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Tort, Trial & Insurance Practice Law Journal

TIPS Law Journal Summer 2024

Recent Developments in Health Insurance, Life Insurance, and Disability Insurance Law

Elizabeth G Doolin, Julie Freund Wall, and Joseph R Jeffery

Summary

  • Is medical malpractice an “accident?”
  • Is a heroin overdose an intentionally self-inflicted injury?
  • When an unprescribed supplement combines with prescription medication to cause or contribute to an insured’s death, is the supplement a “drug” for purposes of a policy’s drug exclusion?
Recent Developments in Health Insurance, Life Insurance, and Disability Insurance Law
Luis Alvarez via Getty Images

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The issues decided or addressed in this year’s collection of accident, disability, ERISA, health, and life insurance decisions will be familiar to practitioners and to regular readers of this article. As always, cases involving accidental death coverage give rise to provocative questions. Is medical malpractice an “accident?” Is a heroin overdose an intentionally self-inflicted injury? When an unprescribed supplement combines with prescription medication to cause or contribute to an insured’s death, is the supplement a “drug” for purposes of a policy’s drug exclusion? Several disability insurance decisions this survey period took a close look at the circumstances under which pain and other physical conditions affect claimants’ cognitive abilities and arguably prevent them from performing the duties of their occupations. Another disability insurance decision considered whether an insured’s full-time work during a period of claimed disability automatically defeated her claim for benefits. This year’s ERISA discussion reviews two circuit-level decisions that examined the type of relief available under ERISA Section 502(a)(3), as well as another circuit-level decision that examined whether a third-party administrator’s claims repricing services made it a plan fiduciary. This year’s health insurance section discusses a district court decision that vacated and enjoined the enforcement of several Affordable Care Act coverage mandates, and it examines regulations proposed by the Departments of Labor, Health and Human Services, and Treasury concerning non-qualitative treatment limitations under the Mental Health Parity and Addiction Equity Act. Finally, this year’s article discusses several significant life insurance decisions that were issued this survey period. The Texas Supreme Court settled longstanding disputes over an insurer’s ability to rescind a life insurance policy due to material misrepresentations made in applications for insurance, an Illinois Appellate Court concluded the state’s revocation-on-divorce statute did not have a retroactive effect, and the supreme courts of Arizona and Georgia clarified the application of their states’ statutes concerning stranger-originated-life-insurance policies.

Accidental Death

When it comes to accidental death jurisprudence, Rust Cohle and Frederich Nietzsche may have been right that “time is a flat circle.” The focus once again of the most significant accidental death and dismemberment decisions this survey period was whether an incident was an “accident.” And where a death was deemed accidental, courts were called upon to determine whether the form of accident was excluded from coverage, often in the context of sickness/infirmity and medical-treatment exclusions. Before we dive into this year’s medical mayhem, however, we have an update on a drug overdose decision discussed in last year’s article.

Drug Overdoses: “First you take a drink, then the drink takes a drink, and then the drink takes you.”

In last year’s edition of this article, our readers met Johnny Yates, a reported heroin user, whose parents found him dead, lying face-down in his bedroom on top of a hypodermic needle with a bottle cap containing a dried light brown substance on a nearby nightstand. Yates’s wife subsequently filed a claim for accidental death benefits, which the insurer denied because Yates’s death resulted from the purposeful use of heroin, which the insurer argued fell under the exclusion for “losses caused by an ‘intentionally self-inflicted injury.’” In Yates v. Symetra Life Insurance Co., the United States District Court for the Eastern District of Missouri entered judgment for the plaintiff, holding that Symetra’s inability to point to evidence showing Mr. Yates “intended his death to occur or that he should have known death was highly likely to occur as a result of injecting heroin” meant Symetra could not satisfy its burden to establish that the intentionally self-inflicted injury exclusion applied.

Affirming the district court, the United States Court of Appeals for the Eighth Circuit observed that the exclusion made a distinction between “loss” (death) and “injury” (overdose): “Symetra will not pay for any loss caused wholly or partly, directly or indirectly, by . . . intentionally self-inflicted injury, whi[le] sane.” To the court, the distinction meant the dispositive issue was whether the insured intentionally overdosed; i.e., whether the loss (Mr. Yates’s death) was caused by Mr. Yates’s “intentionally self-inflicted injury.”

The court found support for its reasoning in decisions where the insured’s death was attributable to drunk driving. Those cases, according to the court, showed that an insured’s accidental death “does not fall under the ‘intentionally self-inflicted injury’ exclusion simply because [the death] was caused by inherently risky conduct.” Rather, the issue of whether an “intentionally self-inflicted injury” exclusion applies to an insured’s accidental death turns on whether or not the injury itself was intended. The Eighth Circuit agreed that there was no evidence that Mr. Yates intentionally overdosed and held that Symetra’s denial of the plaintiff’s claim for accidental death benefits was erroneous.

Sickness/Infirmity and Treatment Exclusions: “There’s no need for fiction in medicine . . . for the facts will always beat anything you can fancy.”

This survey period saw numerous decisions in which coverage turned on the applicability of sickness/infirmity and medical treatment exclusions. In Johnson v. Farmers New World Life Insurance Co., the United States District Court for the District of Colorado analyzed whether sickness/treatment exclusions in four policies issued by three insurers barred coverage for the insured’s death. The insured had two identical accidental death policies issued by Farmers, another issued by Minnesota Life, and a fourth issued by Washington National.

The insured died a day after being found unresponsive in her front yard. Prior to her death, the insured’s physician had prescribed hydrocodone to treat her severe gout. The insured also purchased a legal, unprescribed supplement called Mitragynine, which is commonly known as Kratom. After performing an autopsy, the coroner concluded the insured’s death was caused by the combined use of hydrocodone and Mitragynine. All three insurers denied the resulting claims, invoking the accidental bodily injury exclusions in their policies.

Each of the Farmers policies stated, “This is an accidental death only policy; . . . we will pay the Accidental Death Benefit amount shown in the Schedule provided that: Death occurs as the direct result of an accidental bodily injury, independent of all other causes.” The policies’ exclusions stated, “We will not pay a benefit for a death which is caused by, results from, or is contributed to by: . . . sickness or its medical or surgical treatment . . . [or] taking of any drug, medication . . . unless as prescribed by a physician.”

The accidental death policy issued by Minnesota Life stated that coverage “was limited to a loss that ‘results directly—and independently—from all other causes, from an accidental bodily injury which was unintended, unexpected and unforeseen.’” The policy also contained additional exclusions for losses “caused directly or indirectly by, result[ing] from, or [where] there is contribution from, any of the following: (1) bodily infirmity, illness or disease; . . . (5) the use of. . . drugs, medications . . . unless taken upon the advice of a licensed physician in the verifiable prescribed manner and dosage.”

The insured’s Washington National policy specifically excluded coverage for losses that occurred while “‘being under the influence of any illegal drugs, or being under the influence of any narcotic, unless such narcotic is taken under the direction of and as prescribed by a Physician.’” The policy also excluded coverage for loss attributable to “‘any disease, bodily or mental illness or degenerative process.’” The Washington National policy defined an Accident as “‘a sudden, unexpected and unforeseen event,’ and Accidental Injury as ‘all bodily injuries solely caused by and resulting from an Accident.’” Importantly, the policy explicitly stated that an injury resulting directly or indirectly from any illness, any disease, or any type of medical treatment would not qualify as an Accidental Injury.

Farmers moved to dismiss, arguing that the plaintiff’s actions for breach of contract and bad faith failed to state claims for relief because the policies’ “sickness” and “drugs” exclusions plainly applied. Washington National joined Farmers’ motion to dismiss. The court agreed with Farmers’ reasoning that the exclusions applied because Kratom is an unprescribed drug and the insured’s ingestion of it caused the insured’s death. The court also held that the insured’s death fell under the Farmers policies’ “sickness or its medical treatment” exclusion because the hydrocodone the insured used to treat her gout contributed to her death. In light of the foregoing, the court granted the motion to dismiss, finding that Farmers (and Washington National) properly denied the insured’s claim under each of their exclusions.

Minnesota Life argued that the insured’s death was an excluded loss because Kratom, which was not prescribed by a physician, caused the insured’s death. The court observed that the beneficiaries did not clearly rebut Minnesota Life’s assertion that Kratom should be considered a drug or medication for purposes of the exclusion. As a result, the court concluded Minnesota Life properly denied coverage based on the exclusion for losses caused by unprescribed drugs or medications.

Is medical malpractice an accident? The insured in Hawkins v. Cuna Mutual Group, died while undergoing treatment at a hospital. The insurer denied coverage on the grounds that the insured’s death was not caused by an accident but, even if the death was an accident, the death was not covered because it fell within the policy’s medical-treatment exclusion. The United States District Court for the Western District of Oklahoma agreed.

The insured was unresponsive when she was admitted to a hospital emergency department and resuscitated. Thereafter, she was intubated and put on a ventilator for treatment in the hospital’s intensive care unit. Days later, a feeding tube was inserted into her nostril but was quickly removed after causing her nostril to bleed. This ultimately resulted in the insured becoming unresponsive and receiving advanced cardiovascular life support for forty-three minutes before the family terminated life support. Respiratory failure was listed as the immediate cause of death with gastroenteritis accompanied by vomiting as underlying causes, and septic shock, acute renal failure, atherosclerotic coronary artery disease and epistaxis as other significant contributors to death. The death certificate listed the insured’s death as “natural,” not “accidental.”

The insured’s policy defined “accidental death” as “[d]eath resulting from an injury, and occurring within 1 year of the date of the accident causing the injury.” The term “injury” was defined as “[b]odily damage or harm caused directly by an accident and independently of all other causes” and defined an “accident” as “[a]n occurrence which is unexpected or unforeseen, either as to its cause or as to its result.” Finally, the policy excluded coverage for any loss or covered injury due to any complication resulting from medical treatment or surgery.

The insurer maintained the insured’s death did not result from an “accident” as defined by the policy because it was foreseeable that complications might arise from medical treatment provided to the insured. The beneficiaries countered that the insured’s death was the result of “medical malpractice” and, therefore, was not foreseeable. The court explicitly noted a lack of evidence establishing a causal connection between the insured’s death and the allegedly negligent intubation. Additionally, the court noted the insurer’s persuasive citations to decisions in which coverage was denied under a medical treatment exclusion and upheld, even when medical malpractice was alleged. The decisions generally found that medical treatment exclusions would be meaningless if they did not extend to deaths caused by medical malpractice because “[d]eath is never caused by medical treatment absent some misdiagnosis or mistake.” The court upheld the insurer’s denial of benefits, reasoning that even if the insured’s death resulted from a covered “injury,” the medical treatment exclusion applied, so the denial of coverage was proper.

