A Montana federal court began a recent ruling by asking: “Who is the beneficiary of a lawsuit stemming from an ERISA employee’s misfortune? Is it the ERISA plan or is it the unfortunate employee?”

The case, Rustad-Link v. Providence Health and Services and Unum Group Corp., 2018 WL 627560 (D. Mont., Jan. 30, 2018), involved the question of whether Dawn Rustad-Link’s disability payments could be reduced by funds she received from a medical-malpractice claim.

Rustad-Link, who worked for a hospital in Montana, received group long-term disability insurance coverage from her employer under a policy issued by the Unum Life Insurance Company of America.

Despite a diagnosis of multiple sclerosis that had been made in 1996, Rustad-Link was able to continue working until 2010, when she underwent a below the knee amputation due to an arterial blockage. Rustad-Link applied for disability benefits following the amputation, but Unum maintained that her MS constituted her primary disability.

Unum subsequently changed its categorization of the plaintiff’s disabling impairment multiple times; however, after disability benefits were paid for more than two years, Unum concluded that Rustad-Link was disabled due to MS.

In February 2014, Rustad-Link advised Unum that she would be receiving a medical-malpractice settlement relating to the amputation. Unum responded by advising her that it would offset the settlement against her monthly benefit payments.

Rustad-Link objected, claiming the settlement was based solely on the amputation and was unrelated to her MS. In response, Unum maintained that the MS was not severe enough to impact Rustad-Link’s functional capacity and that it had reconsidered her claim and found her disability was due to the amputation.

Consequently, Unum claimed it was entitled to reduce monthly benefits by the amount of the settlement, resulting in a 90 percent reduction in monthly payments.

Rustad-Link ultimately challenged Unum’s actions in federal court.

The court began its discussion of the case by addressing the standard of judicial review. The court determined that since the policy was issued in Washington state, de novo review was required in accordance with Washington Administrative Code 284-96-012(1)(f)., which prohibits the inclusion of language in a disability policy that would trigger the more insurer-friendly arbitrary and capricious standard of review.

Although the policy had initially been issued prior to the regulation’s effective date, the court nonetheless found the rule applicable since the plaintiff’s cause of action accrued after the regulation’s promulgation.

The court offered an alternative rationale based on Washington regulations that would deem a policy lacking a fixed expiration date to be “considered as if written for successive policy periods or terms of one year.” RCWA 48.18.2901. Thus, the court determined the policy renewed each Jan. 1. The court also noted the policy was prefaced with a Jan. 1, 2010, amendment stating, “[t]he entire policy is replaced by the policy attached to this amendment.”

The court next examined whether Unum could assert attorney-client privilege over documentation relating to consultations that had taken place between Unum claims and financial personnel and in-house counsel that supported Rustad-Link’s position. The court applied the fiduciary exception to find that the communications were not privileged.

“‘As applied in the ERISA context,” the court explained, “the fiduciary exception provides that an employer acting in the capacity of ERISA fiduciary is disabled from asserting the attorney-client privilege against plan beneficiaries on matters of plan administration.'” Stephan v. Unum Life Insurance Company of America, 697 F.3d 917, 931 (9th Cir. 2012) (quoting U.S. v. Mett, 178 F.3d 1058, 1063 (9th Cir. 1999)).

Unum nonetheless maintained that the fiduciary exception would be inapplicable under the de novo standard of ERISA judicial review. Unum argued the existence of a distinction between the “administrative record” and extrinsic evidence, claiming the privileged information was extrinsic to the record and should not be considered.

However, the court observed the communications were contained in the claim record but were excluded solely on the basis of the assertion of privilege. The court characterized Unum’s argument as “circular – it asserts the privilege on the basis of the administrative record-extrinsic evidence divide, while having itself created that divide in the first instance.”

Thus, the court rejected Unum’s argument and ruled the fiduciary exception to attorney-client privilege permitted consideration of the legal communications with the exception of any communications that may have taken place after the commencement of litigation.

The court then turned to the merits of the dispute. The court explained that the policy permitted Unum to offset “[t]he amount that you receive from a third party (after subtracting attorney fees) by judgment, settlement or otherwise.” However, the policy also recited that it would only subject monies paid “as a result of the same disability.” There was no definition in the policy as to the meaning of “same disability,” however.

Rustad-Link argued that “same disability” means the same medical condition, while Unum maintained the term meant the same period of disability.

The court found the plaintiff had the better argument. Since the phrase “same disability” was not defined in the policy, and because the term “disability” is not defined in the policy with reference to time periods, the court rejected Unum’s interpretation.

The court was especially impressed that Unum switched its classification of Rustad-Link’s disabling impairment from MS to amputation only after it learned of her settlement; and the court thus called Unum’s interpretation “impermissibly self-serving.”

The court also examined the settlement agreement within the context of the policy’s offset provisions and noted that offsets are only applicable to payments that are made as income replacement.

However, the malpractice settlement agreement recited that “no amount of the settlement payment is allocated to lost wages,” and the entire settlement was denominated as payment for past and future medical expenses and attorney fees.

Although the court agreed that Unum was not bound by that recitation, it would still be required to show that it was reasonably entitled to the offset. Instead of doing so, the court concluded that “Unum has attempted to benefit from Rustad-Link’s misfortune by unreasonably asserting an offset against a settlement for a different disabling condition.”

Thus, the court ordered Unum to restore the full amount of the plaintiff’s benefits. The court also found a fee award appropriate.

This ruling covers a lot of ground on several important issues, including the applicable judicial standard of review and the fiduciary exception to attorney-client privilege.

The court’s discussion of policy ambiguities was the key to this case, though. In insurance law, the doctrine of contra preferentem is used as a tiebreaker to construe ambiguous terms against the insurer and in favor of the policyholder.

Many courts, however, have refused to invoke the doctrine when insurers possess discretionary authority to construe plan terms. However, since the Supreme Court views an ERISA plan administrator’s conflict of interest as a potential tiebreaker according to Metropolitan Life Insurance Co. v. Glenn, 554 U.S. 105, 117 (2008), a self-serving policy interpretation such as the example of the one offered here by Unum, should not automatically be granted deference. Between two equally compelling interpretations, the benefit of the tie should go to the claimant.

Note: The author represented the plaintiff in the Stephan v. Unum case cited in this column.

This article was initially published in the Chicago Daily Law Bulletin. 

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