Stephan v. Unum Life Ins.Co., 2012 U.S.App.LEXIS 19139 (9th Cir. September 12, 2012)(Issues: Standard of Review, Earnings, Fiduciary Exception to Attorney Client Privilege).
In August 2007, Mark Stephan suffered a spinal cord injury in a bicycling accident that rendered him a quadriplegic. Although Unum, his disability insurer, never questioned Stephan's disability, because the plaintiff had just started a new job, Unum refused to include a significant component of Stephan's compensation in the calculation of his benefits. Unum based the benefit on Stephan's base monthly salary, but excluded his guaranteed bonus, resulting in a benefit of half the amount that would have been paid had the bonus been included. Applying a deferential standard of review, the district court upheld Unum's policy interpretation excluding bonuses. The court of appeals reversed, even though the Ninth Circuit affirmed the applicability of a deferential standard of review.
In April 2007, Stephan began a new job with Thomas Weisel Partners, a securities firm based in San Francisco. His offer letter included the following:
Your salary rate will be $200,000 annually. Your salary will be paid semi-monthly, less payroll deductions and all required withholdings. You will be eligible to participate in Thomas Weisel Partners' discretionary bonus program. Although bonuses are generally discretionary, you will be guaranteed [a] $300,000 bonus for your first 12 months of employment, provided you perform at the level both you and we anticipate and that you have not voluntarily terminated your employment or been terminated for cause prior to the relevant payment dates.
Before the bonus could be paid, on August 11, 2007, Stephan suffered a catastrophic spinal cord injury in a bicycling accident. When he applied for disability benefits shortly thereafter, Unum approved the claim, but calculated benefits based solely on the $200,000 base salary, even though Stephan's employer maintained that it was accruing the bonus each month and despite Weisel's payment of the pro-rata share of the bonus to Stephan at the end of 2007. Stephan's appeal was also unsuccessful even though he provided Unum with documentation from his employer explaining the bonus, and also submitted a report from an accountant and former Unum financial employee finding the disability payment should have been calculated based on both salary and bonus. Litigation ensued; and in the course of the district court proceedings, the court ruled on three motions: the court determined that the abuse of discretion standard of review applied, the court denied plaintiff discovery of memoranda authored by in-house counsel during the claim process, and the court ultimately granted summary judgment to Unum. Stephan appealed all three rulings.
In addressing the standard of review, the court pointed out that Stephan acknowledged the policy's inclusion of language sufficient to confer discretionary authority. However, Stephan maintained that the discretionary language was unlawful pursuant to the California Settlement Agreement between Unum and the State of California, and was also barred by California public policy as expressed in Cal.Ins.Code § 10291.5(b) which provides that the California Insurance Commissioner shall not approve any disability policy that contains "any provision, or has any label, description of its contents, title, heading, backing, or other indication of its provisions which is unintelligible, uncertain, ambiguous, or abstruse, or likely to mislead a person to whom the policy is offered, delivered or issued." However, the statute further provides that approval of a policy is deemed presumptively in accordance with the law.
In February 2004, the Commissioner issued a notice stating an intent to withdraw approval of insurance policies containing discretionary authority provisions because they "render [a policy] 'fraudulent or unsound insurance' within the meaning of [California] Insurance Code § 10291.5" and because they make insurance payments "contingent on the unfettered discretion of the insurer, thereby . . . rendering the contract potentially illusory." However, even after an administrative hearing officer upheld the notice of withdrawal, the Commissioner never followed through because it entered into the California Settlement Agreement (CSA) with Unum. The CSA required Unum to discontinue the use of discretionary clauses in its policies. However, the CSA further provided, "Discretionary authority provisions in existing California Contracts that were issued prior to the date of the Order of the Commissioner are not affected by the CSA."
The Weisel policy was first issued in 1999 and was amended six times prior to Stephan's accident. An amendment in January 2007 stated "[t]he entire policy is replaced by the policy attached to this amendment." However, the attached policy was the same as the prior policy. Stephan maintained the "replacement" language triggered the CSA and disabled the discretionary clauses in the policy. The court of appeals disagreed, though, and deemed the policy a renewal within the meaning of the CSA. Despite Stephan's argument that a renewal of a policy constitutes a new contract, the court determined the specific provisions of the CSA trumped that general statement of the law.
The court was equally dismissive of Stephan's argument that California public policy barred the discretionary clause in 2007. Although the court acknowledged the policies were required, as a matter of law, to comply with the law in effect at the time of each renewal, in the absence of California law in 2007 prohibiting discretionary clauses, the policy provisions were found lawful. However, that did not end the discussion on the standard of review, because the court then turned its focus to Unum's conflict of interest.
