Archive for July, 2013

Seventh Circuit: Insurer Was Proper Defendant to an ERISA Benefits Claim, but Setting High Co-Payment Not a Fiduciary Act or De Facto Denial of Coverage

Tuesday, July 30th, 2013

In Larson v. United Healthcare Ins. Co., __ F.3d __, 2013 WL 3836236 (7th Cir. 2013), the Seventh Circuit upheld the dismissal of plaintiffs’ putative class action claims that health insurers violated Wisconsin state law (WIS. STAT. § 632.87(3)), requiring coverage for chiropractic services when diagnosis and treatment of the same condition is covered if performed by a physician or osteopath.  The plaintiffs argued that the insurers set unreasonably high co-payment amounts such that the result was that the insurance company did not provide coverage.  The plaintiffs alleged several health benefit plans set co-payments at $50.00 to $60.00 per visit, which was basically the cost of the visit.  The district court dismissed the action on the grounds that the insurance companies were not the proper parties to a benefits claim under Section 502(a)(1)(B) of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1132(a)(1)(B), and the plaintiffs failed to state a claim for breach of fiduciary duty under ERISA.

The Seventh Circuit affirmed the grant of dismissal of the action, but on slightly different grounds.  Initially, the Seventh Circuit ruled that in certain circumstances an insurance company may be a proper party to an ERISA claim for benefits.  The Seventh Circuit ruled that, “[b]y necessary implication[,] a cause of action for ‘benefits due’ must be brought against the party having the obligation to pay” the benefits due.  Larson, 2013 WL 3836236, at *6.  The Seventh Circuit then reviewed its precedent and concluded that, “[a]lthough a claim for benefits ordinarily should be brought against the plan (because the plan normally owes the benefits), where the plaintiff alleges that she is a participant or beneficiary under an insurance-based ERISA plan and the insurance company decides all eligibility questions and owes the benefits, the insurer is a proper defendant in a suit for benefits due under §1132(a)(1)(B).”  Id. at *9; see also Cyr v. Reliance Standard Ins. Co., 642 F.3d 1202 (9th Cir. 2011) (en banc).

The Seventh Circuit went on to determine the merits of plaintiffs’ claims against the defendants and uphold the dismissal of the action.  First, the Seventh Circuit agreed with the district court ruling that the setting of co-payment amounts is not a fiduciary act under ERISA and, therefore, there was no breach of an ERISA fiduciary duty.  Larson, 2013 WL 3836236, at *10.

Second, the Seventh Circuit considered whether the plan terms violated Wisconsin state law.  The Seventh Circuit ruled that the insurance policies complied with the law because they provided coverage for chiropractic services.  The Seventh Circuit rejected the plaintiffs’ argument that the setting of co-payments at high amounts effectively carved-back the coverage, ruling that the statute “does not mandate a particular amount or level of coverage” and it does not prohibit the amount of co-payments.   Id. at *11.

In the end, the Seventh Circuit focused on the merits of the plaintiffs’ claims.  Over the years, the defense that the insurance company is not the proper party for an ERISA § 502(a)(1)(B) claim has become the subject of a circuit split.  Therefore, it is important not to rely solely on this defense, and to consider substantive defenses on the merits of the allegations of any complaint.

Kaiser Cement Depublished

Wednesday, July 24th, 2013

The California Supreme Court has now depublished Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of Pennsylvania, formerly published at 215 Cal.App.4th 210 and filed on April 8, 2013. The case is now closed.


Florida High Court Precludes Use of Extrinsic Evidence to Construe Ambiguous Policy Language

Tuesday, July 23rd, 2013

In what may be described as a controversial 4-3 decision, the Florida Supreme Court in Washington National Insurance Corp. v. Ruderman, No. SC12-323, 2013 WL 3333059 (Fla. July 3, 2013), held that ambiguous language in an insurance policy “must be construed against the insurer and in favor of coverage without resort to consideration of extrinsic evidence.” (Emphasis added). Although the first part of the court’s holding, which is embodied in the Latin phrase contra proferentem, was nothing new, the second part of its holding—excluding the use of extrinsic evidence—appears to be a significant departure from well-established Florida jurisprudence. The court limited its analysis on this issue to a 34-year old decision, Excelsior Ins. Co. v. Pomona Park Bar & Pkg. Store, 369 So. 2d 938 (Fla. 1979), and found that the court never “expressly” held that “extrinsic evidence must be considered in determining if an ambiguity exists.”

