Employee Relations Law Journal – From the CourtsMay 7, 2020 | |
North Carolina District Court Permits Plan’s Lawsuit Against Third Party Administrator to Continue
A federal district court in North Carolina has ruled that a plan subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) had standing to assert breach-of-fiduciary duty claims under ERISA against a third party health insurance administrator for the plan.
Beginning in 2017, a covered dependent of a participant (the “Patient”) in the Technibilt Group Insurance Plan, sponsored by Technibilt Ltd, became gravely ill with leukemia and became the plan’s high cost claimant for 2017. In September 2018, the Patient was transported from North Carolina to a hospital in Seattle, Washington, for treatment. On November 7, 2018, the Patient was transported back to Charlotte, where he died a few days later. The Patient’s medical bills and expenses for 2018 totaled more than $1.6 million.
Technibilt reinsured the plan through a third-party excess stop loss insurance policy that provided a $90,000 individual minimum deductible and an unlimited individual reimbursement maximum for 2018. The reinsurance policy, however, only covered claims paid during 2018, not claims incurred but not paid during 2018.
The plan subsequently sued Blue Cross and Blue Shield of North Carolina, to which Technibilt had delegated responsibility for certain “administrative services” pursuant to an administrative services agreement (the “ASA”). The services delegated by Technibilt to Blue Cross included processing claims, making benefit decisions, paying claims, recordkeeping, issuing benefit determination notifications, and managing, controlling, and disposing of plan assets. The plan asserted that it had communicated to Blue Cross the need and specific requests to pay all the Patient’s claims during 2018 on several occasions.
Blue Cross paid a portion of the Patient’s claims, in the amount of $824,301.39, on December 21, 2018. Because the remainder of the Patient’s claims, totaling $810,470.81, was not paid until January 11, 2019, it was not covered by the reinsurance policy that Technibilt had obtained, resulting in a loss to the plan of $810,470.81.
The plan alleged that Blue Cross was a fiduciary under ERISA with respect to the relevant activities and that it had breached its fiduciary duty by failing to process and pay all of the Patient’s medical expenses during 2018.
Blue Cross moved to dismiss. Among other things, Blue Cross asserted that the plan did not have standing to assert claims as a plaintiff for the alleged violation of its fiduciary obligations under ERISA. In particular, Blue Cross argued that ERISA gives standing only to the “Secretary of Labor, a participant, beneficiary, or fiduciary” to bring a civil cause of action under ERISA and it argued that the plan did not fit within those categories.
The District Court’s Decision
The district court denied the motion, finding that the plan could assert an ERISA claim for breach of fiduciary duty.
In its decision, the district court explained that there was a division among courts on the issue of whether an ERISA plan had standing to sue to enforce provisions of ERISA, with some courts allowing a plan to assert claims for the benefit of the plan and others refusing to permit it.
The district court then ruled that the plan had standing in this case to assert a claim against Blue Cross under ERISA.
The district court pointed out that the plan was a specifically named contractual party to the ASA, which generally described the parties’ respective obligations. The district court noted that Blue Cross argued that the plan’s potential contractual claims under the ASA were preempted by ERISA because they related to an ERISA plan. According to the district court, coupling Blue Cross’ contention regarding ERISA preemption with its argument that the plan could not assert any claims under ERISA “would effectively mean that the [p]lan could never assert any claim against Blue Cross for violation of the ASA, even though the [p]lan is a party to the agreement.”
The district court found that denying the plan, a contractual party, any right to enforce the substance of the ASA through ERISA (while not similarly limiting Blue Cross, which presumably could, for example, seek payment of fees from the plan under the ASA) appeared to be inconsistent with the goal of protecting plan participants and beneficiaries of the plan who might be adversely impacted by substantial losses to the plan caused by the inability of the plan to assert claims against a plan fiduciary.
Therefore, the district court denied Blue Cross’ motion to dismiss, “at least at this early stage of the action,” and allowed the plan to continue as a plaintiff. [Technibilt Group Ins. Plan v. Blue Cross and Blue Shield of North Carolina, No. 5:19-CV-00079-KDB-DCK (W.D.N.C. Feb. 3, 2020).]
Seventh Circuit Upholds Ruling Denying Plaintiff’s Challenge to Disability Benefits Decision
The U.S. Court of Appeals for the Seventh Circuit has affirmed a district court’s decision rejecting a challenge to a ruling by the administrator of a long-term disability insurance plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”).
Throughout the 1990s and 2000s, the plaintiff suffered from severe pain linked to endometriosis. This pain eventually became disabling, which prevented her from continuing to work, and the administrator of her employer’s long-term disability insurance plan started paying her benefits in 2002.
A few years later, a doctor also diagnosed the plaintiff with Lyme disease.
By 2007, the Social Security Administration agreed that the plaintiff’s Lyme disease, endometriosis, and other impairments were disabling and it granted her disability benefits.
The administrator of her employer’s long-term disability insurance plan reviewed the plaintiff’s case from time to time to check for her continued disability. In 2013, its review led it to maintain benefits, but its consultant noted that the plaintiff’s functional abilities were improving and that, if this persisted, she might be able to return to work. By this point, the plaintiff’s endometriosis symptoms had subsided and her primary diagnosis had shifted to Lyme disease.
