Georgia Supreme Court Bars Claim Regarding Unconsented Settlement Based on “No Action” Clause

The Georgia Supreme Court recently ruled, in a case involving certified questions from the 11th Circuit U.S. Court of Appeals, that an excess insurer was not obligated to pay a voluntary settlement that its insured entered into without consent and that the insured’s suit was barred based on a “no action” clause in the policy.

The underlying case in Piedmont Office Realty Trust, Inc. v. XL Specialty Insurance Company, No. S15Q0418, 2015 WL 17736620 (Apr. 20, 2015), regarded a securities class action in which the plaintiffs sued Piedmont Office Realty Trust, Inc. (“Piedmont”) for claims in excess of $150 million. Piedmont had purchased and maintained two liability policies, a primary policy issued by Liberty Surplus Insurance Company (“Liberty”) with coverage up to $10 million and an excess policy with XL Specialty Insurance Company (“XL”) with an additional $10 million in coverage. The XL policy provided that it would pay only if Piedmont became “legally obligated to pay as a result of a securities claim.” That “obligation” required XL’s consent to settle a claim, which could not be unreasonably withheld. The policy also contained a “no action” clause that provided that no action could be brought against XL by Piedmont unless Piedmont had complied with all the terms of the policy.

Piedmont was eventually granted summary judgment but agreed during the pendency of plaintiffs’ appeal to mediate the case. By that time, the Liberty policy had been exhausted by defense costs, as had $4 million of the XL policy. Piedmont sought XL’s consent to settle the claim for the remaining $6 million under the XL policy but it would only consent to contributing $1 million. Without any further notice to XL and without XL’s consent, Piedmont settled the case for $4.9 million, with the trial court’s approval, and then demanded the full settlement amount from XL. When XL refused to pay, Piedmont filed suit in the Northern District of Georgia claiming breach of contract and bad faith. XL moved to dismiss the complaint, the court granted the motion and on appeal, the 11th Circuit certified three questions to the Georgia Supreme Court, which can be summarized as asking 1) was Piedmont “legally obligated” to pay the settlement since it was approved by the court; 2) was Piedmont flatly barred from bringing suit by its failure to get consent or was the court required to determine whether consent was unreasonably withheld; and 3) was the case properly dismissed under Georgia law?

While noting that other jurisdictions had determined that an insured who settles in violation of a no action clause can still bring a bad faith suit, the Georgia Supreme Court held that under Georgia law, the case was properly dismissed because the plain language of the policy did not allow Piedmont to settle without XL’s consent and by doing so, Piedmont did not fulfill the policy requirements, thus barring the case based on the no action clause. It further determined that Piedmont was not legally obligated to pay, even though the trial court had approved the settlement, because the payment was considered voluntary without XL’s consent, since the plain language of the policy required it.

MAKE SURE DISCRETIONARY LANGUAGE IS ALWAYS IN THE PLAN DOCUMENTS, NOT JUST THE SPD

A new case out of the Ninth Circuit U.S. Court of Appeals reminds plan administrators once again that discretionary language in an ERISA plan must be clear and should be contained in the actual plan documents, not just in the summary plan description (“SPD”).

In Prichard v. Metropolitan Life Ins. Co., No. 12-17355, 2015 WL 1783507 (9th Cir. Apr. 21, 2015), the Ninth Circuit reversed the district court’s grant of summary judgment in favor of MetLife because it determined that the district court’s review should have been under the de novo standard rather than under the arbitrary and capricious standard because the only document that contained the discretionary language was the SPD, which it determined was not a plan document.

The case involved the review of a denial of long-term disability benefits to Prichard under an employee welfare benefit plan based on a 24-month limitation on benefits for nervous and mental disorders. In the district court, MetLife argued that the review should be under the arbitrary and capricious standard based on language contained in the SPD because it asserted that the SPD and the plan were “one and the same.” Prichard argued that, under the Supreme Court’s decision in Cigna Corp. v. Amara, — U.S. –, 131 S. Ct 1866 (2011), the court was required to review the decision de novo because the only document in the record that granted discretion was the SPD. The district court determined that the SPD was the governing plan document, reviewed the decision under the arbitrary and capricious standard and granted summary judgment to MetLife.