The Dissent

The dissent, authored by Chief Justice Polston, disagreed that the policy was ambiguous and charges that the “majority improperly rewrites the parties’ contract to provide coverage for which the parties did not bargain and the insureds did not pay.” Even if the policy was ambiguous, the dissent contends that the majority “improper recedes from [its own] precedent” because “it is well-settled Florida law that parties may attempt to resolve an ambiguity through available extrinsic evidence before applying the last-resort principle of construction against the drafter.” To support its position, the dissent cites to decisions from the Florida Supreme Court (one dating back over 100 years) and the district courts. The sheer volume of authority referenced by the dissent with selected quotations appears to render the majority’s analysis facially incomplete.


The court’s decision will probably have a tremendous impact on coverage disputes in the State of Florida. The holding effectively precludes insurers from introducing any evidence to oppose a claim that a policy provision is ambiguous. Consequently, insurers will have to focus their legal energy on convincing the court that the policy is clear and unambiguous. On the other hand, given that ambiguity is an extremely subjective determination (as evidenced by this decision), if an insurer offers what the trial court believes to be a reasonable (and favorable) construction of the policy, the courts will have to side with the insured.

Although it remains to be seen, the decision also could obviate the need for experts and streamline cases. The decision also leaves unanswered whether the holding applies in a dispute between two insurers, and whether the sophisticated insured defense—an exception to the doctrine of contra proferentem—is viable. Similarly, while insurers can try to insulate themselves from the effect of the decision by allowing insureds to actively negotiate insurance policies, this would only be realistic for large, sophisticated commercial policyholders. Finally, litigants may try to use the decision in run-of-the-mill contract disputes where the contract was drafted by one party without negotiation or input by the other party.


The Sixth Circuit Reminds Claim Administrators of the Dangers of a Breach of Fiduciary Duty When Handling Plan Assets

Tuesday, July 23rd, 2013

The Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001, et seq., was passed with the goal of protecting plan assets so that those assets would be available for plan participants and beneficiaries.  See Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 510-11 (1981).   Under ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), any person who “exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets” is a fiduciary under ERISA.  It is a breach of ERISA fiduciary duty to use plan assets for the fiduciary’s own purposes.  ERISA § 504(a)(1), 29 U.S.C. § 1104(a)(1); and ERISA § 506(b)(1), 29 U.S.C. § 1106(b)(1).

In Pipefitters Local 636 Ins. Fund v. Blue Cross and Blue Shield of Mich., __ F.3d __, 2013 WL 3746217 (6th Cir. July18, 2013), the Sixth Circuit ruled that Blue Cross and Blue Shield of Michigan (“BCBSM”) breached its ERISA fiduciary duty because it paid certain state fees from the self-funded plan assets without being authorized to do so by the plan.  Since 1996, BCBSM has been required by the State of Michigan to pay one percent of its revenues as a “Medigap” fee for defraying senior citizen medical care costs.  BCBSM entered into an administrative services agreement with the plaintiff to administer claims and allow access to its network, which would allow for payment of medical services at the discounted negotiated rates.  The agreement did not address the payment of the Medigap fee.  BCBSM, however, added the Medigap fee to the discounted fee owed to providers and collected the fee from the plan assets, and passed that Medigap fee on to the state.  As a result, the Medigap fee was being collected from the plaintiff’s ERISA plan assets.  The district court granted summary judgment and awarded plaintiff $284,970.84 after it found that BCBSM collected the Medigap fee between June 2002 and January 2004, which was a breach of its fiduciary duty.