Similarly, in Wicks v. Metropolitan Life Insurance Co., the United States District Court for the Northern District of Texas examined whether an insurer properly denied coverage of accidental death benefits due to an “illness/treatment” exclusion. The insured underwent gastric sleeve surgery to improve his health and was prescribed various medications to assist with recovery, including hydromorphone for pain. At one point following the surgery, the insured received a prescription of an additional milligram of hydromorphone (Dilaudid). About thirty minutes later, the insured was found unresponsive. The hospital attempted lifesaving procedures, but the insured died two days later.

The insured’s accidental death and dismemberment coverage contained a provision stating, “Direct and Sole Cause means that the Covered Loss occurs within 12 months of the date of the accidental injury and was a direct result of the accidental injury, independent of other causes.” There also was an “illness/treatment” exclusion which stated, “benefits will not be paid for any loss caused or contributed to by physical or mental illness or infirmity, or the diagnosis or treatment of such illness or infirmity.” The insurer denied the insured’s claim for accidental death benefits on the grounds that the insured’s death did not result “directly and solely from an accidental injury,” but, even if the insured’s death resulted from an accidental injury, it would still be excluded under the illness/treatment exclusion.

The court found that the insured died from a “standard complication (negative reaction to pain medications) of standard medical treatment (gastric sleeve surgery).” The court also found that treatment of the insured was proper because the “uncontroverted records shows that [the insured] received an appropriate dose of Dilaudid.” This finding is critical because an insured’s death resulting from proper medical treatment provides no reason to disassociate their death from the complications of an underlying illness as death would be a foreseeable result of medical treatment for said illness. Importantly, the beneficiaries provided no evidence or expert testimony establishing negligent care, while the insurer’s expert explicitly stated the dosages were appropriate and that he could not conclude with a reasonable degree of medical certainty that a drug overdose caused the insured’s death. Because the record established the dosages were appropriate and treatment was proper, the court concluded the insured’s death was caused by a pre-existing infirmity (obesity) and affirmed the insurer’s denial of benefits.

In similar fashion, in Couch v. Mutual of Omaha Insurance Co., the United States District Court for the Middle District of Tennessee considered whether a sickness/infirmity exclusion barred recovery of accidental death benefits when an insured died shortly after being found in her home “prone and unresponsive” near her bed with bruising on her face and head. The insured’s daughter, who visited regularly, described the insured as “fine and in good spirits” a couple of days prior. The daughter did not witness the fall but believed the insured had been lying there for some time. The insured was taken to the hospital where she did not improve and received only “comfort measures” until she died several days later. The insurer denied coverage reasoning that there was no evidence an injury caused or contributed to the insured’s death. The insured’s discharge summary revealed a complicated medical history replete with chronic health issues and a CT scan that was “negative for intracranial process,” indicating that the insured’s death was likely due to sickness rather than injury. Furthermore, the insured’s death certificate identified the events directly responsible for the insured’s death as comfort measures, acute respiratory failure, septic shock, and chronic obstructive lung disease. These findings further justified the insurer’s denial of benefits “on the basis that there was ‘no evidence that injury caused or contributed to the decedent’s death.’”

The policy provided benefits if the insured died as the result of and within 365 days of an injury. “Injury” was defined as “bodily harm which is the result of an accident or trauma that occurs while your policy is in force and results in loss independently of sickness and all other causes.” The policy also “expressly excluded coverage for any ‘death resulting directly or indirectly from disease or bodily infirmity.’”

The court found that the plain language of the policy required the plaintiff to prove the insured’s death resulted from “injury,” independent of all causes, and it found that causation had to be established via expert testimony. According to the insurer, the insured did not experience an accident or trauma, and there was no accident or trauma that independently contributed to the insured’s death. The insurer offered the testimony of two experts who opined there was no medical proof in the record establishing the insured suffered a serious head injury or that her death could be linked to such an injury. The plaintiff failed to provide any evidence, let alone expert testimony, to establish that the insured’s death was the direct and independent result of an accident or trauma. As a result, the court concluded the plaintiff failed to establish the insured’s death was a covered injury under the plan. The insurer’s denial of benefits, therefore, was proper.

Although it determined that the insured’s death was not covered by the policy, the court also went on to analyze whether the policy’s “disease or bodily infirmity” exclusion applied. Because the insurer’s experts unequivocally agreed illness caused the insured’s death and because the plaintiff failed to effectively refute those opinions, the court concluded the insurer satisfied its burden to prove the exclusion applied.

The accidental death and dismemberment issues that the courts addressed this survey period are not new to practitioners in this area or to readers of this article, but they shed important light on the circumstances and policy language likely to govern the outcome when an insured’s death can be attributed in some way to medical treatment and the use of prescription and non-prescription medications.

Disability

Cognitive Abilities Loom Large in Disability Determinations: “Cognition Reigns but Does Not Rule.”

The three cognitive disability decisions spotlighted below examined claims predicated on pain or other conditions affecting a claimant’s cognitive abilities. “It’s impossible to think when you’re in pain” is a common refrain from claimants seeking disability insurance benefits, and, in the cases where pain was cited as the source of a claimant’s inability to perform cognitive tasks, the claimant was successful.

In Snapper v. Unum Life Insurance Co. of America, the United States District Court for the Northern District of Illinois criticized the insurer for failing to take into account the effect the plaintiff’s reported pain had on his ability to perform the cognitive tasks of an attorney. Joseph Snapper was a litigation associate at Mayer Brown LLP and had a long history of back and lower-leg problems arising from a herniated disc sustained in 2008 and microdiscectomy in 2012. In 2016, Snapper was involved in an automobile accident that aggravated the symptoms in his back and lower left leg. Snapper took a three-month medical leave of absence in April 2018 and attended several weeks of physical therapy, during which time he also received epidural injections. Snapper returned to work when the three-months leave expired and received additional epidural injections over the next five months.

Snapper began a second leave of absence in February 2019. His pain management specialist wrote in support of his application for leave, advising that Snapper was unable to work for an indefinite period of time and would be reevaluated after receiving a spinal cord stimulator in March 2019. The spinal cord stimulator worsened Snapper’s pain, and he eventually underwent L5-S1 decompression surgery four months later. Snapper applied for long-term disability benefits within weeks of his decompression surgery. Three months later, Snapper, underwent a L5-S1 discectomy and anterior lumbar interbody fusion. These procedures did not resolve his complaints of lower extremity pain, and Snapper continued receiving treatment and therapies for pain management in January and August 2020.

Unum initially granted Snapper’s long term disability (LTD) claim and began paying benefits in the amount of $17,000 per month, but it eventually terminated benefits on the grounds that Snapper was not prevented from performing the duties of his sedentary occupation. A Unum vocational specialist concluded Snapper’s occupation in the national economy matched the demands of a “Litigation Attorney” and involved sedentary work. According to Snapper’s physician, Snapper was limited to working fewer than six hours per day, with breaks every twenty minutes, which was not consistent with the demands of a sedentary occupation. Unum’s Designated Medical Officer disagreed, observing that Snapper’s pain and symptoms had improved and that Snapper reported swimming for exercise, travelling, and an ability to lift heavy weights. In light of his findings, Unum’s Designated Medical Officer concluded the restrictions on Snapper’s performance of sedentary work were not supported. That opinion was confirmed by an internal report of a consulting physician who specialized in physical medicine and rehabilitation, as well as pain management. On July 17, 2020, Unum advised Snapper that it was terminating his long-term disability benefits.

Snapper appealed and provided Unum with the findings of a three-hour functional capacity evaluation (FCE) that found Snapper was unable to work as an attorney due to an inability to sit at a computer and type for extended hours or handle oral presentations while standing, among other tasks. Snapper also provided Unum with the opinion of his own vocational consultant who opined that the restrictions and limitations on Snapper’s activities meant that he was unable to engage in the occupation of a litigation attorney on a full-time basis. Unum upheld the termination of Snapper’s benefits after its reviewing physicians noted that Snapper’s ability to shift positions from standing to sitting during the day and observed that the FCE included findings “suggestive of submaximal and inconsistent effort.”

The district court reviewed Snapper’s claim de novo and focused on Unum’s reliance on a job description that was different from the description Snapper obtained from Mayer Brown. Unum looked to the definition of “Litigation Attorney” in the Enhanced Dictionary of Occupational Titles, which defined the occupation as “Sedentary” and focused on the occupation’s limited physical requirements. Mayer Brown’s job description focused on the cognitive aspects of the occupation, including the ability to “Perform and/or understand technical legal research issues and analysis”; “Review and analyze complex and sophisticated facts, issues, risks, and documents”; and “Draft clear, cogent and well-structured written materials, including but not limited to, emails, correspondence, legal memoranda, and transaction documents”; and other functions that the district court characterized as “cognitive tasks.” The court noted Snapper’s statements in claim forms and interviews with physicians and therapists in which he emphasized that he was unable to “read, write or concentrate because of constant pain.” The district court further noted Snapper’s reports that the side effects of his pain medications, gabapentin, and Cymbalta, negatively affected his cognition, and it cited declarations from Snapper’s friends and colleagues who, based on their observations, stated Snapper’s cognition was negatively affected by pain.

The court concluded Unum’s decision was flawed because Unum “devote[d] virtually no attention” to whether Snapper was able to perform the cognitive tasks his occupation required, focusing instead on Snapper’s failure to adduce evidence demonstrating a cognitive impairment. The failure to address Snapper’s ability (or inability) to perform the cognitive aspects of his occupation was fatal to Unum’s defense of its decision to terminate benefits. The court found that Snapper sustained his burden to prove that his pain and the medications used to treat that pain prevented him from adequately performing the material and substantial cognitive duties of his occupation, and it ordered that Snapper’s benefits be reinstated and that he be paid past-due benefits starting from the date of the termination.

The requirement that insurers (and courts) address whether a claimant’s pain and other symptoms impair a claimant’s cognitive abilities and prevent him from performing the duties of his occupation was central to the decision to reverse and remand for further proceedings in Scanlon v. Life Insurance Co. of North America. Scott Scanlon was a Windows Systems Administrator for the McKesson Corporation and “a U.S. Army veteran with a history of chronic pain and sleep disorders.” He went on temporary leave due to complaints of chronic pain and sleep disorders, and he requested certain accommodations to return to work. McKesson agreed to grant some but not all of those accommodations and Scanlon sought long-term disability benefits instead of returning to work.