The plan administrator reviewed the plaintiff’s case again in 2015, starting with a phone call to the plaintiff to ask how she was doing. The plaintiff told the administrator that she was improving and had started golfing nine holes a week and volunteering. She added that she had a three-hour weekly shift as a docent for the St. Louis Zoo and a position as treasurer of a non-profit that ran an annual art show. The administrator also discovered that the plaintiff was an active member of a group protesting a hospital’s decision to move out of Belleville, Illinois.
The plaintiff’s doctors provided information to the administrator. Her Lyme disease specialist informed the administrator that the plaintiff still was experiencing fatigue, headaches, nausea, dizziness, insomnia, and joint and muscle pain because of her Lyme disease. His records noted both improvements and regressions in the plaintiff’s self-reports.
The administrator later sent a letter to the plaintiff’s Lyme disease specialist in which it defined the terms “light” and “sedentary” work consistent with the U.S. Department of Labor’s Dictionary of Occupational Titles and the Social Security Administration’s regulations and asked if the plaintiff could work at either level of exertion. He responded that the plaintiff could perform sedentary work part-time, no more than four hours a day and with frequent breaks and absences. Under a line asking him to identify the limitations supporting his opinion, he wrote “N/A.”
When the administrator followed up, the plaintiff’s Lyme disease specialist elaborated that the plaintiff suffered from “extreme fatigue” and “major memory and cognitive issues” (as well as nausea, migraines, cramps, and aches), so she could not work at all, for fear of stress exacerbating her symptoms. The plaintiff’s other doctors, including her primary care physician, deferred to the plaintiff’s Lyme disease specialist.
The administrator asked two consulting physicians to review the plaintiff’s file to see whether she could return to her regular occupation – a sedentary job that required, among other things, the frequent use of mental functions. The first doctor determined that the evidence did not show limitations that would preclude such work. He acknowledged that the plaintiff continued to complain of fatigue and pain, but thought her reported activities were out of proportion to her complaints. He ruled out ongoing Lyme disease as a disabling impairment because he saw no evidence of an active infection.
The second consulting physician concurred. He too doubted that the plaintiff had Lyme disease and found that whatever fatigue she had did not preclude her active lifestyle.
Shortly thereafter, the administrator ended the plaintiff’s benefits because it concluded that she could perform the duties of her regular occupation.
The administrator denied the plaintiff’s appeal, and she sued.
The U.S. District Court for the Southern District of Illinois entered judgment on the administrative record in favor of the administrator. It first found that the plaintiff could not perform the duties of her regular occupation, which was the first prong of the plan’s three-pronged definition of disability.
The district court then found, however, that the plaintiff had not met either of the other two prongs, both relating to her ability to work other occupations: that she could “not perform each of the material duties of any gainful occupation for which [she was] reasonably fitted by training, education, or experience” (the “any occupation” option), or that she was (a) “[p]erforming at least one of the material duties of [her] regular occupation or another occupation on a part-time or full-time basis,” and (b) “[c]urrently earning at least 20 [percent] less per month than [her pre-disability income] due to that same injury or sickness” (the “20% less” option).
The plaintiff appealed to the Seventh Circuit.
The Seventh Circuit’s Decision
The Seventh Circuit affirmed.
In its decision, the circuit court explained that in an ERISA de novo review, as was the case here, the plaintiff had the burden of proof in the district court and the obligation to produce evidence to support her claim. The circuit court pointed out that the plaintiff had offered “no evidence, only assertions” that she could not meet either of the other two prongs of the three-prong test for disability. According to the Seventh Circuit, not all jobs were as taxing as the plaintiff’s former job, and she “may not have been foreclosed from some other, easier sedentary job.”
The district court, the circuit court said, “had no evidence” about other positions. The circuit court ruled, therefore, that the plaintiff “failed to carry her burden under the any occupation option.”
The Seventh Circuit also rejected the plaintiff’s argument that, even if her evidence fell short under the any occupation option, she met the 20 percent less option. It pointed out that although the plaintiff asserted that she met the requirements for the 20 percent less option, she had provided “no evidence or explanation” to the district court to support that assertion. “She cited no legal authority and included only one sentence of justification in the fact section of her response brief,” the circuit court noted.
The circuit court found that the district court was presented with an underdeveloped administrative record. From this record, the district court ruled that the plaintiff failed to carry her burden, as the plaintiff, to demonstrate that she was entitled to benefits. The Seventh Circuit concluded by declaring that there was “no clear error in that finding or abuse of discretion in the limitation of its review to the administrative record.” [Dorris v. Unum Life Ins. Co. of America, No. 19-1701 (7th Cir. Feb. 3, 2020).]
Service Provider to Retirement Plan Was “Fiduciary,” Eighth Circuit Decides
The U.S. Court of Appeals for the Eighth Circuit, reversing a district court’s decision, has ruled that a service provider to a retirement plan subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) was a fiduciary.
