Supreme Court Vacates Ruling that ERISA Case Is Time-Barred, though Employer had mismanaged 401(k) Plan for Nearly a DecadeMay 23, 2015 Joe McMillen
Is your 401(k) plan with your employer being closely monitored? Is the plan administrator reviewing the investments periodically to ensure the best investments are being made available at competitive fee pricing? If not, your employer may have breached its fiduciary duty to you. That was the issue in a recent ERISA case addressed by this nation’s Highest Court and, in particular, whether the case was time-barred.
Did your disability insurer follow the law when it denied your insurance claim? Don’t count on it. If you have long- term disability insurance through your employer, you may need a lawyer with expertise in the Employee Retirement Income Security Act of 1974 (“ERISA”) to evaluate that. We routinely see disability insurers violate ERISA laws, either intentionally or negligently.
The case of Puccio v. Standard Ins. Co., 2015 U.S. Dist. LEXIS 21412 (N.D. Cal. Feb. 20, 2015) is a recent example. In Puccio, Judge James Donato issued a favorable opinion for policyholders that reiterated three longstanding legal principles disability insurers cannot seem to get right: (1) a “purely paper review” of the insured’s medical records by the insurer’s consulting physician, without personally examining the insured, is generally not sufficient to deny the insured’s disability claim; (2) although an insurer is not bound by a decision from the Social Security Administration (“SSA”) to award disability benefits, it must evaluate the decision and provide legitimate reasons for a contrary conclusion; and (3) an insurer cannot reject an insured’s claim without explaining in detail what specific additional information would be sufficient for it to award disability benefits.
Defendant Standard Insurance Company (“Standard”) violated every single one of these well-established principles when evaluating Plaintiff Annina Puccio’s long-term disability claim. In January 2009, Ms. Puccio submitted a claim to Standard under her group disability insurance policy asserting disability for a mental disorder. That commenced a six year process of numerous claims and appeals involving different mental and physical conditions. Each time Standard initially denied Ms. Puccio’s claim, she appealed. Standard would then reverse its claim decision and award Ms. Puccio disability benefits. This pattern proceeded for years until Standard finally upheld its claim denial in the final administrative appeal.
In the first two claims, Standard reversed its denials and decided to extend disability benefits for a mental disorder, then later for fibromyalgia and osteoarthritis (both musculoskeletal conditions). The policy had a twenty-four month limit for mental and musculoskeletal disorders. Standard thus rightfully limited Ms. Puccio’s benefits to two years based on those disabling conditions.
When Standard denied the insured’s final appeal, a different medical condition was at issue, Addison’s disease, a potentially crippling endocrine disorder. That disease was not subject to the policy’s two-year limit unlike Ms. Puccio’s earlier claims. Standard nonetheless upheld its denial. It concluded based on reviewing Ms. Puccio’s medical records her Addison’s disease symptoms were well controlled and not disabling. It concluded only her musculoskeletal conditions prevented her from working in her sedentary job. It therefore denied her claim for benefits based on Addison’s disease. It stopped paying any further disability benefits because the policy’s two-year limit on mental and musculoskeletal disabling disorders had expired.
Standard retained no less than nine different doctors during the six-year claim process to review Ms. Puccio’s medical records. None of them personally examined her. Each time they concluded Ms. Puccio was either disabled or not disabled based purely on a “paper review” of her medical records. None of them spoke to her treating physicians. Although Standard was well aware that the SSA concluded Ms. Puccio was disabled and had awarded her disability benefits, it failed to review or even ask for their records. While it reduced Ms. Puccio’s disability benefits based on the amount of the SSA award, as it was entitled to do under the policy, it apparently was not interested in understanding why the SSA found her disabled.
Ms. Puccio filed a lawsuit against Standard under ERISA for her long-term disability benefits beyond the two-year limit. She alleged her Addison’s disease symptoms prevented her from performing her job duties. Standard filed a motion for summary judgment and argued its decision to pay benefits for two years based on Ms. Puccio’s mental and musculoskeletal disorders, but to deny further benefits based on her other physical conditions like Addison’s disease, was proper. It contended her Addison’s disease symptoms did not disable her within the meaning of the policy because they did not prevent her from performing her sedentary job duties.
Judge Donato of the Northern District of California soundly rejected Standard’s argument and denied its motion. As discussed above, Judge Donato found it extremely important that Standard had concluded there was no disability based on a “pure paper review” of the insured’s medical records without ever having a doctor personally examine her. He also criticized Standard for not obtaining, evaluating and distinguishing the SSA’s finding of disability. Finally, he reasoned Standard should have told the insured precisely what additional information she needed to submit to change its denial decision and allow her that opportunity on appeal, but it did not.
