Your ERISA Watch - Third Circuit Rules That Reliance Standard’s Conflict of Interest and “Irregular” Claim Handling Led to Unreasonable Claim Denial

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Noga v. Fulton Fin. Corp. Emp. Benefit Plan, No. 19-3855, __ F.4th __, 2021 WL 5540848 (3d Cir. Nov. 26, 2021) (Before Circuit Judges Ambro, Krause, and Phipps).
 
Attorneys who represent benefit plan participants have an uphill battle. Because the courts are often deferential to the decisions of plan administrators – using the abuse of discretion standard of review – participants often have to prove not only that the decisions denying their benefit claims were wrong, but also that they were “unreasonably wrong.”
 
One way a participant can chip away at this standard is to demonstrate that the administrator has a conflict of interest, or that it handled the claim in a way that calls into question its impartiality. However, it can be difficult to know what kinds of procedural errors are worth highlighting, as a substantial mistake in front of one judge can be a harmless error in front of another. In this published opinion, the Third Circuit has given practitioners some guidance on this issue.
 
Leo Noga worked for Fulton Financial, but began experiencing pain and numbness in his feet and legs in 2014. His symptoms progressed, and eventually he began having difficulty standing, walking, and driving. By early 2015, he could no longer work and was diagnosed with neurogenic muscular atrophy and diabetic polyneuropathy.
 
Reliance Standard, the insurer of Fulton Financial’ s long-term disability plan, initially approved Noga’s benefit claim. However, in October of 2017, Reliance Standard arranged for an independent medical examination (IME) of Noga by a physiatrist, who concluded that Noga was exaggerating his symptoms and could return to work.
 
Noga appealed this decision. In March of 2018, a senior benefits analyst overturned the denial decision based on a medical review by one of Reliance Standard’s registered nurses. However, the very next day, the analyst reversed course and requested two further reviews – one by an endocrinologist and one by an occupational medicine specialist. Both performed “paper reviews” and concluded that Noga was capable of full-time work. Reliance Standard then denied Noga’s appeal, and he was left with no choice but to sue.
 
On cross-motions for summary judgment, the district court determined that Reliance Standard was entitled to deferential review because the policy insuring the benefit plan granted Reliance Standard discretionary authority to determine benefit eligibility. However, even under deferential review, the district court found that Reliance Standard abused its discretion by denying Noga’s claim. In doing so, the court also ruled that an affidavit from Reliance Standard’s analyst was inadmissible.
 
Reliance Standard appealed and made two arguments: (1) the district court erred by not admitting the analyst’s affidavit; and (2) the district court improperly found that Reliance Standard had abused its discretion.
 
The Third Circuit rejected both arguments and affirmed. The court explained the federal common law rule that evidence from outside the claim administrator’s file is typically inadmissible, and held that Reliance Standard’s affidavit did not fall within any exceptions to that rule. The court found that the explanation provided in the affidavit “could have been contemporaneously memorialized in the claim file. But it was not. And because it was not included in the administrative record, the ERISA record rule bars its consideration.”
 
The court further found that it was irrelevant that Reliance Standard had offered the affidavit as a rebuttal to Noga’s allegations of procedural irregularity, noting that “a benefits decision-maker has an incentive to include in the administrative record information that explains procedural irregularities.” Because Reliance Standard did not do so, its affidavit was properly excluded.
 
Turning to the merits of Reliance Standard’s decision to terminate Noga’s benefits, the Third Circuit agreed with the district court that the decision was suspect because of Reliance Standard’s structural conflict of interest in combination with “two significant procedural irregularities.” The structural conflict of interest arose from the fact that “Reliance Standard both makes benefits eligibility decisions and funds those benefits. For an ERISA fiduciary, such a dual role constitutes a conflict of interest.”
 
The two procedural irregularities involved Reliance Standard’s IME request and its request for the two medical peer reviews. The Third Circuit agreed that the IME request was “irregular” because Reliance Standard had repeatedly certified Noga’s claim, yet without receiving any new medical information it arranged for the IME within a month of its most recent certification. Furthermore, the peer review request was “unusual in its timing (a day after reinstating benefits), its impetus (the administrative record does not explain the reason for this change of course), and its scope (seeking paper reviews from two additional outside medical professionals).”
 
