California Insurance Litigation Blog

Recovery of Overpayments Under ERISA

Robert McKennon — Tue, 21 May 2013 16:16:18 -0800

Keith Parker, an excellent mediator who specializes in mediating ERISA matters, authored the following article on “Recovery of Overpayments Under ERISA” We at the McKennon Law Group PC are happy to recommend this outstanding article for your reading. We include the entire article below with permission from Mr. Parker.

Section 1132(a)(3)(B) of ERISA authorizes participants, beneficiaries and/or fiduciaries to bring civil actions seeking “appropriate equitable relief” to enforce the provisions of an ERISA plan. Just what constitutes “appropriate equitable relief” has challenged courts and practitioners, in large part because the Supreme Court has interpreted that language to incorporate the “archaic” (Justice Ginsburg’s word) and “obsolete” (Justice Steven’s word) distinction between relief available in equity and that available in law at the time of the so-called divided bench. While most members of the bar (academics and certain members of the Supreme Court excepted) have no experience with, or interest in, the distinction in this day of the unified bench, the distinction is part of the Federal common law of ERISA and, so, must be considered when dealing with claims for equitable relief under ERISA.

The Ninth Circuit recently considered whether an action by a plan fiduciary to recover an overpayment of disability benefits resulting from an award of Social Security Disability Income (“SSDI”) benefits sought “appropriate equitable relief” under ERISA. Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012). The facts presented were typical of those often seen in disability cases: Bilyeu began receiving benefits under a long-term disability plan which provided that her benefits would be reduced by other income, including SSDI benefits, and that permitted the plan fiduciary to immediately reduce her benefits by an estimate of her potential SSDI benefits. However, the plan fiduciary agreed not to reduce Bilyeu’s benefits when she agreed in writing to repay any overpayment in plan benefits that might result if she received an award of SSDI benefits. The plan fiduciary subsequently terminated Bilyeu’s plan benefits; thereafter Bilyeu received an award of SSDI benefits resulting in an overpayment which she refused to repay. When Bilyeu brought an action under ERISA for improper termination of her benefits, the plan fiduciary filed a counterclaim under Section 1132(a)(3)(B) to recover the amount of the overpayment. Id. at 1086-88, 1090-91.

The Ninth Circuit relied on two Supreme Court decisions – Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2008) and Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) – interpreting Section 1132(a)(3)(B) to identify the elements necessary to state a claim for “appropriate equitable relief” under ERISA. In both those cases the plan participants suffered injuries in automobile accidents and their group medical plans paid for the participants’ subsequent medical care. In both cases the participants settled actions against third-parties responsible for the accidents and their group medical plans then brought Section 1132(a)(3)(B) actions against the participants seeking to recover the amounts paid for their medical care pursuant to provisions in the plans requiring participants to reimburse the plans from amounts recovered from third-parties responsible for their injuries. Sereboff, 547 U.S. at 359-60; Great-West, 534 U.S. at 207-09. The difference in the cases arose from the manner in which the participants had handled the proceeds of the settlements:

In Great-West, the participant carefully structured the settlement such that the proceeds never came into her possession, but rather were placed directly into a special needs trust and her attorney’s trust account. The Supreme Court held that the plan’s claim was not one typically available in equity because the plan had failed to identify a specific fund in the possession of the participant to which an equitable lien attached; the Supreme Court characterized the plan’s claim as one seeking a judgment payable from the participant’s general assets, a garden variety claim at law. Great-West, 534 U.S. at 207-08, 211-14. In Sereboff, on the other hand, the participants took possession of the settlement proceeds and, when the plan demanded reimbursement of amounts paid on their behalf, the participants agreed to set aside a portion of the settlement equal to the amount at issue in a separate investment account. On these facts the Supreme Court held that the plan’s claim was one typically available in equity because the plan sought to recover a specific fund in the possession of the participants to which an equitable lien attached. Sereboff, 547 U.S. at 362-66.

The Ninth Circuit identified three elements necessary to state a claim for “appropriate equitable relief” under ERISA in this context: (1) A promise by the participant to reimburse the disability plan for excess benefits paid upon the receipt of other income such as SSDI benefits; (2) the promise must identify a specific fund, distinct from the participant’s general assets, from which the plan will be reimbursed; and (3) the specific fund must be in the possession of the participant. Bilyeu, 683 F.3d at 1092-93. The plan fiduciary’s claim in Bilyeu met the first element, but not the second and third elements:

At the outset, the Ninth Circuit expressed concern that the specific fund identified by the plan fiduciary – the overpaid portion of the periodic disability benefits paid to the participant – was not, in fact, a distinct or separate fund, but rather was an undifferentiated component of a larger fund – the aggregate disability benefits paid to the participant. Id. at 1093-94. Although the Ninth Circuit did not fully develop its position, its concern seems consistent with the reasoning of the Supreme Court: If, as seems likely, the disability benefits were comingled with the general assets of the participant upon receipt, the plan fiduciary’s claim was essentially one for a judgment for a portion of the general assets of the participant, a quintessential claim at law.

