There’s a lot to be said about the preemption issues raised by state health insurance mandates and the assumptions that underlie the beliefs of those who argue that ERISA preemption should not be allowed to prevent states from experimenting with acts intended to remedy the problem of the uninsured. Articles like this one here, however, suggest the naivety of some of those assumptions, such as the idea that states are likely to really manage the problem in a more effective way than employers, operating under ERISA preemption, have managed to do so to date. Moreover, the article, in its discussion of the huge and apparently unexpected, or at least unplanned for, increase in the cost of insuring the uninsured under the Massachusetts Health Care Reform Act, really drives home a point I have made in other posts, that the problem with these statutes is that they do nothing to address the real problem affecting employer provision of health benefits, namely the extraordinary cost of providing those benefits; as the article reflects, Massachusetts’ much lauded experiment doesn’t target that at all, but simply shifts the pockets that will have to fund those extraordinary and ever increasing costs. And finally, if you look closely at some of the numbers discussed in the article, you come to understand the answer I have given to people who have wanted to know why no one has yet challenged the Massachusetts act as preempted; as I have told people, it’s not because the act isn’t preempted, it is instead because the financial costs to employers have yet to warrant such a challenge. The article explains that the state is anticipating some 400 million dollars in additional costs to provide health insurance under the statute to the uninsured, costs to be assumed by the taxpayers rather than by businesses through any obligation under the mandate to provide insurance; in this way, the Massachusetts statute is much more a mechanism – Trojan horse, some might say – to transfer the costs of the uninsured onto the tax rolls, rather than, by employer mandates, onto the business community. I think it is a safe bet that, had the act been drafted to transfer more of the health insurance costs onto the business community rather than onto the state taxpayers, you would have quickly seen a preemption challenge mounted. And finally in this regard, note the article’s reference to the amount of money that employers have paid to date for not providing the health insurance required by the statute, which is the underwhelming amount of 5 million dollars. I suspect Wal-Mart spent not too much less in legal fees to get the Maryland Fair Share Act overturned, and those aren’t numbers, spread across an entire business community, that are likely to provoke any economically rational business person to want to fund litigation over the act. Start to see those numbers creep up substantially, however, and you can safely plan for a preemption challenge.

At long last and after much effort, I think we may have succeeded in converting S.COTUS, the anonymous blogger on all things First Circuit at Appellate Law & Practice, into an ERISA hobbyist. How else to explain his (her?) expansive and insightful post yesterday on the First Circuit’s analysis of top hat plans in the decision the court issued yesterday in Alexander v. Brigham and Women’s Physicians Organization? As some of you may recall from our post on the district court ruling in that case, the dispute centered around a surgeon who was leaving the institution and a large amount of funds, attributable to services rendered by him while with the hospital that were not sufficiently exceeded by revenue brought in by him, that were deducted from his accounts in certain deferred compensation plans operated by the medical group. The central issue before the First Circuit was whether the deferred compensation plans constituted top hat plans for purposes of ERISA, and the First Circuit concluded that they did, because they involved only a small percentage of the defendant’s employees, each of whom was highly compensated from both an absolute and relative point of view. To the extent there is a takeaway from the First Circuit’s ruling, it really isn’t in the legal analysis, in that the court really simply applied the express language of the relevant provision of ERISA to the facts of the matter; what is of more interest and value is the manner in which the court did so, relying on a quantitative analysis of the number of physicians participating in the plan versus the employee base as a whole, as well as of the compensation of those individuals in comparison to the employee population as a whole. The case can certainly be cited for the proposition that this is the appropriate approach to determining whether the requirements for top hat status are satisfied in any particular case, and provides support for a litigant to delve into actual statistical data to prove or disprove such status.

Fellow blogger Susan Mangiero and I are quoted extensively in a very interesting article, available here, in the January issue of the Institutional Real Estate Letter. The article, titled Investing in Good Governance, focuses on one of – if not the only – potential silver linings in the whole subprime mortgage mess, namely the possibility that it will help to focus pension plan fiduciaries on the fiduciary obligations, particularly as related to protecting plan assets from ill advised and ill informed investments, that they owe to the plan itself and to plan participants.

I suggested some time ago that the Supreme Court looked poised to weigh in on some of the more tempestuous ERISA issues floating around the circuit courts of appeal, and there is probably no single issue that has raised more hackles than the question of so-called structural conflicts of interest, which exists when the administrator who decides a claim for benefits under ERISA is also the party who will have to pay the benefits if the claim is allowed. The lower courts have created a wide range of rules as to how, and when, such a conflict can alter the standard of review that a district court is to apply when passing on a benefit determination made by such an administrator.

