GableGotwals Obtains Victory for Life Insurance Company before Tenth Circuit Court of Appeals.

17 Friday Feb 2012

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Timothy Carney and Erin Dailey recently obtained a victory for the Life Insurance Company of North America (“LINA”) before the Tenth Circuit Court of Appeals.  The issue in Brimer v. Life Insurance Company of North America, No. 11-5032 (10th Cir. Feb. 10. 2012), was whether the wife and children of James Brimer were entitled to accidental death benefits after Mr. Brimer died of an overdose of prescription drugs.  Read the full decision.

Mr. Brimer was insured under the group accidental death and dismemberment policy issued by LINA to his former employer.  Following his death, his wife and children (“Plaintiffs”) made a claim for accidental death benefits.  LINA investigated and initially denied the claim on the basis of the policy’s Exclusion 7, which excluded benefits for loss “resulting from … [v]oluntary self-administration of any drug or chemical substance not prescribed by, and taken according to the directions of, a licensed physician.”  Plaintiffs appealed the denial, arguing that Exclusion 7 was ambiguous.  In response, LINA requested that Plaintiffs submit evidence to show that Mr. Brimer’s death was not foreseeable, or that “Mr. Brimer’s death was not the result of medical or surgical treatment or the result of a sickness, disease, or bodily infirmity,” language taken from the policy’s “medical treatment exclusion,” Exclusion 6.

Plaintiffs declined to submit additional information, and LINA affirmed its denial of the claim on the bases that: (1) Mr. Brimer’s death was not accidental, as it was the foreseeable result of his own voluntary actions; (2) the loss was excluded under the plan’s medical treatment exclusion [Exclusion 6]; and (3) the loss was excluded by Exclusion 7.

Plaintiffs then filed suit.  Because the terms of the plan did not give LINA discretion to determine whether benefits were payable, the de novo standard of review applied.  Plaintiffs argued that Exclusion 7 was ambiguous and should be construed against LINA, and that LINA could not rely upon Exclusion 6 because it was not raised in the initial denial letter. 

The district court initially upheld LINA’s decision on the basis that the death was foreseeable and therefore not an accident, and, in the alternative, that the medical treatment exclusion [Exclusion 6] excluded coverage for the loss.  Plaintiffs filed a “Motion for New Trial.”  In their Reply in Support of their Motion for New Trial, Plaintiffs argued for the first time that Exclusion 6 conflicted with Exclusion 7, creating an ambiguity such that Exclusion 6 should also be construed against LINA.  The district court entered an amended order, this time finding that the death was not foreseeable and was thus an accident, but upholding LINA’s denial of accidental death benefits on the basis of Exclusion 6.  In the amended order, the district court also found that Exclusion 7 was ambiguous and should be construed against LINA.  The district court did not address Plaintiffs’ argument regarding an alleged ambiguity between Exclusions 6 and 7 because the argument was not timely raised.

Plaintiffs appealed.  The Tenth Circuit held that LINA committed a procedural error when it did not rely upon Exclusion 6 until the decision on Plaintiffs’ administrative appeal.  However, the Court determined that the district court properly applied Exclusion 6, because Plaintiffs were not prejudiced by the procedural error.  Specifically, the Court observed that it was undisputed that Mr. Brimer died of an overdose of prescribed drugs and Plaintiffs conceded that the policy itself was the only evidence relevant to determining whether Exclusion 6 barred their claim.  The Tenth Circuit also declined to address Plaintiff’s argument regarding an alleged ambiguity between Exclusions 6 and 7, agreeing with the district court that this argument was waived.

The take-away lessons from this decision include:

  1. If a claim is going to be denied, an ERISA claims administrator should identify and include in the initial denial letter all reasonable grounds for denying benefits that may apply, even if it may seem duplicative or unnecessary;
  2. If an ERISA claims administrator wishes to add a new basis for a claim denial during the administrative process, it should explicitly inform the claimant of the new basis that is being considered and allow the claimant to submit information relevant to the new basis or risk a court finding that a procedural error was committed;
  3. Even if a procedural error occurs in the claim decision process, a court may require the claimant to show prejudice in order to obtain a remedy for the error.

Experts Are Allowed “Reasonable Elaboration”

02 Wednesday Nov 2011

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In a recent appeal of an accidental death policy coverage action, the First Circuit rejected the argument that the district court erred in allowing an expert to testify that an injury was not “a major cause” of the insured’s death.  Gay v. Stonebridge Life Ins. Co., — F.3d —, 2011 WL 5083220, C.A.1 (Mass.), October 26, 2011 (NO. 10-1559).  Plaintiff argued that because the  opinion exceeded the bounds of the expert’s report, the district court erred in allowing the testimony.  The court of appeals found no error, noting that although the expert’s testimony used different words than his report, “it was a reasonable elaboration of the opinion disclosed in the report.”  The court of appeals found that the district court was correct in concluding that, based on the expert report, the plaintiff reasonably could have anticipated and could not have been unfairly surprised by the expert’s testimony.  Additionally, the court of appeals further pointed out, albeit in a footnote, that to the extent plaintiff did not fully apprehend the expert’s opinion, he could have deposed the expert prior to trial, but did not.

