FOLLOW AN INSURANCE POLICY’S PROVISIONS ON TENDERING A DEFENSE AND INDEMNIFICATION CLAIM OR BE PREPARED TO FOOT THE LEGAL BILLS

Words in an insurance policy actually mean something and ignoring them can have real consequences for an insured. That’s the direct message the Eleventh Circuit recently sent when it decided EmbroidMe.com, Inc. v. Travelers Property Casualty Company of America, No. 14-10616, 2017 U.S. App. LEXIS 368 (11th Cir. Jan. 9, 2017). In that case, it held that a commercial general liability policyholder was not entitled to pre-tender litigation costs of more than $400,000 because it hired counsel on its own and then failed to notify Travelers of the litigation for more than 18 months.

In April 2010, EmbroidMe was sued in federal district court in Florida for copyright infringement. EmbroidMe had a commercial general liability policy through Travelers that provided both a defense and indemnification for such a claim but EmbroidMe chose not to notify Travelers of the suit or seek a defense. Instead, it retained a law firm on its own and, as noted previously, litigated the case for over 18 months, incurring fees of over $400,000. The policy contained an exclusionary provision that stated: “no insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”

EmbroidMe finally tendered the matter to Travelers in October 2011. In a letter dated November 21, 2011, Travelers agreed to defend the case going forward and reserved its rights to ultimately challenge its duty to indemnify. It refused however, to reimburse the legal fees EmbroidMe had already paid, based on clear language in the policy. It also cited its right to choose counsel but it eventually agreed to retain the same firm that had been handling the case, although at a reduced rate from that paid by EmbroidMe. The plaintiff in the underlying lawsuit eventually filed a second suit after Travelers agree to take up the defense and it continued to defend both lawsuits. Ultimately, the claims made in both lawsuits were settled.

After the underlying suits were settled, EmbroidMe again tried to convince Travelers to pay the pre-tender costs, which it refused to do, and EmbroidMe filed a breach of contract action in Florida state court, which Travelers removed to federal court.

EmbroidMe contended that under Florida’s Claims Administration Statute (“CAS”), Travelers’ coverage defense was untimely because it was made 39 days after tender, nine days more than permitted under the statute. (There was some dispute about whether the reservation of rights letter was dated 39 or 42 days after tender). Among other things, the CAS estops an insurer from denying coverage unless it gives “written notice of reservation of rights to assert a coverage defense” to the insured “[w]ithin 30 days after the liability insurer knew or should have known of the coverage defense” and further requires an insurer disclaim coverage or provide its policyholder a defense within 60 days. Travelers contended that its refusal to reimburse the costs incurred without prior approval was not a coverage defense but instead was based on a policy exclusion not subject to the CAS. It filed a motion for summary judgment, citing case law from the Florida Supreme Court that had held that the CAS and its time limits applied only to coverage defenses, not policy exclusions, and the district court agreed.

Because the policy precluded the policyholder from “voluntarily assuming any obligation or incurring any expense without Travelers’ consent,” the appeals court held that Travelers’s refusal to pay for pre-tender defense costs was based on a policy exclusion, not a coverage defense and therefore the CAS’s 30-day requirement to communicate coverage did not apply. Specifically, the court stated “[a]ccording to Florida law, the assertion of a coverage defense comes within the CAS and its corresponding time limits, but a defense that a policy provision excludes coverage is not subject to the CAS’s deadlines or even to its requirement that notice be given.” It continued “because Travelers relied on an exclusion, not a coverage defense, its failure to notify EmbroidMe within the time period set out in the statute did not estop Travelers from relying on that ground in refusing to pay these unapproved expenses.”

The decision is both a cautionary tale for insureds and a reminder to insurers that courts routinely uphold clear policy exclusions.  In other words, if you want to take advantage of the policy you’re paying for, follow the provisions, especially the policy’s tender requirements.

AMPLE CREDIBLE EVIDENCE SUPPORTED DISABILITY BENEFIT TERMINATION

In Geiger v. Aetna Life Insurance Company, No. 16-2790, 2017 U.S. App. LEXIS 245 (7th Cir. Jan. 6, 2017), the Seventh Circuit Court of Appeals upheld the U.S. District Court for the Northern Illinois’s grant of summary judgment in favor of Aetna on its decision to terminate long-term disability benefits under a policy that was part of an employee welfare benefits plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). The appeals court also upheld the trial court’s denial of plaintiff’s attempt to conduct limited discovery to address an alleged conflict of interest in Aetna’s handling of the claim.