On appeal, the Sixth Circuit affirmed the district court ruling, finding that the act of applying the Medigap fee to the payments was a discretionary act, and BCBSM was not authorized under the administrative services agreement to charge those fees.  The Sixth Circuit ruled “[w]here a fiduciary uses a plan’s funds for its own purposes, as is the case here with Defendant using the [Medigap] fees it discretionarily charged to satisfy the Medigap obligation it owed to the state of Michigan, such a fiduciary is liable under § 1104(a)(1) and § 1106(b)(1).”  2013 WL 3746217, at * 7.

The Sixth Circuit’s ruling demonstrates the dangers of handling plan assets and the importance of having the administrative services agreement set forth the parties’ obligations.  If BCBSM had reached an agreement that the Medigap fees were part of the administrative fee charged by BCBSM, then plaintiff could not allege breach of fiduciary duty because the fees would not have been plan assets.  If the administrative services agreement stated that BCBSM could add the Medigap fees to the discounted payments for covered services, then plaintiff similarly could not allege a breach of fiduciary duty because BCBSM would have been administering the plan in accord with the plan terms.

Timely Reporting Crucial in Claims-Made-and-Reported Policies

Wednesday, July 17th, 2013

In GS2 Engineering & Environmental Consultants, Inc. v. Zurich American Insurance Company, 2013 WL 3457098 (D.S.C. July 9, 2013), the U.S. District Court for the District of South Carolina, Columbia Division, found that renewal of a claims-made-and-reported policy does not modify the policy requirement that claims be reported in the same policy period in which they are received.

GS2 was insured under a series of one-year claims-made-and-reported insurance policies issued by Steadfast Insurance Company. The first policy covered the policy period August 7, 2005 to August 7, 2006. The policy was renewed annually until the last policy period of August 7, 2010 to August 7, 2011. At issue were the policies in effect from August 7, 2009 to August 7, 2010 (“the 2009 policy”) and August 7, 2010 to August 7, 2011 (“the 2010 policy”). The policies required that a claim first be made against GS2 within the “policy period” and reported, in writing, to Steadfast during the “policy period.”  GS2 was served with a lawsuit filed by Richland School District on April 14, 2010, but Steadfast did not receive notice of the claim until September 23, 2010.  Steadfast denied coverage because GS2 did not both receive and report the claim during the same August 7, 2009 to August 7, 2010 policy period.

In GS2’s ensuing coverage action, the court granted summary judgment for Steadfast.  The court found that GS2 waited too long to notify Steadfast of the lawsuit, and it rejected GS2’s argument that all of the Steadfast policies should be treated as a single continuous policy.  The court also rejected GS2’s alternative argument that the reporting period for the 2009 policy should be extended into the 2010 policy. Instead, the court held that the policies require both that claims be made against GS2, and reported to Steadfast during the same policy period.  Also, the claim came too late to come within the 2009 policy’s extended reporting period.

Seventh Circuit Demonstrates The Dangers Of Not Having Sufficient Written Procedures In Place To Confirm Coverage – Money Damages Are Available For a Breach of ERISA Fiduciary Duty

Tuesday, July 16th, 2013

In Kenseth v. Dean Health Plan, Inc., __ F.3d __, 2013 WL 29991466 (7th Cir. 2013), the U.S. Court of Appeals for the Seventh Circuit changed course in the wake of the U.S. Supreme Court decision in CIGNA v. Amara, __ U.S. __, 131 S.Ct. 1866 (2011), finding that monetary damages may be available as “other appropriate equitable relief” under the Employee Retirement Income Security Act of 1974 (“ERISA”) § 502(a)(3), 29 U.S.C. § 1132(a)(3).  The Seventh Circuit’s opinion follows other recent Circuit Courts’ opinions interpreting AmaraSee Gearlds v. Entergy Servs., Inc., 709 F.3d 448 (5th Cir. 2013); McCravy v. Metropolitan Life Ins. Co., 690 F.3d 176 (4th Cir. 2012).  But the Seventh Circuit went further under ERISA § 502(a)(3) and charted a new tack for future claimants to obtain monetary damages as “make-whole relief” – which is in the amount equivalent to the benefits otherwise not available under the plan – because of poorly worded plan language.

