Roy Harmon, over at his Health Plan Law blog, has his typically scholarly take on two recent rulings out of the United States District Court for the District of New Hampshire in the case of Hopper v. Standard Insurance Company. The rulings primarily revolve around the question of which claims in the lawsuit are preempted under ERISA, and the law, reasoning and rulings of the court on these issues is consistent with First Circuit law, which grants a pretty broad sweep to ERISA preemption. What caught my eye about the case, however, and was of particular interest to me, was the discussion of whether the claims against one of the defendant entities that was involved in the insurance program at issue, namely the insurance broker, were preempted. The court, in one of its two rulings, determined that the broker did not play the role of a fiduciary, was not subject to ERISA, and that the claims against it were not preempted as a result. The court explained:

Hopper’s misrepresentation claims against WGA [the insurance broker], however, are different. Unlike Standard, which functions as an ERISA entity, see Hampers, 202 F.3d at 53 (citing Stetson v. PFL Ins. Co., 16 F. Supp. 2d 28, 33 (D. Me. 1998))(explaining that the "primary ERISA entities are the employer, the plan, the plan fiduciaries, and the beneficiaries of the plan"), WGA is strictly an insurance broker, engaged in sales and marketing functions.

WGA had no direct control over Standard’s insurance policy or the benefits plan. WGA did not administer the plan, and did not determine participant eligibility for benefits or consider appeals of benefit denial. Put differently, Hopper’s claims against WGA are limited to WGA’s "role as a seller of insurance, not as an administrator of an employee benefits plan." Woodworker’s Supply, Inc. v. Principal Mut. Life Ins. Co., 170 F.3d 985, 991 (10th Cir. 1999).

This result is consistent with the underlying goal of ERISA "to protect the interests of employees and other beneficiaries of employee benefit plans." Morstein v. Nat’l Ins. Servs., Inc., 93 F.3d 715, 723 (11th Cir. 1996). "If ERISA preempts a beneficiary’s potential cause of action for misrepresentation, employees, beneficiaries, and employers choosing among various plans will no longer be able to rely on the representations of the insurance agent regarding the terms of the plan." Id. As a result "[t]hese employees, whom Congress sought to protect, will find themselves unable to make informed choices regarding available benefit plans where state law places the duty on agents to deal honestly with applicants." Id. at 723-24.

Accordingly, Hopper’s misrepresentation claims against WGA are not preempted by ERISA.

I think at least this part of the ruling, though arguable, is correct, so I don’t have any real quibble with it. What catches my eye, however, is the issue it raises, of whether an entity involved with an ERISA governed plan is better off staying out of the eye of the storm by avoiding a role that would grant it fiduciary status, or is instead better off playing a large enough role in the administration of the plan to end up being assigned that status. Falling outside of the ERISA framework leaves the entity exposed, as was the broker here, to a range of common law and state statutory claims; indeed, the potential exposure of such a defendant is limited only by the imagination of plaintiffs’ lawyers (and to a certain degree, the actual facts). On the other hand, coming within the realm of entities regulated by ERISA would preclude those types of claims from being asserted against the entity, while limiting recovery to that which is authorized by ERISA.

Granted, it is probably not something that the insurance broker in the Hopper case gave any thought to at the commencement of its involvement with the plan in question, but it might be something for any entity playing a role in an ERISA governed plan to consider at the outset of their retention: should they put themselves in a position to be a fiduciary subject to ERISA, or should they avoid that like the plague?

Well, health insurance really isn’t a major focus of this blog, although we do comment on it from time to time, and it certainly touches on both focuses of this blog, ERISA and insurance. Employer provided health insurance has always done well by me and mine, so I don’t really have a vested interest in this topic, but the always interesting Robert Frank has this to say today in pitching the merits of converting to a single payer health insurance system. Its well-written, persuasive and elegant, but I think he gives short shrift to two particular points in making his case, possibly because of limitations on the article’s length and the fact that one could obviously – and many have – address these two issues in great depth and across many pages. In the first instance, he is a little too glib in assuming that, given the economic benefits of the current system to many of those involved, the economic and political barriers to removing health insurers from the equation can be easily overcome. In the second instance, he is a little too quick to assure us that, since his son was happy with his medical care in Paris, we can all assume that the accessibility and availability of care enjoyed by those of us who are in fact currently insured will not suffer by a move to a government based single payer system. I have little doubt there is plenty more evidence out there on this last point one way or the other, and that it was the restrictions of newspaper writing that limited how much he could put in on that issue and caused him to instead rely on the shorthand of a personal anecdote. At the end of the day, however, these two points that he simply assumes are not barriers to a single payer system are, in fact, the real political and economic issues that confront any attempt to move to such a system.

