Employee Benefit Plan Review – From the Courts – April 2016

April 1, 2016 | Insurance Coverage

U.S. Supreme Court Rules that ERISA Fiduciary May Not Seek Reimbursement from Plan Participant’s General Assets

Robert Montanile was a participant in a health benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) and administered by the board of trustees of the National Elevator Industry Health Benefit Plan. The plan provided that it would pay for certain medical expenses that beneficiaries or participants incurred.

The plan also said that it could demand reimbursement when a participant recovered money from a third party for medical expenses. In that regard, the plan stated:

Amounts that have been recovered by a [participant] from another party are assets of the Plan . . . and are not distributable to any person or entity without the Plan’s written release of its subrogation interest.

In addition, the plan provided that “any amounts” that a participant:

recover[s] from another party by award, judgment, settlement or otherwise . . . will promptly be applied first to reimburse the Plan in full for benefits advanced by the Plan . . . and without reduction for attorneys’ fees, costs, expenses or damages claimed by the covered person.

In December 2008, an allegedly drunk driver ran through a stop sign and crashed into Montanile’s vehicle, injuring him. The plan paid at least $121,044.02 for his initial medical care. Montanile signed a reimbursement agreement reaffirming his obligation to reimburse the plan from any recovery he obtained “as a result of any legal action or settlement or otherwise.”

Thereafter, Montanile filed a negligence claim against the other driver and made a claim for uninsured motorist benefits under his own car insurance. Montanile obtained a $500,000 settlement. He paid his attorneys $200,000 and repaid about $60,000 that they had advanced him. Thus, about $240,000 remained of the settlement. Montanile’s attorneys held most of that sum in a client trust account. This included enough money to satisfy Montanile’s obligations to the plan.

When the board sought reimbursement from Montanile on behalf of the plan, Montanile’s attorney argued that the plan was not entitled to any recovery. The parties attempted but failed to reach an agreement about reimbursement. After discussions broke down, Montanile’s attorney informed the board that he would distribute the remaining settlement funds to Montanile unless the board objected within 14 days. The board did not respond within that time, so Montanile’s attorney gave Montanile the remainder of the funds.

Six months later, the board sued Montanile in a federal district court under Section 502(a)(3) of ERISA, seeking repayment of the $121,044.02 the plan had expended on his medical care. The board asked the court to enforce an equitable lien upon any settlement funds or any property “in [Montanile’s] actual or constructive possession.” Because Montanile already had taken possession of the settlement funds, the board also sought an order enjoining him from dissipating any of the funds.

The district court granted summary judgment to the board. The district court rejected Montanile’s argument that, because he had by that time spent almost all of the settlement funds, there was no specific, identifiable fund separate from his general assets against which the board’s equitable lien could be enforced. The district court held that, even if Montanile had dissipated some or all of the settlement funds, the board was entitled to reimbursement from Montanile’s general assets. The district court then entered judgment for the board in the amount of $121,044.02.

The U.S. Court of Appeals for the Eleventh Circuit affirmed. It reasoned that a plan always could enforce an equitable lien once the lien attached, and that dissipation of the specific fund to which the lien attached could not destroy the underlying reimbursement obligation. The circuit court, therefore, held that the plan could recover out of Montanile’s general assets when he dissipated the specifically identified fund.

The case reached the U.S. Supreme Court, which reversed the Eleventh Circuit’s judgment and held that an ERISA fiduciary could not enforce an equitable lien against a defendant’s general assets under these circumstances.

The Court explained that Section 502(a)(3) of ERISA authorizes plan fiduciaries such as the board to bring civil suits “to obtain other appropriate equitable relief . . . to enforce . . . the terms of the plan.” The Court noted that whether the remedy a plaintiff seeks is legal or equitable depends on (1) the basis for the plaintiff’s claim, and (2) the nature of the underlying remedies sought. It then ruled that the basis for the board’s claim against Montanile was, in fact, equitable for purposes of Section 502(a)(3) because the board had an equitable lien by agreement that attached to Montanile’s settlement fund when he obtained title to that fund.

The remaining issue, therefore, was whether the remedy sought – enforcement of an equitable lien by agreement against Montanile’s general assets – was equitable in nature.  The Court pointed out that equitable liens ordinarily were enforceable only against a specifically identified fund.

The Court decided, therefore, that the board was not seeking an equitable remedy because Montanile had dissipated the settlement fund on “nontraceable items” (for instance, on services or consumable items such as food) and the board sought to recover from Montanile’s general assets. Because the board was not seeking to enforce an equitable remedy, its suit was not one for “appropriate equitable relief,” and it could not proceed under Section 502(a)(3) of ERISA, the Court concluded. [Montanile v. Board of Trustees of National Elevator Industry Health Benefit Plan, 2016 U.S. Lexis 843 (Jan. 20, 2016).