A more compelling argument (in my view) that the plan fiduciary’s claim in Bilyeu failed to meet the specific fund element is that at the time the periodic disability payments were received by the participant, she did not (and could not) know whether an overpayment would occur and, if so, the amount of the overpayment because SSDI benefits had not been awarded. In other words, when the periodic disability benefits were received and comingled with the general assets of the participant, no specific portion of those benefits could be identified as subject to an equitable lien.

The Ninth Circuit did not, however, have to make a definitive ruling on the second element because it found that the plan fiduciary’s claim clearly failed to meet third element – the participant had spent her disability benefits long before she received the SSDI benefits and the plan fiduciary demanded reimbursement of the overpayment and, so, no longer had possession of the specific fund. That being the case, the Ninth Circuit concluded that the plan fiduciary was simply seeking a judgment payable from the general assets of the participant – a claim at law. In so holding, the Ninth Circuit acknowledged contrary precedent from other circuits. Id.at 1094. Review of those cases, however, suggests that the Ninth Circuit’s decision more closely reflects the reasoning of the Supreme Court:

In Funk v. Cigna Group Ins., 648 F.3d 182 (3d Cir. 2011), for example, the Third Circuit held that an equitable lien by agreement attaches to the “specific fund” as soon as it is received by the participant. At that moment, according to the Third Circuit, the participant becomes a constructive trustee of the fund and may be compelled in equity to repay it even if he has spent or otherwise converted the fund. Id. at 194-95. The flaw in the Third Circuit’s analysis is that the “specific fund” it identified as being received by the participant consisted of the SSDI benefits. As the Ninth Circuit correctly observed, the Social Security Act prohibits recipients from assigning SSDI benefits or creditors from attaching liens to such benefits. Bilyeu, 683 F.3d at 1093-94. And, as discussed above, when the disability benefits (as opposed to the SSDI benefits) were received by the participant, no overpayment existed and, so, no equitable lien could attach to any specific portion of those benefits.

Likewise in Cusson v. Liberty Life Assurance Co., 592 F.3d 215 (1st Cir. 2010), the First Circuit concluded that the reimbursement agreement targeted “specific funds for recovery” and “put [the participant] on notice” that she would be required to repay the amount that she “might get from Social Security.” Id. at 231. The problem, however, remains the same – while the participant was receiving her disability benefits, the amount of a potential overpayment, if any, was entirely speculative and, so, no specific fund existed to which an equitable lien attached. These decisions, and others cited by the Ninth Circuit, while perhaps reaching an equitable result – after all, the participant did agree to reimburse any overpayments resulting from her receipt of SSDI benefits – are not consistent with ERISA because the plan fiduciaries were not seeking relief typically available in equity.

In sum, the Ninth Circuit held that the plan fiduciary had no claim under ERISA to recover the overpayment. And (although the Ninth Circuit did not reach the issue) because the plan fiduciary’s state law claims were likely preempted by ERISA, the plan fiduciary was left without a remedy to recover the overpayment. This result is not surprising in light of similar results under ERISA in far more compelling circumstances. See, e.g., Bast v. Prudential Ins. Co., 150 F.3d 1003 (9th Cir. 1998)(no remedy for participant in ERISA medical plan for delays in approval of potentially life saving treatment, allegedly resulting in her death).

Is the lack of a remedy to recover overpayments a cause for concern? After all, the typical group disability plan gives the plan fiduciary the authority to reduce a participant’s benefits by an estimate of potential SSDI benefits, and the lack of a remedy to recover overpayments might cause plan fiduciaries to stop offering participants the option of signing a reimbursement agreement. If such a practice became widespread, participants would certainly suffer as they would not have access to their full disability benefits for the period necessary (often lengthy) to receive a final decision on an award of SSDI benefits.

Another consideration, however, is likely (in my view) to limit the frequency that plan fiduciaries elect to reduce disability benefits by an estimate of potential SSDI benefits. Plan fiduciaries are, after all, fiduciaries. As such, before making a decision to offset an estimate of SSDI benefits, plan fiduciaries presumably will be required to engage in some analysis of whether the participant is, in fact, eligible for SSDI benefits. Such an analysis would require plan fiduciaries to assess whether the participant was disabled under Social Security Act’s broad any occupation standard. Concluding that a participant is likely entitled to SSDI benefits arguably would limit the plan fiduciary’s flexibility to reach a contrary any occupation decision under the disability plan. (Plan fiduciaries currently avoid this predicament by requiring participants to apply for SSDI benefits (and, often times, providing representation to do so), but leaving the actual determination on the merits to the Social Security Administration.) As a result, plan fiduciaries may well decide to accept the risk of the occasional unrecoverable overpayment in lieu of reducing their flexibility to conclude that a participant is not disabled under the any occupation standard.

