Employee Benefit Plan Review – From the Courts

March 2, 2018 | Employment & Labor | Insurance Fraud

Fifth Circuit Holds ERISA Preempts Plaintiff’s Claims under State Law, and Plaintiff’s Claim for Equitable Relief Fails as a Matter of Law

The plaintiff in this case sought to recover life insurance benefits under  an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). Her deceased husband had been a participant in the plan and had life insurance coverage thereunder. The defendant, which had issued to the decedent’s employer a group policy of insurance to fund life insurance benefits payable under the plan, denied coverage under the plan on the ground that the plaintiff’s husband was not a covered employee at the time of his death.

The plaintiff commenced suit in a Louisiana state court, relying on state law requirements regarding the rights of an employee to convert his or her group coverage into an individual life insurance policy when group coverage ends.

The defendant removed the case to federal district court in Louisiana and argued that ERISA completely preempted the plaintiff’s action. After the defendant removed the case, the plaintiff added a claim for equitable relief under ERISA Section 502(a)(3).

The district court dismissed the action, and the plaintiff appealed to the U.S. Court of Appeals for the Fifth Circuit.

In its decision affirming the district court, the Fifth Circuit explained that federal law – in particular, Section 502(a) of ERISA – provided the sole avenue for seeking to recover benefits under an ERISA plan. Therefore, the court continued, ERISA preempted the plaintiff’s state law claims seeking to recover plan benefits.

This decision involves the distinction between conflict preemption, which is governed by 29 U.S.C. § 1144, and complete preemption, which preempts state law that interferes with ERISA’s remedial scheme and “provides a separate vehicle to assert a claim for benefits outside” ERISA.

The court held that ERISA completely preempted the state law the plaintiff relied on. The plaintiff attempted to avoid preemption by arguing that conflict preemption analysis precluded a finding that ERISA preempted the Louisiana law she relied on. The plaintiff argued specifically that ERISA did not preempt her state law causes of action because ERISA’s “savings clause,” 29 U.S.C. § 1144, applied. The court disagreed. Although the court should have gone further to explain the distinction between conflict and complete preemption, the court stated that the savings clause, relevant in a conflict preemption analysis, did “not allow state law claims seeking recovery of ERISA benefits to escape preemption.”

The court acknowledged that the savings clause preserved a role for certain state laws that regulate insurance, that is, conflict preemption, but explained that even a state law otherwise “saved from preemption by the savings clause is itself preempted if” the “state claims … provide a separate vehicle for seeking benefits from an ERISA plan,” that is, complete preemption. Such state law claims, the court stated, “remain preempted as such claims must be brought under ERISA’s civil enforcement provision,” 29 U.S.C. § 1132(a). Explaining how the savings clause fits into the analysis, the court stated:

That is not to say that, when challenging the lawfulness of the denial of ERISA benefits, a beneficiary cannot argue that the administrator failed to comply with applicable laws including any state laws that retain force because of the savings clause. But that must be done in the context of ERISA’s civil enforcement provision.

Accordingly, the Fifth Circuit held ERISA completely preempted plaintiff’s state law claims.

Finally, because the plaintiff had a remedy for plan benefits available under ERISA Section 502(a), the court held that the plaintiff’s claim for equitable relief also failed. Quoting Varity Corp. v. Howe, 516 U.S. 489 (1996), the court reasoned that “[e]quitable relief under ERISA is normally unavailable ‘where Congress elsewhere provided adequate relief for a beneficiary’s injury.’” Thus, equitable relief was unavailable to the plaintiff because ERISA Section 502(a) provided a “direct mechanism” to address the injury for which the plaintiff sought equitable relief, that is, the denial of benefits. [Swenson v. United of Omaha Life Ins. Co., No. 17-30374 (5th Cir. Dec. 4, 2017).]

Tenth Circuit Decides Plan Administrator’s Decision Terminating Long-Term Disability Benefits Was Arbitrary and Capricious

The plaintiff in this case, a systems integration business analyst at Lockheed Martin Corporation, was a participant in the Lockheed Martin Group Benefits Plan, an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). Life Insurance Company of North America (LINA) was the plan’s claim administrator and issued a group policy of insurance to fund long-term disability benefits payable under the plan.

In October 2011, the plaintiff was physically assaulted while walking his dog. As a result, the plaintiff suffered a mild traumatic brain injury (mTBI) that impacted his cognitive abilities and prevented him from returning to work until September 10, 2012, at which point his physician cleared him for part-time work every other day.

