In the January 4, 2021 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon entitled “ERISA Ruling Expands Protection for Employees, Beneficiaries.” The article addresses a recent case by the Ninth Circuit Court of Appeals, Beverly Oaks Physicians Surgical Center, LLC v. Blue Cross and Blue Shield of Illinois, which found that while anti-assignment provisions in ERISA matters are valid and enforceable, plan administrators can waive the right to assert and enforce these provisions when their actions are inconsistent with the provision or they are aware that the claimant is acting as an assignee. This opinion will greatly benefit employees who have medical insurance and sign agreements with their medical providers to assign their rights to collect payment from their health insurers. The Ninth Circuit’s opinion will be not only useful for claimants/employees who have health insurance claims, but also those who have disability, life or other employee benefit claims as the decision in Beverly Oaks will serve to prevent employers and insurers from making misrepresentations regarding ERISA plan terms and/or taking actions inconsistent that which they had previously represented.
In the January 4, 2021 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon entitled “ERISA Ruling Expands Protection for Employees, Beneficiaries.” The article addresses a recent case by the Ninth Circuit Court of Appeals, Beverly Oaks Physicians Surgical Center, LLC v. Blue Cross and Blue Shield of Illinois, which found that while anti-assignment provisions in ERISA matters are valid and enforceable, plan administrators can waive the right to assert and enforce these provisions when their actions are inconsistent with the provision or they are aware that the claimant is acting as an assignee. This opinion will greatly benefit employees who have medical insurance and sign agreements with their medical providers to assign their rights to collect payment from their health insurers. The Ninth Circuit’s opinion will be not only useful for claimants/employees who have health insurance claims, but also those who have disability, life or other employee benefit claims as the decision in Beverly Oaks will serve to prevent employers and insurers from making misrepresentations regarding ERISA plan terms and/or taking actions inconsistent that which they had previously represented.
By Robert J. McKennon
The Employee Retirement Income Security Act of 1974, or ERISA, governs most employer-sponsored benefit plans. ERISA establishes protections for employees in the administration of their employer-sponsored benefits, requiring that the administrator adhere to certain requirements when determining a plan participant’s eligibility for benefits. Typically the ERISA plan’s terms govern, although that is not always the case.
All too familiar to patients of health care providers are agreements that assign to the health care providers their right under an ERISA plan to collect insurance benefits under their patients’ health insurance plans. However, most health insurance plans have anti- assignment provisions that prohibit insureds from assigning their right to collect insurance proceeds directly. Anti-assignment provisions in ERISA plans are valid and enforceable. Davidowitz v. Delta Dental Plan of Cal., Inc., 946 F.2d 1476, 1481 (9th Cir.1991); Spinedex Physical Therapy USA Inc. v. United Healthcare of Arizona, Inc., 770 F.3d 1282, 1296 (9th Cir. 2014). Therefore, courts have prevented health care providers from suing insurers under ERISA where health insurance plans have anti-assignment provisions, thus frustrating the efforts of health care providers to collect insurance proceeds to satisfy unpaid claims.
In its landmark 2011 decision in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), the U.S. Supreme Court signaled a broad expansion of the availability of equitable remedies under ERISA. The doctrines of equitable estoppel and waiver have provided plan participants with methods of forcing an employer or insurance company to honor their representations and take responsibility for previous conduct. But what about applying these equitable doctrines for the benefit of health care providers? There has been some recent good news for them.
The recent case of Beverly Oaks Physicians Surgical Center, LLC v. Blue Cross and Blue Shield of Illinois, 2020 DJDAR 132372 (Dec. 18, 2020) further expands protection for employees and their beneficiaries by expanding the circumstances their medical providers can sue insurers directly based on an assignment, even where the plan at issue contained an anti-assignment provision. In Beverly Oaks, the U.S. 9th Circuit Appeals Court allowed an out-of-network healthcare provider to assert equitable claims under ERISA seeking a direct recovery of unpaid claims from Blue Cross and Blue Shield of Illinois (BCBS).
Beverly Oaks Physicians Surgical Center, LLC (Beverly Oaks) performed out-of-network procedures on 14 patients who had employer-sponsored health insurance plans administered by BCBS. Each patient signed a form granting the center the right to collect benefits on their behalf. The center sought and obtained preapproval for each claim from BCBS, the latter stating it would typically pay between 50% to 100% of the claim.
After performing the procedures, the Beverly Oaks submitted the claims to collect ERISA benefits. BCBS either denied every claim or paid a small reimbursement amount and paying only $140,000 of the total $1.4 million of benefits sought. At no time during the pre-surgery conversations or during the administrative claim process did BCBS advise Beverly Oaks that it intended to assert an anti-assignment provision as a basis for denying reimbursement sought under a patient assignment of benefits.
Beverly Oaks filed a lawsuit alleging that BCBS waived or was equitably estopped from asserting the anti-assignment provision in the plan since BCBS did not assert that provision in pre-surgery telephone conversations or the administrative claim process. BCBS argued that the anti-assignment provision was valid and enforceable, even though the first time BCBS asserted the provision as a defense to payment was in litigation. The district court agreed that the anti-assignment provision was valid and enforceable. Beverly Oaks appealed.
In reversing the trial court’s order, the appeals court found that while anti-assignment clauses are valid and enforceable, plan administrators can waive the right to assert and enforce these provisions when their actions are inconsistent with the provision or they are aware that the claimant is acting as an assignee.
