I don’t have anything to say about this right now, and everybody will be weighing in tomorrow on what the decision itself means, but I thought I would note that the court has issued its opinion, favorable to the insurer and the insurance industry, in the Hurricane Katrina coverage case that went to trial recently. First word on the ruling is here. I do note with amusement that both sides claim to have won.

What happens when a long time business relationship falls apart, and the principal who had been serving as the administrator of the business’ employee benefit plans starts making benefit determinations intended to avoid unnecessarily enriching the other principal? Well, one of the most interesting things that happens – besides expensive litigation and an eventual award that makes a significant impact on the plan’s assets – is that the standard of review applied by the court changes, and the playing field becomes far better for the aggrieved party than it otherwise would. This according, at least, to a terrific decision issued last week by the First Circuit, Janeiro v. Urological Surgery Professional Association.
In Janeiro, the plans, which were apparently well – and professionally – designed, granted, as most such plans do, discretion to the administrator; such a grant normally requires a court hearing a dispute over benefit decisions by the administrator to apply a deferential level of review to such disputes, under which the administrator’s decision must be upheld unless it was arbitrary and capricious. Normally, the plan participant or beneficiary tries to avoid the application of this standard by claiming that the administrator was acting with a conflict of interest, since it is correct that, as a general proposition only, a conflict of interest can preclude application of that deferential standard of review.
But the trick, however, is in the details. The First Circuit does not lightly acknowledge or recognize such conflicts, as I talked about in an earlier post, and the First Circuit emphasized this again in Janeiro, noting that so-called structural conflicts, which are situations where the administrator has a financial interest in whether or not to award the benefits, without more, do not justify an alteration in the standard of review. In Janeiro, however, the court went on to show what does constitute a conflict that justifies such a deviation in this circuit: evidence that the administrator was driven by animus towards the participant and actually misapplied the plan terms as a result. Of particular interest is the fact that the court made it a point to note that the evidence showed that the conflict on the part of the administrator played a “real role” in the administrator’s decisions; it is notable that the court emphasized this point given that the First Circuit has reliably rejected claims of conflict on the part of the administrator where the claimant has not been able to show an actual linkage between the alleged conflict and the decisions made by the administrator.
Now Janeiro involved a small scale retirement plan, making it easier to show such a thing (and making it more likely as well that the parties involved knew each other well enough for personal animus to even come into play, since it is familiarity, after all, that supposedly breeds contempt). This is obviously much less likely to be the case with large employee benefit plans administered by independent third parties. As a result, while Janeiro can be understood as standing for the proposition that a conflict sufficient to alter the standard of review is shown by proving an actual linkage between the administrator’s decision and the administrator’s motivations, that window for proving a conflict is unlikely to be of much use in most cases.

ERISA on the web generally does a nice job of chronicling ERISA decisions out of the Eleventh Circuit, but one of its recent posts, about an August 8th decision by the United States Court of Appeals for the Eleventh Circuit, jumped out at me more than most. The post discusses the case of Billings v UNUM Life Insurance Company, a case involving whether a pediatrician was entitled to continued disability benefits after being disabled due to obsessive compulsive disorder, or whether, instead, the mental health limitation in the plan limited the length of time to which he was entitled to benefits. Although the case presents a somewhat unusual, and certainly curiosity invoking, fact pattern, that is not what drew my attention. Instead, what caught my eye when reading the post was that it discussed the decision and described the court’s reasoning in a manner that made me think not of ERISA litigation, but instead of the other focus of this blog, insurance coverage litigation. As the post described and the court’s opinion reflects, the Eleventh Circuit decided the question by applying rules of policy construction to the plan language at issue that we more often see in insurance coverage disputes, such as the doctrine of contra proferentem (a fancy way of saying construe ambiguities in the document against the drafter, which in the insurance context most often means against the insurer); the court then decided on that basis whether or not the plan language limited the physician’s benefits.
The post left hanging the question of why such an approach was applied, rather than the more typical approach of the court yielding to the administrator’s interpretation of the plan language and ultimate decision so long as both were reasonable and rationally supported by the evidence, but it was easy to guess the reason, and a quick jump over to the opinion itself confirmed it; the plan at issue did not grant discretion to the plan administrator, meaning that the court, and not the administrator, was the ultimate decision maker on the issues presented by the claim.
What interested me most about the case, and the post, was that it illustrated the extent to which if you remove the deferential standard of review usually required of courts deciding benefit cases under ERISA from the equation, they would become, essentially, insurance coverage cases, consisting of a dispute over the plan language and an eventual decision by a court over which interpretation – that favored by the plan or that favored by the claimant – should be selected, with the outcome of that determination essentially deciding who wins. That is insurance coverage litigation in a nutshell, but normally is not ERISA benefits litigation in a nutshell.

