In ERISA, removal of deterrence incentivizes negative behavior

(This article was originally published in the Chicago Daily Law Bulletin on March 23, 2015.)

In 2013, the 6th U.S. Circuit Court of Appeals electrified the ERISA world when it ruled that in addition to paying benefits due after a wrongful rejection of a disability insurance claim, the Life Insurance Company of North America (LINA), a Cigna Corp. subsidiary, would also have to disgorge the profits it earned on the withheld benefits. Rochow v. Life Insurance Co. of North America, 737 F.3d 415 (6th Cir. 2013).
The full court agreed to rehear the case, however, and vacated its earlier ruling. In Rochow v. Life Insurance Company of North America, 2015 WL 925794 (6th Cir. March 5, 2015)(en banc), the full court determined that disgorgement was not a proper remedy and that only pre-judgment interest could be considered.
The court framed the issue as whether, in addition to benefits payable pursuant to 29 U.S.C. Section 1132(a)(1)(B), the estate of Daniel J. Rochow could obtain additional equitable relief pursuant to 29 U.S.C. Section 1132(a)(3). The court answered that question in the negative and held: "Rochow is made whole under Section 502(a)(1)(B) through recovery of his disability benefits and attorney fees and potential recovery of pre-judgment interest."
Any additional recovery would, according to the court, "result in an impermissible duplicative recovery."
The court ruled that Variety Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), only permitted a recovery under Section 502(a)(3) where the relief available under Section 502(a)(1)(B) was inadequate. The court distilled the Supreme Court’s ruling into a basic principle — "a claimant cannot pursue a breach-of-fiduciary-duty claim under Section 502(a)(3) based solely on an arbitrary and capricious denial of benefits where the Section 502(a)(1)(B) remedy is adequate to make the claimant whole."
Otherwise, observed the court, any time a benefit denial was found arbitrary and capricious, additional equitable relief would be potentially available.
In addition to Variety, the court applied Wilkins v. Baptist Healthcare System Inc., 150 F.3d 609 (6th Cir.1998), which also precluded a remedy under Section 502(a)(3) so long as there was a remedy available under Section 502(a)(1)(B), in order to conclude that a claim may be brought under Section 502(a)(3) "only where the breach of fiduciary duty claim is based on an injury separate and distinct from the denial of benefits or where the remedy afforded by Congress under Section 502(a)(1)(B) is otherwise shown to be inadequate." In the ordinary case, the claim alleged pursuant to Section 502(a)(3) is nothing more than "a duplicative or redundant remedy … to redress the same injury."
Although Rochow claimed he suffered a second injury when LINA withheld benefits and earned a substantial profit on those funds, the court disagreed, deeming "[t]he denial … the injury and the withholding is simply ancillary thereto, the continuing effect of the same denial. Together they comprise a single injury."
Nonetheless, the court recognized that Rochow may be eligible for pre-judgment interest, so long as the rate would not be set at such a high level as to amount to punitive damages. Nor may the rate be set too low, since that would fail to make the plaintiff whole. Since the lower court had not ruled on a request for prejudgment interest, the case was remanded for such consideration.
Judge Jane Stranch filed a dissenting opinion. Her main point was that "LINA’s intentional delay in paying Rochow’s substantial disability benefits for more than seven years allowed LINA to earn millions of dollars in profit for its own gain, in breach of its fiduciary duty not to engage in self-dealing. 29 U.S.C. Sections 1104(a)(1), 1106(b)."
Stranch disagreed with every aspect of the majority’s ruling and opined that the disgorgement claim was consistent with Variety. The dissent contended that there was in fact a second injury and that disgorgement was due under the equitable principle that "[a] trustee (or a fiduciary) who gains a benefit by breaching his or her duty must return that benefit to the beneficiary." (citing Skinner v. Northrop Grumman Retirement Plan B, 673 F.3d 1162, 1167 (9th Cir.2012)).
After reviewing ERISA’s fiduciary duties and the cases decided under Section 502(a)(3), including the Supreme Court’s most recent ruling in Cigna Corp. v. Amara, 131 S.Ct. 1866 (2011), the dissent concluded that a disgorgement remedy "comports with the statute, its purposes and trust law" and maintained that the majority’s reading of both Variety and Amara was too narrow.
The dissent cited rulings both from within and outside of the 6th Circuit to establish that a delay in payment constitutes a fiduciary breach and that "only the disgorgement of ill-gotten profits can wholly remedy LINA’s breach of its fiduciary duties." The dissent noted that CIGNA had arbitrarily and capriciously failed to pay benefits and a delay of more than seven years before benefits were paid resulted in a wrongful gain of substantial profit.
And the dissent concluded by citing Nickel v. Bank of American National Trust & Savings Association, 290 F.3d 1134, 1138 (9th Cir.2002), which pointed out: "The elementary rule of restitution is that if you take my money and make money with it, your profit belongs to me."
One of the biggest problems with the ERISA law is that in addition to its arcane procedural rules, the limited remedies available to aggrieved claimants eliminate deterrents against wrongful conduct.
But the removal of deterrence also perversely incentivizes negative behavior since, as this case illustrates, the wrongful withholding of benefits enabled Cigna to earn profits of 24 percent on benefits that rightfully belonged to Rochow and his family after his death.
No matter what rate of pre-judgment interest is awarded on remand, the bottom line is that, despite losing, Cigna still comes out ahead.