This story is a bit ripe, but it’s also a below-the-fold item that you might not have heard about.
Once upon a time there was a man named Thomas Amschwand who worked for a company called Spherion Corporation. Thomas was married to a woman named Melissa and all was right with the world until he was diagnosed with cancer.
Thomas took a medical leave from his job to wage what would ultimately prove an unsuccessful fight against the cancer. During the earlier stages of his leave Thomas took comfort in the fact that Melissa was the beneficiary of some $426,000 in life insurance coverage that Thomas purchased through his employer.
While Thomas was on leave, Spherion switched life insurance providers from Prudential to Aetna. Unbeknownst to Thomas, Aetna had a coverage condition known as the active work rule. The policy provided in relevant part as follows:
If the employee is ill or injured and away from work on the date any of his or her Employee Coverage (or any increase in such coverage) would become effective, the effective date of coverage (or increase) will be held up until the date he or she goes back to work for one full day.
The rule applied with full force to Thomas, who was “ill . . . and away from work on the date . . . his . . . Coverage” through Aetna would become effective, so he would need to “go back to work for one full day” before having coverage.
Aetna courteously agreed to waive the active work rule for Spherion employees who weren’t working because of a medical condition that predated the life insurance switchover. For reasons no one knows, and Spherion refused to explain, Thomas Amschwand slipped through the cracks. Thanks to what Melissa Amschwand and her attorney believe was a monumental pooch screw on Spherion’s part, Thomas never got a waiver of the active work rule.
Thomas knew full well of the Prudential-to-Aetna change and did everything humanly possible to ensure that his life insurance coverage would carry on. The guy knew he was dying and wanted his spouse taken care of. He religiously paid all the premiums. He repeatedly contacted Spherion seeking assurances that he was covered. Spherion repeatedly said that yes, Thomas did in fact have his life insurance coverage. Never did a Spherion representative tell him about Aetna’s active work rule.
Thomas also made repeated requests for written documentation of the terms of the new life insurance coverage. That’s pretty damn significant, seeing as how the active work rule figured prominently in the Summary that Aetna prepared for distribution to Spherion employees. Again, Spherion repeatedly fucked up — and violated federal law — by failing to provide the requested documentation. On some occasions Spherion flat out bullshitted, claiming that Aetna had yet to prepare the documentation Thomas was after. Other times it simply ignored his requests.
Thomas died in February 2001, and soon thereafter Melissa filed a claim with Aetna for life insurance benefits. At that point she found out about the active work rule and the fact that Thomas never received a waiver. Absent compliance with the rule, Thomas had no coverage and his wife got nothing.
After failing at every level of Aetna’s internal appeals process, Melissa filed suit against Spherion in federal district court for breach of fiduciary duty. Primarily, she sought damages in the amount of the life insurance coverage that she would have gotten had Thomas complied with the active work rule or received the waiver.
And so, once again we wade into the filthy, stinking tidal pool that is the federal Employee Retirement Income Security Act of 1974 (“ERISA”). My previous ERISA tirades appear here, here and here. Today’s rant focuses on the measure of damages recoverable under the statute. Or, more accurately, the damages that aren’t recoverable.
As usual, ERISA appears to giveth when in fact it actually taketh the fuck away pretty goddamn hard. ERISA governs pretty much all employee benefit plans, not just retirement income plans. The law provides that anyone who “exercises any discretionary authority or discretionary control respecting management of such plan” or “has any discretionary authority or discretionary responsibility in the administration of such plan” is a fiduciary. 29 U.S.C. § 1002(21)(A)(i, iii). That’s a big deal for a couple of reasons.
First, although it used an insurance company to fund its employee life insurance plan, Spherion retained substantial control over its management and administration. Thus, it was a fiduciary.
Second, fiduciaries owe plan participants and beneficiaries like the Amschwands certain legal duties, including an obligation to exercise their authority “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims[.]” 29 U.S.C. § 1104(a)(1)(B). Plan administrators like Spherion must also comply with a beneficiary’s request for information that ERISA requires the administrator to provide. 29 U.S.C. § 1132(c)(1)(B).
This case looks like the slam dunk of all slam dunks. Intentionally or through striking incompetence, Spherion repeatedly bollixed things. It failed to get Mr. Amschwand the active work rule waiver that Aetna offered, repeatedly told Thomas that he was covered when in fact he wasn’t and failed time and time again to honor Thomas’ request for the plan summary information that ERISA requires administrators to provide on demand.