The Ninth Circuit determined that the SPD and the plan were not “one and the same.” It looked to the insurance certificate, which it stated was the only document in the record that contained a clear indication that it was a plan document. That document stated that the plan consisted only of: 1) the group policy and its exhibits; 2) the plan sponsor’s application; and 3) any amendments and/or endorsements to the group policy. The policy also contained an integration clause that stated that those documents constituted the entire contract. The court seized on this and held that since the SPD was “conspicuously absent” from the integration clause’s list of documents, the SPD could not be relied upon to grant discretion. The court did concede that the plan appeared to consist of more than just the insurance certificate and that it was possible that other plan documents outside the record may have contained a grant of discretion but if that was the case, it was MetLife’s burden to place that evidence before the district court. Because the court found that there was no grant of discretion in the plan documents that were in evidence, it vacated the district court’s decision and remanded the case to be reviewed under the de novo standard.

This case is yet another reminder that plan documents have to clearly grant discretionary authority to the plan administrator in order to be effective. Doing so would have alleviated the problem altogether. It is also a reminder to administrators and practitioners alike to ensure that all the evidence supporting a discretionary review is before the court.

ERISA Fee Awards in Remanded Cases Continues in the Sixth Circuit

Based on recent trends, ERISA fiduciaries, administrators and practitioners defending cases in the Sixth Circuit should be prepared for plaintiffs who have their cases simply remanded back to the claims administrator for further review to seek and be awarded attorneys fees, especially if the benefit denial is reviewed under the arbitrary and capricious standard of review. The latest case is Groth v. Centurylink Disability Plan, No. 2:13-cv-01238, 2015 WL 1396380 (S.D. Ohio Mar. 25, 2015) but the recent cases all trace their lineage back to Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242 (2010). In Hardt, the Supreme Court held that in an action by an ERISA plan participant, the trial court has discretion to award attorneys fees and costs as long as the party seeking fees achieved “some degree of success on the merits.”

The Sixth Circuit has interpreted “some degree of success on the merits” to include a remand requiring the plan administrator to address deficiencies in the original review of the plaintiff’s claim, even if the district court made no determination regarding the plaintiffs disability status.” See Bowers v Hartford Life  & Acc. Ins. Co. No. 2:09-cv-290, 2010 WL 4117515 (S.D. Ohio Oct. 19, 2010). Once the claimant clears this rather low threshold, the court applies the five-part McKay test, that examines: (1) the degree of the opposing party’s culpability or bad faith; (2) the opposing party’s ability to satisfy an award of attorney’s fees; (3) the deterrent effect of an award on other persons under similar circumstances; (4) whether the party requesting fees sought to confer a common benefit on all participants and beneficiaries of an ERISA plan or resolve significant legal questions regarding ERISA; and (5) the relative merits of the parties’ positions. No one factor is dispositive and the court is supposed to weigh all the factors. 

In Groth, plaintiff sued after being denied short-term disability benefits and the court, reviewing the denial under the arbitrary and capricious standard, determined that the plan’s third-party administrator arbitrarily disregarded medical evidence, failed to offer a reasoned explanation based on the evidence for its decision and failed to discuss and resolve conflicts between the reviewing doctors’ opinions. The court said, however, that it did not believe the record clearly established that plaintiff was entitled to benefits and simply remanded the case back to the administrator for further review.

Nonetheless, Groth sought attorney fees. In reviewing the request, the court spent little time on the second and fourth McKay factors, quickly determining both that the plan had the ability to pay any fees awarded and that the plaintiff had not sought to confer a common benefit. As to the bad faith/culpability prong, the court stated that the Sixth Circuit had “found the culpability requirement met where a ‘plan administrator engages in an inadequate review of the beneficiary’s claim or otherwise acts improperly in denying benefits.’” It would appear that this low bar would be met in nearly every time a case is remanded for “inadequate review.”

The court’s analysis of the deterrent effect prong is cause for further concern. The court determined that that the deterrent effect here would be that an award “will warn other plan administrators of important principles that all plan administrators should heed” regarding the review of the medical evidence and opinions and providing an explanation for the denial. As a full and fair review of the record by the administrator is a basic requirement under ERISA, it is hard to understand how a fee award would make such a review more certain.

Similarly, regarding the “relative merits” prong, the court determined that even though she was not awarded benefits and did not prevail on a number of claims, she “was able to overcome the highly deferential arbitrary and capricious standard to achieve a remand.”

Therein may lie the rub. A review of these post-Hardt Sixth Circuit cases shows that a large majority of them involve a remand when the review was under the arbitrary and capricious standard. It is as if the courts are saying that if a plaintiff can overcome the arbitrary and capricious standard and simply achieve a remand, they deserve fees.

Unfortunately, it does not look like this trend will end any time soon in the Sixth Circuit so administrators and practitioners should be prepared for this fight. In fact, it appears that they should seriously consider settling once the fee request is filed if the fees sought are reasonable. If they are not, they should concentrate most of their efforts on fighting the reasonableness and amount of the fees.