From the Courts

January 1, 2014 | Appeals | Insurance Coverage

“Equitable Lien by Agreement” Permits ERISA Plan to Recover Third Party’s Payment to Plan Participant

After a participant in the National Elevator Industry Health Benefit Plan, a self-funded, multi-employer employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA), was injured in an all-terrain vehicle accident, the plan paid approximately $47,590.24 in medical benefits on his behalf. The participant filed a personal injury lawsuit against a third party, resulting in his receipt of a payment in settlement of that action.

Following its unsuccessful attempts to collect reimbursement from the participant from the amount of his settlement, the plan’s board of trustees sued him and moved for summary judgment, relying on language in the plan that stated:

The Plan has a right to first reimbursement out of any recovery. Acceptance of benefits from the Plan for an injury or illness by a covered person, without any further action by the Plan and/or the covered person, constitutes an agreement that any amounts recovered from another party by award, judgment, settlement or otherwise, and regardless of how the proceeds are characterized, will promptly be applied first to reimburse the Plan in full for benefits advanced by the Plan due to the injury or illness….

The district court ruled in favor of the board, deciding that the plan’s language gave rise to an “equitable lien by agreement” in its favor.

The participant appealed to the U.S. Court of Appeals for the Third Circuit, arguing that the district court had erred in concluding that the plan had an equitable lien against his tort recovery because there was no nexus between the funds he had received (which excluded compensation for medical expenses) and the funds the plan had expended (which were solely for medical expenses).

The Third Circuit affirmed the district court’s ruling.

In its decision, the circuit court found that the plan’s language did not limit the plan’s ability to recover its expenditures for medical expenses to an award for medical expenses only. Rather, the circuit court decided, the plan granted a right to reimbursement “regardless of how the proceeds are characterized.” The plan created an “equitable lien by agreement,” the circuit court concluded, adding that the plan’s language requiring the participant to reimburse the plan from the proceeds of his tort settlement was “clear and controlling.” [Board of Trustees of the National Elevator Industry Health Benefit Plan v. McLaughlin, 2014 U.S. App. Lexis 18756 (3d Cir. Oct. 1, 2014).]

Driver Who Lost License After Being Diagnosed with Diabetes Was Not Entitled to Long Term Disability Benefits, Circuit Court Declares

After being diagnosed with insulin-dependent diabetes mellitus, the plaintiff in this case could no longer work as an over-the-road truck driver for Ozark Motor Lines, Inc. Regulations of the US Transportation Department disqualify any person with insulin-dependent diabetes mellitus from operating a commercial motor vehicle and, accordingly, Arkansas disqualified the plaintiff’s commercial driver’s license.

Pursuant to Ozark’s employee benefit plan, which was governed by ERISA, the plaintiff submitted a claim for long term disability benefits to Reliance Standard Life Insurance Company, the plan’s insurer and claims-review fiduciary. He argued that the diabetes-related loss of his commercial driver’s license prevented him from performing his job duties, entitling him to long term disability benefits.

Reliance Standard determined that the plaintiff was not disabled under the terms of the plan. It reasoned that to qualify as “totally disabled” under the plan’s long term disability policy, an insured must be unable to perform the material duties of the insured’s regular occupation due to injury or sickness, and that if an insured required a license for such occupation, the loss of such license for any reason did not “in and of itself” constitute total disability. According to Reliance Standard, there must be evidence that an insured was “physically or mentally incapable of performing the material duties of his occupation as a truck driver” to qualify as totally disabled.

The plaintiff sued Reliance Standard and the plan, arguing that Reliance Standard had abused its discretion in denying him benefits. The district court granted judgment on the record for the plaintiff. It determined that the plaintiff was totally disabled under the terms of the plan because he had lost his license “as a result of an Injury or Sickness,” namely his insulin-dependent diabetes mellitus. The district court supported its conclusion by noting that the federal government forbids insulin-dependent diabetics from operating commercial motor vehicles because the stresses of long-haul driving exacerbate the symptoms of diabetes.

Reliance Standard and the plan appealed to the U.S. Court of Appeals for the Eighth Circuit.

