. Central States, an employee benefit plan governed by ERISA, provides health insurance for Teamsters and their families. Guarantee Trust, an insurance company, provides sports injury insurance for student athletes. This case involved thirteen high school and college students, all athletes and all children of Teamsters. Each of them holds general health insurance from Central States and sports injury insurance from Guarantee Trust. Each suffered an injury while playing sports (most often football) between 2006 and 2009, after which they sought insurance coverage from both insurance companies. Each time Guarantee Trust refused to pay the athlete’s medical expenses, and each time Central States picked up the bill under protest. The 6th Circuit held that primary responsibility for the sports injuries falls on Guarantee Trust. However, with respect to Central States’ relief, the court found that the district court erred in awarding a money judgment in the amount of benefits paid by Central States since the award is legal restitution, not equitable restitution, authorized by ERISA Section 502(a)(3).
Denial of Life Insurance Benefits Reversed. In Yasko v. Reliance Standard Life Ins. Co., 12 C 02658, 2014 WL 2940536 (N.D. Ill. June 30, 2014) (Plaintiff’s attorney: Mark Debofsky), the plaintiff sued Reliance Standard Life Insurance Company (“Reliance”) to recover accidental death benefits from an insurance policy issued to her husband. He died of a pulmonary embolism after traveling by air from Chicago to Mexico. The parties dispute revolved around whether lung cancer or a March 2010 surgery were contributing factors to the husband’s death, the former excluding payment of benefits under the AD&D plan. No autopsy was performed and his Mexican death certificate states that his cause of death was massive pulmonary thromboembolism and secondarily lists under contributing causes “cancer pulmonar,” that is, lung cancer. Reliance denied the plaintiff’s claim for accidental death benefits as well as an appeal of that decision in 2011 because it determined that lung cancer is a sickness and/or disease (not an injury) that contributed to his death. The plaintiff then brought suit under ERISA against Reliance. In denying Reliance’s motion for summary judgment, the court found that since there is no language in the Reliance policy that explicitly removes pulmonary embolism or other injuries attributable to airplane flights from coverage, the husband’s pulmonary embolism after flying was an “Injury,” and an “accident,” under the policy’s terms. Reliance argued that the husband’s previous surgery was a contributing cause to his death and the policy excludes coverage where medical or surgical treatment is a contributing factor. The court further found that Reliance has the burden of proving that the exclusion applies and it did not meet its burden as a matter of law.
Denial of Long-Term Disability Benefits Upheld. In Kludka v. Qwest Disability Plan, 12-16354, 2014 WL 2915871 (9th Cir. June 27, 2014), the 9th Circuit Court of Appeals affirmed the district court’s grant of summary judgment in favor of the Qwest Disability Plan, finding that the district court did not err in concluding that QDS, the third-party administrator of the Plan, did not abuse its discretion in terminating the plaintiff’s long-term disability benefits. Although QDS committed two procedural errors-failing to specify what documents the plaintiff could submit to perfect his claim under 29 C.F.R. § 2560.503-1(g)(1)(iii) and failing to investigate whether he was still receiving Social Security benefits-the court found these errors, neither individually nor cumulatively, amounted to an abuse of discretion. The court also found that the plaintiff did not identify any documents he could have introduced that would have perfected his claim. Furthermore, the district court did not err in failing to consider the plaintiff’s extrinsic evidence of QDS’s alleged conflict of interest since judicial review of an ERISA plan administrator’s decision on the merits is limited to the administrative record. Because the court did not find that there were any flagrant procedural abuses by the disability plan, it found that the district court’s exclusion of the evidence was not an abuse of discretion.