Plaintiff Who Worked 30-Hour Weeks While Claiming to be Disabled Was Not Entitled to Disability Benefits, Second Circuit Affirms

The plaintiff in this case, an aircraft engineer, sought disability benefits under a plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). The plan administrator, Reliance Standard Life Insurance Company, concluded that the plaintiff’s claim failed on two independent grounds: First, that his “medical records [did] not support a Total or Partial Disability,” and, second, that he did not meet “the Total or Partial Disability requirements throughout the entire 180-day Elimination Period.”

The plaintiff sued Reliance in federal court, arguing that it had acted arbitrarily and capriciously when it had determined that he was not entitled to the benefits he sought. The district court rejected his claim.

The plaintiff appealed to the U.S. Court of Appeals for the Second Circuit, which affirmed. It concluded that Reliance’s determination that the plaintiff had failed to satisfy the requirements of the Elimination Period – a condition of obtaining benefits – was plainly reasonable.

In its decision, the Second Circuit explained that the plan promised to:

pay a Monthly Benefit if an Insured: (1) is Totally Disabled as the result of a Sickness or Injury covered by this Policy; (2) is under the regular care of a Physician; (3) has completed the Elimination Period; and (4) submits satisfactory proof of Total Disability to us.

In addition, the circuit court continued, the plan provided that an insured was “Totally Disabled” if, as a result of injury or sickness, the insured could not perform the material duties of his or her “Regular Occupation” during the “Elimination Period” and “for the first 24 months for which a Monthly Benefit is payable.”

The Second Circuit also noted that, under the plan, an insured who was “Partially Disabled” – meaning that, as a result of injury or sickness, the insured could perform the material duties of his or her regular occupation on a part-time basis or some of those material duties on a full-time basis – was considered “Totally Disabled,” except during the Elimination Period. An insured, however, had a “Residual Disability” if the insured was “Partially Disabled” during the Elimination Period, and, the plan said, “Residual Disability will be considered Total Disability.”

The circuit court noted that the “Elimination Period” began on the first day of “Total Disability” and ran for 180 days and that, generally speaking, no benefit was payable if the insured did not remain “Totally Disabled” throughout that time. It added that, for purposes of determining whether an insured could work “full-time” in the insured’s “Regular Occupation,” the plan defined “full-time” as a 30-hour workweek.

The Second Circuit said that, to obtain a favorable benefits determination, the plaintiff had to show that he had “completed the Elimination Period,” i.e., that as a result of injury or sickness, he was unable to perform the material duties of his regular occupation on a full-time basis for a continuous period of 180 days running from the first day of “total disability.” It noted that, in his administrative proceeding, the plaintiff had argued that he had become “totally disabled” on July 2, 2010.  Accordingly, the circuit court said, he would have been eligible for benefits only if at that time and for the next 180 days, he was unable to perform the material duties of his regular occupation on a full-time basis.

The circuit court found, however, that the plaintiff had continued to work full-time – that is, to work 30-hour weeks – through August 20, 2010. Moreover, in the eight weeks following the plaintiff’s asserted onset of disability, he worked for 32, 23, 34, 33, 37, 34.5, 39.5, and 35 hours and, on July 2, 2010, he told his primary-care physician that he was capable of working between 30 and 32 hours weekly.

Because the plaintiff was able to (and did) work full-time during this period, he could have qualified as “totally disabled” only if, during this time, he was incapable of performing at least some of his material duties as an aircraft engineer, the circuit court stated. It concluded that “nothing in the record” suggested that was the case. [Sobhani v. Reliance Standard Life Ins. Co., 2015 U.S. App. Lexis 22041 (2d Cir. Dec. 18, 2015).

Administrator Did Not Have to Accord Special Weight to Claimant’s Treating Physician’s Opinion in Adjudicating Claim, Fifth Circuit Rules

Office Depot, Inc., employed the plaintiff in this case as a store manager whose material and essential duties included being able to complete documentation accurately, operate equipment necessary to run the store, freely access all areas of the store, climb a ladder, and move up to 50 pounds.

On April 18, 2012, a surgeon removed a blockage in the plaintiff’s colon. The plaintiff sought short term disability benefits under the Office Depot plan, which was governed by the Employee Retirement Income Security Act of 1974 (ERISA). The plan replaced an employee’s wages while the employee was “totally disabled,” meaning the employee could not perform all of his or her material and essential duties – the duties normally required that could not be reasonably omitted, changed, or accommodated.