The Important Potential Implications of Zhang v. California Capital Insurance Co. For Insurance Litigation in California

Robert McKennon — Tue, 14 May 2013 16:08:54 -0800

After much anticipation, last week the Supreme Court of California heard oral arguments in the pivotal case of Yanting Zhang v. California Insurance Co., S178542 on May 8, 2013. This case looks to have a substantial impact on insurance litigation in California and could open up another significant avenue for insureds to pursue claims against their insurance companies. The key issue in Zhang is under what circumstances may an insured bring a cause of action against an insurer under the “Unfair Competition Law” (Bus. & Prof. Code, section 17200 or “UCL”). Specifically, the issues on review by the Supreme Court are: (1) Can an insured bring a cause of action against its insurer under the unfair competition law (Bus. & Prof. Code section 17200) based on allegations that the insurer misrepresents and falsely advertises that it will promptly and properly pay covered claims when it has no intention of doing so? (2) Does Moradi-Shalal v. Fireman's Fund Ins. Companies 46 Cal.3d 287 (1988) bar such an action? Based on the Court’s questions during the oral arguments, as they were reported in the Los Angeles Daily Journal, it appears that the Supreme Court may be on the verge of ruling in favor of the Plaintiff in Zhang and thereby substantially broadening the scope of potential claims available to insured.

A crucial question for the Supreme Court in Zhang, and a focal point of the oral arguments, is the reach of the Supreme Court’s landmark decision in Moradi-Shalal, which barred private actions seeking to enforce California’s Unfair Insurance Practices Act (“UIPA”), namely, Insurance Code Section 790.03, et seq. (“Section 790.03”).

The Supreme Court’s decision in Moradi-Shalal left open the issue of whether claims for violation of the UCL may still allege conduct that violates Section 790.03. Initially, courts in California heavily favored a broad reading of Moradi-Shalal and found that allegations of fraudulent misrepresentation and false advertising in violation of Section 790.03 cannot be brought under the UCL. Specifically, courts reasoned that allowing such claims would circumvent the Supreme Court’s holding in Moradi-Shalal. See, e.g., Textron Financial Corp. v. National Union Fire Insurance Company, 118 Cal.App.4th 1061, 1070 (2004); Safeco Insurance Company v. Superior Court, 216 Cal.App.3d 1491, 1494 (1990) (finding that the UCL “provides no toehold for scaling the barriers of Moradi-Shalal”). In Textron, a case that arose from an insurer's refusal to honor a claim for insurance benefits concerning property damage, the court found that “merely alleging these purported acts constitute unfair business practices under the unfair competition law is insufficient to overcome Moradi-Shalal.” Textron Financial Corp., supra at 1070-71.

Now, the Zhang case has the potential to significantly limit the broad reading of Moradi-Shalal applied by courts in California in the past and, if the Court of Appeals decision is affirmed, open the door for a slew of new claims against insurers that they have engaged in unfair business practices in violation of Section 790.03. The Zhang case involves an insured, Zhang, who owned an apartment building which was damaged in a fire in 2005. Zhang attempted to collect benefits under the policy issued by her insurer California Capital Insurance Company (“California Capital”). However, Zhang alleged that there was a litany of problems with California Capital’s handling of her claim and that they refused to approve adequate payment for the repair of the premises. Zhang brought a claim against California Capital for breach of contract, breach of the implied covenant of good faith and fair dealing, and also several alleged violations of the UCL. The claims for breach of contract and bad faith were settled and dismissed, leaving her UCL claim. Included under her UCL claim were allegations that California Capital had acted unfairly by engaging in false and deceptive advertising, suggesting it would provide coverage in the event of a loss, when it had no intent to do so. Most importantly, she also alleged that California Capital engaged in unlawful conduct which violates Section 790.03 as part of UCL claim.

California Capital filed a demurrer to Zhang’s cause of action under the UCL arguing, unsurprisingly, that Zhang could not state a cause of action under Section 790.03 based on the decision in Moradi-Shalal. The trial court sustained California Capital’s demurrer relying largely on the Textron case. Then, in a stunning break from prior decisions, the Court of Appeal reversed the trial court’s holding and found that because Zhang is alleging unlawful and misleading conduct prohibited by the UCL in violation of Section 790.03, the suit may proceed on that claim. The court in Zhang specifically addressed the clearly contradictory holding in the Textron decision. Specifically, the court in Zhang held that, contrary to the finding in Textron, Moradi-Shalal does not bar a claim under the UCL where the plaintiff specifically alleged conduct expressly prohibited by Section 790.03. The court pointed to the Supreme Court’s decision in Manufacturers Life Insurance Co. v. Superior Court, 10 Cal.4th 257 (1995), in which the high court rejected the idea that Section 790.03 was intended to “displace existing rights and remedies for unlawful business practices” in the insurance industry, among them the UCL. As such, the court believed that there is no reason to treat insurers differently from other businesses when it comes to actions under the UCL. The court held that although the UIPA did not provide a private cause of action, in the UCL the legislature had provided such a remedy for conduct that fell within its purview and, as such, Zhang's allegations that the insurer solicited her business through false advertising and false promises clearly justified a claim under the UCL and is not barred by Moradi-Shalal.

