Hopkins v. Prudential Insur.Co. of America, 2006 WL 1343432 (N.D. Ill., May 12). Plaintiff, an employee of Bank One Corporation, challenged his disability insurer's invocation of a preexisting condition exclusion to deny him long-term disability benefits.

Hopkins was first employed by Bank One in 1999, and elected long-term disability insurance coverage when he commenced employment. Hopkins was laid off in late 1999, but rehired one year later. About six months after he was rehired, Hopkins became disabled and sought benefits from Prudential. Prudential denied the claim, though, on the ground that he became disabled within twelve months of becoming employed, and the insurer asserted he began experiencing stress and anxiety symptoms prior to his rehire, thus triggering the preexisting condition exclusion. When Hopkins appealed, Prudential maintained its denial, but on the second appeal, Prudential found the preexisting condition inapplicable due to Hopkins's prior employment, and paid him benefits for a short period of time, although the insurer concluded that symptoms improved sufficiently to allow Hopkins to return to work. Hopkins appealed a third time, contending he did not improve sufficiently to return to work at his regular occupation, but Prudential upheld its determination and again reiterated that the preexisting condition was applicable and that the earlier decision to the contrary was mistaken.

In analyzing the issues, the court first examined which standard of review applied to the claim. The court began by noting that the policy itself did not contain discretionary language and had been found deficient in that regard by Diaz v. Prudential, 424 F.3d 635 (7th Cir. 2006), a case that examined identical language. ( Editor's note: Mark DeBofsky represented the plaintiff in the Diaz case.) The court also rejected Prudential's argument that discretion could be discerned from a summary plan description because the SPD has no independent authority to expand upon or create powers independent of the plan itself. Further, the court dismissed defendant's reliance on other cases that held that auxiliary documents can create discretion because the other cases involved documents that were part of the plan or policy; here, there was an express disclaimer preceding the SPD stating it was not part of the policy.

The court then turned to the main issue: how to interpret the policy. Ruling that ''[b]ecause an ERISA plan is a contract, standard rules of contract interpretation apply,'' the court applied a contract rule requiring construction of ambiguous terms in the insured's favor. The plaintiff argued that rule mandated judgment in his favor because he was a rehired employee; the terms of the plan and SPD were in conflict with one another, and would consider the preexisting condition elimination period to run 12 months from the date Hopkins was initially hired, not from the date of rehire.

Before examining the conflict, though, the court first had to determine whether the SPD met ERISA's disclosure requirements set forth at 29 U.S.C. § 1022 because the failure to satisfy that requirement ''may estop a plan administrator from denying coverage for terms not included in the SPD.'' If the SPD were adequate, however, the court looks at both the plan and SPD to determine whether there is a direct conflict; if so, the claimant can rely on the terms of the SPD to estop the plan administrator from denying coverage. Upon consideration of the issue, the court found the SPD inadequately complied with section 1022; alternatively, the court found a direct conflict, which estopped the plan from denying coverage.

Although an SPD is not required to contain every detail and circumstance under which a plan operates, section 1022 requires that it must include the plan's requirements for eligibility and participation and circumstances which may result in disqualification, ineligibility or denial or loss of benefits. The court examined a case very similar to this one, Bowerman v. Wal-Mart Stores Inc., 226 F.3d 574 (7th Cir. 2000), which involved a health benefits claim for a rehired employee, in instructing its analysis of the issue. There, too, the SPD failed to adequately explain the circumstances under which a rehired employee (a term used but not defined in the plan or SPD) would be subject to a preexisting condition; and the court found such failure inadequate to meet section 1022.

The SPD here stated, ''[i]f you are a rehired employee, your LTD eligibility is calculated using your adjusted service date, not your latest date of hire.'' Consequently, Hopkins was justified in assuming his effective date for LTD coverage was when Bank One first employed him.

The court wrote: ''It follows then, that Hopkins would reasonably conclude that, immediately upon his rehire on Nov. 27, 1999, his LTD coverage was in effect. Given that the average person in Hopkins' circumstances would not have known that the preexisting condition limitation applied to him as a rehired employee, the SPD lacks the clarity and completeness required by section 1022.''

The court added, ''The court does not find Hopkins' situation to be so unusual that it does not warrant clarification, rather than obfuscation, in the SPD. Notably, as in Bowerman, the confusion caused by the exception for rehired employees is of the insurer's own making. It would be unjust to allow Prudential to include this misleading rehire exception in the SPD, and then to penalize claimants for believing it.''

The court's analysis continued and found that detrimental reliance is not required under section 1022, although even if it were required, sufficient evidence existed to show that Hopkins detrimentally relied on the SPD when he paid premiums. Finally, even assuming the SPD complied with section 1022, the court explained the governing rule.

''While generally the plan governs,'' the court wrote. '' 'We allow a participant or beneficiary to rely on the SPD and estop the plan administrator from denying coverage because of terms not included in the SPD only if there is a direct conflict between the SPD and the underlying policy.' Mers, 144 F.3d at 1024. A direct conflict does not exist where the SPD is merely a clumsy paraphrase of the plan's clear language or where the proposed interpretation of the SPD is illogical. See Health Cost Controls, 187 F.3d at 711-12; Senkier v. Hartford Life & Accident Ins. Co., 948 F.2d 1050, 1051 (7th Cir.1991) (finding no conflict where the plan clarified the SPD). Similarly, there is no direct conflict where the SPD is merely silent on an issue that the plan covers. Mers, 144 F.3d at 1024.''