SCOTUSBlog reported on Friday that the Supreme Court has now accepted cert on a case presenting this exact issue. To quote SCOTUS:

An ERISA case added to the docket tests whether the manager of an employee benefit plan has an illegal conflict of interest if the plan gives that individual the authority both to pay benefits and to rule on eligibility for benefits (MetLife v. Glenn, 06-923). In addition to that question, the Court added a second issue to be addressed: if that is a conflict of interest, how should that be taken into account by a court reviewing a specific benefit decision. The Sixth Circuit Court, in conflict with some federal appeals courts but in agreement with others, ruled that the dual role of funding and decider for plan administrators is a potential conflict of interest that must be weighed in judging a plan manager’s benefit eligibility ruling.

There is certainly benefit to the Court weighing in on this issue and hopefully adding some conformity across the federal courts on this issue; as I have discussed in other posts, such as here, different rules apply to this type of situation in different circuits, and it obviously makes no sense for a federal statute to be interpreted and applied differently dependent simply on the state in which a lawsuit over the issue is filed. However, as I have argued before in these digital pages, I think the whole issue of this so-called structural conflict of interest is something of a tempest in a teapot, and I do not agree with those, such as the Workplace Prof in his post on this same subject, who think that the mere existence of such a dual role on the part of the administrator warrants treating the decision maker as suspect and the decision as unworthy of the deference normally granted to an administrator operating under the appropriate grant of discretionary authority. Rather, either there is evidence before a court from which it can be determined or at least inferred that the administrator’s dual role affected the outcome, or there isn’t. While it may make sense to take that conflict into account in the former instance, where evidence exists that the administrator actually acted in a conflicted manner, there is no logical basis to do so in the latter instance; in the absence of evidence that the dual role actually affected the outcome, changing the standard of review constitutes nothing more than punishing the administrator simply based on its status, and not on evidence of misconduct. Last I looked, that’s not generally how we do things in the courts of this country.

I had two different, perhaps more substantive things in line to talk about today, but I think I am going to push them back to later in the week, to instead pass along a highly entertaining article (at least to people who really like the ins and outs and oddities of the insurance industry) that showed up on my doorstep in yesterday’s New York Times. I have talked before about a number of themes in insurance coverage, including niche coverages and the difficulty for individuals of funding their own defense against complicated lawsuits; both of these themes came together right here, in this recent post about directors and officers coverage and in particular concerning a niche product targeted solely at protecting former directors and officers.

This story here out of the New York Times is perhaps one of the more remarkable tales of niche insurance coverage, and tells the tale of a specialty insurance agency that exists solely to sell insurance to CIA, FBI and similar government employees that covers them against lawsuits and government investigations arising from their work. I have to admit, I have always wondered about this a little bit, as congressional investigations and government prosecutions of a variety of federal law enforcement and similar employees have piled up over the years, a curiosity that may have begun all the way back when I used to see Robert McFarlane, implicated in the Iran Contra affair, in the hallways of the office building where I had one of my first post-collegiate jobs. The article explains that the policy covers tens of thousands of government employees, is relatively inexpensive and provides “up to $200,000 in legal fees for administrative matters like investigations by Congress or an inspector general, or cases involving demotion or dismissal [plus] [a]n additional $100,000 is available for legal fees in criminal investigations, and the policy pays up to $1 million in damages in a civil suit.”

An insurance/business note that you should not overlook in the article is that the product really drives home the impact of risk sharing across a broad insured population. The coverage, which provides a fair amount of dollars of protection (although, as the article points out, probably nowhere near enough to cover the legal costs generated in the highest profile cases), costs each insured only a few hundred dollars, a pretty big gap between premium and the potential payout. However, when you note that the policy is purchased by tens of thousands of employees but only a tiny handful ever end up needing the specialized coverage it provides, you can see how the numbers work out to allow the insurer to provide such coverage at such a low and manageable cost for the insureds.

You see, everything at the end of the day is about insurance. Risk sharing that allows smaller businesses to move forward with operations, plaintiffs’ decisions over who has enough insurance to warrant suing, even the economic dislocations of climate change – everything comes back to the insurance industry. Here’s a great example, and an amusing one. Remember the lawyer who flew across the Atlantic after being diagnosed with tuberculosis? And who naturally was thereafter sued by other passengers who became quite worried about what they might have picked up from the guy? (Your faithful correspondent here moves three rows away on a commuter train if someone even sniffles, so I certainly have sympathies for those other passengers.) Well, he notified his homeowner’s insurer of those cases and the insurer is paying to defend him, but it has now launched the real battle, namely litigation over whether or not there is coverage for these claims against him; if there isn’t, he’s stuck paying any judgments or settlements. You can find the whole story here. A couple of interesting side points. First, there is no doubt the insurer is, as the article suggests, taking the right tack here; the proper approach is to defend and simultaneously ask a court to declare whether there is any coverage. This is particularly so in this instance because of the second side point, which is that, on first glance, those coverage defenses of the homeowner’s insurer noted in the article aren’t the best; without even knowing the facts beyond what I’ve read in the media in the past or reading the complaint, I can spot the potential holes in their arguments from here. When coverage is particularly debatable, it makes no sense for an insurer to simply deny coverage and leave the insured on its own, because of the potential exposures – a long story, best saved for another day – that can attach to the insurer if it is wrong in deciding that there is no coverage; rather, the best tactical play in that situation is to defend the insured, and to not deny coverage unless and until a court agrees there is no coverage. The downsides to the insurer in that situation are nothing more than the costs of litigating the coverage question and possibly, depending on the jurisdiction, having to pay the insured’s costs in the coverage litigation if the court decides there is coverage; that’s a heck of a lot cheaper than the potential liabilities, including bad faith judgments, that can attach to an insurer that simply denies coverage on its own, and is later found to have been wrong.