The court defined waiver as follows: “Waiver is ‘the intentional relinquishment of a known right.’ Gordon v. Deloitte & Touche LLP Grp. Long Term Disability Plan, 749 F.3d 746, 752 (9th Cir. 2014) (citing Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d 1551, 1559 (9th Cir. 1991) (Waiver occurs when ‘a party intentionally relinquishes a right, or when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.’)).
The court found that Beverly Oaks had plead adequate facts to support waiver, including Beverly Oaks indicated on the claim form submitted to BCBS that it was acting as its patient’s assignee, BCBS processed each claim, denied in full or underpaid Beverly Oaks’ billed charges, and at no time during pre-surgery telephone conversations or the administrative claim process did BCBS raise the anti-assignment provision as a basis to deny benefits. This was to enough to show that BCBS should have been aware that Beverly Oaks sought to collect plan benefits through a patient assignment. The court also commented on BCBS’ silence and payment during the claims process, commenting that this behavior was “’so inconsistent with an intent to enforce’ the anti-assignment clause as to ‘induce a reasonable belief that [the right to enforce the clause] ha[d] been relinquished.’” The court held that “Blue Cross thus cannot raise the anti-assignment provision for the first time in litigation when Blue Cross held that provision in reserve as a reason to deny benefits.”
In addition to waiver, the court found the alleged facts also plausibly showed that BCBS made actionable misrepresentations upon which Beverly Oaks reasonably relied and therefore, were equitably estopped from raising the anti-assignment provisions. “Equitable estoppel ‘holds the fiduciary to what it had promised and operates to place the person entitled to its benefit in the same position he would have been in had the representations been true.” Specifically, the court pointed to telephone conversations between BCBS representative and Beverly Oaks wherein the representative stated that Beverly Oaks was eligible to receive payment, thus inducing Beverly Oaks to move forward with the claims process. In addition to traditional requirements to establish equitable estoppel, under 9th Circuit authority, Beverly Oaks also had to allege (1) extraordinary circumstances; (2) that the provisions of the plan at issue were ambiguous such that reasonable persons could disagree as to their meaning or effect; and (3) that the representations made about the plan were an interpretation of the plan, not an amendment or modification of the plan. The court held that these requirements were properly alleged facts that show a BCBS made a promise that it reasonably should have expected to induce action or forbearance on Beverly Oaks’ part, combined with a showing of repeated misrepresentations over time. Thus, the 9th Circuit reversed and remanded the case the case to the district court.
While federal courts consistently find anti-assignment clauses in ERISA matters enforceable, the decision in Beverly Oaks will have wide-reaching implications not only for medical providers, but also for plan participants and their beneficiaries. Plan and claim administrators must beware that making misrepresentations regarding plan terms, making representations about whether a procedure is covered or failing to raise certain defenses during the pre-claim and claim administrative review process could give rise to equitable claims that inure to the benefit of plan participants, their beneficiaries, and to their assignees. Because waiver and equitable estoppel serve as some of the legal systems’ fundamental checks on the fairness of a party’s actions and these doctrines serve to prevent employers and insurers from performing actions contradictory to what they have previously guaranteed or established via their words or conduct, decisions like Beverly Oaks are to be lauded.
In the October 23, 2020 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon. The article addresses a recent case by the California Court of Appeals, Dones v. Life Ins. Co. of N. Am., which reversed the trial court’s ruling sustaining demurrers without leave to amend based upon an agency theory due to the employer county’s errors administering the life insurance policy on behalf of the insurance company. These errors were imputed to the insurance company, rendering it liable for the employer’s mistakes under the equitable remedies of waiver and estoppel. The Dones case will surely be read to further expand liability against non-governmental employers and insurers and assist employees and their beneficiaries in receiving their much needed plan benefits.
Ruling demonstrates when employers are agents of insurers
A recent 9th Circuit decision affirms that in the context of employer-sponsored benefits, the employer is the agent of the insurer with regard to the administration of the policy.
By Robert J. McKennon
People are often drawn to job opportunities because of the employee benefits offered to them and their families. A generous benefit package that includes several types of insurance such as medical, short-term and long-term disability, and life coverage could be the deciding factor for a prospective employee. They are not experts in the enrollment process. They often rely on their employer’s human resources department to help them understand their coverage options, pay their premiums, understand what forms they must submit and help them solve any problems that may arise. However, if the employer fails to accurately explain coverage requirements, and if the forms are not correctly completed to an insurer’s satisfaction, insurers can and will deny claims, blaming the employees or their employers. California law protects employees in some circumstances. For example, under an agency theory, an employee can impute legal responsibility to the insurer for the employer’s errors in administering an employee benefit plan, thus rendering the insurer liable for the employer’s mistakes or negligence under equitable remedies of waiver and estoppel.
The recent case of Dones v. Life Ins. Co. of N. Am., 2020 DJDAR 10896 (Oct. 7, 2020) further expands protection for employees and their beneficiaries. In Dones, an employee of the County of Alameda (County), Trina Johnson, enrolled in supplemental life insurance coverage with the Life Insurance Company of North America (LINA). She was a County employee but on a medical leave of absence. While on her medical leave, she received information regarding her benefit eligibility for the supplemental life insurance. She made her election online, selecting $230,000 in supplemental life coverage and naming Michael Dones as her primary beneficiary.
