In Fiorentini v. Paul Revere Life Insurance Company, No. 17-3137, 2018 U.S. App. LEXIS 16741 (7th Cir. June 21, 2018), the Seventh Circuit determined that a business owner that had once been receiving total disability benefits but had since returned to work was not eligible for continued total disability benefits despite his argument that he was not able to perform all his job duties because he was unable to what it takes to generate new business.

In 1982, Henry Fiorentini founded Panatech Computer Management, Inc., a small information-technology company that specializes in providing customized software to small businesses. In 1998, he was diagnosed with invasive basal cell carcinoma of the right ear which required several surgeries, including the eventual amputation of the ear and replacing it with a prosthetic one. After the surgeries, he experienced permanent hearing loss, fatigue, migraines, dry mouth, tinnitus (a constant ringing sound), and an inability to localize sound. After the last of the surgeries, which occurred in 2008, Fiorentini submitted a claim for total disability benefits under an occupational disability insurance policy he had purchased from Paul Revere. The policy defined “total disability” as being unable to perform the important duties of his “occupation.” In his original application he listed his occupation as “President & Owner” of Panatech and said that his occupation entailed four “important duties”: sales (6–8 hours per week), consulting/meetings (7–10 hours per week), programming (15–25 hours per week), and administrative work (2–3 hours per week). Paul Revere concluded that he was unable to perform these duties, approved his claim and began paying Fiorentini total disability benefits in February 2009.

Five years later, Paul Revere notified Fiorentini that he no longer met the total disability requirements of his policy. He had been cancer-free since 2009 and was working regularly again. While he allegedly continued to suffer side effects from the surgery and worked fewer hours than he had before, the company determined that he was now well enough that he was exercising full control over Panatech. However, while it found him ineligible for total disability benefits, Paul Revere invited Fiorentini to apply for “residual disability” benefits under his policy. Coverage under that provision would have required Fiorentini to show that he was either unable to perform “one or more of the important duties” of his occupation or could only perform his important job duties for “80% of the time normally required to perform them” and that he earned at least 20% less than he did predisability.

Fiorentini did not submit that information. Instead, he let his policy lapse and sued Paul Revere, seeking damages for breach of contract, statutory penalties for unreasonable and vexatious conduct under Illinois law, and a declaratory judgment. The district court entered summary judgment for Paul Revere. On appeal, Fiorentini argued that the “total disability” clause covered him even though he could still do almost everything his occupation required him to do. In fact, he did not dispute that he was able to perform three of the important duties listed on his claim for total disability benefits: consulting with clients, programming, and administrative duties. He did however, claim that he was unable to perform the fourth, which he characterized as essential: sales.

He alleged that ever since his surgery, Panatech had survived exclusively on work from its existing clients; that he was the only one who can bring in new clients; and that he can do so only by meeting personally with prospects, giving presentations, and attending seminars. He claimed that that kind of face-to-face contact was now impossible for him because of his continuing symptoms, including tinnitus and fatigue. He also dismissed the suggestion that he could solicit new business through phone calls, emails, the internet, or a marketing company because he claimed that for his small business, only in-person contact will do.

The appeals court noted that Fiorentini’s claim that his inability to execute one task renders him “unable to perform the important duties of [his] Occupation” seized upon an opening in Seventh Circuit caselaw that suggests that the inability to perform one task might sometimes qualify under similarly worded policies. Fiorentini cited wording from another Seventh Circuit case that had noted that a shortstop who could no longer throw would be unable to do his job even if he could still run, hit, and catch and Fiorentini claimed that in-person solicitation is to him what throwing is to a shortstop—utterly essential. In other words, he claimed that because he couldn’t sell, he couldn’t do his job even if he could still program, consult with existing clients and do administrative tasks. The appeals court quickly dismissed this argument by stating “[a] shortstop who can’t throw can’t be a shortstop; Fiorentini, on the other hand, functions daily as Panatech’s president. While his capacity as Panatech’s president has been diminished by his inability to perform one of his important duties, he is not unable to continue his occupation.”  It further noted that under the plain language of the Paul Revere policy, a “diminished ability to perform his occupation” was not covered, only the inability to continue it.