The Third Circuit noted that these irregularities had “a significant connection to the financial incentives at the core of Reliance Standard’s structural conflict of interest” because they both led directly to the denial of Noga’s claim. Reliance Standard’s “unusual decision…strongly suggests that Reliance Standard was acting not as a ‘disinterested fiduciary’ but as a financially motivated actor seeking to pay less money out in benefit claims.” Because the conflict of interest, combined with the procedural irregularities, “actually infected” the benefit termination decision, the court held that Reliance Standard had abused its discretion and affirmed the retroactive reinstatement of Noga’s benefits.
 
Plaintiff was represented by ERISA Watch subscriber Tybe Brett.

Below is a summary of this past week’s notable ERISA decisions by subject matter and jurisdiction.
 
Arbitration
 
Eighth Circuit
Carroll v. DST Sys., No.  4:21-09090-NKL, 2021 WL 5435249 (W.D. Mo. Nov. 19, 2021) (Judge Nanette K. Laughrey). In this ERISA game of whack-a-mole, DST Systems and its inconsistent arbitration stances keeps rearing its head. As before, the plaintiffs here are all plan participants in DST’s 401(k) plan who have each received an arbitration award against DST for overly concentrated investments in the plan. Plaintiffs seek confirmation of their awards and DST opposes the motion arguing plaintiffs should be part of a mandatory class certified in New York. DST has been inconsistent, first arguing successfully in favor of mandatory arbitration in a putative class action case in Missouri, then arguing again in favor of arbitration in New York, this time unsuccessfully, and finally arguing that ERISA participants cannot arbitrate at all in these Missouri cases. Judge Laughrey, however, has been incredibly consistent in finding that DST’s contradictory arguments meant judicial estoppel applied. Once again, plaintiffs’ motion to confirm the arbitration awards was granted as there were no specified circumstances preventing the Federal Arbitration Act from applying.
 
Campfield v. DST Sys., No.  4:21-09160, 2021 WL 5435245 (W.D. Mo. Nov. 19. 2021) (Judge Nanette K. Laughrey). More of the same from this DST Systems case, although this particular one has a slight twist. Mr. Campfield gets his own separate decision as his circumstances include an offset issue. DST argued that Mr. Campfield’s judgment of $7,550 in damages doesn’t include a deduction for the settlement proceeds he received in the related New York class action. As neither DST nor Mr. Campfield informed the court of the amount of the settlement, the court entered judgment in Mr. Campfield’s favor until DST provides the amount and Mr. Campfield is given the opportunity to respond. DST additionally argued that Mr. Campfield’s counsel was impermissibly seeking to recover multiple times for the same expenses. The court rejected this argument as well because plaintiff’s counsel represented that they would work with DST to ensure that they recover no more than 100% of their costs. Nor did DST show what alleged double recovery occurred or in what amount. Therefore, the court determined that DST had given it insufficient reason to warrant refusing entry of judgment and confirming the award.
 
Breach of Fiduciary Duty
 
First Circuit
Ortiz v. Cooperativa de Seguros Multiples de P.R., No. Civ. 19-2056 (SCC), 2021 WL 5533005 (D.P.R. Nov. 24, 2021) (Judge Silvia Carreno-Coll). Participants of the Real Legacy Assurance Retirement Plan filed this suit for ERISA breach of fiduciary duty violations and negligence under Puerto Rico law against defendants Cooperativa de Seguros Multiples de Puerto Rico, Banco Popular de Puerto Rico, Santander Securities, LLC, Tronosco Consulting Group, Inc., Willis Towers Watson US, LLC, ABC Insurance Companies, and several individuals who were on the plan’s administrative committee. In 2014, $4.1 million of the plan’s assets were invested in Puerto Rico Bonds, classified in February 2014 as “junk” bonds. As of December 31, 2014, about a quarter of the plan’s assets were invested in these junk bonds with 100% of the plan’s municipal bonds also invested in the Puerto Rico Bonds. Plaintiffs argued that this was imprudent, and also argued that defendants failed to accurately report and calculate the plan’s funding status and targets, and that contributions made were well below the funding requirements established by ERISA. As a direct result of the mismanagement and underfunding, the fund entered into a liquidation process in 2019. In a letter from October 2019, plan participants were informed that only some of them would receive benefits under the plan and even those recipients would only receive approximately 65% of the total amount they would have otherwise received had the plan not been underfunded. Defendants moved to dismiss. The court denied the motion, determining that plaintiffs’ complaint contained “enough facts to state a claim to relief that is plausible on its face.”
 
