Employee Benefit Plan Review – From the Courts

September 18, 2017 | Norman L. Tolle | Insurance Coverage

Insurer Could Offset Monthly Disability Payments Against Plaintiff’s Part-Time Earnings, Third Circuit Rules

The plaintiff in this case, a gastroenterologist, suffered a debilitating injury to her shoulder and underwent surgery in an attempt to repair the damage. The surgery was only partly successful and the damage from her injury prevented her, for a time, from performing her duties as a gastroenterologist with a medical group in Newark, Delaware.

The plaintiff qualified for and received disability payments from Reliance Standard Life Insurance Company under a long-term disability policy offered by her medical practice.

The plan, which was governed by the Employee Retirement Income and Security Act of 1974 (ERISA), paid the plaintiff a monthly benefit, but stipulated that this amount would be reduced if she ever was able to perform work on a limited basis. According to the plan’s “Rehabilitation Provision,” if a beneficiary returned to work part-time, the monthly payment was reduced by “an amount equal to 50% of earnings received” from that part-time work.

The plaintiff was approved for the maximum disability payment in April 2009. Approximately a year later, Reliance discovered that the plaintiff had returned to part-time work with her medical practice and had posted a net income for the month of March 2010. Reliance notified the plaintiff that, pursuant to the plan, it would reduce her monthly benefit by 50 percent of the amount of her net monthly income.

The plaintiff objected to this reduction, and administratively appealed Reliance’s decision. She argued that she had not “received” any earnings because the funds she earned had been applied to the large negative balance she owed her medical practice for overhead, staffing, malpractice insurance, and other items. In other words, the plaintiff contended that because her earnings had been used to pay down the debt she owed to her medical practice, she had not received any earnings against which Reliance could offset her disability payments.

Reliance rejected this argument and reduced her benefits accordingly.

The plaintiff sued Reliance in the U.S. District Court for the District of Delaware, challenging the reduction of her benefits. The district court ruled in favor of Reliance, and the plaintiff appealed to the U.S. Court of Appeals for the Third Circuit.

There, the plaintiff conceded that the plan permitted Reliance to offset her benefit by any earnings she received from part-time work, but she contended that she had not “received” any earnings because the funds had been used to pay down a debt she owed to her medical group.

The circuit court rejected the plaintiff’s appeal and affirmed the district court.

In its decision, the circuit court found that the plan “clearly” permitted Reliance to offset the plaintiff’s benefit by any earnings she received from part-time work. It then said that the plaintiff’s argument “misse[d] the mark” because she had received the benefit of her earnings by having those funds applied against the deficit she owed her medical practice. According to the Third Circuit, money still may be earned even if the funds were never possessed so long as the recipient attained the benefit of the funds.

In any event, the circuit court pointed out that there was nothing in the plaintiff’s medical practice’s shareholder agreement that required that the plaintiff’s medical practice use any of the plaintiff’s earnings to pay off her debt. Rather, the Third Circuit noted, the agreement stipulated that she would be paid a salary and bonuses in addition to receiving retirement and other fringe benefits; that she would be charged “Specific Practice-Related Expenses”; and that any compensation paid to employees would be reconciled with any debts or expenses incurred by that employee. The agreement did “not say” that earnings were required to offset against the debt the plaintiff owed the practice, the circuit court concluded. [Patrick v. Reliance Standard Life Ins. Co., 2017 U.S. App. Lexis 10105 (3d Cir. June 7, 2017).]

New York Federal Court Upholds Plan’s Reliance on DSM-IV’s Definition of “Mental Illness”

The plaintiff in this case worked for the School of Visual Arts from 2003 until 2009, when she became disabled by bipolar disorder. In May 2010, she began to collect long-term disability benefits from the school under a plan the school sponsored and administered and for which Hartford Life Insurance Company served as the claims fiduciary, charged with making eligibility determinations and interpreting the plan’s provisions. The plan was subject to the Employee Retirement Income Security Act of 1974 (ERISA).

