While the majority of disability insurance is obtained through group insurance, there are a large number of individual disability insurance policies in force (ranging from policies sold in the late 1980's, to early 1990's, to today). Individual disability policies are commonly marketed and sold to professionals, with a heavy emphasis on physicians – given their specialized occupation and their need to insure a significant monthly income. However, individual policies are also marketed to a wide range of white collar and blue collar occupations and incomes. Just as individuals with group disability insurance often need legal assistance to obtain their benefits, so do those with individual disability policies.
The key to reviewing a legal inquiry for a disability insurance claim is to recognize whether the insurance is group (and likely subject to ERISA), or individual (typically subject to state law). Discerning group from individual coverage is not usually difficult. The problem is determining subject matter jurisdiction. This can be a game changer. The applicable law impacts everything from which court will hear the case (state or federal), to the ensuing litigation process (discovery, evidentiary standards, summary judgment standards, right to a jury trial), to damages (a right to compensatory or bad faith relief, as opposed to only equitable relief). Do not assume that because it is an individual policy that ERISA does not apply. The financial benefits of ERISAfying an insurance policy are too great.
Simply because a disability policy is individual versus group, do not assume it is automatically free from ERISA preemption. The insurance industry recognizes the significant advantages to be obtained by ERISAfying a personal insurance policy – from limited discovery, to limited damages, to limited review. By way of example, in the mid 1990's, Provident Life & Accident[1] issued an "Internal Memorandum" referred to as the McCall Memo[2] in which Provident went on the offensive of ERISAfying their personal disability insurance policies …
A task force has recently been established to promote the identification of policies covered by ERISA and to initiate active measures to get new and existing policies covered by ERISA. The advantages of ERISA coverage in litigious situations are enormous: state law is preempted by federal law, there are no jury trials, there are no compensatory or punitive damages, relief is usually limited to the amount of benefit in question, and claims administrators' may receive a deferential standard of review.
The economic impact on Provident from having policies covered by ERISA could be significant. As an example, Glenn Felton identified 12 claim situations where we settled for S7.8 million in the aggregate. If these 12 cases had been covered by ERISA, our liability would have been between zero and $0.5 million.
While the McCall Memo was issued in 1995, some 20 years ago, its message remains the same today as it did then. Insurers continue to search for legal arguments so as to ERISAfy personal disability insurance policies.
The court well understands why Provident wants to place the ERISA fence around Rosen's state law claims. It would be well worth the effort if Provident could meet its burden of proving that ERISA affords Rosen his only remedy …[3]
Insurers do not segregate ERISA and non-ERISA disability claims amongst their staff. There is not a dividing wall in the claims departments. Rather, disability claims are processed in the same unit, using the same personnel and the same stock form letters. As a result, it is not uncommon to see a denial letter that contains ERISA language even when the insurance policy is not subject to ERISA. Whether this misinformation is by intent or not, the result is the same – claimants assume their legal rights and remedies are severely restrained. Moreover, claimants have a difficult time finding legal counsel. When this sort of letter is reviewed by attorneys unfamiliar with ERISA litigation (aside from a desire to avoid it), it is not uncommon for them to decline representation based on the letter's ERISA proclamation – thereby, depriving claimants of their right to counsel. Fortunately, the courts have recognized that such misleading statements (that ERISA applies) can support a finding of bad faith.
In Hangarter v. Provident Life & Accident Ins. Co., 373 F.3d 998 (9th Cir. 2004), the appellate court upheld a $7.6 million verdict, of which $5 million was for punitive damages. The Court held that the insurer engaged in a "biased investigation" and that the "letter terminating Hangarter's benefits was misleading, deceptive, and fell below industry standards as it incorrectly advised Hangarter about her rights under the policy."[4] Notably, the Court took exception to the insurer's false representation that ERISA applied and held the misrepresentation supported the jury's finding of bad faith and resulting punitive damage award.
