In 2010, I authored a column titled, “The standard of review can affect application of offsets,” Chicago Daily Law Bulletin, July 12, 2010. That column discussed two recently issued U.S. District Court rulings on the subject of benefit offsets and pointed out the standard of Employee Retirement Income Security Act (ERISA) review could determine whether a plan administrator had the power to interpret an ambiguous plan provision in a self-serving manner. In one of the two cases an insurer was permitted to recoup about $20,000 in benefits that had previously been paid and reduce ongoing benefit payments to a claimant who was also receiving veteran disability payments.

Recently, the 8th U.S. Circuit Court of Appeals overturned that decision. In Riley v. Sun Life and Health Ins.Co., No. 10-2850, 2011 U.S.App.LEXIS 20393 (8th Cir. Oct. 7, 2011), the issue before the court was whether an insurer is entitled to offset from the plaintiff’s employer-sponsored disability benefits payments the insured receives from the Department of Veterans Affairs (VA) in disability benefits. The insurer claimed the right to an offset even though the policy did not specify veteran benefits among the payments that could trigger a reduction in benefits. The court found that omission fatal and explained why.

The plaintiff, James Riley, ceased working in 2005 at his place of employment when he became disabled on account of multiple sclerosis (MS). Riley is also a Vietnam War veteran who receives VA benefits based on a determination that his MS is considered a service-related disability since his initial MS symptoms first appeared while he was in active service. According to 38 U.S.C. § 1112(a)(4), any veteran who develops MS within seven years from the date of separation from service during a period of war shall be presumed to have incurred or aggravated the MS during the period of service.

In the course of updating its records in 2007, Sun Life learned that Riley was receiving VA benefits and immediately took the position it could offset those benefits as “other income.” Sun Life’s policy permits a reduction of benefits when the insured is receiving “other income” which includes “[a]ny amount of disability or retirement benefits under: a) the United States Social Security Act [SSA] … ; b) the Railroad Retirement Act [RRA]; c) any other similar act or law provided in any jurisdiction.” The policy did not, however, explicitly enumerate VA benefits as “other income.”

The district court concluded that since both disability payments were for the same condition, the insurer had the right to offset the VA benefits. The appeals court disagreed. Sun Life relied heavily on two appellate rulings. In High v. E-Systems, Inc., 459 F.3d 573 (5th Cir. 2006), the court permitted an offset of VA benefits under a policy that permitted a benefit reduction for “benefits payable under any other group disability plan.” 459 F.3d at 578. Sun Life also cited Jones v. ReliaStar Life Insurance Co. 615 F.3d 941 (8th Cir. 2010), where “other income” was defined as payment for “the same or related disability for which [the participant is] eligible to receive benefits under the group policy.” Id. at 944. Because the VA payments inJones were for the same disabling impairment, the court permitted the offset.

However, the court noted both the different policy language under this policy and also cited Williams v. Group Long Term Disability Ins. No. 07-6022, 2008 WL 2788615, at *3 (N.D. Ill. July 17, 2008). Although the policy language in Williams was the same as the policy terms in High, the court disallowed the offset because VA benefits were not specified as a permissible offset and because VA benefits were deemed “different” and the court was unwilling to permit the offset without it being made clear at the inception of the policy that VA benefits would be offset. Williams also found that VA benefits could not be defined as a “group disability plan.”

Although the policy at issue here allowed an offset for Social Security disability, Railroad Retirement or “any other similar act of law,” the court distinguished VA benefits. The court pointed out that since such benefits are paid for a military service-related disability, “as a matter of statutory construction, [VA benefits] do not derive from an act that is ‘similar to’ the SSA or RRA” which are “both federal insurance programs based upon employment and the amount of an award under their terms depends upon how much has been paid in.” SSA and RRA payments are an insurance program with payments derived from a tax on both the employee and employer; in contrast, VA benefits are not an “insurance” program “but instead are considered obligatory compensation for injuries to servicemen and servicewomen during military duty.” The benefits are not based on length of service, rank or amount of pay received while serving, but are paid based on the extent of the veteran’s injury and are funded by Congress rather than a tax on members of the military.

In addition, unlike Social Security and Railroad Retirement benefits where the claimant bears the burden of proving disability, the standards to qualify for VA benefits are designed to “give the benefit of the doubt to the claimant.” 38 U.S.C. § 5107(b). The court also cited Henderson ex rel. Henderson v. Shinseki, 131 S. Ct. 1197, 1200, 1205 (2011) which points out the unique character of veterans’ benefits. Thus, the court found VA benefits were not “similar” to SSA benefits due to the “different objectives” of the Veterans Benefits Act and the manner in which benefits are implemented.

There was a dissent, however. The dissent applied a dictionary definition of the word “similar” as meaning “having characteristics in common.” The dissent found sufficient similarity between the Veterans Benefits Act, Social Security, and Railroad Retirement, to support Sun Life’s conclusion. While the dissent acknowledged that “similar act or law” is an ambiguous term, the plan gave the insurer discretionary authority to construe ambiguous terminology; and under ERISA, courts are to uphold an administrator’s interpretation “if it is reasonable.” (citing Conkright v. Frommert. 130 S. Ct. 1640, 1646 (2010); Firestone Tire & Rubber Co. v. Bruch . 489 U.S. 101, 111 (1989)). Thus, while the dissent acknowledged that the majority might have been correct on de novo review, the majority should have given deference to the plan administrator’s interpretation.

In my earlier article on this case I focused on the appropriateness of granting deference to the insurer’s interpretation, particularly since Sun Life advanced a financially self-serving interpretation without previously specifying that it would offset veterans’ benefits. The appeals court took a different approach than the district court by heavily emphasizing the unique nature of veterans’ benefits and the differences between those benefits and SSA and RRA benefits.

Either way, though, what is particularly striking is that the insurer could have accomplished what it was seeking by simple draftsmanship. While it may not be desirable as a matter of public policy to permit offsets of veterans’ benefits, if Sun Life had obtained approval from the Nebraska insurance commissioner to sell this policy to Riley’s employer with such an offset, it almost certainly would have been permitted. But as far as the record reveals, Sun Life’s inclusion of VA benefits among other income payments that could be used as an offset against benefits was never contemplated when this policy was sold. And to permit the insurer to take such an offset after the sale of the policy under the guise of discretionary authority is contrary both to ERISA’s promise to “protect contractually defined benefits” (Black & Decker Disability Plan v. Nord. 538 U.S. 822, 830 (2003)(citations omitted) and the statutory requirement set forth in 29 U.S.C. Section 1022(b) that employees be told clearly of “circumstances which may result in disqualification, ineligibility or denial or loss of benefits.”

I was the plaintiff’s attorney in the Williams case cited in this article.

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