Following the Court of Appeals’ decision in Zhang, both plaintiff’s attorneys and insurance companies anticipated a possibly ground-breaking decision by the Supreme Court after it held oral argument in the case three years after it took up the case. As was reported in the Daily Journal on Thursday May 9, 2013, the Supreme Court heard oral arguments the previous day on May 8. According to the Daily Journal, only three justices asked multiple questions and the arguments were both relatively short. However, “the questions posed by the justices suggested the court is inclined to rule in favor of Zhang.” Specifically, Justice Joyce L. Kennard repeatedly asked Zhang’s attorney “hypothetical questions based on the assumption the court were to side with his client.” Although the attorney for California Capital argued that under Moradi-Shalal, Zhang’s claim must be handled by the insurance commissioner, Justice Carol Corrigan questioned why Zhang cannot sue for false advertising where her contract was fraudulently induced. Justice Carol Corrigan also added that who wins the false advertising argument is currently irrelevant, and the only question is whether Zhang has a right to bring her claim. When asked by the Court whether it would have to overturn Moradi-Shalal if it ruled for Zhang, Zhang’s attorney definitively answered “no” and explained that none of Zhang’s actions are related to Moradi-Shalal and pleading false advertising is enough.

Based on the oral arguments, it seems that the Justices of the California Supreme Court are inclined to limit the scope of Moradi-Shalal and allow Zhang to proceed with her case. Such an outcome would have very important consequences for insurance litigation in California. Allowing insured plaintiffs to maintain claims under the UCL based on an insurer’s advertising or representation regarding timely payment for covered losses could open the floodgates for a huge number of new claims for such false advertising and fraud in connection with their advertising. Moreover, given the broad scope of the UCL, such claims will also likely to become common in complaints against insurance companies. Although damages per se are not recoverable under the UCL, restitution may be available under the theory that the insured purchased the policy in reliance on misrepresentations by the insurer. Recovery of insurance premiums paid may be a remedy, along with policy benefits that are owed under an insurance policy. In any case, the threat of injunction for violation of the UCL requiring changes to the insurer’s practice would still be a powerful weapon for plaintiffs. On the other hand, if the Supreme Court decides in favor of California Capital, it would reaffirm Textron Court’s broad reading of Moradi-Shalal and continue to limit insured plaintiffs to breach of contract and breach of the implied covenant of good faith and fair dealing claims. The decision by the Supreme Court in the Zhang case is expected within 90 days of the oral argument on May 8. Both insureds and their attorneys should keep careful watch for this potentially momentous decision in the field of insurance litigation.

Reasonable Interpretation of Statute Does Not Preclude Triable Issue of Fact on Insurance Bad Faith Claim

Sean Crane — Fri, 10 May 2013 17:34:06 -0800

A recent California Court of Appeals decision sought to clarify the application of California Insurance Code Section 533.5(b) concerning the statute’s preclusion of an insurer’s duty to defend its insured in criminal actions. In Mt. Hawley Insurance Co. v. Richard Lopez, Jr.,__Cal.App.4th___, 2013 Cal. App. LEXIS 346 (May 1, 2013) the Court of Appeals held that Section 533.5 (b) is not applicable to criminal actions brought by federal prosecuting authorities, and thus is limited to precluding the insurer’s duty to defend its insured in state criminal actions brought by the Attorney General, any district attorney, any city prosecutor, or any county counsel. The Court importantly held that the insurer’s Motion for Adjudication of the insured’s bad faith claim should be denied given the insurer’s potentially unreasonable actions even though the insurer gave a reasonable interpretation to an insurance code section.

In Mt. Hawley, the Court of Appeals addressed the appeal of a summary judgment motion and a demurrer concerning the extent of Section 533.5 (b)’s preclusion of the duty to defend. This case arose out of an indictment of the insured by the United States Attorney for the Central District of California for allegedly committing a criminal conspiracy, making false statements, concealing fraudulent actions, and falsifying records. The charges were brought based upon the insured’s alleged participation in a conspiracy to falsify records to move a patient up the transplant waiting list, which consequently resulted in the death of another patient. The Policy at issue stated that the insurer, “shall have the right and duty to defend any Claim covered by this Policy, even if any of the allegations are groundless, false or fraudulent.” The definition of clam in the policy’s endorsement included a criminal proceeding against any insured commenced by an indictment. However, the Insurer rejected the insured’s tender a defense based upon its belief that Section 533.5 (b) precluded the duty to defend in all criminal matters.

The Court of Appeals reversed the District Court’s grant of summary judgment. The court first noted that Bodell v. Wallbrook Insurance Co., 119 F.3d 1411 (9th Cir. 1997) held that Section 533.5 (b) applies to criminal actions brought by the four listed state and local agencies, but does not apply to criminal actions brought by federal prosecutors. However, in the Bodell decision, the Ninth Circuit did not engage in the three-step analysis for statutory interpretation required under California law, and did not specifically address whether or not Section 533.5 (b) precluded an insurer from providing a defense in all criminal actions, including federal criminal actions. Thus, the Court of Appeals analyzed the statute to determine: 1) whether the plain language of the statute is susceptible to only one reasonable interpretation; 2) the purpose behind the statute; and 3) whether, “reason, practicality, and common sense to the language at hand,” mandated a conclusion that the statute required that the insurer defend and indemnify the insured.