I was going to write about something else today – about a particular technical, tactical issue in litigating insurance coverage and ERISA, particularly breach of fiduciary duty, cases – but I came across something else that was too intriguing to me to pass up, and I will return later this week to the issue I meant to discuss today. What caught my eye was this article on cyberinsurance, which I liked for a number of reasons: one, it is a good article on the topic; two, it sounds cool, what with the word cyber in it; and three, it mingles my interest – reflected by the existence of this blog – in technology with my professional interest in insurance coverage.

And just what is cyberinsurance? It is a specialty insurance product covering the risks inherent in reliance on computer data and computer generated, stored and manipulated information. As the article points out, most traditional insurance products relied on by businesses do not provide much, if any, coverage for the risks related to a business’ reliance on this type on technology, so a few insurers have created specific policies targeting this risk. The policies cover:

First-party business interruption covers revenue lost during system downtime caused by accidents and security breaches. Losses during catastrophic regional power outages are typically excluded, but that’s little different from standard exclusions for floods or other "acts of God."
First-party electronic data damage covers recovery costs associated with compromised data, such as virus infections.
First-party extortion covers ransom demands of hackers who claim to control systems or data and threaten to do serious harm.
Third-party network security liability covers losses associated with the compromise and misuse of data for such purposes as identity theft and credit card fraud.
Third-party (downstream) network liability covers judgments from lawsuits initiated by those harmed by denial-of-service attacks and viruses sent out over your system.
Third-party media liability covers infringement and liability costs associated with Internet publishing, including Web sites, e-mail and other interactive online communication.

One of the more interesting things from an insurance coverage standpoint about the article, and about this product, is that, as the article points out, “[u]nlike traditional insurance policies, cyberinsurance has no standard scoring system or actuarial tables for pricing premiums,” and instead each company that offers the coverage must investigate the potential insured’s exposure and develop a price point for that particular insured that adequately captures the risk.

 

I came out on the wrong side of this order from one of my cases, but that’s alright; although John Barth’s fictional lawyer in the Floating Opera may have never lost a case, any real life lawyer who tells you the same thing is, well, speaking fiction.

But it is an interesting ruling nonetheless, on a relatively new and important issue, namely the scope of electronic discovery obligations imposed by the e-discovery amendment to the federal rules. This decision by a U.S. magistrate judge presents the factors that should be considered to determine whether electronic discovery should be ordered, or is instead too burdensome to be allowed.

There is also in the decision a little lesson for ERISA governed plans, namely, to make sure that electronic databases and electronic claim files are structured in a manner that allows for easy recall and searching of data, because as this order reflects, the courts will order such searching and production of electronic data if that data is in play in the case, even if the data is stored in a way that makes it very expensive to uncover.

Recently, waiting for a pretrial conference in federal court on one of my cases, I listened as a judge explained to the lawyers in a different case, based on only knowing the causes of action, what the actual facts of the case before him must be, even though he had never heard from the parties before. He did, in fact, actually nail the general outline of the case off the top of his head, and the lawyers for the parties simply had to fill in a few of the more specific facts for him. The judge explained that he had seen that type of case a thousand times before, and the fact patterns were always basically the same.

