Apparently I am not the only one with concerns about the arbitration process, which I discussed in a recent post. As this article notes, both the Eleventh Circuit and the Georgia state courts are displaying an overt hostility towards parties who challenge arbitration decisions in court, after the arbitration has concluded. What is unclear from the article, however, is whether the courts are displaying a justified anger against parties who bring meritless challenges to arbitration rulings into court, or are instead displaying a simple prejudice against such challenges. If the former, it is hard to quarrel with the attitude being displayed by the courts, but if it is the latter, it is unwarranted.
The Federal Arbitration Act, which as a general rule will govern arbitration contracts that impact interstate commerce in some manner and which controls most litigation over arbitration decisions in federal courts, provides express grounds on which an arbitration ruling can be challenged and overturned in court. Many states have similar arbitration acts that apply similar rules to arbitrations governed by state law. Judges often display a sort of knee jerk belief that arbitration is semi-sacred and is not to be tampered with, at least not lightly. These arbitration acts, however, require the courts to intervene when the standards for doing so under those acts are met, and in my experience, they are met more often than courts seem to be willing to recognize. For instance, many arbitration clauses impose express rules on the arbitration, and an arbitrator who decides in a manner inconsistent with such rules is, in reality, operating outside of his or her authority. An arbitration decision reached under such circumstances should be set aside. The Federal Arbitration Act and many state arbitration acts require courts to fairly entertain such arguments, and to set aside an arbitration if appropriate to do so. A judicial hostility towards challenges to arbitrations is certainly not consistent with this, but for that matter neither is the benign prejudice against overturning such decisions that judges sometimes appear to manifest.
For an example of a court properly understanding its role in overseeing arbitrations, see this post.

The New York Times provides an excellent report today on the impact of Medicare Part D and the unintended – maybe(?) – result of moving millions of lower income patients from Medicaid to Medicare. The article points out that drug company profits will increase significantly because the patients are moved from Medicaid, which has certain price restrictions, to Part D, which lacks those same restrictions. In the article, A Windfall from Shifts to Medicare, the author sums up:

The windfall, which by some estimates could be $2 billion or more this year, is a result of the transfer of millions of low-income people into the new Medicare Part D drug program that went into effect in January. Under that program, as it turns out, the prices paid by insurers, and eventually the taxpayer, for the medications given to those transferred are likely to be higher than what was paid under the federal-state Medicaid programs for the poor.
About 6.5 million low-income elderly people or younger disabled poor people were automatically transferred into the Part D program for drug coverage. . . .
Drugs tend to be cheaper under the Medicaid programs because the states are the buyers and by law they receive the lowest available prices for drugs.
But in creating the federal Part D program, Congress – in what critics saw as a sop to the drug industry – barred the government from having a negotiating role. Instead, prices are worked out between drug makers and the dozens of large and small Part D drug plans run by commercial insurers.

The article provides a thorough summary of a complex problem. Beyond the problem, though, is a question. Is this an economic distortion flowing from the structure of the industry, of the type discussed in an earlier post on such distortions? Or was the original cheaper structure the distortion?

Updating my post the other day concerning the ramifications, under ERISA and otherwise, of retiree medical benefits and attempts to terminate them, a recent post in BenefitsBlog documents why, for those of us still working today, it may well be a non-issue. Citing a report from Watson Wyatt, BenefitsBlog notes that future retirees will be bearing most and perhaps all of the costs of their medical benefits. The Watson Wyatt report notes, of particular salience:

The trend away from employer-provided retiree health benefits will continue as a result of rising health care costs, growing retiree populations, uncertain business profitability and federal regulations that provide only limited opportunities for funding retiree medical benefits.
The benefits provided to future retirees will be significantly less generous than those current retirees receive today, as employers are cutting back, capping or completely eliminating their retiree health benefits programs. Eight out of 10 employers that still offered retiree medical benefits in 1999 had reduced their retiree medical expense per active employee from the level reported for 1993, according to Watson Wyatt research.
Future retirees will shoulder substantially more – if not all – of the costs of their health care in retirement. Watson Wyatt estimates that the level of employer financial support will drop to less than 10 percent of total retiree medical expense by the year 2031, under plan provisions already adopted by many employers.