Denial of Supplemental Life Insurance Benefits Upheld. In Affonso v. Metro. Life Ins. Co., 12-16250, 2014 WL 2872226 (9th Cir. June 25, 2014), the 9th Circuit Court of Appeals affirmed a district court’s grant of summary judgment to Metropolitan Life Insurance Company (“MetLife”) in this ERISA action arising from MetLife’s partial denial of benefits to the plaintiff under his wife’s supplemental life insurance policy. The court found that the unambiguous Morgan Stanley Benefits Plan (“Plan”) terms limited the wife’s eligibility for supplemental life insurance coverage to $500,000 based on her benefits eligible earnings of $53,017.73, even though the Benefits Center website permitted her to apply for $1,000,000 of coverage. The Summary Plan Description and the 2010 Benefits Enrollment Highlights booklet, both available to the wife, clearly limited coverage to “a maximum of the lesser of ten times [the employee’s] Benefits Eligible Earnings … or $5,000,000.” The Certificate of Insurance issued by MetLife contained the same limitation. The court found that this clear coverage limitation and the plaintiff’s knowledge of it was affirmed by Plan representatives, who repeatedly told the plaintiff and his wife that they would be contacted to adjust discrepancies in the wife’s application. Because the coverage limitation was unambiguous, the plaintiff’s conditional receipt, waiver, and equitable estoppel defenses fail. The court further found that the deduction of a premium at the $1,000,000 coverage level at most confirms that the wife was covered when she died, but does not negate the clear limitation on her coverage.
Court Applies California Ban on Discretion to Long-Term Disability Plan. In Rapolla v. Waste Mgmt. Employee Benefits Plan, 13-CV-02860-JST, 2014 WL 2918863 (N.D. Cal. June 25, 2014), the plaintiff contested the Life Insurance Company of North America’s (“LINA”) denial of long-term disability benefits which he claimed due to his multiple orthopedic problems, including degenerative disc disease of the lumbar spine and herniated discs. LINA argued that the disability plan gives discretion to LINA to construe and interpret the terms of the Plan and to decide all questions of eligibility. LINA also argued that California Insurance Code Section 10110.6, which bans discretionary provisions in insurance policies, does not apply to this ERISA plan. It is undisputed that the plaintiff’s claim accrued on June 28, 2012, which is the date on which his claim for permanent disability benefits was denied. Thus, the only issue is whether the policy was offered, issued, delivered, or renewed on or after January 1, 2012, but before June 28, 2012. For the purposes of section 10110.6, a policy automatically renews every year on the policy’s anniversary date. The court found that the policy became effective on January 1, 2005, and it was most recently amended in 2009, meaning that the policy’s renewal date falls within the relevant time period, as the policy continued in force after it was amended in 2009 and through January 1, 2012. As such, any grants of discretion that can be deemed to be a part of the policy are void and unenforceable, and thus, the denial of benefits at issue must be reviewed de novo.
The court rejected defendants’ contention that section 10110.6 does not apply because that section applies only to insurance policies or agreements, and not to ERISA plans, and here, the delegation provision is included only in the plan and not in the policy. The court found that the policy and the plan are a single composite agreement, and for that reason, section 10110.6 applies to the delegation provisions at issue. Concluding otherwise would render section 10110.6 practically meaningless, as ERISA plans could grant discretionary authority to determine eligibility under an insurance policy, so long as the grants were set forth somewhere other than in the insurance policy. The court also rejected defendants’ contention that section 10110.6 does not apply because the section is preempted by ERISA. The court found that it falls within ERISA’s savings clause, which applies to state laws that are specifically directed toward entities engaged in insurance and substantially affect the risk pooling arrangement between the insurer and the insured. The Ninth Circuit has already held that state laws regulating discretionary clauses in insurance policies fall within the scope of the savings clause. And, as some judges in this district have noted, there is no reason why the result should differ when a state law is directed toward a discretionary clause contained in an agreement or another document relating to the administration of an insurance policy, including a benefits plan. This is particularly true where, as here, the policy and the plan operate as one unified contract.
Employee Stock Ownership Plans. In Fifth Third Bancorp v. Dudenhoeffer, 12-751, 2014 WL 2864481 (U.S. June 25, 2014), participants in an employee stock ownership plan (ESOP) brought a putative class action against their employer and various of its officers under ERISA, alleging that defendants were plan fiduciaries who breached their duty of prudence by continuing to buy and hold the employer’s stock when they knew or should have known that stock was overvalued and excessively risky. The U.S. Supreme Court held that ESOP fiduciaries were not entitled to a “presumption of prudence,” abrogating the holdings of several Circuit Court of Appeals, but ERISA fiduciaries could prudently rely on market price of stock as assessment of its value in light of all public information. The court also held that a claim for breach of duty of prudence based on inside information was required to allege alternative action that fiduciary could have taken consistent with securities laws, which a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the plan than to help it.