The Life Insurance Company of North America (LINA) denied his claim for long-term disability benefits. LINA and Scanlon agreed that Scanlon’s job as performed in the national economy was that of systems analyst and that the job required the performance of both physical and cognitive tasks. A functional capacity evaluation (FCE) established that Scanlon could perform a variety of physical tasks (e.g., kneel, squat, climb stairs, fine-motor tasks), but it also found he was not capable of sitting at a computer for eight hours a day. More specifically, the FCE found that Scanlon could sit fifteen minutes at a time for up to two hours and fifty minutes a day, and that he could stand forty-five minutes at a time for up to four hours and twenty-two minutes a day. In terms of Scanlon’s cognitive abilities, a clinical psychologist opined that Scanlon’s “sleep and pain disorders impacted his cognition and verbal fluency in conversation.”

The district court reviewed Scanlon’s claim de novo. It acknowledged the psychologist’s opinion of Scanlon’s condition and noted that he suffered from “myriad chronic orthopedic and sleep disorders that cause him pain and impact his daily life.” Nevertheless, the district court upheld LINA’s denial on the grounds that Scanlon had not shown that his condition prevented him from performing the material duties of his job.

The Seventh Circuit concluded the district court failed to consider Scanlon’s “inability to perform the cognitive requirements of his job during regular work hours” as well as his “inability to sit at his desk for eight hours a day as required by his occupation.” LINA argued that the district court appropriately declined to consider the effect Scanlon’s chronic conditions had on his ability to perform the cognitive aspects of his occupation because McKesson made accommodations that relieved Scanlon of responsibility for those aspects of his job. The Seventh Circuit rejected that approach, focusing on the policy requirement that Scanlon’s occupation be evaluated as it is performed in the national economy, i.e., without McKesson’s accommodations. The district court’s failure to address that issue was clear error according to the Seventh Circuit, which reversed and remanded the district court’s decision with instructions to address Scanlon’s ability to perform the cognitive aspects of his job in light of the limitations reflected in the record.

While complaints of cognitive impairments carry weight, they do not always rule whether benefits are owed. The holding in Arenson v. First Unum Life Insurance Co. is one such example. Gregg Arenson, a former futures and options broker, argued that he was entitled to disability benefits because Unum erroneously discounted the effect a stroke reportedly had on his cognitive abilities. Applying a deferential standard of review, the district court concluded the denial of benefits was reasonable and granted summary judgment for the defendant insurer.

Arenson’s stroke occurred on October 11, 2018, and Arenson complained to his neurologist of difficulty with vocabulary and word-finding. Arenson’s neurologist, however, noted no cognitive abnormalities on examinations the next day or ten days later. Moreover, his neurologist opined that the symptoms Arenson complained about were “unlikely to be from [mild cognitive impairment] since [the results of his short test of mental status are] normal.” At approximately the same time, Arenson was diagnosed with coronary artery disease and atrial fibrillation. His primary care physician instructed him to remain off-work due to the high stress of his occupation. Arenson applied for and received short-term disability benefits and, in December 2018, Unum opened an inquiry into whether he qualified for long-term disability benefits.

After consulting with Arenson’s employer and its own vocational analyst, Unum asked Arenson’s neurologist whether he believed Arenson was capable of performing the duties of his “broker-plus” occupation. The neurologist opined that Arenson could perform those duties and could return to work in February 2019. Two Unum in-house physicians reviewed Arenson’s medical records and agreed that Arenson could perform the duties of his occupation. As support, they cited a lack of “focal neurological, cognitive, or functional deficits” in Arenson’s medical records. Relying on those opinions, Unum denied Arenson’s claim.

On appeal, Arenson submitted the results of tests conducted by a neuropsychologist, who concluded that Arenson displayed “a few isolated cognitive impairments/inefficiencies.” Relying on the neuropsychologist’s opinion, Arenson’s vocational expert opined that Arenson would be unable to perform his specific occupational responsibilities, “which required managerial skills and quick thinking, [and] encompassed more than those of a broker or securities trader.” Unum’s in-house physicians, a neurologist and a psychiatrist, reviewed Arenson’s submissions. The neurologist concluded, and the psychiatrist agreed, that any cognitive deficiencies identified by Arenson’s neuropsychologist were not caused by the stroke because they did not correlate to the left pre-central gyrus or right cerebellum, which were the parts of Arenson’s brain affected by his stroke. As for the nature of Arenson’s job duties, Unum’s vocational expert agreed with Arenson’s experts that his duties included managerial tasks that went beyond the duties of a typical broker.

Responding to the opinions of Unum’s neurologist and psychiatrist, Arenson’s neuropsychologist asserted that they lacked the qualifications necessary to evaluate neuropsychological test results. Unum’s neuropsychologist then reviewed the test results (but not the underlying data) and concluded that they did not show that Arenson suffered from any cognitive impairments. Unum upheld its decision to deny benefits on February 28, 2020, and Arenson brought suit in May 2020.

Unum was entitled to deferential review of its determination that Arenson was not eligible for LTD benefits. Arenson argued that Unum’s reliance on the opinions of a neuropsychologist who did not review the data generated by neuropsychological testing, as well as Unum’s reliance on the opinions of a neurologist and psychiatrist who proffered opinions based on the results of that testing, amounted to an unreasonable claims procedure.

The court rejected that argument and observed that Arenson’s primary care physician was the only medical professional who expressed concern about Arenson’s return to work, and his concern arose from Arenson’s high blood pressure and the stress associated with Arenson’s occupation, rather than from any diagnosis of a cognitive impairment. Because none of Arenson’s treating physicians diagnosed Arenson as having any cognitive impairments, the court found that the Unum physicians who reviewed Arenson’s medical records reasonably concluded he was not prevented by any cognitive impairment from performing the material duties of his occupation. The court also found it was reasonable for Unum to rely on the statement by Arenson’s neurologist that Arenson was able to return to work in February 2019. Because the opinions Unum relied on were reasonable, the court was bound to defer to Unum’s choice to credit its own physicians over those supporting Arenson’s claim under the deferential standard of review.

Claimant’s Work History Not Determinative: “We Ought Not to Look Back, Unless It Is to Derive Useful Lessons from Past Errors, and for the Purpose of Profiting by Dearly Bought Experience.”

Decisions this survey period remind that a claimant’s history of working prior to asserting a disability claim is often but not always a critical part of any benefits decision. In Mucciacciaro v. Hartford Life and Accident Insurance Co., the insurer denied benefits based on the plaintiff’s history of working during the time period that she claimed to be disabled. The court overturned the insurer’s denial and directed it, on remand, to look beyond the plaintiff’s work history and to the medical record.

Sandra Mucciacciaro was a dental hygienist who began experiencing back pain in 2017. She brought her condition to her employer’s attention in 2019, along with a doctor’s note asking that she be permitted to work no more than thirty hours per week. Her employer denied the request, and she worked another six months before resigning. Her last day of work was June 17, 2020.

Mucciacciaro’s application for long-term disability benefits identified June 18, 2020, as the first date on which she was unable to work. The insurer denied Mucciacciaro’s claim because she was no longer employed as of that date and, thus, was not eligible for benefits under her LTD plan. In her administrative appeal, Mucciacciaro explained that she misunderstood the application and erroneously listed June 18, 2020, as the date her disability began when, in fact, it had begun in 2019. The insurer upheld its denial, determining Mucciacciaro could not have been disabled prior to June 18, 2020, because she had been “performing the Essential Duties of [her] Occupation” in 2019 and through her last day of work.

Because the insurer had discretion to determine Mucciacciaro’s eligibility for benefits, the question for the court was whether the insurer’s denial of benefits was arbitrary and capricious. Mucciacciaro argued that her prior complaints and request for accommodation served as evidence of her earlier disability; the insurer countered that the strict language of the policy meant Mucciacciaro was not disabled because she was performing all essential functions of her job up to the date of her resignation.

With no Third Circuit precedent addressing whether a claimant’s full-time work during a period of claimed disability automatically defeated a finding of disability, the district court surveyed decisions from the Seventh, Eighth, and Eleventh Circuits. Those jurisdictions agreed that a participant’s full-time work was not determinative of a claimant’s disability, and they agreed that a claimant could work while disabled. In those instances, a claimant’s work history was just one fact to consider, along with the claimant’s medical history, when making a benefit determination. Rather than deciding whether the denial of benefits was arbitrary and capricious, the court remanded the claim to the insurer with instructions to analyze Mucciacciaro’s medical records and determine whether her claimed disability pre-dated her resignation.

Improving Medical Conditions’ Effect on Ongoing Claims Determinations: “I’ve Got to Admit It’s Getting Better.”

Does a claimant’s history of receiving disability benefits have an effect on a court’s review of a decision to terminate benefits due to a claimant’s reportedly improved medical condition? Two decisions this survey period suggest that the answer is “yes” and that the effect is significant, though perhaps not significant enough to overcome the deferential review of such terminations.

In Geiger v. Zurich American Insurance Co., Kevin Geiger, a writer and editor for CBS News New York became disabled as a result of pulmonary hypertension and pulmonic regurgitation, culminating in open-heart surgery in July 2018. After receiving short term disability benefits through September 2018, Geiger applied and was approved for long-term disability benefits.

Several months later, Geiger moved to North Carolina and began treating with Dr. Brett Izzo in April 2019. Dr. Izzo recorded as part of Geiger’s initial visit that Geiger was doing quite well: he had lost approximately sixty pounds after his surgery and was exercising daily. Normal findings on an echocardiogram further supported the view that Geiger’s condition had improved. Nevertheless, in a statement to Zurich, Dr. Izzo supported Geiger’s continued receipt of long-term disability benefits. He explained that Geiger’s extensive cardiac history and need to take high doses of a diarrhetic prevented him from returning to work. Zurich terminated benefits in July 2019, citing Geiger’s normal echocardiogram findings and his lack of cardiovascular symptoms.

Geiger appealed, and Zurich requested a peer review by an internal medicine physician who specialized in cardiovascular disease. The reviewing doctor concluded Geiger was capable of full-time seated work with certain restrictions and limitations. The Physical Requirements and Job Demand Analysis completed for Geiger’s job at CBS confirmed his occupation was sedentary. Because the restrictions and limitations that the reviewer identified would not prevent Geiger from performing his job at CBS, Zurich upheld the denial of benefits. Geiger sued, and the district court entered judgment in favor of Zurich on cross-motions for summary judgment.

The Fourth Circuit affirmed, citing the importance of the deferential standard of review afforded to Zurich. The Fourth Circuit concluded that it was reasonable for Zurich to disagree with Dr. Izzo and Geiger based on Dr. Izzo’s report that Geiger was free of heart-related symptoms after moving to North Carolina. In affirming the judgment for Zurich, the court emphasized that the standard of review was central to its holding by quoting from another of its 2023 decisions: “like offensive linemen on a football team, standards of review lack glamour but are often decisively important.”