As soon as I read the article Arbitration’s Fall From Grace in GC South, I knew I needed to pass it along to others. Insurance policies are often written with arbitration clauses that require coverage disputes between the insured and the insurer to be arbitrated. In seminars I have given, I often discuss the pros and cons of arbitrating a coverage dispute, and I try to emphasize that arbitration is not necessarily preferable to litigation. It depends on what you want to accomplish in the dispute resolution process, and variables related to how you think you should get to the result you are pursuing. Do you need certain types of discovery to win, types that are more readily available in the court system than under the rules of the American Arbitration Association? If so, then you want to avoid arbitration.
Another key question is whether you are aiming to prevail on summary judgment – the arbitration rules do not explicitly provide for such motion practice, and I have arbitrated cases in which substantial briefing and expense has gone into simply trying to convince the arbitration panel to hear summary judgment type motions.
Another key consideration is the legal strength of your case. Is the body of law in the circuit that the case would be litigated in if the matter were not arbitrated favorable to you? If so, I often advise clients to avoid arbitration. Why? Because if the law is in your favor but an arbitration panel misapplies it, you have no right of appeal; if a trial court misapplies it and you lose at that level as a result, you can have it overturned on appeal. Thus, if you should win on the law, you shouldn’t willingly go to arbitration, if you can avoid it.
I have won more commercial arbitrations than I have lost, but whichever end of the stick I have ended up on, one fact has remained consistent: for any even mildly complicated case, arbitration can be an unwieldy beast.
All these problems and more are discussed in wonderful detail in the article. In my own experience, the article is right on the money, both with regard to the pros, and the cons, of arbitrating disputes.

One of the problems that insurers, and insurance law, have to confront is the distortion in behavior, economic and otherwise, that insurance can create. Insurance coverage law deals with this problem in a number of ways, such as by means of the known loss doctrine, which – although the specifics of its application vary from jurisdiction to jurisdiction – essentially holds that a person cannot insure against an expected, existing or highly probable loss. As such, it prevents an insured company or individual from insuring against something the company or the person intends to do and knows is likely to cause harm. One can think of the known loss doctrine in this context as protecting against people undertaking harmful activities that they would not otherwise have done if they did not think they could insure themselves against the consequences.
We can also understand the various treatments given by the courts of different states to the question of whether a punitive damages award against an insured is insurable as being part of the same thought process. . . .

Continue Reading Economic and Behavioral Distortions, and How Insurance and ERISA Law Cope With Them

The problem of companies reneging on promises to provide medical and other benefits to retirees is in the news pretty much every week, if not every day. Company after company, retirement plan after retirement plan, benefits that beneficiaries believed were theirs for life are being significantly reduced, or even terminated. In some industries, most prominently the auto industry, the promise to pay such benefits to retirees has become, at least according to the companies and to many independent analysts, an unsustainable cost that threatens the industry’s ability to compete on price in the marketplace.
The problem isn’t going away. An article today in the National Law Journal provides an excellent overview of the problem, noting in part that “[a] recent report by Standard & Poor’s found that post-retirement benefits, mostly medical costs, were underfunded by nearly $300 billion among the firms in the S&P 500 stock index,” and that “[t]he trend in industry after industry is to eliminate retiree benefits.”
ERISA obviously impacts attempts by companies and their employee benefit plans to reduce or end benefits that the recipients believed were a lifetime retirement commitment. The National Law Journal article provides a summary of the state of the law on this impact, noting:

In 1974 Congress created the Employee Retirement Income Security Act to establish fiduciary standards to protect retiree pensions and other benefits. Although pensions were vested under the law and difficult to alter, health benefits were not and could be changed more readily.
The 7th Circuit has one of the toughest standards for retirees attempting to block loss of benefits. The court has said that a company had to have misled plan participants about the terms in order to have breached its fiduciary obligation.
In the case of 347 CNA Financial Corp. retirees whose early retirement health care allowance was cut off, the court found the promise of “lifetime” coverage meant “good for life unless revoked or modified,” Vallone v. CNA Financial Corp., 375 F.3d 623 (2004).
By contrast, the 2nd Circuit has provided a more expansive interpretation of ERISA’s fiduciary standard by focusing on the plain meaning of the word “lifetime.” The court found that a company might violate its fiduciary duty if it provides a lifetime benefit, but the right does not vest. Abbruscato v. Empire Blue Cross & Blue Shield 274 F.3d 90 (2001).
And the 3rd Circuit, in In re Unisys Corp. Retiree Medical Benefit “ERISA” Litigation, 58 F.3d 896 (1995), said that a plan administrator who knows but fails to provide information, to the detriment of beneficiaries, breaches its fiduciary duty.
Lastly, the 6th Circuit has said that if a company misleads the retirees, regardless of whether it was negligent or intentional, a breach of fiduciary duty exists. James v. Pirelli Armstrong Tire Co. 305 F.3d 439 (2003)

