With lawyers, how we view an opinion, and for that matter a blog post, frequently depends on the focus of our practices and the things that, as a result, we are looking for. I was reminded of this over the weekend when I came across this post on Appellate Law and Practice, a blog run by a self described group of federal law clerks and appellate lawyers who post about the recent decisions in the circuit courts of appeals that they cover. Being appellate practice oriented folk, a central aspect of their take on my recent posts about Janeiro and the contrary opinion, Abatie, out of the Ninth Circuit was to note that the two cases, and my posts on them, demonstrate a split in the circuits on the issues addressed in the two decisions.
Which was interesting because one of the things that jumped out at me right off the bat about the Ninth Circuit’s decision in Abatie, a decision I discussed in detail here and here, but did not previously comment on, is that in reading it, one can almost see the court and its clerks targeting a spot on the Supreme Court’s docket. From the detailed presentation of the interaction of the decision with current Supreme Court precedent, to the almost scholarly review of the various approaches of other circuits, it reads like an invitation to the Supreme Court to weigh in yet again on the standard of review and conflict of interest questions still open under current Supreme Court jurisprudence.

There was another important issue addressed in the First Circuit’s decision this month in Janeiro, one I had planned to address in a return post on the case, involving an issue dear to the hearts of anyone who sues plans, administrators or fiduciaries for a living, namely the right to recover attorneys’ fees in such a lawsuit. Before I could return to this point, however, I got sidetracked by my favorite decision of the month, Abatie v. Alta Health and Life Insurance. So I am returning to it now, before this point can get shunted to the side again by some other new development.
In Janeiro, you may recall, the defendant took a beating in the case, and the plaintiff, rightfully so under ERISA, sought to recover attorneys’ fees after prevailing on his claim. The First Circuit, addressing the district court’s decision not to award fees to the prevailing plaintiff, gave a nice, concise presentation of the law at this point in time in this circuit on this issue. Emphasizing that an award of attorneys’ fees in such cases is entirely discretionary, the court discussed the standards governing this determination in this circuit. In key part, the court declared:

ERISA provides that attorneys’ fees are available in the court’s discretion. . . . We begin by noting that in an ERISA case, a prevailing plaintiff does not, merely by prevailing, create a presumption that he or she is entitled to a fee-shifting award.. . . [T]his court has listed five factors that ordinarily should guide the district court’s analysis: (1) the degree of culpability or bad faith attributable to the losing party; (2) the depth of the losing party’s pocket, i.e., his or her capacity to pay an award; (3) the extent (if at all) to which such an award would deter other persons acting under similar circumstances; (4) the benefit (if any) that the successful suit confers on plan participants or beneficiaries generally; and (5) the relative merit of the parties’ positions. . . .This list is illustrative, not exhaustive[;]no single factor is dispositive; and indeed, not every factor in the list must be considered in every case.

The First Circuit approved of the district court’s analysis of this issue, and in so doing presented the model for how to address this issue. It is fact specific, and the way to argue it to the court, and for the court to in turn consider the issue, is to address what the actual facts of the matter show on that specific case with regard to each of the five factors (recognizing, of course, that the First Circuit specifically left open the possibility that there are still more factors that could possibly be considered, and that even some of the factors specifically identified by the court may have no relevance).

I tend to be a fan of facts, and of hard numbers, as they frequently paint a picture different than the one that would otherwise appear. This is no less true for the subject matter of this blog than for other subjects. Lawsuits and litigation, and the discussions about them, often focus on the spectacular or the rare. Insurance coverage is no different, as it is really the rare case that turns into a courtroom drama, a point I hinted at here, when I noted how relatively few coverage determinations are actually challenged in court and overturned. There has been much discussion in recent weeks about the Hurricane Katrina coverage litigation taking place in Mississippi, and in particular the hundreds of lawsuits still pending in the federal courts there. Yet in contrast, as this article reminds us, the vast majority of claims arising out of Hurricane Katrina have been settled amicably, with insurers paying out multiple billions of dollars in claims in Louisiana and Mississippi, and insureds reporting a high level of satisfaction with their insurers’ responses to the claims. The Insurance Information Institute reports that a year after the storm, approximately 95% of the Hurricane Katrina related claims in those two states have been resolved. Now, of course, the caveat is that we all know the old saying, that there are three kinds of lies – lies, dang lies and statistics – and thus we would need to see the underlying data – in particular the survey questions – to know how much credence to give this report, but I suspect the results being reported here bear a pretty good resemblance to reality.

