Tenth Circuit Addresses ERISA Limitations Provision in Class Action Decision

In Fulghum v. Embarq. Corp., 785 F.3d 395 (10th Cir. 2015), the Tenth Circuit Court of Appeals considered the claims of a class of telephone company retirees whose life and health insurance benefits were reduced or eliminated by their former employers after the employees retired. The employer Defendants included Embarq Corporation and companies who became Embarq subsidiaries after its spin-off from Defendant Sprint Nextel. The Plaintiffs claimed they were entitled to vested lifetime benefits pursuant either to the terms of their various ERISA welfare benefit plans, or to fraudulent communications made to them by plan administrators. They filed claims for breach of contract and breach of fiduciary duty under ERISA, as well as claims under the Age Discrimination in Employment Act.

During their employment, the Plaintiffs had received summary plan descriptions (“SPDs”) that explained the benefits provided in their plans. The Defendants based motions for summary judgment on the SPDs, organizing 32 different identified SPDs into five separate groups, according to similarities of plan language and coverage. Fulghum, 785 F.3d at 402. They contended the class members against whom they sought judgment had retired under one of the identified SPDs, or under an SPD that was not included in one of the five groups, but was identical in all material respects to one of the identified SPDs. Id.

The Court first considered whether Defendants breached their contractual duties under ERISA to provide vested benefits because the terms of the plans, as expressed in the SPDs, promised lifetime benefits to the employees. Under ERISA, an employer is generally free to change, modify or terminate its welfare benefit plans for any reason at any time, unless the employer has contractually agreed to provide vested benefits. Fulghum, 785 F.3d at 402, citing Curtiss-Wright Corp. v. Schoonajongen, 514 U.S. 73, 78 (1995). An employer creates a contractual agreement by incorporating “clear and express language” promising vested benefits into a formal written ERISA plan, which can be done through SPD documents. Id. at 403.

After reviewing the SPDs submitted by Defendants and applying general principles of contract construction, the Tenth Circuit found that none of the SPDs in the five groups contained clear and express language promising vested benefits, and affirmed summary judgment on those claims based on the identified SPDs. The plans either contained language that expressly reserved the employers’ rights to change or terminate the described benefits, or they contained language that otherwise unambiguously contemplated future plan changes or terminations in a manner that could not reasonably be misinterpreted by the employees.[1]

The Court next considered the Defendants’ argument that Plaintiffs’ claims for breach of fiduciary duty under 29 U.S.C. §1104(a)(1) were time-barred. The limitations periods that apply to such actions is found at 29 U.S.C. §1113:

No action may be commenced under this subchapter with respect to a fiduciary’s breach of any responsibility, duty, or obligation under this part, or with respect to a violation of this part, after the earlier of – (1)       six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in case of an omission the latest date on which the fiduciary could have cured the breach or violation, or (2)       three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation, except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation. (emphasis supplied).

The parties’ dispute arose from application of the six-year exception, which applies in cases of “fraud or concealment.” The Defendants claimed the exception applies only when a plan fiduciary takes steps to fraudulently conceal an alleged breach of duty, thus preventing its discovery, and that the Plaintiffs did not allege the Defendants attempted to conceal their actions.

The Plaintiffs, on the other hand, claimed the exception also applies when a §1104(a)(1) breach of fiduciary duty claim is based on the theory that a plan fiduciary engaged in fraud, i.e., a fiduciary knowingly misrepresented or omitted to tell an employee of a material fact with the intent to deceive. They contended the misrepresentations and omissions Defendants made about lifetime benefits were fraudulent, and that the lawsuits Plaintiffs filed were timely under the exception because they were filed within six years after the plans were amended, which enabled discovery of the alleged breaches.

Prior to Embarq, the Tenth Circuit had never addressed the application and scope of the exception provision, and looked to other circuit court cases, finding the First, Third, Eighth, Ninth, and DC circuits hold the exception applies only when a fiduciary has taken concrete steps to conceal an alleged breach. Fulghum, 785 F.3d at 414. This approach is based on the belief that Congress intended to incorporate the federal “fraudulent concealment” doctrine into the “fraud or concealment” language of §1113. The fraudulent concealment doctrine tolls the running of a statute of limitations when a defendant acts to prevent a plaintiff from timely discovering its fraud.

The Tenth Circuit then noted a different approach taken by the Second Circuit Court of Appeals, which declined to combine the words “fraud or concealment” into the term “fraudulent concealment.” Fulghum, 785 F.3d at 414. The Second Circuit court held the exception does not act to toll the running of the statute of limitations in §1113(1), but instead is itself another, separate statute of limitations that applies only in certain types of cases, i.e., when a fiduciary acts to conceal a breach of duty, and when an ERISA plaintiff’s breach of fiduciary duty claim is based on a fraud theory.