The master policy stated, “If an Employee is not actively at work due to Injury or Sickness, coverage will not become effective for an Employee on the date his or her coverage would otherwise become effective under this Policy. [¶] Coverage will become effective on the date the Employee returns to Active Service.” The master policy defined “Active Service” as follows:
An Employee will be considered in Active Service with the Employer on a day which is one of the Employer’s scheduled work days if either of the following conditions are met: [¶] 1. He or she is actively at work. This means the Employee is performing his or her regular occupation for the Employer on a full-time basis, either at one of the Employer’s usual places of business or at some location to which the Employer’s business requires the Employee to travel. [¶] 2. The day is a scheduled holiday, vacation day or period of Employer approved paid leave of absence, other than disability or sick leave after 7 days.
After her cancer diagnosis, Johnson received confirmation that she had successfully elected her benefits and that her coverage would become effective on January 1, 2017. The County deducted premiums for her benefits which were sent to and accepted by LINA. Johnson remained on leave and died six months later without having returned to work.
After Johnson’s death, a County employee informed Dones that Johnson’s life insurance coverage never became effective because she had not returned to “active service.”
Dones sued both LINA and the County. In his second amended complaint, he asserted causes of action for breach of contract, breach of implied contract and breach of the implied covenant of good faith and fair dealing (against LINA only). Dones asserted that both defendants waived and were estopped from asserting the active service requirement. The second amended complaint alleged that if an employee who elected the supplemental insurance benefit while on leave returned to work for even one day after the January 1, 2017, effective date, the supplemental benefit would become active. But Johnson did not understand the requirement and reasonably believed that the policy covered her automatically after the effective date.
Defendants filed demurrers to Dones’ amended complaint. The trial court sustained the demurrers without leave to amend. It rejected Dones’ argument that LINA and the County waived, or were estopped from enforcing, the active service requirement. The trial court relied on case law holding that waiver and estoppel arguments cannot be used to create insurance coverage that does not exist in the plan documents. Dones appealed.
In reversing the trial court’s order, the California Court of Appeals considered several cases, including most importantly the 9th U.S. Circuit Court of Appeals decision in Salyers v. Met. Life Ins. Co., 871 F.3d 934 (9th Cir. 2017), a case involving employee benefits subject to the Employee Retirement Income Security Act of 1974 (ERISA). The Salyers court found a waiver where the insurer accepted premium payments but later denied a death benefit because the plan participant failed to provide a “Statement of Health” as required for eligibility. The court held, “The deductions of premiums, [the insurer] and [employer’s] failure to ask for a statement of health over a period of months, and [the employer’s] representation to Salyers that she had $250,000 in coverage were collectively ‘so inconsistent with an intent to enforce’ the evidence of insurability requirement as to ‘induce a reasonable belief that [it] ha[d] been relinquished.’”
While insurers and plan administrators often argue that waiver cannot be used to create coverage beyond that actually provided in an employee benefit plan, Salyers noted the distinction created by the acceptance of premiums. The Salyers court held that where premium payments have been accepted despite the plan participant’s alleged noncompliance with policy terms, giving effect to the waiver does not expand the scope of the plan, but rather, provides the plaintiff with an available benefit for which he paid.
The Dones court noted further that waiver and estoppel are normally questions of fact. It declined to hold that these principles cannot establish the existence of an effective contract of insurance as a matter of law.
It then turned to whether the County’s conduct could support causes of action for breach of contract against LINA. The court considered the California Supreme Court’s decision in Elfstrom v. New York Life Ins. Co., 67 Cal.2d 503, 512 (1967), which held as a matter of law that the employer is the agent of the insurer in performing the duties of administering group insurance policies. The California Supreme Court based its reasoning on the fact that the employee has no knowledge or control over the employer’s actions in handling the policy or its administration. The Dones court found that Dones’ allegations (that the County was acting as an agent for LINA in the administration of the life insurance policy as well as informing Johnson of available benefit options, communicating with her about and confirming her selections, deducting premium payments and transmitting them to LINA) were sufficient to allege agency under Elfstrom. It determined that the County acted as LINA’s agent in administering the life insurance policy (for purposes of determining LINA’s liability). But it held that the County could not be held responsible, relying on law that makes it difficult to pin liability on governmental entities.
This decision affirms that in the context of employer-sponsored benefits, the employer is the agent of the insurer with regard to the administration of the policy. This can be very important to tie an employer’s errors in administration to the insurer and thus provide an avenue of recourse for a beneficiary such as Dones who would otherwise be without recourse.
Plan administrators must carefully and accurately communicate coverage options and policy terms to employees like Johnson. If they do not, they and the insurer may be exposed to litigation and potential liability for their misconduct. As was the case with Salyers, this often occurs with a “proof of good health” requirement that the plan administrator and insurer fails to enforce, leading the unsuspecting employees to believe they are fully covered. Recent expansion of breach of fiduciary duty liability, waiver, estoppel and agency theories in federal ERISA cases have been a welcome development for employees who obtain insurance coverage from their employers. While the Dones case did not find liability against the County, when read in conjunction with Salyers, it will surely be read to further expand liability against non-governmental employers and insurers outside of the ERISA context and will thus assist employees and plan beneficiaries to secure their much needed plan benefits. Robert J. McKennon is a shareholder of McKennon Law Group PC in its Newport Beach office. His practice specializes in representing policyholders in life, health and disability insurance, insurance bad faith and ERISA litigation. He can be reached at (949) 387-9595 or rm@mckennonlawgroup.com. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.