The court further noted that Fiorentini’s ineligibility for benefits under the total disability provision of the policy was contained in his own testimony because he admitted that he met regularly with existing clients at their businesses or over lunch, visited job sites weekly to discuss and address computer problems and offered no explanation for why he could meet with existing clients but not potential clients. He further admitted that he renewed his pilot’s license and spent 75–80 hours a year flying around the Midwest, primarily to have breakfast with other recreational pilots and still played in a weekly adult hockey league. The court concluded by noting that while the record supported the inference that Fiorentini could not discharge his duties as Panatech’s president in precisely the same manner as he did before, such a reduced capacity to perform job duties was addressed by the policy’s “residual disability” provision, which Fiorentini chose not to apply for.


In a ruling that could have cost nonprofit religious-affiliated employers millions of dollars in compliance and other costs had it gone the other way, on June 5, 2017, the U.S. Supreme Court held, in a unanimous opinion authored by Justice Kagan in Advocate Health Care Network v. Stapleton, Nos. 16-74, 16-86, 16-258, 2017 U.S. LEXIS 3554, (June 5, 2017), that employee benefit plans established or maintained by church-affiliated entities are exempt from regulation under the Employee Retirement Income Security Act of 1974 (“ERISA”), even when they are not originally established by a church and in so doing, reversed the judgments of the Third, Seventh and Ninth Circuits.

The cases arose out of three class action lawsuits filed by employees of church-affiliated nonprofits that run hospitals and other healthcare facilities and the dispute hinged on the combined meaning of two separate ERISA provisions under 29 U.S.C. § 1002(33), which Justice Kagan boiled down to:

“Under paragraph (A), a “‘church plan’ means a plan established and maintained . . . by a church” and [u]nder subparagraph (C)(i), “[a] plan established and maintained . . . by a church . . . includes a plan maintained by [a principal-purpose] organization.'”

The employees claimed that their employers’ pension plans did not fall within ERISA’s church-plan exemption because, although subparagraph (C)(i), a 1980 amendment to ERISA, allowed so-called “principal-purpose organizations,” such as the defendant nonprofits, to “maintain” exempt benefit plans, ERISA still required that such plans must have been originally “established” by a church. In contrast, the hospitals claimed that subparagraph (C)(i) was added “to bring within the church-plan definition all pension plans maintained by a principal-purpose organization, regardless of who first established them,” a position long taken by the IRS, the Labor Department and the Pension Benefit Guaranty Corporation. The Third, Seventh and Ninth Circuits all agreed with the employees and determined that the plain language of the statute required that to be exempted, the plan must have originally been “established” by a church.

The Supreme Court granted certiorari based on its determination that the issues in the cases raised important matters and began its analysis by examining the statutory language. In determining that Congress was really creating a new exemption when it added subparagraph (C)(i), the Court phrased the issue as a simple logic problem with paragraphs (A) and (C)(i) as its first two steps, stating:

“Premise 1: A plan established and maintained by a church is an exempt church plan and Premise 2: A plan established and maintained by a church includes a plan maintained by a principal-purpose organization. Deduction: A plan maintained by a principal-purpose organization is an exempt church plan.”

As such, it stated that since Congress deemed that the category of plans “established and maintained” by a church “to include” plans maintained by principal-purpose organizations, then all those plans are exempted from ERISA. The Court further noted that had Congress wanted to accomplish what the employees claimed it intended by adding (C)(i), it could have simply omitted the words “established and” and allowed principal-purpose organizations to maintain previously established plans while still requiring that they be established by a church. The Court also restated its long-standing practice “to give effect, if possible, to every clause and word of a statute” and noted that following the employees’ claims would require it to treat “established and” as “stray marks on a page – notations that Congress regrettably made but did not really intend.”

By ruling this way, the Court essentially maintained the status quo, as the three previously mentioned federal agencies had been consistently interpreting the statute this way for more than 30 years. However, it will probably end, or at least severely curtail, the recent trend of class action lawsuits stemming from so-called “church-plan conversions” filed by employees of principal-purpose organizations.


In another victory for plan administrators seeking reimbursement under the terms of ERISA plans, in Rhea v. Alan Ritchey, Inc. Welfare Benefit Plan, No. 16-41032, 2017 U.S. App. LEXIS 9482 (5th Cir. May 30, 2017), the Fifth Circuit held that what the plaintiff termed a “disclaimer” in an ERISA plan document did not invalidate the summary plan description or the requirement set out in that SPD that the plaintiff was required to reimburse the plan for medical expenses it had paid on her behalf when she settled a malpractice case related to those expenses.