Finally, the termination letter incorrectly stated that the policy was governed by ERISA. If true, this would have meant that Hangarter had no available remedies under state law, including punitive damages.[5]
In 1971, the National Association of Insurance Commissioners (NAIC) issued a model "act relating to unfair methods of competition and unfair and deceptive acts and practices in the business of insurance."[6] In 1997, the NAIC issued an updated model act entitled "Unfair Claims Settlement Practices Act."[7] Since that time, with the exception of Mississippi and Nevada, each state has adopted the model act or a similar version.[8] By way of example, Kentucky's insurance code provides protections for this sort of misrepresentation (that ERISA governs the policy) of a claimant's rights. By statute, it is considered an unfair claims settlement practice for an insurer to "misrepresent pertinent facts or insurance policy provisions."[9] With that in mind, do not assume the denial letter is correct.
First, document the file. Confirm the insurer's position as to whether it contends ERISA is applicable, and if so, on what basis. If in litigation, make sure to obtain a copy of the insurer's training materials and/or claims manual. These internal documents typically provide express procedures and instructions for claims personnel to follow in determining whether ERISA applies. When it is apparent the claims person did not comply with the insurer's own internal guidelines, you can use these materials as evidence of the insurer's failure to adequately train and supervise its claims personnel. The following is an example of an insurer's internal Q&A guidelines for its claims staff.
Q: What if I don't know if the claim considered ERISA or Non-ERISA? Should I just use the ERISA language?
A: No, you should not. As the insuring company we are obligated to do our best to determine this. By placing ERISA specific language in letters for a Non-ERISA claim, it could be construed that we are misleading the claimant and putting him/her through our Appeal review process when he/she truly does not have to. The same goes for Appeal Acknowledgement, Uphold on Appeal, etc. There is no acceptable "catch all" wording.
Alternatively, where an insurer's guidelines are sparse or non-existent, this serves as additional evidence of a failure to train. By way of example, in a recent deposition, the claims manager confirmed that claims personnel do not receive any training on determining whether ERISA applies. Instead, claims staff use an internet resource: www.freeerisa.com. The problem is this website does not provide anything other than copies of Form 5500 filings. Simply because an entity files, or does not file a Form 5500, is not conclusive.
While an insurer may argue an individual insurance policy is subject to ERISA because a Form 5500 was filed, this is not enough. Even if the insurer has treated the insurance policy "an ERISA plan with respect to government filings, its mere labeling of the plan should not determine whether ERISA applies. Allowing this could lead to a form of ‘regulation shopping.'"[10] "Labeling an otherwise exempted plan as an ERISA plan" does not make it so.[11] At best, an insurer's filing of a Form 5500 "is voluntarily undertaken as a precaution and does not in and of itself render the policy an ERISA governed plan."[12]
Second, if the insurer remains firm that ERISA controls the claimant's legal rights, investigate further and continue to document the file. The insurer's duty of good faith "continues during any litigation" and the unfair claims settlement statute applies with equal force to "conduct occurring after the commencement of litigation."[13] Conduct after commencement of litigation would include an insurer raising ERISA as an affirmative defense or removing the case to federal court based on ERISA preemption.
Practice Tip: Express preemption, commonly referred to as the "relates to" preemption, is an affirmative defense and cannot provide the basis for subject matter jurisdiction.[14]
Again, depositions narrowly tailored to confirming the basis, or lack thereof, for asserting ERISA can strengthen claims for punitive damages (whether statutory, common law, or consumer protection). Make the corporate witness provide the factual basis for asserting ERISA. Further, have claims staff confirm that ERISA impacts their investigation and decision making process. This will provide support for a jury finding the claim denial unreasonable – thereby opening the door to bad faith. Further, these sorts of admissions support a jury finding the claims process to be inherently flawed and biases. This finding will open the door to bad faith damages even where the contract claim fails. "Under Kentucky law, however, it is irrelevant whether the defendant could have denied [an] application in good faith if the evidence shows that the defendant, in fact, reviewed the application in bad faith." [15]
Third, make sure the insurer is actually the entity that actually processed the claim. Of late, there is a trend for insurance companies to sell disability insurance on their paper (i.e. with their name and logo) only to outsource their entire claims process. In some instances, these third-party claims processors are also insurers – subject to direct claims for bad faith. Alternatively, if they are not insurers, they are subsidiaries of insurers – typically the same insurance company who is reinsuring the original insurer's liability under the disability policy. Identifying whether claims administration has been outsourced is important, especially if ERISA is alleged in the denial decision. The insurer that issued the policy remains liable for the acts of its staff and its agents, including third-party claims processors. The fact that the insurer rubber-stamps the third-party decision, to deny a claim and to represent ERISA applies, supports the conclusion that the insurer failed to properly train and/or supervise.