Disability Benefit Claims
 
Eighth Circuit
Phillips v. Aetna Life Ins. Co., No. 20-2048 (PAM/DTS), 2021 WL 5449289 (D. Minn. Nov. 22, 2021) (Judge Paul A. Magnuson). Following an assault in 2019, plaintiff David Phillips sustained serious injuries, including a subdural hematoma and an intraventricular hemorrhage in his brain, as well as facial and rib fractures. These injuries required hospitalization and left Mr. Phillips disabled, as he now suffers from cognitive and memory impairments preventing him from returning to his job as a systems engineer for the Boeing Company. After Aetna Life Insurance Co. denied Mr. Phillips long-term disability claim, he filed this suit. The parties filed cross-motions for summary judgment. The court granted defendant’s motion and denied plaintiff’s motion, as Mr. Phillips' own treating neurosurgeon cleared him to return to work and a CT scan showed a complete resolution of the subdural hematoma and hemorrhage. On top of that, Aetna requested Mr. Phillips undergo neuropsychological testing that his family medicine doctor had suggested, but Mr. Phillips never underwent these tests. The court was thus satisfied that Aetna examined the objective evidence in the record and appropriately determined that Mr. Phillips was not disabled as defined by the plan during the relevant period. 
 
Discovery
 
First Circuit
Leavitt v. Sonoco Health & Grp. Benefits Plan, No. 1:20-cv-00426-LEW, 2021 WL 5500469 (D. Me. Nov. 21, 2021) (Magistrate Judge John H. Rich III). This case lies at the Venn diagram intersection of disability and life insurance cases and therefore has so many technicalities and intricacies that the court found limited discovery warranted and granted the discovery motion of Brian P. Leavitt and Amanda L. Riendeau. Brother and sister plaintiffs sued to recover supplemental life insurance benefits of their late father Brian M. Leavitt. Following a workplace injury, Brian M. ceased working and began receiving disability benefits. When he began receiving long-term disability benefits, Brian M. stopped paying insurance premiums. It is unclear whether he needed to continue paying premiums during this time, as defendants argue, or whether the plan language required only the employer to continue paying benefit premiums once a participant was totally disabled. Defendant Sonoco argued that its cancellation of Brian M.’s supplemental life insurance policy was appropriate given the lack of payment of the required premiums. The court however, found the relevant plan language to be ambiguous. Although, “discovery is the exception, rather than the rule, in an appeal of a plan administrator’s denial of ERISA benefits,” the court concluded that the exception was warranted for this unusual case.
 
ERISA Preemption
 
Eleventh Circuit
Thoms v. Advanced Tech. Sys. Co., No. 1:20-cv-235-ECM (WO), 2021 WL 5450453 (M.D. Ala. Nov. 22, 2021) (Judge Emily C. Marks). Plaintiff Laura Thoms brought suit against her late husband’s former employer, defendant Advanced Technology Systems Company, Inc. (“ATSC”), and defendant Olson Benefits Group, LLC after a life insurance benefits denial. Ms. Thoms asserted various state law contract and tort claims against both defendants, as well as an ERISA claim against ATSC. Defendant ATSC moved to dismiss, and defendant Olson moved for judgment on the pleadings. Both motions were granted and both defendants were dismissed from the case. First, the court found all of the state law claims preempted by ERISA as they related to an ERISA benefits plan. The court held that ATSC’s actions – indicating to employees that life insurance was available, allowing employees to apply for insurance and name beneficiaries, allowing employees to pay premiums, and intending for life insurance to take effect – were “sufficient to move ATSC’s plan from intent to reality and sufficient for this court to find that the plan was ‘established’ under ERISA.” However, Ms. Thoms also asserted that if there was an ERISA life insurance policy then her ERISA claim for benefits was viable. The court disagreed, finding the employer ATSC was not the plan administrator and had delegated its entire discretionary authority to Sun Life. The court therefore determined “that ATSC is not a proper defendant to a claim of ERISA benefits. To hold otherwise would be to promote formality over substance … (which) the court declines to do.” As for defendant Olson, because all of the claims against it were state law claims found to be preempted by ERISA, the court also granted its motion for judgment on the pleadings.
 