Applying that rule, the court found the SPD conflicted with the plan. Noting that the plan does not even mention the term ''rehired employee,'' nor do any other plan terms discuss the situation of a rehired employee, the court held there was a direct conflict. The court also invalidated a disclaimer in the plan stating that in the event of a conflict between the plan and summary, the plan language governs. The court explained:

''To find otherwise would be inequitable. In general, a claimant sees the SPD, not the plan, and he makes decisions based on the terms as they are set forth in the SPD. It is unreasonable to allow insurers to place misleading or false information in the SPD, and then to allow them to rely on a disclaimer to renege on false promises. Enforcement of such disclaimers would defeat the protections ERISA is intended to provide and would render 29 U.S.C. § 1022 a virtual nullity. See Panaras v. Liquid Carbonic Indus. Corp., 74 F.3d 786, 788 (7th Cir.1996). Consequently, this disclaimer does not disturb the Court's finding that the Plan and the SPD are in conflict.''

The court then ruled Hopkins detrimentally relied on the SPD when he paid premiums believing he was eligible for coverage without being subject to the preexisting condition limitation. Therefore, because of the language in the SPD, and since Hopkins was active at work at the time he left due to disability, the preexisting condition was inapplicable. Further, because Prudential raised no defenses to the claim other than the preexisting condition exclusion, the court found Hopkins is entitled to benefits and awarded him benefits due.

As an offset against benefits, though, the court noted that the plan contained provisions reducing the amount payable by Social Security disability benefits. Although Hopkins had not received any Social Security benefits, the plan allows a deduction for benefits for which a claimant ''may qualify;'' therefore, the offset may be available regardless of whether Hopkins received Social Security disability benefits. However, the offset is not applied where the claimant applies for Social Security, signs a reimbursement agreement promising to reimburse Prudential in the event benefits are awarded, and exhausts appeals. Consequently, the court ordered that Hopkins apply for benefits.

In addition to the foregoing, the court awarded prejudgment interest at the prime rate without compounding, but did not allow an award of attorneys' fees or costs. Acknowledging that a fee award pursuant to 29 U.S.C. § 1132(g) is at the court's discretion, the court determined that Prudential's position was substantially justified and argued in good faith. The court found that prior to the issuance of Diaz, Prudential had a good faith basis to argue for a deferential standard of review, which would have given Prudential more discretion in its interpretation of the plan.

This is an important ruling on the issue of the conflict between the SPD and the plan. The court's analysis of this issue is thorough and scholarly and applies normal rules of contract construction. As the court pointed out, this is not such an unusual issue, and the court's ruling will assist future courts in analyzing similar issues. There is also a certain sense of curbstone equity in this ruling in that Hopkins paid premiums with the expectation of receiving coverage, and it would have been unfair to deprive him of benefits.

With respect to ordering the payment of benefits, the court's ruling is also consistent with Lauder v. UNUM Life Insur. Co., 284 F.3d 375 (2d Cir. 2002). That decision also dealt with a disability claim defense based on a policy exclusion. When the court rejected the insurer's policy defense, the 2d Circuit ruled the insurer forfeited its right to contest the plaintiff's disability, holding, ''First UNUM knew of Lauder's claim of disability, chose not to investigate it, and chose not to challenge it. It therefore waived its right to rely on lack of disability as a defense to Lauder's claim.'' 284 F.3d at 382. Consequently, Lauder ordered the disability insurer to pay all benefits due.

The court's refusal to award attorneys' fees is disappointing, though. Because the ERISA law provides for no damages award, there is no incentive for qualified counsel to bring suit in ERISA claims without a fee award. ERISA cases are exceedingly difficult, and while the principle at issue may be significant, often, the monetary amount is too small for a client to afford paying on an hourly fee basis or for counsel to accept retention on a contingency fee basis.

In its ruling, the court relied heavily on Bowerman v. Wal-Mart Stores Inc., 226 F.3d 574, 592 (7th Cir. 2000), which is also a relevant precedent as to the attorneys' fee issue. There, the court there awarded fees after finding a ''modest presumption'' in favor of a fee award. Fundamental fairness and equity also require an award of fees. As explained in Hooper v. Demco Inc., 37 F.3d 287, 291 (7th Cir. 1994):

''We note that the primary purpose of ERISA, to protect the participants in employee benefit plans, is achieved by 'establishing standards of conduct, responsibility, and obligations for fiduciaries of employment benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the federal courts.' ERISA § 2(b), 29 U.S.C. § 1001(b). To encourage aggrieved parties to seek redress under ERISA, the statute gives the trial court discretion to award attorney's fees to a prevailing party.''

In addition to negating the underlying purpose of ERISA, denial of attorney's fee requests encourage insurers to deny more claims. At the same time, fee denials hinder claimants' ability to secure counsel to litigate their claims. Indeed, fee awards act as the only incentive for insurers to pay ERISA claims since the ERISA law disallows claims for punitive damages or extracontractual damages. Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987). Moreover, ERISA has been considered a law of equity (Great West Life & Annuity Insurance Company v. Knudson, 122 S.Ct. 708 (2002)); and without a fee award, plaintiffs would not be made whole. Here, Hopkins's victory is pyrrhic indeed based on the fees he will now owe his attorney.