Now here is a neat post about New Jersey using disclosure – and presumably the hope that embarrassment will cause a change in behavior – to address the problem of large employers who, instead of providing health benefits, allow subsidized state health care programs to provide the health insurance for their employees. This is in contrast to trying to mandate that employers pay for such care, directly or indirectly, for their employees, as was the case in Maryland with the Fair Share Act, and the problems with ERISA preemption that this more direct approach provokes.
I am not sure publicity and embarrassment will do the trick in solving this problem, but until someone figures out a way around the preemption problem that derailed Maryland’s more direct attempt to tackle this problem, this may be as good an approach as any that a state government can pursue.

The mortgage giant Freddie Mac has now agreed to a settlement of claims against it stemming from the effect of questionable accounting on the stock holdings of employees enrolled in its 401(k) plan. As Stephen Taub nicely sums it up:

Freddie Mac agreed to pay $4.65 million to settle a class-action lawsuit brought under the Employee Retirement Income Security Act. The charges stemmed from the company’s restatement for the years 2000 through 2002.
The mortgage giant had been accused of fraudulently overstating its earnings, thus inflating the value of its shares, according to published reports. Part of the affected stock was held in employee retirement plans.

More information on the settlement can be found here, here and here.
The lawsuit was “brought on behalf of past and present employees who held Freddie stock through their 401(k) retirement plans when the company disclosed billions of dollars of accounting errors and its share price sank.” The Freddie Mac action is of a type with other lawsuits claiming that ERISA was violated under these circumstances “because the people running the [401(k)] savings plan failed to give complete and accurate information to participants in the program and failed to manage the fund properly.”
Of particular note may be the applicable numbers, as the settlement calls for only a $4.65 million payment, which doesn’t seem like that high a number, given that “[a]t the end of 2002, $76.5 million of the retirement plan’s holdings — 19 percent of the total — was invested in” Freddie Mac stock, according to the plaintiffs. This may be more evidence for the idea, addressed here, that this theory of liability is increasingly no longer the road to riches for plan participants and their lawyers.

I like this case. Lobsters, boats, New England in the summer, insurance coverage – what’s not to like? Beyond that, this decision this month from the First Circuit is a nice textbook example of when a misrepresentation in an insurance application will void a policy. We all know that obtaining insurance requires applying for insurance, and this means filling out an insurance policy application. Misrepresentations by an insured in such an application can justify an insurer’s denial of coverage for a claim made after the policy was issued, but in many jurisdictions the fact that the insured made a misrepresentation isn’t enough to bring this about; instead, the insured has to have made a material misrepresentation, meaning that the misstatement by the insured must have truly affected the insurer and its decision to sell the insurance to the insured or the pricing of that insurance.
In Commercial Union Insurance Company v. Pesante, the insured applied for coverage for a gill net fishing boat, warranting that it (the boat, not the guy who filled out the application) was instead used for lobstering. The very fact that this scenario ended up before the First Circuit telegraphs what is coming next, that the boat was used for gill net fishing, not lobstering, and was damaged during its use for that type of fishing. Reflecting a general sense against voiding policies that one can gather from much of the case law concerning whether a policy can be voided for these types of misrepresentations, the United States District Court found that there was an insufficient causal relationship between the accident that the boat was involved in and the type of fishing being done, and that the misrepresentation did not preclude coverage as a result. The trial court “based its decision on a finding that there was no causal relationship between [the insured’s] breaches and the losses suffered. The court reasoned that, since [the insured boat] was steaming home when the accident occurred, [the insured] technically was not gill netting and therefore was not in breach of the warranty at the time of the loss.”
Seems kind of silly, if the insured can misrepresent in an insurance application the very nature of the risk being insured yet avoid any consequences by the sheer good fortune – if you can call it that – of having the loss occur on the way home rather than while out to sea fishing. It appears that the First Circuit saw it the same way, finding that the misstatement of the character of the boat justified a loss of coverage for the accident. The First Circuit noted that under Rhode Island law, a material misrepresentation voids coverage regardless of whether or not the misrepresentation was deliberate, and that a misrepresentation is material if it affected the insurer’s decision to insure the risk. The First Circuit found that under this standard the policy was void and the insured was not entitled to coverage for the accident because:

had the underwriter known that the Oceana was used for gill netting and not lobstering, [the insured] would have been charged a premium twenty-five percent higher than the $1,550 that was quoted. It is therefore clear that [the insurer] would not have insured [the boat] at the quoted price had it known the true nature of the vessel’s use. We therefore find that the misrepresentation was material.