Because ERISA preemption is an affirmative defense, the insurer bears the burden of proof.[16] The same burden applies if the insurer invokes ERISA as the basis for removal to federal court. An insurer "seeking removal bears the burden of establishing its right thereto." [17] An insurer cannot, "merely by injecting a federal question into an action that asserts what is plainly a state-law claim, transform the action into one arising under federal law, thereby selecting the forum in which the claim shall be litigated."[18] Furthermore, any doubts as to whether ERISA applies must be "resolved against removal."[19]
In enacting ERISA, Congress defined an "employee welfare benefit plan" to include:
... any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise ... benefits in the event of sickness, accident, disability, death or unemployment....[20]
Ths language identifies five material elements an insurer must prove in order to successfully invoke ERISA. Courts have generally identified these required elements as: (1) a "plan, fund, or program"; (2) established or maintained; (3) by an employer or by an employee organization, or by both; (4) for the purpose of providing … disability … benefits; (5) to participants or their beneficiaries.[21] The absence of any single element precludes ERISA application. Moreover, even if all five elements are present, ERISA will not apply if "no employees or former employees participate."[22]
One of the most problematic elements is ERISA's definition of "employee" and "participant." The U.S. Supreme Court found this language to be "uninformative … [and] completely circular."[23] As the agency responsible for enforcing ERISA, the Department of Labor has issued binding regulations defining an "employee benefit plan" to exclude "any plan ... under which no employees are participants covered under the plan."[24] Further, while a business owner is considered an employee, that distinction alone is insufficient to implicate ERISA. The "plan" would have to cover not just the owner, but also "one or more employees other than the business owner."[25]
In the context of individual disability insurance policies, it is generally a good idea to have the policy, premiums, and all related correspondence come directly to the individual. This certainly undermines any serious contention that the insurance policy is part of an ERISA plan. However, it is common for the insured professional to have the premium billed to their business.
Practice Tip: Disability insurance benefits are typically taxable, or non-taxable, depending on how the premium was paid. If the insurance premium is deducted as a business expense, the benefits are likely taxable. Conversely, if the insurance premiums are paid with after-tax dollars, the benefits are likely tax-free.
The reason for doing so is simple. Insurer's routinely offer a "list-bill" discount from 10% to 15%. A list-bill refers to the situation where one or more individuals in the same business (i.e. medical doctors) agree to allow the insurer to bill their respective premiums by sending a list-bill to the practice.
… an acceptable employee group of three or more employees of an employer can apply for and be issued individual disability income policies to each of said employees. By applying as an employee group, each applicant receives a 10% discount on his individual premium payments.[26]
Again, the incentive is the premium discount. The problem is that when a claim is filed, the insurer argues the individual policy has been made part of a plan and is therefore subject to ERISA.
UNUM contends that the "list bill" policy of which Shaw's agreement was part is an "employee welfare benefit plan" under ERISA. Because this claim is both a ground for UNUM's motion for summary judgment, and a response to Shaw's challenge to the court's own jurisdiction, UNUM carries the burden of demonstrating ERISA's applicability.[27]
Unfortunately, insurers have been successful in convincing federal courts that the list-bill mechanism created an ERISA plan. Vigilance is required to rebut this expected argument, to include requiring the insurer to prove that the discount was anything more than an administrative convenience for its billing department (e.g. association endorsements, actuarial pricing, and form filings with state regulators). Expect the insurer to file a self-serving affidavit concerning the list-bill discount. Insist on discovery to rebut the affidavit.