Well, yeah, liability may well be a no-brainer, but what damages can you recover? Under the law of pretty much all states, you can sue a fiduciary for breach of fiduciary duty and recover the full measure of your damages, i.e., whatever sum of money is necessary to make you whole for the damages resulting from the fiduciary’s breaches. Trouble is, ERISA broadly preempt state law as to employee benefits plans. Unless the target defendant is an insurance company and the state law is an insurance regulation, chances are good that state law doesn’t apply at all.
So it was with Spherion, whose activities were well within ERISA’s preemptive scope. Thus, the nature and extent of Melissa’s recovery is governed exclusively by ERISA itself.
The remedies provision of ERISA is 29 U.S.C. § 1132. The statute goes on ad nauseam, so you’d think there’s all sorts of relief available. Well, that just ain’t so. The basic provision allows a plan beneficiary or participant “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan[.]” That does Melissa no good at all. She clearly wasn’t entitled to benefits under the Aetna policy, and the quoted language says jack shit about recovery from plan administrators.
A beneficiary can also sue for “the relief provided for in subsection (c) of this section[.]” This one did help Melissa some, as Subsection (c) gives courts discretion to make a plan administrator pay the beneficiary up to $100 per day for violating its duty to provide plan summary information on request. Spherion’s conduct was sufficiently egregious that the Court exercised its discretion to make it pay the full $100 per day. The judge was also angered enough to grant Melissa a discretionary award of attorney fees pursuant to Subsection (g)(1). At least the lawyers got paid.
But the real damages in this case was the $426,000 in life insurance benefits that Melissa would have gotten but for Spherion’s fuckuppery. Is that recoverable? According to the trial court and the U.S. Court of Appeals for the Fifth Circuit, the answer to that question is a big, fat, resounding no.
The relevant provision of § 1132 is subsection (a)(3), which says that a plan participant, beneficiary or fiduciary may sue “ to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan” or for “other appropriate equitable relief[.]” The issue, of course, is what “other appropriate equitable relief” means and whether or not it includes make-whole damages of the sort Ms. Amschwand was looking for.
The term “equitable relief” dates back to days of yore when there were two separate court systems existing side by side, courts of law and courts of equity. I won’t burden you with a lengthy discussion of the distinctions. First, I simply don’t know the history well enough. Second, what I do know is insufferable boring. For present purposes, suffice it to say that money damages was a remedy generally reserved to courts of law. Courts of equity, by and large, were limited to granting “equitable” relief, for instance ordering the specific performance of a contract or enjoining a particular act. Nowadays courts are merged into a single system at the federal level and in almost all states. Those unified courts have authority to grant both legal and equitable relief.
But ERISA limits courts to awarding the benefits authorized under the plan or “other appropriate equitable relief.” For Melissa Amschwand to get what she was after, she would have to convince a court that full money damages qualifies as “equitable relief.”
It doesn’t sound as daunting as you might think. Back in the day, courts of equity often granted “legal” remedies in the exercise of their equitable powers. In actions by a trust beneficiary against a trustee, courts of equity regularly awarded the prevailing beneficiary money damages because that was the only way to “do equity.” So “equitable relief” in ERISA doesn’t necessarily foreclose make-whole money damages after all, does it?
Not so fast, goddammit. Everyone remain calm. Antonin Scalia is about to save the day for corporate America.
In Mertens v. Hewitt Associates, 508 U.S. 248 (1993), Justice Scalia got four of his colleagues to sign onto an analysis in which “appropriate equitable relief” doesn’t actually refer to all relief that courts of equity could grant. The phrase referred only to relief that courts of equity “traditionally” granted such as restitution, injunctions, writs of mandamus and such. If Congress meant to allow the full range of legal-type relief that courts of equity could grant, then its use of the term “equitable” would be superfluous, and that would be bad.
If that sounds kinda stupid, it’s only because it IS kinda stupid. The sort of strained, contrived analysis evidenced in Mertens is what you get when you let a predetermined result dictate the course of your reasoning. Here, the preordained result is “Money damages bad. Very bad.”
