Circuit Upholds Sanctions against Plaintiff’s Attorney in Case Involving Alleged Breach of Disability Insurance Policy

July 31, 2013 | Appeals | Employment & Labor | Insurance Coverage

The plaintiff in this case sued Paul Revere Life Insurance Co., alleging that Paul Revere had engaged in bad faith and that Paul Revere had breached his disability insurance policy by terminating his disability benefits. The district court dismissed the plaintiff’s bad faith claim, and denied the plaintiff’s two motions for reconsideration.

Shortly before trial began on the plaintiff’s claim that Paul Revere had breached the insurance policy, Paul Revere moved to prohibit the plaintiff from offering certain evidence related to the bad faith claim and from making certain prejudicial statements during opening statements about Paul Revere’s alleged bad faith. The plaintiff filed two responses, arguing that he did intend to show at trial, among other things, that the Paul Revere representatives who had handled his claim had “utilized improper claim procedures” and that “[t]he fact that [the parent company of Paul Revere] placed its profits above the rights of its insureds and its moral and ethical duty owed to its insureds under the express terms of the contract is clearly a subject of comment in this matter.”

The district court held a hearing and granted Paul Revere’s motions. The case then proceeded to trial on the issue of whether Paul Revere had breached the insurance contract.

In the first moments of opening statements, the plaintiff’s counsel alleged that Paul Revere practiced “corporate greed.” Paul Revere objected and moved for a mistrial; the trial court granted the motion.

After the judge recused himself and a new judge was assigned, Paul Revere moved to sanction the plaintiff’s counsel for breaching the court’s orders. The district court granted that motion and sanctioned the plaintiff’s attorney $8,143.42 plus certain court costs.

Paul Revere and the plaintiff subsequently settled their underlying breach-of-contract claim and the plaintiff appealed the sanction award, arguing that the district court had abused its discretion in sanctioning his counsel for an act that was not a basis for a mistrial and that did not otherwise multiply the proceedings.

The U.S. Court of Appeals for the Sixth Circuit affirmed the district court’s ruling. The circuit court explained that, under federal law, sanctions were appropriate when counsel “objectively falls short of the obligations owed by a member of the bar to the court and which, as a result, causes additional expense to the opposing party. The purpose is to deter dilatory litigation practices and to punish aggressive tactics that far exceed zealous advocacy.” An award of attorney’s fees required a showing of “more than negligence or incompetence,” the Sixth Circuit added, but “less than subjective bad faith.”

The Sixth Circuit then explained that the plaintiff’s counsel had “continuously sought to raise a theory of the case that the judge had disallowed” and that the district court had “expressly barred” the plaintiff from raising certain of those issues, warning him not “to degenerate [in opening statements] into calling the defendant insurance company names because they denied payments” or to get into “the fairness or unfairness of the defendant’s position” or the fairness of their claims process.

In doing so, the circuit court continued, the judge and Paul Revere’s counsel had discussed the possibility of a mistrial if the plaintiff’s counsel breached the district court’s order. Despite all of this, the circuit court declared, the plaintiff’s counsel argued that Paul Revere practiced “corporate greed,” the “modern-day Paul Revere” was “woefully different” from the historical Paul Revere, that Paul Revere would not engage in a “selfless act of patriotism,” and that its insureds could not look to their insurer “in the hour of darkness and peril and need.” The circuit court then found that it was “no surprise” that Paul Revere had moved for, and that the district court had granted, a mistrial because the plaintiff’s counsel had violated the district court’s orders.

Finally, the circuit court pointed out that, even after the mistrial had been declared, the plaintiff’s counsel “unapologetically insisted that his arguments were appropriate while simultaneously stating” that he “intended to introduce the jury to the concept of an insurance company accepting premiums based on promises it had no intention of keeping,” and that he intended to argue in oral statements that “[Paul Revere] make[s] you promises to protect you and your family in times of need but in the end, the promises made are nothing but illusions which cause security to fade.” These statements, the circuit court found, further supported the district court’s conclusion that the plaintiff’s counsel had “intentionally and egregiously ignored the district court’s clear orders.”

