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Sixth Circuit 502(a)(3) Windfall in Rochow v. Life Insurance Company of North America — ERISA’s Delicate Balance Goes So Far Off Kilter That I Am Queasy

Posted in ERISA Fiduciary Compliance, ERISA Litigation

When you think about it, balance is really important. It is hard to imagine how we all stand steady on a planet that is rotating on its access and rotating around the sun. The last earthquake I experienced left me queasy afterward, and that is how I feel after reading a new decision. Curses (or thank you?) to Brian Hall, editor of our sister blog, employerlawreport.com, for forwarding.

Within days of writing the Dudenhoeffer v. Fifth Third Bank blog about a threat to ERISA’s delicate balance and importance of boundaries, we have yet another Sixth Circuit decision that blazes past boundaries and throws that delicate balance into a tailspin. The Sixth Circuit has, in the words of dissenting Judge McKeague, “taken an unprecedented and extraordinary step to expand the scope of ERISA coverage.” Under what was (I thought) clear U.S. Supreme Court and Sixth Circuit precedent, a claimant could not receive both an award under Section 502(a)(1)(B) for a benefit claim, and an award under Section 502(a)(3) for the same injury. However, the plaintiff in Rochow v. Life Insurance Company of North America (“LINA”) was awarded not only the amount of the benefits, but also an amount under 502(a)(3) that almost quadrupled the benefits amount. The problem with ignoring the crucial ERISA principle of making whole, not punishing, is that the plaintiff’s windfall punishes all the other participants in employer-sponsored health care, disability and life insurance plans, whose premiums could skyrocket to cover this new threat to clawback 10+ years of corporate return on equity. Combine this with health care reform, and the Dudenhoeffer assault on employee stock ownership plans, and I have to ask whether employer-sponsored plans will become dinosaurs, and I need to starting thinking about my career security.

Rochow involves an employee who was demoted in July 2001 and terminated in January 2002, one month prior to being hospitalized and diagnosed with HSV-Encephalitis, a rare and severely debilitating brain infection. Rochow had medical records from 2001 that stated he was suffering short-term memory loss. During the appeal process, LINA acknowledged that Rochow had experienced effects of the disease in 2001, but denied coverage on the basis that Rochow continued to work and was not disabled until February 2002, after he was terminated. After an employer representative stated that Rochow had not been able to perform all material duties of his job in 2001 due to his lack of memory, LINA denied the claim again, stating he filed his claim until after his termination date, and after he was no longer actively working. After another appeal, LINA denied his claim stating that Rochow had not presented medical records to support his inability to work prior to his termination date.

The district court ruled that the decision was arbitrary and capricious, was not the result of a deliberate, principled reasoning process, and did not appear to have been made solely in the best interests of the participants and beneficiaries. The court stated that there is no “logical incompatibility between working full time and being disabled from working full time,” and that the policy only required “satisfactory proof” of disability, not medical evidence. Incredibly, rather than granting pre-judgment interest, the district court awarded an additional amount almost quadruple the benefits amount by using LINA’s rate of return on equity (“ROE”). The rationale for this award was LINA breached its fiduciary duty, and that disgorgement was required to prevent unjust enrichment. So the court gave two awards for a denial of benefits: the 502(a)(1)(B) benefits, and 502(a)(3) equitable relief. Which is exactly what I thought was prohibited under clear U.S. Supreme Court and Sixth Circuit precedent. Even more incredibly, the Sixth Circuit affirmed.

When and how did disgorgement become an appropriate equitable remedy under 502(a)(3) rather than compensatory, and how is it that the court can provide a separate remedy on top of a benefit recovery? What happened to ERISA’s boundaries that separate acting as an ERISA fiduciary from acting as a corporation, even when the same entity performs both roles? When did denying a claim necessarily mean a conflict of interest? What happened to the idea that a fiduciary has a fiduciary duty all the participants to deny claims when it believes that is merited based on plan terms? Why are we even talking about LINA’s ROE? I have no idea.

The one part of this case I can follow is the dissent, which explains (citations omitted and punctuation changed): “At its core, ERISA is a remedial statute. It does not seek to punish violators, but rather, attempts to place the plaintiff in the position he or she would have occupied but for the defendant’s wrongdoing. The aim of ERISA is to make the plaintiffs whole, but not to give them a windfall.”

Disability cases like this are a challenge. With due respect, it sounds like this situation would probably have gone better if in 2001, Rochow had sought more medical advice, obtained a statement from his employer about his ability to work, and filed for disability benefits. And his employer might have steered him in that direction. But as is not uncommon in these types of situations, that did not happen, and LINA was asked to look back to a period of time with limited medical records and an after-the-fact statement from the employer. I am not convinced LINA made the wrong determination. But assuming it did, what was it about this particular benefit denial that caused the denial to constitute a breach of fiduciary duty? Is every denial that is reversed by a court in the Sixth Circuit now a breach of fiduciary duty? Do we have a new presumption that every benefit denial by the claims fiduciary of an insured welfare plan is a self-interested breach of fiduciary duty? Do we award the employer’s ROE when the plan is self-insured? Do plaintiffs only get windfalls in the case of welfare plans, or also in the case of plans with trusts?

In bulldozing past ERISA’s boundaries regarding roles, Rochow v. LINA threatens to disrupt the delicate ERISA balance that is necessary to ensure that employers continue to offer affordable group benefit plans. Allowing the fiduciary to make claims decisions in accordance with plan terms (subject to reversal, but without penalty) is crucial to the premium structure of these plans. How much do you have to increase premiums to build in this new threat to clawback 10+ years of corporate ROE? I will leave that question to my actuary friends. But here we are worried about the impact of health care reform on premiums, and we are gobsmacked by Rochow premium increases. The plaintiff received a windfall, but it comes at the expense of all the other participants in employer-sponsored health care, disability and life insurance plans. It’s hard to say whether this decision will be treated as a threat to employer-sponsored plans, or a big mistake, but we will keep watching.