Although the abuse of discretion standard requires affirmance of the plan administrator's decision so long as it is reasonable, a conflict of interest can heighten a court's skepticism as to the insurer's findings. As a fiduciary under the ERISA law,
Unum has a duty to process claims "solely in the interests of the [plan's] participants and beneficiaries." Glenn, 554 U.S. at 106 (alteration in original) (internal quotation marks omitted). But because Unum "both decides who gets benefits and pays for them, . . . it [also] has a direct financial incentive to deny claims." Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 868 (9th Cir. 2008); see also Glenn, 554 U.S. at 105, 114-15; Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 966 (9th Cir. 2006) (en banc). Unum's dual role as plan administrator, authorized to determine the amount of benefits owed, and insurer, responsible for paying such benefits, creates a structural conflict of interest. See Glenn, 554 U.S. at 105, 114-15.
Although the conflict of interest does not alter the standard of review, the Ninth Circuit noted the conflict remains a factor to be considered and "[t]he weight of this factor depends upon the likelihood that the conflict impacted the administrator's decision making." *25. The district court gave little weight to Unum's conflict. However, the court of appeals disagreed and was sharply critical of the district court's finding.
The court explained that while traditional summary judgment factors "have limited application in ERISA cases governed by the abuse of discretion standard" *26 (citing Nolan v. Heald College, 551 F.3d 1148, 1154 (9th Cir. 2009)), consideration of the conflict of interest does trigger summary judgment; and "[a]s to issues regarding the nature and impact of a conflict of interest, summary judgment may only be granted if after 'viewing the evidence in the light most favorable to the non-moving party, there are [no] genuine issues of material fact.'" Id. (internal quotation marks omitted). *27. The district court was criticized for failing to view the evidence of bias in a light most favorable to Stephan. Hence, on remand, the Ninth Circuit ordered that the district court "may, but need not, hold a bench trial to determine the impact of Unum's conflict of interest" in order to determine the weight to be given the conflict. In conducting such an inquiry, the district court could admit evidence outside the record and is to take into consideration "Unum's history of biased decision making; any evidence that its decision making was biased in this case, including the internal memoranda between Stephan's claim analyst and its in-house counsel; as well as any evidence that Unum took steps to reduce the potential impact of a conflict of interest, either in general or in this case."
With respect to the internal memoranda, the court deemed those communications discoverable under the fiduciary exception to the attorney-client privilege. Under ERISA, "the fiduciary exception provides that an employer acting in the capacity of ERISA fiduciary is disabled from asserting the attorney-client privilege against plan beneficiaries on matters of plan administration." *30 (citing United States v. Mett, 178 F.3d 1058, 1063 (9th Cir. 1999)). The court deemed the question of whether the fiduciary exception applied to fully insured plans a question of first impression in the Ninth Circuit, although the court recognized the Third Circuit found in favor of the insurer inWachtel v. Health Net, Inc., 482 F.3d 225 (3d Cir. 2007). Nonetheless, the court pointed out that every district court that has addressed the issue since Wachtel has been critical of that ruling: Klein v. Nw. Mutual Life Ins. Co., 806 F. Supp. 2d 1120 (S.D. Cal. 2011); Buzzanga v. Cigna, No. 4:09-CV-1353, 2010 WL 1292162 (E.D. Mo. Apr. 5, 2010); Smith v. Jefferson Pilot Fin. Ins. Co., 245 F.R.D. 45 (D. Mass. 2007). All of those rulings found the fiduciary exception applicable to insurers.
The court noted two justifications for the fiduciary exception - fiduciaries are obligated to disclose to plan beneficiaries all information regarding plan administration; and also because, since the fiduciary represents the beneficiaries of the trust, the beneficiary is the real client. The court found both rationales apply equally to insured and funded ERISA plans, particularly in view of ERISA's broad disclosure requirements. Although the district court rejected the applicability of the fiduciary exception because it found an adversarial relationship had begun after Stephan's counsel contacted Unum, following an in camera examination of the documents, the Ninth Circuit disagreed. The court explained that the advice related to plan administration and were therefore discoverable -
The documents at issue are notes of conversations between Unum claims analysts and Unum's in-house counsel about how the insurance policy under which Stephan was covered ought to be interpreted and whether Stephan's bonus ought to be considered monthly earnings within the meaning of the Plan. Unlike the memoranda in Mett, the disputed documents offer advice solely on how the Plan ought to be interpreted. They do not address any potential civil or criminal liability Unum might face, nor is there any indication that they were prepared with such liability in mind.