The Tenth Circuit declined to follow either of these approaches. Instead, it decided that §1113(1) is a six year statute of repose rather than a statute of limitations, and that “the better view is that the fraud or concealment provision is a legislatively-created exception” to that statute of repose. It observed that §1113(1)(A) requires an ERISA plaintiff to file a breach of fiduciary duty claim within six years after the date of the last action which constituted a part of the breach, and, in the case of an omission claim under §1113(1)(B), within six years of the last date the fiduciary could have cured the breach. Although it clearly sets forth a limited six year period of time within which an ERISA plaintiff must bring its fiduciary duty claims regardless of time of discovery, and the defendant’s liability is extinguished as a matter of right if the claims are not timely brought, it is a statute of repose and, therefore, it can be subject to legislatively-created exceptions that can extend the filing period.

The Court’s conclusion was based on principles of statutory construction. The language the Legislature used to create the exception follows §1113 subparagraph 1 and §1113 subparagraph 2, but the exception itself is not contained in a third numbered subparagraph 3. This structure suggested to the Court that the exception provision was not meant to be a separate statute of limitations. Further, the fact that it begins with the word “except” means it must be read with reference to the two preceding subsections, and not as a separate statute of limitations. Fulghum, 785 F.3d at 415.

The Court further stated the scope of the exception turned on the meaning of the terms “fraud” and “concealment.”   Because the ERISA statute does not contain definitions for these terms, the Court looked to their ordinary meanings at the time the exception was enacted, which could be viewed as separate and distinct meanings. Also, Congress’ use of the disjunctive “or” in the language “fraud or concealment” indicated to the Court that the terms should be given separate meanings.

The Court concluded its analysis by noting that because a statute of repose creates a substantive right in defendants to be liability-free after a specific period of time, it is not subject to the judicial doctrines of equitable tolling or estoppel, but that Congress, by creating the fraud or concealment exception, was restoring these doctrines to selected ERISA breach of fiduciary duty claims. Fulghum, 785 F.3d at 416. This lessened the harsh result that could occur in situations where a plan fiduciary has engaged in prohibited conduct that a plan member could not readily discover in time to meet the filing periods of §1113.

Finally, the exception promotes one of the primary purposes of ERISA , which is to ensure that employees receive sufficient information about their rights under employee benefit plans to make well-informed decisions.

Because the Plaintiffs’ pleadings had included a comprehensive list and fully developed record of allegations and facts concerning fraud, which the Defendants denied, a factual dispute existed as to whether Defendants committed fraud or concealment within the six-year exception period, and Defendants were not entitled to summary judgment on the breach of fiduciary duty claims. Fulghum, 785 F.3d at 416.

Finally, the Tenth Circuit affirmed summary judgment for Defendants on all claims based on the Age Discrimination in Employment Act. Existing federal regulations authorized the reductions made in certain of the benefits, and the Court found Defendants had legitimate “non-age reasons” for instituting other reductions and terminations, including a desire to reduce costs and to bring their plan benefits in line with those provided by other companies. Fulghum, 785 F.3d at 417-421.

[1]     The Court, however, reversed summary judgment as to those class members whose contract claims arose from SPDs other than those 32 specifically identified in the five groups.

Are You Sure It’s ERISA?


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Are You Sure It’s ERISA?

     Imagine you are faced with a claim based on an alleged disabling condition that prevents an individual from working. You have a document from the employer that describes short-term disability benefits that the individual may be entitled to receive while unable to work. The document looks like a summary plan description and refers to the program as an employee benefit plan under the ERISA statutes. The employer files a Form 5550 annually with the Department of Labor and the IRS identifying it as an ERISA plan. It looks like ERISA, it sounds like ERISA, but is it really ERISA? Or is it in fact something else?

     Attorneys handling ERISA claims should be aware that certain self-funded short-term payroll plans can appear remarkably, and deceivingly, like ERISA welfare benefit plans. If, however, the claim at issue is actually a compensation dispute related to payroll practices involving the employer’s general assets as the source of payment, ERISA does not apply. In such cases, litigation in federal court is not an option, and state court claims, such as bad faith breach of contract, can come into play.

     Courts have recognized that the “broadly worded” language of ERISA does not clearly delineate the statute’s coverage, which defines an “employee welfare benefit plan” as:

    any plan, fund, or program which…is…established or maintained by an employer…for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, [or] death… 29 U.S.C. § 1002(1).