Call it professional jealousy that someone else has such an interesting case to try, call it the same urge to look that slows up traffic when there is an accident over by the side of a road, call it simply a professional interest in a fascinating insurance coverage dispute, but I am fascinated by the trial that began yesterday in federal court in Mississippi arising out of the wind and storm damage caused by Hurricane Katrina. In it, well known plaintiffs’ attorney Richard Scruggs is claiming that Nationwide Mutual Insurance Company wrongly denied coverage of damage to the plaintiffs’ home. In a nutshell, Nationwide argues that “while wind damage is covered by its homeowners’ policies, damage from flooding is excluded, including Katrina’s wind-driven storm surge.” The plaintiffs counter that, one, the agent misled them into not purchasing a flood policy and, two, the damage was in any event predominately wind damage, with their lawyer arguing that:

weather data shows Katrina’s 140 mph wind hit the Mississippi coast three hours before any storm surge flooding [and that] Nationwide’s experts ignored that evidence and wrongly blamed water for the vast majority of the damage to the [plaintiffs’] house.

The case is expected to be a bellwether for thousands of other suits making similar claims:

The trial, being heard without a jury by U.S. District Judge L. T. Senter Jr., is the first among hundreds of lawsuits that have been filed by Gulf Coast homeowners challenging insurance companies over the wind-verses-water issue. Plaintiffs’ attorneys hope a ruling in the homeowners’ favor would pressure insurance companies to pay out hundreds of millions of dollars in settlements for homeowners whose claims have been rejected.

Law.com has the story here, the Washington Post here, and the New York Times here.

I mentioned West Legalworks’ upcoming ERISA Litigation Conference in a recent post. Of interest – to me anyway, and I think to anyone who litigates denial of benefit claims – is that in the marketing materials for the conference, the organizers note “shifting standards of review” on benefit denials as an important subject.
To the extent the conference organizers may be referring to actual precedential changes in the applicable standards of review in certain circuits, that is one thing. But in my own practice I have noticed a subtle shift in the way judges are applying standards of review that have long been on the books, and that have not formally been shifted by any superceding appellate rulings.
When applying the arbitrary and capricious standard, I have noted a more skeptical eye being applied by judges. Whereas in the past judges would typically be satisfied that the standard was met so long as there was a reasonable amount of evidence in the administrative record that supports the administrator’s finding, now they seem more often than not to actually look at the pieces of evidence in the record with a critical eye and decide for themselves whether it supports the finding. Another way to think about this is that in the past the mere existence of supporting evidence in the record was enough for the administrator to prevail; now it seems that judges are looking more closely at the quality of that evidence as well in deciding whether or not it was reasonable for the administrator to reach its determination.
It is a more skeptical application of the same standard, and as such something of a quiet and barely perceptible shift in the case law, one that, if I am right about this and this thought holds up across time and over a broader sampling of cases, is occurring without any appeals court rulings announcing an actual change in the law.
At this point, it is somewhat of a small sampling on which I base this impression; I will be curious to see what the future holds in this regard.

I often mention in seminars and meetings a point that I call “the insurance company and the repeat player.” In doing so, my intent is to emphasize to insureds and their usual counsel the importance of retaining experienced insurance coverage lawyers to represent them when issues arise involving insurance coverage and insurance policies, whether they arise in the context of negotiating a policy, seeking coverage for a loss, disputing a coverage determination, negotiating a resolution of a claim with an insurer, or litigating a coverage dispute with an insurer.
The allusion to a repeat player is meant to drive home the point that the insurer in such a scenario is always using an expert on insurance coverage to represent it and even more than that, is probably using an attorney who has thousands of hours of experience working with the exact insurance product at issue; the attorney is a repeat player. The insured, to have any chance of competing on an even playing field, needs a repeat player of its own – i.e., an experienced insurance coverage lawyer with expertise in the type of policy and coverage issues involved in the matter.
My thoughts on this go further, but I will not repeat them all here (or what else will I have left to post on in the future?). What brings the point to mind right now, however, is that Rees Morrison has a post on his Law Practice Management blog on the Horndal effect, the improvement in efficiency and effectiveness that flows to the repeat player, only he discusses it in the context of the benefits captured by in house law departments when lawyers in the department become specialists and “repeat players.” His description of the economics that underlie the idea of the repeat player captures this point beautifully. To quote in part,

As in-house counsel handle matter after matter of a similar kind, they gain experience and they can do more, better, and in less time. The knowledge they accumulate can be thought of as a by-product — a spillover from the repeated production of advice and counsel

West Legalworks has announced the time, place, faculty and subject matter for its annual ERISA Litigation Conference, the 19th ANNUAL ERISA LITIGATION CONFERENCE: The Nation’s Leading Forum on How Current Rulings Affect Claims, Plan Design and Operations.
For those of us who litigate cases governed by ERISA and who like this stuff, this one looks like fun.