(b) No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in subdivision (c), any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to Chapter 5 (commencing with Section 17200) of Part 2 of, or Chapter 1 (commencing with Section 17500) of Part 3 of, Division 7 of the Business and Professions Code in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel, notwithstanding whether the exclusion or exception regarding the duty to defend this type of claim is expressly stated in the policy.

The Court of Appeals found that Section 533.5 (b) was susceptible to three different interpretations as to the preclusion of the insurer’s duty to defend in criminal actions, and determined that the statute was therefore ambiguous and necessitated an interpretative analysis of the statute’s legislative history. Upon review of the legislative history of Section 533.5 (b) the Court of Appeals found the statute had been intended to address a very specific problem the State Attorney General was experiencing in litigating Unfair Competition Actions (Cal. Bus. & Prof. Code § 17200) and False Advertising Actions (Cal. Bus. & Prof. Code § 17500). The State Attorney General’s Office found itself filing actions against a business or an individual, only to proceed into litigation of the matter against a defense tendered by an insurance company, while the individual/business whose conduct violated the provision(s) was not being held directly accountable. Therefore, the purpose of Section 533.5 (b) was to facilitate consumer protection activities, while alleviating the burden being placed on the local prosecutorial resources from the pro-longed litigation battles with insurance defense teams.

The Court of Appeals found the application of reason, practicality, and common sense unnecessary, but proceeded through the final step to provide further support of its holding that Section 533.5 (b) did not apply to criminal actions brought by federal prosecutors. The Court of Appeals found unpersuasive the insurer’s argument that there was a strong public policy of barring insurance coverage to discourage certain types of behavior, and remarked that the public policy concerns applied to indemnification of an insured rather than the defense of an insured. The Court Appeals rejected the insurer’s argument that the Court’s interpretation of Section 533.5 (b) would create a potential conflict with California Insurance Code section 533.5, subdivision (a), explaining that the latter dealt with indemnification of fines, penalty or restitution of in a criminal action or proceeding rather than a duty to defend. Nor did the Court of Appeals find any merit in the insurer’s argument that its interpretation of Section 533.5 (b) would conflict with statutes in the Corporations Code and Government Code. Instead, the Court of Appeals found that its interpretation brought harmony to the code section, and assisted in practically applying the intent the Legislature had when drafting Section 533.5 (b).

Through this in-depth analysis, the Court of Appeals recognized that the California Legislature never intended for Section 533.5 (b) to apply to criminal actions other than those brought by the state and local agencies enumerated in the statute. However, the insurer argued that even if it were incorrect in its interpretation of the statute, it should still be entitled to summary adjudication of the insured’s bad faith claim because a general dispute exists from the insurer’s reasonable interpretation of the statute. As discussed above, the Court of Appeals agreed that the insurer’s interpretation of the statute had been reasonable, but the Court of Appeals stated that it was doubtful that the “general dispute doctrine” applied to third party disputes such as the present matter. Instead, the Court of Appeals found that the reasonableness of the insurer’s conduct in denying the defense of the insured was a question of fact that precluded summary judgment, especially since the insurer had agreed to defend the hospital where the insured was employed for the same criminal investigation, while refusing to defend the insured, who was covered under the policy as an employee of the hospital.

Moreover, the Court of Appeals additionally found that the insurer may have acted in bad faith by denying coverage based on a medical incident exclusion that, according to the insured, was not part of the policy. The Court of Appeals noted that the “insurer’s continued reliance on endorsement insureds claim they never received was ‘indicia of bad faith’ and one for the jury to decide.” Tomaselli v. Transamerica Ins. Co., 25 Cal.App.4th 126 (1994). Therefore, a triable issue of fact existed as to whether the insurer acted in bad faith by denying coverage based on an exclusion that cannot be found in the Policy and the trial court’s ruling for summary judgment was reversed.

Insurance Brokers' Duties to Third Parties Continue to Shrink

Robert McKennon — Wed, 01 May 2013 12:57:32 -0800

The Wednesday May 1, 2013 edition of the Los Angeles Daily Journal featured Robert McKennon and Victor Xu’s article entitled: “Insurance Brokers’ Duties to Third Parties Continue to Shrink.” In it, Mr. McKennon and Mr. Xu discuss how a new appellate decision- Travelers Property Co. of America v. Superior Court 2013 DJDAR 5005 (Cal. App. 2d Dist. 2013)- clarifies and limits the duties owed by insurance brokers to third-party claimants. The article discusses how in Travelers, the court specifically addressed the holding in Nowlon v. Koram Insurance Center, Inc., 1 Cal.App.4th 1437 (1991) and limited the holding in that case to the unique circumstances of negligence per se. The article also discusses how Travelers does not foreclose the possibility of other types of breach of professional duty claims by third-parties against brokers, especially where the harm was reasonably foreseeable. The article is posted below with the permission of the Daily Journal.

