DDBlog

A new case from California opens the door to challenging disability insurers’ efforts to offset permanent total workers’ compensation awards. In Alloway v. Reliastar Life Ins.Co., 2008 U.S.Dist.LEXIS 34853 (C.D.Cal. April 28, 2008), the court refused to dismiss a challenge to Reliastar’s practice of offsetting permanent total awards. The court found that under California law, the permanent total award is not made for loss of income, which would be a permissible offset, but “are provided for permanent bodily impairment, to indemnify for impaired future earning capacity or decreased ability to compete in an open labor market.” Illinois law is the same. The Illinois Supreme Court has also ruled “a primary purpose of the benefits paid under section 8(e)(18) [820 ILCS 305/8(e)(18)-permanent total disability] is to compensate the employee for the pain and inconvenience represented by the loss of both feet, both legs, both arms or both eyes, while the benefits payable for temporary total disability are calculated to replace his lost current earnings.” Freeman United Coal Mining Co. v. Industrial Com., 99 Ill. 2d 487, 496, 459 N.E.2d 1368 (1984). Thus, we will be challenging long term disability insurers’ offsets of permanent total workers’ compensation benefits.

The briefs have been filed in the Glenn case which will assess whether insurers who administer ERISA claim are acting under a conflict of interest; and, if so, whether the conflict should diminish deference accorded to insurers. The case is being argued on April 23 and a decision is expected by July 1. To view the briefs, the American Bar Assocaton has compiled a complete collection at http://www.abanet.org/publiced/preview/briefs/april08.shtml#metlife

Two courts issued rulings this week upholding the authority of the states to ban the inclusion of discretionary clauses in health and disability insurance policies that trigger an arbitrary and capricious standard of court review in benefit disputes governed by the ERISA law. The pernicious effect of that standard of court review means that claimants need to prove that the benefit claim denial is not merely wrong, but that it is downright unreasonable such that no rational person could have come to such a conclusion. Without discretionary clauses, the de novo standard applies, which means the court weighs the evidence and does not defer to either party. The rulings are American Council of Life Insurers v. Watters, No. 07 cv 631 (W.D.Mich. 2/29/2008) and Standard Insurance Company v. Morrison, cv-06-47-H-DWM (D.Mont. 2/27/2008). Both rulings are well-reasoned and provide a detailed rationale as to why the state regulations are not preempted by the ERISA law. These rulings will hasten the final demise of discretionary clauses.

The Supreme Court issued a ruling today in the LaRue v. DeWolff Boberg case which dealt with the issue of what remedies are available under the ERISA law. LaRue, who lost substantial profits when his 401k plan administrator ignored his investment instructions, sued for the loss; and although LaRue lost in the lower courts, he was the victor in the Supreme Court. Someone unfamiliar with ERISA might think that this issue is not at all complex, assuming that damages are owed when a financial services provider neglects investment instructions. Nothing in ERISA is that easy, though. The Court maintained that individual claims for damages are still precluded under the ERISA law. However, because LaRue had an individual plan benefit account, he could sue on behalf of that account to restore the profits to the account. A concurring opinion by Chief Justice Roberts suggested a different approach - he wrote that the benefit plan required the plan administrator to follow investment instructions; therefore, he maintained that suit could be brought against the plan. Another concurrence by Justice Thomas simplified the analysis but reached the same conclusion that the claim belonged to LaRue's "plan."

What the Court never addressed, though, was the provision contained in Section 502(a)(3) of the ERISA law that allows an individual to bring an individual claim for equitable relief for breach of fiduciary duty. Today's ruling still leaves unprotected participants in plans who suffer losses on account of misrepresentations and leaves for yet another day whether such individuals are entirely without a remedy under the ERISA law.

Group long term disability benefits often are paid at a rate of 60% of monthly earnings, but how are monthly earnings calculated? According to Hemenway v. Unum Life Insurance Company, 89 Fed. Appx. 630; 2004 U.S. App. LEXIS 4011 (9th Cir. 2004),

BME [Basic Monthly Earnings] includes the full proportion of any bonuses attributable to the months worked prior to the date disability begins, regardless of when those bonuses are actually received by the employee. Hemenway's employer, Booz Allen & Hamilton, awards performance bonuses mid-June based on employee performance during the previous fiscal year (ending March 31). An employee's performance bonus is thus compensation for the months worked during the fiscal year, regardless of the fact that the employee does not receive the bonus until after the completion of the fiscal year. *2-*3.

Other cases ruling that insurers cannot view only the monies paid prior to the date of disability onset in calculating BME include Gibbs v. CIGNA Corp., 440 F.3d 571, 576-579 (2nd Cir. 2006) which found that “guaranteed” compensation could not be disregarded in performing the BME calculation, and Hawkins-Dean v. Metro. Life Ins. Co., 161 Fed. Appx. 684, 2006 U.S. App. LEXIS 389 (9th Cir. Cal. 2006); on remand 514 F. Supp. 2d 1197 (C.D. Cal. 2007) which found that all elements of compensation have to be taken into consideration.

These are very instructive court rulings that can help individuals whose compensation consists of base salary plus bonus or salary plus commission to maximize their benefits.