Court Denies Consideration of Outside Evidence. In Tretola v. First Unum Life Ins. Co., 13 CIV. 231 PAE, 2014 WL 2815586 (S.D.N.Y. June 23, 2014), the plaintiff-plan participant was disabled by Fibromyalgia. Her long-term disability claim was denied by First Unum so she brought suit seeking reinstatement of her benefits. In support of her motion for summary judgment, she requested that the court consider extrinsic evidence, including a declaration from a former First Unum employee (who stopped working for Unum in 2002) and a document titled “Fibromyalgia Position Statement and Guidelines.” The court determined that the plaintiff did not establish good cause to admit the extrinsic evidence. The court had previously decided to review Unum’s claim de novo and it found that the admission of evidence of Unum’s biased claims handling from more than a decade ago is of no moment. The court further found that the evidence is irrelevant and excluded under the federal rules of evidence.
State Law Claims Preempted by ERISA. In Coil v. Rightchoice Managed Care, Inc., 2:14-CV-04098-NKL, 2014 WL 2826221 (W.D. Mo. June 23, 2014), the plaintiff filed suit in state court against the defendants for breach of contract and vexatious refusal to pay. His wife had emergency medical treatment and subsequently died. The plaintiff alleged that a medical insurance policy, provided by the defendants, was in full force and effect on the dates services were rendered to his wife. Initially, the defendants processed claims for payment of his late wife’s medical bills, but subsequently rescinded any payments made, and denied coverage. The defendants moved to dismiss the plaintiff’s state law claims, arguing that his claims are preempted by ERISA since the medical benefits were provided through an employer-sponsored medical plan. The court determined that each of the elements of an employee welfare benefit plan is present here and granted the defendants motion but permitting the plaintiff to amend his complaint to more clearly allege any ERISA claim he might have.
Vacation Pay Plan Not Covered by ERISA. In Dietrick v. Securitas Sec. Servs. USA, Inc., 13-CV-05016-JST, 2014 WL 2880218 (N.D. Cal. June 23, 2014), the plaintiff is a former employee of Defendant Securitas Services USA, Inc. (“Securitas”), a national provider of security services. The plaintiff worked for Securitas as a security guard for several years prior to being laid off and alleged that Securitas failed to pay him and other security guards the full overtime compensation they were owed, because Securitas failed to take into account in the overtime calculation the payments that security guards received in connection with Securitas’ “Vacation Pay Plan.” The plaintiff further alleged that Securitas improperly treated these payments as vacation payments under the Fair Labor Standards Act (“FLSA”), even though such payments were, in practice, retention or productivity bonuses. The plaintiff asserted a claim under the FLSA for failure to pay overtime wages against Securitas on his own behalf and on behalf of a putative class of Securitas employees who were subject to the Plan. Additionally, the plaintiff asserted various claims under California law on his own behalf and on behalf of two putative classes of Securitas employees who were employed by Securitas in California
Securitas moved for summary judgment on several grounds, including that all of the plaintiff’s claims for violations of California’s labor laws fail because they are preempted by ERISA, as the payments at issue are paid out of an ERISA trust and not out of Securitas’s general funds. The plaintiff opposed the motion, arguing that the “vacation” payments at issue are actually retention and productivity bonuses, not vacation pay, and therefore must be a part of the overtime calculation under the FLSA. The plaintiff also argued that the payments at issue are not governed by ERISA because they do not constitute vacation pay.
The court concluded that the payments at issue are not connected in any way to the taking of vacation by security guards. Instead, these payments are based on the hours that security guards worked during the prior year and on whether they continued their employment with Securitas through their anniversary. As such, the payments are de facto retention bonuses designed to incentivize employees to stay with Securitas for whole years at a time. Because the payments are not “payable only upon the occurrence of a contingency outside of the control of the employee” like the welfare plans contemplated by ERISA § 1002(1), the court could not conclude that the payments are “vacation benefits” covered by ERISA. The court denied Securitas’s motion for summary judgment in its entirety.
* Please note that these are only case summaries of decisions as they are reported and do not constitute legal advice. These summaries are not updated to note any subsequent change in status, including whether a decision is reconsidered or vacated. The cases reported above were handled by other law firms but if you have questions about how the developing law impacts your ERISA benefit claim, the attorneys at Kantor & Kantor LLP may be able to advise you so please contact us.
Case summaries authored by Michelle L. Roberts, Partner, Kantor & Kantor LLP, 1050 Marina Village Parkway, Suite 105, Alameda, CA 94501; Tel: 510-992-6130.