United States Supreme Court to Decide When the Statute of Limitations Period Begins in an ERISA Disability Case

Scott Calvert — Mon, 29 Apr 2013 16:47:09 -0800

By granting certiorari in Heimeshoff v. Hartford Life and Accident Insurance Co., 496 Fed. Appx. 129, 2012 U.S. App. LEXIS 19269, 2012 WL 4017133 (2d Cir. September 13, 2012), the United States Supreme Court is poised to address an issue that has left countless ERISA claimants without a remedy to challenge a wrongful denial of disability benefits. Specifically, the Supreme Court will consider when the statute of limitations accrues following a decision to deny a claim for disability benefits. Or, as a claimant would ask the question, “What is my deadline to file a lawsuit in an ERISA matter?”

In Heimeshoff, the claimant was a Wal-Mart employee who filed long-term disability claim under an ERISA plan, asserting that she could no longer work as of June 2005 because of a variety of conditions, including lupus and fibromyalgia. Her claim was denied in November 2007, and she filed her lawsuit in November 2010, believing that she met the Policy’s three-year internal limitations period. However, the District Court granted Hartford’s motion to dismiss, based on the policy language stating that a lawsuit must be brought “within 3 years after written proof of loss is required to be furnished,” which would have been in September 2008 (because proof of loss was due within 90 days of Heimeshoff’s last day at work).

The Second Circuit Court of Appeals affirmed the District Court’s ruling, rejecting the arguments that the Hartford’s contractual limitations period did not begin to run until the final denial of benefits and that Hartford erred by not disclosing the deadline to file a lawsuit in the final denial letter.

Hopefully, in addressing these issues, the United States Supreme Court’s ruling will simplify the calculation of deadlines to file a lawsuit. The clearer the rules, the fewer claimants who will be unwittingly left with no remedy to challenge a final denial decision.

Many claimants (and some lawyers) are confused by the deadlines associated with ERISA claims. If your claim for disability benefits was denied by an insurance company, you should speak with an attorney as soon as possible to ensure that you do not forfeit your right to file a lawsuit. If you have a dispute with an insurance company and would like to discuss your matter with an attorney, please contact us for a free consultation.

FAQs: Can an Insured Sue for Future Policy Benefits and Attorneys' Fees in a Lawsuit Against an Insurer for Disability Insurance Benefits?

Victor Xu — Thu, 18 Apr 2013 10:15:54 -0800

The McKennon Law Group PC periodically publishes articles on its California Insurance Litigation Blog that deal with frequently asked questions in the insurance bad faith and ERISA area of the law. This is another such article in that series.

If an insurance company has unfairly denied an insured’s disability benefits or has otherwise committed bad faith, an insured may be entitled to substantial compensation for harm that the insured has suffered. In fact, not only may an insured seek payment of all the unpaid benefits, but the insured can also sue for future policy benefits, among other damages.

Under a breach of contract theory, an insured generally can only recover accrued unpaid benefits where payments under the policy are made periodically. However, under California law, insurers are subject to an implied covenant of good faith and fair dealing. If an insurer acts in bad faith in handling an insured’s disability insurance claim, the insured can sue to recover future disability benefits. See Hangarter v. Provident Life & Acc. Ins. Co., 373 F.3d 998, 1012-1013 (9th Cir. 2004). Furthermore, if the insured can establish bad faith by the insurer, the insured can also recover reasonable attorneys’ fees incurred in proving the benefits owed in a lawsuit. See Brandt v. Sup.Ct. (Standard Ins. Co.), 37 Cal. 3d 813, 817 (1985). Generally, an insured can establish bad faith by showing that an insurer’s delay or withholding of benefits under the disability insurance policy was unreasonable or without proper cause. For a detailed discussion of what constitutes insurance bad faith, see the article on our California Litigation Blog here.

If the insured’s insurance disability plan is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), then the remedies available under California law for breach of the implied covenant of good faith are not available. This means that, under ERISA, the insured/participant will not be able to recover future disability benefits. However, pursuant to ERISA, section 502(a)(1)(B), an insured/participant may sue for benefits due under the terms of an ERISA plan and also a declaration of the insured’s/participant’s rights to future benefits under the disability insurance plan. Furthermore, as under California law, ERISA allows the judge to exercise discretion to award the prevailing party attorneys’ fees and costs incurred during court proceedings. See 29 U.S.C. §1132(g)(1).

Being denied disability benefits during an insured’s/participant’s time of physical and emotional hardship is extremely upsetting. However, both California and federal law provide insureds with considerable remedies where their benefits have been wrongfully denied by insurers. It is crucial for insureds/participants to understand that they have a right to their disability benefits and that they can take action to protect them. If you have a dispute with an insurance company and would like to discuss your matter with an attorney, please contact us for a free consultation.