Ordinarily, a claim under ERISA § 502(a)(3) seeking the equivalent of benefits is ineffectual for several reasons.  The ERISA plan language controls whether a claimant is entitled to benefits and thus, if claimants cannot prove their entitlement to benefits under the plan, they will not prevail under section 502(a)(3).  See ERISA § 402, 29 U.S.C. § 1102; Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 83 (1995). Also, claimants previously faced the unyielding hurdle that the relief sought could not be money damages.  See Mertens v. Hewitt Assocs., 508 U.S. 248 (1993).  But in Kenseth, the Seventh Circuit ruled that an oral communication in connection with claims administration could provide a basis to award “make-whole relief” in the form of money damages.

In Kenseth, Deborah Kenseth (“Kenseth”) was enrolled in an employee welfare group health benefit plan governed by ERISA.   The ERISA plan provided in-network coverage subject to certain limitations and exclusions, including an exclusion for medical services related to the treatment of morbid obesity and any medical services to treat a non-covered service.  On its face, the plan did not provide coverage for Kenseth’s gastric bypass and surgery to treat severe acid reflux associated with a previous gastric banding surgery that she received years ago.  But the ERISA plan invited plan members to call the claim administrator to find out if services were covered.  Kenseth, without reviewing the plan, called the claims administrator, who purportedly misinformed Kenseth that the services would be covered.  In the initial appeal, the Seventh Circuit found that an ambiguity existed in the plan regarding whether treatment for complications associated with Kenseth’s original gastric banding surgery was covered, and whether there was an authoritative process for confirming whether a particular service was included in the plan.  See Kenseth v. Dean Health Plan, Inc., 610 F.3d 452 (7th Cir. 2010).  Nevertheless, the Seventh Circuit presaged the futility of Kenseth’s claim, stating “[t]he relief that Kenseth truly seems to seek is relief that is legal rather than equitable in nature,” and “this is the sort of make-whole relief that is not typically equitable in nature and is thus beyond the scope of relief that a court may award pursuant to section 1132(a)(3).”  Id. at 481.

But after Amara, on the second appeal, the Seventh Circuit ruled that: “We can now comfortably say that if Kenseth is able to demonstrate a breach of fiduciary duty as we set forth in our first opinion, and if she can show that the breach caused her damages, she may seek appropriate equitable relief including make-whole relief in the form of money damages.”  Kenseth, 2013 WL 2991466, at *14.

The ruling in Kenseth should serve as a warning to all ERISA plan administrators to review their plan language regarding who has the final authority to advise whether a particular service is covered.  Equivocal or ambiguous plan language may open the door to a potential breach of ERISA fiduciary duty claim designed at getting the equivalent of benefits that are not covered under the plan.  The best practice to protect against these claims is to make sure the plan expressly provides that oral communications are not sufficient to confirm coverage for a particular service.

Injured Party Free to Pursue Medical Payments Under Tortfeasor’s Policy After Settlement of Liability Claim

Monday, July 8th, 2013

By Beth E. Yoffie, Sedgwick Los Angeles

In a case of first impression, Barnes v. Western Heritage Ins. Co., ___ Cal.App.4th ___, 2013 Cal.App.LEXIS 480 (June 20, 2013), the California Court of Appeal, Third Appellate District, held the collateral source rules allow an injured plaintiff to pursue benefits under the medical payments provision of a commercial general liability (“CGL”) policy even after the tortfeasor’s liability insurer settles the injured party’s claims under the liability portion of the insurance contract. 

