The issue in the 5th U.S. Circuit Court of Appeals ruling High v. E-Systems Inc Long Term Disability Income and Death Benefit Plan, 2006 U.S.App.LEXIS 19613, (Aug. 3), was whether MetLife had the authority to offset Veterans Administration disability benefits that the plaintiff had been receiving even before he was hired by E-Systems in 1982 and which continued throughout his employment and after High became unable to work in 1992. From 1992 until 1998, no offset was taken; however, when MetLife became the plan administrator in 1998 it informed High that it was going to offset VA benefits, which reduced the disability benefit from just over $1,200 per month to $50 per month. High challenged the offset and eventually brought suit after exhausting pre-suit appeals; however, the district court sided with the insurer. The Court of Appeals affirmed.

The court determined that it was within MetLife’s discretionary authority to offset VA benefits in accordance with Wildbur v. ARCO Chemical Co., 974 F.2d 631, 637-38 (5th Cir. 1992), which applies the following test:

”First, a court must determine the legally correct interpretation of the plan. If the administrator did not give the plan the legally correct interpretation, the court must then determine whether the administrator’s decision was an abuse of discretion…. In answering the first question, i.e., whether the administrator’s interpretation of the plan was legally correct, a court must consider: (1) whether the administrator has given the plan a uniform construction; (2) whether the interpretation is consistent with a fair reading of the plan; and (3) any unanticipated costs resulting from different interpretations of the plan.

If a court concludes that the administrator’s interpretation is incorrect, the court must then determine whether the administrator abused his discretion. Three factors are important in this analysis: (1) the internal consistency of the plan under the administrator’s interpretation; (2) any relevant regulations formulated by the appropriate administrative agencies; and (3) the factual background of the determination and any inferences of lack of good faith.”

Although High challenged the time delay in assertion of the offset, the court found that MetLife instituted the offset immediately after it became plan administrator and determined that VA benefits should be offset which the court characterized as a ”scenario [that] constitutes careful deliberation and MetLife and E-Systems’s part and does not evidence arbitrary or capricious decision-making.”

The court also rejected the plaintiff’s citation to Barnett v. Aetna Life Insurance Co., 723 S.W.2d 663, 667, 30 Tex. Sup. Ct. J. 191 (Tex. 1987), which recognized that ”[b]enefits under the VA appear to be unique in character and scope, certainly important enough to warrant specific mention in an insurance policy if they are sought to be offset.”The court foundBarnett was based on Texas insurance law that it found to be preempted by ERISA. Second, in Barnett, the Texas Supreme Court was examining an insurance policy, while this matter involved a self-funded plan. Third, the court found that Barnett did not include an all-encompassing provision, as in the E-Systems Plan, providing for a reduction ”by other income benefits to which such Employee may be entitled, and which are payable on or after the commencement of the disability for which benefits are payable,” including ”other income benefits: (a) Disability benefits payable under the federal Social Security Act (including benefits for dependents); (b) Earnings continuation from any Employer; (c) benefits payable under any other group disability plan; and (d) benefits payable under any workmen’s compensation or similar law.”

The court also refused to consider the plan language ambiguous in order to apply the doctrine of contra proferentem. Even if there were an ambiguity, the court ruled the discretionary authority granted by the plan allowed MetLife to interpret the plan to resolve the ambiguity.

Finally, the court rejected the plaintiff’s claim that the doctrines of estoppel or waiver precluded application of the offset. On the estoppel issue, the court found that reliance cannot be reasonable if it is inconsistent with the clear and unambiguous terms of the plan documents. Nor can extrinsic evidence modify or supersede plan language, and the court also determined that no extraordinary circumstances would justify applying an estoppel. Nor did the court find a waiver, which requires ”a voluntary or intentional relinquishment of a known right.” Pitts v. Am.Sec.Life Ins. Co., 931 F.2d 351 (5th Cir. 1991). Since MetLife acted immediately upon assuming its duties as plan administrator, waiver did not apply.

In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989), the Supreme Court admonished that a conflict of interest ”must be weighed as a ‘facto[r] in determining whether there is an abuse of discretion.’ ” In disregard of that principle, the court here allowed a self-serving plan interpretation to govern. The fact that MetLife only recently became plan administrator when the offset was applied should have been deemed irrelevant – it was still the same plan. Since the plan did not unequivocally state that VA benefits were to be offset, the initial decision not to offset such benefits, which the plan applied for six years, should have compelled a conclusion that there was never an intent to offset Veterans benefits.