Big, bureaucratic insurance companies and plan administrators can often mistakenly calculate benefits or provide incorrect accountings to insureds. These mistakes can become especially pronounced over time where insureds rely upon benefit accountings and representations of coverage to plan for their financial future and to decide whether to purchase insurance. With the Supreme Court’s decision in CIGNA Corp. v. Amara, 563 U.S. 421 (2011), the Court made clear that the equitable remedies of estoppel, surcharge, reformation and breach of fiduciary duty could be applied to hold insurance companies and plan administrators accountable in policies governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). Despite that decision, it remains particularly difficult for an ERISA claimant to plead equitable estoppel. However, the recent Second Circuit opinion, Sullivan-Mestecky v. Verizon Communications, Inc., — F.3d —-, 2020 WL 2820334 (2d. Cir. 2020), provides clarity and support for this relief such that we may see more equitable estoppel claims that are successful under ERISA. The decision further supports theories of surcharge, reformation and breach of fiduciary duty in situations where a plan administrator mistakenly calculates benefits and produces values that are in excess of plan terms.
In Sullivan-Mestecky, the Second Circuit considered the doctrines of estoppel, surcharge, reformation and breach of fiduciary duties in relation to an ERISA employee life insurance policy under which the plan administrator had confirmed coverage of over $600,000 for years, only to realize upon claim that it had committed a clerical error and that the actual policy value should have been closer to $11,000. Ultimately, the court found that the beneficiary plaintiff, Kristine Sullivan-Mestecky, had properly plead her Section 502(a)(3) claims for equitable remedies under ERISA, and it reversed the district court’s decision that had found otherwise.
The plaintiff’s mother, Kathleen Sullivan, was employed by the New York Telephone Company, a predecessor entity to Verizon, from 1970 to 1978, during which period her annual income was $18,600. In June 2011, Sullivan contacted the Verizon Benefits Center, which at the time was administered on behalf of Verizon by Aon Hewitt Company. Verizon responded by sending her a “Retirement Enrollment Worksheet,” stating that she was eligible for a life insurance option from the Verizon plan that provided coverage in the amount of $679,000 through Prudential Insurance Company of America. Sullivan followed the instructions on the worksheet and enrolled in this coverage option. After enrolling and designating her daughter Kristine Sullivan-Mestecky as the beneficiary of the life insurance policy, Sullivan received various mailings from Verizon that confirmed the existence and coverage amount of the policy. Sullivan reached out to Verizon and “expressed her understanding, and even surprise, about the extent of her benefits. However, Center representatives repeatedly confirmed the existence and coverage amount of the policy.” Id. at *1-2.
Due to a calculation error, Aon Hewitt had coded Sullivan’s annual $18,600 income as her weekly income, but this mistake was not caught until after she died. Sullivan-Mestecky, understanding herself to be the beneficiary of a generous life insurance policy, allowed her aging mother to live rent-free at her home, covered her mother’s living expenses and paid off her debts, and also took an extended unpaid absence to care for her mother before her death. Of course, Sullivan did not feel that it was necessary to take out an additional life insurance policy due to the generous value of her employer policy.
Based on her mother’s age at the time of her death, Sullivan-Mestecky believed her life insurance policy was worth $582,600. After her mother’s death, Sullivan-Mestecky submitted a claim to Prudential, but Prudential paid only $11,400, which amount it stated was the true value of the policy.
Sullivan-Mestecky disputed the non-payment of her full benefits, and Verizon responded that it “had mistakenly calculated Sullivan’s large coverage amount and thus provided Ms. Sullivan with incorrect information about her life insurance policy.” Id. Sullivan-Mestecky therefore filed suit alleging claims under Sections 502(a)(1)(B) and 502(a)(3) of ERISA. On July 7, 2016, the district court granted Verizon’s and Prudential’s motion to dismiss the Section 502(a)(3) claim. On May 16, 2018, the district court granted summary judgment to both defendants on the Section 502(a)(1)(B) claim.
On appeal, the Second Circuit discussed equitable remedies under Section 502(a)(3). The court found that Sullivan-Mestecky could appropriately seek equitable relief under the Supreme Court’s decision in Amara and that her Section 502(a)(3) claim could proceed against Verizon. The court found that Sullivan-Mestecky could proceed against Verizon under the equitable remedies of estoppel, surcharge, reformation and breach of fiduciary duty.
In the Second Circuit, to make a claim for estoppel under Section 502(a)(3), a plaintiff must plausibly allege five elements: “(1) a promise, (2) reliance on that promise, (3) injury caused by the reliance, . . . (4) an injustice if the promise is not enforced, and (5) extraordinary circumstances.” Weinreb v. Hosp. for Joint Diseases Orthopaedic Inst., 404 F.3d 167, 172-73 (2d. Cir. 2005). The Sullivan-Mestecky court examined Verizon’s repeated oral assurances to Sullivan about the value of her life insurance policy in determining whether Sullivan-Mestecky had pled extraordinary circumstances, and it joined the Sixth Circuit in finding that estoppel could be plausibly pled as an appropriate equitable remedy by an ERISA plaintiff who is alleging gross negligence in the absence of intentional inducement. The court found that Sullivan-Mestecky had plausibly pled the five elements required to make an estoppel claim against Verizon, because Verizon had sent Sullivan an enrollment worksheet that indicated that she was eligible for a life insurance policy valued at $679,700, a retirement of confirmation worksheet, a confirmation of coverage on demand letter, a beneficiary confirmation notice and a Form W-2, all of which represented that Verizon was providing Sullivan with a generous life insurance policy. The court found that these written documents constituted and reflected the promise that Sullivan-Mestecky sought to enforce and that she had amply pled reliance on that promise. Sullivan-Mestecky, 2020 WL 2820334, at *5.