Medical Benefit Claims
 
Eighth Circuit
J.W. v. Cigna Health & Life Ins. Co., No. 4:21-cv-00324-SRC, 2021 WL 5415051 (E.D. Mo. Nov. 19, 2021) (Judge Stephen R. Clark). Plaintiff J.W. is a minor who suffers from psychological and behavioral disorders and who is a covered beneficiary under a self-funded ERISA healthcare plan. His parents checked him into three different residential treatment centers, and Cigna denied coverage for all three after concluding that J.W.’s treatment was not “medically necessary.” J.W. sued Cigna and his father’s employer, Barry-Wehmiller, asserting claims for wrongful denial of benefits, breach of fiduciary duty, and violation of Missouri’s Mental Health Parity Act. Defendants Cigna and Barry-Wehmiller moved to dismiss J.W.’s claim for breach of fiduciary duty and Cigna moved to dismiss the Missouri Mental Health Parity Act claim. The court, weary of what it viewed as an “artfully disguised benefits claim,” found the breach of fiduciary duty claim to be a claim for benefits under the plan rather than an appropriate claim for equitable relief. Therefore, the court dismissed this claim. Additionally, the court held that ERISA preempted J.W.’s claim under the Missouri mental-health parity law because “states cannot regulate the benefits that self-funded health plans provide.” Accordingly, the court dismissed this count and defendants’ motions to dismiss both the fiduciary duty and the state mental health parity claims were granted with prejudice.
 
Tenth Circuit
Bruce M. v. Aetna Life Ins. Co., No. 2:20-cv-00346-DBB, 2021 WL 5522554 (D. Utah Nov. 24, 2021) (Judge David Barlow). Plaintiffs brought a wrongful denial of benefits claim against defendant Aetna Life Insurance Company after Aetna stopped paying for their son C.M.’s treatment at a residential treatment facility. C.M. is an 11-year-old boy who suffers from serious mental health and behavioral disorders. He was admitted to Intermountain Children’s Home on June 13, 2018, where he received residential mental health treatment until August 25, 2019. Aetna approved treatment for one month from June 13 to July 12, 2018, and then denied coverage thereafter because it determined Bruce no longer met the Level of Care Assessment Tool requirements for residential treatment center level of care. The parties filed cross-motions for summary judgment. The court denied defendant’s motion and granted in part plaintiff’s motion. Applying the arbitrary and capricious standard of review, the court determined the denial was not supported by substantial evidence. Specifically, the court pointed to many instances of aggressive and violent behavior exhibited by C.M. throughout the denial period that were ignored by Aetna. The “noted gaps and discrepancies” in the record that meant the court could not “support the conclusion reached by the decision-maker.” However, the court decided that remanding to Aetna was appropriate as “the court cannot determine whether there was sufficient evidence in the record to support a denial of benefits.” Because the court remanded to Aetna for further consideration, it concluded that prejudgment interest was not warranted. Nevertheless, plaintiffs were awarded attorneys’ fees and costs incurred based on their success in obtaining a reversal of the arbitrary and capricious denial.
 