Nice informative story out of the National Law Journal on the so-called stock-drop suits, which allege breaches of fiduciary duty under ERISA by trustees charged with managing company 401(k) plans. The lawsuits in question were “filed on behalf of employees who lost money in their 401(k) and other retirement plans because of the declining price of their employer’s stock.” In those cases, the “[p]laintiffs allege that companies and trustees they hire to manage their retirement plans had a fiduciary duty to shift employee investments out of their stock after learning of an impending decline in the share price.” The law may be turning against such theories. As the article summarizes:

The so-called “stock-drop” suits, which were filed under the Employee Retirement Income Security Act of 1974, or ERISA, were brought alongside hundreds of shareholder class actions following the demise of Enron Corp.
In the past year, several rulings — coupled with an action by the U.S. Department of Labor — have put limits on the liability of directed trustees, who are hired by an employer to manage employee retirement plans.

The article does allow, however, that plaintiffs’ lawyers will respond by shifting their targets, and possibly their theories, rather than abandon this line of litigation.

David Rossmiller, one of the pioneers, along with Marc Mayerson, of insurance coverage blogging, has kind words to say about the Boston ERISA and Insurance Litigation Blog here and again here. I can, in turn, commend David’s Insurance Coverage Law Blog to those of you who, like me, are always looking for more to read on the law of insurance and insurance coverage. Every week David has at least two or three posts that I could happily borrow from/riff about on this blog, and only a little self-discipline prevents me from relying so heavily on his work.
Beyond that, a quick survey of David’s posts always uncovers something that lawyers who practice in this area can borrow to use in their own cases. I can ensure you, for instance, that it won’t be long before one of my briefs accuses an adversary of mounting the “Big Rock Candy Mountain” defense.

This being – roughly – the start of a new month, I engaged in my usual habit of reviewing any ERISA decisions issued in the past month by the courts in the First Circuit, just to make sure I didn’t miss anything while busy with the usual run of business. As it turns out, on July 20th, the United States District Court for the District of Rhode Island issued its opinion in Holm v. Liberty Mutual Life Assurance Co. and Bank of America , a case in which an employee who had resigned from a company without first seeking disability benefits thereafter sought them later. In many ways, this is a traditional denial of benefits decision in this circuit, with the court finding that the plan granted the administrator sufficient discretion to invoke the arbitrary and capricious standard of review and then finding that under that standard the administrator’s denial of benefits must be upheld since there was sufficient evidence in the record to support the decision. The court does offer some good language, and a good synopsis of the circuit’s most popular decisions, on these points, and, frankly, you can tell on one read of the opinion that the outcome should have been the same regardless of the level of review applied by the court.
What makes the decision more interesting than most, however, is that the case presented the somewhat unique situation of the defendants raising the question of whether the benefit was even provided under an ERISA governed plan, and the court provides a nice summary of the law in this circuit for making that determination. As per the court (I have left out the cites):

ERISA provides a broad definition for employee benefit plans, and this definition has been divided by the First Circuit into “five essential constituents:”
(1) a plan, fund or program (2) established or maintained (3) by an employer or by an employee organization, or by both (4) for the purpose of providing medical, surgical, hospital care, sickness, accident, disability, death, unemployment or vacation benefits … (5) to participants or their beneficiaries. . . . In determining whether a specific plan is an ERISA plan, the First Circuit reviews the extent of the employer’s role in administering the benefits. Those obligations are the touchstone of the determination: if they require an ongoing administrative scheme that is subject to mismanagement, then they will more likely constitute an ERISA plan; but if the benefit obligations are merely a one-shot, take-it-or-leave-it incentive, they are less likely to be covered. Particularly germane to assessing an employer’s obligations is the amount of discretion wielded in implementing them.