I was reminded of this when I read this recent decision by Judge Tauro in the Massachusetts federal district court, which concerns competing claims to life insurance proceeds provided under an ERISA governed plan. It seems as though the facts of this case are likewise always the facts in these types of claims: a divorce proceeding, followed by a standard state probate court order forbidding the husband from removing his soon to be ex-wife as the beneficiary, followed in short order of course, by the husband changing the beneficiary to his girlfriend (usually followed not long afterward by the husband’s demise, although no one has proven – to my satisfaction anyway – a causal linkage between that and either the girlfriend or the change in beneficiary).

Now of course what happens in that case is you end up with two competing claimants to the life insurance proceeds, one of whom – the ex-wife – asserts that she could not have legally been removed as the beneficiary, and the other of whom – the girlfriend – claims that she is the beneficiary pursuant to the plan’s terms and therefore must be paid the proceeds, at least if the plan’s terms are going to be enforced. And then what happens next of course, is that the plan administrator, quite rightly, files an interpleader action asking the court to figure out which one of the two should get the proceeds. A plan administrator would err if it did anything else, as ERISA preemption and the plan’s terms would suggest that the girlfriend should get the proceeds, but this would be in direct contradiction of a probate court order; there is no reason for the plan and its administrator to be stuck between the rock of the plan and the hard place of the probate court order. And avoiding being stuck in this type of position is exactly why federal law allows interpleader in this situation.

Judge Tauro, in his opinion at the end of January in Unicare Life & Health v Chantal Phanor et al, presents in a very logical manner exactly how this issue should be considered and resolved, finding that the proceeds should be paid out to the former wife under this scenario, so long as the probate court order qualifies as a qualified domestic relations order (“QDRO”) for purposes of ERISA. As the court explained, Congress expressly exempted QDROs from preemption, so as to allow probate courts to properly divvy up marital assets. The key issue with QDROs, and whether the beneficiary designation mandated by them should govern instead of the beneficiary designation that would govern if the terms of the plan controlled the issue, is that there are specific characteristics of the order that must exist for it to qualify as a QDRO. An issue of controversy, and which was at the center of the dispute in Unicare, is how strictly those requirements should be applied, and whether a probate court order that only loosely fits the requirements can qualify as a QDRO for these purposes. Judge Tauro came down squarely on the side of not taking those requirements literally, instead requiring only that the probate court order fit generally within the requirements and fall within the purpose intended to be served by QDROs.

For some reason, the Unicare decision is not currently available on the Massachusetts District Court’s website, but I will keep an eye out and post a link to it when it becomes available.  For now, it can be found on Lexis, at 2007 U.S.Dist. LEXIS 6136.

This blog serves many purposes, at least in my mind. Among them is to bring to the reader information he or she may otherwise not have access to, and another is for me to investigate things in the insurance and ERISA fields that I am interested in. I think both of these purposes are well served by a recent discussion between the blog and Robert Kingsley, who until last year was the President and CEO of Financial Pacific Insurance Company, a California based insurer; Rob left the company after closing its sale to the Mercer Insurance Group. Rob spoke with the blog recently to provide some insight from inside the insurance industry:

Blog: You have certainly had a close up view of the trend towards consolidation in the insurance industry, having just overseen the sale of one insurer to another. Any thoughts on whether this trend will continue, accelerate, or instead slow down?
Rob: In a declining rate environment with the pressure to grow and companies flush with capital there is little doubt the pace of consolidation will accelerate.

Blog: Is the trend towards consolidation a positive or instead a negative for the industry?
Rob: I think consolidation is a good thing for any industry so long as the markets remain competitive and the barriers to new capital and new ideas remain relatively low. The fact of the matter is that smaller, entrepreneurial organizations innovate in ways the larger companies, due to their sheer size, are incapable of.

Blog: What about for the consuming public?
Rob: So long as the market remains competitive the trend toward consolidation will help consumers. For one thing, as companies grow through consolidation they achieve greater economies of scale in their expenses and a portion of the savings will be passed on to consumers in the form of lower rates.

Blog: What is driving the urge to merge in the industry?
Rob: The industry is over capitalized and companies have made certain growth and profit growth ‘promises’ to investors, which are simply not achievable through organic growth.