The plaintiff invested in a retirement plan governed by ERISA that was offered by the Principal Life Insurance Company. The plan set a guaranteed rate of return, the Composite Crediting Rate (“CCR”), which Principal unilaterally calculated every six months.
Before a CCR took effect, Principal notified plan sponsors, which alerted the participants.
If a plan sponsor wanted to reject the proposed CCR, it had to withdraw its funds, facing two options: (1) pay a surrender charge of five percent, or (2) give notice and wait 12 months. If a plan participant wished to exit, he or she faced an “equity wash.” The plan participant could immediately withdraw his or her funds, but could not reinvest in plans like the 401(k) retirement plan for three months.
The plaintiff sued Principal, a service provider to the plan, alleging that it had breached its fiduciary duty and had engaged in prohibited transactions under ERISA. Both counts relied on Principal being a fiduciary. Alternatively, the plaintiff argued that if Principal was not a fiduciary, it was engaging in prohibited transactions as a party in interest.
After certifying a class action, the U.S. District Court for the Southern District of Iowa granted summary judgment in favor of Principal, finding that it was not a fiduciary or liable as a party in interest.
The plaintiff appealed to the Eighth Circuit.
The Eighth Circuit’s Decision
The Eighth Circuit reversed, finding that Principal was a fiduciary when it set the CCR.
In its decision, the circuit court explained that Principal was not a fiduciary if: (1) its actions conformed to specific contract terms, or (2) the plan and participants could freely reject its actions.
The Eighth Circuit then found that Principal’s setting of the CCR did not “conform to a specific term of its contract with the employer plan.” The circuit court explained that every six months, Principal set the CCR with no specific contract terms controlling the rate, calculating the CCR based on past rates in combination with a new rate that it unilaterally determined.
The Eighth Circuit was not persuaded by Principal’s assertion that it was acting pursuant to the contract because the contract authorized Principal to set the CCR. The circuit court reasoned that although the contract empowered Principal to set the CCR, the rate itself was not a “specific term of the contract.” When Principal notified a plan sponsor of the proposed CCR, the sponsor had not agreed to it, the circuit court added. It then ruled that a service provider may be a fiduciary “when it exercises discretionary authority, even if the contract authorizes it to take the discretionary act.”
The Eighth Circuit next ruled that plan sponsors did not have “the unimpeded ability to reject the service provider’s action or terminate the relationship.” As the circuit court explained, if a plan sponsor wanted to reject the CCR, it had to leave the plan, with two options: (1) pay a five percent surrender charge, or (2) have its funds remain in the plan for 12 months. In the circuit court’s view, charging a five percent fee on a plan’s assets impeded termination. Likewise, it added, holding a plan’s funds for 12 months after it wanted to exit impeded termination.
Accordingly, the Eighth Circuit concluded, Principal was a fiduciary exercising control and authority over the CCR. Because it found that Principal was a fiduciary when it set the CCR, it said that it did not have to address the plaintiff’s argument alleging that Principal was conducting a prohibited transaction as a party in interest. [Rozo v. Principal Life Ins. Co., No. 18-3310 (8th Cir. Feb. 3, 2020).]
Ninth Circuit Rules That District Court Erred by Failing to Consider Plaintiff’s Treating Physicians’ Reports
The U.S. Court of Appeals for the Ninth Circuit has ruled that a district court erred by failing to consider the plaintiff’s supplemental physicians’ reports when deciding her suit against the plan administrator that had terminated her long-term disability benefits.
The plan administrator for a long-term disability benefit plan terminated the plaintiff’s benefits in April 2017, and the plaintiff appealed.
The plan administrator denied the plaintiff’s appeal. In doing so, it cited for the first time an opinion from a physician dated July 27, 2017 that the plaintiff could sit for up to eight hours per workday, and a vocational specialist’s report that the plaintiff, therefore, could perform two sedentary jobs.
The plan administrator, however, failed to disclose that physician’s report to the plaintiff until the day it denied her appeal.
The plaintiff sued, and the U.S. District Court for the Central District of California upheld the termination of her benefits. The plaintiff appealed to the Ninth Circuit.
The Ninth Circuit’s Decision
The Ninth Circuit vacated the district court’s decision.
The circuit court reasoned that if the plan administrator had timely provided the physician’s July 27, 2017 evaluation to the plaintiff, then the plaintiff’s treating physicians could have provided such comments and performed such additional examinations and tests as might be appropriate to challenge that evaluation.
By denying the plaintiff “the disclosure and fair opportunity for comment,” the Ninth Circuit ruled, the plan had denied her the “statutory obligation of a fair review procedure.”
The circuit court then stated that when an administrator has engaged in a procedural irregularity that has affected the administrative review, the district court should “reconsider [the denial of benefits] after [the plan participant] has been given the opportunity to submit additional evidence.”
Concluding that the district court should have considered letters from the plaintiff’s treating physicians rebutting the July 27, 2017 evaluation, the Ninth Circuit vacated the district court’s judgment and remanded for it to review the entire record in light of the plaintiff’s rebuttal evidence. [Wagenstein v. Cigna Life Ins. Co., No. 18-55955 (9th Cir. Jan. 7, 2020).]
- Norman L. Tolle