Archive for September, 2013

SDNY Refuses to Find Exceptions to the Firestone Deference Rule

Wednesday, September 25th, 2013

In Wedge v. Shawmut Design & Construction Group Long Term Disability Ins. Plan, No. 12 Civ. 5645 (KPF) (S.D.N.Y. Sept. 10, 2013), the court declined to recognize an exception to the rule established in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), where the Supreme Court held that, for ERISA welfare benefit plans, judicial review of an administrator’s claim determination is to be reviewed under a deferential arbitrary and capricious standard when the plan vests the administrator with discretionary authority to determine a claimant’s eligibility for benefits.

In Wedge, the plaintiff (“Wedge”) received long-term disability benefits as a participant in an ERISA plan established and maintained by his employer (the “Plan”).  The Plan’s administrator, Reliance Standard Life Insurance Company (“RSLI”), had discretionary authority to determine Wedge’s eligibility to receive benefits, and terminated Wedge’s long-term disability benefits based on its determination that he no longer was disabled.  Wedge appealed RSLI’s decision and then sought judicial review.  Both parties agreed that the court ordinarily would apply a deferential arbitrary and capricious standard of review pursuant to Firestone, but Wedge argued that the court should apply a de novo standard of review in his case because RSLI issued its final determination on Wedge’s claim 79 days late and 13 days after Wedge commenced his lawsuit to recover long-term disability benefits.  In making this argument, Wedge relied heavily on the Second Circuit’s decision in Nichols v. Prudential Ins. Co. of America, 406 F.3d 98 (2d Cir. 2005), arguing that an exception to the Firestone discretionary review standard applies in cases where the administrator fails to exercise its discretionary authority.  RSLI countered that the arbitrary and capricious review standard should apply because the Supreme Court has not recognized any exceptions to Firestone.

The court rejected Wedge’s arguments, including his reliance on Nichols.  The court noted that Nichols presented distinguishable facts, including the administrator’s general failure to engage in communications with the claimant, as opposed to RSLI’s consistent communications with Wedge during the administrative process.  Notably, RSLI’s delay in issuing its final benefit determination was attributable, in part, to Wedge’s effort to negotiate conditions precedent to appearing for an Independent Medical Examination (“IME”) requested by RSLI, and RSLI’s attempts to accommodate Wedge’s request for an opportunity to review and respond to the report prepared by the IME physician.  Moreover, the Nichols court determined that the plan language did not vest discretionary authority in the administrator. Finally, and “most importantly,” RSLI did, in fact, exercise its discretion when it issued a final appeal decision a few days after the litigation commenced.

The Wedge court further reasoned that Nichols should not determine or influence the applicable standard of review because “[t]he continuing vitality of the Second Circuit’s decision in Nichols is far from clear.”  In particular, pre-2002 ERISA regulations applicable in Nichols provided that an administrator’s failure to issue a determination on a claim for benefits within the time specified would render the claim “deemed denied,” but did not address the claimant’s right to seek judicial review.  Thus, the Nichols court was concerned that an administrator could obstruct the claimant’s access to judicial review by delaying rendering its claim determination.  However, under the revised regulations, which applied to the Plan, claimants are deemed to have exhausted the administrative remedies and may bring civil actions seeking plan benefits if administrators fail to follow claim procedures.

The Wedge court also recognized that precedential, post-Firestone Supreme Court decisions have not recognized any exceptions to the Firestone rule.  For example, in Conkright v. Frommert, 559 U.S. 506 (2010), the Supreme Court reversed a Second Circuit decision that, like Nichols, crafted an exception to the Firestone deference rule.  Accordingly, the Wedge court declined to interpret Nichols as requiring de novo review where an administrator did not exercise its discretion in the time or matter required by ERISA, as doing so would “turn Firestone on its head.”


How Many Times Did that “Occur”? Alaska Supreme Court Confirms that Multiple Injuries Do Not Signify Multiple “Occurrences”

Friday, September 20th, 2013

In United Services Automobile Association v. Neary, Nos. S-14580, S-14600, 2013 WL 4399129 (Alaska, Aug. 16, 2013), the Supreme Court of Alaska confirmed that a gunshot that kills one person and injures several others constitutes one “occurrence” under a liability policy.

Fifteen-year-old Kevin Michaud  accidentally fired a gun owned by his parents.  The bullet killed one of his friends and seriously injured another.  The parents of the two victims sued Michaud and his parents, and Michaud’s parents and the victims’ parents both sued the Michaud parents’ insurer, United Services Automobile Association (“USAA”).

The plaintiffs sought a declaratory judgment as to USAA’s liability under the USAA policy, which provided a $300,000 limit for “Each Occurrence.”  A question arose on summary judgment relating to the number of “occurrences.”  USAA claimed there was only one, whereas the plaintiffs claimed there had been multiple.  The trial court held there was only one “occurrence.”

The victims’ parents appealed, presenting two different theories as to why the gunshot gave rise to multiple “occurrences.”  First, they said that each act of negligence that enabled Michaud to shoot the gun should have counted as a separate “occurrence.”  Following this line of reasoning, Michaud’s own negligent handling of the gun, and each negligent act of his parents in failing to secure their gun and supervise his activities, constituted separate “occurrences.”  The argument was rejected.  Under Alaska law, “it is the unforeseen event, not every act of negligence preceding it, that constitutes the accident or occurrence for purposes of insurance coverage.”  Although there may have been multiple acts of negligence, it was the single gunshot that constituted the “occurrence.”