Donna Geiger worked as an account executive at Sprint Nextel from 2001 to 2009 and was a participant in the company’s employee welfare benefit plan, governed by ERISA. Aetna issued and was the claims administrator for the plan’s disability policy. In October 2009, Geiger stopped working at Sprint and claimed short term disability, which was approved by Sprint, due to lumbar back pain caused by a previous discectomy, and severe ankle pain. In January 2010, she had surgery on both ankles and eventually underwent a full ankle replacement in December 2010. During that time, Aetna determined that Geiger was disabled from her occupation as an account executive under the Plan and approved her claim for long term disability benefits.

To receive benefits during the first two years, the Plan required that Geiger be totally disabled from performing the duties of her own occupation. After two years, the Plan required that she be disabled from performing the duties of any occupation and as the two-year anniversary was approaching, Aetna began a review of the claim. The company terminated Geiger’s benefits in August 2012 after her initial 24-month period of LTD benefits expired which Geiger appealed. As part of the review, Aetna obtained peer reviews from two independent physicians, one of which concluded that Geiger’s ankle condition would not preclude her from sedentary work. It also consulted Geiger’s anesthesiologist, who agreed that Geiger was capable of sedentary work. The other independent physician reached the opposite conclusion, finding that Geiger could not perform sedentary work and on May 1, 2013, Aetna reinstated Geiger’s benefits, finding “sufficient medical evidence to support a functional impairment which precluded the employee from performing the material duties of her own occupation.”

In May 2014, Aetna again terminated Geiger’s benefits after determining that she was not totally disabled. The impetus for this termination was that Geiger had been observed on surveillance video getting into and driving an SUV, shopping at numerous locations and carrying bags during those activities, all with no apparent difficulty. Geiger again appealed, and the decision was once again upheld in February 2015, after which Geiger filed suit in the Northern District of Illinois.

Both parties moved for summary judgment and the court granted summary judgment to Aetna, holding that Aetna’s decision was not arbitrary and capricious under Section 1133 of ERISA because, among other things, Aetna had, during the process, conducted “an Independent Medical Examination, three Independent Physician Peer Reviews, a Comprehensive Clinical Assessment, a Transferrable Skills Assessment, activity report surveillance, multiple communications with Ms. Geiger’s team of physicians, and even reversed its first termination after a holistic review of Ms. Geiger’s medical history and claim application.” As such, the judge determined that the termination decision was reasonable. The court also denied plaintiff’s attempt to conduct limited discovery into Aetna’s alleged conflict of interest stating that Aetna took measures to ensure that it followed “a reasonable procedure with sufficient safeguards to prevent a detrimental conflict of interest,” including those mentioned above.

Geiger appealed claiming that the district court had erred both in granting summary judgment to Aetna and in denying discovery on the conflict issue. Geiger argued that Aetna’s termination of her benefits was arbitrary and capricious because it relied on the same evidence it had previously considered when reinstating her benefits, yet reached the opposite conclusion. The court disagreed determining that the new surveillance evidence supported one of the independent doctor’s opinions and refuted the other’s. It further noted that Aetna was entitled to seek and consider new information, change its mind in appropriate cases, and perform a periodic review of a beneficiary’s disability status. As such, it held that Aetna’s termination was not arbitrary and capricious and affirmed the district court’s decision.

The court also affirmed the lower court’s ruling denying discovery on the conflict of interest issue. It noted that a conflict of interest exists when, a plan administrator has both the discretionary authority to determine eligibility for benefits and the obligation to pay benefits when due, which was undisputed in this case. However, it also stated that discovery in a benefits case is only permitted under exceptional circumstances and that “it is thus not the existence of a conflict of interest—which is a given in almost all ERISA cases—but the gravity of the conflict, as inferred from the circumstances, that is critical.” It further noted that conflicts must be viewed considering the steps the insurer takes to minimize the potential bias and based on the district court’s finding that Aetna’s procedures were reasonable and sufficiently safeguarded against a detrimental conflict of interest and that that court has inherent broad discretion to control discovery, it determined that the district court did not abuse its discretion in denying Geiger’s request for discovery.