On April 27, Sedgwick Claims Management Services, Inc., the claim administrator for the plan, notified the plaintiff that he was required to support his benefits claim with medical evidence by May 10.

The plaintiff missed the deadline, and Sedgwick tentatively denied him benefits. The plaintiff, however, submitted office-visit notes from his surgeon on May 15 stating that the plaintiff would be disabled until June 12.

After Sedgwick’s internal medical personnel reviewed the surgeon’s notes, Sedgwick approved the plaintiff’s claims through May 31 under the plan’s guidelines. Sedgwick’s medical personnel concluded that, because the plaintiff was healing normally, the surgeon’s notes did not support a determination that he could not perform all the material and essential duties of his job after May 31. Sedgwick did, however, request that the plaintiff submit his surgeon’s notes, from appointments on May 22 and May 31, for another review and possible extension of benefits.

Sedgwick’s personnel reviewed the May 22 and May 31 notes, which revealed that the plaintiff was recovering from surgery normally. The plaintiff began to experience numbness in his thigh and some diminished forward flexion, but his reflexes and strength remained normal. Sedgwick denied an extension of benefits because numbness in the thigh and diminished flexibility did not bear on the plaintiff’s ability to perform his material and essential duties without assistance.

Sedgwick also analyzed office visit notes from the plaintiff’s June 11 appointment with a neurologist. The neurologist reiterated that the plaintiff complained of numbness in his thigh caused by meralgia paresthetica and some limited flexion, so the neurologist ordered magnetic resonance imaging (MRI) and electromyography (EMG) tests for the plaintiff. The neurologist concluded that the plaintiff’s reflexes, cranial nerves, optic discs, visual fields, and strength were normal.

After the MRI and EMG, the plaintiff inquired about going back to work; the neurologist replied that it was entirely up to him. The plaintiff said he could not work, and the neurologist told him that was fine and that he could stay off work for the time being. The neurologist, however, apparently did not examine the material and essential duties of the plaintiff’s job and did not conclude that the plaintiff could not perform these duties without assistance.

Sedgwick again denied an extension of benefits because it concluded that the doctors’ notes up to June 11 did not support a determination that the plaintiff was unable to perform the material and essential duties of his job without assistance.

On July 19, 2012, Sedgwick’s medical personnel evaluated the plaintiff’s MRI and EMG. The MRI indicated that the plaintiff had degenerative disc disease but did not indicate any limit on his ability to walk or perform the material and essential duties of his job without assistance. The EMG was normal. Sedgwick acknowledged that the objective medical evidence indicated that the plaintiff had degenerative disc disease and meralgia paresthetica, but determined that those conditions did not prevent him from performing the material and essential duties of his job without assistance.

Sedgwick again reviewed the plaintiff’s entire file on July 23 and concluded that he was not totally disabled under the plan, and it denied his claim on July 24.

The plaintiff appealed and Sedgwick initiated a review by a board-certified neurologist. Although he did not personally examine the plaintiff, the neurologist examined his entire file, concluding that the objective medical evidence did not support the conclusion that the plaintiff faced any restrictions or limitations regarding the demands of his job. Thus, he concluded that the plaintiff was not totally disabled under the plan.

The plaintiff sued Sedgwick and Office Depot for wrongful denial of his claims. Although Sedgwick had reviewed all of the plaintiff’s objective medical evidence on at least five occasions, the U.S. District Court for the Eastern District of Louisiana granted summary judgment in favor of the plaintiff and remanded for Sedgwick to consider additional evidence. Sedgwick again reviewed the entire file and denied the claims.

The district court granted the plaintiff’s additional motion for summary judgment, concluding that Sedgwick had abused its discretion by relying on its internal medical staff’s opinions rather than the plaintiff’s treating physicians.

Sedgwick and Office Depot appealed to the U.S. Court of Appeals for the Fifth Circuit, which reversed the district court’s ruling.

In its decision, the Fifth Circuit explained that Sedgwick’s decision would stand if it was “supported by substantial evidence” and was “not arbitrary and capricious.” Substantial evidence, the circuit court continued, was “more than a scintilla, less than a preponderance, and [was] such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.”

The Fifth Circuit then declared that a claim administrator did not have to conduct an independent medical examination of the claimant before denying a claim. Instead, it said, a decision could be supported by substantial evidence where it was “based on medical opinions formed after reviewing all the medical evidence offered by a claimant.”  The circuit court further noted that when reviewing a claims administrator’s determination, courts had “no warrant” to require administrators automatically to accord special weight to the opinions of a claimant’s physician, adding that courts may not impose on plan administrators a discrete burden of explanation when they credited reliable evidence that conflicted with a treating physician’s evaluation.

