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Ruttenberg v. United States Life Insur.Co. in the City of New York, 2005 U.S.App.LEXIS 13029 (7th Cir. 6/30/2005)(Issues: ERISA Preemption-Who’s Covered; Active at Work).  This is one of our cases which presents an issue that we have litigated repeatedly given the number of independent commodity and financial instrument traders who work in Chicago: Whether an independent trader who receives disability coverage under a policy issued to the clearinghouse through which the trader clears trades is deemed a “participant” or “beneficiary” subjecting any claims brought under such policies to ERISA preemption.  We have reported on several of our cases, including the district court ruling in this case - Turnoy v. Liberty Life Assur.Co. of Boston, 2003 U.S.Dist.LEXIS 1311 (N.D.Ill. 1/30/03)(February 2003); Ruttenberg v. United States Life, 2003 U.S. Dist. LEXIS 7397, 30 Employee Benefits Cas. (BNA) 1792 (N.D.Ill. 4/28/03)(May 2003)(independent self-employed commodity trader was a beneficiary of a commodity clearinghouse’s long term disability policy since that coverage also applied to employees of the clearinghouse)(reaffirmed in Ruttenberg v. United States Life Insur.Company, 2004 U.S.Dist.LEXIS 2300 (N.D.Ill. 2/18/2004)(March 2004); Dwyer v. Unum Life Insur.Co. of America, 2003 U.S.Dist.LEXIS 21521 (N.D.Ill. 12/1/03)(December 2003)(same); Shyman v. Unum Life Insur.Co., 2004 U.S.Dist.LEXIS 4964 (N.D.Ill. 3/24/2004)(April 2004)(on appeal).  This ruling definitively resolved the issue by holding the statutory definition of “beneficiary” is broad enough to encompass traders who are covered under the same policy insuring employees of the trading company.  The bulk of this ruling, though, had to do with construction of a contractual ambiguity; and the Seventh Circuit overturned the district court ruling finding that Ruttenberg’s claim was barred by an eligibility provision.  The court found the provision ambiguous and ruled the doctrine of contra proferentum required the ambiguity to be construed in the policyholder’s favor.  However, the court also remanded the case to determine the underlying question of Ruttenberg’s disability due to a pulmonary disorder.  Both Ruttenberg’s treating doctor and an independent pulmonologist hired by the insurer found him disabled; nonetheless, the insurer refused to pay citing opinions from reviewing doctors retained by U.S. Life. 

Interestingly, the court began its analysis with a discussion of standard of review.  U.S. Life claimed it was entitled to a deferential standard of review based on language in the master policy application stating, 

if the insurance contract [that SMW applied for] compromises a part of an employee benefit plan, [U.S. Life] is granted sole discretionary authority to determine eligibility, make all factual determinations and to construe all terms of the policy. 

The district court found that provision insufficient since it was not repeated in either the policy or summary plan description.  Nor did either the policy or the SPD contain language sufficient to grant discretion to the insurer.  Thus, the court applied a de novo standard of review, affirming the district court’s finding in that respect. 

Turning next to the question of ERISA preemption, the court examined the terms “participant” and “beneficiary” contained in the ERISA statue, as well as the statutory definition of “employee benefit plan.”  The court noted,

Under §  1003, ERISA applies to "any employee benefit plan" that is, among other things, maintained by an employer engaged in commerce. Id. §  1003(a)(1). As relevant to this appeal, the statute defines an "employee benefit plan," n10 as "any plan, fund, or program which was . . . established or maintained by an employer . . . for the purpose of providing for" one of two classes of covered persons: "participants or their beneficiaries." Id. §  1002(1). A "participant" in an ERISA-qualifying plan

means any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit.

Id. §  1002(7). The other qualifying ERISA class members are "beneficiaries," that is, "a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder." Id. §  1002(8). *16-*17. 