Perhaps the only unanswered question from this decision is why lobster costs more than fish at the market, given that the fixed costs of insurance are lower for the lobsterman than for the fisherman.

I don’t want to leave the impression that the Ninth Circuit’s decision in Abatie is a wacky or fringe decision, or that I think that myself. Far from it. The new rule it announces for that circuit on the effect of structural conflicts is certainly well within the margins of current mainstream jurisprudence on the issue, probably more so than the somewhat Rube Goldberg like burden shifting contraption that the Abatie court described the circuit as previously applying to such conflict situations. It is fair to say, though, that with regard to the core of its ruling, I simply don’t agree with the premise that the conflict of interest alone, without a showing that the conflict actually played a role in the decision making at issue, should affect the standard of review. It is not as though other circuits don’t take such conflicts into account, as they do and they should. But I think the more appropriate rule is to have that conflict only matter if the claimant can show that it actually mattered; i.e., that it affected the decision made by the plan or its administrator. This is, in essence, what the First Circuit required in Janeiro, as discussed here. And requiring this simply should not be a significant issue, since proving a conflict of interest, based on documents or testimony, is – or at least should be – a standard arrow in the quiver of any competent trial lawyer; there is no quicker way to discredit testimony on cross examination than to show the speaker had agendas other than the truth in mind when he or she spoke. So at the end of the day, I don’t think the broad, throw the baby out with the bath water condemnation of all insurers and of all administrators acting while burdened with a structural conflict that Abatie enacts is warranted; you can clearly protect against the undue influence of such conflicts in a more nuanced and fact specific manner than what the Ninth Circuit has chosen to do.
So to those I have heard from who are concerned that the reliance on the market argument that I presented here is too favorable to insurers/administrators and does not provide sufficient protection against having benefit determinations swayed by such conflicts, I can say only this in a short piece: I do think market discipline works against any tendency for such decisions to be swayed by conflicts of this nature, but when the market is not enough to prevent it, an aggrieved party is still protected against having a benefit determination affected by the conflict simply by proving that the conflict actually did affect the outcome of his or her particular claim. Market forces and an evidence based rule to protect claimants is a nice one – two punch, and certainly seems more preferable to me than simply assuming that all decisions made by an administrator who must pay any benefits that are awarded are always suspect.
And as to why I am not fond of that latter approach, I will hopefully return to that point in a subsequent post, for those of you who, like me (I hope I am not the only one), simply can’t get enough of Abatie.