Two years after it began paying long-term disability benefits to the plaintiff, Hartford terminated the plaintiff’s benefits pursuant to the plan’s 24-month cap for mental disabilities.

The plaintiff appealed this decision internally to Hartford, arguing, among other things, that bipolar disorder was a “biologically based illness” and, therefore, that it was “a physical condition” not subject to the 24-month cap for mental disabilities.

Hartford denied the plaintiff’s appeal primarily because the plan defined “mental illness” as those listed in the current (i.e., the fourth) edition of the Diagnostic and Statistical Manual of Mental Disorders (DSM-IV), and the DSM-IV listed bipolar disorder as a mental disorder.

The plaintiff sued, and the parties moved for summary judgment.

The U.S. District Court for the Eastern District of New York granted summary judgment in favor of Hartford.

In its decision, the district court upheld Hartford’s reliance on the DSM-IV to define “mental illness.” The district court pointed out that the plan “explicitly” defined mental illness in terms of the mental disorders listed in the DSM-IV, and it rejected the plaintiff’s contention that the definition was “obsolete” and “overbroad.”

The district court was not persuaded by the plaintiff’s argument that Hartford should have reviewed the plan’s definition of mental illness to determine if it was valid and then advise the school of its review, declaring that it was “implausible” that Hartford, as the claims fiduciary charged with making case-by-case eligibility determinations, would have a fiduciary duty to consider whether the plan’s provisions needed to be revised. Although the school, as the plan sponsor and administrator, had the authority to amend the plan, the district court concluded that the school had “no fiduciary duty to do so.” [Kim v. Hartford Life Ins. Co., 2017 U.S. Dist. Lexis 91660 (E.D.N.Y. June 14, 2017).] 

Court Limits Plaintiff’s Use of Insurer’s Policies and Procedures to His Own LTD Benefits Case

In this case, the plaintiff sued Aetna Life Insurance Company pursuant to the Employee Retirement Income Security Act of 1974 (ERISA), claiming that Aetna had erroneously denied him long-term disability (LTD) benefits after he had been diagnosed with coronary artery disease.

The plaintiff asked Aetna to turn over its policies and procedures (P&P) governing the handling of administrative appeals of LTD claims and a form “scorecard” for its LTD disability benefit managers.

In response, Aetna moved for a protective order directing that the materials be designated confidential and that they could be used only for this litigation. According to Aetna, the P&P was maintained confidentially within Aetna, and authorized employees could access it only through a password-protected intranet system. In support of Aetna’s motion, an Aetna employee submitted an affidavit in which she attested that the company had devoted significant time and money to developing these documents, that they were not publicly available, and that they would be valuable to Aetna’s competitors.

The plaintiff disputed Aetna’s assertion that it had kept these materials confidential. Moreover, the plaintiff argued that, as a matter of law, these materials could not be confidential because regulations of the U.S. Department of Labor required insurers to disclose the relevant procedures during the processing of claim appeals.

The U.S. District Court for the Southern District of New York granted Aetna’s motion.

In its decision, the district court decided that Aetna had “adequately demonstrated” that dissemination of the P&P and the scorecard would place it at a competitive disadvantage.

The district court rejected the plaintiff’s argument that these materials could no longer be considered confidential, pointing out that Aetna had made “reasonable efforts to keep the P&P confidential” and that much of the P&P was “in fact, kept confidential.”  The district court concluded that Department of Labor regulations did not preclude confidentiality, that they mandated disclosure “only of materials related to the particular adverse benefits determination,” and that they did not foreclose Aetna from asserting that the P&P in general was confidential. [Aitken v. Aetna Life Ins. Co., 2017 U.S. Dist. Lexis 88181 (S.D.N.Y. June 2, 2017).]

Employees Who Had Not Been Terminated When Refinery Was Idled Were Not Entitled to Severance Benefits, Third Circuit Decides

The plaintiffs in this case were former maintenance employees of Sunoco, Inc., assigned to perform duties at two of Sunoco’s refineries: the Marcus Hook Refinery and the Philadelphia Refinery. In 2012, Sunoco decided to idle the main processing unit of the Marcus Hook Refinery.