The circuit court then concluded that, in light of the plaintiff’s counsel’s “repeated attempts” to raise a bad faith theory, his “name-calling at trial,” his “self-professed trial theory,” and the district court’s familiarity with the case, the plaintiff’s counsel had not shown that the district court had inappropriately declared a mistrial or had abused its discretion in imposing sanctions. [Sabatine v. Paul Revere Life Ins. Co., 2013 U.S. App. Lexis 8579 (6th Cir. Apr. 26, 2013).]

Plan May Exclude Benefits Where Beneficiary Pursues or Intends to Pursue Damages against Third Party, Circuit Court Holds

In this case, the plaintiff participated in the Southern California Lumber Industry Welfare Fund’s multi-employer self-funded medical indemnity plan, which was governed by the Employee Retirement Income Security Act of 1974 (ERISA). Until 2002, the plan advanced benefits for medical expenses incurred by a participant pending recovery from a third party liable for those expenses. In 2002, the U.S. Supreme Court held that the provision of ERISA authorizing plan fiduciaries to bring civil actions to obtain “appropriate equitable relief” did not authorize employee benefit plans to seek reimbursement of advanced medical expenses from beneficiaries who recovered damages for those expenses from a third party. The fund’s board of trustees in 2002 then amended the plan’s exclusion for third party injuries to read:

This Plan does not provide benefits where the care required is for injuries or illness to you or your eligible dependents caused through the act or omission of another person, known as a Third Party, and where you are pursuing or you intend to pursue a claim or lawsuit for damages against the Third Party.

The board also amended the plan to remove the provision of the plan providing for advance payment of benefits in cases of third party liability and all language subrogating the plan to a participant’s claims against third parties.

In 2008, the plaintiff was injured in a helicopter crash. The fund sent him a questionnaire asking, “Have you filed or are you planning to file a claim or lawsuit against a third party as a result of the injury/illness?” The plaintiff checked the box indicating “Yes.” The fund then denied the plaintiff’s claims.

The plaintiff appealed to the fund’s board, arguing that the exclusion required that a court first adjudicate that a third party had “caused” the accident before benefits could be denied. The board disagreed, finding that the exclusion applied whenever the participant pursued or intended to pursue a claim or lawsuit against a potentially culpable third party.

The plaintiff then filed suit, alleging that the board had abused its discretion in interpreting the exclusion, that the exclusion as interpreted was unconscionable and violated public policy, and that the board had breached its fiduciary duties in denying the plaintiff’s claims.

The district court granted the fund’s motion for summary judgment, and the plaintiff appealed.

The U.S. Court of Appeals for the Ninth Circuit affirmed.

In its decision, the circuit court ruled that the district court had not erred in finding that the board’s reading of the exclusion was reasonable. The circuit court reasoned that the exclusion applied when a claimant was pursuing or intended to pursue a claim against a third party, and thus did “not require prior adjudication of that claim before its application.” According to the circuit court, the board’s interpretation was consistent with the purpose of the exclusion, which was to refrain from advancing benefits that, in light of the U.S. Supreme Court’s 2002 decision, might not be recoverable.

The circuit court next rejected the plaintiff’s contention that the exclusion was either unconscionable or violative of public policy, noting that the contract was a product of collective bargaining between management and labor, each of which was represented on the board that adopted the challenged exclusion; that, in choosing medical coverage, the plaintiff had a choice between the plan he chose and two health maintenance organization plans, neither of which had the exclusion; and that the exclusion was adopted years before the plaintiff had become a participant in the plan, was unambiguous, and appeared twice in the summary plan description. [Noecker v. Southern California Lumber Industry Welfare Fund, 2013 U.S. App. Lexis 6841(9th Cir. April 4, 2013).]