Here, the circuit court found, although the plaintiff had offered medical evidence from his treating physician that he was disabled from meralgia paresthetica and degenerative disc disorder, his doctors never explained why or how that prevented him from performing his job functions. The circuit court also said that although Sedgwick’s personnel did not personally examine the plaintiff, they had reviewed his file numerous times and had concluded that he was not totally disabled under the plan. It observed that, “Sedgwick could acknowledge that [the plaintiff] suffered from certain maladies but conclude that they did not amount to total disability.”

Accordingly, the circuit court ruled that Sedgwick’s denial of the plaintiff’s claim was not arbitrary and capricious and was supported by substantial evidence because it was based on its medical personnel’s opinions formed after numerous, thorough reviews of the plaintiff’s claims and objective medical evidence. The district court erred in concluding otherwise, and judgment should have been for Office Depot and Sedgwick, the Fifth Circuit concluded. [Schiro v. Office Depot, Inc., 2015 U.S. App. Lexis 22331 (5th Cir. Dec. 16, 2015).]

Company That Provided Retirement Plan’s Investment Options Was Not A Fiduciary, Eighth Circuit Decides

McCaffree Financial Corp., which sponsors for its employees a retirement plan governed by the Employee Retirement Income Security Act of 1974 (ERISA), entered into a contract with Principal Financial Group pursuant to which Principal agreed to offer investment options and associated services to McCaffree employees participating in the McCaffree retirement plan. The contract provided plan participants with a number of investment options.

First, participants could maintain retirement contributions in a “general investment account” offering guaranteed interest rates.

Alternatively, participants could allocate those contributions among various “separate accounts” that Principal had created to serve as vehicles for retirement-plan customers to invest in Principal mutual funds.

Principal assigned each separate account to a different Principal mutual fund, meaning that contributions to a separate account would be invested in shares of the associated mutual fund. Principal reserved the right to limit the separate accounts (and, therefore, the mutual funds) that it would make available to plan participants.

In addition, McCaffree maintained the ability to limit, via written notice to Principal, the accounts in which its employees could invest. Pursuant to these provisions, the full list of 63 accounts included in the plan contract was narrowed down to 29 separate accounts (and associated Principal mutual funds) eventually made available to plan participants.

The contract provided that, in return for Principal providing access to these separate accounts, participants would pay to Principal both management fees and operating expenses. Principal assessed the management fees as a percentage of the assets invested in a separate account, and this percentage varied for each account according to its associated mutual fund. In addition, Principal could unilaterally adjust the management fee for any account, subject to a cap (generally three percent) specified in the contract. The contract required Principal to provide participants at least 30 days’ written notice of any such change. The operating expenses provision did not place a limit on the amount that Principal could charge for such expenses, but it restricted Principal to passing through only those expenses necessary to maintain the separate account, such as various taxes and fees Principal paid to third parties. Principal assessed both the management fee and operating expenses in addition to any fees charged by the mutual fund assigned to each separate account.

Five years after entering into this contract, McCaffree filed a class action lawsuit on behalf of all employees participating in the McCaffree plan. The complaint alleged that Principal had charged participants who invested in the separate accounts “grossly excessive investment management and other fees” in violation of Principal’s fiduciary duties of loyalty and prudence under ERISA. McCaffree claimed that the separate accounts served no purpose other than to invest in shares of various Principal mutual funds and, therefore, involved minimal additional expense for Principal. Because each Principal mutual fund charged its own layer of fees, McCaffree alleged, the additional separate account fees were unnecessary and excessive. McCaffree’s suit sought to recover for plan participants these separate account fees as well as the diminution of investment returns that had occurred as a result of the fees.

The district court dismissed the complaint, holding that Principal was not acting as a fiduciary at the time the fees and expenses had been negotiated, and that any subsequent fiduciary duty Principal owed lacked a sufficient nexus with McCaffree’s excessive fee allegations.

McCaffree appealed to the U.S. Court of Appeals for the Eighth Circuit, which affirmed.

The Eighth Circuit rejected McCaffree’s contention that Principal’s selection of the 63 separate accounts in the initial investment menu constituted both an exercise of discretionary authority over plan management and plan administration and that, as a result, Principal owed a fiduciary duty to ensure that the fees associated with those accounts were reasonable. The circuit court noted that the contract between McCaffree and Principal “clearly identified each separate account’s management fee and authorized Principal to pass through additional operating expenses to participants in these accounts.” It then ruled that a service provider’s adherence to its agreement with a plan administrator did “not implicate any fiduciary duty where the parties negotiated and agreed to the terms of that agreement in an arm’s-length bargaining process.”

