A recent ruling from the 3rd U.S. Circuit Court of Appeals is a wake-up call to professionals who are paying both for disability insurance coverage at their place of work and also maintaining supplemental disability coverage purchased through a professional association. Fleisher v. Standard Ins.Co., 2012 U.S.App.LEXIS 9907 (3d Cir. May 17, 2012) ruled that instead of a supplement, the additional coverage could be used to reduce the amount of benefits payable by the workplace insurer.

Robert Fleisher, an endodontist in Philadelphia, was insured for $10,000 a month in disability insurance coverage through the Standard Insurance Co., which issued a group policy to his practice. In addition, he purchased a policy paying $1,500 a month through the American Association of Endodontics. The Standard policy contained a provision that reduced the benefits payable by “(a)ny amount you (a plan participant) receive or are eligible to receive because of your disability under another group insurance coverage.” No offset is taken, though, for benefits paid under “any individual disability insurance policy.” The policy did not define the terms “group insurance” or “individual disability” insurance. Over Fleisher’s protests, Standard reduced his payment by the amount of benefits he received under the policy purchased through his professional association.

Both the district court and the appeals court overruled Fleisher’s objections, finding Standard possessed discretionary authority under Employee Retirement Income Security Act (ERISA) to interpret the policy to permit an offset of association-sponsored benefits. Despite acknowledging an ambiguity in the term “group insurance,” the court ruled that regardless of whether the association-sponsored coverage was true group insurance or “franchise insurance,” where members of a group are issued individual policies, Standard had the authority to characterize the association coverage as group insurance and offset those benefits. Although the court recognized that true group insurance and franchise insurance are distinct from one another, the court pointed out they are known collectively as “group insurance.” (citing Holmes’ “Appleman on Insurance” § 2.5 (2d ed. 2002)).

General principles of insurance law would normally require an ambiguous term in an insurance policy to be construed in favor of the insured under the principle of contra proferentem. However, that doctrine was deemed inapplicable under the abuse of discretion standard so long as the interpretation chosen by the insurance company was reasonable. The court cited a litany of appellate rulings negating the applicability of the contra proferentem doctrine in the face of a deferential standard of review. Therefore, the appeals court upheld the district court’s dismissal of the plaintiff’s complaint, even rejecting evidence from the sponsor of the franchise insurance policy characterizing that policy as individual coverage. The court pointed out “under the arbitrary and capricious standard of review, the relevant inquiry is not whether it is reasonable to interpret the North American policy as an individual insurance policy, but whether it is unreasonable to interpret it as group insurance.”

A dissenting opinion filed by Judge Leonard Garth would have applied the rule of contra proferentem based on Standard’s conflict of interest since the insurer benefited financially from its interpretation. Garth remarked, “This case goes beyond the point of being close, to the point of the administrator’s decision being incorrect- if ever there were a situation where the administrator’s conflict of interest must properly be considered as a factor, this is it!” *38 (emphasis in original). The dissent was also troubled by the procedural posture of the case, which came to the court of appeals on appeal from the granting of a motion to dismiss without any fact-finding. Garth concluded his dissent with the following lament:

“While I am loathe to discount all of the analyses found in the majority opinion, I cannot accept the fact that fair and equitable means should be so thoroughly disregarded in favor of fitting a legal square peg into a legal round hole. To me, the majority has resolved Dr. Fleisher’s problem by merely seeking out some the [sic] legal principles which would support its conclusion without regard to the fundamental precepts of equity, fairness and justice. A major consideration on this appeal should include judicial insight to the nature of the problem, the nature of the conflict which the administrator of an ERISA plan must analyze, the nature of the ramifications that may ensue from this court’s decision and the nature of the actions that a litigant can take to protect a particularly vital interest.

It is odd that neither the majority nor the dissent mentioned another case involving Standard that dealt with the identical issue and reached the same outcome: Gutta v. Standard Select Trust Ins. Plans. 530 F.3d 614 (7th Cir. 2008). Also, Hall v. Life Insur. Co. of North America, 317 F.3d 773 (7th Cir. 2003) permitted an offset of franchise insurance, but there the policy explicitly included franchise insurance as a permissible offset.

As to this case, though, the dissent makes a strong point. The doctrine of contra proferentem both consistent with and supported by Metro. Life Ins.Co. v. Glenn, 554 U.S. 105 (2008), which ruled that insurer conflicts are a factor to consider that may prove decisive in a close case . By its nature, the rule of contra proferentem used by courts as a tie-breaker. Thus, even under a deferential standard of review, given the insurer’s financially self-serving interpretation of the policy, and with all other factors being equal, the rule of contra proferentem should have outweighed the insurer’s discretionary authority. Particularly in the 3rd Circuit, which recognized in U.S. Airways, Inc. v. McCutchen, 663 F.3d 671 (3d Cir. 2011) the availability of a variety of equitable defenses in ERISA claims, preventing the transformation of supplemental coverage paid for with additional premium dollars into a windfall for the insurer seems a more lofty judicial goal than giving deference under self-granted discretionary authority to an insurance company, particularly in view of ERISA’s paternalistic purpose and intent to protect contractually promised benefits.

Note: I represented the plaintiff in the Gutta case cited in this article.

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