Thus, if Ruttenberg were either a participant or beneficiary, his claims would be preempted by ERISA.  Reading the language of the statute, the court acknowledged that the use of the term “beneficiary” in other portions of the ERISA statute, which reference “participants and their beneficiaries,” could mean the definition of “beneficiary” only applies to persons designated to receive benefits by plan participants.  Nonetheless, the court found:

We do not think these provisions, when read in the context of the entire statute, create a severe textual ambiguity. Our sister circuits that have considered the question agree with U.S. Life's view that, under §  1002(8), a "beneficiary" may be a person designated to receive benefits under a plan; "beneficiary" is not limited to those who are designated as beneficiaries by a "participant." See Hollis v. Provident Life & Accident Ins. Co., 259 F.3d 410, 415 (5th Cir. 2001); Wolk v. UNUM Life Ins. of America, 186 F.3d 352, 356 (3d Cir. 1999); Engelhardt v. Paul Revere Life Ins. Co., 139 F.3d 1346, 1351 (11th Cir. 1998); Prudential Ins. Co. of America v. Doe, 76 F.3d 206, 208 (8th Cir. 1996); Peterson v. American Life & Health Ins. Co., 48 F.3d 404, 408-09 (9th Cir. 1995). Indeed, the same interpretation has been applied by district courts in this circuit. See, e.g., Turnoy v. Liberty Life Assurance Co. of Boston, No. 02 C 6066, 2003 WL 223309 (N.D. Ill. Jan. 30, 2003). *19-*20.

Although the court agreed with the plaintiff that Ritter v. Massachusetts Casualty Insur.Co., 439 Mass. 214, 786 N.E.2d 817 (2003)(May 2003) supported Ruttenberg’s position, the court sided with the authorities listed above finding that Ruttenberg was a “beneficiary” of an employee benefit plan, thus subjecting his claim to the ERISA law.  The court also suggested in footnote 13 that because Ruttenberg cleared his trades through the plan sponsor, he had a nexus with that organization; and because of the policy language, he could even be deemed an employee of that organization and therefore a participant.

The next issue considered by the court was whether Ruttenberg sufficiently exhausted “administrative remedies” prior to filing suit.  Although the court found Ruttenberg filed suit prematurely, it would have been futile for him to appeal further:

Indeed, the record indicates that U.S. Life has opposed Mr. Ruttenberg's claim at every step. U.S. Life spent more than eighteen months adjudicating Mr. Ruttenberg's claim. In the course of this process, it contested every medical opinion favorable to Mr. Ruttenberg, including that of its own expert Dr. Diamond. After Mr. Ruttenberg agreed to a stay in the proceedings, U.S. Life spent over a year reviewing his submission before it denied the claim, knowing that he would resume the suit in the event of an unfavorable result.

The history of this matter, both before the district court and in administrative proceedings, provides ample support for the district court's view that U.S. Life would have denied Mr. Ruttenberg's claim even if he had filed an administrative appeal. Indeed, there is no evidence in the record demonstrating that U.S. Life's denial would be anything but "certain" if the company had reviewed Mr. Ruttenberg's claim once again. Accordingly, we cannot say that the district court's futility determination was "'down-right unreasonable.'" Zhou, 295 F.3d at 679 (quoting Cincinnati Ins. Co. v. Flanders Elec. Motor Serv., 131 F.3d 625, 628 (7th Cir. 1997)). Therefore, the district court's futility determination was a proper exercise of discretion. *24-*25.

The court then considered the eligibility issues.  U.S. Life raised two eligibility defenses: First, that Ruttenberg was not an employee; and second, that he failed to work “full-time.”  Although the court rejected the plaintiff’s claim that the burden of proof on those issues rested on the insurer, Ruttenberg was the winner on both claims.  The district court concluded the policy’s definition of “employee” was ambiguous and encompassed Ruttenberg since the policy eligibility encompassed “traders who report earnings on their 1099 form.”  Although Ruttenberg was not an “employee” in the traditional sense as someone who “works in the service of another person,” employers account for the wages paid to employees on form W-2, while the issuance of a 1099 implies an independent contractor.  Thus, given the ambiguity in the definition, the court applied contra proferentum (a legal doctrine construing insurance policy ambiguities in favor of the insured), finding:

Indeed, we have noted that the contra proferentem doctrine "serves its function when it prevents traps for the unwary." Id. Allowing Mr. Ruttenberg to purchase insurance for which U.S. Life now claims that he is ineligible constitutes the type of "trap for the unwary" that contra proferentem is meant to prevent. The district court correctly found the term "employee" to be ambiguous, and properly construed the term against the policy's drafter, U.S. Life. *31-*32.

The court overturned the district court, though, on its refusal to find a similar ambiguity in the “full-time” work requirements of the policy, which states that full-time means: 

active work on the Participating Employer's regular work schedule for the class of employees to which you belong. The work schedule must be at least 30 hours a week. 