Approximately six weeks later, the plaintiff was allowed to return to part-time work on a daily basis. The plaintiff claimed, however, that even under a part-time schedule he experienced cognitive fatigue and headaches, requiring frequent rest. He often worked from home where it was easier to take naps throughout the day. Because he could no longer stay organized or keep track of deadlines after the assault, the plaintiff received poor feedback at work.

The plaintiff filed a claim for partial long-term disability benefits, which LINA approved on March 30, 2012. About one year later, LINA reviewed the plaintiff’s file and contacted his physician’s office for more information about his condition and restrictions. The physician’s nurse told LINA that the plaintiff’s restrictions were basically permanent as he was “not likely to improve.”

Despite this prognosis, LINA sent the plaintiff a letter one week later notifying him that it was terminating his long-term disability benefits, explaining that “the medical documentation on file does not continue to support the current restrictions and limitations to preclude you from resuming a full-time work schedule.”

The plaintiff appealed this determination and provided a list of his basic job duties. The plaintiff claimed that there was no evidence to support LINA’s determination that he was or had been able to perform each and every material duty of his regular occupation full-time. He supplemented this appeal with a psychological and vocational evaluation from a psychologist.

LINA upheld its determination on appeal, asserting that there was insufficient clinical evidence of how the plaintiff’s functional capacity continuously prevented him from performing each and every of the material duties of his occupation from and after March 16, 2013. The plaintiff appealed a second time and LINA again upheld its adverse determination. The plaintiff then filed suit in the U.S. District Court for the District of Colorado.

The district court held that LINA’s decision to terminate the plaintiff’s partial long-term disability benefits was arbitrary and capricious, and it reversed that determination. LINA appealed to the U.S. Court of Appeals for the Tenth Circuit.

In its decision affirming the district court, the court first noted that because LINA had full discretionary authority to interpret and construe the terms of the plan, the court would review LINA’s determination under the arbitrary and capricious standard. Under that standard of review, the court stated, it would uphold LINA’s determination as long as it was made “on a reasoned basis and supported by substantial evidence” in the administrative record.

The court observed that the plaintiff’s position as a systems analyst was a full-time position amounting to an eight-hour day and a five-day work week. Although the plan required claimants seeking long term disability benefits to provide sufficient evidence they were “unable to perform each and every material duty of his or her regular occupation on a full-time basis,” and although claimants typically have the burden of proving eligibility for benefits, the court stated it would uphold LINA’s benefit determination only if there was “substantial evidence in the record supporting the determination that [the plaintiff] is able to perform each and every material duty of a Systems Analyst for eight hours a day.” The court said, however, that the record revealed “no such evidence.”

The court noted that when LINA first approved the plaintiff’s claim for long-term disability benefits in the spring of 2012, it noted his “deficits in executive functioning, attention, memory and higher level attention/speed of processing.” These limitations were especially problematic for a return to work, the court said, because the plaintiff’s occupation as a systems analyst required “high executive function.”

Moreover, the court continued, when LINA asked the plaintiff’s physician for an update on the plaintiff’s condition a year later, the physician explained that the plaintiff was “limited by cognitive fatigue” and was “simply unable to tolerate full time work activities yet.”

The court noted that the plaintiff’s limitations were believed to be permanent and unlikely to improve. The court added that the record did not reflect significant improvements in the plaintiff’s cognitive functioning between his part-time return to work in September 2012 and LINA’s internal review of his claim status in March 2013.

LINA contended that its determination was well-supported, because it terminated the plaintiff’s long-term disability benefits based “on updated medical evidence” as well as independent medical file reviews. The court was unpersuaded. Again, despite the plan language requiring the plaintiff to demonstrate that he was unable to perform “each and every” material job duty, the court found that none of the independent reviewers concluded from the medical evidence that the plaintiff “was capable of performing each and every material duty of his regular occupation on a full-time basis.”

The court also added that none of LINA’s vocational experts found that the plaintiff was capable of performing each and every one of his material duties on a full-time basis either. Ultimately, the court said, LINA’s experts, whether medical or vocational, failed to evaluate the plaintiff’s ability to perform his material job duties on a full-time basis.

The court concluded that for LINA’s benefit determination to be “well-reasoned,” the determination had to be “based on medical evidence that [the plaintiff] is capable of performing each and every material duty of his occupation as a Systems Analyst on a full-time basis,” but that LINA provided no such evidence. Accordingly, the court held that LINA abused its discretion. [Van Steen v. Life Ins. Co. of North America, Nos. 16-1405 & 16-1421 (10th Cir. Jan. 2, 2018).]

