If a health insurer mistakenly advises a patient that a surgical procedure is covered by its policy – and in reliance on that advice, the patient proceeds with the surgery, can the patient recoup the expenses incurred in undergoing the procedure from the insurance company if the insurer maintains that its prior advice was mistaken?

That was the issue presented in Kenseth v. Dean Health Plan Inc., 2013 U.S.App.LEXIS 12083 (7th Cir. June 13, 2013).

In a prior decision, reported at 610 F.3d 452 (7th Cir. 2010), the court found a potential breach of fiduciary duty under Employee Retirement Income Security Act (ERISA), but remanded the case for the lower court to decide whether a breach occurred and whether a remedy was available.

Although the lower court found in the insurer’s favor, shortly after that ruling was issued, the U.S. Supreme Court decided Cigna Corp. v. Amara, 131 S.Ct. 1866 (2011), which held that a surcharge monetary remedy under ERISA may be available for breach of fiduciary duty due to a misrepresentation that causes a monetary harm.

The plaintiff in the case, Deborah Kenseth, had undergone weight loss surgery in 1987. Eighteen years later, she required a second operation to resolve severe acid reflux that was due to complications from the first surgery. When Kenseth called her insurer, Dean Health Plan, for guidance as to whether the service was covered, she received an affirmative answer and underwent the surgery.

However, the insurer later refused to pay benefits, citing a policy exclusion for treatment of morbid obesity. Although Kenseth lost her case in the trial court, the court of appeals found that although “mistakes in the advice given to an insured which are attributable to the negligence of the individual supplying that advice are not actionable as a breach of fiduciary duty,” a fiduciary may be liable for failing “to take reasonable steps in furtherance of an insured’s right to accurate and complete information.” Kenseth I, 610 F.3d at 470.

Since Dean had encouraged plan participants such as Kenseth to call its customer service center for advice on whether various treatment was covered, the court found a breach of fiduciary duty since neither the certificate nor the agent at the customer service center warned that insureds could not rely on the advice given. Moreover, although the certificate was clear that the original surgery was not covered, “it was far from clear that the policy excluded coverage for services aimed at resolving complications from that surgery, however long ago the original procedure may have taken place.” Kenseth I, 610 F.3d at 474.

The confusion was even more pronounced because the plan had reimbursed Kenseth for prior treatment she had received due to complications of the earlier surgery. And the ambiguity was worsened even further by the lack of clarity as to the “means by which a participant may obtain an authoritative determination on coverage for a particular medical service.” Kenseth I, 610 F.3d at 476.

Patients were encouraged to call the service center if they were uncertain about whether a service was covered, but there was no warning that information provided by the customer service representative could not be relied on or that Dean might later renege on a representation that a particular service was covered. Thus, the court of appeals found in its first review that Dean may have breached its fiduciary obligations owed to participants in the health plan. That issue was remanded for a final determination by the lower court and the question of whether the breach was remediable was also left to be decided by the district court.

The answer to the second issue was provided by Amara. There, the Supreme Court ruled that plan summaries cannot overcome explicit contrary plan terms, however, providing misleading information in the summary could be deemed a breach of fiduciary duty, remediable pursuant to 29 U.S.C. Section 1132(a)(3), which “allows a ‘participant, beneficiary, or fiduciary to obtain other appropriate equitable relief’ to redress violations of … parts of ERISA or the terms of the plan.'”

In defining the scope of such relief, the court was directed by the maxim that “‘[e]quity suffers not a right to be without a remedy.'” Cigna, 131 S. Ct. at 1879 (quoting R. Francis, “Maxims of Equity” 29 (1st Am. ed. 1823)). Hence, the court found three potential remedies were available to prevent fraud or correct mistakes – equitable reformation of the terms of the plan to comport with the representations that were erroneously made, estoppel or surcharge to compensate the injured party for the loss resulting from a breach of duty or to prevent unjust enrichment. The court added that detrimental reliance is not required before the surcharge remedy could be imposed; only that the plan participant suffer actual harm on account of the misrepresentation.

Two later appellate rulings, Gearlds v. Entergy Servs. Inc., 709 F.3d 448 (5th Cir. 2013) and McCravy v. Metropolitan Life Ins. Co., 690 F.3d 176 (4th Cir. 2012), reinforced Amara; and the 7th U.S. Circuit Court of Appeals found both cases, which involved misrepresentations concerning benefit coverage, instructive in this matter. The court therefore concluded that “Kenseth may seek make-whole money damages as an equitable remedy under Section 1132(a)(3) if she can, in fact, demonstrate that Dean breached its fiduciary duty to her and that the breach caused her damages.”

This is a significant ruling on an issue that has befuddled the courts. Prior to Amara, there was a huge remedies gap in ERISA that precluded any redress for misrepresentations if the only means of remedying the harm was through monetary compensation.

Cases such as Amschwand v. Spherion, 505 F.3d 342 (5th Cir. 2007) illustrated the need for a recognition that monetary compensation was required where a misrepresentation of coverage prevented a widow from receiving life insurance indemnity. Amara and now Kenseth realize the necessity of equity providing a remedy for a demonstrable wrong.

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