Exhaustion of Administrative Remedies–the Effect on Claims Alleging Statutory Violations of ERISA

14 Friday Oct 2011

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In Pikas v. Williams Companies, Inc., 2011 WL 4606705 (N.D. Okla. Sept. 30, 2011), Judge Frizzell of the United States District Court for the Northern District of Oklahoma ruled that although statutory claims are not subject to the exhaustion of administrative remedies requirement, exhaustion of remedies may affect when a claim is clearly repudiated and therefore when the statute of limitations is triggered. Plaintiff Pikas filed a class action on behalf of himself and all others who took lump sum pension payments under the Williams Pension Plan, alleging the plan illegally denied lump sum pension recipients the actuarial equivalent of a cost of living adjustment in violation of anti-cutback and nonforfeitability provisions of ERISA. Williams moved to dismiss Pikas’ individual claims as time barred, arguing that although claims for benefits due under the terms of a plan are subject to administrative exhaustion, statutory claims are not, and Pikas filed his lawsuit more than three years after he received the lump sum payment about which he complains. Judge Frizzell agreed with Williams that administrative exhaustion was not required for statutory violation claims, stating “[i]nterests of judicial economy would not be served by requiring administrative exhaustion because the dispute is one of law, not fact.” Id. at *3. Judge Frizzell turned to the issue of what facts and circumstances lead to a clear repudiation of the plaintiffs’ claims, concluding that “class plaintiffs’ claims accrued when they received their lump sum payments.” Id. at *5. However, because Pikas questioned whether he received a COLA and pursued his administrative remedies, his claims did not accrue until the administrative remedies were exhausted because “Pikas did not have clear knowledge he would be denied a COLA until after he exhausted his administrative remedies.” Id. Among other things, Judge Frizzell noted language in the relevant plan that stated beneficiaries must file a claim and “request a review of any complete or partial denial prior to seeking a review of your claim for benefits in a court of law” and noted that Williams had sent a letter to Pikas at the conclusion of the administrative process stating that Pikas “has now” exhausted his remedies and has a right to bring a civil action. Pikas, 2011 WL 4606705 at *5. Judge Frizell held that “[b]ecause Pikas relied on the Plan and pursued his administrative remedies, and because Williams then communicated that he had a right to bring a civil action, Williams is now estopped from claiming otherwise….Pikas timely pursued his administrative remedies as directed by the Plan, and should not now be penalized for doing so.” Id. Judge Frizzell declined Pikas’ invitation to extend the holding to require exhaustion of administrative remedies for clear repudiation to occur. Id. Thus, the class was left with one rule for Pikas (trigger upon exhaustion of administrative remedies) and another for the rest of the class (trigger upon receipt of the lump sum payment). Judge Frizzell noted that Williams had advised the result could make class treatment inappropriate but did not seek to decertify the class or withdraw its stipulation that the case qualified for class treatment. Id. at *1.

Flood, hail, locusts — What happens when your damage is caused by all the Biblical plagues but some of the plagues are excluded in your policy?

26 Monday Sep 2011

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A typical policy of insurance contains a general description of the coverage provided by the policy followed by a list of “exclusions” specifically reducing the scope of coverage.  The Oklahoma Supreme Court has defined the role of an exclusion as a contract term that eliminates coverage where, were it not for the exclusion, coverage would have existed.  Often, an insured will suffer a loss that is attributable to multiple causes, some of which are covered and some of which are excluded.  In this scenario, the question arises whether the insurer has an obligation to pay for the loss.

To deal with this situation, the Oklahoma Supreme Court recognized in 1954 what is known as the “efficient proximate cause doctrine.”  This doctrine allows an insured to recover if the loss can be attributed to a cause, which is covered and not excluded, even if the loss may have been incidentally and indirectly contributed to by other causes that are excluded.  However, in recognition that an insurance policy is a contract between the insured and the insurer, Oklahoma courts have held that the parties to that contract may agree to negate the application of the efficient proximate cause doctrine.

Recently, in National American Ins. Co. v. Gerlicher Co., LLC, et al., 2011 OK CIV APP 94, the Oklahoma Court of Civil Appeals addressed the efficient proximate cause doctrine in a modern context.  The National American Court was presented with a case in which it was asked to decide whether damage from water intrusion and mold could be recovered by an insured despite an apparently applicable policy exclusion.  

The case involved water intrusion, high humidity and mold in a building.  The owner retained an environmental testing company to evaluate the problem and it determined the problems were caused by three different issues working in tandem:  (1) the use of a vinyl wall covering on the interior side of the exterior wall, (2) the sloping of the brick row ledges toward the building instead of away from it and (3) the presence of holes and cracks in the EIFS (Exterior Insulation and Finish System), which allowed water into the building.  The owner of the building sued the general contractor, which then asked its insurer to indemnify the general contractor against any loss and to provide a defense.  The insurer brought a separate suit asking the Tulsa County District Court to declare that the EIFS exclusion in the applicable insurance policy precluded coverage for the claimed loss.  The general contractor resisted that declaration arguing that the efficient proximate cause doctrine should allow coverage because EIFS was only one of the three causes identified in the testing company’s report.

The trial court agreed with the insurer and granted the declaration.  On appeal, the Court of Civil Appeals (“CCA”) first briefly discussed whether the efficient proximate cause doctrine was still viable in Oklahoma and concluded it is.  The CCA then reviewed the language of the policy to determine (a) whether damage caused by faulty EIFS was excluded and (b) whether the language of the insurance policy negated application of the efficient proximate cause doctrine.  The CCA determined that EIFS damage was clearly and unambiguously excluded in the applicable policy:

            The EIFS Exclusion begins with a provision that clearly states the policy ‘does not apply to ‘property damage’…that arises out of, is caused by, or is attributable to [EIFS] whether in whole or in part.’  The EIFS exclusion is neither masked by technical or obscure language nor hidden in the policy.  Indeed it is prominently displayed by a separate ‘Policyholder Notice’ regarding the EIFS exclusion….

National American Ins. Co., at ¶20.  The CCA addressed the second question and concluded the parties had also agreed to negate the efficient proximate cause doctrine:

            The only reasonable construction of the exclusion is that when more than one cause is involved in a loss that includes EIFS, whether directly or indirectly, there is no coverage regardless of whether the causes acted concurrently or in any combination with EIFS.  When loss is caused by both covered perils and EIFS, the NAICO policy contains language that expressly precludes coverage and avoids application of the efficient proximate cause doctrine.

Id.  The CCA did not specify which words in the policy negated the efficient proximate cause doctrine.  However, the presence of common policy phrases like “in whole or in part” and “directly or indirectly” was apparently sufficient evidence of the parties’ agreement to negate the doctrine.  Consequently, although the efficient proximate cause doctrine lives on in Oklahoma, it is likely that typical policy exclusion language will sufficiently evidence agreement to negate its application.