Broker not Liable in Fraudulent Policy Scheme because it hadn’t Placed the Policies

In M.G. Skinner & Associates Insurance Agency, Inc. v. Norman-Spencer Agency, Inc., No. 15-2290, 2017 U.S. App. LEXIS 63 (7th Cir. Jan. 4, 2017), the Seventh Circuit Court of Appeals affirmed the trial court’s ruling that Norman-Spencer Agency Inc., an insurance broker, could not be held liable for negligence or breach of fiduciary duty for its role, or lack thereof, in placing what eventually turned out to be fraudulent commercial property policies because it did not owe a duty of care to either of the plaintiffs under both an Illinois statute and common law.

Western Consolidated Premium Properties, Inc. (“WCPP”) was a risk purchasing group through which commercial property owners could buy insurance, and M.G. Skinner & Associates Inc. (“Skinner”) acted as that program’s administrator. The program involved hundreds of commercial properties, including office buildings, shopping centers and multi-unit residential properties. In 2011, WCPP sought, through its various brokers, to renew the insurance for its properties and during the renewal process, one of the brokers suggested using Norman-Spencer as a sub-broker. Ultimately however, although Norman-Spencer expressed interest in becoming involved in the process, it played no role in the actual transactions. WCPP eventually procured insurance for the majority of its properties through a Michael A. Ward and his company, JRSO LLC, and a number of WCPP properties overseen by Myan Management Group separately procured insurance with Ward and JRSO. Norman-Spencer served as program administrator of the Myan program.

In the end, the “policies” that were issued to both WCPP and Myan were a sham and were not backed by a legitimate insurer. Ward was eventually convicted of wire fraud and sentenced to 10 years in prison. He was also required to pay $9 million in restitution to various victims of the fraud, including WCPP.

Once the scam was uncovered, Myan’s coverage was reincorporated into WCPP’s, and the new insurance it was forced to buy cost over $2 million more than the sham policies.

In May 2012, WCPP and Skinner sued Ward, JRSO, Norman-Spencer and several other insurance brokers and all the claims except those against Norman-Spencer were resolved either through settlement or default judgment. As to Norman-Spencer, WCPP sought to hold it liable for negligence under the Illinois Insurance Placement Liability Act (“IIPLA”) and a common-law breach of fiduciary duty claim, because it alleged that Norman-Spencer had failed to notify WCPP of certain “obvious signs that the ultimate provider of the insurance was dishonest.” These “facts” that Norman-Spencer became aware of included orders of both conservation and confiscation issued by a Cook County, Illinois court against Ward and/or JRSO and a “suspicious” alleged reinsurance agreement that Ward had provided to Norman-Spencer after several delays. Skinner made similar claims regarding the placement of the Myan policies.

Norman-Spencer moved for summary judgment on both WCPP’s and Skinner’s claims. The district court granted Norman-Spencer’s motion for summary judgment regarding WCPP’s claims concluding that Norman-Spencer did not owe a duty to WCPP under the IIPLA because neither WCPP nor any broker in the procurement chain ever requested Norman-Spencer’s assistance with that placement. The court also granted Norman-Spencer summary judgment on WCPP’s breach of fiduciary duty claim, concluding that Norman-Spencer could not be liable under that theory because it did not participate in the placement or receive any WCPP funds from that placement.

It also granted the motion as to Skinner’s claims concluding in part that Skinner was not an “insured” on the Myan policy for purposes of the IIPLA and that because Skinner was not the “insured” on the Myan Management policy and did not make any payment toward that policy, Norman-Spencer could not have breach a fiduciary duty.

Both WCPP and Skinner appealed. On appeal, WCPP argued that three different items, an unexecuted memorandum of understanding, an undocumented conversation and an email between Norman-Spencer and another broker, evidenced that Norman-Spencer had participated as a sub-broker and could therefore be liable under the IIPLA. The appeals court rejected that argument because, among other things, there was evidence that Ward had specifically prohibited Norman-Spencer from participating in the placement. As such, Seventh Circuit agreed with the district court that Norman-Spencer owed no duty of care to WCPP because it was never involved in placing insurance on that company’s behalf and that liability under the IIPLA can only arise once an insured has made a request for specific coverage from a broker. As to the Skinner claims, while the court acknowledged that Norman-Spencer had actively procured insurance for the Myan properties, it agreed with the lower court that Skinner could not maintain its negligence claim because Skinner was not listed as an insured on the policy issued to Myan, and therefore, essentially had no standing to bring a claim under the IIPLA.

