By Julie Y. Kim, Sedgwick New York

On March 13, the Second Circuit issued a significant opinion interpreting key provisions of the Employee Retirement Income Security Act (“ERISA”).  In Thurber v. Aetna Life Ins. Co., Case No. 12-370-cv, 2013 WL 950704 (2d Cir. Mar. 13, 2013), the court affirmed the order of the District Court for the Western District of New York to the extent it dismissed the plaintiff’s ERISA § 502(a)(1)(B) claim, but reversed the District Court’s denial of Aetna’s counterclaim pursuant to ERISA § 502(a)(3) to recover overpayment of short-term disability (“STD”) benefits.  In reaching its decision, the court held that ERISA plan administrators are not required to provide actual notice to participants and beneficiaries of a plan’s grant of discretionary authority to an insurer or other claim fiduciary, and that Aetna’s counterclaim to recover its overpayment of STD benefits constituted equitable – not legal – relief, and was permissible under ERISA § 502(a)(3).

On appeal, the Second Circuit disagreed with the Seventh Circuit to the extent that its holding in Herzberger v. Standard Ins. Co. interpreted ERISA as requiring actual notice to plan participants of a reservation of discretionary authority, reasoning that “unless ERISA requires the SPD [summary plan description] to contain language setting the standard of review, we see no reason why a plan administrator must actually notify a participant of its reservation of discretion.  ERISA contains no such edict.”  Affirming the district court’s summary judgment in favor of Aetna on its denial of Thurber’s long-term disability benefit claim, the court agreed that Aetna did not act arbitrarily and capriciously and its determination was supported by substantial evidence.

Notably, the Second Circuit reversed the District Court’s dismissal of Aetna’s counterclaim to recover its overpayment of STD benefits based on Thurber’s receipt of other income benefits in the form of no-fault insurance payments.  Discussing Supreme Court decisions analyzing the issue, the Second Circuit held that Aetna’s counterclaim was equitable in nature because the insurer sought specific funds (overpayments resulting from Thurber’s simultaneous receipt of no-fault insurance benefits and STD benefits) in a specific amount (the total overpayment) as authorized by the plan, that had been entrusted to Thurber.  Acknowledging a Circuit split on the issue, the court determined that a different result was not warranted because either (1) Aetna sought to recover a specific portion of benefits rendered overpayments rather than the actual third-party income Thurber received, or (2) the overpayments made had since been dissipated.  The plan clearly provides Aetna the right to recover benefits rendered overpayments, giving Thurber adequate notice that she was holding the money in a constructive trust, and the funds were under her control but belonged to the insurer.

In issuing this precedential opinion, the Second Circuit specifically rejected the Ninth Circuit’s recent decision in Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012), which denied insurers the right to pursue recovery of overpayment under ERISA.  It seems likely that there will be significant court activity regarding this issue as courts continue to struggle with interpreting what claims constitute “equitable” relief permissibly sought under ERISA § 502(a)(3).

By John T. Seybert and Julie Kim

In Maurer v. Reliance Standard Life Insurance Co., No. 11-16044, 2012 WL 6101903 (9th Cir. Dec. 10, 2012), the Ninth Circuit interpreted a policy provision favorably for insurers, holding that a policy’s mental nervous limitation may permissibly limit long-term disability (“LTD”) benefits where the beneficiary would otherwise be capable of working, but for the mental or nervous disorder.

Sara Maurer (“Maurer”) ceased working as an attorney and filed a claim for disability benefits based on chronic neck and back pain, and fibromyalgia.  Maurer’s insurer, Reliance Standard Life Insurance Company (“RSL”), determined that Maurer was disabled by fibromyalgia “with a significant psych component to chronic pain” and paid twenty-four months of benefits.  In connection with its concurrent review of Maurer’s benefit claim, RSL received updated treatment records indicating that Maurer suffered from depression, anxiety and “bi-polar diathesis,” indicating Maurer’s predisposition to the condition when stressed.  After paying LTD benefits for three years, RSL performed another review and concluded that without the contribution of mental nervous illness, Maurer’s medical records indicated that she was capable of performing full time sedentary work. RSL therefore notified Maurer that it was terminating her benefits.

On administrative appeal, Maurer argued that she was completely disabled by psoriatic arthritis.  RSL obtained an independent medical evaluation by a board-certified rheumatologist, who could not confirm that diagnosis and opined that Maurer’s alleged symptoms were primarily related to chronic pain and psychiatric dysfunction rather than inflammatory disease.  RSL’s administrative appeals process resulted in the conclusion that the prior termination of benefits was appropriate.  The U.S. District Court granted summary judgment to RSL, finding that RSL’s coverage determination was not an abuse of discretion.

On appeal, the Ninth Circuit considered whether Maurer’s claim for LTD benefits was limited to the twenty-four month period applicable to mental nervous disorders.  The employee welfare benefit plan provided benefits for policyholders who become “totally disabled.” The policy also included a “Mental/Nervous Limitation,” which provided that benefits for total disability “caused or contributed to by mental nervous disorders . . . will not be payable beyond an aggregate lifetime maximum duration of twenty-four (24) months. . . .”  Maurer argued that the mental nervous limitation should not apply unless RSL could demonstrate that the mental nervous condition was the sole cause of the disability.  The Ninth Circuit rejected Maurer’s argument and ruled that the insurer “permissibly interpreted the ‘mental/nervous’ limitation to preclude coverage when, in the absence of a mental or nervous disorder, a beneficiary would be physically capable of working.”

While this decision may result in other courts following the Ninth Circuit’s lead, insurers should carefully consider whether to apply a mental illness limitation in cases involving both physical and mental conditions – under Maurer, insurers must be able to show that, but for the mental illness, the claimant would be capable of working.

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The new year will surely bring more news and developments stemming from Pres. Obama’s signing of the Patient Protect and Affordable Care Act (“PPACA”). The mandated state insurance exchanges must begin operation by an October 1, 2013 open enrollment period for health cover­age with a January 1, 2014 effective date.  So, we thought our readers would be interested in this recent article by San Francisco partner Hilary Rowen discussing the Act’s insurance exchange provisions and deadlines, the impact of the exchanges on the marketplace, and the impact on employer-based health coverage. The article originally appeared in the December 2012 issue of the ABA Health eSource.

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