Judge Donato discussed these legal principles in his opinion as follows:
Standard should have conducted an in-person medical evaluation to assess the disability impact of Puccio’s Addison’s disease . . . Standard limited itself purely to a paper review of her medical records at the cost of ascertaining all the facts from an in-person exam. That alone raises questions about the thoroughness and accuracy of the benefits determination.
* * * *
Evidence of a Social Security Award of disability benefits is of sufficient significance that failure to address it offers support that the plan administrator’s denial was arbitrary, an abuse of discretion. While Standard was not bound by the SSA’s determination, complete disregard for a contrary conclusion without so much as an explanation raises questions about whether an adverse benefits determination was the product of a principled an deliberative reasoning process. . . .
Taken together, these factors alone support a finding that Standard abused its discretion, but there is more. Standard also failed to request the specific evidence that it and its reviewing physicians concluded was necessary to evaluate Puccio’s claim.
* * * *
The Ninth Circuit has emphasized that ERISA regulations call for a meaningful dialogue between a claims administrator and plan beneficiary. A beneficiary is entitled to a description of any additional material or information that was necessary for her to perfect the claim, and to do so in a manner calculated to be understood by the claimant. Standard never informed Puccio that it needed information specifically stating that her Addison’s disease or gastrointestinal issues would prevent her from performing sedentary level work, separate and apart from the other conditions. . . . If Standard required specific information to evaluate Puccio’s claim, Standard needed to ask for it. [Citations omitted].
Based on that reasoning, Judge Donato held Standard abused its discretion when it denied Ms. Puccio’s long-term disability benefits beyond the mental health and musculoskeletal coverage. He remanded the case back to the plan administrator, Standard, to reconsider whether Ms. Puccio is entitled to additional disability benefits. He found Standard must obtain and evaluate the evidence it should have in the first place in reaching its decision, i.e., opinions from Standard’s “paper review” doctors after personally examining the insured, the SSA record, and the insured’s medical records that specifically address how Addison’s disease impacts her ability to work.
Do disability claims administrators diligently follow the law and act in the best interests of the plan’s participants as they are obligated to do as an insured’s fiduciary? You would not be surprised that the answer is that they do not. Often, as Standard did here, a disability claims administrator has a conflict of interest because it acts as both the decider of your claim and the entity ultimately responsible to pay it. Saddled with that conflict, Standard, like other similarly situated insurers, had a financial incentive to deny Ms. Puccio’s claim and ignore well-established legal principles about how a disability claims administrator must act when investigating the claim. Now ask yourself this question: did your claims administrator do so in handling your long-term disability insurance claim?
Robert J. McKennon Named Corporate LiveWire’s Global Awards 2015 Insurance & Risk Management Lawyer of The Year for Orange County, CaliforniaMay 12, 2015 Robert McKennon
McKennon Law Group PC is proud and honored to announce that Robert J. McKennon, founding shareholder of McKennon Law Group PC, has been named as Corporate LiveWire’s Global Awards 2015 Orange County, California Insurance & Risk Management Lawyer of the Year. The annual Global Awards Lawyer of the Year recognition honors the achievements of those individuals that have consistently shown best practice and demonstrated general excellence in every endeavor on a global and national level. Mr. McKennon specializes in all types of insurance litigation but especially focuses his efforts in long-term disability insurance, life insurance, long-term care insurance, health insurance and insurance bad faith litigation.
The Corporate LiveWire Global Awards 2014 Lawyer of the Year winner’s guide is available here.
In actions brought under the Employee Retirement Income Security Act of 1974 (“ERISA”), two roads diverge in federal court—and the court’s choice regarding the applicable standard of review can make all the difference in the scope of permissible evidence. If the court applies the abuse of discretion standard of review, the court more typically (but not always) only considers evidence received by the insurer in time for its decision and limits its review to the “administrative record” to determine whether the insurer’s denial was an abuse of discretion. Alternatively, the court may review a case “de novo,” and may consider documents not previously provided to the insurer to determine whether the insured is entitled to benefits.
On April 22, 2015, the United States Court of Appeals for the Ninth Circuit issued a decision affirming the district court’s decision to award McKennon Law Group PC’s client, an attorney (“insured”), his past-due ERISA plan benefits, as well as attorneys’ fees, costs and interest against Sun Life & Health Insurance Company in connection with his short-term and long-term disability insurance claim.