Sunoco and USW Local 10-901, which represented the maintenance employees, thereafter engaged in bargaining and entered into a settlement agreement in February 2012. Pursuant to that agreement, the maintenance employees were “afforded the opportunity to be assigned on a temporary basis to work at the Philadelphia Refinery and work until laid off from such temporary assignment as determined by management.” Additionally, the agreement established a severance benefit plan to “alleviate financial hardships which may be experienced” by Sunoco employees in connection with the idling of the [Marcus Hook] Refinery.”

Following the idling of the main processing units at Marcus Hook Refinery, the maintenance employees were assigned to the Philadelphia Refinery.

In July 2012, Sunoco entered into a contribution agreement to sell the Philadelphia Refinery to Philadelphia Energy Solutions, LLC (PES), in which Sunoco was a minority owner. Around the same time that the agreement between Sunoco and PES was being negotiated, PES and Local 10-1, which represented the Philadelphia Refinery workers, entered into a memorandum of understanding and agreement (MOU) dated June 26, 2012. Pursuant to the MOU, PES “agree[d] to hire all maintenance employees from the Marcus Hook mobile workforce who have been working temporarily at the Philadelphia Refineries.”

Sunoco sold its Philadelphia Refinery to PES in September 2012. On September 7, 2012, the maintenance employees were terminated by Sunoco. That same day, PES hired the maintenance employees to work at the Philadelphia Refinery pursuant to the terms of the contribution agreement and the MOU. The maintenance employees, therefore, were “immediately re-employed by [PES]” as of the date of their termination as Sunoco employees.

On October 3, 2012, USW Local 10-901 sent a letter to Sunoco’s vice president of labor relations seeking severance benefits on behalf of the maintenance employees. A formal claim for benefits was sent to the plan administrator on October 22, 2012.

The plan administrator denied the requested benefits in January 2013. The plan administrator determined that the maintenance employees had not been “terminated from employment in connection with the idling of the [Marcus Hook Refinery]” and, therefore, were not eligible for severance benefits under the plan. The plan administrator further concluded that although the maintenance employees had been temporarily assigned to the Philadelphia Refinery after the idling of the Marcus Hook refinery, they had converted to permanent status after PES and Local 10-1 executed the MOU in June 2012.

After their appeal was denied, the maintenance employees filed suit in the U.S. District Court for the Eastern District of Pennsylvania. The district court awarded summary judgment to the plan, concluding that the plan administrator’s denial of benefits had been neither arbitrary nor capricious and that it had been warranted under ERISA.

The maintenance employees appealed to the U.S. Court of Appeals for the Third Circuit, which affirmed.

In its decision, the circuit court ruled that the plan administrator’s decision had been reasonable and consistent with the plan’s goal to “alleviate financial hardships” employees might experience in connection with the idling of the Marcus Hook Refinery. It noted that the plan limited severance benefits to those employees whose employment was “terminated in connection with [Sunoco’s] idling” of the main processing units of the Marcus Hook Refinery and that it provided that the affected employees who expressed an interest in terminating their employment with Sunoco and were accepted for termination would be eligible for severance benefits.

The circuit court explained that the maintenance employees had a smooth transition to PES employment and had not experienced any period of unemployment. Therefore, the circuit court said, they had suffered no financial hardship in connection with the idling of the Marcus Hook Refinery and had been awarded the same or better compensation as a result of the transfer to PES employment.

Under these circumstances, the circuit court concluded, payment of severance benefits to the maintenance employees would have provided a windfall to employees who had never changed their jobs, had never been out of work, and had been provided benefits and salary by PES. [Felker v. USW Local 10-901, 2017 U.S. App. Lexis 10982 (3d Cir. June 21, 2017).]