The court thoroughly rejected the argument that contact from counsel indicated the prospect of litigation by pointing out:
Courts that have considered the issue, however, "have repeatedly rejected the argument that the prospect of post-decisional litigation is enough to overcome the fiduciary exception." Allen v. Honeywell Ret. Earnings Plan, 698 F. Supp. 2d 1197, 1201 (D. Ariz. 2010) (internal quotation marks omitted); see, e.g., Geissal v. Moore Med. Corp., 192 F.R.D. 620, 625 (E.D. Mo. 2000); Klein, 806 F. Supp. 2d at 1132-33 (collecting cases). Most courts have held that it is not until after the final determination -- that is, after the final administrative appeal -- that the interests of the Plan fiduciary and the beneficiary diverge for purposes of application of the fiduciary exception. See Klein, 806 F. Supp. 2d at 1132. We agree with the weight of authority. The context of the documents at issue here -- communications in advance of Unum's decision on Stephan's appeal -- indicates that their goal was the determination of Stephan's pre-disability earnings, a matter of plan administration, and was not preparation for litigation.
The court next addressed the central issue in the case - whether Stephan's bonus should have been counted as earnings. The court began by citing evidence of Unum's history of biased adjudication compiled in a law review article: John H. Langbein, Trust Law as Regulatory Law: The Unum/ Provident Scandal and Judicial Review of Benefit Denials Under ERISA, 101 Nw. U. L. Rev. 1315, 1317-21 (2007)). The court also cited other rulings that have commented on Unum's history "'of erroneous and arbitrary benefits denials, bad faith contract misinterpretations, and other unscrupulous tactics,'" McCauley v. First Unum Life Ins. Co., 551 F.3d 126, 137 (2d Cir. 2008) (quoting Radford Trust v. First Unum Life Ins. Co., 321 F. Supp. 2d 226, 247 (D. Mass. 2004), rev'd on other grounds, 491 F.3d 21, 25 (1st Cir. 2007)) and Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 868 (9th Cir. 2008). The court further noted the CSA resulted from an investigation into Unum's claim handling practices. Hence, the district court's finding of the absence of a history of biased claim administration by Unum was "incorrect." Nor was there any evidence presented by Unum that it made efforts to mitigate its conflict of interest.
The court then turned to the policy language and Unum's interpretation that, in the opinion of the court, "rests on terms that do not appear in the relevant text." The policy specified that
"Monthly Earnings" means your average gross monthly income as figured:
- a. from the income box on your W-2 form which reflects wages, tips and other compensation received from your Employer for the two (2) calendar-years just prior to your date of disability; or
- b. for the period of your employment with your Employer if you have been employed less than two (2) full calendar years prior to your date of disability.
Average gross monthly income is your total income before taxes. It is prior to any deductions made for pre-tax contributions to a qualified deferred compensation plan, Section 125 plan, or flexible spending account. It does not include income received from car, housing or moving allowances, Employer contributions to a qualified deferred compensation plan, or income received from sources other than your Employer.
Since Stephan was employed for less than a year before he became disabled, his benefit was to be calculated based on his "average gross monthly income . . . for the period of [his] employment" at Weisel. The court noted the policy was silent about whether and how the bonus would be included, but pointed out that Unum had issued other policies that both included and which excluded bonus payments. Unum insisted that the "monthly earnings" had to be payments "received" up to the date of disability. However, the court determined that restricting earnings to payments received applied only to employees who had been employed by Weisel for at least two years. Hence, section (a) of the definition was inapplicable and inclusion of the word "received" in interpreting section (b) was, in the words of the court, "misplaced." *43. The court also expressed concern that Unum's interpretation "would make arbitrary distinctions based on an insured's length of employment, distinctions not supported by the text of the Plan." The court then gave the example that if he became disabled on the day the bonus was paid, it would be included, but if he became disabled one day earlier it would be excluded. The court also found Unum's interpretation irrational because "for those employees who have received their bonuses, 'total income' would include salary and bonuses. For those whose bonuses are guaranteed but have yet to be paid, such income would include salary only. This result is at odds with the policy's language, which defines monthly earnings without regard to length of employment." *44. Finally, the court explained:
Finally, interpreting "gross monthly income" to include only income actually received would mean that employees who became disabled before receiving their first paycheck would receive no disability payments at all. Similarly, the disability payments for an employee whose paycheck was incorrect -- for example someone who had been accidentally underpaid due to a payroll error or intentionally underpaid due to discrimination -- would be calculated based on this erroneous figure. *44-*45.