Blog: Big insurers, smaller insurers? Who’s got the bigger upside at this point?
Rob: I may be biased (having a small company background) but I am a believer in the small insurer. I think they generally know their markets better and react and respond to opportunity more effectively than their larger counterparts. It’s not a universal rule, but on average, smaller niche companies have outperformed their larger peers. Conning has performed a couple studies on this subject.

Blog: There is probably no bigger consumer of legal services than the insurance industry. From your point of view of having led a company that consumes those services, what is your biggest complaint about lawyers and the services they provide to clients?
Rob: The big disconnect is that the lawyers are selling time and the insurance companies are buying results. That’s all I say about that subject (note my wife is an attorney).

Blog: What’s the single biggest thing lawyers could do to better serve clients like the company you headed?
Rob: Financial Pacific had (has) an in-house law firm that handled 80% or more of our litigated cases. The reason we formed that firm was to change the economics of the loss adjustment process. When a carrier is paying an hourly fee to an attorney it can affect the carrier’s settlement appetite and price point. Turning that variable cost into a fixed cost allows the carrier to cleanly evaluate the merits of the litigated case without being affected by the ‘meter is running’ mentality. Law firms that are sensitive to that dynamic and/or are willing to be evaluated and compensated based on their results (their outputs) as opposed to their inputs (hours) would be valuable and highly coveted.

Blog: Rob, thanks for your time.

No doubt at least some of you have noticed my fixation on the attorney-client privilege, and where its borders should be drawn when a party’s counsel plays a central role in the events that may or may not trigger insurance coverage or show bad faith. I have the same sort of cartographer’s obsession with mapping where those borders should be when the administrator of an ERISA governed plan makes a benefit determination based on the investigation and legal conclusions of counsel. What happens to the privilege, for instance, if a company’s in-house counsel interprets the plan’s terms and applies them to the facts, thereafter recommending to the plan administrator what decision to render on a claim? And what happens if the plan administrator then adopts that recommendation as its determination? One can picture the same scenario involving reliance on outside counsel to do the same work.

Well, as this well-developed post from the Health Plan Law blog discusses, the plan administrator can delegate in this manner to counsel, and adopt counsel’s findings, at least as a general statement. But what effect would doing so have on the attorney-client privilege that would otherwise normally attach to communications between counsel and a client? Health Plan Law has this to say on that topic:

The question is this: while a plan may consistent with exercise of fiduciary discretion delegate duties as to claim investigation to legal counsel, is there a concomitant sacrifice in scope of privileged communications?
A fundamental legal principle states that the attorney-client privilege may be waived expressly or by implication. Implied waivers are consistently construed narrowly.See, In re Lott, 424 F.3d 446, 452 (6th Cir.2005). On the other hand, “an attorney-client communication is placed at issue when the party makes an assertion that in fairness requires examination of protected communications.” Clevenger v. Dillard’s Department Stores, Inc. Slip Copy, 2007 WL 27978 (S.D.Ohio 2007) (Dillard’s defendants impliedly waived the privilege for communications with legal counsel related to plan termination). The concern raised here is succinctly stated as follows: ‘the attorney-client privilege cannot at once be used as a shield and a sword.’ United States v. Bilzerian, 926 F.2d 1285, 1292 (2d Cir.1991)
And then again, to what extent does privilege apply in fiduciary matters in any event? In this connection consider the following regarding the “fiduciary exception”:
Most courts, including the Seventh Circuit, have recognized the existence of a fiduciary exception to the attorney-client privilege. In J.H. Chapman Group, Ltd. v. Chapman, No. 95 C 7716, 1996 WL 238863 (N.D.Ill. May 2, 1998), for example, the court explained that “[t]he fiduciary duty exception ‘is based on the notion that a communication between an attorney and a client is not privileged from those to whom the client owes a fiduciary duty.”See also Bland v. Fiatallis North America, Inc., 401 F.3d 779, 787 (7th Cir.2005) (recognizing fiduciary exception in the ERISA context).