IME, VRC, and Opinions of Reviewing Physicians Sufficient for Circuit Court to Uphold Decision to End Plaintiff’s Long Term Disability Benefits

As an accounts payable clerk for Alphastaff, Inc., the plaintiff in this case was eligible to receive long term disability (LTD) benefits as a participant in an employee welfare benefit plan under a group insurance policy issued by Aetna Life Insurance Company, which served as the plan’s claim administrator.

The plaintiff ceased work and underwent coronary artery bypass surgery in March 2009.  She subsequently applied for LTD benefits. Aetna approved her claim but, after a physician performed an independent medical examination (IME) in July 2010 and concluded that the plaintiff was capable of working and after a vocational rehabilitation consultant (VRC) employed by Aetna who reviewed the physician’s findings determined that there were five sedentary occupations that the plaintiff could perform (as well as the local employers for each occupation), Aetna terminated the plaintiff’s LTD benefits in August 2010.

The plaintiff appealed that decision, and Aetna affirmed its decision after reviewing the reports of three physicians it had hired to review the plaintiff’s medical records. The plaintiff then sued, and the trial court granted summary judgment in favor of Aetna. The plaintiff appealed to the U.S. Court of Appeals for the Eleventh Circuit.

The circuit court explained that the plaintiff had the burden of proving that she was disabled. It added that if the plaintiff satisfied that burden, she then had to demonstrate that Aetna’s decision to deny her LTD benefits was arbitrary and capricious; that is, she had to show that no reasonable grounds supported Aetna’s decision.

The circuit court then pointed out that the plaintiff’s LTD benefits were payable for a period of “total disability,” ruling that the plaintiff had not shown proof of her continued disability. Indeed, the circuit court continued, reviewing physicians who considered the medical evidence found that the plaintiff was capable of sedentary work, which was consistent with the result of the IME and the VRC report, which identified sedentary occupations available to the plaintiff in her geographical area.

In any event, the circuit court continued, Aetna’s decision was not arbitrary and capricious, and it was not unreasonable for Aetna to rely on the findings of reviewing physicians, in conjunction with the IME and the VRC, and not to rely on the opinion of the plaintiff’s treating physician who had reached the opposite conclusion. [Herring v. Aetna Life Ins. Co., 2013 U.S. App. Lexis 8667 (11th Cir. Apr. 29, 2013).]

Circuit Upholds $10-Per-Day Penalty for Failure to Provide COBRA Notice to Employee Who Resigned

After the plaintiff in this case began to work for Design Assistance Corporation (DAC), she enrolled in its group health insurance plan. She resigned from DAC but did not receive notice of her eligibility to continue her coverage, as required by the Comprehensive Omnibus Budget Reconciliation Act of 1986 (COBRA), for almost a year after her resignation.

The plaintiff sued DAC, and the district court found that, in the time between her resignation and when she received the COBRA notice, she had paid for medical expenses that otherwise would have been covered by the plan. The district court concluded that DAC’s failure to timely notify the plaintiff of her right to continuation coverage violated ERISA’s notification requirement and therefore subjected DAC to a statutory penalty. The district court valued that penalty at $10 per day for each of the 293 days between the date when it found DAC should have given the plaintiff her COBRA notice and the date when notice finally was given.

The plaintiff appealed to the U.S. Court of Appeals for the Third Circuit, arguing that she was eligible to receive a statutory penalty from DAC of up to $110 for each day that the notice of her eligibility for COBRA coverage was late, and also seeking reimbursement for the medical expenses she had paid before she received the COBRA notice; the plaintiff also sought attorney’s fees.

In its decision, the Third Circuit ruled that the district court had not abused its discretion when it did not find that DAC had acted in bad faith or with malicious intent. It also ruled that the district court had not abused its discretion in determining that DAC should be penalized, noting that the plaintiff should have received the COBRA notice before she did, that she had paid $656.22 in medical expenses after she had resigned until she received the COBRA notice, and that she “may have tended to her medical needs differently than she would have done in the months following her resignation, had she not been under the mistaken assumption that she had no health care coverage.”