Ninth Circuit Emphasizes Need for an Insurer to Have a Meaningful Dialogue With the Claimant When Denying Benefits

Sean Crane — Mon, 15 Apr 2013 16:44:20 -0800

A recent Ninth Circuit Court of Appeals decision reaffirmed the need for plan administrators to state the reasoning behind their denial of coverage. In Lukas v. United Behavioral Health, __ F.3d __, 2013 U.S. App. LEXIS 1230 (9th Cir. Jan. 17, 2013) the Ninth Circuit was faced with evaluating whether the district court properly weighed the factors necessary to determine if there was an abuse of discretion by the plan administrator in denying the benefits to the claimant. On de novo review, the Ninth Circuit found that the lower court failed to properly weigh these factors and reversed the decision, remanding the case back to the district court for a benefit award and further necessary proceedings related to that award.

The claim at issue in Lukas was based upon Lukas’ stay at a residential treatment facility for an eating disorder and co-morbid conditions. United Behavioral Health denied Lukas’ claim for benefits because it did not think the treatment at the facility was a medical necessity. Furthermore, United Behavioral Health stated that Lukas had not provided adequate documentation to prove a medical need for the treatment. However, Lukas had provided United Behavioral Health with a letter from the medical treatment facility expressing why the treatment was necessary. At no time during the initial denial or the appeals process, did United Behavioral Health explain why the letter from the medical treatment facility was insufficient in proving a medical necessity, nor did they request any further information. The Ninth Circuit specifically found that the lower court had not properly weighed the factors pertaining to the existence of a conflict of interest and the procedural requirements for review of the claim. The Court made it clear that the weight given to the conflict interest factor depends on the facts of each case, and the Administrative Record revealed that United Behavioral Health committed numerous procedural errors that caused the conflict of interest to weigh more heavily in the analysis.

The Ninth Circuit found that United Behavioral Health committed three clear ERISA statutory violations during the review process, including a failure to provide a meaningful explanation in the initial determination of denial of benefits, a failure to provide a complete case file on request and a failure to reveal the name of the reviewing doctor upon the second appeal. Additionally, the Court stated that United Behavioral Health inadequately investigated the claim by not clearly defining their decision and requesting more information. This was particularly troublesome because of the conflict presented by United Behavioral Health acting as both a payor and evaluator of claims.

The Court stated that United Behavioral Health’s:

Reliance upon a lack of documentation was unreasonable because it was not supported by the record and because [United Behavioral Health’s] numerous procedural violations deprived [Lukas] of the opportunity to provide additional relevant records.

The Ninth Circuit’s decision suggests that a single statement denying coverage does not meet the standard necessary to constitute meaningful dialogue, and without a further explanation by the plan administrator or a request for further information from the claimant, a plan administrator likely exposes itself to the risk of liability under ERISA.

There are several procedural protections ERISA affords claimants in ensuring that their claims are properly investigated and reviewed. This opinion is one of many recent Ninth Circuit opinions explaining how a claims administrator’s violation of these procedural protections will positively impact the outcome of a court’s review of a insured’s/participant’s claim.

FAQs: What Kinds of Actions by an Insurer Constitute Bad Faith?

Robert McKennon — Fri, 22 Mar 2013 12:49:41 -0800

The McKennon Law Group PC periodically publishes articles on its California Insurance Litigation Blog that deals with frequently asked questions in the insurance bad faith and ERISA area of the law. This is another such article in that series.

Generally, to establish a bad faith claim in first party cases (such as those involving life, health, disability, property and casualty, auto liability, and homeowner’s insurance), an insured must demonstrate that an insurer’s delay or withholding of benefits under the policy was unreasonable or without proper cause. The courts have determined that many types of conduct may constitute insurance bad faith, such as:

Failure to accept an insured’s reasonable settlement offer.
Biased investigation or factual determination, including:
- Misrepresenting the nature of the investigatory proceedings and the insurer's employees/agents lied during the depositions or to the insured.
- Focusing on facts justifying denial, ignoring evidence that supported the claim, and failure to utilize objective standards in making its claims decisions.
- Retention of biased doctor to conduct an independent medical exam and to prepare a report that falsely minimized insured's injuries.
- An insurance provider’s act in conducting a “pure paper” review, rather than an independent medical examination, constitutes “an indicator of bias.”
Failure to conduct a thorough investigation, including:
- Failure to interview necessary witnesses.
- Failure to investigate beyond facts and coverage theories asserted by insured.
- Failure to consult with medical experts in appropriate cases.
Unduly restrictive interpretation of claim form.
Denial of a claim based on improper standards.
Unreasonable delay in payment of claim.
Deceptive, abusive or coercive practices to avoid payment of claim, including:
- Misrepresenting coverage.
- Intimidating prospective witnesses.
- Threats to close file without payment to pressure settlement.
- Groundless accusations against insured to pressure settlement.
- Arbitrary termination of benefits.
Inadequate communication with insured.
Failure to notify insured of certain policy rights.
Unreasonably incorrect accountings.
Unreasonable litigation conduct.

Insurance bad faith claims can be potent weapons for insureds or beneficiaries who have been mistreated by insurance companies in the handling of their insurance claims. Knowing what kinds of actions by an insurer constitute bad faith is therefore critical to understand if you are considering an insurance bad faith lawsuit. If you have a dispute with an insurance company and would like to discuss your matter with an attorney, please contact us for a free consultation.