Attorney Fee Awards Under ERISA: How Much Success is Enough?

19 Monday Sep 2011

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Last year in Hardt v. Reliance Standard Life Ins. Co., 130 S. Ct. 2149 (2010), the U.S. Supreme Court addressed a split between the federal courts of appeal on whether an ERISA litigant must be a prevailing party in order to obtain fees under 29 U.S.C. §1132(g)(1), which provides “the court in its discretion may allow a reasonable attorney’s fee and costs of action to either party.”  The Court held that prevailing party status is not required, and set a new standard that broadened the class of litigants who can qualify for fees under the statute.  An ERISA litigant now must only achieve “some degree of success on the merits of a case” to be eligible for fees.  The Court did not, however, elaborate on the scope of the new standard, and left open questions regarding just how much success in an ERISA matter is enough to sustain a fee claim:  (1) Is a court order remanding a case to a plan administrator for further review enough success? (2) How does the standard apply if the claimant loses on remand? (3) What if a case settles prior to a decision?  

The Hardt case arose from these facts.  Hardt stopped working due to carpal tunnel syndrome, and applied for long-term disability benefits under her employer’s ERISA plan.  The plan administrator, Reliance Standard Life Insurance Company, approved Hardt’s claim temporarily while she underwent a functional capacities evaluation at its request.  Reliance asserted that even though the test confirmed her neck and hand limitations, it showed she could perform sedentary work.  Hardt appealed and the administrator partially reversed, finding she was totally disabled from her regular occupation and was entitled to 24 months of benefits.  Id. at 2152.

While her appeal was pending, Hardt was diagnosed with neuropathy.  She applied for and was awarded Social Security disability benefits based on her treating physicians’ reports that she could not perform even sedentary work. Shortly thereafter, her 24 months expired, and Reliance declined to continue benefits on the grounds that the medical records did not show she was totally disabled from working at any occupation.  Hardt appealed again and submitted her neuropathy records.  Reliance had her undergo another FCE, but did not ask the evaluator to review her for neuropathic pain, even though it knew of her diagnosis.  The exam results were invalid, so Reliance obtained additional reviews.  Again, it did not require a physical exam of Hardt or a review of all her records.  Based on the reports it received, Reliance denied Hardt’s second appeal.  Id. at 2153.

Hardt brought suit, alleging Reliance wrongfully denied her benefits claim.  The district court did not grant Hardt’s summary judgment motion, but found Reliance did not give her the kind of review she was entitled to under ERISA.  It did not adequately consider Hardt’s treating physicians’ findings and its physician’s report was vague and conclusionary.  The record in fact demonstrated compelling evidence of total disability due to neuropathy.  Although inclined to rule for Hardt, the court instead ordered Reliance to address the deficiencies on remand, instructing it to “adequately consider” all of the evidence, and warning that judgment would be entered for Hardt if it did not do so within 30 days.  Id. at 2154.

After another review, Reliance awarded long term benefits, and Hardt moved for attorney’s fees under §1132 (g)(1).  The district court concluded she was a prevailing party, and, applying the “five-factor” test requiring evaluation of factors such as the relative merits of the parties’ positions, granted fees to Hardt.  See, e.g., Gordon v. United States Steel Corp., 1724 F. 2d 106, 108 (10th Cir. 1983).  On appeal, the Fourth Circuit Court of Appeals reversed the fee award.  It found Hardt was not a prevailing party because the remand order did not require Reliance to award benefits to her, so there was no enforceable judgment on the merits or court ordered consent decree, which was required for “prevailing party” status.  Id. at 2155.

 Hardt asked the U.S. Supreme Court on writ of certiorari to consider two questions:  (1) whether the Fourth Circuit correctly held that fee recovery under §1132 (g)(1) was limited to a prevailing party, and (2) whether an order remanding a benefits claim was, without more, sufficient to support a fee award under the statute.  Id. at 2155-56. 

The Supreme Court reversed on the first question.  Congress had not included in the plain text of §1132(g)(1) an express “prevailing party” limitation on attorney fee awards, nor did anything in the statute suggest such a limitation.  Instead, the statute by its terms gave courts discretion to award fees to either party.  Id. at 2156.

The Court then addressed other statutes that, like prevailing party statutes, deviate from the “American Rule,” which requires each litigant in a lawsuit to pay its own fees, unless a statute or contract provides otherwise.  The Court cited to its interpretation of the Clean Air Act fee provision, under which fees are recoverable “whenever appropriate” as long as a party “achiev[ed] some success” on the merits, even if not a “major success.”  Id. at 2157.  The Court applied a similar standard, holding an ERISA fee claimant must show “some degree of success on the merits” before discretionary fees can be awarded.  The Court further found the five-factor test had no role in the success on the merits analysis, although it observed in a footnote that the factors could possibly play some role once success was shown.  The Court did not, unfortunately, go on to clearly explain what an ERISA litigant must show to prove it had achieved some degree of success.  Instead, it simply observed that a claimant does not satisfy the requirement by achieving “trivial success” or a “purely procedural victory,” but does satisfy it if one can “fairly call the outcome of the litigation some success on the merits without concluding a lengthy inquiry into the question whether a particular success was substantial or occurred on a central issue.”  Id. at 2158.

In the Court’s view, the facts of Hardt’s particular case showed she had achieved far more than trivial success or a procedural victory.  She had not prevailed on summary judgment, but had:  (1) produced compelling evidence that she was totally disabled, (2) persuaded the district court that Reliance inadequately reviewed her claim and failed to follow ERISA guidelines, and (3) obtained an order that led Reliance to reverse its decision and award her benefits.  Id. at 2159.

The Court explicitly declined to decide the second question raised on certiorari – whether an order remanding a benefits denial for further review, without more, is sufficient “success on the merits” to support a fee award under §1132 (g)(1).  Id.