The court explained that the district judge had limited its holding to the facts relating to Stephan; however, since the plan applied to all Weisel employees, the interpretation was arbitrary because it would violate the obligation to ensure that "the plan provisions" are "applied consistently with respect to similarly situated claimants." 29 C.F.R. § 2560.503-1(b)(5). The court found Unum's interpretation "either disregards this obligation or reaches an unsupportable result." *45.
The court also criticized Unum's interpretation of Stephan's offer letter which guaranteed a $300,000 bonus, rendering that payment a "nondiscretionary part of his income, so long as he met the conditions of the offer letter." In the court's opinion, it was not "sensible to understand his inability to work due to disability as a voluntary termination of employment." *46. Since there was no indication that Stephan's performance was deficient, it appeared to the court that he met the requirements for receipt of a bonus. Moreover, as the court pointed out, "the central question at issue in this case is not whether Stephan was entitled to receive his bonus in its entirety, but whether he earned it on a pro rata basis each month as part of his income." *46 (emphasis in original).
The Ninth Circuit rejected Unum's focus on a comment made by Weisel's general counsel in a telephone conversation in which he stated that the firm intended to "morally honor" its commitment to pay the bonus. The court found that Unum "took this quotation out of context and then proceeded to give it undue weight in its determination of Stephan's pre-disability earnings." *47. The court quoted from the entire conversation in which the general counsel explained that the bonus was not discretionary but an integral component of compensation. Other documentation, which included the opinion from a CPA hired by Stephan who had worked at Unum and who had participated in developing the contract, corroborated that view. The accountant, as well as Weisel's general counsel, expressed views to Unum that the bonus was pro-rated and accrued each month.
The court also rejected Unum's argument that it had only received premiums on $200,000 of income since the record showed that "Unum either did not in fact rely on the premiums or did so in a way that was illogical. In either case, Unum's citation of premium payments supports an inference of bias." *51. Indeed, Unum believed it had received premiums based on $100,000 in income, yet paid benefits based on $200,000, meaning that Unum could not have relied on the premium payment amount. But once Unum confirmed the premiums reflected $200,000 in income, it suddenly shifted gears and used the premium payment argument as the basis for denying benefit payments inclusive of the bonus. The court explained that "shifting and inconsistent" rationales suggest a conflict of interest. There was also evidence in the record about the method by which Weisel paid premiums and adjusted premium payments for past years after paying bonuses in succeeding years.
Finally, the court addressed the bonus accrual argument by referencing standard texts on accounting to support the conclusion that the accrual of the bonus each month, even if it was not paid monthly, is consistent with generally accepted accounting principles. Thus, Unum's assertion of a rationale contrary to "basic accounting principles" was deemed yet another ground demonstrating Unum's conflict of interest. Hence, the court remanded the matter to the district court to reconsider the weight to which Unum's conflict of interest affected its determination.
A dissent filed by Judge Diarmond O'Scannlain would have affirmed the district court's decision.
Discussion: There is very little to add to the court's thorough discussion of the issues. The key factors to be taken away from this ruling are that general summary judgment principles apply to a court's consideration of an insurer's conflict of interest. But that finding sets up an interesting issue of strategy - since a summary judgment analysis requires viewing the evidence in a light most favorable to the opponent, claimants should be wary of moving for summary judgment where the conflict issue is significant since that would require viewing the evidence in the light most favorable to the insurer. The court's explicit statement that extrinsic evidence is admissible on this issue is also significant and clearly opens the door to discovery.
The court's ruling on the fiduciary exception to the attorney-client privilege is also of major importance. Although there is now arguably a circuit split on the issue, effectively there is Wachtel and every other case ruling to the contrary, which minimizes the likelihood of Supreme Court review.
Finally, the court's discussion of conflict of interest with respect to contract interpretation affords guidance on the extent to which courts will defer to an insurer's contract interpretation. Although the court made no mention of the doctrine of contra profentem, the Ninth Circuit effectively imported at least the spirit of that doctrine by pointing out inconsistencies in the insurer's interpretation of the contract and the need to interpret the contract consistently for all participants and not just in a particular situation. The court also emphasized how significant and in what manner the conflict of interest affects a court's assessment of contract interpretation.
Mark DeBofsky of Daley, DeBofsky and Bryant represented Mr. Stephan.