The circuit court reversed.  In its decision, it found that Reliance Standard’s interpretation of the plan – requiring “evidence that one is physically or mentally incapable of performing the material duties of his occupation,” independent of the insured’s loss of a license – was a “reasonable” interpretation of the plan that had to be upheld. The Eighth Circuit observed that the plan’s loss-of-license provision stated that the loss of a license for any reason was insufficient in and of itself to entitle a claimant to benefits. The circuit court added that although diagnosis with diabetes mellitus caused the plaintiff to lose his license, that was “not enough by itself to justify benefits.” According to the circuit court, Reliance Standard’s interpretation did not foreclose an insured who had lost a license based on injury or sickness from receiving benefits, but rather required that the insured submit evidence that the injury or sickness itself – independent of the loss of license – rendered the insured unable to perform his or her occupation. The court noted that it was permissible for Reliance Standard to require evidence specific to the insured, as opposed to the generalizations in the Department of Transportation’s regulations.

The circuit court rejected the plaintiff’s contrary interpretation of the plan that loss of a license by itself did not entitle the plaintiff to benefits if the loss was for a non-medical reason, but that it was sufficient if the license was lost due to sickness or injury, finding that this interpretation would render the loss-of-license provision “surplusage.”

The Eighth Circuit then ruled that Reliance Standard’s determination that the plaintiff was not totally disabled was supported by substantial evidence, noting that although the plaintiff’s own physician had opined that the plaintiff would be unable to work as an over-the-road truck driver based on the Department of Transportation’s regulations, the physician had identified no physical limitations on the plaintiff’s ability to do so as a direct result of his diabetes.

The Eighth Circuit concluded that it was reasonable for Reliance Standard to determine that the evidence was insufficient to show that the plaintiff was physically or mentally incapable of working as an over-the-road truck driver due to his diabetes mellitus. [Hampton v. Reliance Standard Life Ins. Co., 2014 U.S. App. Lexis 19098 (8th Cir. Oct. 7, 2014).]

Finding that Plaintiff Had Not Timely Exhausted His Administrative Remedies, Court Dismisses His Lawsuit against Plan Administrator

The plaintiff in this case, who worked for Wal-Mart Stores, Inc., alleged that he had become disabled and was entitled to benefits under Wal-Mart’s long term disability group insurance policy. On April 4, 2012, the plan administrator, Hartford Life and Accident Insurance Company, approved the plaintiff’s claim. On December 17, 2012, however, the plaintiff received a letter from Hartford discontinuing his benefits effective March 25, 2013. The termination letter stated that:

[ERISA] gives you the right to appeal our decision and receive a full and fair review. You are entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to your claim. If you do not agree with our denial, in whole or in part, and you wish to appeal our decision, you or your authorized representative must write to us within one hundred eighty (180) days from the receipt of this letter. Your appeal letter should be signed, dated and clearly state your position. Please include your printed or typed full name, Policyholder, and at least the last four digits of your Social Security Number with your appeal letter (i.e. xxx-xx-1234). Along with your appeal letter, you may submit written comments, documents, records and other information related to your claim.
Once we receive your appeal, we will again review your entire claim, including any information previously submitted and any additional information received with your appeal. Upon completion of this review, we will advise you of our determination. After your appeal, and if we again deny your claim, you then have the right to bring a civil action under Section 502(a) of ERISA.

The letter directed the plaintiff to send his appeal letter to a Hartford Claim Appeal Unit in Hartford, Connecticut.

The plaintiff’s certificate of insurance also stated that, if the plaintiff chose to appeal a denied claim, he must do so “no later than the expiration of 180 days from the date you received your claim denial.” Pursuant to the termination letter and certificate of insurance, the plaintiff had until June 15, 2013 – 180 days after receipt of the termination letter on December 17, 2012 – to file an appeal.

On May 2, 2013, the plaintiff, through his counsel, replied to Hartford by letter addressed to a person at Hartford’s disability claim office in Atlanta. The May 2 letter requested a copy of the policy, additional time to submit an appeal, and confirmation that the appeal period had begun on March 25, 2013, when Hartford had stopped paying the plaintiff’s benefits. Specifically, the letter stated that the attorney had “been retained to represent [the plaintiff] with respect to his claim for benefits” and “would like to request a copy of the above-referenced disability policy for our review, as well as additional time to submit an appeal on [the plaintiff’s] behalf.”

Hartford responded to the letter by providing a copy of the policy but did not address the other issues that the letter raised.