The Hardt decision thus left in its wake several open issues.  First, because a clear order on the merits is no longer required to qualify an ERISA claimant for statutory fees, courts differ on what exactly is required.  Some have found that the remand of an ERISA benefits decision to a plan administrator without “something more,” such as an explicit court finding of an ERISA violation or total disability as expressed in Hardt is not enough success on which to base a fee award.  See, Dickens v. Aetna Life Ins. Co., 2011 WL 1258854 (S.D. W. Va.); Christoff v. Ohio Northern Univ. Emp. Benefit Plan, 2010 WL 3958735 (N.D. Ohio).  

Others, however, have held that the fact a court has remanded an ERISA case to a plan administrator for further consideration is enough success to entitle an ERISA plaintiff to fees.  Although remand does not guarantee that the plaintiff will obtain the exact relief it seeks, such as a full award of benefits, it at least sends the case back for a second administrative review of the evidence, providing another shot at benefits.  See, e.g., Richards v. Johnson & Johnson, 2010 WL 3219133 (E.D. Tenn.); Blajei v. Sedgwick Claims Management Services, Inc., 2010 WL 3855239 (E.D. Mich.); Olds v. Retirement Plan of International Paper Co., 2011 WL 2160264 (S.D. Ala.).  Indeed, it has been held that even if an ERISA claimant completely loses a case on remand, she can still be entitled to fees by virtue of achieving the remand order.  See,  Scott v. PNC Bank Corp. & Affiliates Long Term Disability Plan, 2011 WL 2601569 (D. Md.).

Second, the point at which a request for fees is appropriate remains a question.  Citing Hardt, at least one court has determined that fees can be awarded to an ERISA claimant even before a plan administrator has reviewed and decided a case remanded to it, because the litigant achieved sufficient success on the merits by the remand alone.  Blajei, supra.  Others have refused to consider fee requests until the plan administrator makes a final benefits determination after remand, or until the appellate process on a benefits determination made after remand is completed.  Mohamed v. Sanofi-Aventis Pharmaceuticals, 2010 WL 2836617 (S.D.N.Y.); Spradley v. Ownes-Illinois Hourly Employees Welfare Benefit Plan, 2011 WL 209164 (E.D. Okla.).

Third, how “success on the merits” is achieved remains an open question after Hardt.  Courts have indicated that the voluntary settlement of a claim by an administrator after an ERISA suit is filed perhaps can meet the new standard, as well as an administrator’s voluntary dismissal of a counterclaim for reimbursement of benefits.  See, Taaffe v. Life Ins. Co. of N. Am., 769 F. Supp. 2d 530 (S.D. N.Y. 2011); Simonia v. Glendale Nissan/Infiniti Disability Plan, 608 F. 3d 1118 (9th Cir. 2010).

Finally, the Hardt Court’s treatment of the five-factor test has elicited different results among courts.  The Hardt Court believed the test was unnecessary to the analysis of ERISA fee entitlement.  One court has interpreted the Court’s consideration of this issue as entirely prohibiting application of the test.  Taaffe, supra.  Others continue to apply the test.  Some say it is required in the analysis, Simonia, infra, while others say the five factors “may” be considered as guidelines in exercising fee entitlement discretion, once success on the merits is established.  See, e.g., Williams v. Metropolitan Life Ins. Co., 609 F.3d 622 (4th Cir. 2010); Thompson v. Union Security Insurance Co., 2011 WL 346467 (D. Kan); Bowers v. Hartford Life and Accident Insurance Co., 2010 WL 4117515 (S.D. Ohio).

The cases interpreting Hardt illustrate that the new standard established by the Supreme Court has not simplified the ERISA fee process.  The decision merely replaced the determination of whether an ERISA claimant is the “prevailing party” with a more fact-intensive determination of whether the claimant has achieved “some degree of success on the merits” through remand, settlement, or other action.  Therefore, in the assessment of ERISA cases with respect to fees after Hardt, factors such as the particular language or facts surrounding a remand order, the timing of a fee application, and the possibility that fees may be awarded to an ERISA claimant even when a case is resolved through settlement or voluntary dismissal are significant.  Notwithstanding the disparate court views on these factors, one issue is clear after Hardt.  Even with the Hardt Court’s express recognition that §1132(g)(1) authorizes discretionary fees to either party when some success on the merits is achieved, ERISA plan administrator defendants – even when completely successful in a case – remain unlikely to obtain fee awards under the statute.  See, Toussaint v. J.J. Weser, Inc., 2011 WL 2175987 (2nd Cir.); Tomlinson v. El Paso Corp., 2011 WL 1158637 (D. Co.).

Patient Protection and Affordable Care Act Individual Health Insurance Mandate Struck Down by 11th Circuit, Setting Up Supreme Court Showdown

19 Friday Aug 2011

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On August 12, 2011, the Eleventh Circuit Court of Appeals held that the individual mandate provision of the Patient Protection and Affordable Care Act, passed in 2010, is unconstitutional. The divided three-judge panel struck down the requirement that Americans must carry health insurance or face penalties.  The Eleventh Circuit ruling conflicts with the June 29, 2011 Sixth Circuit ruling upholding the constitutionality of the statute’s individual mandate, which was the first appeals court decision to rule on a challenge to the law. Other appeals are presently pending in the 4th Circuit and D.C. Circuit.

The Eleventh Circuit ruling makes it more likely that the Supreme Court will soon grant certiorari to resolve the conflicting decisions regarding the constitutionality of the individual mandate provisions of the statute, and possibly others. Challenging the 6th Circuit’s opinion, the Thomas More Law Center filed a petition for certiorari to the Supreme Court on July 26, 2011. The Justice Department will no doubt challenge the 11th Circuit opinion, and so the Supreme Court may take the issue up fairly soon.

The 11th Circuit’s 2-1 ruling by Judge Frank Hull, a Clinton appointee,  was joined by Chief Judge Joel Dubina, appointed by George H.W. Bush.  Judge Stanley Marcus, in a dissenting opinion, said the mandate is constitutional. He was also appointed by Clinton.

