Anyone interested in the topics of this blog is probably familiar with the media coverage of homeowners insurers raising rates and/or simply withdrawing from writing homeowners insurance in coastal regions, including not just in the traditional hurricane regions of the south but up through New England as well. Many stories are replete with sturm und drang about the issue, ranging from political criticism of insurers to questioning of the companies’ motives. Studies like this one here, however, suggest that it is instead entirely rational for insurers, who should have a long term perspective in mind, to substantially reduce their exposure to coastal risks. The long term potential loss exposure in those markets is clearly growing exponentially, and it would be fundamentally irrational for insurers not to recognize and respond to it.

I have written before about the idea of insurance and insurers as leading indicators, and that is what you are seeing in this scenario as well. If insurers are unwilling to expose themselves to the increasing risk posed by coastal development in the era of global warming, then it may be that they are on to something, and the political sturm und drang should be directed at ameliorating the risks they are forecasting and trying to avoid, rather than at them for doing so.

Word comes to me today from Susan Mangiero, who pens the Pension Risk Matters blog (that phrase reminds me just a little of one of my favorite move phrases of all time, “a lot of alliteration from anxious anchors”), that I am quoted in an interesting article by Liz Peek in the New York Sun today, titled “Pension Fund Litigation Could Slow Investments.” The gist of the article? That there is a lot of hidden risk in pension assets that fiduciaries and plan sponsors aren’t fully cognizant of, and that this reality is placing fiduciaries at risk of litigation. The article, relying on data from Susan’s new company that tracks pension related litigation, points out the swelling numbers of lawsuits being filed over this issue.

Does the fact pattern below allow for a remedy under ERISA, particularly as the Sereboff/equitable relief line of cases has been interpreted in the First Circuit to date? 

The plaintiff employee says that she purchased a life insurance policy on her husband through her employer’s group coverage. When her husband was dying, she resigned her employment to care for him. She asked her employer for the proper forms to convert the group life insurance coverage to individual coverage, as she was entitled to do. Her employer refused or failed to provide the forms despite several in-person and telephone requests. In the meantime, the time for conversion (31 days) expired, her husband died, and now the life insurance company has denied her any benefits.

The United States District Court for the District of Maine just found in the case of Mitchell v. Emeritus Management that the fact pattern does not support a cause of action under any of ERISA’s remedial rights – for breach of fiduciary duty, for denied benefits and for equitable relief – available to a plan participant, a situation the court found “very troubling.” The court found that: (1) the participant could not recover the insurance benefits by means of an action for equitable relief because it was truly a claim for payment of the benefits at issue, rather than for equitable relief; and (2) the participant could not recover the proceeds on a claim seeking benefits because, under the facts at issue, there was no right to life insurance proceeds under the actual plan terms since there was no timely conversion, and therefore the administrator did not act arbitrarily and capriciously in denying the claim.

I guess two things jump out at me. One, the court rightly acknowledged that this result flows from the fact that ERISA simply leaves some harms incapable of remediation, something that is understood to have simply been part of the balancing act engaged in by Congress in enacting the statute, in which a decision was made to grant only limited rights of recovery in exchange for enacting a statute that would encourage the creation of employee benefits. Second, however, and at the same time, I think this is more what the Workplace Prof had in mind last month when he complained about what he considers the “grand irony” of ERISA, that a statute intended to protect employees can end up depriving them of a remedy, than was the case of the Wal-Mart equitable lien, that I discussed here, in which the Prof proffered the “grand irony” thesis, one which I took issue with in the context of that particular case.

You know, people often get bogged down when talking about ERISA with the limitations of the statute and the protections it provides on the individual level; that is, to an extent, what the hullabaloo about the LaRue case is about, as it concerns the question of whether investment losses in a 401(k) plan are actionable if they only injure an individual, or instead only if they have a macro effect on the plan as a whole. But a look at the bigger picture on occasion reflects why we have ERISA, why its an important statute, and why it matters, despite the cottage industry of criticism that the statute and its interpretation by the courts has created. A story in the New York Times today jumped out at me as demonstrating the importance of ERISA’s imposition of fiduciary obligations on pension plans on a macro basis, as imposing a regime in which the interests of the plan participants whose retirements are at stake must be placed at the forefront of all considerations related to the management of a pension plan. The article concerns investment fund problems in a state government fund in Florida, created by the subprime lending mess. Before anyone yawns into their third cup of coffee of the day over yet another story on subprime lending (as the people at Mortgage Meltdown astutely pointed out recently, if you follow the mass media, you would end up with the erroneous impression that everything is, and everybody is holding, subprime debt), take a look at the part of the article where the elected officials who oversee the fund discuss possible remedies, and the first thing they think of is to raid the massive amount of cash in the state pension plan. And that, on a macro level, is the point of ERISA’s protection of pension plan participants, and its imposition of obligations on those who run such plans to act in the best interest of the participants in managing the plans: they represent huge piles of cash that can be tempting targets in the worst of times, and the obligations imposed by ERISA exist to counter that temptation. That’s a good thing, if you ask me, no matter how much criticism the details of the statute’s application provoke.