Claim Administrator Breached Plan Terms – and Its Fiduciary Duties – by Paying Plan Beneficiaries Through Retained Asset Accounts Instead of Making Payments in “One Sum”

The plaintiffs in this case were the beneficiaries of life insurance provided by two employee welfare benefit plans governed by the Employee Retirement Income Security Act of 1974 (ERISA). The deceased plan participants obtained the coverage through their employment with two separate companies: JPMorgan Bank and Con-way Incorporated. The plans’ claim administrator’s default practice was to pay plan benefits to beneficiaries by opening a personal bank account for the beneficiaries containing the amount of benefits due, and not to issue a single check.

When paid through such a “retained asset account,” a beneficiary received a draft book that he or she could use to write drafts against the funds in the account. A beneficiary could obtain the full value of the account at any time by writing a draft to himself or herself for the full account balance. Interest accrued on the account daily and was credited monthly. Until drafts written by beneficiaries cleared, the plans’ claim administrator was able to invest the funds in its possession – the “retained assets” – and retain any profit or loss, less the interest credited to the accounts.

Each summary plan description (SPD) for the plans provided that payment of life insurance benefits under the plan could be made generally through a retained asset account. Each SPD also said that to the extent there were any discrepancies between the SPD and the plan, the plan would control. The plans, however, were silent with respect to payment through retained asset accounts and, in fact, stated that payment would be made in “one sum.”

The plaintiffs contended in their lawsuit that, among other things, paying benefits in this manner violated the claim administrator’s fiduciary duties under ERISA Section 404(a)(1). The parties moved for summary judgment.

The court first considered whether the claim administrator was acting in its fiduciary capacity when it made payments through the retained asset accounts. This, the court stated, depended on “whether making payment via the account fulfilled [the administrator’s] obligations to the beneficiaries under the plan documents.” If the administrator acted consistently with the plan documents, then it satisfied its obligations under ERISA and, thus, was no longer acting as a fiduciary when it paid through the retained asset accounts. If, however, the administrator acted contrary to the plan documents, its decision to establish retained asset accounts did not discharge its obligations under the plans, and ERISA’s fiduciary obligations still applied.

The court held that the claim administrator’s choice to establish accounts for beneficiaries “was inconsistent with the plan language,” which required payment in “one sum.” The court based this aspect of its decision on SPD language resolving discrepancies between the SPD and the plan. Although the SPD said payment would be generally made through a retained asset account, the plan was silent with respect to the accounts and stated that payment would be made in one sum. Thus, because the SPD stated that the plan governed when there were discrepancies between the SPD and the plan, the decision to pay into retained asset accounts ran afoul of the plan.

The court added that although the beneficiaries had access to the funds with the establishment of the accounts, the claim administrator “essentially was retaining possession of the funds until such time as the beneficiaries drew the funds out in whole or in part.” In the court’s view, by retaining possession of the funds in such a manner, the claim administrator did not comply with the terms of the plan requiring payment in “one sum.”

The court then found that the claim administrator’s decision to pay plan benefits into retained asset accounts and invest the proceeds breached its fiduciary duties under ERISA to the beneficiaries.

ERISA, the court explained, requires plan fiduciaries to act for the “exclusive purpose” and “solely in the interest of [a plan’s] participants and beneficiaries.” Here, the court stated, the claim administrator “chose to ignore its obligations under the plan documents” and created the retained asset accounts “to generate a profit for itself.” In doing so, the court held, the claim administrator “had its own interests in mind, not those of its beneficiaries.” Accordingly, the claim administrator breached its fiduciary duties.

The court next considered whether the plaintiffs could recover for the claim administrator’s breach. The plaintiffs sought disgorgement of the profits the claim administrator made when it invested the funds on deposit in the retained asset accounts. Although the court acknowledged that ERISA requires a plaintiff to show a fiduciary breach proximately causes harm, the court stated plaintiffs do not “need to show a loss to recover for a breach of fiduciary duty under ERISA – the plaintiff may also show that the fiduciary profited through the use of plan assets.”  The court cited to 29 U.S.C. § 1109 in support of this proposition. This section, however, states that fiduciaries may be individually liable to plans for losses to the plan, such as lost profits, not to individual plan participants or beneficiaries. The court recognized that the plaintiffs suffered no out-of-pocket loss, but nevertheless held under this theory that they were entitled to disgorgement of the administrator’s profits.