The panel found that even though the individual mandate is unconstitutional, the remainder of the law can stand. The panel also said that the law’s expansion of Medicaid is constitutional.  In striking down the individual mandate, the panel noted, among other things, that, “Properly formulated, we perceive the question before us to be whether the federal government can issue a mandate that Americans purchase and maintain health insurance from a private company for the entirety of their lives. These types of purchasing decisions are legion. Every day, Americans decide what products to buy, where to invest or save, and how to pay for future contingencies such as their retirement, their children’s education, and their health care. The government contends that embedded in the Commerce Clause is the power to override these ordinary decisions and redirect those funds to other purposes.” 

The panel rejected such a reading of the Commerce Clause, saying “the Supreme Court has always described the commerce power as operating on already existing or ongoing activity.” All prior cases “involved attempts by Congress to regulate preexisting, freely chosen classes of activities.” Not buying health insurance is not an already existing or ongoing activity, or a preexisting class of activity, the panel found.  The panel concluded, “The government’s position amounts to an argument that the mere fact of an individual’s existence substantially affects interstate commerce, and therefore Congress may regulate them at every point of their life. This theory affords no limiting principles in which to confine Congress’s enumerated power.”

Judge Marcus, who dissented, called the decision “wooden, formalistic and myopic.”  He said that Congress has shown time and again that it has power over the national health care markets, especially in its ability to set prices under Medicare, its regulatory authority over insurers and drugmakers and its ability to issue rules that cut across both how care is delivered and covered. “Both the congressional intent to link the two and the empirical relation between the purchase of health insurance and the consumption of health care services are clear,” Marcus wrote.

The 11th Circuit decision contrasts with the 6th Circuit’s 2-1 June 2011 decision upholding the law.  

The 6th Circuit found, “Congress had a rational basis for concluding that the minimum coverage provision is essential to [Obamacare’s] larger reforms to the national markets in health care delivery and health insurance,” Judge Boyce F. Martin, a Carter appointee, wrote for the majority in the 2-1 ruling.  Judge Jeffrey Sutton, a George W. Bush appointee, concurred. Judge James Graham, a Reagan appointee who is a U.S. district judge, dissented.  Judge Martin dismissed the argument that there’s a difference between economic activity and inactivity, because “the text of the Commerce Clause does not acknowledge a constitutional distinction between activity and inactivity, and neither does the Supreme Court.”  Judge Martin further note that “there is no constitutional impediment to enacting legislation that could be characterized as regulating inactivity.”  After rejecting this argument, however, Judge Martin found that “far from regulating inactivity, the minimum coverage provision regulates individuals who are, in the aggregate, active in the health care market.”

In his concurring opinion, Judge Sutton noted that “the lingering intuition—shared by most Americans, I suspect—that Congress should not be able to compel citizens to buy products they do not want.” However, he then found that health care is different, because it involves “regulating how citizens pay for what they already receive.”  Thus, Congress may regulate this conduct through the Commerce Clause.

In his dissent, Judge Graham stated: “If the exercise of power is allowed and the mandate upheld, it is difficult to see what the limits on Congress’ Commerce Clause authority would be.” He asked, “What aspect of human activity would escape federal power?”

The clear division among these jurists, and the primary issue that will be framed for the Supreme Court, is how far Congress may go in regulating individuals under the Constitution’s Commerce Clause? Can Congress regulate inaction, e.g., an individual’s decision not to purchase an item, or not to purchase a specific kind of item? Can Congress force individuals to purchase something they don’t want or believe they don’t need? Can Congress regulate a purely private transaction (or failure to transact) that by itself may have no direct impact on interstate commerce?  The Supreme Court has at times viewed the Commerce Clause as an expansive grant of power to Congress to regulate conduct that only incidentally touches interstate commerce. Other times, the Court has refused to read the clause as expansively. It is an important issue that may have a much broader impact on businesses and individuals than simply with respect to purchasing health care coverage.

Insurers who act in bad faith, or who settle bad faith claims, may not look to insurance agents as a source of indemnity or contribution

26 Tuesday Jul 2011

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The Oklahoma Court of Civil Appeals recently addressed whether an insurer that had settled a claim by its insured for a violation of the duty of good faith and fair dealing could seek to recover a portion of the settlement from its soliciting agent under indemnity or contribution theories.  In GuideOne America Ins. Co., Inc. et al. v. Shore Ins. Agency and Nancy Shore, 2011 OK CIV APP 69, the Court held that no such recovery was permissible.  That facts that led to the dispute were as follows.  The insured called the soliciting agent (Shore) following an automobile accident.  Shore initially called the insurer (GuideOne) to check the insured’s coverage.  Shore later spoke to the insured and told her that GuideOne’s UM coverage would not “kick in” until the other driver’s liability insurance “paid everything.”  The insured asked Shore not to report the claim because she was afraid the new claim, when combined with her prior claim history, would cause the cancellation of her policy with GuideOne.

Roughly three months later, the insured apparently changed her mind and submitted a claim to GuideOne.  The insured spoke directly with a GuideOne representative and relayed the incorrect advice previously received from Shore about when her UM coverage would kick in.  Despite knowing that Shore’s advice was incorrect, the GuideOne representative failed to correct the insured’s misimpression.

The insured filed suit against GuideOne for breach of contract and for breach of the duty of good faith and fair dealing.  GuideOne settled the suit by its insured.  GuideOne sued for indemnity and contribution from the Shore Insurance Agency, which moved for and was granted summary judgment on GuideOne’s claims for indemnity, implied indemnity and contribution.

The Court of Civil Appeals made short work of the indemnity claim based on the Independent Agent Contract with GuideOne.  Because that contract contained no provision requiring the Shore Agency to indemnify GuideOne, the Court of Civil Appeals held that summary judgment on that claim was appropriate. 

The Court of Civil Appeals next considered GuideOne’s claim for implied indemnity.  GuideOne sought implied indemnity because it claimed the settlement represented a payment on behalf of the Shore Agency–presumably as a result of vicarious liability  The Court of Civil Appeals rejected that claim too, finding the undisputed evidence established that GuideOne paid the settlement, at least in part, because its representative knew the insured was operating under a misimpression about her UM coverage but failed to correct it and for that reason was ineligible to seek implied indemnity.