Robert J. McKennon and Joseph McMillen Publish Article in Los Angeles Daily Journal: “When Insurers Rescind, They Must Act Fast”April 02, 2015 Iris Chou
The April 1, 2015 edition of the Los Angeles Daily Journal features an article written by Robert McKennon and Joseph McMillen of the McKennon Law Group entitled: “When Insurers Rescind, They Must Act Fast.” In the article, Mr. McKennon and Mr. McMillen discuss the California Court of Appeal’s decision in DuBeck v. California Physicians’ Service, 2015 DJDAR 2629 (Cal. App. 2d Dist. Mar. 5, 2015), which held that Blue Shield of California (“Blue Shield”), waived its right to rescind her health insurance policy and, therefore, her claim was covered. While Ms. DuBeck had allegedly willfully misrepresented material facts about her medical condition on her application, the appellate court found that even if she had done so, Blue Shield waived its right to rescind.
The article is posted below with the permission of the Los Angeles Daily Journal.
When insurers rescind, they must act fast
By Robert J. McKennon and Joe McMillen
Did you disclose your material medical history on your health insurance application?
What about your application for disability or life insurance? Be careful that you do or
you may find yourself without insurance when you need it most like Bonnie DuBeck
did when she learned she had breast cancer that her insurer would not cover because she allegedly misrepresented her medical condition.
Fortunately for DuBeck, the California Court of Appeal in DuBeck v. California
Physicians’ Service, 2015 DJDAR 2629 (Cal. App. 2d Dist. Mar. 5, 2015), held her
insurer, California Physicians’ Service, doing business as Blue Shield of California,
waived its right to rescind her health insurance policy and, therefore, her claim was
covered. While DuBeck had allegedly willfully misrepresented material facts about her
medical condition on her application, the appellate court found that even if she had
done so, Blue Shield waived its right to rescind. Looking at the facts, one wonders how the trial court did not easily reach the same conclusion.
On Feb. 16, 2005, DuBeck submitted a signed application for health insurance to
Blue Shield. Five days earlier, she had visited the Revlon UCLA Breast Center where a nurse performed a “fine needle aspiration” on a lump in her left breast that had
developed after she ran into a cabinet. On the nurse’s advice, DuBeck scheduled a
mammogram and consultation with a breast surgeon for Feb. 17, the day after she
submitted the insurance application.
DuBeck was asked on the application whether she ever had treatment or symptoms
related to potential breast problems or had been advised to have a physician conduct
an exam or further testing which had not yet been performed. DuBeck answered “no”
to each question, omitting material information about her recent and upcoming breast
procedures. On April 1, 2005, Blue Shield issued a health insurance policy to DuBeck
without knowing about her breast exam, procedures and potential health problems.
The lump turned out to be malignant. In the months that followed, DuBeck had breast
surgery and other related medical procedures. In April and May 2005, DuBeck started
submitting claims to Blue Shield under the policy for the medical services. Blue Shield
did not pay for the claims, but suspended processing them. It explained the services
might not be covered under the policy’s preexisting condition exclusion and that it
needed to investigate further.
Blue Shield continued to collect DuBeck’s premiums, $19,600, for the next seventeen
months. It paid for her other claims unrelated to her breast cancer. It did not rescind
the policy during that period.
Seventeen months after Blue Shield issued the policy, on Sept. 8, 2006, it sent
DuBeck a letter explaining it had determined she had not provided complete and
accurate information on her insurance application. Namely, she failed to disclose the
fine needle aspiration procedure, a mammogram and a breast surgeon exam. With full
knowledge that DuBeck had undergone breast cancer surgery and had submitted a
claim to Blue Shield to cover the costs of these procedures, Blue Shield decided to
terminate the policy prospectively rather than rescind it. The letter stated, “Blue shield
has determined that, rather than rescind the coverage completely, your coverage was
terminated prospectively and ended effective today, September 8, 2006.” Blue Shield
also promised to cover and pay for any covered services prior to the termination date.
On the same date Blue Shield sent DuBeck the letter, it sent her a “Certificate of
Creditable Coverage” confirming that her coverage began April 1, 2005, and ended
September 8, 2006. The certificate stated that it was “evidence of your coverage under this plan.”
Two years later, because it had still refused to pay for her breast cancer surgery and
related services, DuBeck sued Blue Shield for breach of the insurance contract and bad faith, among other claims. Blue Shield asserted an affirmative defense that the policy was subject to rescission because DuBeck had willfully misrepresented material facts in her application, rendering the policy void ab initio. It moved for summary judgment on that defense, which the trial court granted.