Donna Rhea was the beneficiary of an employee benefit plan organized under ERISA, who suffered injuries caused by her physician’s medical malpractice. The plan used a single document as both its summary plan description and its written instrument and that document contained a reimbursement provision, which stated “if a third party causes a Sickness or Injury for which you receive a settlement, judgment, or other recovery, you must use those proceeds to fully return to the Plan 100% of any Benefits you received for that Sickness or Injury.” It further stated, “[i]f the Plan incurs attorneys’ fees and costs in order to collect third party settlement funds held by you or your representative, the Plan has the right to recover those fees and costs from you.” The ERISA plan covered $71,644.77 of her medical expenses and after she settled the malpractice claim, the plan sought reimbursement, which she refused to pay, claiming that the plan did not have an enforceable written instrument.

The basis of her claim was that the SPD alluded to a separate “official Plan Document” and stated that if there was any discrepancy between the SPD and the official plan document, the plan document governed. Despite this “disclaimer,” at the time the plan sought reimbursement, there was no other plan document and the plan produced an affidavit to her lawyer stating that the SPD was “the Plan document that has been accepted, ratified, and maintained by the Plan Sponsor, that contains all of the ERISA-required plan provisions, and operates as the Plan’s official plan document.” In response, Rhea claimed, among other things, that the plan did not have an ERISA-compliant written instrument in place at the time it paid her medical expenses and therefore, had no right to reimbursement. Rhea filed a declaratory judgment action in the Eastern District of Texas seeking a declaration that she was not required to reimburse the plan. The plan filed a counterclaim in which it requested both equitable relief and damages under ERISA and the trial court, based on the recommendation of the magistrate judge, granted summary judgment to the plan and awarded over $31,000 in attorney fees and costs to the plan, a decision from which Rhea appealed.

The appeals court began its analysis by noting that while ERISA required plan administrators to provide SPDs to beneficiaries and that plans are required to be established and maintained pursuant to “written instruments,” there is nothing peculiar about an SPD functioning as both the SPD and the written instrument. In doing so, it specifically rejected Rhea’s argument that CIGNA Corp. v. Amara, 563 U.S. 421 (2011) required two separate documents, stating that because the Amara court was grappling with a conflict between the SPD and written instrument, it was factually distinguishable from this case, in which the court was simply determining whether the SPD could function as a written instrument in the absence of a separate written instrument.

It then rejected Rhea’s claim that the SPD did not comply with ERISA’s requirements “because it does not go into enough depth about how the Plan is funded or how it can be amended” because it determined that even though the SPD did not “lay out complex amendment or funding procedures,” something the court said was not required, it had sufficiently complied with ERISA’s information requirements. It further rejected her arguments that 1) the plan had never adopted the SPD as the plan’s written instrument because there was no evidence the plan adopted any other written instrument and 2) the plan had “lied” to her when the SPD appeared to refer to a non-existent separate written instrument because it held that an SPD, in the absence of a separate written instrument, still qualifies as the plan document.

Based on this analysis, the appeals court upheld the trial court’s decision that the plan contained a valid reimbursement provision that created an equitable lien by agreement in the plan’s favor when she settled the malpractice claim. It also upheld the lower court’s decision to award attorney fees, because it determined that the trial court had weighed all the factors required when awarding such fees, “including, most significantly, that Rhea was at least arguably acting in bad faith when she moved to deny the Plan a recovery to which it is contractually entitled.”


In Ariana M. v. Humana Health Plan of Texas, Inc., No. 16-20174, 2017 U.S. App. LEXIS 7072 (5th Cir. Apr. 21, 2017), which involved a claim for benefits under an ERISA-governed health insurance policy, the Fifth Circuit held that Texas’s statutory ban on the inclusion of discretionary clauses in such policies was not applicable to the case and, therefore, did not require de novo review of the administrator’s denial of the claim.

As ERISA administrators and practitioners know, under the Supreme Court’s ruling in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), an administrator’s coverage decision is reviewed de novo unless the plan grants the administrator discretion, in which case, it is reviewed for abuse of that discretion. Unique among the circuits however, is the Fifth Circuit’s rule, first articulated in Pierre v. Connecticut General Life Insurance Co., 932 F.2d 1552 (5th Cir. 1991), that all factual conclusions made by an ERISA administrator are reviewed for an abuse of discretion regardless of whether the plan contains discretionary language.