Plaintiff Justin Barnes was injured when a table fell on his back during a recreation program co-sponsored by the Shingletown Activities Council (“Council”).   More than a year later, after consulting a medical specialist, he requested payment from the Council’s CGL insurer, Western Heritage Insurance Company (“Western Heritage”).  Western Heritage denied the claim on grounds that Barnes failed to report the claim within a year of the accident as the policy required. 

Barnes sued the Council for negligence and premises liability, seeking recovery of medical expenses and general damages.  Western Heritage settled the action on the Council’s behalf.  Barnes subsequently filed suit against Western Heritage for breach of contract and bad faith based on its failure to pay his medical expenses claim. 

The trial court entered summary judgment in favor of Western Heritage on the ground, among others, that collateral estoppel barred the action because Barnes’ settlement of the personal injury action resolved the medical payments issue under the insurance contract. The court also ruled that permitting Barnes to recover under the medical payment provision would result in an impermissible double recovery.

The appellate court reversed, finding the insurance policy’s medical payments coverage was separate and distinct from the liability coverage.  The court found that the medical expenses part created a direct obligation from Western Heritage to Barnes instead of providing coverage for the Council’s tort liability; accordingly, it held the medical expenses coverage was a collateral source from which Barnes could recover directly from the insurer.   

The case is significant because it found for the first time that an injured plaintiff may pursue a claim against a defendant’s insurer for bad faith and breach of contract under a medical payments provision after settling the underlying lawsuit against the insured.  The decision means that a liability insurer whose policy includes a medical payments provision may be on the hook for both the injured party’s medical expenses and the insured’s liability to the injured party which, in turn, can also encompass the injured party’s medical expenses.

Absolute Pollution Exclusion Applies Indoors

Friday, July 5th, 2013

By Timothy D. Kevane, Sedgwick New York

In Midwest Family Mutual Insurance Co. v. Wolters, et al., — N.W.2d –, 2013 WL 2363239 (Minn. May 31, 2013), the Minnesota Supreme Court joined the minority view in holding that the absolute pollution exclusion applies to pollution that may occur indoors.

What Happened: the insured, a general contractor, was hired to build a home, including the installation of a gas boiler and carbon monoxide detectors.  The homeowners suffered serious injuries as a result of carbon monoxide poisoning and sued for negligence, claiming an incorrect boiler was installed and the detectors malfunctioned.  The contractor’s general liability policy contained an absolute pollution exclusion precluding coverage for bodily injury arising out of the release of pollutants.

What the Court Said:  applying a plain-meaning approach to the interpretation of the policy, the court held that carbon monoxide is both a pollutant and irritant.  And, because the exclusion avoids the use of language descriptive of the natural environment (e.g., “atmosphere”), the exclusion applies to a release that occurs indoors.  The court thus rejected the majority rule that the exclusion is limited to hazards traditionally associated with environmental pollution.

For What It’s Worth:  while the authorities remain split on the issue, Wolters demonstrates that the absolute pollution exclusion can be reasonably construed to apply to non-environmental claims.  Here, the court’s analysis was guided by the revision to the “qualified” pollution exclusion (deleting the reference to pollution of the “atmosphere”).  The Court’s “plain-meaning” approach is noteworthy in prevailing over other rules of construction that exclusions are narrowly interpreted and ambiguities construed against the insurer.  For followers of Judge Posner (fans, detractors and those in the middle), the dissent cited his recent Seventh Circuit opinion in Scottsdale Indemnity, noting the exclusion was never intended to apply to non-environmental accidents in which pollutants have caused “everyday activities” to have gone “slightly, but not surprisingly, awry.”

Aerospace Insurance Update

Tuesday, July 2nd, 2013

Our Aerospace practice group’s June newsletter discusses the introduction of drones into domestic airspace and the privacy concerns it raises.  The newsletter also features an article importance of forum selection clause for insurers by examining a case between a German manufacturing company and Virginia residents.

Click here to read the full issue.

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Sedgwick’s insurance attorneys regularly present to clients and other industry professionals on a wide range of topics. For a complete list of our attorneys, click here.
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