The insurer in Iravani v. Unum Life Insurance Co. of America, did not have the benefit of deferential review and, to borrow from the Fourth Circuit’s football analogy, was sacked in the district court under a de novo standard of review. Sharareh Iravani was a cosmetic beauty specialist at Saks Fifth Avenue between 2006 and 2010 when she became disabled from that occupation due to neck pain and migraine headaches. Iravani received long-term disability benefits for nearly a decade before they were terminated on January 7, 2021. Pointing to the totality of medical evidence in the file, including the infrequency and lack of intensity in the treatment Iravani received, Unum concluded she was capable of “full-time sedentary or light physical demands” and, therefore, also was capable of “perform[ing] the duties of alternative gainful occupations” for which she was qualified based on her education and experience.

Iravani was diagnosed with cervicalgia, bilateral upper extremity C6 radiculopathy; cervical spondylosis at C5-C6 and C6-C7; and cervical spinal stenosis at C5-C6; and C6-C7 in 2010. In 2011, she was treating her migraines with a combination of prescription medication, injections, and physical and chiropractic therapy. She was diagnosed the same year with cervical disc syndrome, lumbar degenerative disc disease, radicular neuralgia, cervical sprain, thoracic sprain/strain, lumbar sprain/strain, and segmental dysfunction along her spine. By March 2012, her physician opined that she had reached maximal medical improvement with regard to her cervical and lumbar conditions, and Unum’s in-house registered nurse concurred. Thereafter, Iravani continued care with a number of physicians taking primarily over-the-counter medications for pain. Four years later, in July 2016, Unum confirmed there had been no change in Iravani’s reported pain complaints or level of impairment.

A 2017 annual review by one of Unum’s employees concluded that Iravani’s symptoms and functional capacity had not improved. However, a June 2017 form completed for California disability insurance by Iravani’s pain specialist physician arguably suggested that Iravani would be able to return to work by January 2018. The form required the physician to identify a date certain for Iravani’s return to work and notably did not allow him to list “indefinite.” He selected January 5, 2018, as a potential return-to-work date but, on the same form, also advised that Iravani received “acupuncture, cortisone injections, and physical therapy . . . [and] was incapable of performing her normal work.”

In October 2019, Iravani advised Unum she had stopped seeing her physicians because she had lost her health insurance and was taking Tylenol and Excedrin to treat her pain. She resumed some care in August 2020 when she returned to her pain specialist, and he concluded Iravani’s condition was “either the same or worse than before.”

Dr. Stewart Russell conducted a review of Iravani’s files for Unum at the end of 2020. He opined that no functional restrictions were warranted for Iravani based on her medical records. His opinion was informed largely by Iravani’s recent history of taking only Tylenol and Excedrin for pain, which he considered to be inconsistent with reports of severe spinal pain complaints and migraine pain respectively. Unum’s medical director reviewed and agreed with Dr. Russell’s opinion, as did another physician who reviewed Iravani’s medical records at Unum’s request. Notably, an Unum claims analysist concluded that Dr. Russell did not give sufficient weight to the findings of an administrative law judge who awarded Iravani social security disability benefits, and she advised that she could not support Dr. Russell’s opinions. Unum forwarded Dr. Russell’s opinions to Iravani’s pain specialist for review and comment, and he also advised that he disagreed with Dr. Russell’s opinion.

The district court rejected Unum’s argument that Iravani’s medical condition had improved. It found that the reviewing physicians’ “conclusions and Unum’s argument fail[ed] to situate Plaintiff’s treatment in the broader context of her medical care.” It pointed out that several of her conditions were degenerative and would not be expected to improve over time. Moreover, the reviewing physicians’ opinions did not say that Iravani’s condition had improved, but, rather, opined that “there was a dearth of evidence to substantiate [Iravani’s] claims of disabling pain.” Even that reasoning, however, ignored important context, according to the court; that is, Iravani’s physicians had universally agreed that a conservative approach to her treatment was appropriate.

The court acknowledged that it was Iravani’s burden to establish her entitlement to benefits, but it also observed that Ninth Circuit precedent held that a prior award of benefits weighed against the propriety of a decision to terminate benefits. In light of the weight given to a prior award of benefits, the court concluded that the evidence established Iravani continued to experience severe pain that made it impossible for her to work in any gainful occupation to which she was suited by her background, education, and experience, and it entered judgment in her favor and against Unum.

ERISA

Courts Open the Door to Equitable Relief . . . but Only Against Fiduciaries

Plans’ alleged unfairness works in participants’ favor for Section 502(a)(3) claims: “The world isn’t fair, Calvin.” “I know, but why isn’t it ever unfair in my favor?”

Several Circuit Courts this reporting period wrestled with equitable claims in ERISA cases. In Rose v. PSA Airlines, Inc., the Fourth Circuit found that a sufficiently alleged unjust enrichment theory could support a Section 502(a)(3) claim for monetary relief. The plaintiff sought relief for her deceased son’s estate under Section 502(a)(1)(B) following the defendants’ allegedly wrongful denial of benefits for a heart transplant, or in the alternative, under Section 502(a)(3) for an alleged breach of fiduciary duty. The plaintiff “sought declaratory and injunctive relief, monetary damages, and ‘appropriate equitable relief’ including ‘surcharge, disgorgement, constructive trust, restitution, [and] equitable estoppel.’”

In Rose, the plaintiff’s son, a plan participant, was waiting for a heart transplant due to a rare heart condition. He died less than two months after receiving his diagnosis at twenty-seven years old. Within a few weeks of his diagnosis, his physicians submitted the required information for requesting approval for the heart transplant surgery. The physicians twice asked for approval, and the defendants denied both requests, asserting that the requested treatment was not covered because it was experimental. When the plaintiff’s son asked for a re-evaluation, the defendants denied the request, asserting that he did not satisfy certain criteria that were not actually part of the plan. His physicians appealed, advising that the plaintiff’s son would not survive without the surgery. The defendants again denied the request, citing the same criteria. The physicians then sought an “‘expedited’ external claim review,” but the defendants did not complete it within the required seventy-two hours. The plaintiff’s son died approximately one week after the physicians submitted the external claim review, which was five days after the defendants should have rendered a decision. More than a month after the death of the plaintiff’s son, the reviewers overturned the previous claim denials.

The Fourth Circuit first noted that that Section 502(a)(1)(B) generally allows for a plan participant to pay for their medical treatment and later request reimbursement or to sue for an injunction to require the plan’s medical provider to give the plan participant the medical treatment. Neither happened in Rose. The Fourth Circuit also noted that “[Section] 502(a)(1)(B) does not authorize a plaintiff to seek the monetary cost of a benefit that was never provided.” The plaintiff’s Section 502(a)(1)(B) claim sought the monetary cost of the heart transplant that her son never received. Accordingly, the Fourth Circuit affirmed the dismissal of the Section 502(a)(1)(B) claim.

But the Fourth Circuit reversed the dismissal of the plaintiff’s Section 502(a)(3) claim in which the plaintiff alleged the defendants were “unjustly enriched by keeping the money they should have paid [the plaintiff’s son’s] doctors.” The Fourth Circuit conducted an extensive review of Supreme Court case law regarding equitable relief, noting that a plaintiff who seeks “personal liability” against a defendant for an amount of money seeks legal, not equitable, relief under Section 502(a)(3). It also noted that “subject to certain limits—monetary relief based on a defendant’s unjust enrichment can be ‘equitable.’” As part of its review, the Fourth Circuit noted that the United States Supreme Court, in CIGNA Corp. v. Amara, “suggested that it might allow certain plaintiffs to pursue ‘make-whole,’ loss-based, monetary relief under [Section] 502(a)(3)” because “such relief was analogous to ‘surcharge,’ an ‘exclusively equitable’ remedy under the law of trusts.” But the Fourth Circuit also noted that “the Supreme Court has since acknowledged . . . this part of Amara was dicta” and that the Court’s interpretation of equitable relief prior to Amara remained “‘unchanged.’”

The district court did not consider whether the plaintiff’s unjust enrichment allegations “plausibly alleged facts that would support relief that was ‘typically’ available in equity.” Because there remained a question of whether the plaintiff plausibly alleged the defendants “were unjustly enriched by interfering with [her son’s] rights . . . and . . . that the fruits of that unjust enrichment remain in the [defendants’] possession or can be traced to other assets,” the Fourth Circuit remanded the action to the district court to make those determinations.

The Sixth Circuit, in Patterson v. United HealthCare Insurance Co., remanded an appeal to the district court to determine whether the plaintiff’s breach of fiduciary duty claim could be used to recoup a payment that he made to the plan administrator for his plan. The plaintiff was in an auto accident and sustained injuries that the plan paid to treat. After recovering from the other driver, the plan administrator informed the plaintiff that his plan required him to use that recovery to reimburse the plan for the expenses that it paid. The plaintiff and the plan settled, with the plaintiff agreeing to pay $25,000 to the plan. The plaintiff later received the plan document, which he claimed did not require him to pay the money that he recovered from the other driver to the plan.

The plaintiff sued the insurer and related companies under ERISA. The district court dismissed some of the claims for lack of standing and the others for failure to state a claim upon which relief could be granted.
On appeal, the Sixth Circuit first held that the plaintiff had standing to sue to recover the $25,000 settlement payment. He had standing to seek that relief because the money he allegedly lost was a “concrete injury” that the defendants’ behavior allegedly caused. The plaintiff, however, did not have standing under Section 502(a)(2) to seek injunctive relief for any “plausible future injury” or for “settlements wrongfully taken from other plan beneficiaries and wasted or mismanaged plan assets,” or “harm to the plan itself,” including “inadequate funding” of the plan. The only cognizable claims the plaintiff could assert against the plan and its agent arose under Section 502(a)(3) for “breach of fiduciary duty and engagement in prohibited transactions,” and, in that action, the plaintiff’s relief was limited to recouping the $25,000 settlement payment. The Sixth Circuit reversed the district court’s dismissal of the “breach of fiduciary duty and prohibited transaction claims,” remanded the case to the district court to address those claims, and affirmed the remainder of the district court’s decision. The Sixth Circuit also directed that the remand address, inter alia, whether one of the defendants “was acting as a fiduciary at the relevant time.”

Third-party administrator lacked the control necessary to make it a functional fiduciary: “You seem to be mistaken about how much control you exercise over this arrangement.”