In the alternative, the victims’ parents argued that the number of “occurrences” was derived from the number of injuries, and that  there were six “occurrences” because there were six different injuries – i.e. the injuries caused to each of the two victims, and then the emotional distress that each of the four parents suffered.  The court rejected this argument, noting that this “effects” test would render insurers’ liability both unpredictable and limitless.

Affirming the trial court’s decision, the court concluded that the unforeseen and unexpected firing of the single gunshot had caused all the injuries, and was therefore the sole “occurrence.”

A Reservation of Rights Regarding the Pollution Exclusion and the Timing of Damages Does Not Trigger An Insured’s Right to Independent Counsel in California

Monday, September 16th, 2013

In Federal Ins. Co. v. MBL, Inc., 2013 WL 4506149 (Cal. Ct. App. Aug. 26, 2013), the California Court of Appeal continued the judicial trend of restricting the insured’s right to insurer-paid independent counsel. The court held that a general reservation of rights, and a specific reservation of rights to deny coverage on the basis of the Absolute Pollution exclusion and to contend that the alleged damages did not occur during the policy period, do not create a conflict of interest between the insurer and its insured which would entitle the insured to independent counsel in an underlying action.

Pursuant to Section 2860 of the California Civil Code, if an insurer has a duty to defend and reserves its right to deny coverage regarding an issue that can be controlled by defense counsel appointed by the insurer, a conflict of interest arises between the insurer and the insured and entitles the insured to its own independent counsel, paid for by the insurer. The insured MBL, a supplier of PCE and other dry cleaning products, was named as a defendant in several third party complaints and cross-complaints in litigation instituted by the federal government for recovery of costs associated with remediation of groundwater contamination. Several of MBL’s liability insurers agreed to defend under a reservation of rights, and the insurers appointed defense counsel for MBL. MBL refused the defense counsel selected by the insurers, and contended that the reservations of rights entitled it to independent counsel of its own choosing at the insurers’ expense.

The court rejected MBL’s arguments and held that none of the three types of reservations issued by the insurers created a conflict of interest which would warrant an appointment of independent defense counsel. First, the court held that a general reservation of rights, pursuant to which the insurers did not expressly reserve their right to deny coverage under any particular exclusion (but preserved the insurers’ rights to rely on all their policies’ terms) did not create an actual conflict that gives rise to a right to independent counsel. The court reasoned that such a general reservation could do nothing more than create a theoretical, potential conflict of interest. Second, the court held that a reservation to deny coverage under an “Absolute Pollution” exclusion did not create a conflict because whether the exclusion applies is strictly a matter of contract interpretation and could not be controlled by defense counsel. Finally, the court held that a reservation on the issue of when the alleged damages occurred was irrelevant to the defense of the underlying claim and did not trigger a right to independent counsel, because MBL did not show how defense counsel could control that issue.

The case affirmed the holding of prior case law, first espoused in San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal. App.3d 358, that only an actual and significant conflict of interest – as opposed to a potential or theoretical conflict – entitles an insured to independent counsel under Section 2860.


AMA’s Recognition of Obesity as a Disease May Trigger Increased Claims under Employment Practices Liability Coverage

Tuesday, September 10th, 2013

In June, the American Medical Association (AMA) adopted a policy recognizing “obesity” as a “disease” requiring a range of medical intervention.  With “obesity” now recognized as a “disease” by the AMA, obese employees may be afforded greater protection under the Americans with Disabilities Act of 1990, as amended by the ADA Amendments Act of 2008 (ADA).  Consequently, obesity-related employee claims may dramatically increase, thereby triggering increased claims for insurance under employment practices liability coverage.

There is no federal law that expressly prohibits obesity discrimination, but plaintiff employees have brought obesity-related discrimination claims under the ADA with varying degrees of success.  The ADA generally prohibits discrimination against employees with physical or mental disabilities.  Additionally, the ADA requires employers to make “reasonable accommodations” for their disabled employees to perform their duties as long as such an accommodation does not impose an undue hardship on the employer.  Federal courts have waivered on whether obesity is a recognized disability under the ADA.  Several courts have held that obesity is not a disability under the ADA.  Other courts have held that, to constitute an ADA impairment, an employee’s obesity must be the result of a physiological condition.  A few courts have held that severe obesity is a disability under the ADA even without proof of a physiological basis.

Although the AMA’s new policy is not legally binding, it may prompt more courts to recognize “obesity” as a disability under the ADA.  According to the Center for Disease Control and Prevention (CDC), approximately one-third of American adults are “obese.”  Consequently, the number of ADA claims brought by employees against their employers for obesity-related discrimination may increase dramatically.  Employers facing liability for these claims may seek insurance coverage under an employment practices liability (EPL) insurance policy.  An EPL policy generally affords coverage for claims brought by employees alleging wrongful employment acts, including discrimination, wrongful termination, retaliation, or sexual harassment subject to the terms and exclusions of the policy.  Accordingly, a standard form EPL policy may provide coverage for obesity-related claims of discrimination brought by employees.

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