The court had little trouble concluding that the benefit plan in question was “clearly an employee benefit plan as defined by the ERISA statute” in light of the actual facts of the matter.

I have talked before about the depressing topic of the termination of retirement benefits, and the role of ERISA in that scenario. As almost no one failed to notice, the Senate just passed the Pension Protection Act of 2006, which makes “significant changes to practically every retirement plan,” as Jerry Kalish notes. I am fond of the detail on this statute provided by Jerry, and also here by B. Janell Grenier, who quickly recognized that “[t]he 907-page Pension Protection Act of 2006 passed last week by Congress is sure to keep benefits lawyers busy for years to come.” I highly recommend both blogs for details on the statute.
And as if to provide a nice counterpoint on the question of whether the statute is needed, the New York Times reminds us yet again today of the precariousness of pensions and the entire pension system, in this timely and darkly entertaining article. Of course, there is another way, separate from relying on new legislation and other legal remedies, to protect oneself against the loss of pension benefits in retirement, as these people clearly know.

Some of you may have noted, given what I had to say here and again here, my view that the law of insurance coverage is not as well developed or at least not as consistent in the case law as it should be. At the end of the day, it is just policy language and facts, and it shouldn’t be so difficult for the case law to reflect a consistent approach to insurance policy issues. Admittedly, such a project is complicated by the reality that the facts and the policy language differ from case to case, and the truth is that the slightest change in either variable can affect the outcome. I once spent years litigating a case that at the end of the day, turned on the distinction between the word damage and the word damages; I came to think of it as the Sesame Street case, with the case eventually focusing on the “letter of the day,” and that one letter “s” becoming outcome determinative.
Additional insured clauses are a perfect example of this problem. Generally speaking, additional insured clauses simply serve the purpose of adding a third party, who would otherwise be a stranger to the relationship between the insured and its insurer, to a policy as an insured. Anyone who practices in, or anywhere near, the fields of insurance coverage, construction, architecture, professional liability or real estate, as well as a host of others, is familiar with these clauses, and has probably noted as well the variability in the policy language often used in such clauses. In truth, what should be the simple act of adding a party to a policy as an additional insured in this manner is often rife with unexpected difficulties if and when a claim against that additional party arises, due to even slight variations in the language used in those clauses and disputed questions of fact concerning the events that gave rise to the claim against the additional insured.
What brings this to mind today are several recent discussions of issues involving additional insured clauses, and which make clear that how they should apply to any given set of facts simply is not, and probably never will be, completely settled. InHouse Blog has the story of a new development in California law on this topic, Marc Mayerson has a similar story about a New York state decision addressing the additional insured problem, and the policyholder lawyers at Anderson Kill have this to say about the choice of law complications caused by such clauses.

Readers of this prior post know that I had some questions as to whether the Maryland legislature engaged in the necessary amount of due diligence before enacting the Fair Share Act. There is certainly much to be said, though, for the very fact of state legislatures attempting to resolve difficult problems, such as the availability of health benefits.
McGlinchey Stafford, through its Hurricane Law Blog, provides another fine example of a state legislature trying to solve a difficult problem, one that is particularly interesting for those of us with an interest in the insurance industry and its role in the recovery of states affected by Hurricane Katrina. While much media coverage has centered in recent weeks on the Hurricane Katrina coverage litigation that has been ongoing in federal court in Mississippi, and which is now primed for a ruling by the court (thanks to David Rossmiller for the link), the Louisiana state legislature has continued with legislative activities directed at an orderly clean up and recovery, this time by extending the time for affected policyholders to file property damage claims. Recognizing that the dispersion of residents after the flooding may have made it difficult for residents to assess their losses and timely file insurance claims, the state legislature “extended the period within which Hurricane Katrina insurance claims must be filed by one year — until August 30, 2007.” The legislature also instructed the state to promptly file a declaratory judgment action to establish the constitutionality of this change. The complaint (“petition” in Louisiana legal lingo) is interesting reading, both for its description of the new change in the law and of the need for it. A hearing on the petition is set for August 21.