Lastly, the Court of Civil Appeals addressed whether GuideOne could seek contribution from the Shore Agency.  The Shore Agency argued against contribution pointing out that GuideOne’s duty of good faith and fair dealing was non-delegable.  Recognizing this problem, GuideOne responded by arguing the Shore Agency negligently failed to timely report the insured’s claim and further asserted the Shore Agency owed a duty to “assist policyholders and cooperate with adjustors in reporting and handling claims and render such other services to policyholders as may properly and reasonably be provided by an Agent” arising out of the Independent Agent Contract with GuideOne.  The Court of Civil Appeals rejected the contract-based contribution claim.  In reference to the Independent Agent Contract, the Court held that this contract was not the contract on which the insured based her claim against GuideOne and in any event contribution cannot be had for joint breach of a contract.  The Court of Civil Appeals also rejected the negligence based claim.  Here, the Court of Civil Appeals noted that GuideOne could not have been liable (or paid a settlement) for mere negligence because the bad faith claim brought against it by its insured requires a showing of more than mere negligence.  Thus, even if GuideOne was correct that the Shore Agency was negligent, that conduct could not have been the responsibility of GuideOne, which could not be held liable for mere negligence in dealing with its insured.  The Court of Civil Appeals concluded that the Shore Agency and GuideOne were not and could not be “jointly or severally liable in tort for the same injury” to the insured and thus summary judgment in favor of the Shore Agency was appropriate.

The GuideOne America Ins. Co. decision reiterates the Oklahoma Supreme Court’s earlier holdings that require more than mere negligence to establish liability for breach of the duty of good faith and fair dealing.  The decision also reinforces the rule that soliciting agents do not owe a separate duty of good faith and fair dealing to insureds.  Finally, GuideOne America Ins. Co. established clear guidance for drafting agent agreements between Soliciting Agents and insurers.  Any insurer that wishes to allocate between itself and its soliciting agent all or some of a later determined bad faith liability must very clearly provide for that allocation via contract.  Absent a clear contractual provision, the insurer will bear the entire liability in a bad faith scenario even if the soliciting agent negligently initiated or contributed to the problem.

Oklahoma Tort Reform 2011 – This Time It’s Personal

06 Monday Jun 2011

Posted by in Tort Reform, Uncategorized

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What is this “tort” thing? Why does it need reforming? And why in Oklahoma do we keep seeing this issue every few years – didn’t this get taken care of already?  And why should you care?

Last answer first.  Everyone will be affected by this year’s tort reform, no matter where they are on the economic scale.  If you are a doctor, a hospital, an insurance company or a manufacturer, you will care a lot more, because you will be more directly affected.  But let’s get into why you will care.  What does it do?

“IT”  is actually “they” – there were three different and fairly major bills that were passed and will take effect November 1. The biggest is House Bill 2128, which does most of the headline-grabbing, because it features a $350,000 “cap” on what we layers call “non-economic damages”, and what most of the rest of the country calls “pain and suffering”.  Where did this cap figure come from, you ask?  Basically thin air – the legislators  just thought it sounded good.  There is also a mechanism for lifting the cap for claims based “on negligence” where both the Judge AND the jury find clear and convincing evidence that a Defendant’s acts were:

i.  In reckless disregard of rights of others

ii. grossly negligent

iii. fraudulent

iv. intentional or with malice

“That seems pretty fair to me”, you might say. “What’s the problem?”.  And, as with all legislation, there are indeed some problems – and some very serious ones at that.  First, none of the types of actions that would allow the cap to be lifted are generally insurable, so if and when a  cap is lifted, the insurance company that is providing coverage for a given liability would then be off the hook (or certainly have an argument that it should be), and any business or individual will have to pay these amounts themselves.  Note that this would apply not just to the part of the award above the cap, but to the entire award.  So a business could be left to hang, exposed to a large judgment without the benefit of insurance protection.

Problem number 2: this does not allow for the lifting of the cap on claims based on any theory other than negligence.  This includes, for example, claims based on a product liability theory which are not based on negligence.  So, there will be a cap on non-economic damages incurred in a product liability claim, but there will be no way to lift that cap.

Problem number 3:  The bill provides that the Judge AND Jury BOTH have to make findings of one of those categories.  What if the judge finds one category, and the jury finds another? Or what if a judge finds one category and the jury doesn’t?  A quandary indeed.

Problem number 4:  Subsection B (which houses the cap-lifting requirements) “shall be applied in a jury trial only after the trier of fact has made its factual findings and determinations as to the amount of the plaintiff’s damages”.  That’s all well and good, but how will this work with claims of punitive damages (the wordings for which are somewhat similar to wording of the standards noted above, but are not the same)?  A jury won’t be able to determine the amounts of actual damages until it has been sent out and has decided the above questions.  Then, if it does find one of the categories, it then has to decide the amount of actual damages to award.  But the fun does not stop there – after it makes one of the findings above, the jury has to be sent back out to decide whether or not to award punitive damages, under seemingly similar (but technically different)  set of criteria, setting the stage for nearly-unavoidable jury confusion.

And as if those problems were not enough, the bill also says the jury will answer “special interrogatories” (the form and wording for which was of course not supplied).  There go years of appeals on that question alone. And lastly, these restrictions do not apply to wrongful death actions (which are governed by 12 O.S. 1053).  So if you’re going to be negligent, apparently you’re economically better off not killing somebody in the process.

The next bit of reform is found in Senate Bill 862.   This bill eliminates the doctrine of joint and several liability, which (in some form) had basically provided that if you were hurt and it was the fault of more than one person or entity, you could collect everything from either of them, regardless of which was most at fault.  However under this new bill, you only pay for your own share of the damages.  This has its own interesting ramifications — it provides that in a claim based on fault, you are responsible for only your percentage of fault.  But again – this applies ONLY to actions based on fault.  Note that product liability claims are not based on fault.  Therefore the law will continue to be that even a product is found to be only if 1% responsible for an injury, the manufacturer will pay 100% of the damages. Not exactly music to the ears of a manufacturer.