Nor was there any mention of 38 U.S.C. Section 5301(b), which states:

”This section shall prohibit the collection by setoff or otherwise out of any benefits payable pursuant to any law administered by the Secretary and relating to veterans, their estates, or their dependents, of any claim of the United States or any agency thereof against (1) any person other than the indebted beneficiary or the beneficiary’s estate; or (2) any beneficiary or the beneficiary’s estate except amounts due the United States by such beneficiary or the beneficiary’s estate by reason of overpayments or illegal payments made under such laws to such beneficiary or the beneficiary’s estate or to the beneficiary’s dependents as such. If the benefits referred to in the preceding sentence are insurance payable by reason of yearly renewable term insurance, United States Government life insurance, or National Service Life Insurance issued by the United States, the exemption provided in this section shall not apply to indebtedness existing against the particular insurance contract upon the maturity of which the claim is based, whether such indebtedness is in the form of liens to secure unpaid premiums or loans, or interest on such premiums or loans, or indebtedness arising from overpayments of dividends, refunds, loans, or other insurance benefits.”

In view of that statute, and in consideration of the lack of specific language justifying an offset, the court should have examined In Re Unisys Long-Term Disability Plan ERISA Litigation, 97 F.3d 710 (3d Cir. 1996). There, the court defeated an ERISA plan’s attempt to offset social security benefits awarded to a plan participant’s dependents because the plan failed to specify that such an offset was appropriate. The court rationalized its ruling by stating, ”in order to interpret contracts with some consistency, and in order to provide contracting parties with a legal framework which provides a measure of predictability, the courts must eschew the ideal of ascertaining the parties’ subjective intent and instead bind parties by the objective manifestations of their intent.” (citing Mellon Bank, N.A. v. Aetna Business Credit Inc., 619 F.2d 1001 (3d Cir. 1980)).

Hence, since only primary social security benefits were specified as a permissible offset, the court refused Unisys’s interpretation to expand its offset rights to include dependents’ social security benefits.

The 5th Circuit’s rejection of the Barnett case and of common-law principles also deserve closer analysis. No less an authority than the Supreme Court has suggested that courts should create a federal common law to fill the interstices in the ERISA law. See, Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 112 (1989). Consequently, numerous cases have applied to the ERISA law consumer protective doctrines that read insurance policies strictly, which includes the doctrine of contra proferentem. Such courts include the 7th and 9th Circuits in Phillips v. Lincoln National Life Insurance Co., 978 F.2d 302 (7th Cir. 1992) and Kunin v. Benefit Trust Life Insurance Company, 910 F.2d 534 (9th Cir. 1990), which both held that insurance policy limitations relating to mental impairments were ambiguous since it was unclear whether conditions that had an organic cause were excluded. Although some courts have deemed the doctrine inapplicable where deferential authority is conferred, University Hospitals of Cleveland v. Emerson Elec. Co., 202 F.3d 839, 846 (6th Cir. 2000) remains the leading exponent of factoring the conflict of interest into whether a party is allowed to invoke its discretionary authority to support an interpretation that favors self-interest. However, in the 7th Circuit, Morton v. Smith, 91 F.3d 867 (7th Cir. 1996), refused to apply the doctrine of contra proferentem when the arbitrary and capricious standard governs, a position joined by the 8th Circuit in Brewer v. Lincoln National Life Insur. Co., 921 F.2d 150 (8th Cir. 1990) and the 10th Circuit in Kimber v. Thiokol Corp., 196 F.3d 1092 (10th Cir. 1999). Since offsets of VA benefits were not specified in clear terminology, the insurer’s expansive interpretation should therefore have been rejected. The plan drafters could easily have specified offsets of VA benefits (to the extent it may be legal to do so); the failure to do so should not have been countenanced by the court.

Even putting aside the applicability of contra proferentem, though, there remains a guiding ERISA principle that should have compelled a contrary conclusion in this case. Section 102(b) of the ERISA statute (29 U.S.C. §1022(b)) requires that plan participants be furnished with a summary plan description that specifies ”circumstances which may result in disqualification, ineligibility, or denial or loss of benefits.” Since the plan at issue in this case failed to explicitly provide that ”other income benefits” included Veterans benefits, the SPD was defective and should never have permitted a court to conclude that VA benefits were offset table.

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

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