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Does ERISA Allow Depositions of Claim Adjusters in Disability Insurance Claims?

Despite the fact that the Federal Rules of Civil Procedure are intended to apply to all civil actions adjudicated in federal court, ERISA cases receive different treatment, especially cases that involve disability insurance benefits. In Charles v. UPS National Long Term Disability Plan, 2013 U.S.Dist.LEXIS 164218 (E.D.Pa. November 19, 2013), the court was called upon to decide whether to allow a deposition of the claim adjuster who denied benefits. The plaintiff sought to question the adjuster on a variety of topics that related to whether the claim was fairly adjudicated. The plan's administrator, Aetna, opposed the motion, contending that depositions are impermissible in ERISA actions.

The court acknowledged that the scope of review in ERISA cases is usually limited to a review of the claim record. However, the court noted that it could also take into consideration "evidence of potential biases and conflicts of interest that is not found in the administrator's record." (citing Howley v. Mellon Financial Corp., 625 F.3d 788, 793 (3d Cir. 2010)(quoting Kosiba v. Merck & Co., 384 F.3d 58, 67 n. 5 (3d Cir.2004))(quotation marks omitted)). The court further pointed out that the issue of bias and conflict of interest is not limited to cases adjudicated under the abuse of discretion standard; and that the proposed inquiry would be appropriate irrespective of the applicable standard of review.

This ruling presents an interesting question. If the court ultimately decides to conduct a de novo review, would bias or conflict of interest be relevant to the court's consideration? If the insurer is biased but still renders a correct decision, what difference would it make as to whether a conflict infected the decision?

Even if the conflict is irrelevant as to the correctness of the decision, ERISA imposes fiduciary duties upon claim administrators. While Variety Corp. v. Howe, 516 U.S. 489 (1996) found that in the ordinary claim for benefits an added claim for breach of fiduciary duty is unnecessary, the fiduciary obligation is not obviated. Indeed, in Metro.Life Ins.Co. v. Glenn, 554 U.S. 105, 115 (2008), the Supreme Court recognized that ERISA's fiduciary obligations impose on insurers a requirement to utilize "higher-than-marketplace quality standards" to insure accurate claim decisions. Whether those standards were met therefore has to be an influential factor in a court's analysis of the correctness of the claim decision. Virtually all courts have recognized that Glenn makes such an inquiry relevant under the abuse of discretion standard. It is therefore questionable why the same information would be irrelevant under a de novo standard.

Permitting discovery into bias also illuminates whether the promisor in a contractual agreement has complied with its duty of good faith and fair dealing. The U.S. Court of Appeals for the Seventh Circuit has defined "good faith" as a compact reference to an implied undertaking not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting, and which therefore was not resolved explicitly by the parties." Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357 (7th Cir. 1990). Insurance policies, which are contracts, are subject to the Restatement (Second) of Contracts, which acknowledges: "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." Comment d to that section adds,

Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty. A complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party's performance.

A leading commentator adds, "The duty of good faith and fair dealing that is usually imposed requires at least that a party do nothing to prevent the occurrence of a condition of that party's duty. Thus if a party has conditioned a duty to pay on honest satisfaction with the other party's performance, the condition is excused if the party to be satisfied refuses to look at the performance. Such a refusal would amount to a breach that would excuse the conditions and make the duty of pay unconditional." 2 E. Allan Farnsworth, Farnsworth on Contracts: Third Edition 454 (2004).

The duty of good faith and fair dealing was also recently highlighted in a concurring opinion authored by Judge Richard Posner in a case involving an insurer's duty to notify an insured as to whether treatment being sought is being administered by a provider within the insurer's network of providers. Although the majority found the insurer's failure to provide adequate information was a breach of fiduciary duty owed under ERISA, Judge Posner suggested that a contract approach would be preferable, pointing out:

One of the implicit terms in every contract is the duty of good-faith performance. Denil v. DeBoer, Inc., 650 F.3d 635, 639 (7th Cir. 2011); Market Street Associates Ltd. Partnership v. Frey, 941 F.2d 588, 593-96 (7th Cir. 1991). It requires the performing party, in this case the plan administrator, to avoid "taking deliberate advantage of an oversight by your contract partner concerning his rights under the contract." Id. at 594. A closely related principle is that "you cannot prevent the other party to the contract from fulfilling a condition precedent to your own performance, and then use that failure to justify your nonperformance." Ethyl Corp. v. United Steelworkers of America, AFL-CIO-CLC, 768 F.2d 180, 185 (7th Cir. 1985). The plan in this case saved itself a considerable sum of money because the plaintiff obtained surgery for his wife at a hospital that wasn't in the provider network. The contractual duties that I have just described required the plan administrator to inform the plaintiff of his options if he inquired about them-and he claims he did. If so informed the plaintiff might have decided to move his wife to a hospital in the network. There was time, and it appears that there was at least one hospital in range of Rush competent to perform the surgery. Whether the plaintiff and his wife would have exercised that option is critical to whether he can recover the additional $80,000 that he paid Rush for the surgery. But it is an issue that awaits resolution on remand.

The Supreme Court's decision in Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 105 S. Ct. 3085, 87 L. Ed. 2d 96 (1985), does not rule conventional principles of contract interpretation out of ERISA and so deny the duty of good faith performance of obligations created by an ERISA plan. It holds only that extra-contractual damages can't be obtained in a suit for breach of a plan's obligation, whether fiduciary or contractual, explicit or implicit, to process claims in good faith.

Killian v. Concert Health Plan, 2013 U.S. App. LEXIS 22657, 54-67 (7th Cir. Nov. 7, 2013)(Posner, J., concurring).

Finally, bias and conflict are important considerations in assessing an insured's eligibility for an award of attorneys' fees pursuant to 29 U.S.C. § 1132(g). Although eligibility to receive a fee award is triggered by achieving "some degree of success on the merits," (Hardt v. Reliance Standard Life Ins.Co., 130 S.Ct. 2149 (2010)), most courts still require a more detailed analysis that necessitates evaluating the defendant's culpability or bad faith. Thus, an inquiry into whether the claim was evaluated honestly and fairly justifies permitting depositions of the individuals who rendered the claim decision.

For further information, contact Mark DeBofsky - [email protected]

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