In Massachusetts Laborers’ Health & Welfare Fund v. Blue Cross Blue Shield of Massachusetts, the First Circuit addressed whether the defendant was an ERISA fiduciary for purposes of the plaintiff’s breach of fiduciary duty claim. The court, as a matter of first impression, concluded that a person is a fiduciary even if they exercise “nondiscretionary control or authority over plan assets.” In doing so, it joined the Second, Third, Sixth, Seventh, Eighth, Ninth, and D.C. Circuits. The First Circuit noted, however, that under ERISA, only “persons who ‘exercise[ ] . . . authority or control’ with respect to the ‘management or disposition’ of plan assets” reach fiduciary status. It noted that merely exercising “‘physical control or the performance of mechanical administrative tasks generally is insufficient to confer fiduciary status.’” Instead, as the First Circuit noted, fiduciary status requires some “‘meaningful control.’” The First Circuit concluded that the plaintiff’s allegations did not satisfy these criteria.

The defendant, Blue Cross Blue Shield of Massachusetts (BCBSMA) contracted with a self-funded multi-employer group health plan to serve as a third-party administrator from 2006 to 2022. The plaintiff Fund administered the plan. The Fund gave participants access to rates that BCBSMA negotiated at a discount with “a network of medical providers.” BCBSMA’s responsibilities included “repricing participants’ claims according to its provider arrangements and transmitting approved claim payments to providers . . . .” The Fund alleged that BCBSMA priced claims inaccurately, resulting in millions of dollars of overpayments to providers, and it alleged that BCBSMA engaged in self-dealing by collecting “wrongful and excessive recovery fees” arising from its inaccurate repricing efforts. The Fund alleged, for example, that BCBSMA would cause a pricing error and then catch the error, remedy it in regard to the payment to a provider, but collect a fee from the Fund based on the erroneous repricing. The Fund asserted claims for breach of fiduciary duty under 29 U.S.C. § 1109(a), “self-dealing with Plan assets in violation of 29 U.S.C. § 1106(b)(2),” and “injunctive relief under 29 U.S.C. § 1132(a)(3).”

The district court rejected the Fund’s argument that BCBSMA was an ERISA fiduciary and granted BCBSMA’s Rule 12(b)(6) motion to dismiss. It found that BCBSMA was not a named fiduciary in the summary plan description, and it concluded BCBSMA was not a “functional fiduciary” because its application of negotiated rates did not give it “discretionary management over the management of the Plan.” Furthermore, because the working capital the Fund provided to BCBSMA to administer claims was not a plan asset, BCBSMA did not have discretionary authority over plan assets. And even if the working capital was a plan asset, BCBSMA “had not exercised sufficient ‘authority or control’ over the working capital amount to render BCBSMA a fiduciary.”

On appeal, the First Circuit noted that, under ERISA, a person can be a fiduciary if named as such in a plan instrument or under a plan procedure, or can be a “‘functional fiduciary’” by “‘performing at least one of several enumerated functions with respect to a plan.’” Because it is possible for a person to be a fiduciary for only some purposes, the First Circuit analyzed whether BCBSMA was a fiduciary with respect to (1) “pricing claims and allegedly overpaying providers,” and (2) “when pursuing recoveries of overpaid amounts and retaining associated fees before reimbursing the Fund.”

The First Circuit affirmed the dismissal of the Fund’s actions for failure to state claims upon which relief could be granted after reviewing the administrative-services-only contract, the summary plan description, and the complaint. It found that BCBSMA lacked discretion when acting as alleged in the complaint. The court observed that, while BCBSMA’s actions may have been a breach of contract, they were not the actions of an ERISA fiduciary. For instance, the complaint alleged BCBSMA’s pricing claim outcomes were inaccurate, but it did not allege “that [BCBSMA] had the discretion to reach different conclusions.” Similarly, the remedies that the Fund sought did not plausibly suggest that it stated claims for breach of fiduciary duty. The overpayments and retention fees the Fund alleged that it was entitled to recover did not depend on the grant of any discretion to BCBSMA. Rather, the relief that the Fund sought arose from “actions alleged to violate BCBSMA’s contractual obligations, . . . as to which BCBSMA had no discretion.” To the extent the complaint alleged BCBSMA exercised discretion in connection with judgments it made about insufficient claim settlements, as opposed to “reprocessing claims” for “full recoveries,” the Fund did not allege BCBSMA’s exercise of discretion involved the management of the plan. Therefore, “[t]he Fund . . . failed to plausibly allege that BCBSMA exercised discretionary authority or control over management of the Plan when taking the actions” on which the Fund’s claims were based. Finally, the First Circuit found that the Fund did not plausibly allege that “BCBSMA exercised ‘any authority or control respecting management or disposition’” of Fund assets. The Fund provided BCBSMA access to working capital for the administration of the Fund’s claims, but that “working capital amount” was not a plan asset, according to the First Circuit. Even if it was, the Fund did not plausibly allege “BCBSMA exercised ‘any authority or control respecting management or disposition’ of the working capital amount.” The First Circuit emphasized that its holding was limited, and that it did “not hold, for example, that a [third-party administrator] lacks fiduciary status whenever the plan sponsor is responsible for claims adjudication.” Thus, the Circuit Courts’ detailed analyses in these cases indicate that the issue of equitable relief in the context of Section 502(a)(3) claim is likely to continue to invite vigorous debate.

Procedural Irregularities That Aren’t Bad Enough to Be Fatal to a Benefit Denial: “I’m Not Bad; I’m Just Drawn That Way.”

Two courts this reporting period were called upon to decide how the arbitrary and capricious standard of review should be applied in long-term disability disputes in which procedural irregularities occurred during the administrative review of a claim. One decision reinforces the notion that not all procedural irregularities are created equal and, so, do not always warrant a loss of deference. The other decision illustrates that even a standard of review that is weakened by procedural irregularities is not fatal to a plan’s case.

In McIntyre v. Reliance Standard Life Insurance Co., the Eighth Circuit vacated the district court’s granting of summary judgment to the plaintiff ERISA plan participant. The plaintiff was a nurse who stopped working due to symptoms of a “genetic, degenerative neurological disease that damages peripheral nerves.” The plan administrator paid the plaintiff long-term disability benefits for over two years and terminated the benefits after conducting a review regarding the any-occupation period.

On appeal of summary judgment for the plaintiff, the Eighth Circuit considered, in part, how much weight to give the plan administrator’s delay in deciding the plaintiff’s administrative appeal and the plan participator’s “evaluator/payor conflict of interest.” The Eighth Circuit gave the delay of the decision little weight, noting that “the delay was ‘caused by both [the plaintiff and the plan administrator],’ but there is no evidence (and [the plaintiff] does not claim) that [the plan administrator’s] role in the delay stems from an attempt to find a sympathetic doctor, pressure [the plaintiff] to drop her appeal, or otherwise rig the appeals process against her.” The Eighth Circuit gave some weight, however, to the plan administrator’s conflict of interest because, although the plaintiff did not establish the plan administrator had a history of biased claims administration, the plan administrator did “not argue that it maintained structural separations to minimize its conflict of interest.” The Eighth Circuit reversed summary judgment for the plaintiff and reversed the fee award to the plaintiff, remanding the case for entry of judgment in favor of the plan administrator.

In MacNaughton v. Paul Revere Insurance Co., the plaintiff, an ERISA plan participant and radiologist, who had problems with her vision in one eye, sought reinstatement of her own-occupation long-term disability benefits under Section 502(a)(1)(B). The District Court for the District of Massachusetts noted that “the Plan vests [the plan administrator] with discretion and therefore [the court] reviews the denial decision under an ‘arbitrary and capricious’ standard. That requires the decision to be supported by ‘substantial evidence’ and to be ‘reasoned.’” The district court considered several examples of “procedural unreasonableness” in the plan administrator’s review, deciding that they called for “a less deferential review” of the plan administrator’s benefit termination decision. Specifically, the court noted that the plan administrator decided to “reevaluate” the plaintiff’s claim after she made an “offhand statement to an examiner that ‘there are no R[estrictions] & L[imitation]s, really.’” Further, the opinion of the plan’s peer reviewer was problematic in the court’s view. The peer reviewer opined on the plaintiff’s ability to perform the duties of her occupation as a diagnostic radiologist, but did so without having been provided a description of the physical requirements of the occupation. The court also noted “inconsistencies” in the plan administrator’s “decision-making process,” such as its reliance on a peer reviewer’s cherry-picking of medical information in the notes of plaintiff’s treating physicians. Accordingly, it decided to use a “less deferential” arbitrary and capricious standard of review.

Even applying a less deferential review, the district court granted the plan administrator’s motion for summary judgment. The court noted that, in comparing the plaintiff’s treating physician’s report with the peer reviewing physician’s reports, the plan administrator has to accept that the plaintiff has “some subjective difficulties in her left eye,” but “does not need to accept that [the plaintiff] is disabled absent objective tests proving otherwise.” The court further noted, “As discussed above, [the plaintiff’s treating physician] never adequately explains how his diagnosis affects the controlled conditions radiologists work in.”

These cases serve as a reminder that the weight given to procedural irregularities is case-specific and that they do not necessarily sound the death-knell for insurers’ and plan administrators’ positions.

The Parity Act and Looking at Different Medical Necessity Guidelines: “When You Change the Way You Look at Things, the Things You Look at Change.”

The United States District Court for the Western District of Washington looked beyond the third-party guidelines that a plan used to determine whether residential treatment for mental health concerns was medically necessary. Under the Mental Health Parity and Addiction Equity Act (Parity Act), if a group health plan or health insurance coverage provides (i) medical and surgical benefits and (ii) mental health or substance use disorder benefits, the issuer of the plan or the insurance coverage “must not impose more restrictions on the latter than it imposes on the former.” The Parity Act is incorporated into ERISA, and Plan participants who bring claims for Parity Act violations under Section 502(a)(3), also commonly assert claims for medical benefits under Section 502(a)(1)(B).

The plaintiff in N.C. v. Premera Blue Cross, filed suit on behalf of her minor son, A.C., who received 14 months’ worth of residential treatment for mental health concerns. The plan administrator for A.C.’s plan approved benefits for nine days of his stay, advising that the remainder of the stay was not medically necessary under the terms of the plan. Plaintiff sued seeking benefits for all fourteen months of A.C.’s treatment under ERISA Section 502(a)(1)(B), arguing that it was medically necessary and therefore covered by the plan. She also asserted a Parity Act claim and sought equitable relief under ERISA Section 502(a)(3), arguing that the criteria used to deny A.C. benefits violated the Parity Act by imposing more restrictive limitations on mental health benefits than on comparable medical benefits.

The plan administrator used guidelines from an organization named InterQual to determine whether residential treatments for mental health conditions were medically necessary. The guidelines established several steps for determining whether a residential treatment was medically necessary. The first step looked at whether, for each week of a stay at a residential treatment facility, a patient exhibited one or more symptoms appearing on a list prepared by InterQual. The guidelines next provided that a patient must exhibit one of the behavioral symptoms appearing on a second list that InterQual prepared. And, finally, InterQual’s guidelines suggested that, for each week of a residential treatment stay, several varieties of interventions must have occurred for residential treatment to qualify as medically necessary.