Pension Benefit Claims
 
Fifth Circuit
Fracalossi v. MoneyGram Pension Plan, No. 3:17-CV-00336-X, 2021 WL 5505604 (N.D. Tex. Nov. 24, 2021) (Judge Brantley Starr). Plaintiff Kimbra Fracalossi brought suit against her former employers, Viad Corp. and MoneyGram International, Inc., and the MoneyGram Pension Plan, after she was denied early retirement benefits. Ms. Fracalossi brought suit under ERISA Sections 502(a)(1)(B) and 502(a)(3), alleging that, after a plan amendment, MoneyGram incorrectly denied her the right to have her work at Viad’s Exhibitgroup/Giltspur division count toward her early retirement eligibility, and that MoneyGram breached its fiduciary duties by failing to inform her in the summary plan description of the amendment and its effect. MoneyGram moved for summary judgment and moved to strike Ms. Fracalossi’s experts and rebuttal experts. Ms. Fracalossi moved to strike, exclude or limit defendant’s expert testimony. First, examining Ms. Fracalossi’s injury, the court held that she had no remedy under the plan’s terms as she was ineligible for early retirement benefits under the plan as a result of the amendment. Therefore, because she could not pursue benefits under the plan, Section 502(a)(1)(B) did not provide an adequate remedy, and Ms. Fracalossi was left only with her Section 502(a)(3) breach of fiduciary duty claim. Therefore, the court granted MoneyGram’s motion for summary judgment on the denial of benefits claim. Turning to the fiduciary breach claim, the court addressed MoneyGram’s argument that it was not required to notify Ms. Fracalossi of the amendment because her service ended two years before the amendment. At issue was whether Ms. Fracalossi stopped accruing service under the plan when she began working for the Exhibitgroup/Giltspur division of Viad, as MoneyGram argued, or whether she continued to accrue service until the amendment took effect two years later. If the latter is true, MoneyGram had a duty to inform her of the changes to the plan. As Ms. Fracalossi was able to provide evidence, including a U.S. Securities and Exchange Commission Form 10-K and copies of her IRS W-2 forms showing that she was still an employee of the Viad Corp at the time of the amendment, the court held that there was enough evidence in Ms. Fracalossi’s favor to preclude granting MoneyGram summary judgment on this issue. Additionally, the court found genuine issue of material fact as to Ms. Fracalossi’s loss of benefits for five years under the two retirement plans. For these reasons the court denied MoneyGram’s motion for summary judgment on Ms. Fracalossi’s breach of fiduciary duty claim. Finally, the court granted MoneyGram’s motion to strike and denied Ms. Fracalossi’s motion to strike. The court agreed with MoneyGram that all of Ms. Fracalossi’s expert report summaries were insufficient under Rule 26 and failed to give MoneyGram notice of what information the experts would testify to and whether the witnesses qualified as experts on the subject matter. With regards to Ms. Fracalossi’s motion to strike, the court held that MoneyGram’s actuarial expert’s testimony on the value of benefits under the plan was relevant and reliable and therefore denied the motion.
 
Pleading Issues & Procedure
 
D.C. Circuit
Chipman v. Cigna Behavioral Health, Inc., No. 20-7094, __ F. App’x__, 2021 WL 5537709 (D.C. Cir. Nov. 23, 2021) (Before Circuit Judges Henderson, Millett, and Sentelle). Plaintiff and appellant Robert Chipman brought suit against his employer, his health insurance plan, and Cigna Behavioral Health, the plan’s administrator, for wrongful denial of his benefit claims for his dependent’s treatment at a residential treatment center. Cigna denied the claim, determining it was not “medically necessary” as defined by the plan. The district court, finding the denial supported by substantial evidence, granted Cigna’s motion for summary judgment. On appeal, Mr. Chipman argued that Cigna’s summary judgment filing violated a local rule requiring a summary judgment movant to submit a statement of material facts with its motion. The district court held that Cigna had complied with the local rule. The D.C. Circuit Court affirmed. “As the district court observed, Local Civil Rule 7(h)(2) states that Rule 7(h)(1) is inapplicable in cases where ‘judicial review is based solely on the administrative record’ such as ERISA cases.” Accordingly, the district court’s judgment was affirmed.
 
