Insured's silence not enough
Chicago Daily Law Bulletin
July 2, 2007
by MARK D. DEBOFSKY
The interesting issue presented in today's case is the effectiveness of a policy amendment introducing a discretionary clause. Burkett v. Union Security Ins.Co., 2007 U.S.Dist.LEXIS 41858 (W.D.Wash. June 7).
If the amendment was effective, the court would apply the arbitrary and capricious standard of review to a disability benefit dispute. If not, the de novo standard was applicable. The evidence concerning the amendment consisted of a letter sent to the policyholder that enclosed the proposed amendment and stated the amendment would become effective unless declined by the policyholder. Applying rules of contract interpretation, the court determined the amendment was ineffective. The court cited ERISA section 402(b)(3) (29 U.S.C. § 1102(b)(3)), which requires that every employee benefit plan maintain a procedure for amending the plan that identifies the persons who have authority to amend. The policy contained the following amendment procedure:
''Changing the Policy[.] The policyholder owns the policy. The policy may be changed at any time by an endorsement or amendment agreed upon by the policyholder and us. A change must be approved by one of our executive officers. No agent can change the policy or waive any of its provisions.''
The court determined the procedure was not met because as a matter of law it had not been agreed upon - ''silence cannot be deemed an acceptance of the proposed amendment.'' The court explained the governing principle:
''When interpreting a policy under ERISA, federal courts apply federal common law, and ' ''interpret terms in ERISA insurance policies in an ordinary and popular sense as would a person of average intelligence and experience.'' ' See Padfield v. AIG Life Ins. Co., 290 F.3d 1121, 1125 (9th Cir. 2002) (quoting Babikian v. Paul Revere Life Ins. Co., 63 F.3d 837, 840 (9th Cir. 1995). In so doing, the court 'may ''borrow from state law where appropriate[.]'' ' Id. Under the general common law rule, silence cannot be taken as manifestation of assent to an offer. See Union Pac. R.R. Co. v. Chicago, Milwaukee, St. Paul and Pac. R.R. Co., 549 F.2d 114, 118 (9th Cir. 1976) ('One party cannot unilaterally modify a contract without the consent of the other party.') (citing Hanson v. Puget Sound Navigation Co., 52 Wn.2d 124, 323 P.2d 655 (1958)).''
Therefore, although the court determined the parties could have agreed in advance that silence could constitute acceptance, they had not done so; hence, the amendment was ineffective. As further support, in footnote six of the opinion, the court cited the Restatement (Second) of Contracts section 69 (Acceptance by Silence or Exercise of Dominion), cmt. a (1981), stating:
''The mere receipt of an unsolicited offer does not impair the offeree's freedom of action or inaction or impose on him any duty to speak. The exceptional cases where silence is acceptance fall into two main classes: those where the offeree silently takes offered benefits, and those where one party relies on the other party's manifestation of intention that silence may operate as acceptance.''
Since neither exception was met, the court ruled that silence could not constitute a means of acceptance. The court also rejected an argument that the employer's dissemination of a summary plan description containing discretionary language triggered the arbitrary and capricious standard of review. The court found that where the plan's master document is more favorable than the SPD, that document controlled. Accordingly, because the amendment was ineffective, the court applied the de novo standard to its consideration of the underlying case.
The last point raised by the court has been the subject of numerous cases. When an SPD invokes discretionary language while the plan itself is silent, several courts have ruled the conflict results in a denial of discretion according to Schwartz v. Prudential Insur.Co. of America, 450 F.3d 697 (7th Cir. 2006) and Shaw v. Connecticut General Life Insur.Co., 353 F.3d 1276 (11th Cir. 2003). Similarly, in Teplick v. Boeing Company Employee Health and Welfare Benefit Plan, 2004 U.S.Dist.LEXIS 8748 (D.Ore. 5/11/2004), the court ruled that the presence of discretionary language in an administrative services agreement, but not elsewhere, fails to justify a deferential standard of review. And in Ruttenberg v. United States Life Insur.Co. in the City of New York, 413 F.3d 652 (7th Cir. 2005), the Court of Appeals ruled that a policy application is insufficient to trigger a deferential standard of review.
I was counsel of record in both the Schwartz case in the Ruttenberg case.