The court concluded that because the claim administrator breached its fiduciary duties by paying plan benefits into the accounts, the plaintiffs were entitled to summary judgment with respect to their breach of fiduciary duty claims under ERISA. [Huffman v. Prudential Ins. Co. of Am., No. 2:10-cv-05135 (E.D. Pa. Dec. 6, 2017).]

Comment

The court did not hold that payment through a retained asset account or some other means that generated income for a plan’s claim administrator per se violated fiduciary duties under ERISA. As the U.S. Court of Appeals for the Third Circuit has recognized, “the retained-asset account method of payment is not in itself necessarily inconsistent with ERISA.” Edmonson v. Lincoln Nat’l. Life Ins. Co., 725 F.3d 406 (3d Cir. 2013). Indeed, it would be “inconsistent with ERISA’s goals to prohibit this type of arrangement.” Id.

Plan’s Anti-Assignment Provision Bars Health Care Provider’s Suit Against Insurer for Benefits

On March 16, 2016, the plaintiff, New Jersey-based University Spine Center, performed spinal surgery on a patient, a participant in a health plan, an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). The participant assigned to the plaintiff his right to plan benefits. The plaintiff then sought payment for its services from the plan.

Toward that end, the plaintiff submitted a claim requesting reimbursement in the amount of $435,222 from the plan. The plaintiff alleged, however, that the plan only paid $7,145.65.

The plaintiff participated in the plan’s administrative appeals process in an effort to recover the remaining balance of $428,076.35. The plan’s claims fiduciary denied the plaintiff’s appeal.

Litigation followed. The plaintiff alleged the claims fiduciary violated ERISA by failing to make all required payments under the plan.

The fiduciary moved to dismiss the complaint, contending that the plaintiff did not have standing to sue for benefits under the plan, because the plaintiff was not a plan participant or beneficiary. The fiduciary contended that the assignment of benefits to the plaintiff was void because the plan contained an anti-assignment clause that expressly prohibited the participant from assigning his rights or benefits. The fiduciary argued that the clause, which stated that the participant “may not assign [his or her] benefits or rights under this plan,” deprived the plaintiff of standing to bring its lawsuit.

The court agreed and granted the fiduciary’s motion to dismiss.

In its decision, the court explained that, under Section 502(a) of ERISA, a “participant or beneficiary” may bring a civil action to recover benefits under the terms of an ERISA plan. Accordingly, the court continued, standing to sue under ERISA was statutorily “limited to participants and beneficiaries.”

The court noted, however, some court decisions have permitted a health care provider to bring a cause of action by acquiring “derivative standing” through an assignment of rights to the provider from the plan participant or beneficiary. The court then considered whether the participant’s attempted assignment of benefits successfully assigned his rights under the plan to the plaintiff, and decided that it had not.

The court stated that the plan’s anti-assignment provision was “clear and unambiguous” and it prohibited the participant from assigning to the plaintiff his right to bring suit.

Accordingly, even though the Third Circuit has not yet decided the question, the court concluded that the plan’s anti-assignment clause was valid and barred the plaintiff’s claims against the fiduciary. [University Spine Center v. Aetna, Inc., No.: 17-7825 (JLL) (D.N.J. Dec. 20, 2017).]

Comment

Courts across the country have validated anti-assignment provisions such as the one in the University Spine case and have denied standing to third parties seeking to enforce their assigned rights. See, e.g., Physicians Multispecialty Grp. v. Health Care Plan of Horton Homes, Inc., 371 F.3d 1291 (11th Cir. 2004) (“[A]n unambiguous anti-assignment provision in an ERISA-governed welfare benefit plan is valid and enforceable.”); LeTourneau Lifelike Orthotics & Prosthetics, Inc. v. Wal-Mart Stores, Inc., 298 F.3d 348 (5th Cir. 2002) (ERISA plan’s anti-assignment clause was enforceable); City of Hope Nat’l Med. Ctr. v. HealthPlus Inc., 156 F.3d 223 (1st Cir. 1998) (“[W]e hold that ERISA leaves the assignability or non-assignability of health care benefits under ERISA-regulated welfare plans to the negotiations of the contracting parties”); St. Francis Reg’l Med. Ctr. v. Blue Cross & Blue Shield of Kan., Inc., 49 F.3d 1460 (10th Cir. 1995) (“ERISA’s silence on the issue of assignability of insurance benefits leaves the matter to the agreement of the contracting parties”); Davidowitz v. Delta Dental Plan, Inc., 946 F.2d 1476 (9th Cir. 1991) (“The court concludes that ERISA welfare plan payments are not assignable in the face of an express non-assignment clause in the plan”); Advanced Orthopedics & Sports Med. v. Blue Cross Blue Shield of Mass., No. 14-7280 (FLW) (D.N.J. July 20, 2015) (“[C]ourts routinely enforce anti-assignment clauses contained in ERISA-governed welfare plans”).