Plaintiff Loses Bid for Life Insurance Proceeds Where Husband Had Not Converted Group Life Coverage to Individual Policy Before His Death

The plaintiff’s husband was employed by Wal-Mart Stores, Inc., until July 11, 2012. Under the terms of the group life insurance policy Wal-Mart had obtained for its employees from Prudential Insurance Company of America, the plaintiff’s husband had the right to convert his Wal-Mart term life insurance coverage to an individual life insurance policy for 31 days after he “ceased to be insured for the Associate Term Life Insurance” – which was August 11, 2012.

The plaintiff’s husband did not convert the coverage and, on August 27, 2012, he died. The plaintiff filed a claim for benefits with Prudential.

Because Prudential had received no response to the notice of conversion it said it had sent to the plaintiff’s husband on July 23, 2012 and because he had passed away outside of the 31-day conversion period, Prudential concluded that the plaintiff’s husband had not been covered under the group term life insurance policy and that he had not converted his insurance to individual coverage. Therefore, Prudential denied the plaintiff’s claim.

The plaintiff sued, but the U.S. District Court for the Southern District of Texas dismissed her claims. She appealed to the U.S. Court of Appeals for the Fifth Circuit, contending that Prudential had abused its discretion in denying her claim to life insurance benefits.

The Fifth Circuit affirmed.

In its decision, the circuit court explained that the plaintiff’s husband had passed away outside of the 31 days after his last day of work, and he had not converted his group term life insurance coverage into an individual life insurance policy in the time allowed under the Wal-Mart plan. Therefore, the circuit court ruled, Prudential’s determination that the plaintiff was not entitled to her husband’s life insurance benefits was neither arbitrary nor capricious.

The Fifth Circuit was not persuaded by the plaintiff’s argument that the group term life insurance policy provided that the conversion period for her husband was 92 days after he left Wal-Mart, and that he had been within that conversion period when he died.

The circuit court explained that the 92 days allotted to convert from the group life insurance policy applied only in the event that Prudential had not sent written notice of the right to convert to the plaintiff’s husband. Here, the Fifth Circuit pointed out, Prudential had presented evidence that it had provided written notice of the plaintiff’s husband’s right to convert on July 23, 2012, 12 days after he had ceased to be insured under the group term life insurance. This evidence supported Prudential’s position that it had given notice of conversion and that the plaintiff’s husband had not responded within the requisite time period, according to the circuit court. Thus, the Fifth Circuit concluded, the 92 day period of the policy had never come into play. [Hendrix v. Prudential Ins. Co. of America, 2017 U.S. App. Lexis 11008 (5th Cir. June 21, 2017).] 

New York Law Barred Offset of Disability Benefits by Amount of Personal Injury Settlement

The plaintiff in this case, a New York state resident, was injured while working in New York at his employer’s customer’s site. He filed for, and received, long-term disability benefits related to the injury through his employer’s benefit plan, which was governed by the Employee Retirement Income Security Act of 1974 (ERISA).

The plaintiff brought a personal injury suit in a New York state court against his employer’s customer and settled the suit for $850,000. In light of the settlement, the plan’s insurer and claims administrator, Aetna Life Insurance Company, reduced the plaintiff’s disability benefits by a portion of the settlement proceeds. Taking the position that the settlement included compensation duplicative of the plaintiff’s disability benefits and citing a plan provision regarding offsetting payments from other sources, Aetna maintained that the plan permitted it to reduce its benefit payment obligation.

The plaintiff sued Aetna to recover the offset benefits. In moving for summary judgment, he invoked Section 5-335 of the New York General Obligations Law, which provides that personal injury settlements “shall be conclusively presumed” not to include “any compensation for the cost of health care services, loss of earnings or other economic loss[es]” that “have been or are obligated to be paid or reimbursed by an insurer.”

The U.S. District Court for the Eastern District of New York denied the plaintiff’s motion, reasoning that Section 5-335 had no bearing on the amount of the plaintiff’s benefit entitlement in light of the plan’s choice of law provision designating Connecticut law – and not New York law – as controlling the plan’s construction.