Last, and perhaps most confusingly, Senate Bill 865 provides that the jury shall be instructed that awards are not taxable. This was designed to prevent a jury from awarding more in damages to cover what they thought would be taxes.  One big problem is that the IRS has already decided that punitive damage awards ARE taxable.  Thus judges are in the unenviable position of being ordered by law to instruct that damage awards are not taxable, when in fact part of such an award may be.  (Appellate lawyers, start your engines.)   Frankly I’m not sure how much of a problem this was, but it sure is one now.

The Bottom Line?

First, the apparent winners here appear to be insurance companies, doctors, hospitals and larger business that are typically involved in larger-damage and injury cases.  Manufacturers seem to have lost big (being shut out of the application of the new “joint and several liability” bill), but also have won something, as there will be a hard cap on non-economic damages they can look forward to.

Second, these bills will have no effect on “nuisance” or “frivolous” lawsuits, which are almost always relatively small and thus will not approach the cap limitations.

Third, those who have little economic damage but serious pain and suffering will be undercompensated (for example: anyone with little or no income and a brain injury/paralysis – housewife or senior citizen).

Note that these bills will be attacked in the courts on several fronts, including constitutionality (likely on separation of powers, don’t equally apply to all types of cases, etc.).  The failure to account for product liability claims in the severability of responsibility will be a problem as well, as will be the procedure for lifting the cap as it meshes with the punitive damages statute.  The latter will befuddle judges statewide, and it will be interesting to see how such a procedure develops as well as how it is handled by the appellate courts.

One thing we can all look forward with certainty is years of appeals on several issues, as noted above.  And of course to a truckload of personal injury cases being filed on or before October 31.

Supreme Court clarifies when “other appropriate equitable relief” may be awarded under ERISA

31 Tuesday May 2011

Posted by in ERISA

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The U.S. Supreme Court issued an opinion on May 16 that clarifies when a participant or beneficiary may recover “other appropriate equitable relief” under 29 U.S.C. § 1132 (a)(3) for an ERISA violation. In CIGNA Corp. v Amara, 131 S. Ct. 1866 (2011), the Court considered the relief available to a class of participants and beneficiaries of CIGNA’s pension plan who alleged that CIGNA had intentionally misrepresented plan changes. In Amara, CIGNA informed the class that it intended to replace its existing pension plan with a new plan that it claimed would give them “significantly enhanced” benefits, the same benefit security as the earlier plan, and steadier benefit growth. However, once the new plan was implemented, it did not provide the promised benefits, and according to the district court, the new plan actually provided less favorable benefits to the class in a number of respects.

The district court found that the disclosures CIGNA made prior to implementation of the plan were incomplete and misleading, and that CIGNA had intentionally misled the class, in violation of its reporting and disclosure obligations under 29 U.S.C. §§ 1022 and 1024 (dealing with SPDs and other disclosures). Based upon these violations, the court found that the class was entitled to seek relief under 29 U.S.C. § 1132(a)(1)(B).  The court found that relief was limited, however, to those class members who suffered “likely harm,” although each individual member did not need to prove individualized harm.  Rather, the court found that the evidence raised a presumption of harm that CIGNA could try to rebut with contrary evidence, and that CIGNA did not rebut the presumption.  The court also found that it could invalidate the plan amendments under § 1132 (a)(1)(B), and could enjoin enforcement of the new plan.  The court also found that under this same remedial provision it could reform the plan to allow class members to receive benefits that were lost as a result of the plan amendments.  Accordingly, the court awarded additional benefits to those class members that had already retired and had began receiving benefits under the new plan, and increase the value of the accounts of the other affected plan participants.

In reviewing the lower court’s decision, the Supreme Court found that the court erred because § 1132 (a)(1)(B), which allows participants and beneficiaries to recover “benefits due . . . under the terms of [the] plan,” and to “enforce” the plan’s terms, did not authorize the relief granted.  This was so, the Court found, because instead of seeking to enforce the plan’s terms, the district court had “changed” those terms through its reformation of the plan and its injunctions.

Also, the Court found that the district court’s decision to “enforce” the plan summaries and descriptions provided by CIGNA to participants and beneficiaries was not authorized under § 1132 (a)(1)(B). Significantly, the Court state that “we cannot agree that the terms of statutorily required plan summaries…necessarily may be enforced ….as the terms of the plan itself.”   The Court found that other provisions of ERISA suggested that these disclosures were not intended to be part of the plan or to be enforced through this remedial provision.  The Court reasoned that it is the plan sponsor’s (typically the employer) duty to draft the terms of the plan, while the administrator is responsible for providing summary plan descriptions and other disclosures. Given these separate roles,  the Court found, “we have no reason to believe that the statute intends to mix the responsibilities by giving the administrator the power to set plan terms indirectly by including them in the summary plan description.”

After concluding that § 1132 (a)(1)(B) did not authorize the district court to grant such relief, the Court went on to find that § 1132 (a)(3) could allow for such relief.  This was so because § 1132(a)(3) allows a court to award “other appropriate equitable relief” to redress violations of ERISA or the plan’s terms. This provision thus allows relief that was typically available in equity.  The Court found that, “The case before us concerns a suit by a beneficiary against a plan fiduciary…about the terms of a plan…It is the kind of lawsuit that, before the merger of law and equity, [plaintiffs] could have brought only in a court of equity, not a court of law.”  The district court’s injunctions fit within this equitable relief category, as did its reformation of the plan to remedy CIGNA’s misrepresentations about the new plan.  The Court also found that the district court had essentially held CIGNA to what it had promised–that the new plan would not take away benefits employees had already accrued, which resembled the equitable remedy of estoppel.  The court further found that the monetary compensation awarded by the district court to those individuals who had already retired was equitable in nature, as it flowed from the trustee’s breach of fiduciary duty, and/or was necessary to prevent the trustee’s unjust enrichment as a “surcharge” against the trustee.   