In considering the extraordinary-circumstances requirement of ERISA estoppel, the court found that this had been met, based on Verizon’s conduct that it found had amounted to gross negligence. Id. at *6. The court wrote:
Verizon’s agents sent numerous mailings informing and assuring Sullivan that she was entitled to a life insurance policy in the amount of $679,000. She relied on these representations only after diligently and repeatedly confirming their veracity and meaning with the Verizon Benefits Center. On calls with the Verizon Benefits Center, Sullivan expressed her surprise at the stated value of her life insurance policy, effectively alerting Verizon to the fact that it may have miscalculated the value. Not only did Sullivan draw attention to the high coverage figure, but an Aon Hewitt employee flagged the policy amount, writing in an email to a colleague that the amount seemed high and asking if the company’s software was somehow computing the wrong amount. Another Aon Hewitt employee then responded, erroneously, that the amount was correct. Instead of opening an investigation that likely would have uncovered the clerical error that led Sullivan and her daughter to believe that she had procured a generous life insurance policy, Verizon representatives reassured Sullivan that her beneficiary would receive, after the age discount, more than half a million dollars in death benefits. It was only after Sullivan’s death, when the purchase of alternative life insurance to support Sullivan-Mestecky was impossible, that Verizon attempted to correct its clerical error. In contravention of what it had repeatedly and unambiguously represented to Sullivan in writing and on calls, Verizon paid Sullivan-Mestecky a total of $11,400, less than two percent of what Verizon had promised. Verizon’s acts of gross negligence present circumstances far “beyond the ordinary.” The persistence and size of Verizon’s error, notwithstanding the ample inquiry notice provided by Sullivan’s calls to the Verizon Benefits Center, were “remarkable.” We find that Sullivan-Mestecky satisfactorily pled extraordinary circumstances. Id.
The Sullivan-Mestecky court also considered surcharge under Section 502(a)(3) and found that this was dependent upon the plaintiff’s allegation of fiduciary breach, specifically that Verizon failed to act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use as ERISA requires. 29 U.S.C. § 1104(a)(1)(B). The court found that she had plausibly pled that Verizon had breached its fiduciary duties through its gross negligence in its management of Sullivan’s life insurance policy by consistently failing to provide complete and accurate information about Sullivan’s status and options in response to her questions about plan terms and/or benefits. Sullivan-Mestecky, 2020 WL 2820334, at *6. The court found that this fiduciary breach was sufficient to support the equitable remedy of surcharge.
Further, the Sullivan-Mestecky court considered the equitable remedy of reformation under Amara, which is described as “[t]he power to reform contracts (as contrasted with the power to enforce contracts as written)” as “a traditional power of an equity court, not a court of law.” The Supreme Court wrote that “equity would reform [a] contract, and enforce it, as reformed, if . . . mistake or fraud were shown.” Amara, 563 U.S. at 440. The Sullivan-Mestecky court wrote that it need not discuss mutual mistake because the plaintiff had adequately pled that Verizon had committed equitable fraud by misrepresenting that Sullivan was entitled to a life insurance policy in the amount of $679,000. As a result of Verizon’s fraudulent representations, the court found that Sullivan had reasonably but mistakenly expected that her beneficiary would receive generous death benefits, and Sullivan-Mestecky thereby adequately pled circumstances that would permit the district court to equitably reform the terms of her plan with Verizon, sufficient to bind Verizon to its fraudulent representations.
Insurance companies and plan administrators typically try to excuse their mistakes that often have the effect of causing tremendous financial disruption for claimants who rely upon them for accurate accountings of their benefits and coverage. As the Sullivan-Mestecky matter shows, an insured could potentially receive a windfall from an insurance company or plan administrator’s mistake, as long as certain elements are met. This case will serve as a useful guidepost for equitable claims under ERISA.
If your insurance company or plan administrator has mishandled or denied your claim, please contact our firm for a free consultation. We have extensive experience handling equitable claims under ERISA.
Waiver and equitable estoppel serve as some of the legal systems’ fundamental checks on the fairness of a party’s actions. Both doctrines serve to prevent an individuals and insurers from performing actions contradictory to what they have previously guaranteed or established via their conduct. “A waiver occurs when a party intentionally relinquishes a right or when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” Salyers v. Metro. Life Ins. Co., 871 F.3d 934, 938 (9th Cir. 2017) (internal quotations omitted). Equitable estoppel “holds the [individual] to what it had promised and operates to place the person entitled to its benefit in the same position he would have been in had the representations been true.” Gabriel v. Alaska Elec. Pension Fund, 773 F.3d 945, 955 (9th Cir. 2014) (internal quotations omitted). Often times, an insurer makes a declaration to an insured only for the insurer to then change its position to the insured’s detriment. This occurs in a variety of contexts such as life insurance, accidental death or dismemberment insurance and disability insurance. In Salyers v. Metro. Life Ins. Co., 871 F.3d 934 (9th Cir. 2017), the Ninth Circuit Court of Appeals addressed waiver in the context of the Employee Retirement Income Security Act of 1974 (“ERISA”) and it has become one of the most important cases dealing with waiver and estoppel issues in ERISA employee benefit area.