Failure to Exhaust Administrative Remedies Dooms Plaintiff’s ERISA Action

As an employee of the Bank of America, the plaintiff in this case was a participant in the bank’s health plan, an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). The plaintiff suffered from severe intractable supraorbital neuralgia, a condition that causes throbbing, paroxysmal, or constant pain present in the sub-occipital region as well as other parts of the posterior scalp. The plaintiff unsuccessfully underwent multiple surgical procedures to treat the condition.

After these procedures failed to give the plaintiff relief, her neurological surgeon informed the plaintiff of another treatment option, known as neuromodulation, that required the implantation of first trial and then permanent peripheral nerve stimulating electrodes.

On February 1, 2016, the plan’s third-party administrator responded to a pre-procedure inquiry from the plaintiff’s neurological surgeon regarding coverage. The administrator informed the surgeon that neuromodulation was not covered under the plan.

On February 24, 2016, the plaintiff’s neurological surgeon sent a second letter to the administrator objecting to the denial of coverage and requested reconsideration of the decision. The plaintiff also sent the administrator a letter on March 1, 2016 stating, in pertinent part, “I would like to appeal this decision.”

On March 31, 2016, the administrator upheld its decision.

Nevertheless, the plaintiff opted to undergo the neuromodulation in late September. In early October, the plaintiff had the trial electrode removed and the permanent peripheral nerve stimulating electrode and implantable pulse generator inserted. The plaintiff reported to her neurological surgeon in follow-up visits in 2016 and 2017 that, subsequent to the neuromodulation, she was not experiencing pain.

The plaintiff paid $117,351 for the procedure from her own funds. Ultimately, the administrator denied coverage of the procedure in a series of explanations of benefits letters (EOBs).

On April 24, 2017, the plaintiff sued the administrator and Bank of America under ERISA Section 502(a)(1)(B) and ERISA Section 502(a)(3), seeking unpaid benefits and interest.

The defendants moved for judgment on the pleadings. They contended that the plaintiff failed to appeal the denial of benefits after receiving services within 180 days after receiving notice of the adverse determination, as required by the plan’s summary plan description (SPD). The defendants argued that the plaintiff’s failure to exhaust the plan’s administrative remedies required dismissal of the complaint.

The court granted the defendants’ motion.

In its decision, the court explained that although ERISA does not contain an express exhaustion requirement, before a plaintiff may bring a benefits action under ERISA, he or she must exhaust the plan’s administrative remedies. Requiring exhaustion before resorting to a lawsuit in federal court affords a “safeguard that encourages employers and others to undertake the voluntary step of providing medical and retirement benefits to plan participants.”

The court held that the plaintiff’s failure to follow the SPD’s appeal requirements was “fatal to her claim.” The court noted that the plaintiff underwent the procedure in late September and early October 2016 and received two EOBs, one dated October 18, 2016 and another dated December 13, 2016, denying her claims. According to the court, the plaintiff was required to appeal the denial of benefits within 180 days of receiving the adverse determination.

The plaintiff failed to allege that she appealed the post-procedure benefit determination, and the court ruled that this failure precluded her lawsuit.

Further, the court stated that the plaintiff’s mere assertion in her complaint that she had “exhausted all her administrative remedies” was insufficient. Indeed, the court concluded that the plaintiff’s conclusory pleadings and assertions in her briefing that she had received a “final appellate decision, leading to exhaustion,” were irrelevant as the plan documents specified that she was required to appeal the adverse benefit determination after undergoing the procedure and she did not allege in the complaint that she appealed the determination. Accordingly, the court entered judgment on the pleadings and dismissed the case. [Peppiatt v. Aetna Life Ins. Co., No. 2:17-cv-02444 (ADS)(AKT) (E.D.N.Y. Dec. 4, 2017).]

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