Ruttenberg argued that the definition, requiring “’active work on the Participating Employer's regular work schedule for the class of employees to which you belong,’ id. (emphasis added), indicates that the full-time requirement applies only to SMW's common law employees, not to independent traders covered by the policy.” Citing other cases raising similar issues, in which the full-time requirements were relaxed, Ruttenberg explained that the exchanges are barely open 30 hours per week and that traders perform other tasks off the floor; and that a strict interpretation of the policy would “defeat the reasonable expectations of the insured to deny coverage to more than eighty traders, based on a "full-time" requirement they cannot meet, after they have paid for the insurance.”

Siding with Ruttenberg, the court explained that in interpreting a contractual term,

we cannot give meaning to a word standing alone. Rather, we must take into account its placement in the text and discern its proper relationship to the text in which it is placed. Here, given the ambiguity in the term "employee," it is not clear from the contract that the "full-time" requirement applies to non-common law classes of "employees" like independent traders. Indeed, in defining "full-time," the policy simply refers back to the ambiguous term "employee": "FULL-TIME means active work on the Participating Employer's [SMW's] regular work schedule for the class of employees to which you belong." R.36-1 at 298. If, as we have determined, the term "employee" is itself ambiguous as applied to Mr. Ruttenberg, then the policy is equally ambiguous about the application of the "full-time" requirement to his class of worker. *36-*37.

Moreover, the court held,

Independent traders like Mr. Ruttenberg do not work according to a work schedule established by SMW; independent traders clear their trades through SMW but the company does not control the details of their work schedules. Similarly, to qualify as a "full-time" worker, the employee must render "active work," defined as performing "each duty of your job for full pay." Id. It is not clear how "full pay" is measured for independent traders who do not draw a salary from SMW and simply clear their trades through the company. The inclusion of independent traders as "employees" under the eligibility clause cannot be reconciled with a definition of "full-time" that such workers cannot meet. One of the provisions must take precedence, and arguably this means that the "full-time" requirement does not apply to the class of eligible employees that includes Mr. Ruttenberg. *37-*38.

Because the court found the policy terminology ambiguous, it did not have to base its holding on the doctrine of “reasonable expectations of the insured;” however, in footnote 19, the court accepted that theory as an alternative ground for ruling in plaintiff’s favor, stating

we note in the alternative that courts in ERISA claims interpret policies based on normal contract principles; this includes considering the reasonable expectations of the insured. See Lifson v. INA Life Ins. Co. of New York, 333 F.3d 349, 353 (2d Cir. 2003); Tester v. Reliance Standard Life Ins. Co., 228 F.3d 372, 375 (4th Cir. 2000); Perez v. Aetna Life Ins. Co., 150 F.3d 550, 556-57 (6th Cir. 1998) (en banc); Saltarelli v. Bob Baker Group Med. Trust, 35 F.3d 382, 386 (9th Cir. 1994). Mr. Ruttenberg offered sufficient evidence that he and other independent traders expected to be covered by the plan's terms, and we do not believe that such an expectation is so unreasonable to warrant summary judgment. We further note that, on this record, and for reasons discussed above, application of the contra proferentem maxim to interpret the "full-time" provision on remand may be appropriate.

Discussion:      Although we were disappointed in the ruling on the beneficiary issue, the vindication of Ruttenberg’s position on the remaining arguments is a significant addition to the discussion of these issues in ERISA jurisprudence.  The court’s application of established legal doctrines of contract interpretation in order to avoid the unfairness of a situation where a party as been induced to buy insurance coverage that the insurer seeks to evade restores an element of fairness to the ERISA law that is frequently lacking. 

The court’s resolution of the standard of review issue is also worth noting.  It shows that courts will not grant deference to an insurer that hides the ball from the insured; and reinforces the Seventh Circuit’s holding in Herzberger v. Standard Insur.Co., 205 F.3d 327, 332-33 (7th Cir. 2000): 

An employer should not be allowed to get credit with its employees for having an ERISA plan that confers solid rights on them and later, when an employee seeks to enforce the right, pull a discretionary judicial review rabbit out of his hat.   The employees are entitled to know what they're getting into, and so if the employer is going to reserve a broad, unchanneled discretion to deny claims, the employees should be told about this, and told clearly.

 This note appeared in the Disability E-News Alert! For subscription information, please go to www.disabilityenewsalert.com .