In Salyers, the Ninth Circuit found an insurer liable for a $250,000 life insurance policy, despite the insured’s failure to provide evidence of insurability to the insurer, as required by the policy. Susan Salyers worked as a nurse at Providence Health & Services. Providence provided life insurance to its employees through a plan sponsored by MetLife. The insurance was governed by ERISA. MetLife’s Summary Plan Description provided that, for a dependent to be eligible for life insurance coverage, the dependent must submit evidence of insurability in the form of a “Statement of Health” for elected coverage over $50,000. In 2013, Ms. Salyers elected a total of $40,000 in coverage, $20,000 for herself and $20,000 for her dependent. As the result of an administrative error, Providence’s internal records showed Ms. Salyers and her dependent as having coverage of $500,000. Neither Metlife nor Providence corrected the error or requested a statement of health. Providence deducted premiums for $500,000 in coverage. In the 2014 open enrollment period, Ms. Salyers elected $250,000 in coverage for her dependent, and, again, neither Providence nor MetLife requested a Statement of Health.
Ms. Salyers’ dependent passed away. MetLife processed the claim but issued only $30,000 in death benefits. It asserted that Ms. Salyers never submitted a “Statement of Health” and, therefore, Ms. Salyers could only receive the lesser amount. On administrative appeal, MetLife continued to deny coverage asserting that “its receipt of premiums did not create coverage” under the plan. Id. at 937.
Ms. Salyers filed suit arguing that MetLife was estopped from contesting coverage and, in the alternative, had waived the evidence of insurability requirement. The district court found in favor of MetLife, determining that Ms. Salyers had failed to meet the burden of establishing coverage via evidence of insurability. Ms. Salyers appealed and the Ninth Circuit reversed based on MetLife’s waiver through acceptance of premium payments by Providence, acting as MetLife’s agent in “collecting, tracking and identifying inconsistencies with the evidence of insurability requirement.” Id. at 941. The Ninth Circuit explained that “Courts have applied the waiver doctrine in ERISA cases when an insurer accepted premium payments with knowledge that the insured did not meet certain requirements of the insurance policy.” Id. at 939. MetLife was liable because of Providence’s apparent and implied authority to collect evidence of insurability on MetLife’s behalf. Because Providence failed to properly collect evidence of insurability for Ms. Salyers’ dependent, MetLife waived the right to enforce the Statement of Health requirement. Id. at 938-41. In footnote 5, the Salyers court noted that:
Generally, “[t]he doctrine of waiver looks to the act, or the consequences of the act, of one side only, in contrast to the doctrine of estoppel, which is applicable where the conduct of one side has induced the other to take such a position that it would be injured if the first should be permitted to repudiate its acts.” Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d 1551, 1559 (9th Cir. 1991)(internal citations and quotation marks omitted). We are mindful, however, of our previous statement that “in the insurance context, the distinction between waiver and estoppel has been blurred . . . . [I]t is consistent with ERISA to require an element of detrimental reliance or some misconduct on the part of the insurance plan before finding that it has affirmatively waived a limitation defense.” Gordon v. Deloitte & Touche, LLP Grp. Long Term Disability Plan, 749 F.3d 746, 752-53 (9th Cir. 2014)(internal citations and quotation marks omitted). Assuming, without deciding, that our holding inGordonapplies beyond the waiver of a statute of limitations defense at issue in that case, the record reflects that Salyers detrimentally relied on Providence and MetLife’s conduct, presumably by not buying other insurance. In a letter to Salyers, MetLife admits that “it appears that Ms. Salyers detrimentally relied on having Dependent Life Insurance great[er] than $30,000.”
Id. at 941, n.5.
Since Salyers, district courts do not appear to have placed much emphasis on footnote 5. For example, in Cohorst v. Anthem Health Plans of Kentucky, Inc., 2017 WL 6343592 (C.D. Cal. Dec. 12, 2017), a case which cited to Salyers, Aubrey Cohorst brought an action under ERISA against Anthem Health Plans of Kentucky, Inc. (“Anthem”). The underlying dispute involved Anthem’s denial of coverage for Ms. Cohorst’s artificial disc replacement surgery, which required the use of a “Mobi-C” device. Ms. Cohorst’s doctor determined that the surgery was medically necessary and sought Anthem’s prior approval. In the initial approval process, Anthem confirmed its approval of the surgery, but did not specify the medical device that would be used. Anthem’s internal documents mirrored its initial approval, describing the surgery as “medical necessary” and meeting “criteria guidelines.” See id. at *1-3.
When Ms. Cohorst’s physician contacted Anthem to confirm which medical device had been approved for surgery, Anthem told the doctor it approved the “Pro Disc-C” and not the “Mobi-C.” Shortly after this conversation, Anthem created a new reference number allegedly based on the request to use the “Mobi-C” device and overturned its original approval, finding the procedure to be “Experimental” or “Investigative” and thus not medically necessary under the terms of the plan. Ultimately, Ms. Cohorst underwent the surgery and Anthem refused to cover its costs.