The circuit court also was not persuaded by McCaffree’s contention that Principal acted as a fiduciary when it selected from the 63 accounts included in the contract the 29 it ultimately made available to plan participants, ruling that there was no connection between the act of winnowing down the available accounts and the allegedly excessive fees.

Similarly, the circuit court found no connection between Principal’s discretion to increase the separate account management fees and McCaffree’s excessive fee allegations, noting that those were fees “to which the parties contractually agreed.”

Accordingly, the Eighth Circuit concluded that Principal’s enforcement of the terms of its contract with McCaffree “did not implicate any fiduciary duties” and that McCaffree had failed to establish a connection between its excessive fee allegations and any post-contractual fiduciary duty that Principal may have owed to plan participants. [McCaffree Financial Corp. v. Principal Life Ins. Co., 2016 U.S. App. Lexis 214 (8th Cir. Jan. 8, 2016).]

Court Enforces Arbitration Provision in ERISA Plan

In this case, the plaintiff was a plan participant under a health benefit plan sponsored by her employer. The plan was insured by Aetna Health of California, Inc., and was governed by the Employee Retirement Income Security Act of 1974 (ERISA).

The plaintiff’s son, a beneficiary under the plan, was diagnosed with autism and his treating provider recommended 36 hours per week of applied behavior analysis (ABA) treatment. The plaintiff sought coverage for 36 hours of ABA therapy, but Aetna Health authorized only 20 hours, stating that “[m]edical necessity for more than 20 hours is not met.” The plaintiff internally appealed the decision, which Aetna Health affirmed. That same day, the plaintiff appealed the decision to the California Department of Managed Health Care, which increased her son’s coverage to 25 hours per week.

The plaintiff sued Aetna Health, alleging that it applied and was subject to a 12-page guideline written by Aetna Inc. that “would consider no more than 20 hours per week for 60 consecutive days” of therapy. She asserted that Aetna Health’s original decision to cover only 20 hours per week of her son’s therapy was based on this 20 hour “benefit cap,” which she contended violated the Mental Health Parity and Substance Use Disorder provision of ERISA and California’s Mental Health Parity Act.

Aetna Health moved to compel arbitration. It relied on the arbitration provision in the Enrollment Request that the plaintiff completed when she enrolled her son in the plan; that provision provided:

ANY DISPUTE ARISING FROM OR RELATED TO HEALTH PLAN MEMBERSHIP MAY BE DETERMINED BY SUBMISSION TO BINDING ARBITRATION, AND NOT BY A LAWSUIT OR RESORT TO COURT PROCESS EXCEPT AS CALIFORNIA LAW PROVIDES FOR JUDICIAL REVIEW.

Aetna Health also pointed out that the plaintiff’s “Evidence of Coverage” (“EOC”), setting out the terms of her coverage, contained a section entitled “Binding Arbitration” that stated:

Binding arbitration is the final process for resolving any disputes between Interested Parties arising from or related to HMO coverage, whether stated in tort, contract or otherwise.

The court granted Aetna Health’s motion.

In its decision, the court first found that because the plaintiff was not challenging her adverse benefits determination, but rather was alleging that the defendants’ had violated ERISA by requiring arbitration, the federal regulations limiting arbitration in administrative claims procedures did not apply to her claim. Accordingly, the general federal policy in favor of arbitration did not violate ERISA and, in particular, ERISA did not override the Federal Arbitration Act’s presumption in favor of the validity of agreements to arbitrate.

Then, the court rejected the plaintiff’s contention that she had not agreed to arbitrate her claims against Aetna Health. It pointed out that the plaintiff’s Enrollment Request, through which she requested to add her dependent child to the plan, was signed by the plaintiff herself (not her son) and that, by signing, she affirmed that “[o]n behalf of myself and the dependents listed,” the “plan documents [including the EOC] will determine the rights and responsibilities of member(s).” Moreover, the court continued, the EOC had an arbitration provision that provided that “[b]inding arbitration is the final process for resolving any disputes between Interested Parties arising from or related to HMO coverage.” The court also noted that the Enrollment Request stated that the plaintiff “understand[s] that [she] is giving up the constitutional right to have disputes decided in a court of law before a jury, and instead accepting the use of binding arbitration.”

Accordingly, the court concluded that the plaintiff’s agreement with Aetna Health required arbitration of her claim against Aetna Health. [Sanzone-Ortiz v. Aetna Health of Calif., Inc., 2015 U.S. Dist. Lexis 171624 (N.D. Cal. Dec. 22, 2015).]

Reprinted with permission from the April 2016 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

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