Circuit Court Reverses Dismissal of Complaint Seeking Long Term Disability Benefits On Limitations Grounds

February 29, 2012 | Appeals | Employment & Labor | Insurance Coverage

After the plaintiff in this case brought suit to challenge a denial of long term disability benefits, the district court concluded that the complaint was time-barred by a limitation-of-actions clause in the plan. The plaintiff appealed.

The plan, issued by Hartford Life and Accident Insurance Company, generally prohibited a claimant from bringing a lawsuit more than three years after the time the claimant was required to submit a written proof of loss. Hartford contended that under the terms of the plan, the plaintiff’s proof of loss was due on January 20, 2006, 90 days after the elimination period ended on October 22, 2005. According to Hartford, the plan’s three year limitations period for filing suit began to run on January 20, 2006, and ended on January 20, 2009. The plaintiff filed suit nearly five months after that date, on June 18, 2009.

The plaintiff contended that after having originally denied his claim for long term physical-disability benefits, Hartford granted his claim for two years’ worth of mental-health disability benefits – the maximum duration of those benefits under the plan – for the period from October 22, 2005 to October 22, 2007. Subsequent to its approval of the plaintiff’s mental health benefits claim, Hartford, in a November 20, 2006 letter, asked the plaintiff to provide additional information regarding his physical disabilities so that it could determine whether he was eligible for long term physical-disability benefits to begin on October 22, 2007, after his two years of mental-health benefits ended. Even though he had not replied to this letter, the plaintiff contended that the limitations period began to run 30 days after Hartford sent its November 20, 2006 request for additional information, and that his complaint was therefore timely.

Hartford admitted at oral argument that its post-denial requests for additional information regarding the plaintiff’s long term physical disabilities would have restarted the running of the limitations period if the plaintiff had replied to its letter and had furnished the information that Hartford had requested. Hartford contended, however, that because the plaintiff had failed to respond, and had not engaged in the “deliberative process” regarding his physical long term disability claim, he should receive no leniency under the plan’s limitations clause.

The circuit court rejected Hartford’s argument, noting that the terms of the plan made no mention of the possibility that a claimant’s actions (or failure to act) could affect the limitations period. Instead, the plan mentioned only actions performed and deadlines set by Hartford. Accordingly, it found, there was no reason the plaintiff’s apparently dilatory behavior should alter the start-date or duration of the three year limitations period.

The appellate court then concluded that Hartford’s post-denial request for additional proof of loss regarding the plaintiff’s claim for long term physical-disability benefits extended the three year limitations period to run from December 20, 2006, when the proof of loss was due. Accordingly, it reversed the district court’s judgment in favor of Hartford based on the limitations provision and remanded the case to the district court for further proceedings. [Epstein v. Hartford Life and Accident Ins. Co., 2011 U.S. App. Lexis 23162 (2d Cir. Nov. 18, 2011).]

Appeals Court Affirms Workers’ Compensation Board’s Decision In Favor Of Claimant

The claimant in this case, a court reporter, was found unconscious at her workplace and was rushed to a local hospital, where she was diagnosed with a subarachnoid hemorrhage caused by a ruptured basilar artery aneurysm. The claimant survived but was unable to communicate and a workers’ compensation claim was filed on her behalf. The claimant’s employer and its workers’ compensation carrier opposed the claim, asserting that the ruptured aneurysm was not related to the claimant’s employment. Following a hearing, a Workers’ Compensation Law Judge (WCLJ) found that the employer did not overcome the presumption of compensability set forth in the New York Workers’ Compensation Law. The Workers’ Compensation Board affirmed the WCLJ’s decision, and the employer and workers’ compensation carrier appealed.

The appellate court affirmed. It explained that under New York law, a presumption of compensability exists where, as in this case, an unwitnessed or unexplained injury occurred during the course of the affected worker’s employment. An employer may overcome the presumption by presenting substantial evidence to the contrary, the appellate court added.