Dying is easy, comedy is hard? No, ERISA is hard. I tell people all the time that there is almost no such thing as a simple answer to an ERISA related question, or at least no such thing as a straightforward answer. There are entire chapters in ERISA treatises dedicated to the seemingly, but actually not, question of the proper manner in which to request plan documents so as to invoke the statutory obligations, upon financial penalty, imposed on administrators to produce them. Or take the question of equitable relief in a cause of action brought under ERISA; in almost every other area of the law, we all know what equitable relief is, but in ERISA, we have to engage in a historical inquiry into the development of the law of remedies to know if a particular claim is equitable or not.

Now when you add in on top the fact that ERISA and its imposition of fiduciary obligations is beginning to supplant securities litigation theories as a method for suing corporations and investment banks for subprime, stock drop and other investment losses, as discussed here for instance, you can see just how complicated the topic becomes, as well as how potentially dangerous for fiduciaries and plan sponsors are the issues raised by ERISA. And of course, that’s what makes practicing in this area fun for those of us who handle these types of cases. But it also makes thorough and timely analysis of litigation risks and exposures crucially important, and what looks to be a promising new internet based research tool to help with this is now available. Pension Litigation Data is now up and running on line, and is meant to be a tool that will allow up to the minute research into the numerous pension related lawsuits pending in United States courts. The subscriber based site “debuts with over 1,500 retirement plan legal actions, each classified by nearly 100 fields, including court circuit, type of allegation, plaintiff, defendant and date [and provides a] continuously updated and searchable database” on the subject.  A joint venture of a couple of companies, including fellow blogger Susan Mangiero of Pension Governance LLC, I think it looks promising, and you may want to take a look.

Here’s an interesting little case out of the Fourth Circuit this week concerning what, at this point, must be the world’s most famous long term disability plan, namely the NFL’s Bert Bell/Pete Rozelle NFL Player Retirement Plan. This plan has been the subject of much media commentary over the past few years, as former players have come forward to complain about the benefits available under the plan to long retired players and as stories, like this one here concerning former Pittsburgh Steeler Mike Webster, have come to light involving questionable decision making in denying the claims of long retired players. I recently reviewed the disability benefits terms of the plan for other purposes, and it is frankly a pretty interesting document, with a lot of room for ambiguity in its application. This stems from the fact that the plan provides different types or levels of benefits depending on when a former NFL player became disabled, including how long after ceasing playing in the league the incapacity set in. The plan recognizes that the nature of professional football can result in long term injuries that may not manifest themselves in disability until years, in some instances many, have passed from the time the player retired from the league, and different benefits can kick in depending on when in that time period the player’s disability, originally stemming from injuries incurred while a player, finally arose and disabled him. Deciding when in that long stretch of time the retired player’s long ago on-field injuries finally manifested themselves in an inability to work, i.e., in permanent and total disability, is a difficult undertaking, rife with room for disagreement. And that’s exactly what this new case out of the Fourth Circuit, involving former Bears linebacker Wilber Marshall, is concerned with, the sheer difficulty of making the determination. The Fourth Circuit concluded that the medical evidence did not support the dating of that event given by the board that administers the plan, and pushed the date further back, resulting in an award of additional benefits to the retired player.

A colleague – who, to protect the innocent, shall remain nameless (sort of a blog witness protection program) – passed along this remarkable decision out of the Fourth Circuit this month, Evans v. Eaton Corporation Long Term Disability Plan. The decision is an elegant and sustained defense of the granting of discretion to administrators and the application of the arbitrary and capricious standard of review under ERISA. The opinion reads almost as though the court set out to answer, and perhaps even to throw down a gauntlet to, critics who complain that the Supreme Court should not have established discretionary authority and the corresponding level of review, explaining, among other points, that such review is instead entirely consistent with the purposes and operation of ERISA, as well as with congressional intent. It’s a fine decision, whether you agree or disagree with the court’s analysis and conclusions. I would go beyond that, and suggest that critics of arbitrary and capricious review need to confront and provide a persuasive response to the court’s analysis of these issues, if they are going to criticize, with any credibility, the arbitrary and capricious review standards applied by the courts.