A frequent correspondent, even though he normally runs from ERISA cases as though he ‘d been handed a basket full of snakes, forwarded me the Ninth Circuit’s decision from earlier this week in Abatie v Alta Health and Life Insurance. Fascinating opinion. I could write an article or even a book on the decision, given its themes, its discussion of the historical development of the law on certain issues, and the rules for benefit litigation in the Ninth Circuit it declares (but that is what this blog is for, to discuss these kinds of things in a more timely manner than could be done in these other forms of media). What this means is you will probably see multiple posts on it from time to time, on different facets that are worth shining a light on.
For now though, what I wanted to comment on is its central focus, namely the impact on the standard of review of what is known as a structural conflict on behalf of a plan administrator in cases where the plan grants discretion to the administrator (and as a result the court should be applying the arbitrary and capricious standard of review to any judicial review of the administrator’s decisions). I discussed structural conflicts and their effects a couple of days ago in a post on how the First Circuit deals with such a conflict. To reiterate, as the Ninth Circuit phrased it In Abate, “an insurer that acts as both the plan administrator and the funding source operates under what may be termed a structural conflict of interest.” The First Circuit recently reaffirmed that this type of conflict, without more – namely proof that the administrator actually had a real world, not just a hypothetical, conflict, and made a benefit determination that was truly influenced by it – does not alter the standard of review. In contrast, the Ninth Circuit believes it does affect it, and how it does so is the primary subject of the opinion in Abate.
The rationale for the belief of the First Circuit, and other circuits that follow the same line of thought, that such structural conflicts can be ignored is that market forces should be sufficient to dissuade administrators from declining to pay benefits simply because they are the source of the funds, the idea being that, over time, market forces will punish those who do and reward those who do not. These structural conflicts usually entail insurers who both insure the benefits at issue and administer the claims made for benefits under the plan. The idea is that there will be a flight to quality, if you will, by plans and the companies who run them to insurers/administrators who do not act to their own benefit and the detriment of the plan’s participants as a result of such a conflict.
Now, I am not totally convinced by this line of thinking, and clearly the judges of the Ninth Circuit aren’t either, but I am more inclined than not to agree with it. I have never been totally inclined because it has always felt too much like what happens when lawyers play at being economists; they find a nice sounding macroeconomic idea and apply it as though true, without it ever having really been rigorously tested. On the other hand, based on my own experience of seeing, both in my own practice and in the case law, hundreds of cases in which such a conflict existed, it seems to me that the anecdotal evidence is clear that this reliance on the market does in fact seem to work and account for any problems posed by this potential conflict. The better companies that insure and/or administer plans do not, in fact, act out this conflict, even without anything more elaborate in the case law to prevent them from doing so than the assumption that the market will take care of the problem. My own belief is that such an approach is just the natural outgrowth of the overall mentality -from hiring to training to accountability – of the better run companies, who seem to operate on the assumption that good business practices pay off, or as I am inclined to say, that good business is itself good business. Recent research suggests that this may just be the case, Enron and the like notwithstanding; research indicates that “ethical business practices generate better financial performance,” at least in the insurance industry (on this point, see here and here and here as well).
Meanwhile, the lesser companies, who may – it is almost never, if ever, really proven on the evidence to my satisfaction that they are doing so – be acting based on such a conflict, usually get caught and defeated simply under the traditional arbitrary and capricious standard without any change being imposed on the standard of review based on the existence of a mere structural conflict. And why is this? Because the administrative record, on which the court is basing its decision if the scope of review is the arbitrary and capricious standard, won’t sufficiently support the decision of such a conflicted administrator if the conflict is the real reason for the denial of benefits. If you think about it, it is both logical and points out the irrelevance of the structural conflict. If the administrative record actually supported the administrator’s decision to deny the claim, than the conflict either didn’t exist or was irrelevant: the record evidence justifies the denial, and it is irrelevant if the claim was also denied because the administrator was also acting due to the conflict it faced. On the other hand, if the record evidence doesn’t support the denial (which will presumably be the case if the only reason for the denial is the administrator’s conflict of interest), than the administrator’s decision will be overturned by the court as having been an arbitrary and capricious decision since it lacked sufficient support in the record, regardless of whether or not the reason for the denial was the administrator’s conflict of interest.
So maybe I am a bit of a hometown fan, but I’ll go with the First Circuit on this one.

For those of you who find the health part of health insurance more interesting than the insurance part, David Harlow has a health care law blog out detailing health law issues in Massachusetts. David has been heavily involved in the state regulation of health care in Massachusetts for many years. Thanks to Robert Ambrogi for the link.

I doubt there is anything that has been the subject of more incessant chatter at seminars, with less to show for it, than the question of when, or if, an insurer can obtain reimbursement of defense costs incurred on uncovered claims. Ever since the California Supreme Court issued its ruling in Buss, the issue has been the focus of much excited talk – perhaps more than it has ever really been the subject of any action – and understandably so, given that insurers have been paying defense costs for what seems like an eternity on uncovered claims because of the long established rule that an insurer must provide a defense against the entire case if even only one claim in the action is covered. One can easily see how the possibility of putting an end to that would grab the imagination of an entire industry.
Finally, though, someone has really shed more light than heat on the issue. Thanks to David Rossmiller, here is insurance coverage litigator Randy Maniloff’s detailed look at the question. One thing I liked in particular was Randy’s conclusion, which hints at exactly why, as suggested above, the issue has generated more talk than actions by insurers to recover defense costs from their insureds: namely, that the sheer difficulty of allocating defense costs between covered and uncovered claims makes recovering defense costs difficult even in those jurisdictions where such recovery is allowed. On a perhaps more cynical note, it seems to me that courts can also be expected to rely on this fact to protect insureds from reimbursement claims, even in states that allow such claims, in cases where reimbursement strikes the court as inequitable.