Having submitted incomplete versions of the disputed documents in support of its response brief, Defendant cannot now expect the Court to deny Plaintiff's request for limited discovery of the remainder thereof. At the very least, Plaintiff is justified in expecting that there may be something in the remainder of these documents that could be useful in responding to Defendant's brief. Furthermore, having offered Taylor's affidavit in support of its argument that UMC is not a governmental entity, Defendant cannot deny Plaintiff the opportunity to depose him.[28]
Finally, aside from the list billing argument, assuming there was a plan, the plan must be in existence at the time of the claim. It is common for insureds to change employment and to leave or close businesses over the course of their career. But, they typically retain the individual insurance policy and simply change the address of record (for billing, correspondence, etc.). When this insured files a claim, the debate then becomes whether there is still a "plan" or whether there was a "conversion." Again, in order for ERISA to apply, there must be a plan – a current plan. Absent an ongoing administrative scheme, there is no plan and ERISA does not apply.[29]
Practice Tip: Beyond the space of this article, an additional means of avoiding ERISAfication is to demonstrate the insurance policy falls within the ERISA "safe harbor".[30]
[1] Provident Life & Accident has since merged with Paul Revere and Unum. Today, the combined entity is referred to simply as Unum, and is one of the largest if not the largest disability insurer in the country.
[2] See http://www.cfids-me.org/disinissues/discandal.pdf ("Trust Law as Regulatory Law: The
Unum/Provident Scandal and Judicial Review of Benefit Denials under ERISA").
[3] See e.g. Rosen v. Provident Life and Accident Ins. Co., 2015 WL 260839 at *6 (N.D.Ala., Jan.21, 2015).
[4] Hangarter v. Provident Life & Accident Ins. Co., 373 F.3d 998, 1010-1011 (9th Cir.2004).
[5] Id.
[6] State Farm Mut. Auto. Ins. Co. v. Reeder, 763 S.W.2d 116, 118 (Ky. 1988).
[7] http://www.naic.org/store/free/MDL-900.pdf
[8] Id.
[9] KRS 304.12-230(1).
[10] Stern v. International Business Machines Corp., 326 F.3d 1367, 1374 (11th Cir.2003).
[11] Miller v. PPG Industries, Inc., 278 F. Supp.2d 826, 831 (W.D.Ky.2003).
[12] Johnson v. Watts Regulator Co., 1994 WL 258788 at *4 (D.N.H.1994), aff'd, 63 F.3d 1129 (1st Cir.1995).
[13] Knotts v. Zurich Ins. Co., 197 S.W.3d 512, 517 (Ky.2006) ("[W]e hold that KRS 304.12-230 applies both before and during litigation.").
[14] Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 64 (1987) ("ERISA pre-emption, without more, does not convert a state claim into an action arising under federal law.")
[15] Estate of Riddle v. S. Farm Bureau Life Ins. Co., 421 F.3d 400, 409 (6th Cir.2005).
[16] Gordon v. NKC Hospitals, Inc., 887 S.W.2d 360, 362 (Ky.1994).
[17] Her Majesty the Queen in Right of the Province of Ontario v. City of Detroit, 874 F.2d 332, 339 (6th Cir.1989) (citing Wilson v. Republic Iron & Steel Co., 257 U.S. 92, 97-98 (1921)).
[18] Caterpillar, Inc. v. Williams, 482 U.S. 386, 399 (1987).
[19] Wilson v. USDA, 584 F.2d 137, 142 (6th Cir.1978).
[20] 29 U.S.C. § 1002(1).
[21] Donovan v. Dillingham, 688 F.2d 1367, 1371 (11th Cir.1982).
[22] McLain v. Unum Life Ins. Co. of America, 2013 WL 3242842 * 3 (N.D.Ala., June 21, 2013) (quoting Slamen v. Paul Revere Life Ins. Co. 166 F.3d 1102, 1104 (11th Cir.1999))(emphasis added).
[23] Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1, 12 (2004) (quoting
Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323 (1992)).
[24] 29 C.F.R. § 2510.3–3.
[25] Hendon, 541 U.S. at 6.
[26] Shaw v. Unum Life Ins. Co., 1989 U.S. Dist. LEXIS 5346, 1 (D.N.J., May 15, 1989).
[27] Id. at *4.
[28] Milby v. Liberty Life Assur. Co., 995 F. Supp. 2d 745, 747 (W.D.Ky.2014).
[29] Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11 (1987);
[30] 29 C.F.R. § 2510.3-1(j). Under the Safe Harbor provision, ERISA does not apply to insurance programs in which:
(1) No contributions are made by an employer or employee organization;
(2) Participation the program is completely voluntary for employees or members;
(3) The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and
(4) The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.
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