While CIGNA argued that the district court could not award relief unless the individuals showed “detrimental reliance” or prejudice flowing from any alleged misrepresentations, the Court found that this was not necessarily so.  Rather, the Court found, equity courts regularly reformed contracts where there were fraudulent omissions or statements that affected the substance of the contract.  Also, equity courts routinely “surcharged” trustees in an amount that would make beneficiaries whole by reason of a trustee’s breach.  Neither of these remedies expressly required a showing of detrimental reliance.  The Court did not establish a black line rule in all cases, recognizing that the remedy and proof required to establish the claim may vary depending on the facts.  The Court did agree with CIGNA that it would be err for a court to “surcharge” a trustee for breaches where no harm was occasioned, and that a fiduciary may be surcharged under § 1132(a)(3) only upon a showing of “actual harm” to be proved by a preponderance of the evidence.  The Court concluded that the individual need only show a violation, harm and causation.  The Court then remanded the claims to the district court for further consideration.

The full import of Amara is yet to be seen. However, there are some significant takeaways to note. First, the Court found that § 1132 (a)(1)(B) is limited to a claim to enforce contractual benefits or plan rights, and does not allow for equitable remedies or those remedies beyond what may be allowed by the terms of the plan.  This holding serves to limit the widely held view by lower courts that in the event of a conflict between the plan and SPD, a court may enforce the SPD under § 1132 (a)(1)(B). 

Second, the Court found that the terms of a plan summary or a similar statutorily required disclosure about a plan are not the equivalent of the terms of the plan itself and cannot be enforced as terms of the plan. This holding also goes against what many lower courts have found when considering whether and to what extent SPDs and other disclosures are part of the plan. It will be interesting to see what lower courts will do in light of this holding because many times there is no express trust or plan document and courts have enforced SPDs and other benefit summaries or descriptions as plan documents.

Thus, plan sponsors and administrators must be careful to review the their plans and plan summaries, and consider whether and to what extent they should draft formal welfare plan documents rather than rely upon insurance policies or summary booklets that describe benefits. Arguably, under Amara, these documents may be found to be insufficient to serve as formal plan documents. Also, plan sponsors and administrators should be careful to review plans and SPDs and other disclosures to ensure they are consistent with one another, and train claims personnel to review the terms of the plan in determining claims and to not simply utilize and rely upon a plan summary and assume that the plan and summary are consistent. 

Third, Amara seems to be inconsistent with or at least difficult to reconcile with Mertens v. Hewitt Associates, 508 U.S. 248 (1993), where the Court previously found that other appropriate equitable relief under § 1132(a)(3) was limited to traditional equitable remedies and did not include monetary recovery except in instances where the trustee was unjustly enriched by reason of its fiduciary breach and specific funds could be traced and disgorgement ordered.  Thus, while Amara seems to remove the argument that participants may enforce faulty SPDs or disclosures and seek recovery of monetary damages under § 1132 (a)(1)(B),  it appears to have opened a new outlet for plaintiffs to make such claims under § 1132(a)(3) without the previously required showing of detrimental reliance, allowing them to seek to “surcharge” the “trustee” for “actual harm” caused by breaches of fiduciary duty. It also appears to allow additional remedies, such as to reform the plan’s terms to accurately reflect the features misrepresented in prior disclosures (e.g., to require the plan sponsor to provide what it had promised). Depending on how the lower courts interpret Amara, this could be a dangerous proposition plan sponsors and others who promulgate SPDs and other disclosures in anticipation of plan changes. Although these disclosures are meant to summarize the actual changes, which means they should be succinct and less detailed than the plan itself, it may lead to overkill in such disclosures for fear of missing some detail whether important or not.  Plan sponsors and administrators must be careful in drafting SPDs and other disclosures, including disclosures concerning proposed or actual plan changes, and ensure they are as accurate and complete as possible.

Further Restrictions on Joint & Several Liability in Oklahoma

13 Friday May 2011

Posted by in Tort Reform

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Governor Fallin recently signed SB 862 into law, which virtually eliminates joint and several liability in tort actions under Oklahoma law.  SB 862 eliminates joint and several liability, protecting defendants from judgments that exceed the degree to which they are at fault in any tort action, unless the plaintiff is the state of Oklahoma.  SB 862 applies to “all civil actions…that accrue on or after November 1, 2011.”

SB 862 modifies Oklahoma’s current statute governing joint and several liability, 23 O.S. § 15.  The current statute, as modified in 2009, eliminated joint and several liability for defendants unless one of three conditions was present:

(1)  The defendant was more than 50% liable,

(2)  The defendant’s conduct was determined to be “willful and wanton” or “reckless,” or

(3)  The action was brought by or on behalf of the State of Oklahoma.

SB 862 eliminates the first two exceptions to the statute.  Now, no matter what percentage of fault is attributed to a defendant, she will only be liable for the damage she actually caused.  In addition, even if a court finds her conduct to be more egregious than mere negligence, she will still only be liable for her fair share of the damages.

 Oklahoma will continue to see actions brought under the old statute, as SB 862 applies to tort actions that “accrue on or after November 1, 2011.”  Until the statute of limitations bars the actions that accrue prior to November 1, 2011, defendants may still find themselves liable under the old statute.  For example, a case filed in January 2013 alleging that the defendant recklessly injured the plaintiff in July 2011 could still potentially subject a defendant to joint and several liability, since the case would be brought within the two-year statute of limitations. 

 Nonetheless, SB 862 is a great step in eliminating joint and several liability for defendants, and is great news for insurance companies.  Joint and several liability typically harmed the defendant who had the ability to pay for the plaintiff’s injuries-usually the defendant who had insurance.  Now, if an insured defendant is found liable for a plaintiff’s injuries, the most an insurance company would be force to pay would be the actual damage caused by its insured.  Under the prior statute, if a reckless defendant was only 1% liable, an insurer might still be required to pay for the entire damages calculation if the other defendants were either not brought into the action or were judgment-proof (e.g. broke). 

The new statute better protects defendants and their insurers from paying a disproportionate percentage of the damages suffered by a plaintiff.

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