The media is ablaze with discussion of this whole Dickie Scruggs indictment/bribery circus. I don’t expect I am going to have much to say about it – ever -on this blog; not to put on airs, but although insurance is in the title of this blog, I try to focus the subject matter on substantive insurance issues, and I don’t think this qualifies. But like most people, I can’t take my eyes off a good car wreck either, and like many lawyers, I am fascinated by the story. Bribe a judge? And not only that, but to get him to send something to arbitration? Excuse me? But really, the only thing I wanted to say was that for those of you who are interested in this very interesting event, far and away the best, most thorough, most nuanced and most objective coverage anywhere is by David Rossmiller on his blog, Insurance Coverage Law. You can tell from his coverage that David was a professional journalist before becoming a lawyer before becoming a blogger. This story is right in his wheelhouse – it’s a breaking journalistic story (much more than it is a legal story), that calls for an in-depth knowledge of something David has been following closely on his blog for a long time, the Hurricane Katrina insurance coverage litigation.

More on LaRue in the wake of Monday’s oral argument, and the inevitable commentary from all sides – including this one – on Tuesday:

• My last two posts on the LaRue case, here on the briefing and here on the oral argument, assumed a certain prior level of understanding on the part of the reader as to the issues and statutory provisions involved in the case. Workplace Prof has a more soup to nuts review of those, in the wake of the argument, here, which is also cross-posted here.

• Susan Mangiero was taken by the discussion in the oral argument of what powers may or may not have been identified in the summary plan description appended to LaRue’s complaint. I took this discussion by the Justices to be part of an inquiry into what are the constraining parameters of a claim such as the one brought by LaRue. As I have discussed before, I think the Court will allow this type of claim to be actionable, primarily because the law of ERISA is going to have to evolve to fit the brave new retirement world in which defined contribution plans, rather than defined benefit plans, rule, and establishing a right of remedy for the type of error alleged by LaRue is a necessary part of that evolution. However, I don’t expect, both for reasons related to the historically limited remedial reach of ERISA and the philosophy of various justices, that theory of liability and right of recovery to be unconstrained or left as simple as error by fiduciary plus loss to one account =s liability. Rather, although the Court may leave the parameters of the theory of liability to future cases for development, I expect the Court to at least indicate in dicta certain restraints and constraints on such claims. In this way, I think the eventual opinion will essentially walk the line between the concern of the respondent and its supporting amici that allowing claims of this nature will excessively increase the cost of providing plans to employees and the concern voiced by LaRue’s counsel that employees must be allowed a remedy for this kind of error.

• And here’s the New York Times’ highly readable account of the oral argument, by the excellent Linda Greenhouse.

• Finally for today, on a lighter and less substantive note, here’s the WSJ Law Blog’s post on the case, with a nice little profile of Tom Gies, who represented the respondent.

Just read the transcript of Monday’s oral argument in LaRue, which you too can read right here. Interesting argument, and interesting lines of questions from the court, although I am skeptical as to how much guidance as to the court’s thinking one can draw from the Justice’s questions themselves. In many ways, the lines of inquiry seemed to parallel my earlier post here on the arguments made by both sides. I had mentioned in my earlier post that the respondent focused heavily in its briefing on two points, the first being that prior jurisprudence of the Court concerning ERISA cases suggest that the narrow framework of ERISA remedies should not extend to encompass this type of claim, and the second that LaRue’s case itself was pled with holes that did not suggest it as a good vehicle for authorizing these types of claims. With regard to the first line of argument, questioning right off the bat of the respondent’s counsel targeted the fact that the prior jurisprudence relied upon by the respondent did not concern defined contribution or other retirement benefits and was based on a starkly different fact pattern; I mentioned in my earlier post on the parties’ briefing that I thought the earlier jurisprudence was too different in nature to provide much support for either side in the circumstances presented in the LaRue case, and after reading the argument, I think that remains the case. With regard to the second issue, LaRue’s counsel was peppered with questions concerning possible holes in the way he sought to recover for the alleged mistakes at issue, questioning that I thought was consistent with my earlier view that while the Court may well allow the type of claim at issue here to be actionable, the Court may well find that LaRue himself hasn’t placed himself in a position that he qualifies to go forward with such a claim. Perhaps the most interesting nugget to me in the transcript is that, with regard to the question of whether such a claim should be allowed at all – i.e., found to be authorized by the statute – the questioning seemed to consistently focus on one simple issue, namely that the only intelligible and consistently intellectually defensible position is that the plain language of the applicable statutory section would allow a loss to only one or a few plan participants’ accounts to be actionable, and would not require, as the respondent asserts, a loss to most or all of the plan’s participants before a claim for breach of fiduciary duty could exist.