In this case, the appellate court found no basis upon which to disturb the Workers’ Compensation Board’s conclusion that the employer did not present sufficient evidence to overcome the presumption. The record established that, prior to the claimant’s collapse, she was under considerable stress at work and her workplace was loud and overheated. The appellate court noted that, although the employer’s expert opined that the claimant’s ruptured aneurysm was unrelated to her employment, the Board agreed with the WCLJ that the expert’s report and testimony were not credible – in large measure because he was evasive when questioned as to whether work-induced stress could raise a person’s blood pressure high enough to cause an aneurysm to rupture. Notably, the appellate court continued, the expert acknowledged that high blood pressure could be a factor in the rupture of an aneurysm and conceded that he did not know what the claimant’s blood pressure was at the time the rupture occurred. The appellate court then declared that, contrary to the employer’s argument, the Board, which was the sole arbiter of witness credibility, was not required to wholly credit the expert’s opinion on this point simply because it was the only expert proof presented.  Accordingly, it affirmed the Board’s decision in favor of the claimant. [In the Matter of the Claim of Richman v. N.Y.S. Unified Court System, 2012 N.Y. Slip Op. 82 (App. Div. 3d Dep’t Jan. 5, 2012).]

Administrator’s Calculation of Claimant’s Pre-Disability Earnings Is Upheld

After the plaintiff in this case, a medical doctor, became disabled, he closed his practice and applied for disability benefits from Principal Life Insurance Company, which had issued short term and long term group disability policies to the practice. The policies provide that an insured who was disabled was entitled to receive 60 percent of his or her pre-disability earnings, capped at $1,500 per week for short term benefits and $6,000 per month for long term benefits. Those benefits, however, were reduced by the amount that all disability benefits (from both individual and group policies) exceeded the insured’s pre-disability earnings. Principal Life determined that the plaintiff was disabled, as defined in the policies, but that, in view of the fact that he was receiving $15,470 per month in disability benefits on individual disability policies issued by another company, he was not entitled to any benefits under Principal Life’s group disability policies.

The plaintiff brought suit, claiming that the administrator of the Principal Life policies had misconstrued the policies in calculating his pre-disability earnings at $9,916 and that, with a proper calculation, his pre-disability earnings were far greater, entitling him to the maximum benefits from Principal Life, despite the fact that he was receiving $15,470 on his individual disability policies. More particularly, he contended that Principal Life, when calculating his pre-disability earnings, had erroneously deducted from his gross pre-disability earnings extraordinary and one-time business expenses incurred by him in 2003-04 in starting up his practice and in pursuing litigation with partners in his former medical practice.  Without the reductions resulting from these extraordinary, one-time business expenses, the plaintiff asserted that his pre-disability earnings were sufficiently large to entitle him to the maximum disability benefits from the group policies.

The administrator, who was given “complete discretion” to interpret the policies, had concluded that because the plaintiff claimed his extraordinary expenses as deductions on his federal income tax returns, he thereby represented that they were “ordinary and necessary” business expenses. Thus, those same expenses were also, in the language of the policies, “usual and customary,” “incurred on a regular basis,” and “essential to the established business operation.” The district court held that the administrator, in adopting this interpretation, had not abused her discretion, and the plaintiff appealed.

The U.S. Court of Appeals for the Fourth Circuit affirmed. It recognized that the policy language, defining those expenses that may be subtracted from gross income to arrive at pre-disability earnings, was “somewhat confusing,” but it concluded that the administrator’s interpretation was a reasonable one.

The circuit court explained that the policy language provided essentially that the plaintiff’s pre-disability monthly earnings were determined by subtracting from his gross earnings as reported for federal income tax purposes his business expenses as defined in subsection (b) of the policies’ definition of pre-disability earnings. The business expenses were defined in part as (1) “the usual and customary unreimbursed business expenses,” (2) “which are incurred on a regular basis,” (3) “are essential to the established operation of the Policyholder,” and (4) “are deductible for Federal Income Tax purposes.”