On May 13, 2013, the plaintiff’s counsel sent another letter to Hartford stating that the policy required an explanation of the review procedure upon denial of a claim and again seeking confirmation that the appeal period had begun on March 25, 2013. The plaintiff’s counsel alleged that he received no response to this letter, although Hartford claimed it sent him a letter dated May 16, 2013 advising that the 180-day appeal period had commenced upon the plaintiff’s receipt of the termination letter, as had been stated in the termination letter.

On July 8, 2013, more than three weeks after the date for filing an appeal had passed, the plaintiff’s counsel contacted Hartford by telephone. The Hartford representative allegedly informed the plaintiff’s counsel that, to process an appeal, the plaintiff had to request additional time to file an appeal. The Hartford representative allegedly informed the plaintiff’s counsel that such requests needed to be in writing, that they were routinely granted, and that there was no foreseeable reason why the plaintiff’s request would be denied.

The plaintiff’s counsel submitted a written request later that day. On August 7, 2013, an appeals specialist at Hartford denied the plaintiff’s request for additional time to appeal.

The plaintiff sued Hartford, which moved to dismiss the complaint. The court granted Hartford’s motion, agreeing with Hartford that the plaintiff had failed to timely exhaust his administrative remedies and that the time for doing so had passed.

In its decision, the court rejected the plaintiff’s argument that his correspondence with Hartford had satisfied the exhaustion requirement because it had provided adequate notice of an appeal by clearly bringing the issue to Hartford’s attention. The court found that Hartford had acted reasonably when it had determined that the plaintiff’s May letters – the only letters sent before the June 15, 2013 deadline to file an appeal – had not satisfied the exhaustion requirement.

The court noted that the plaintiff’s counsel had not sent the May letters to the address specified for appeals by the plaintiff’s termination letter; that neither letter had clearly stated the plaintiff’s position, as instructed by his termination letter, but instead had “merely requested” copies of documents and clarifications; and that both letters had “referenced an appeal in the future tense by requesting information on the timeline within which to submit it.” Under these circumstances, the court concluded, Hartford reasonably could have construed the May letters as not providing adequate notice of an appeal or constituting an appeal but instead as mere requests for documents that the plaintiff’s “lawyer sought to review before determining whether to file an appeal in the future.” [Deaton v. Hartford Life and Accident Ins. Co., 2014 U.S. Dist. Lexis 125847 (E.D. Ark. Sep. 9, 2014).]

Failure to Notify Employees Dooms Restaurant’s Efforts to Rely on FLSA’s “Tip Credit”

In 2008, the Wage and Hour Division of the U.S. Department of Labor commenced an investigation into the payroll practices of a restaurant in Guaynabo, Puerto Rico. The probe began with an audit of the restaurant’s payroll summaries and time records for the period March 2006 through March 2008. The investigator concluded that certain deductions that had been taken from waiters’ pay violated the minimum wage provisions of the federal Fair Labor Standards Act (FLSA). Specifically, the investigator found that the restaurant had deducted what it termed a “spillage fee,” which the investigator concluded frequently reduced waiters’ weekly pay below the minimum wage. Although the restaurant maintained that waiters earned much more in tips than the payroll summaries indicated, it allegedly produced no probative evidence of actual tip income.

The investigator also determined that certain employees had been misclassified as exempt from overtime pay requirements and that proper records of the hours worked by those employees had not been maintained. This determination grounded a conclusion that the restaurant was not in compliance with the FLSA’s recordkeeping and overtime pay requirements.

The federal government sued the restaurant, its owner, and its general manager, alleging that each defendant was liable for violating the FLSA’s minimum wage, overtime, and recordkeeping requirements. Following discovery, the government moved for partial summary judgment on the minimum wage claims. The defendants cross-moved for summary judgment on all of the government’s claims.

A magistrate judge recommended denying the defendants’ motion, granting the government’s motion (except as to prospective injunctive relief), and awarding damages in the form of payment of wages owed. The district court agreed. The district court calculated the wages owed to be $129,057.22 and entered judgment for the federal government against all of the defendants in that amount plus interest.

The defendants appealed to the U.S. Court of Appeals for the First Circuit.

The circuit court affirmed. In its decision, the circuit court explained that the FLSA requires employers to pay a prevailing minimum wage and makes failure to do so unlawful. The circuit court added that the FLSA has certain exceptions to the minimum wage rate, including one exception, known as the “tip credit,” that stipulates that an employer may pay a tipped employee a cash wage as low as $2.13 per hour and count the tips received to make up the difference between the hourly wage paid and the prevailing hourly minimum wage rate.

