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.

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.