The plaintiff appealed to the U.S. Court of Appeals for the Second Circuit, which ruled that Section 5-335 prohibited Aetna’s reduction of the plaintiff’s disability benefits and that the plaintiff was entitled to receive the unpaid benefits.

In its decision, the circuit court rejected all of Aetna’s arguments that Section 5-335 did not apply in this case.

First, the circuit court found that ERISA did not preempt the application of Section 5-335, as Aetna argued. The Second Circuit reasoned that ERISA did not preempt all state laws that related to an ERISA plan, noting that it exempted from preemption, “any law of any State which regulates insurance.” Section 5-335, the Second Circuit said, was a law that regulated insurance.

The Second Circuit also rejected Aetna’s argument that Section 5-335 did not apply because the plan provided that it would be “construed” under the law of Connecticut. The circuit court said that the provision of the plan that stated that the plan would be “construed” in accordance with Connecticut law set forth “only which jurisdiction’s law of contract interpretation and contract construction” would be applied. The circuit court decided that that provision was insufficient to require application of the “full breadth of Connecticut law, to the exclusion of another jurisdiction’s law, in fields other than the interpretation of the language in this contract.” In particular, the circuit court decided, the provision did not require application of Connecticut law to the question of whether Aetna could reduce the plaintiff’s benefits by amounts he had received from the settlement of his personal injury suit, notwithstanding New York’s directive to the contrary.

Accordingly, the circuit court concluded that Section 5-335 controlled the outcome of the plaintiff’s appeal. It ruled that the district court had erred in granting Aetna’s motion for summary judgment and denying the plaintiff’s motion for summary judgment as to the issue of the plaintiff’s entitlement to the past and ongoing benefits that Aetna had not paid on the ground that they were duplicative of the plaintiff’s personal injury settlement. [Arnone v. Aetna Life Ins. Co., 2017 U.S. App. Lexis 11055 (2d Cir. June 22, 2017).]

Surveillance and Social Media Could Be Considered to Determine Eligibility for Long-Term Disability Benefits, Fifth Circuit Rules

Between October 2005 and April 2010, the plaintiff in this case worked at Experian Information Systems, Inc., as a customer support associate. On April 21, 2010, the plaintiff stopped working full-time at Experian due to health issues. Her rheumatologist and treating physician diagnosed her with, among other things, systemic lupus erythematosus, fatigue, and morning stiffness. The plaintiff applied for short-term disability (STD) benefits and then, when her condition did not improve, for LTD benefits under Experian’s long-term disability plan.

Aetna Life Insurance Company, the plan’s underwriter and claims administrator, approved STD benefits to the plaintiff based on her physician’s diagnosis beginning April 23, 2010. Aetna paid the plaintiff 26 weeks of STD benefits between April and October 2010. In September 2010, Aetna notified her that it was evaluating her eligibility for LTD benefits.

On October 20, 2010, Aetna advised the plaintiff that she met the “own occupation” definition of disability, meaning that she was eligible to receive monthly LTD benefits for 24 months because she was unable to perform the material duties of her own occupation.

Aetna paid LTD benefits to the plaintiff through the entire own-occupation period.

In July 2012, Aetna was notified that an administrative law judge (ALJ) had denied the plaintiff’s claim for Social Security disability insurance (SSDI).

After the first 24 months of LTD benefits, in contrast to the “own occupation” period, the Experian plan provided for payment only if the plaintiff was “not able, solely because of injury or disease, to work at any reasonable occupation.” After an independent medical examination (IME) of the plaintiff in November 2012, Aetna approved the plaintiff’s LTD benefits under the “any reasonable occupation” standard of the plan. It also advised her that Aetna would periodically reevaluate her eligibility.