In MLG Case, the San Francisco Superior Court Rules that Plaintiff Therabotanics May Pursue Claims Against Sephora and Solazyme For Interference With Contract and Unfair Competition

Robert McKennon — Thu, 21 Feb 2013 17:05:08 -0800

McKennon Law Group recently filed a case on behalf of Therabotanics, LLC, a subsidiary of Ideal Living, for breach of contract, unfair competition, misappropriation of trade secrets, harmful interference with contract, and conversion of assets against Sephora, USA, Inc. and Solazyme, Inc. Therabotanics and Solazyme had entered into an exclusive agreement for a joint venture to sell a line of algae-based skin care products through a television infomercial. The exclusive agreement contained a carve-out that allowed Solazyme to sell a “premium” product with other distributors, but at a higher price and under a specific name.

The complaint alleges that Sephora and Solazyme entered into a separate joint venture to sell the same or similar skin-care products in violation of the agreement between Therabotanics and Solazyme, and they did this knowingly and with the intent to frustrate the agreement between Therabotanics and Solazyme. The complaint alleges that Therabotanics shared trade secrets and other assets with Solazyme to develop the skin-care product, and that Solazyme used those trade secrets and assets to develop a competing product with Sephora in violation of the agreement between Therabotanics and Solazyme. The product sold by Sephora was not a “premium” product being sold at a higher price, but instead the same or similar product that was to be sold by Therabotanics, and was marketed at the same price point. Solazyme thereafter backed out of the agreement with Therabotanics and continued its sales with Sephora.

Solazyme and Sephora challenged the complaint filed by Therabotanics on the grounds that their conduct did not amount to unfair competition or harmful interference, and asserted that there was no wrongdoing on the part of either party. The court found that Therabotanics sufficiently alleged that Sephora had wrongfully interfered with the agreement between Therabotanics and Solazyme, and overruled many of Sephora’s and Solazyme’s objections to Therabotanics claim for unfair competition, allowing Therabotanics the opportunity to state with more specificity the wrongdoing that is alleged to have occurred. The court also overruled Sephora and Solazyme’s objections to Therabotanics claim for conversion of assets. Thus, Sephora and Solazyme will be forced to defend themselves against these claims in court. A further synopsis of the court’s ruling was published on Law360.com at the following link: http://www.law360.com/articles/416708/sephora-can-t-dodge-competition-claims-over-skin-care-deal. Commenting on the court’s ruling, Robert McKennon of the McKennon Law Group told Law360:

We are very pleased that the Court has substantially overruled Defendants Solazyme, Inc.’s and Sephora, USA, Inc.’s attempt to have my clients’ claims dismissed at the demurrer stage of this litigation. We are equally pleased that the Court has allowed us to amend our causes of action for fraud and unfair competition to add the requisite specificity to pursue those claims against Solazyme and Sephora, as well as against Solazyme’s Senior Vice President and General Manager, Frederick Stoeckel. We are confident that our clients will prevail in their claims against the defendants in this litigation.

McKennon Law Group PC Founding Partner, Robert J. McKennon, Receives 2013 "Super Lawyer" Designation As Well as Other "Top Attorney" Recognitions

Reid Winthrop — Tue, 22 Jan 2013 09:43:43 -0800

McKennon Law Group PC is proud to announce that its founding partner, Robert J. McKennon, has been recognized as one of Southern California’s "Super Lawyers" for Insurance Coverage and will appear in the upcoming 2013 edition of Southern California Super Lawyers magazine as well as the Los Angeles and Orange Coast Magazines.

Each year, Super Lawyers magazine, which is published in all 50 states and reaches more than 13 million readers, names attorneys in each state who attain a high degree of peer recognition and professional achievement. The Super Lawyer designation is given to less than 5% of lawyers nationally after being nominated and voted on by their peers. Mr. McKennon also received this Southern California Super Lawyer designation in 2011 and 2012.

In addition, for the 2012-2013 years, Mr. McKennon received the following awards and recognitions:

• Named in the Business Edition 2012 Thomson Reuters/Super Lawyers annual list of the nation's top attorneys in business practice areas.

• Awarded the designation of “2013 Top Rated Lawyer in Labor & Employment” by American Lawyer Media and Martindale Hubbell, leading providers of news and rating information to the legal industry.

• Awarded the designation of 2012-2013 “Southern California’s Top Rated Lawyers” by American Lawyer Media and Martindale Hubbell, leading providers of news and rating information to the legal industry.

• Awarded the designation of 2012-2013 “Top Rated Lawyer in Commercial Litigation” by American Lawyer Media and Martindale Hubbell, leading providers of news and rating information to the legal industry.

• Rated AV Preeminent in Insurance Law by his peers, an achievement of Martindale Hubbell’s highest rating in legal ability and ethical standards.

• Featured in the Corporate Counsel magazine and The National Law Journal, both of which feature the Top Rated Lawyers in Insurance Law.

• Awarded AVVO's highest rating of "Superb," (receiving a score of “10” out of “10”)which also highlights an attorney's competence, ethical conduct, professional ability, diligence and overall performance.