Quiat on Claims : New York Disability Insurance Lawyer & Attorney : Michael Quiat : Uscher Quiat Uscher & Russo Law Firm : ERISA, Denied Claims

The first thing disability insurance companies do when hit with a claim in a state court that even mentions ERISA is to move it over into Federal District Court. It’s an almost knee-jerk reaction, no matter what the cause of action, because insurers seem to feel more comfortable in a federal court.

This feeling may be because a lot of plaintiff’s attorneys practice mostly in state courts and are unfamiliar with the practice and procedure in federal jurisdictions. Or, it may be that insurers get a warm and fuzzy feeling in federal courts because ERISA usually gives them a “deference” leg up in an ERISA matter.

Whatever the reason, automatic removal of such cases in the 2nd Circuit will no longer be a slam dunk after Stevenson v. The Bank of New York Company, Inc., . In Stevenson, the Federal District Court sent a case removed from the state court back to the state because the complaint did not make a claim about ERISA and its standards, or the conduct of any ERISA functionaries in their ERISA capacities.

In Stevenson, plaintiff sued Bank of New York because he alleged certain promises were made to him that if he worked abroad for the bank, his rights under certain ERISA plans would be maintained, and he would suffer no loss under those plans as a result of working abroad. His suit sounded in contract and tort law, having nothing to do with the interpretation of ERISA or his rights under ERISA.

Yet, the Bank of New York was able to remove the case from state to federal court, purportedly on the basis of ERISA jurisdiction, and further, to get the District Court to dismiss the complaint.

Holding that the claims in the complaint are neutral toward ERISA plans and that mention of ERISA in the complaint was just used to describe the underlying consideration for the contract, the 2nd Circuit remanded the case back to the District Court, with directions to remand the case back to the state courts for further proceedings.

So from now on, at least in New York, Connecticut and Vermont, insurers will have to do more than show that a complaint just mentions ERISA to get a removal into their warm and fuzzy place – the Federal District Court.

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A recent 3rd Circuit Court of Appeals ruling got us to thinking about the effect of lengthy litigation on an award in disability income cases.

In Eshelman v. Agere Systems, Inc., 554 F. 3rd 426, the appellate court upheld a District Court decision awarding additional damages to the plaintiff’s jury award of $200,000, to cover the added taxes she would have to pay because she received a lump sum award rather than having been paid her salary over a period of years as she would have if she had not been discriminated against.

Well, we reasoned, shouldn’t the same thinking be applied to disability income insurance cases which many insurers cause to be dragged on for years and years when it is apparent to any disinterested observer that the claim should have been paid early on. The insurance company’s reluctance (almost a reflex action when it comes to paying claims) should not cause the disabled policyholder more grief by adding to his or her tax burden.

The circumstances are very similar. When a person loses a position because of the wrongful action of the employer, the person loses the benefit of being paid weekly or monthly and paying income taxes periodically through withholding and annual tax returns.

When an insurer wrongfully drags out the award of benefits to a disabled person, the claimant loses the benefit of being paid these insurance monies weekly or monthly and paying income taxes (if the benefits are taxable) annually. (Generally, disability income benefits are taxable if an employer pays the policy premium and non-taxable if the insured pays the policy premium).

If a disability income case drags on for awhile (some are known to have gone 10 years or more), and results in a lump sum award to make up for the years during which no monies were paid, that lump sum is taxed in the year it is received by the claimant. Many times this puts the recipient in a much higher tax bracket, meaning that a much larger percentage of the award will have to be paid than the claimant would have paid if benefits were received and taxes paid each year.

As a result, the claimant is not made whole, receiving less money in his or her pocket than he or she would have received if paid monthly for the period

We believe it fair that a District Court judge have the discretion to make an additional financial award to make up for the tax difference so as to make the plaintiff whole when appropriate evidence has been elicited to support such a tax award.

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Texas has now joined New York in trying to level the playing field for their ERISA disability income insurance claimants. Both states have proposed new regulations designed to negate the deference courts give to insurance companies in deciding disability income cases under ERISA.

If the regulations are finalized and become law, New York and Texas will join more than 20 other states in giving their citizens an even chance to prove their right to disability benefits.

These problems started with the case of Firestone v Bruch, 489 U.S, 101, when the U.S. Supreme Court found that, under the court’s interpretation of trust law, ERISA plans could be written so that discretion is given to claims administrator’s in deciding claims, and courts would then be obliged to give deference to the administrator’s findings.

This led to the concept of “arbitrary and capricious” review in ERISA disability cases. Under Bruch, the administrator’s denial of a claim would be upheld unless the claimant could show that the denial was “arbitrary and capricious”, a term of art in the law. This rule raised a mountain in the path of the claimant. If there was any reasonable basis for the denial, it would be upheld, no matter how compelling the claimant’s contrary evidence might be.

The major problem with giving deference is that the administrator is many times the insurer who pays the claim. So, if the administrator approves the claim, it also has to pay the claim out of its own funds. This deference power in a conflict of interest situation would try the moral fiber of an angel. So, you can imagine what it does to insurance companies which are far from angels!

There have been many examples of how this conflict works against disabled employees, including the most infamous one – the Unum 49-state investigation of its claims handling practices, which led to a large settlement with Unum and the reopening for review of more than 220,000 Unum case disability income denials.

What makes this deference requirement of Bruch even more problematic for claimants is the principle of preemption which makes federal law completely controlling over state law in ERISA matters. Courts have held that states have very little to say in these cases, with one big exception – states have the right to determine the language of insurance policies in their jurisdiction. In policy language, state word is law.

As a result, many states which object to insurance companies getting the upper hand over their citizens because of Bruch, have banned the use of discretionary language which favors insurers, in approving the policy forms used in their state.

One would think that every state would look out for its people in this way, especially when it takes so little effort.

What is surprising is that about half of the states haven’t done it yet, leaving the insurers with the upper hand against their own people.

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