DuBeck appealed and argued Blue Shield waived any right to rescind the policy. The
Court of Appeal agreed, reversed the trial court, and found waiver as a matter of law.
The court noted rescission extinguishes a contract, rendering it void ab initio, as if it
never existed. Rescission is, of course retroactive, rendering a contract or insurance
policy unenforceable from the outset. Cancellation, however, is prospective. To rescind under California law, the insurer must return to the insured all the premiums paid, unlike cancellation.
It is established California law that an insurer has the right to rescind a policy when
the insured misrepresented or concealed material information in seeking to obtain
insurance. Nieto v. Blue Shield of California Life & Health Ins. Co., 181 Cal. App. 4th
60, 75 (2010). However, that right, like any other, can be waived: “An insurance
company will be deemed to waive any ground which would otherwise entitle it to
rescind a policy … when, despite knowledge of the facts giving it the option, it impliedly recognizes the continuing effect of the policy.” Pierson v. John Hancock Mut. Life Ins. Co., 262 Cal. App. 2d 86, 91 (1968); see also Silva v. National American Life Ins. Co., 58 Cal. App. 3d 609, 61516 (1976).
In general, to constitute a waiver, there must be an existing right, a knowledge of its
existence, an actual intention to relinquish it, or conduct so inconsistent with the intent
to enforce the right as to induce a reasonable belief that it has been relinquished.
Pacific Business Connections, Inc. v. St. Paul Surplus Lines Ins. Co., 150 Cal. App. 4th 517, 525 (2007), quoting Klotz v. Old Line Life Ins. Co. of America, 955 F. Supp. 1183, 1186 (N.D. Cal. 1996).
Under this authority, the Court of Appeal held that Blue Shield waived its right to
rescind the policy as a matter of law, finding the insurer’s conduct was “so inconsistent with the intent to enforce the right [to rescind] as to induce a reasonable belief that it has been relinquished.” The court reasoned Blue Shield told its insured it was terminating the policy prospectively rather than rescinding it, that all her claims prior to the cancellation date would be covered, and retained her premiums.
Additionally, the court explained that in 2009, the Legislature enacted Health and
Safety Code Section 1389.21, which prohibits an insurer governed by the KnoxKeene
Health Care Service Plan Act from rescinding or canceling a health care service plan
contract for any reason more than 24 months following its issuance. Although the
effective date of the statute was January 2010, the court stated: “we find support for
our decision in the Legislature’s judgment that two years is ample time for an insurer to uncover any misrepresentations made in an application and determine whether to
rescind or continue coverage.”
The court determined that Blue Shield first asserted its right to rescind DuBeck’s
policy (during litigation) over three and a half years after issuing it, and more than two
years after admittedly learning the truth about appellant’s medical condition. The court
concluded these facts established Blue Shield had engaged in conduct so plainly
inconsistent with an intent to enforce the right to rescind the policy that it had waived
that right. That Blue Shield first attempted to rescind the policy in litigation after it
represented that it would cancel the policy, but not rescind it, made this outcome
This case teaches that insurers must promptly rescind the policy and return all
premiums upon learning of material misrepresentations in the application. They
cannot engage in conduct inconsistent with a right to rescind that would lead an
insured to reasonably believe the policy is still in effect. California courts will not
hesitate to find waiver as a matter of law in that scenario.
California Court of Appeal Emphasizes Just How Broad the Duty to Defend Is, which Includes Suits Alleging Even RapeApril 01, 2015 Robert McKennon
A liability insurer’s duty to defend its insured against lawsuits is extremely broad, much broader than its duty to indemnify its insured for a judgment entered against it. That has been the law in California for decades. But just how broad is the duty to defend? Does it extend to civil lawsuits alleging the insured raped and sexually assaulted the plaintiff? Does it extend to lawsuits alleging intentional acts by the insured? You bet it does if the policy contains the right language.