In late 2013, Aetna referred the plaintiff’s claim to its risk management unit. Aetna conducted a public records search on the plaintiff and obtained video surveillance of her activities over a 22 minute period on December 31, 2013 and over a 107 minute period on January 3, 2014. According to Aetna, the plaintiff was observed driving to three fast-food restaurants and a pharmacy, turning her body, bending down, leaning forward, reaching into the back seat of her car, carrying a bag over her shoulder, and walking quickly.

Aetna also performed a social media search of the plaintiff and her husband. It said that it found that the plaintiff’s LinkedIn account confirmed that she was a student at Northcentral University, although Aetna never confirmed whether she actually was attending class. According to Aetna, the plaintiff’s husband’s Facebook account reported that the plaintiff visited several restaurants, a movie theater, and a bowling alley during four days in July and August 2013. Aetna also said that his social media account indicated that they visited various tourist attractions in San Antonio, Texas, during this period, although there were no pictures of either the plaintiff or her husband at these places.

In February 2014, Aetna asked an occupational medicine specialist to perform a peer review of the plaintiff’s medical file. He concluded that “the evidence presented [did] not support any level of restriction/limitation resulting in impairment.” He said that the surveillance footage demonstrated that the plaintiff’s activities were “consistent with at least a sedentary [physical demand level] occupation capacity,” and that the plaintiff was capable of performing in such capacity.

On March 27, 2014, Aetna informed the plaintiff that she no longer qualified for LTD benefits, which required her to be unable to work in any occupation.

After Aetna denied her appeal, the plaintiff sued Aetna. The U.S. District Court for the Northern District of Texas concluded that Aetna’s decision to terminate LTD benefits had been based on and supported by a complete and thorough review of the claim file, including medical records, multiple opinions from the plaintiff’s treating physician, two different peer review physicians, video surveillance, social media investigation, and the plaintiff’s self-reporting during the relevant time.

The district court determined that Aetna had presented substantial evidence to support its denial of LTD benefits under the “any reasonable occupation” standard. It also considered the July 2012 decision by the ALJ denying the plaintiff’s claim for SSDI, finding it “highly relevant” as to whether Aetna had acted arbitrarily and capriciously in terminating the plaintiff’s LTD benefits.

The plaintiff appealed to the U.S. Court of Appeals for the Fifth Circuit. Among other things, the plaintiff argued that the surveillance and social media investigation evidence did not disprove her physician’s conclusions regarding her limitations or refute her self-reporting regarding her condition. She contended that she and her physician said that she had good days and bad days and that the surveillance and social media had captured her activity level on good days. She also argued that the surveillance captured her only driving and sitting in her car for brief periods and that this did not establish that she could sit for most of a work day or stand and walk on an occasional basis. Moreover, she argued that Aetna had improperly placed special importance on the fact that the plaintiff drove when she claimed she did not. The plaintiff conceded that she drove, but emphasized that her physician had expressly noted that she could drive. She asserted that her misstatement to Aetna, therefore, had been inconsequential.

The Fifth Circuit affirmed.

In its decision, the circuit court ruled that Aetna’s reliance on the surveillance and social media evidence did not constitute an abuse of discretion. It pointed out that the surveillance footage and social media search were only part of the evidence that Aetna had relied on to determine the plaintiff’s eligibility. The circuit court noted that Aetna also had based its decision to terminate the plaintiff’s LTD benefits on its own review of her physician’s medical records and opinions, the IME report, the ALJ’s determination that the plaintiff was ineligible for SSDI, the plaintiff’s self-reporting during the relevant time, and the conclusions of two peer reviewers.

Moreover, the circuit court added, Aetna had relied on the surveillance footage not only as evidence to determine the plaintiff’s actual limitations, but also as evidence to determine whether the plaintiff’s self-reporting was credible. The Fifth Circuit said that Aetna recognized that the plaintiff likely would have good days and bad days, but that it concluded from the entirety of the evidence that the plaintiff could work in a sedentary position with occasional limitations when she experienced flares from lupus. [Davis v. Aetna Life Ins. Co., 2017 U.S. App. Lexis 10576 (5th Cir. June 14, 2017).]

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