To take advantage of that exception, the circuit court pointed out, the employee must be a “tipped employee” receiving more than $30 in tips per month; the employee must retain the tips received (although certain “tip-pooling” arrangements are permitted); and the employer must inform the employee in advance that it intends to count a portion of the employee’s tips toward the required minimum wage. The circuit court noted that this notice provision was strictly construed and normally required an employee to take affirmative steps to inform affected employees of the employer’s intent to claim the tip credit.

The circuit court rejected the defendants’ argument that they had complied with the FLSA requirement that they inform their employees in advance that the restaurant would be relying on the tip credit because the waiters’ pay stubs had reflected a wage lower than the statutory minimum and tip amounts sufficient to bring the waiters’ wages up to the minimum. The circuit court declared that the FLSA “requires that employees be informed by their employer that the employer intends to treat tips as satisfying a portion of the minimum wage.” The First Circuit said that the duty to inform was an “affirmative duty placed upon the employer” that could not be satisfied by the “mere hope or assumption” that employees either would “divine their employer’s intentions or figure out their statutory entitlements” from the way in which the employer conducted its business.

Accordingly, the First Circuit affirmed the district court’s decision in favor of the government and against the defendants. [Perez v. Lorraine Enterprises, Inc., 2014 U.S. App. Lexis 18778 (1st Cir. Oct. 1, 2014).]

Circuit Court Affirms District Court’s Decision that Physician, as Independent Contractor, Could Not Bring ADA, ADEA, or FMLA Claims against Hospital

In this case, a pathologist suffered a heart attack in March 2008, underwent a heart transplant in May 2009, and was hospitalized for bipolar disorder in October 2010. In August 2011, Avera St. Luke’s, a non-profit corporation operating St. Luke’s Hospital in Aberdeen, South Dakota, terminated its services agreement with the pathologist, invoking the provision in the agreement that either party could terminate the agreement with or without cause on 90 days prior written notice.

The pathologist sued Avera, alleging violations of the federal Americans with Disabilities Act (ADA), the federal Age Discrimination in Employment Act (ADEA), and the federal Family and Medical Leave Act (FMLA).

The district court granted Avera’s motion for summary judgment, concluding that each of these statutory claims failed because undisputed material facts demonstrated that the plaintiff was an independent contractor rather than an Avera employee.

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

In its decision, the circuit court explained that all of the statutes that the plaintiff relied on in his claims against Avera limited their protections to “employees,” and that independent contractors were not covered. It then agreed with the district court that the plaintiff, in performing professional services under his agreement with Avera, was working as an independent contractor.

The circuit court noted that Avera had no right to control the specific manner in which the plaintiff rendered pathology services, adding that the plaintiff had testified that no one from Avera had exercised control over his professional services and that he had maintained complete freedom to set his schedule and determine the manner of his performance, including the hiring of substitute pathologists at his own expense, so long as he provided the services required by the agreement. In addition, the Eighth Circuit continued, the plaintiff had “explicitly agreed” in the agreement that he was an independent contractor, as was typical in hospital/staff physician relationships.

Moreover, the circuit court pointed out, the plaintiff was not provided with benefits or malpractice insurance, Avera did not withhold income and FICA taxes from his monthly compensation and reported his income on a Form 1099, and the plaintiff reported his compensation as the income of a self-employed independent contractor. (By contrast, the circuit court noted, Avera withheld taxes from its payments to employee-physicians and reported those payments on W-2 forms.)

The Eighth Circuit also observed that other facts “strongly” suggested an independent-contractor relationship: the plaintiff had the contractual right to hire substitute pathologists and assistants at his own expense (including his wife), had no weekly hours requirement, was never assigned duties not specified in his contract, held other medical employment during much of his time at Avera, and was never bound by a non-compete agreement. These facts, the circuit court found, demonstrated that the plaintiff had retained substantial “freedom of choice” in determining the extent to which he committed his available professional time to St. Luke’s Hospital.

The circuit court then upheld the district court’s determination that the plaintiff was an independent contractor of St. Luke’s Hospital under his agreement. Accordingly, it concluded, the district court had not erred in granting summary judgment dismissing the plaintiff’s claims. [Alexander v. Avera St. Luke’s Hospital, 768 F.3d 756 (8th Cir. 2014).]

Reprinted with permission from the January 2015 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

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