In Ariana M., the plaintiff had been in and out of medical facilities over several years for the treatment of mental illness, eating disorders and engaging in self-harm. Humana initially found that the treatment was medically necessary and approved a partial hospitalization for a total of 49 days but denied further treatment at the expiration of that time because it determined that the treatment was no longer necessary and plaintiff filed suit. Humana eventually filed a motion for summary judgment, and the district court, using the abuse of discretion standard in reviewing the administrator’s decision, granted Humana’s motion and plaintiff appealed.

Like many states in recent years, Texas, at Texas Insurance Code Section 1701.062(a), enacted a ban on the inclusion of discretionary language in insurance policies and most federal courts that have reviewed those statutes have held that they are not preempted by ERISA. On appeal, plaintiff argued that the Texas statute prevented the district court from using the abuse of discretion standard in reviewing Humana’s denial but the Fifth Circuit disagreed. In effect, the Fifth Circuit ruled that the statute was not applicable in this case because Pierre mandated deference to the administrator’s decision regardless of whether a policy contains discretionary language. It stated “[t]he plain text of [Section 1701.062(a)] provides only that a discretionary clause cannot be written into an insurance policy; it does not mandate a standard of review.” (emphasis added). As such, it held that the statute simply addresses the language that can be contained in a policy, not what the required standard of review in court is, and since the district court’s deferential review was required pursuant to Pierre and not the policy language, the district court’s ruling was correct.

It is worth noting however that all three members of the panel joined in a concurrence that calls into question the continued validity of Pierre and the Fifth Circuit’s lone-wolf position, ending with “[t]he lopsided split that now exists cries out for resolution.” It will be worth following to see if the Fifth Circuit addresses this issue in the near future and joins the other federal courts in requiring discretionary language in the plan documents for the application of the abuse of discretion standard.


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.


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.


In Foster v. Sedgwick Claims Management Services, Inc., 2016 U.S. App. LEXIS 21274 (D.C. Cir. Nov. 29, 2016), the District of Columbia Circuit held, among other things, that the district court’s dismissal of plaintiff’s ERISA claim regarding short-term disability benefits was proper because that benefit fell under the “payroll practice” exemption under ERISA regulations promulgated by the Department of Labor.

Kelly Foster, who was employed as a mortgage loan closer at SunTrust Bank, submitted claims for short-term disability benefits in January and August 2012 after missing work for several ailments. Sedgwick, which was the third-party administrator for both SunTrust’s short-term and long-term disability plans, denied the claims based on its determination that Foster had failed to provide “sufficient objective medical documentation” to support her claim. In September 2012, Foster was terminated based on her work absences and she subsequently appealed Sedgwick’s decision to deny short-term disability benefits, which Sedgwick upheld in early 2013. After her termination, she also filed a long-term disability claim which was also denied and upheld on appeal.

In July 2014, Foster sued both Sedgwick and the SunTrust plan under 29 U.S.C. § 1132(a), ERISA’s civil enforcement section, regarding the denial of both long-term and short-term disability benefits. Defendants filed a motion for summary judgment, claiming, among other things, that as to the short-term benefits, Foster could not seek review under ERISA because that plan was an “ERISA-exempt payroll practice,” under the DOL regulation set out at 29 C.F.R. § 2510.3-1(b)(2), which Foster conceded. Despite the concession however, the district court still analyzed defendants’ argument and independently determined that because the short-term disability benefits were “paid from SunTrust’s general assets and [were] ‘entirely separate’ from the Employee Benefits Plan,” it was a payroll plan, exempt from ERISA and since Foster’s complaint only invoked ERISA as the basis for her claims, it had no alternative but to grant summary judgment on the claim. Foster first moved for reconsideration in the district court and in that motion raised for the first time, the argument that the short-term plan was not an exempt payroll procedure and that was denied.  (The court also granted summary judgment to the defendants on the long-term claim).

The circuit court began its analysis of the short-term benefit denial by stating that without the Department of Labor’s regulation, the short-term benefit plan would be a welfare benefit plan under ERISA but that DOL exempts certain “payroll practices” from ERISA including: “[p]ayment of an employee’s normal compensation, out of the employer’s general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons.”

Analyzing the facts that were before the district court, the circuit court noted that SunTrust’s short-term disability plan clearly fit within the regulatory definition of “payroll practices” because it 1) was payment of an employee’s normal compensation; 2) paid from the employer’s general assets; and 3) was paid on account of time during which the employee was absent for medical reasons. The court went on to opine that it appeared “that SunTrust drafted its short-term disability plan to match the regulatory exemption.” As such, the appeals court affirmed the district court’s grant of summary judgment based on the payroll practices exemption on the merits, while it also rejected the appeal because the argument had not been preserved in the district court because it had not been raised prior to the motion for reconsideration. (It is worth noting that the circuit court also affirmed the denial of long-term benefits based on Sedgwick’s discretion to interpret the terms of the plan and its determination using that Sedgwick had not abused that discretion when it denied those benefits).