Interestingly as well, the issue of whether a claim could proceed in the LaRue case as an equitable claim for relief under the Sereboff line of cases was discussed in only the most cursory terms by all involved, including the Justices. For various reasons, not the least of which is that the Court’s prior treatment of this issue has painted the Court into a bit of a corner from which it cannot back out without either repudiating prior holdings or engaging in intellectual gymnastics, I don’t see the Court advancing the ball on this issue in its opinion in this case.

Roy Harmon and the Workplace Prof have the story of a severely injured worker whose settlement with the tortfeasor was effectively taken, in its entirety, by the plan administrator – Wal-Mart – on a reimbursement claim in accordance with the administrator’s rights under Sereboff. Roy Harmon has a nice factual discussion of the problem demonstrated by the case, and the Prof raises the ante, pointing out the injustice this is working for the particular individuals involved in the case. No disagreement there. But what concerns me is a point that the Prof makes, in which he effectively characterizes this as a problem driven by ERISA; sayeth the Prof:

In short, a truly horrible situation under ERISA, and not that far-fetched when one comes to understand the manner in which the scope of equitable relief under ERISA and ERISA preemption work together to create what I call the "Grand Irony of ERISA": that employers now use ERISA as a shield against employees; the same employees whose benefits ERISA was supposed to protect.
A Kafka-esque scheme [if] there was one and yet another publicity black eye for Wal-Mart.

But, although I am speaking almost third hand with little knowledge of the actual facts of this exact case, it seems to me this is not an ERISA problem, but a litigation tactics problem. It seems to me that the first obligation of a plaintiff’s lawyer in this type of a situation is either to obtain a waiver or compromise from the plan of its right of reimbursement that will keep the bulk of the recovery in the hands of the severely injured plan participant, or if that is not possible (perhaps because the plan administrator refuses to do so), to include in valuing settlement the amount that will have to be paid back to the plan on a reimbursement claim. If that makes the settlement value so high that the case can’t settle, then so be it, and it becomes a case which simply has to be tried and the amount of medical bills that must be reimbursed to the plan becomes just one part of the damages that go up on the blackboard in front of the jury in calculating the damages that the plaintiff claims should be awarded to him; in this way, if the jury returns a verdict, the amount that must be paid back to the plan is only one portion of the money recovered by the plan participant, with the participant free to retain the remaining amounts, which ought to encompass awards for future care, future loss of earnings, and the like.

One can fairly ask whether this places the participant at risk of losing at trial and taking nothing, and the answer to that question is, of course, that this risk exists and is significant; avoiding that exact risk is, after all, why a plaintiff settles a case for less than full value. But the fact is that a settlement, such as the one involved in the case Roy and the Prof discuss, that does not significantly exceed the reimbursement owed to the plan- after or without compromise by the administrator -can leave the participant in the exact same spot as a loss at trial would, holding no money at all after the plan is reimbursed.

Litigation is a dynamic and ever changing organism, and, much like Newton’s third law of physics, for every action during the course of a lawsuit there is a corresponding, if not necessarily equal and opposite, reaction. The situation presented by the admittedly horrible circumstances detailed by Roy and the Prof is one that needs to be resolved as part of playing out the end game of a lawsuit, not after the fact as a dispute over ERISA rights and remedies.

Given the tragic nature of the events in question, I don’t delve into this point lightly, or just because it looks like good blogging fodder. But in the discussions I have seen so far of this issue, and on the impact of ERISA on it, I haven’t seen this particular aspect discussed in detail, and I think it’s a point that simply cannot be overlooked by any plan participant or lawyer stuck in the same situation in the future.