The administrator concluded that all the attributes described in the policies’ definition of pre-disability business expenses, even though stated distinctly, were in substance no more than relevant restatements of the attributes that made the expenses deductible for tax purposes. Therefore, the administrator used the business expenses claimed by the plaintiff on his tax returns in her calculations. The attributes given in the policies to pre-disability business expenses – that they be “usual and customary,” “incurred on a regular basis,” and “essential to the established business operation” – merely expressed, the administrator concluded, “attributes of expenses that have traditionally been considered in determining deductibility under [Internal Revenue Code Section 162(a)].” Section 162(a) allows taxpayers to deduct “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” The administrator thus noted that there was a “clear nexus” between the “ordinary and necessary” language contained in Section 162(a) and the various phrases contained in subsection (b) of the policies’ definition of monthly earnings.

The circuit court said that the plaintiff argued reasonably that because business expenses for purposes of the policies’ calculations must meet both the criterion of being deductible under the Internal Revenue Code and the other criteria stated separately in subsection (b) of the policies, the separately stated criteria in subsection (b) must be further limitations, distinguishing expenses deductible for tax purposes from business expenses defined in the policies for determining monthly earnings. However, the circuit court found, the overall policy language, taken in context, “would seem to permit the administrator reasonably to conclude that the policies’ definition of business expenses should be read in light of I.R.C. § 162(a).”

The circuit court then stated that even though the administrator’s interpretation might render much of subsection (b)’s definition of business expenses repetitive and superfluous, it was nonetheless, “if not the best, at least a reasonable solution to an interpretive dilemma.” Because the policy entrusted Principal Life with “complete discretion” to resolve ambiguities and to determine benefits, the circuit court concluded that it would respect its reasonable interpretation of the language when calculating the plaintiff’s pre-disability earnings, and it affirmed the district court’s decision in favor of Principal Life. [Fortier v. Principal Life Ins. Co., 2012 U.S. App. Lexis 557 (4th Cir. Jan. 11, 2012).]

Ledbetter Law Applies To Claims For “Unequal Pay For Equal Work,” Circuit Says

The plaintiff in this case, a maintenance worker for Kansas Unified School District #501, was told in 2003 that the district was going to eliminate his position. Rather than fire him, however, the district told the plaintiff that he could transfer to a vacant custodial position at a lower pay grade. If the plaintiff accepted the new position, the district promised he could retain his salary for two years before the lower pay associated with the new job took effect. The plaintiff agreed in writing, and two years later the district reduced his salary as it said it would.

The plaintiff eventually filed administrative charges alleging that the district’s actions were motivated by unlawful age discrimination. The plaintiff, however, did not bring his administrative charges until 2006, even though the discrimination allegedly occurred in 2003. When the plaintiff took his claims to court, the district court held that he had waited too long to seek administrative review, and that the delay had the effect of barring his lawsuit. The plaintiff appealed to the U.S. Court of Appeals for the Tenth Circuit.

While the plaintiff’s appeal was pending, Congress passed the Lilly Ledbetter Fair Pay Act, a law specifically aimed at effecting changes to limitations law in the employment discrimination field. To allow the district court the opportunity to consider whether the Act rescued the plaintiff’s claims, the parties agreed to dismiss the appeal. In the end, though, the district court concluded that the Act did not help the plaintiff, and he appealed again.

In its decision affirming the dismissal of the plaintiff’s lawsuit, the Tenth Circuit explained that the Ledbetter Act came in response to the U.S. Supreme Court’s decision in Ledbetter v. Goodyear Tire & Rubber Co., Inc. In that case, Lilly Ledbetter proved at trial that her supervisors gave her poor performance reviews because of her sex and that these reviews, in turn, caused her employer to pay her less than similarly situated male workers. The Supreme Court, however, ruled that her pay discrimination claim was untimely and the jury’s verdict in her favor had to be overturned because she had filed her administrative charge more than 300 days after the announcement of the employer’s relevant pay-setting decision.

Congress subsequently enacted the Ledbetter Act, adding new language to the Age Discrimination Employment Act (ADEA) that states that “an unlawful practice occurs, with respect to discrimination in compensation in violation of this chapter, when a discriminatory compensation decision or other practice is adopted, when a person becomes subject to a discriminatory compensation decision or other practice, or when a person is affected by application of a discriminatory compensation decision or other practice, including each time wages, benefits, or other compensation is paid, resulting in whole or in part from such a decision or other practice.”