Ms. Cohorst sued Anthem. Under a de novo standard of review, the court evaluated the plan and the relevant exclusionary language. The court determined that the procedure fell within the exclusion. Despite this, the District Court still found in favor of Ms. Cohorst based on a theory of waiver. Id. at *10. Emphasizing Anthem’s inconsistent behavior, the court held that Anthem waived its right to assert the exclusion when it first approved the surgery as medically necessary. Id. The court explained that Anthem had waived its right to deny Ms. Cohort’s claim because it initially approved her surgery, albeit with a “Pro Disc-C” device. The court explained that waiver occurs when “a party intentionally relinquishes a right” or “when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” Id. (citing Salyers, 871 F.3d at 938). The court reasoned that Anthem was fully aware of Ms. Cohorst’s medical condition when it initially approved the surgery and it was only after Dr. Bray appealed Anthem’s decision regarding the type of device to be used in the surgery that Anthem suddenly decided to completely reverse its prior authorization and deny Ms. Cohorst’s entire claim. The court found that because there was no new information regarding Plaintiff’s prior condition or any change in its medical policy, Anthem waived its right to rely on the exclusion that was available to it when it provided its initial approval. Id. at 10.
Of interest, the court did not analyze the case in terms of detrimental reliance. Instead, the court performed a standard waiver analysis, like it would for a case not involving ERISA.
Footnote 5 of Salyers raises another question. Has there been any change in how courts apply promissory estoppel in the ERISA context? Salyers is only a year old, but it appears that Salyers has not significantly altered how district courts in the Ninth Circuit apply the doctrine of promissory estoppel.
As explained in Gabriel v. Alaska Electrical Pension Fund, 773 F.3d 945, 955 (9th Cir. 2014), a Ninth Circuit case that predates Salyers, to establish equitable estoppel, a party must establish “(1) the party to be estopped must know the facts; (2) he must intend that his conduct shall be acted on or must so act that the party asserting the estoppel has a right to believe it is so intended; (3) the latter must be ignorant of the true facts; and (4) he must rely on the former’s conduct to his injury.” To assert a claim for equitable estoppel under ERISA, additional requirements must be met. “Accordingly, to maintain a federal equitable estoppel claim in the ERISA context, the party asserting estoppel must not only meet the traditional equitable estoppel requirements, but must also allege: (1) extraordinary circumstances; (2) that the provisions of the plan at issue were ambiguous such that reasonable persons could disagree as to their meaning or effect; and (3) that the representations made about the plan were an interpretation of the plan, not an amendment or modification of the plan.” Id. at 956 (internal quotations omitted).
Post Salyers, some district courts in the Ninth Circuit still use this same test listed in Gabriel. See Spies v. Life Ins. Co. of N.A., 312 F.Supp.3d 805, 812-13 (N.D. Cal. 2018); Meakin v. California Field Ironworkers Pension Trust, 2018 WL 405009, at *7 (N.D. Cal. Jan. 12, 2018); O’Rouke v. Northern California Elec. Workers Pension Plan, 2017 WL 5000335, at *15 (N.D. Cal. Nov. 2, 2017); Polevich v. Tokio Marine Pac. Ins. Ltd., 2018 WL 4356583, at *9-10 (D. Guam Sept. 13, 2018); Berman v. Microchip Tech. Inc., 2018 WL 732667, at *14 (N.D. Cal. Feb. 6, 2018).
Berman v. Microchip Technology Inc., 2018 WL 732667 (N.D. Cal. Feb. 6, 2018), provides a good example of how estoppel can apply in the ERISA context. In Berman, a group of former Atmel employees sued their employer over alleged violations of a severance benefits plan arising under ERISA. The employer created the severance benefits plan due to uncertainty surrounding the employer’s future and its attempts to secure a merger partner. The plan was outlined in a series of letters to the employees. The letters explained that the plan would terminate on November 1, 2015 “unless an Initial Triggering Event . . . occurred prior to November 1, 2015, in which event the [Atmel Plan] will remain in effect for 18 (eighteen) months following that Initial Triggering Event.” Id. at *1. Initial triggering event was defined as “enter[ing] into a definitive agreement . . . on or before November 1, 2015, that will result in a Change of Control of the Company.” The plan benefits would only be provided if a change of control occurred and the employees were terminated without cause within 18 months of the triggering event.
Atmel and a company called Dialog Semiconductor PLC executed and announced a formal merger agreement before November 1, 2015. Before the closing date of the Dialog merger, Atmel and Microchip entered into merger negotiations. Atmel withdrew from the agreement with Dialog and entered into an agreement with and became a wholly owned subsidiary of Microchip. When communicating with its employees, Atmel and Microchip explained that the plan would still apply even if the deal with Microchip, as opposed to Dialog, was completed.
Subsequently, Microchip failed to honor the plan. Several terminated employees sued to obtain their severance benefits under the plan. Microchip moved to dismiss the complaint. One of the plaintiffs’ arguments relied on equitable estoppel. The court relied on the standard Gabriel test. See id. at *14. Defendants argued that the plan was not ambiguous and the circumstances failed the extraordinary circumstances prong of the test. The court did not agree with the defendants. It stated:
First, the Court is satisfied, notwithstanding Plaintiffs’ assertions that the provisions of the Atmel Plan are unambiguous, that reasonable parties could disagree as to whether the Plan required the Initial Triggering Event and the Change of Control to involve the same merger partner—particularly at the motion to dismiss stage, and particularly since that interpretation is one of the primary disputes in this case. Second, Plaintiffs sufficiently allege detrimental reliance on an oral, material misrepresentation of that ambiguity by Defendants.