Multi-Million Dollar Disgorgement Award Struck Down in Rochow - But the Disgorgement Remedy May Still Be AliveMarch 31, 2015 Robert McKennon
In December 2013, we published an article highlighting the Sixth Circuit Court of Appeals’ bold decision to award the plaintiff disability benefits plus $2.8 million in disgorged earnings, as a potential “game-changer” in Employee Retirement Income Security Act of 1974 (“ERISA”) litigation—that is, if it survived review. Rochow v. Life Ins. Co. of N. Am., 737 F.3d 415 (6th Cir. 2013) (“Rochow I”). Alas, the Sixth Circuit Court of Appeals vacated the decision in February 2014 and stayed the case. Rochow v. Life Ins. Co., 2014 U.S. App. LEXIS 3158 (6th Cir. Feb. 19, 2014) (“Rochow II”). Finally, in March 2015, the Court of Appeals issued an en banc decision vacating the disgorgement award and remanding the case for a review of prejudgment interest. Rochow v. Life Ins. Co. of N. Am., 2015 U.S. App. LEXIS 3532 (6th Cir. 2015) (“Rochow III”). The Court held that because the plaintiff was adequately compensated by an award of the insurance benefits, attorneys’ fees and possible prejudgment interest, that in this case, disgorgement was not necessary to make the plaintiff whole. Although this decision is disheartening to claimant’s attorneys eager to test the limits of ERISA remedies, a careful reading of Rochow III reveals that the Sixth Circuit does not entirely foreclose disgorgement as an appropriate remedy under ERISA. Moreover, the concurring and dissenting opinions provide additional guidance for future ERISA claimants who suffer injuries and seek equitable remedies beyond their policy benefits.
Chances are that you have heard an anecdote or two about Lloyd’s of London, the insurance company known for, among other things, issuing policies that involve coverages other than the usual for automobiles and houses. A whisky company, for example, once bought a policy from Lloyd’s that would cover the cost of a reward to anyone who managed to haul in the Loch Ness Monster. Famous singers have had Lloyd’s insure their voices.
Similar stories involve promising or well-established athletes purchasing injury or long-term disability insurance coverage from Lloyd’s. As the Orange County Register recently reported, former University of Southern California wide receiver Marqise Lee did just that, taking out a $5 million policy that would pay benefits to him in the event that an injury or other disability caused him to be less valuable in the eyes of National Football League (NFL) professional teams come draft day.
Lee’s decision appeared prescient, as the player wound up spraining the MCL in one of his knees in September – when the college football season was in full swing. He missed a few games and reportedly played at less than 100% in some others. He was subsequently drafted in the second round by the NFL’s Jacksonville Jaguars, who offered him a four-year contract worth over $5 million.
Lee’s policy with Lloyd’s, however, promised to pay him the difference between the value of his rookie contract and $9.6 million, up to a difference of $5 million.
Like so many other insureds, Lee filed a claim for benefits based on his injury. Lee filed a claim with Lloyd’s to collect the difference between his rookie contract and the $9.6 million baseline, which came to a little more than $4.5 million, by filing a proof of loss claim based on medical information about his injured knee. Lloyd’s, in response, argued that Lee’s claim either misrepresented, concealed or left out critical information that would have, in effect, nullified the policy. Lloyd’s argument, that Lee did not disclose his entire relevant medical history, is a common argument made when a claimant files for disability insurance benefits, even if the claimant did disclose his or her entire medical history. Legally, it is called policy “rescission,” a tactic many insurers use inappropriately.
Lee subsequently filed suit in California against underwriters from Lloyd’s, asking to be awarded damages of $4.5 million and claiming that Lloyd’s made the choice to deny the claim “in bad faith” (that is, in violation of the implied covenant of good faith and fair dealing that is inherent in every insurance contract) and “with a conscious disregard for Lee’s rights.” Lee’s lawsuit also seeks punitive damages in excess of $4.5 million, “to make an example of the defendants and in order to deter similar conduct.”
Lloyd’s has tried to get the case heard in New Jersey, rather than in California. The Garden State is said to have laws that are more advantageous to insurance companies – one more reason why you should considering consulting an attorney, who can advise you of your options for surmounting little-known obstacles to resolving your case.
FAQs: What Factors Contribute to the Valuation of a Lump Sum Buyout of a Disability Insurance Claim?March 16, 2015 Scott Calvert
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, life insurance, long term disability insurance, annuities, accidental death insurance, ERISA and other areas of the law. This article is the second of two articles focusing on lump sum buyouts of a disability insurance claim. The first article discussed the various times the opportunity to enter into a lump sum buyout might be available to an insured, and some factors to consider when contemplating a disability insurance buyout. This article focuses on how to value the claim and the various factors considered when calculating the buyout sum.
As detailed in the first article, an insured receiving long-term disability insurance benefits might desire to negotiate a lump sum buyout with the insurance company, where the company makes a one-time, lump sum “buyout” of claim and policy. However, the most important question for an insured to consider is “what is my disability insurance policy worth?” This is a complicated question that can only be answered by assessing a variety of different factors.