The next big cases interpreting the statutory phrase “appropriate equitable relief” were Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 234 (2001) and Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 336 (2006). Those cases didn’t involve lawsuits against ERISA fiduciaries. They involved workers injured in accidents caused by the negligence of third-party tortfeasors. The workers’ employee benefits plans paid accident-related medical expenses. When the workers recovered money from the tortfeasors’ liability insurers, the plan administrator demanded repayment from the settlement proceeds pursuant to the subrogation/reimbursement provisions in the plan documents. The workers told the administrators to go fuck themselves and litigation ensued. The issue was whether the “appropriate equitable relief” language of subsection (a)(3) authorized a court to award money damages to a fiduciary against a plan beneficiary on a subrogation claim.
The answer Great-West and Sereboff provide is, “it depends.” In both cases the plan administrator argued that it was seeking equitable relief in the form of “equitable restitution.” The administrator in Sereboff was allowed to recover while the administrator in Great-West wasn’t. The rule that emerge from the two cases is that a subro claim can properly be classified as “equitable” — an “equitable lien established by agreement,” whatever that means — and is enforceable under ERISA so long as the administrator is seeking reimbursement from an identifiable fund that is still in the plan beneficiary’s possession, as opposed to seeking reimbursement from the beneficiary’s general assets. In Great-West the plan administrator sued the beneficiary/tort claimant, but by that time the beneficiary had already placed the proceeds of the settlement into a special needs trust. Presumably, the administrator would have won had it made the trust a co-defendant, but it only sued the subrogor and was seeking recovery from his general assets. In Sereboff the beneficiary/tort claimant still had possession of the settlement funds. Thus, the plan administrator could seek recovery from the “identifiable fund” in which the administrator had an equitable lien.
The Fifth Circuit applied the same sort of analysis to this case. Amschwand v. Spherion Corp., 505 F.3d 342 (5th Cir. 2007) (pdf, 12 pages). Melissa’s lawyer argued that the fact that this case was a lawsuit against a fiduciary for breach of fiduciary duty made all the difference in the world. In actions such as this courts of equity had full authority to award money damages. In the end, Mertens and its progeny only say that extracontractual damages are unavailable in lawsuits against non-fiduciaries. The Fifth Circuit, like all but one of the other federal courts of appeals (the Seventh Circuit), rejected the proposed distinction and ruled that Melissa’s case sought wholly “legal” relief. She was seeking recovery not from some identifiable fund in which she had a lien but instead from Spherion’s general corporate assets. Since ERISA doesn’t authorize recovery of money damages, Melissa could not recover from Spherion the money she would have received in life insurance proceeds had Spherion not fucked up so badly and so often.
That doesn’t mean Melissa got nothing. “Restitution” is a traditional equitable remedy, and Spherion obviously recognized that. It gave Melissa a refund of the life insurance premiums that Thomas paid for the time he had no coverage. Spherion obviously realized the gravity of its incompetence, but the premium refunds weren’t even enough to cover Mr. Amschwand’s funeral.
Having nothing to lose, Melissa petitioned the U.S. Supreme Court for review. The Court seemed interested early on when it invited the Solicitor General’s office to file a brief on the government’s behalf. Even the Bush Administration Justice Department sided with Melissa. The Solicitor General argued in its invitation brief for a broad reading of “appropriate equitable relief” that would have allowed Ms. Amschwand to pursue her claim.
It wasn’t to be. One of the Court’s last official acts before closing up shop at the end of June was denying Melissa’s request for review.
When you hear members of Congress talking about a “patients’ bill of rights,” they’re likely referencing a federal bill designed to amend ERISA by making full money damages available to claimants, at least in the health insurance context. It’s abundantly clear that the courts don’t want to do that, even though the law supports it. Thus, we’re stuck relying on our elected representatives.
When the Democrats took over both houses of Congress I had high hopes for substantial amendments to Section 1132 that would allow recovery of make-whole damages in all employee benefits cases. President Pencilcock would have vetoed the measure, but at least he would have been stuck explaining why he hates the notion of personal responsibility as applied to corporate “persons.”
But no. The present Democratic Congress has set records for fecklessness and complicity with a criminal administration that it’ll be difficult if not impossible to match. The odds of getting the much needed amendments to ERISA are pretty much nil.
So brace yourself, folks. If your employer-provided health insurance plan denies you or your family member a diagnostic test that you’re clearly entitled to receive under the terms of your plan, and permanent debilitating injury or death results from delayed diagnosis of a readily treatable illness, you can still sue. Trouble is, your recovery will be limited to what the plan should have paid to begin with. That’s what qualifies as fair in the strange little world that is the United States of America these days.