The plan administrator denied the plaintiff’s claim for benefits beyond the first nine days of A.C.’s stay because it concluded that, under the InterQual guidelines, the residential treatment that A.C. received was not medically necessary. In her administrative appeals, the plaintiff argued, inter alia, that the InterQual guidelines violated generally accepted standards for determining medical necessity and that the effect of the plan administrator’s reliance on the InterQual guidelines was to violate the Parity Act because the plan imposed more stringent coverage requirements on mental health benefits than on benefits for medical care. The plan administrator denied the plaintiff’s appeals on the grounds that, inter alia, A.C. could have been treated in a less restrictive setting and, so, residential treatment beyond the first nine days of his stay did not satisfy the plan’s requirement that treatment be consistent with “generally accepted standards of medical practice”; that it be medically necessary.

The court reviewed the plan’s denial of benefits de novo. Because the InterQual guidelines were not incorporated into the plan documents, the court concluded that it was not beholden to them to determine whether A.C.’s treatment was medically necessary. Citing the Ninth Circuit’s “reasonable expectations” doctrine (providing that “courts will protect the reasonable expectations of insureds”) and the doctrine of contra proferentem, the court concluded that it needed to consult other guidelines and principles to determine the meaning of the plan’s phrase “generally accepted standards of medical practice.” The court consulted the American Academy of Child and Adolescent Psychiatry’s (AACAP) “Principles of Care for Treatment of Children and Adolescents with Mental Illness in Residential Treatment Centers” (Principles of Care) and “Practice Parameter for the Assessment and Treatment of Children and Adolescents with Reactive Attachment Disorder and Disinhibited Social Engagement Disorder” (RAD Practice Parameter).

Relying on the various guidelines and the evidence in the record, including the medical opinions and recommendations of A.C.’s treating physicians, to which the court assigned greater weight than to the plan’s independent peer review physicians, the court found that the treatment that A.C. received during the remainder of his stay was “in accordance with the generally accepted standards of medical practice” and, therefore, was covered by the plan. The court awarded the plan benefits to the plaintiff under Section 502(a)(1)(B) but dismissed her Parity Act claim, which she brought under Section 502(a)(3) of ERISA, on the grounds that it “would be inappropriate” to award the equitable relief available under that Section when it also awarded her plan benefits.

Health Insurance

Are Some Affordable Care Act Mandates Built on Unfirm Foundations?: “And I Discovered That My Castles Stand Upon Pillars of Salt and Pillars of Sand.”

The Affordable Care Act (ACA) imposes several coverage mandates on private health insurers. Many of those mandates are based on recommendations and guidelines issued by various federal agencies. The past several versions of this article have tracked litigation challenging those mandates, and this survey period saw the United States District Court for the Northern District of Texas vacate all recommendations and guidelines issued by one federal agency since March 23, 2010. The court further enjoined the Secretaries of the United States Departments of Labor, Health and Human Services, and Treasury from implementing or enforcing all coverage mandates based on those recommendations and guidelines.

Last year’s article reported on Braidwood Management Inc. v. Becerra, a lawsuit that challenged the authority of three federal agencies to issue some of the recommendations and guidelines that became ACA coverage mandates for most private health insurance contracts. The Braidwood plaintiffs challenged the following: (1) the recommendation by the U.S. Preventive Services Task Force (PSTF) to cover pre-exposure prophylaxis (PrEP) drugs in order to prevent HIV infection; (2) the recommendation by the Advisory Committee on Immunization Practices (ACIP) to cover the HPV vaccine in order to prevent new HPV infections and HPV-associated diseases, including some cancers; (3) guidelines issued by the Health Resources and Services Administration (HRSA) calling for coverage of counseling for alcohol abuse, screening, and behavioral health counseling for sexually transmitted infections, screening and behavior interventions for obesity, and counseling for tobacco use; and (4) other HRSA guidelines that required nonexempt employers to cover “[a]ll Food and Drug Administration approved contraceptive methods, sterilization procedures, and patient education and counseling for all women with reproductive capacity.” The last set of HRSA guidelines became known as the Contraceptive Mandate.

The plaintiffs objected to the mandated coverage on a mixture of religious and economic grounds. All of them wanted the option to purchase or to obtain health insurance that excluded or limited coverage for the agencies’ recommended drugs and procedures, something that they argued they could not do because “health insurance companies stopped selling insurance plans excluding the objectionable coverage in response to” the mandates.

The plaintiffs argued the mandates were invalid because the agencies that issued them were constituted in violation of two Article II clauses of the United States Constitution—the Appointments Clause and the Vesting Clause—and also violated the Nondelegation Doctrine and the Religious Freedom Restoration Act (RFRA). We reported last survey period that, for reasons that go beyond the scope of this article, the Braidwood court agreed the PrEP mandate (prompted by the PSTF’s recommendations) violated Braidwood’s rights under the RFRA. The court also concluded that (1) the process by which PSTF members were appointed violated the Appointments Clause, but stated it would entertain additional briefing before selecting a remedy for that violation; (2) the Secretary of the Department of Health and Human Services (HHS) effectively ratified the actions of ACIP and HRSA, meaning that their recommendations and guidelines did not violate the Appointments Clause; (3) Congress’s assignment of authority to the PSTF did not violate the Vesting Clause; and (4) none of the three agencies’ actions violated the nondelegation doctrine.

This survey period, the Braidwood court addressed three issues that remained unresolved following its prior decision. Two of those issues—the determination that the religious- and non-religious-objector plaintiffs had standing to assert the claims described, and the determination that the PrEP mandate violated the RFRA as to the religious-objector plaintiffs—are beyond the scope of this article. The third issue, however, addressed the appropriate remedy following the court’s holding that the appointment of PSTF members since the ACA’s enactment on March 23, 2010, violated the Appointments Clause. The court held that the plaintiffs were entitled to vacatur of all HHS actions implementing the PSTF’s recommendations and guidelines after March 23, 2010, and it further enjoined the Secretaries of HHS, Labor, and Treasury “and their officers, agents, servants, and employees” from implementing or enforcing the coverage mandates adopted based on recommendations from the PSTF.

The government appealed the district court’s decision and sought a partial stay of the order pending resolution of the appeal. The government argued the vacatur and nationwide injunction were not legally justified. Both were overly broad, they argued, because the district court’s order otherwise granted the plaintiffs complete relief, whereas the vacatur and injunction affected coverage beyond the PrEP mandate about which the plaintiffs complained, reaching services such as screenings for breast and lung cancer and certain colonoscopies. In a Joint Stipulation and Proposed Order, the plaintiffs acknowledged that the district court’s order would not shield them (or their insurers) from statutory penalties and enforcement actions that the government might impose or pursue if the judgment were reversed or vacated. In light of that ruling, the plaintiffs stipulated to a stay of the district court’s vacatur and injunction, subject to the government’s agreement that it would not seek penalties or pursue enforcement actions against the plaintiffs or their insurers for conduct taken by them consistent with the district court’s order prior to the Fifth Circuit’s issuance of the mandate in the appeal. Following the parties’ stipulation, the Fifth Circuit issued a stay pending the issuance of the mandate.

We have every reason to believe there will be further developments to report in the Braidwood dispute during the next survey period, and we look forward to reporting on those updates.

Scrutinizing How Plans Select Medical Necessity Guidelines and How They Affect Rights Under the Parity Act. “It’s About Who Controls the Information: What We See and Hear, How We Work, What We Think . . . . It’s All About the Information!”

The principal focus of the Mental Health Parity and Addiction Equity Act (Parity Act) is to ensure that persons covered by group health plans or health insurance coverages that provide benefits for (i) mental health/substance use disorder treatments (Mental/SUD) and (ii) medical and surgical treatments do not face greater barriers and restrictions on access to Mental/SUD benefits than they face when accessing benefits for a medical or surgical procedure. The United States District Courts for the Western District of Washington and the District of Utah considered the adoption by two plans of guidelines used to determine whether Mental/SUD treatments were “medically necessary.” One court considered the extent to which a plan was obligated to analyze such guidelines before adopting them to ensure that they did not violate the Parity Act, and the other court considered whether the adopted guidelines improperly limited Mental/SUD benefits in violation of the Parity Act. And, in a development that is likely to inform future court decisions examining those issues, the United States Departments of Labor, HHS, and Treasury proposed new Parity Act regulations during this survey period.

The Parity Act targets two types of “treatment limitations” that may be imposed on Mental/SUD benefits. The first type of limitation is known as a quantitative treatment limitation (QTL), which is a limitation that is expressed numerically. For example, a plan’s limit on the number of outpatient visits a plan covers in a year is a QTL. The second type of treatment limitation is a nonquantitative treatment limitation (NQTL), which is any limitation on the scope or duration of benefits for Mental/SUD treatment.

In S.L. by & through J.L. v. Cross, the plaintiffs sought benefits for a minor, S.L., in connection with his stay at a residential treatment facility.
The plan denied benefits after determining the stay was not medically necessary. Faced with the deferential review of the plan’s decision, the plaintiffs argued the court’s review should be “tempered by a degree of skepticism” due to what the plaintiffs characterized as several conflicts of interest.

One purported conflict concerned the adoption by the plan’s claims administrator, Premera Blue Cross, of InterQual 2015 Residential & Community-Based Treatment Criteria to determine whether S.L.’s treatment was medically necessary under the plan. The plaintiffs argued that the claims administrator was required analyze the guidelines as NQTLs before adopting them, in order to ensure the plan did not impose greater treatment limitations on Mental/SUD benefits than it imposed on medical or surgical benefits. The plan adopted InterQual’s guidelines without conducting such an analysis. That “failure,” the plaintiffs argued, reflected a conflict of interest that required the court to conduct a less deferential review of the plan’s benefit determination. The court was far from convinced that the alleged Parity Act violation, if it occurred, would amount to a conflict of interest, but, in the end, it did not reach the issue because it found that the plaintiffs failed to establish the existence of a violation.

The court agreed with the defendants that the written-analysis requirement was not in effect in 2016, when S.L.’s claims arose and were denied. The requirement did not go into effect, the court explained, until February 2021 following the passage of the 2021 Consolidated Appropriations Act. The plaintiffs argued that a federal regulation in effect in 2016 required the plan to conduct an NQTL analysis. The regulation required plans to provide participants and beneficiaries access to “documents with information on medical necessity criteria for both medical/surgical benefits and mental health and substance-use disorder benefits,” which documents included those reflecting “the processes, strategies, evidentiary standards, and other factors used to apply a nonquantitative treatment limitation” to Mental/SUD benefits. The court found the plaintiffs’ Parity Act argument unavailing and, as a result, rejected the plaintiffs’ argument that a conflict of interest required the court to temper its deferential review of the plans’ benefit decision with “a degree of skepticism.” Ultimately, the court found some procedural irregularities unrelated to the NQTL issue but determined that the denial of benefits was reasonable and not an abuse of discretion.