Oral argument at the Supreme Court is scheduled for Monday in LaRue v DeWolff, Broberg & Associates, which presents the technical question of whether a loss to only one participant’s 401(k) plan is actionable as a breach of fiduciary duty causing a loss to the plan, but which on a broader level concerns the question of who should bear the administration risk (defined as the problems of mistakes or malfeasance in the operation of a benefit plan) inherent in the operation of a 401(k) plan. Is it the participant or instead the plan fiduciaries who should bear that risk? To LaRue, who focuses his arguments around this idea, mistakes attributable to the administrators that harm the account balances of a particular plan participant represent a risk that should be borne by the erring administrator, and should therefore be actionable under ERISA even if the only losses in the entire plan from the mistake were suffered by one particular plan participant. The respondents reply, quite correctly, that ERISA provides limited remedies and some losses are simply – and quite intentionally under the terms of the statute – not actionable; to the respondents, LaRue’s loss, which stemmed from the administrator not following his specific investment instructions related to his specific account, is exactly such a non-remediable event under ERISA.

While the respondents are right that ERISA, presumably intentionally and certainly consistently with the general understanding of the statute and its history, provides only limited rights of recourse and leaves some losses to be borne by the affected plan participant, the statutory language itself at issue in the case – concerning whether an individual’s loss of the type described by LaRue qualifies as an actionable loss to the plan when only the individual was harmed – does not specifically leave in or leave out the circumstances of LaRue’s particular loss from the category of losses that are actionable under ERISA. And that is really where the Supreme Court’s involvement here comes into play, on the question of whether the type of administration risk described by LaRue belongs within or without the statute’s remedies; how the Court interprets the specific statutory language at issue will decide that question.

Personally, I’m of the view that the Court will find that the statutory language allows for the type of claim that LaRue is presenting. The language in question is capable, without any stretching of the language, of including the kind of claim at issue, and past jurisprudence doesn’t bar – or even present a significant impediment – to such an interpretation of the particular statutory language at issue. Moreover, and interestingly given the respondents’ – quite appropriate – tactical reliance on the general theme underlying past Court opinions on ERISA cases that suggest a claim such as LaRue’s is not actionable, the body of law that bears on this issue really was not created in response to one of the primary economic developments in American life over the last handful of years, namely the transition over to a regime of individual responsibility for retirement by means of defined contribution plans such as 401(k) plans and the accompanying transfer to individuals of the risks of retirement investing, and the corresponding disappearance of a defined benefit regime in which all such risks were borne not by individuals, but instead by their employers. Questions like the one presented by the petitioner in LaRue haven’t really been addressed at the high court level in the context of this new economic reality, and I am not convinced of the utility of past ERISA decisions concerning other contexts in resolving the statute’s application in the defined contribution context. I suspect that LaRue will present an early example of the Court accepting that the statutory language in ERISA that remains open to differing interpretations should be understood as transferring at least some of the administration risk inherent in the world of 401(k) plans from the individual saver and onto the party in the best position to avoid the risk, namely the administrator.

At the same time, I am not convinced that this is going to do much good for LaRue himself. The respondents take the tactical approach in their briefing of focusing on the particular flaws in LaRue’s presentation of himself as the poster boy for plan participants confronted by erring administrators, in an attempt to show that the particular claim he presented to the courts below does not justify interpreting the statutory language in a manner that would allow his claim to proceed. It’s a pretty good argument, and I wouldn’t be surprised to see a final opinion that opens up the type of claim he is arguing for, but puts him outside of its scope.

Some years back, I was on a job interview when I was asked a question by a senior partner in a fairly good sized firm. When I began my answer with the comment that I was loathe to brag, he interrupted me to say that it was a job interview, so if there was ever a time when it was appropriate to brag, it was then. Not bad advice, in hindsight. In much the same way and with the same sort of license, I thought I would mention that this blog has been included by the people at LexisNexis on its list of top blogs at its Insurance Law Center, which I can recommend to you as a good place to locate cases, commentary and timely information on insurance related issues. I am told that “the selection of [the Boston ERISA and Insurance Litigation] blog was made by insurance editors at Matthew Bender and LexisNexis Mealey’s Insurance publications as one that can be relied upon to provide its readers with timely review and analysis on insurance and insurance related topics.” Well, we try to, anyways.

Either way, modesty – false or not – aside, I appreciate the recognition, and hope the readers of this blog find some more of the information they are looking for at the LexisNexis insurance law center.