The plaintiff in the Kansas Unified School District case argued that, under the Ledbetter Act, a new claim arose – and the limitations clock reset – each time an employer issued a new paycheck reflecting or effecting an act of discrimination. As applied to his own case, the plaintiff argued, the district’s decision to transfer the plaintiff to lower-paid positions was the “unlawful practice” and, because that decision eventually affected his compensation, a new cause of action arose for limitations purposes each and every time he received a smaller paycheck in his new position.

The circuit court disagreed with that analysis, finding that the Ledbetter Act did not go “so far.” By its express terms, the circuit court continued, the Act applied only to claims alleging “discrimination in compensation” – or, put another way, claims of unequal pay for equal work; it did not affect the accrual of other cases alleging discrimination in hiring, firing, demotions, transfers, or the like. Because the plaintiff did not bring that kind of claim – the plaintiff did not assert a pay discrimination claim – the Ledbetter Act therefore offered him “no help,” the circuit court concluded. [Almond v. Unified School District # 501, 2011 U.S. App. Lexis 23718 (10th Cir. Nov. 29, 2011).]

Judgment Allowing Benefit Plan To Recover Amount Exceeding Net Amount Of Employee’s Third Party Recovery Is Reversed

After an employee of US Airways was injured in a car accident, the company’s health benefit plan paid medical expenses in the amount of $66,866 on his behalf. The employee, through his attorneys, filed an action against the driver of the car that caused the accident. Because the driver of the other car had limited insurance coverage, and because three other people were seriously injured or killed, the employee settled with the other driver for only $10,000. However, with his lawyers’ assistance, the employee and his wife received another $100,000 in underinsured motorist coverage, for a total third party recovery of $110,000. After paying a 40 percent contingency attorneys’ fee and expenses, the employee’s net recovery was less than $66,000. US Airways demanded reimbursement for the entire $66,866 that it had paid for the employee’s medical bills, and the employee’s law firm placed $41,500 in a trust account, reasoning that any lien found to be valid would have to be reduced by a proportional amount of legal costs.

When the employee did not pay, US Airways, in its capacity as administrator of the benefits plan, filed suit in federal district court seeking “appropriate equitable relief” under ERISA §502(a)(3) in the form of a constructive trust or an equitable lien on the $41,500 held in trust and $25,366 personally from the employee. US Airways claimed that the policy permitted it to recoup the entire $66,866 it provided for the employee’s medical care out of the $110,000 total that he had recovered regardless of his legal costs. US Airways argued that the plan language “specifically authorized reimbursement in the amount of benefits paid, out of any recovery.”

The employee asserted that it would be unfair and inequitable to reimburse US Airways in full when he had not been fully compensated for his injuries, including pain and suffering. He argued that US Airways, which made no contribution to his attorneys’ fees and expenses, would be unjustly enriched if it were permitted to recover from him without any allowance for those costs. Indeed, he argued, if legal costs were not taken into account, US Airways would effectively be reaching into its beneficiary’s pocket, putting him in a worse position than if he had not pursued a third party recovery at all.

The district court rejected the employee’s arguments and granted summary judgment to US Airways. The district court required the employee to sign over the $41,500 held in trust and to pay $25,366 from his own funds, and the employee appealed to the U.S. Court of Appeals for the Third Circuit.

In vacating the district court’s decision, the circuit court found that the judgment requiring the employee to provide full reimbursement to US Airways constituted “inappropriate and inequitable relief.” The circuit court found that because the amount of the judgment exceeded the net amount of the employee’s third party recovery, it left him with less than full payment for his emergency medical bills, thus undermining the entire purpose of the plan. At the same time, the judgment amounted to a windfall for US Airways, which, the circuit court observed, had not contributed to the cost of obtaining the third party recovery.

Therefore, the circuit court vacated the district court’s judgment and remanded the case to the district court, adding that the district court should consider factors such as the distribution of the third party recovery between the employee and his attorneys, the nature of their agreement, the work performed, and the allocation of costs and risks between the parties when deciding on “appropriate equitable relief” in favor of US Airways. [US Airways, Inc. v. McCutchen, 2011 U.S. App. Lexis 22883 (3rd Cir. Nov. 16, 2011).]

Reprinted with permission from the March 2012 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

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