The Employee Retirement Income Security Act law creates a number of perverse incentives for insurers that administer benefit claims. Without the availability of remedies beyond the restoration of benefits due, insurers can earn significant profits on delayed payments.

A recent 6th U.S. Circuit Court of Appeals ruling, Rochow v. Life Ins. Co. of North America, 2013 U.S.App.LEXIS 24271 (6th Cir. Dec. 6, 2013), has dramatically shaken up the status quo.

Rochow has had a lengthy history. The original plaintiff, an insurance executive, applied for disability benefits in 2002 after he began experiencing memory loss and other symptoms that were ultimately diagnosed as HSV-encephalitis, a rare and debilitating brain infection.

The insurer, Life Insurance Company of North America (LINA), denied the claim; however, its decision was later found arbitrary and capricious and that determination was upheld by the 6th Circuit – Rochow v. LINA (Rochow I), 482 F.3d 860 (6th Cir. 2007). Although the plaintiff died shortly thereafter, his estate pursued the claim and, on remand, in addition to the benefits due, Rochow sought an equitable accounting and disgorgement of all profits obtained by LINA on the benefits it had withheld. The district court accepted the plaintiff’s calculation and ordered disgorgement and remedies totaling $3,797,867.92. LINA appealed.

LINA raised a number of procedural challenges, none of which were successful. Nor was LINA successful in attacking the disgorgement remedy. LINA’s main argument was that disgorgement is inappropriate because “equitable relief under Section 502(a)(3) is available only where Section 502(a) does not otherwise provide an adequate remedy.”

The plaintiff disagreed and maintained that the remedy is appropriate because it does not merely represent a repackaged benefits claim; it provided a different type of remedy than benefits and was appropriately awarded to remedy the defendant’s breach.

Although Variety Corporation v. Howe, 516 U.S. 489 (1996) cautioned against concurrent claims for benefits and for breach of fiduciary duty where the breach claim is nothing more than a “repackaged” claim for benefits, the court did not foreclose such relief where an award of benefits is insufficient to provide adequate relief.

Here, the claim for benefits was found inadequate to “provide the equitable redress of preventing LINA’s unjust enrichment.” The court further determined that “disgorgement does not result in double compensation, nor does it represent punishment.”

The court cited Parke v. First Reliance Standard Life Ins. Co., 368 F.3d 999, 1008 (8th Cir. 2004), which found that pre-judgment interest is a form of disgorgement and added, “[i]t is undisputed that an accounting for profits – the remedy that allows for disgorgement of profits awarded by the district court – is a type of relief that was typically available in equity and therefore is appropriate under Section 1132(a)(3)(B).”

The court also cited a recent Supreme Court ruling, CIGNA Corp. v. Amara, 131 S.Ct. 1866, 1880 (2011), which found that the “surcharge” remedy is available in equity to “provide relief in the form of monetary ‘compensation’ for a loss resulting from a trustee’s breach of duty, or to prevent the trustee’s unjust enrichment … ” From a public policy standpoint, the court further observed, “If no remedy beyond the award of benefits were allowed, insurance companies would have the perverse incentive to deny benefits for as long as possible, risking only litigation costs in the process.”

The court added, “Insulating LINA from disgorgement in this case would exacerbate the existing systemic conflict of interest.”

The court cautioned, though, that not every case will justify a finding of breach of fiduciary duty and a finding that a denial was arbitrary and capricious is not necessarily equivalent to a breach of fiduciary duty. However, in this matter the court found, “there are facts supporting the finding that LINA breached its fiduciary duty by continually ignoring its own plan definitions which resulted in wrongly denying benefits for five years after the initial request.”

Finally, the court addressed the proper amount of the disgorgement remedy. The court relied heavily on SEC v. First Jersey Securities, 101 F.3d 1450, 1474-75 (2d Cir. 1996), cert. denied, 522 U.S. 812 (1997), which ruled, “The district court has broad discretion not only in determining whether or not to order disgorgement but also in calculating the amount to be disgorged.”

Although LINA challenged the methodology utilized by the plaintiff’s expert, the court found the calculations appropriate since the funds from the benefits withheld were available to LINA for investment, operating expenses and other expenses and, thus, should be treated as equity. Therefore, a calculation based on the insurer’s return on equity was appropriate.

Judge David McKeague filed a dissent. He deemed the disgorgement a “windfall” that undermines ERISA’s remedial plan.

This decision is easily the biggest and most significant ERISA ruling since CIGNA v. Amara. If this decision holds up against the inevitable petition for rehearing and possible Supreme Court review, it will change the entire course of ERISA litigation because of its recognition of the perverse incentives that ERISA’s limited remedies create for insurers to deny claims, since their risk is minimal.

The methodology accepted by the court shows how profitable it is for insurers to delay payment; and concerns expressed in the opinion about how disgorgement might necessitate discovery are obviated because even basic Internet research quickly reveals the return on equity of publicly traded insurers. Indeed, the parent corporation of the Life Insurance of North America reported over a 20 percent return on equity in 2009, an otherwise down year in the national economy.

The lesson of this case sends a message that was perhaps best and most succinctly stated in a 9th Circuit case, Nickel v. Bank of Am., 290 F.3d 1134, 1138 (9th Cir. 2002), that was cited in the Rochow opinion.

There, the 9th Circuit explained disgorgement as “if you take my money and make money with it, your profit belongs to me.” The 6th Circuit made that abundantly clear in this ruling, as well.

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