It seems like everyone is weighing in on the question of billable hours and alternative fee arrangements these days. My colleague and occasional lunch companion – and forceful proselytizer for abandoning the billable hour – Chris Marston weighed in on his blog the other day on the evils of the billable hour and his belief that alternative fee arrangements are better for both the client and the law firm representing the client. Chris’ post caused Arnie Herz to tag Chris’ firm as “cutting edge” and provoked a thoughtful commentary from Carolyn Elefant on who should bear the risk of mistakes made in establishing a non-billable hour pricing arrangement.
Chris’ comments lay a nice foundation for considering a particular question that has often puzzled me, namely whether a policyholder should ever pay coverage lawyers by the billable hour, given certain fee shifting rules available to policyholders – but not to insurers – and a particular structural aspect of coverage litigation. Under Massachusetts law, a policyholder who prevails on a coverage case against an insurer can generally recover his attorney fees from the insurer, in one of those remarkable and relatively rare exceptions to the American rule (under which all parties are generally responsible for their own legal fees and costs). In addition, Massachusetts’ bad faith statute – Chapter 93A – under which claims for insurance bad faith are prosecuted, presents still another avenue for recovering fees from an insurer. Beyond that, when a policyholder sues its insurer after a loss, the amount that is being sought from the insurer is usually either already a sum certain (the amount of the loss already being known) or can be readily guesstimated. Still beyond this, an experienced insurance coverage litigator ought to be able to make a fair guess – known in other businesses, such as home remodeling, as an estimate – from past experience as to how much time will have to be put into such a case to prevail on behalf of the client.
Given these avenues for fee shifting to the insurer if the policyholder prevails, the ability to craft a contingency arrangement based on the known value of the loss and the resulting likely amount of recovery, and the knowledge base of the experienced practitioner, there seems little reason why someone suing an insurance company should ever have to pay by the hour. One would think that a policyholder could expect a fee arrangement calculated on the basis of the likely recovery, and structured around the likelihood of recovering fees at the end of the day from the insurer if the lawyer was right to recommend challenging the insurer’s coverage determination in the first place.
If you take this little thought experiment a step further, such a paradigmatic shift in how policyholders compensate their coverage lawyers would likely benefit not only policyholders, but insurers and the court system as well. The simple fact of the matter is that insurers are not always wrong on their coverage determinations, no matter what many policyholder lawyers may think. In fact, given the amount of coverage decisions they make on a given day, the relatively few that are challenged in court, and the even fewer that are ever overturned by a court, it is fair to say that insurers are right far more often than they are wrong. You can almost prove this point by a faux mathematical equation: number of coverage decisions by the insurance industry in a year, minus the number reversed by a court in a year, leaves behind a whole lot of coverage determinations that are simply correct.
If insureds compensated their coverage lawyers not by the billable hour, but instead by the fee shifting and/or contingency bonus they would receive if successful, one could expect semi-frivolous lawsuits against insurers, and even those of at best debatable merit, to be brought far less often than they are currently. It would only make sense that if an insured’s lawyer was paid to be right about whether to challenge a coverage determination in court, rather than being paid simply for challenging the coverage determination – rightly or wrongly – in court, policyholders would almost certainly receive from their attorneys the type of objective analysis of coverage that is needed to properly determine whether a coverage determination is right or wrong, before a decision to sue an insurer is made; it would now be in the best interest of both the insured and the insured’s lawyer not to file lawsuits against insurers on which they are unlikely to prevail. This would be a nice change, both for the burdens on the courts and the costs to insurers of simply being in business, from the current environment in which it is fair to say that some, but certainly not all, lawyers sue insurance companies simply because, to borrow from the bank robber Willie Sutton, that is where the money is.