On more of a concrete and less abstract level, you can think about this in terms of the administrative record; there are exceptions, but in most circumstances and in most courts, the administrative record would make up the universe of evidence that the court can consider in ruling on a challenge to an administrator’s determination of a particular claim.  Generally speaking, the administrative record is to contain the information relied upon or considered by the administrator in making that determination.  But what about attorney advice received by the administrator and relied upon by it?  The scope of the attorney-client privilege can impact whether or not that advice should be part of the administrative record.

Just a brief note today on something interesting that caught my eye concerning a topic, top hat plans, that we have discussed a fair amount recently. Here is a nice detailed technical discussion of top hat plans from the BNA Pension and Benefits Blog. The discussion is centered around the Alexander case out of the federal district court that I talked about here, and on which the post’s author apparently served as a non-testifying expert.

Now here’s a curious little article from the New York Times on the question of whether mutual fund companies, including in their retirement calculators, deliberately overestimate the amount that people must save and invest to be able to afford to retire. The article notes that a number of respected economists find this to be the case, and the article notes that the mutual fund companies themselves obviously have much to gain if employees believe they must increase their retirement savings. As the article bluntly puts it, “financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.” Specifically – although without analyzing the data behind these conclusions, one can’t be sure whether these numbers fall into the old saw that the three types of lies are lies, damn lies and statistics – one of the economists claims that “Fidelity’s online calculators typically set the target of assets needed to cover spending in retirement 36.4 percent too high. Vanguard’s was 53.1 percent too high. A calculator offered by TIAA-CREF, one of the largest managers of retirement savings, was 78 [percent] higher.”

The article engenders a couple of thoughts. For one, would 401(k) fee and other breach of fiduciary litigation related to retirement savings be quite as wide spread if the working/retirement saving public believed they were saving enough already for retirement, rather than having been taught that they are behind the eight ball in accumulating enough money for retirement? This raises something of a behavioral question, or maybe a chicken and the egg question. Would people care enough to sue over these types of issues if they thought they were safely prepared for retirement, and to what extent does the fear that they are not drive decisions regarding litigation? Or are these suits really driven by the imagination of plaintiffs’ lawyers, and thus it really wouldn’t make any difference at all what the actual world view is of employees as a whole with regard to whether they are on track for a secure retirement or should instead be very, very afraid of what the future will bring?

And finally, would it be a breach of fiduciary duty if plan administrators overstated the amount that employees should save for retirement when they educate employees? And if it was, what would the damages be, particularly if the oversavings produced significant investment gains for the plan participant?

This post from Legal Sanity, in which the writer talks about the importance of mutually beneficial business relationships, defined as those in which each side essentially is watching out for the other even more than for itself, caught my attention, although not, I am sure, for the reason the writer intended, who wrote it with an eye toward the subject of business development for lawyers.

It instead registered with me because I have been looking these days for a neutral umpire for an insurance coverage arbitration before the American Arbitration Association, an issue complicated by the fact that, almost like combatants in a civil war, coverage lawyers are almost always predominately in one camp or the other, either generally representing insurers or instead generally representing insureds. This dynamic can make it very difficult to find an experienced insurance coverage lawyer to serve as an arbitrator who is not seen by one side or the other as excessively aligned with the interests of one or the other of these frequently warring camps.

But if, as the Legal Sanity post suggests, the best business relationships are mutually beneficial rather than adversarial, is the insurance regime really best served by a sort of wary, arms length cold war relationship between insureds and insurers? Don’t both, at the end of the day, really have the same fundamental primary goal, namely the lowest amounts of loss possible under insurance programs? And couldn’t an approach aimed at the two sides working together more, rather than more often than not just crossing swords in litigation after the fact, go far toward reducing both insurers’ losses and insureds’ corresponding premiums?

I will give a concrete example. Many commercial insurance programs mandate arbitration of disputes as one of the terms of the policy. But what if they mandated mediation as a first step in any dispute over a denial of coverage, with both sides expected to bring to the mediation the same level of legal representation, preparation and analysis as they would bring to a court proceeding? Isn’t it possible it could end up with better outcomes for both sides, at less expense and with the possible result of a more trusting long term relationship between businesses and insurers, parties who, after all, have been in a closely entangled business relationship for decades and will continue to be so for as far forward as the eye can see?