ERISA PREEMPTS DISABILITY PLAINTIFF’S CLAIM THAT AN INDEPENDENT REVIEWER WAS PRACTICING MEDICINE WITHOUT A LICENSE

In Milby v. MCMC LLC, No. 16-5483, 2016 U.S. App. LEXIS 23112 (6th Cir. Dec. 22, 2016), the Sixth Circuit Court of Appeals held that a negligence per se claim against a medical records reviewer based on a claim of practicing medicine without a license was completely preempted by ERISA.

Samantha Milby worked as a nurse at the University of Louisville Hospital and was covered by a long-term disability insurance policy through that employment. In April 2011, she applied for and received disability benefits through her insurance policy for approximately 17 months based on her claim that she could no longer work for health reasons. During the claim, the plan hired MCMC, a Massachusetts-based third-party reviewer, to review Milby’s medical records and provide an opinion on whether the medical evidence she and her doctors had provided supported her claimed work restrictions. MCMC and its agent, neither of whom were licensed to practice medicine in Kentucky, opined that Milby’s treating physicians had not provided objective findings “which would support her inability to stand and move for more than just a few minutes, as well as repetitively bend, squat, kneel, and crouch.” MCMC’s eventual opinion was that Milby would have the capacity to perform sustained full time work without restrictions as of February 23, 2013, and, based in part on that recommendation, the plan terminated Milby’s benefits effective February 21, 2013.

Milby eventually filed two separate lawsuits regarding the claim denial, one against her disability insurance provider and this one, alleging a state-law claim of negligence per se against MCMC based on her claim that it was practicing medicine in Kentucky without the appropriate licenses. MCMC removed the case to federal court based on complete preemption under ERISA. The trial court denied Milby’s motion to remand the case to state court and granted MCMC’s motion to dismiss under Fed R. Civ. P. 12(b)(6) and Milby appealed.

In its review, the appeals court had to determine whether or not the claims were preempted under ERISA, and did so by applying the test set out by the Supreme Court in Aetna Health Inc. v. Davila, 542 U.S. 200 (2004), which held that a claim falls in the category of complete preemption under ERISA section 1132(a) when it  satisfies both prongs of the following test: (1) the plaintiff complains about the denial of benefits to which she is entitled only because of the terms of an ERISA-regulated employee benefit plan; and (2) the plaintiff does not allege the violation of any legal duty (state or federal) independent of ERISA or the plan terms.

As to the first prong, the court opined that a claim “likely falls within the scope of §1132(a) when the only action complained of is a refusal to provide benefits under an ERISA plan and the only relationship between the plaintiff and defendant is based on the plan” and determined that since MCMC’s conduct was indisputably part of the process used to assess Milby’s claim for benefits, the negligence claim was actually an alternative enforcement mechanism to ERISA’s civil enforcement provisions.

As to the second prong, the court looked to Kentucky law to determine whether MCMC owed an independent legal duty to Milby separate from ERISA or the Plan’s terms. Milby argued that the medical reviewers owed her an independent duty under Ky. Rev. Stat. § 311.560, which prohibits the practice of medicine without a license. The statute defined the practice of medicine as “the diagnosis, treatment, or correction of any and all human conditions, ailments, diseases, injuries, or infirmities by any and all means, methods, devices, or instrumentalities.” Based on a previous Sixth Circuit case that had determined that simply reviewing medical files was not the practice of medicine under Kentucky law because, among other things, it did not involve making determinations regarding the medical necessity of any treatment, the court held that MCMC was not practicing medicine within the meaning of the Kentucky licensing law and therefore did not owe an independent duty to Milby under the statute she attempted to invoke. It held instead that the allegations in Milby’s complaint implicitly relied on ERISA to establish the duty required for her negligence claim, thereby satisfying the second prong of the Davila test. As such, the appellate court affirmed the district court’s dismissal because the state-law negligence claim fit in the category of claims that are completely preempted by ERISA.