Second Circuit
Conn. Gen. Life Ins. Co. v. BioHealth Labs., No. 3:19-CV-01324 (JCH), 2021 WL 5447142 (D. Conn. Nov. 22, 2021) (Judge Janet C. Hall). Plaintiffs Connecticut General Life Insurance Company and Cigna Health and Life Insurance Company brought suit against six laboratories for an alleged fraudulent billing scheme. Currently, only its three equitable claims (unjust enrichment, an ERISA 502(a)(3) claim, and a claim under the Declaratory Judgment Act) remain. Defendants moved to dismiss all of these remaining civil claims. Cigna alleged that the labs, all out-of-network providers, engaged in fraudulent fee forgiveness, billing of unnecessary testing, and unbundling. Supposedly because it suspected fraud on the part of the labs, Cigna stopped paying claims for reimbursement from them. Then in 2015, two of the labs filed a complaint against Cigna for improper denial and failure to process submitted claims, which was ultimately dismissed for failure to exhaust administrative remedies. Two years later, Cigna filed this action. First, the court concluded that the labs were entitled to a presumption of laches. In applying the doctrine of laches to Cigna’s federal claims, the court examined whether it should be applying the doctrine “promulgated by federal courts in the context of federal statues, or continue to follow Connecticut law not only in determining that Cigna’s claims are subject to laches, but also in how that doctrine should be interpreted.” Although the court determined that defendants' arguments that they were prejudiced by Cigna’s delay in bringing suit and that Cigna brought this suit simply as a strategic maneuver may have merit, the court found dismissal at this stage unwarranted because resolution of those issue naturally would require fact-finding and a more developed record. Therefore, the court denied the labs’ motion to dismiss on the basis of laches. Defendants also moved to dismiss the remaining claims for failure to adequately state a claim because they claimed that all three claims pertain to fraud and are therefore subject to the heightened pleading standard of Rule 9(b). Defendants argued that Cigna’s allegations were not stated with sufficient particularity. The court found Cigna provided sufficient information with regard to two of the labs, PBL and BioHealth, to withstand the motion to dismiss. The same was not true for the claims against the other four labs. The court held, “in contrast to the specific, example-driven allegations Cigna makes against PBL and BioHealth, its claims against (the other four labs) are all based on information and belief.” Therefore, the court granted the motion to dismiss the claims against those four labs as inadequately pled under Rule 9(b).
 
Ninth Circuit
Grove v. Reliance Standard Ins. Life. Ins. Co., No. 3:21-cv-00222-CWD, 2021 WL 5435109 (D. Idaho Nov. 19, 2021) (Magistrate Judge Candy W. Dale). Plaintiff Julie Grove brought a wrongful denial of benefits claim and a breach of contract claim against Reliance Standard Insurance alleging defendant wrongfully terminated her long-term disability benefits payments on the grounds Ms. Grove was no longer totally disabled as defined by the plan. Defendant moved to dismiss Ms. Grove’s breach of contract claim and to strike her jury demand. Both motions were granted. First, the court determined that Ms. Grove’s breach of contract claim was preempted by ERISA as it duplicated her ERISA claim and sought to recover benefits due under the plan. Additionally, the court held that there is no right to trial by jury under ERISA. For these reasons, Ms. Grove’s breach of contract cause of action was dismissed with prejudice and her jury trial demand was stricken from the complaint.

Note from the Your ERISA Watch editors:
 

Your ERISA Watch is written and edited by Elizabeth Hopkins and Peter Sessions, with the assistance of Emily Hopkins. Each week our goal is to provide you with the benefit of the expertise of knowledgeable ERISA litigators who are on the frontline of benefit claim and fiduciary breach litigation. Although our firm represents plaintiffs, we strive to provide objective and balanced summaries so they are informative for the widest possible audience.

We include recent cases that have been picked up by Westlaw or sent to us by one of our readers. If you have a decision you'd like to see included in Your ERISA Watch, please send it to Elizabeth Hopkins at ehopkins@kantorlaw.net.

And don't forget to check out the ERISA Watch podcast, which tells the true stories behind the cases. The newest episode, due out on December 3, focuses on the importance of the investment fee issue in Hughes v. Northwestern University. Just in time for the Supreme Court argument in Hughes on December 6, Former Assistant Secretary of Labor Phyllis Borzi will explain why this issue matters to anyone with a pension. You can listen to this podcast and other episodes here.

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