After those findings, the Third Circuit decided that the district court had not erred in failing to award statutory damages in an amount greater than $10 per day against DAC. It explained that the district court had “carefully set forth the reasoning behind its decision to impose a relatively low penalty” and that, in addition to finding an absence of bad faith, it had determined that the fact that the plaintiff’s insurance was reinstated retroactively and at no cost to her exhibited “a certain degree of good faith by” DAC and its willingness to remedy the mistake.

Next, the Third Circuit affirmed the district court’s decision refusing to award the plaintiff $656.22, the amount of medical expense she had incurred in the time between her resignation and her receipt of the COBRA notice, plus interest. It explained that while ERISA would seem to permit such reimbursement, there was no statutory authority mandating such reimbursement, and it added that, after DAC had retroactively reinstated the plaintiff’s medical benefits to cover the time period when she had incurred the medical expenses in question, she “could have, but failed to, resubmit to her insurer the $656.22 worth of unreimbursed medical expenses allegedly incurred during the lapsed period.” Accordingly, the circuit court decided, the district court had not abused its discretion in finding that the plaintiff had failed to mitigate her damages and in denying her reimbursement.

Finally, the circuit court affirmed the district court’s decision denying the plaintiff’s request for attorney’s fees. It concluded that the district court had not abused its discretion in determining that the lack of bad faith on DAC’s part, the minimal deterrent effect of shifting fees in this particular case, the minimal benefit that this litigation would have on members of the benefit plan as a whole, and the relatively small harm suffered by the plaintiff given that DAC had retroactively reinstated her insurance coverage, all weighed against the award of attorney’s fees. [Fama v. Design Assistance Corp., 2013 U.S. App. Lexis 7225 (3d Cir. Apr. 10, 2013).]

Appeals Court Upholds Dismissal of Employee Licensed by Colorado to Use Medical Marijuana

After the plaintiff in this case was fired, he sued his former employer, Dish Networks, L.L.C., alleging that he was a quadriplegic who was licensed by Colorado to use medical marijuana pursuant to the Medical Marijuana Amendment in the Colorado constitution. The plaintiff alleged that he had used marijuana within the limits of the license, that he never used marijuana on Dish Networks’ premises, and that he never was under the influence of marijuana at work. According to the plaintiff, Dish Networks fired the plaintiff after he tested positive for marijuana in violation of Dish Networks’ drug policy.

The plaintiff claimed that his termination breached Colorado’s Lawful Activities Statute (the Act), which prohibits an employer from discharging an employee for “engaging in any lawful activity off the premises of the employer during nonworking hours,” subject to certain exceptions. Dish Network filed a motion to dismiss, arguing that the use of medical marijuana was not “lawful activity” because it was prohibited under both state law and federal law.

The trial court addressed only the state law issue and granted Dish Network’s motion, deciding that plaintiff’s medical marijuana use was not “lawful activity” under Colorado law.  The plaintiff appealed.

The appellate court affirmed, finding that state-licensed medical marijuana use was not a “lawful activity” for purposes of the Act. It reasoned that for an activity to be “lawful” in Colorado, it must be permitted by, and not contrary to, both state and federal law. Conversely, an activity that violated federal law but complied with state law could not be “lawful” under the ordinary meaning of that term. Therefore, the appellate court continued, applying the plain and ordinary meaning, the term “lawful activity” in the Act meant that the activity — in this case, the plaintiff’s medical marijuana use — must comply with both state and federal law.

The appellate court therefore concluded that because the plaintiff’s state-licensed medical marijuana use was, at the time of his termination, subject to and prohibited by federal law, it was not “lawful activity” for the purposes of the Act. It then affirmed the district court’s decision dismissing the plaintiff’s complaint. [Coats v. Dish Network, L.L.C., 2013 Colo. App. Lexis 616 (Colo. Ct. App. Apr. 25, 2013).]

Reprinted with permission from the August 2013 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

Related Publications


Legal updates and news delivered to your inbox