In K.D. v. Anthem Blue Cross & Blue Shield, the plaintiffs argued that the criteria that the defendants used to determine the medical necessity or medical appropriateness of Mental/SUD treatments violated the Parity Act. One of the plaintiffs, A.D., had a long history of social anxiety, severe depression, and suicidal ideation by the time she was in her late teens and early twenties. She dropped out of college after only forty-five days due to criminal behavior, drug and alcohol use, and an inability to follow through with her psychiatric care independently. At the recommendation of her therapist, A.D. was admitted to a residential treatment facility. The facility’s nine to twelve month program started with full-time residential treatment and, over time, shifted to a “transitional living” setting, as a patient’s progress warranted. The plan approved sixteen days’ worth of benefits and steadfastly denied A.D.’s requests and appeals for additional benefits, explaining that her continued stay was not “medically necessary” and, therefore, was not covered under the plan.”

The plan relied on certain Milliman Care Guidelines to determine whether the treatment that A.D. received was medically necessary. The plaintiffs argued that the discharge criteria set forth in those guidelines imposed more stringent treatment limitations on access to Mental/SUD benefits than the guidelines the plan used to assess the “medical necessity” of medical and surgical benefits.

The discharge criteria for Mental/SUD benefits “allowed for discharge from residential health treatment at any time after treatment began whereas the internal criteria for discharge from analogous medical/surgical treatment considers discharge only in the last of three ‘stages’ of treatment following a developed treatment plan.” That means, the court explained, that the residential mental health treatment that participants received under the plan could be terminated as not medically necessary “as soon as Defendants believe [participants] have progressed to the point that they no longer need [treatment], regardless of how far along they are in their treatment plans or services.”

That conclusion contrasts with the guidelines for determining medical necessity in skilled nursing facilities, which the court described as the medical/surgical analog to residential mental health facilities. The medical necessity guidelines for skilled nursing facilities contained no criteria that would warrant discharge as early in a course of treatment as the Mental/SUD criteria allowed. Rather, “discharge is contemplated only for the third ‘stage’ of care, which occurs as patients progress through a treatment plan and show progression, a therapeutic response to interventions, and an ability to transition out of treatment.”

The court concluded that the plan’s discharge criteria applied more stringent limitations on Mental/SUD benefits than on analogous medical and surgical benefits. It did not attempt to determine whether the differences in treatment limitations were due to the criteria established by the guidelines, or whether the differences were attributable to plan’s application of those criteria. Either way, the plan was “determining medical necessity . . . in a materially different way that significantly limits benefits for mental health treatment” and that violated the Parity Act. In light of those findings, the court granted summary judgment for the plaintiffs and remanded the plaintiffs’ claims to the plan administrator.

The Departments of Labor, Health and Human Services, and Treasury Propose New Parity Act Regulations for Plans Adopting Medical Necessity Guidelines: “If We Don’t Get Some Cool Rules Ourselves—Pronto—We’ll Just Be Bogus, Too!”

New regulations proposed by the Employee Benefits Security Administration of the United States Department of Labor, the Centers for Medicare & Medicaid Services within the United States Department of Health and Human Services, and the Internal Revenue Service under the United States Department of the Treasury “would amend the existing NQTL standard to prevent plans and issuers from using NQTLs” in ways that place greater limits on access to Mental/SUD benefits than on medical/surgical benefits. The rules also would implement, among other things, recent statutory mandates that require plans and issuers to “document their NQTL comparative analyses . . . [in order] to demonstrate whether the processes, strategies, evidentiary standards, and other factors used to apply an NQTL to [Mental/SUD] benefits are comparable to, and applied no more stringently than, those used to apply the limitation with respect to medical/surgical benefits in the same benefit classification.”

The comparative analyses required under the proposed regulations would have to include five elements. First, the analyses would have to include the specific terms used by a plan or insurance coverage to describe and/or apply an NQTL and would have to provide “a description of all [Mental/SUD] benefits and medical/surgical benefits to which each . . . term applies in each benefit classification.” Next, the analyses would need to include all “factors” that the plan or issuer used to determine how the NQTLs would apply to Mental/SUD and medical/surgical benefits. The Departments explained that their use of the term “factors” refers to “all information, including processes and strategies . . . that a [group or issuer] considered or relied upon to design [the] NQTL or [that it] used to determine how the NQTL applie[d] to benefits under the plan or coverage.”

As a fourth consideration, the analyses also must include the evidentiary standards that the plan or issuer used to develop the “factors” behind the NQTLs, and include the comparative analyses that demonstrate that the NQTLs are not applied more stringently to Mental/SUD benefits than the NQTLs that apply to medical/surgical benefits for the same classification. Finally, the comparative analyses must include the specific findings and conclusions that the plan or issuer reached, including the results of any analyses that indicate the plan or coverage is not in compliance with Parity Act requirements. If a plan or issuer is unable to show that an NQTL is no more restrictive as to Mental/SUD benefits than medical/surgical benefits “the NQTL would violate [Parity Act] and may not be imposed on mental health or substance use disorder benefits in the classification.”

The proposed rules, however, make an exception for NQTLs that reflect either “[i] independent professional medical or clinical standards or [ii] guard against indicators of fraud, waste, and abuse (while minimizing the negative impact on access to appropriate benefits).” “NQTLs that impartially apply generally recognized independent professional medical or clinical standards . . . to medical/surgical benefits and mental health or substance use disorder benefits” may be imposed notwithstanding the fact that they violate the no-more-restrictive requirement, the prohibition on the use of discriminatory factors and evidentiary standards, or the data-evaluation requirements. The exception for NQTLs imposed to prevent fraud, waste, and abuse is more narrow. Those NQTLs may be imposed even if they violate the no-more-restrictive requirement, but they still must comply with requirements concerning the design and application of NQTLs and the relevant data evaluation requirements for NQTLs. The Departments proposed the exceptions because they “are of the view that such [NQTLs] are premised on standards that generally provide an independent and less suspect basis for determining access to mental health and substance use disorder treatment.”

The proposed regulations aim to realize the Parity Act’s promise that “participants, beneficiaries, and enrollees . . . experience financial requirements and treatment limitations for mental health and substance use disorder benefits that are in parity with those applied to their medical/surgical benefits.” If new rules are approved in a form substantially similar to those in the Departments’ proposal, the challenge will be to implement and enforce them when so many of the proposed standards and requirements are subjective. We will follow developments concerning the proposed rules and anticipate additional reporting on them in the next survey period.

Life Insurance

Revocation on Divorce: “Seems to Be Fair. Split Right Down the Middle. The House to Barbara; The Mortgage Payments to Me. The Furnishings, Color TV and Piano to Barbara. The Monthly Payments to Me. The Insurance Benefits to Barbara. The Premiums to Me.”

This survey period saw a continued exploration of the timing and impact of various state revocation-on-divorce statutes, including those in Illinois and Florida.

In Shaw v. U.S. Financial Life Insurance Co., the Illinois Appellate Court affirmed a circuit court’s decision that Illinois’s revocation-on-divorce statute does not apply to divorces that preceded the statute’s January 1, 2019, effective date. The insured in Shaw named his then-wife the primary beneficiary of his life insurance policy and named his children as the policy’s contingent beneficiaries. The insured and his ex-wife divorced in 2016, and the insured’s insurance policy was not mentioned in their divorce decree or in an April 2017 modification to the divorce judgment.

Following Illinois’s 2018 amendment to its Marriage and Dissolution of Marriage Act, an insured’s designation of a former spouse as the beneficiary of a life insurance policy entered into before the divorce is revoked, unless the insured takes steps to redesignate the former spouse as the policy’s beneficiary (via the divorce judgment or directly with the insurer), or unless the former spouse is to receive the proceeds in trust for a dependent. The insured in Shaw died in February 2020 without having redesignated his ex-wife as the beneficiary of his life insurance policy.

When assessing whether a statute has retroactive effect, Illinois courts recognize that procedural statutory amendments may be applied retroactively while substantive ones cannot. The circuit court in Shaw determined on summary judgment that Illinois’s revocation-on-divorce statute could not apply retroactively to the divorce because the statute was substantive, not procedural. The circuit court also held that the applicable statute was the one in effect on the date of the divorce, not on the date of the insured’s death. Because the insured and his wife divorced before the statute went into effect, it did not apply, and the beneficiary designation was not revoked by operation of law.

The appellate court, after a detailed examination of the revocation statute’s legislative history and of case law involving similar statutes in other states, agreed with the circuit court’s decision. It focused on whether the statute’s application was triggered by the insured’s divorce or death. The court acknowledged that “the nature of life insurance policies suggests that the insured’s death is the operative event” that triggers application of the statute, but found that the language of the statute and its location in the Dissolution of Marriage Act suggested the legislature intended the revocation provision to take effect at the time of a divorce, “not at some later time”—such as the insured’s death or the conclusion of a probate proceeding. The court considered it significant that the Illinois legislature apparently elected not to use language from the Uniform Probate Code’s revocation-on-divorce provision, which would have given the statute retroactive effect. Although both the circuit court and the appellate court mention Sveen v. Melin, neither discussed whether the Illinois revocation statute violated the Contract Clauses of the Illinois or federal constitutions. Several courts applying Illinois law have already begun to follow the ruling in Shaw.

In Dargan v. Federated Life Insurance Co., the United States District Court for the Southern District of Florida analyzed Florida’s revocation on divorce statute and found that it does not apply to an insurance policy no longer owned by an insured at the time of divorce. The insured and owner of the life insurance policy at issue in Dargan identified his wife at the time as the policy’s primary beneficiary. Before they divorced, the insured allegedly gifted the policy to his wife, making her the policy’s owner and beneficiary. When the ex-wife filed suit against the insurer for its failure to pay her the policy’s death benefits, the insurer moved to dismiss, arguing that the couple’s divorce, combined with Florida’s revocation-
on-divorce statute, voided the designation of the ex-wife as the policy’s beneficiary. The Southern District of Florida disagreed with the insurer, concluding that Florida’s revocation statute applied only to interests the insured held at the time of the divorce and the time of his death. Because the district court accepted as true the ex-wife’s allegations that the insured gifted the policy to her before their divorce, it declined to dismiss the ex-wife’s complaint.

Material Misrepresentations: “Why Do People Have to Tell Lies?” “Usually It’s Because They Want Something. They Are Afraid the Truth Won’t Get It for Them.”