Id. at *15. The court denied Microchip’s motion insofar as it related to the employees’ claim for equitable estoppel. See id.
In the ERISA context, the doctrines of waiver and estoppel can be difficult to invoke. However, sometimes, an insurer makes a critical mistake and must honor its word. Whereas Salyers may be an indication of a gradual change in the doctrine, the change has not yet been firmly established. District courts still rely on the traditional forms of waiver and equitable estoppel. It is quite possible that the foundation for a shift in the doctrines is being laid, but only time will tell if that is the case.
In the next article, we will discuss the similar claims for breach of fiduciary duty and surcharge, which are often easier to prove and prove similar and very satisfying remedies for an ERISA plaintiff/claimant.
Have you ever considered filing a disability insurance claim and an employment action against your employer at the same time? If you are considering it, you will want to read this article. There could be big trouble ahead if you are not careful.
When a physical or mental illness strikes, preventing an employee from fully performing the duties of his or her occupation, employers typically respond in one of two ways. Some employers are helpful and understanding, and provide support while the employee and his or her doctors try to assess whether the employee will be able to continue to work. Unfortunately, some employers react in the completely opposite manner, harassing the employee until he or she quits or stops working due to the disability, or even firing the employee outright. Sometimes it is the employer’s behavior that actually causes the disability. In those situations, employees who have coverage under a short-term disability and/or long-term disability insurance policy can file a claim for disability benefits with the insurer. If the insurer properly evaluates and pays the claim, the employee can use the benefits to pay for life expenses.
Understandably, after being mistreated by their employers, especially in their time of need, many employees want to pursue an employment lawsuit against their former employer. While the desire to “punish” the employer may be strong, pursuing an employment lawsuit may not always be in the best interest of the employee and disability claimant. The reason: the filing of an employment lawsuit can prevent a disability claimant from receiving disability benefits. This is because one of the elements required in many employment law claims is that the person must be capable of adequately performing his or her job at the time he or she left employment. This includes claims for discrimination, wrongful termination, retaliation and harassment.
To adequately plead and prove these causes of action, the employee must assert that he or she was capable of performing the duties of the job. However, in order to assert a claim for disability income insurance benefits, claimants must prove the opposite: that their physical or mental condition prevents them from performing the material and substantial duties of their occupation. These two positions are in conflict, and applying the legal concept of judicial estoppel, courts have ruled that asserting the ability to perform one’s job duties in an employment law action as a matter of law prevents the employee from also claiming to be disabled.
For example, in Rissetto v. Plumbers & Steamfitters Local 343, 94 F.3d 597 (9th Cir. Cal. 1996), the plaintiff filed a Workers’ Compensation claim in which she asserted she was disabled from performing her work. After settling that claim with the insurer, she brought an employment action against her employer alleging that her termination constituted age discrimination. The dispute ended up before the Ninth Circuit, which reviewed whether a claimant was judicially estopped from asserting both a disability claim and a discrimination claim covering the same period of time.
After noting than a disability claim rests on an “inability to work,” the Court observed that the employment law claim rests on the position that Rissetto was capable of adequately performing her job at the time she was terminated. The Ninth Circuit then explained that because these two claims are in direct conflict, the later-asserted employment law claims were precluded under the concept of judicial estoppel, which “precludes a party from gaining an advantage by taking one position, and then seeking a second advantage by taking an incompatible position.” See also Kovaco v. Rockbestos‐Surprenant Cable Corp., 834 F.3d 128 (2d Cir. 2016).
The California Court of Appeal similarly ruled that a plaintiff was judicially estopped from asserting a claim for racial discrimination after being out on disability leave for six months prior to termination, as the Court noted that he could not be able to perform his job and disabled from it at the same time. Where the plaintiff claimed “total inability to perform any of his job functions or any other occupation” due to disability, plaintiff could not tell another court that he had been qualified to perform his job and had been wrongfully terminated. See Drain v. Betz Laboratories, Inc., 69 Cal. App. 4th 950, 960 (1999); see also King v. Herbert J. Thomas Memorial. Hospital, 159 F.3d 192, 194 (4th Cir. 1998); McClaren v. Morrison Management Specialists, Inc., 420 F.3d 457, 458 (5th Cir. 2005)
Thus, a person who intends to file a claim for long-term disability benefits under a disability insurance policy must be very careful about asserting employment law claims against his or her employer. Often, employees do not understand and are not told that asserting employment claims can preclude disability insurance claims, so they do file such claims. Such claims are often in direct conflict with filing a disability insurance claim, and could cost the insured years of disability insurance benefits to which he or she would be otherwise entitled. Indeed, a disability insurance claim could be worth hundreds of thousands of dollars, perhaps even millions of dollars, and an unsuspecting disability insurance claimant could end up losing this valuable disability insurance claim. This is especially true if a disability insurance claimant has state law available to him or her and could otherwise pursue a broad range of damages by proving insurance bad faith, including punitive damages. This is why it is very important to make sure you consult with highly experienced disability insurance claims attorneys when considering which legal courses of action to follow.