In a ruling that should be welcomed by professional liability insurers involved in suits filed by third parties where the professional’s representation of a client is not at issue, the Fifth U.S. Circuit Court of Appeals recently reversed the trial court in Edwards v. Continental Casualty Company, No. 15-30827, 2016 U.S. App. LEXIS 19753 (5th Cir. Nov. 2, 2016), and held that the malpractice insurer had no duty to defend a lawyer under a professional liability policy because the underlying lawsuit by a defendant in a previous lawsuit sought restitution of legal fees paid to an opposing lawyer as part of a settlement and, therefore, did not allege any “acts or omissions” as defined by the policy.

Edwards represented Andrew Schmidt, a commercial diver, in a personal injury suit, against Schmidt’s employer, Cal Dive, for a brain injury he allegedly sustained during a work-related dive and the parties entered into a multi-million-dollar settlement agreement before trial under which Cal Dive and its insurer paid a lump sum to Schmidt and funded an additional payment through annuity contracts. As a part of the settlement, Cal Dive paid attorney’s fees to Edwards through an annuity contract.

A year after the settlement, Cal Dive and its insurer filed suit against Schmidt and Edwards alleging that Schmidt had exaggerated or fabricated the extent of his injuries, although they did not allege that Edwards played any part in the “scheme.” As to Edwards, Cal Dive sought its cost of funding the annuity contract to him based in its claim that it was fraudulently induced to settle and claimed that it was entitled to restitution from Edwards of all funds that he “unjustly received” under the “invalid” settlement agreement, based on claims for unjust enrichment and restitution. That case was eventually dismissed for failure to state a claim and that dismissal was affirmed by the Fifth Circuit.

Edwards’s law firm maintained a professional liability policy with Continental Casualty Company that named Edwards as an insured and Edwards timely notified Continental of the claims brought against him in Cal Dive’s lawsuit and sought defense and coverage, but Continental declined to provide either. Edwards filed a declaratory judgment action against Continental, seeking a declaration that his firm’s professional liability policy required Continental to defend him and Edwards filed a motion for partial summary judgment and Continental filed a motion for summary judgment. The district court granted partial summary judgment in favor of Edwards, holding that Continental had a duty to defend him and Continental appealed.

Continental argued on appeal that it had no duty to defend Edwards in the underlying action because Cal Dive’s claims against Edwards were not the kind covered by the insurance policy. The policy provided that Continental “shall have the right and duty to defend in the Insured’s name and on the Insured’s behalf a claim covered by this Policy even if any of the allegations of the claim are groundless, false or fraudulent.” The pertinent policy language specified that a “claim” is one “arising out of an act or omission, including personal injury, in the rendering of or failure to render legal services, which were defined as “services . . . performed by an Insured for others as a lawyer.”

The appeals court first noted that it was undisputed that Louisiana law applied to the case and that under Louisiana law, “[t]he duty to defend is determined by examining the allegations of the injured plaintiff’s petition . . . and the insurer is obligated to tender a defense unless the petition unambiguously excludes coverage.” The court opined that Continental’s duty to defend was only activated by a claim covered by the policy but that the claims filed against Edwards in Cal Dive’s underlying action were not the type of claims that were covered by the Continental policy. It concluded that Cal Dive’s claims against Edwards did not “arise out of an act or omission . . . in [Edwards’s] rendering of or failure to render legal services” because Cal Dive did not allege “a single professional act or omission by Edwards that gives rise to such claims.” In fact, Cal Dive specifically alleged that it does “not believe that Edwards . . . [was] aware of Schmidt’s fraud.” In other words, the competency of Edwards’s representation of Schmidt, or lack thereof, was not at issue in the underlying suit and Edwards was only named in the suit because he received settlement funds from Cal Dive for his representation of Schmidt. While Edwards argued that the “arising out of” language of the policy should be applied broadly to provide coverage for Cal Dive’s claims and that this reading of the insurance policy “would result in professional liability policies only covering claims for malpractice and other attorney misdeeds,” the appeals court held that such an interpretation would effectively read the words “act or omission” out of the policy’s definition of a claim.