During this survey period Texas solidified its minority position as a state that requires insurers seeking to rescind a life insurance policy due to a material misrepresentation in an application for insurance to plead and prove the insured’s intent to deceive. Several other states continued to apply their respective versions of material misrepresentation statutes, none of which requires proof of an intent to deceive.

In American National Insurance Co. v. Arce, the Supreme Court of Texas confirmed that Texas’s common law scienter requirement comports with Section 705.051 of the Texas Insurance Code, which is the State’s statute permitting rescission of life insurance policies during the contestable period due to material misrepresentations made on an application for insurance. The insured in Arce applied for a $25,000 life insurance policy and answered “no” to most of the application’s medical questions. The insured died during the policy’s contestable period, and the insurer refused to pay the policy’s proceeds to the beneficiary after discovering that the insured incorrectly answered at least one of the application’s questions related to certain medical diagnoses and treatment. The beneficiary sued, the trial court ruled in favor of the insurer on summary judgment, the appeals court reversed most of the trial court’s rulings and remanded the lawsuit for further proceedings, and the insurer petitioned the Texas Supreme Court for review. The petition requested review of whether an insurer must prove an insured’s intent to deceive to rescind a life insurance policy under Section 705.51. The petition also asked the Texas Supreme Court determine whether Section 705.005 of the Texas Insurance Code, which requires insurers to provide notice of the insurer’s intent to rescind within ninety days after discovering a misrepresentation in an insurance application, applied to the policy at issue in the case.

The first question boiled down to whether Texas common law informed the construction of Section 705.51. Texas common law provided insurers a defense to actions seeking policy benefits when an insured made a material misrepresentation that the insurer relied on to issue the insurance policy, but the defense was available only if the insured made the misrepresentation with the intent to deceive. The Texas Insurance Code established other misrepresentation defenses, including one under Section 705.51, which applied specifically to life insurance policies.

The insurer in Arce argued that the misrepresentation defense in Section 705.051 did not require it to prove the insured’s intent to deceive. The beneficiary argued Section 705.051 must be construed to include the common law’s intent-to-deceive requirement. After examining the text of Section 705.051, the court concluded that Section 705.051 should not be read as foreclosing the common-law requirement that an insurer must prove an insured’s intent to deceive in addition to the Section’s statutorily mandated conditions. The Texas Supreme Court acknowledged that, although Texas was in the minority of jurisdictions when it came to requiring proof of intent to establish a material misrepresentation defense, the State has knowingly and intentionally required that element for more than a century and the Court would not assume the legislature intended to change its position on the issue without a more definitive expression of such intent.

As for the second question, the Texas Supreme Court concluded the requirement in Section 705.005—that an insurer provide notice of its intent to rescind within ninety days of discovering the falsity of the misrepresentation—did not apply to the policy in Arce. According to the Court, Section 705.005 was inapplicable to life insurance policies that included language confirming the policy was subject to a two-year contestability period. Because the life insurance policy in Arce included that language, Section 705.005’s ninety-day notice requirement did not apply.

Decisions in several other jurisdictions this survey period affirmed the majority position that “innocent” misrepresentations may be material and can support an insurer’s right to rescind. In American General Life Insurance Co. v. Kleshnina, the United States District Court for the Northern District of Georgia held that Georgia law required only that it determine whether an insured’s misrepresentation on his application for coverage was material, not whether it was fraudulent. The insured had been advised to schedule a colonoscopy in the five years prior to completing his application and went so far as to schedule and then reschedule the procedure without completing it before submitting his application. The insured died during the contestable period, and the insurer subsequently discovered that the insured’s history of having been advised to have, but not completing, a colonoscopy within five years of his application. The insurer’s underwriting guidelines mandated that it decline coverage for any applicant for whom medical testing had been recommended but not completed.

The Georgia material misrepresentation statute bars insurers from rescinding a policy unless an insured’s misrepresentation was fraudulent or material. The court in Kleshnina found that the insured’s failure to report the planned colonoscopy was a misrepresentation. Because the insurer rescinded on the basis of the representation’s materiality (and not that it was fraudulent), it did not matter whether the insured was aware that his statement was false. The only factor that the court considered was whether the insured’s misrepresentation was objectively false, which it was. The court further concluded, based on the testimony of the insurer’s underwriter, that the insured’s misrepresentation about the diagnostic testing recommended to him was material because, had the insurer known of the recommendation, it would have waited for the testing to be completed before deciding whether to issue the policy. The court granted summary judgment in the insurer’s favor.

Similarly, in Wharran v. United of Omaha Life Insurance Co., the United States District Court for the Middle District of Florida held that the insurer was entitled to rescind the life insurance policy at issue because the insured incorrectly answered an application question about his driving history. Florida’s material misrepresentation statute allows an insurer to rescind a policy due to an insured’s fraudulent or material misrepresentation. Because the insured’s response to the question about his driving history was unquestionably false, and because deposition testimony from an underwriter confirmed the insurer would not have issued the policy had it known the truth of the insured’s driving history, the court granted the insurer’s summary judgment motion.

The analysis and holding in Frohn v. Globe Life & Accident Insurance Co. illustrates the operation of Ohio’s material misrepresentation statute. If an insurer proves that a response to an application question is objectively false, it creates a rebuttable presumption under Ohio law that the applicant intended to deceive the insurer. In Frohn, the insurer proved at summary judgment that responses on the insured’s application to questions related to depression, abnormal liver function, and stiff-man syndrome were false. The application was completed by the insured’s wife, who also was the plaintiff. She was unable to demonstrate that the false responses on the application were due to honest mistakes or that she did not believe her husband had the conditions at issue. She claimed not to know the insured had liver issues and argued that she did not consider depression to be a “mental disorder,” and further claimed that she did not know stiff-man syndrome was a neurological disorder. The court found her assertions unsupported by the evidence and determined that the plaintiff had not rebutted the presumption that her application answers were willfully false. The insurer’s underwriting testimony demonstrated that the false answers were material because had the insurer known the truth, it would have declined to issue the policy or issued a different policy. The court granted summary judgment in the insurer’s favor.

STOLI Questions: “Whoever You Are, I Have Always Depended on the Kindness of Strangers.”

Two federal courts sent their stranger-originated life insurance (STOLI) questions to the state supreme courts in their respective jurisdictions this survey period. The Georgia Supreme Court clarified that even if an insured intends to sell their life insurance policy to a third party with no insurable interest, the policy is not an illegal wagering contract in Georgia if the third party had no involvement in the policy’s procurement. And the Arizona Supreme Court weighed in on the interaction between STOLI and the contestable period.

In Crum v. Jackson National Life Insurance Co., the Georgia Supreme Court answered a certified question from the United States Court of Appeals for the Eleventh Circuit concerning STOLI. Jackson National issued a life insurance policy in 1999, and the insured sold it to a buyer as a viatical settlement eight months later. After the insured died, the buyer tried to collect the policy’s proceeds, but Jackson National refused to pay. The United States District Court for the Northern District of Georgia agreed with the insurer that the policy was an illegal wagering contract because the insured intended to sell the policy when he bought it. The Eleventh Circuit, however, did not believe Georgia case law definitively answered the questions raised by the buyer’s appeal. Therefore, it asked the Georgia Supreme Court to determine whether a life insurance policy purchased by an insured on his own life but with the intent to sell it to a third party with no insurable interest was an illegal wagering contract if the third party had nothing to do with the policy’s procurement.

The Georgia Supreme Court closely examined Georgia’s common law and statutory history related to STOLI policies, and it concluded that a policy taken out in the manner described above would not be void as an illegal wagering contract. The court acknowledged that older Georgia case law that might have viewed the issue differently, but it explained that view did not survive Georgia’s 1960 revision to its Insurance Code. The court flagged the insurable interest statute in particular as support for its construction of Georgia law. That statute expressly allowed an insured who purchased a policy on their own life to name someone without an insurable interest in their life as the beneficiary of their policy.

In Columbus Life Insurance Co. v. Wilmington Trust, N.A., the Arizona Supreme Court answered a certified STOLI question from the United States District Court for the District of Arizona. The insurer issued a second-to-die policy to the insureds in 2003, which policy contained a two-year incontestability provision, consistent with Arizona law. After the contestability period expired, an investor purchased the policy, and Wilmington Trust was made the policy’s owner. After both insureds died, Wilmington Trust submitted a claim for the policy’s benefits, which the insurer refused to pay. The insurer argued the policy was part of a STOLI scheme that violated Arizona law, making it void ab initio and making the contestability provision a nullity. Wilmington Trust argued that Arizona’s statutorily required incontestability provision precluded the insurer’s challenge to the policy’s validity.

The Arizona Supreme Court examined the history of Arizona public policy concerning STOLI. That history revealed that Arizona prohibited, under both common law and the insurance code, the issuance of life insurance policies to third parties lacking an insurable interest in the insured. The Arizona Supreme Court acknowledged that contracts which contravened public policy were typically void ab initio but, the Court observed, public policy concerning STOLI had to be viewed in the context of Arizona’s comprehensive statutory scheme regarding such insurance. Arizona law provided exclusive remedies related to STOLI: (1) those who procured STOLI policies could be subject to misdemeanor penalties; and (2) an insured’s estate could recover insurance policy proceeds from the STOLI beneficiary. The court also found it compelling that Arizona’s statutorily required incontestability provision only had one exception—that the policy’s validity could be challenged after two years only for non-payment of premiums—with no express exception related to STOLI.

The court also took note of the way Arizona’s statutory scheme structured the STOLI remedies. First, the scheme requires insurance proceeds to be paid to STOLI beneficiaries and only later permits recovery by the insured’s estate upon proof that the policy is not valid. The court understood that scheme to mean the statutes assume that STOLI policies are valid. In addition, the language used in the statutes—i.e., repeated use of the word “contract” and no use of the word “void”—signaled that the Arizona legislature did not intend that STOLI policies be treated as void ab initio after the two-year contestability period. In light of its construction of Arizona’s comprehensive statutory scheme to regulate STOLI policies, the Arizona Supreme Court concluded that insurers may not challenge a life insurance policy’s validity based on lack of insurable interest after expiration of the two-year contestability period.

Conclusion

Many of the decisions on which this year’s article reported are certain to see additional developments over the course of the next survey period. We fully expect to see further developments in the Braidwood case and in connection with the proposed Parity Act regulations. And we will be interested to see how the state supreme court and appellate court decisions on issues concerning rescission, revocation-on-divorce, and STOLI are applied going forward. Undoubtedly, accidental death insurance cases in the coming year will present additional provocative questions, and we will see other significant decisions in the ERISA and disability insurance realms. We look forward to bringing those issues to you in next year’s article.

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