Massachusetts v. Morash, 109 S. Ct. 1668, 1672 (1989); Cal. Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., Inc., 117 S. Ct. 832, 837 (1997).

     After ERISA was enacted, the Secretary of Labor, who is the official specifically charged with defining ERISA’s “accounting, technical and trade” terms, promulgated a regulation that excluded “payroll practice” plans from ERISA’s “employee welfare benefit plan” definition even though such plans are established by employers to provide medical, sickness and other benefits to employees, and appear to fall within ERISA’s scope. See, Morash, 109 S. Ct. at 1674; Stern v. IBM Corp., 326 F.3d 1367, 1372-73 (11th Cir. 2003) (parties dealt with claims made under “a program [that] would clearly qualify as an ERISA plan but for its specific exemption by a reasonably justified regulation”); McMahon v. Digital Equip. Corp., 162 F.3d 28, 36 (1st Cir. 1998) (“[N]ot all plans that fall within the literal definition in § 1002(1) are included within the scope of ERISA, [such as] certain enumerated ‘payroll practices …’”). The non-ERISA payroll practice plans cover situations relating to:

    Payment of an employee’s normal compensation, out of the employer’s general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons…. 29 C.F.R. § 2510.3-1(b)(2).

According to the preamble to the regulation, such plans are exempt because, “although relating to benefits described in [section 3(1) of [ERISA]], [they] are more closely associated with normal wages or salary.” 40 Fed. Reg. 34526 (Aug. 15, 1975). Bassiri v. Xerox Corp., 463 F.3d 927, 932 (9th Cir. 2006).

     Whether a particular case involves an ERISA benefit plan or an exempt payroll practice is a question of fact that is determined by examining the surrounding facts and circumstances. McMahon, 162 F.3d at 36; Langley v. Daimler Chrysler Corp. 502 F.3d 475, 479 (6th Cir. 2007). To be exempt, a plan must meet the definition of payroll practice, including whether the plan pays an employee’s “normal compensation” as a benefit. The Department of Labor chose to define “normal compensation” broadly; even if a short-term plan provides benefits that are less than an employee’s full salary, it can be sufficient to constitute “normal compensation.” See, e.g., Bassiri, 463 F.3d at 930-33 & n. 2 (court, giving deference to Department of Labor opinion letters, concluded that Xerox’s disability plan providing 60 percent of employees’ usual salary provided “normal compensation” under regulation definition); Butler v. Bank of Am., No. 3:06-CV-262-B, 2008 WL 1848426, at *2-3 (N.D. Tex. April 21, 2008) (finding employer’s STD policy exempt from ERISA; payment of minimum of 75 percent of employee’s base salary out of company’s general assets sufficient to constitute “normal compensation”).

     The source of the funding for temporary benefits is a critical fact focused on by the Labor Department. For example, as long as the plan is funded entirely by the employer’s general assets, the fact that they are paid from a third-party’s bank account is immaterial. Bilheimer v. Fed Express Corp., No. 08-80420-CIV, 2009 WL 1324202, *3 (S.D. Fla. May 13, 2009); Walsh v. Life Ins. Co. of N.A., No. 06-10845-GAO, 2007 WL 2343657, *5 (D. Mass. Aug. 15, 2007). If, however, a plan is partially funded by an insurance policy rather than the employer’s general assets, or an employer receives reimbursement for payments it makes from an outside source, it will likely be deemed an ERISA plan. McMahon, 162 F.2d at 37; Butler, 2008 WL 1848426, at *3.

     Payments made by an employer pursuant to a short-term payroll practice must be made on account of periods of time during which the employee is “physically or mentally unable to perform his or her duties” to fall within the regulation, and can include short term vacation plans, disability plans, sickness or accident plans, and others.

     The fact that a document describing a benefits program refers to the program as “non-ERISA,” or lacks an explanation of ERISA appeal rights, can be considered in the evaluation. The way a plan is actually implemented can be considered, including whether benefits are paid in the same manner as salaries, and whether benefits end if an employee is terminated:

    Xerox’s LTD Plan more closely resembles salary: The payments come in regular paychecks, in an amount tied to the employee’s salary and not to the variable performance of a fund. And, like salary, LTD Plan benefits end upon termination.See Scott v. Gulf Oil Corp., 754 F.2d 1499, 1503 (9th Cir. 1985) (noting that payroll practices end upon termination);see also Department of Labor, Opinion 96-16A, 1996 ERISA LEXIS 28, at *6 (Aug. 27, 1996) (finding that disability plan was not a “payroll practice” because, inter alia, the payroll practices exception is “not intended to apply to arrangements that continue cash payments to individuals…after the individuals have ceased to be considered employees…..”). Bassiri, 463 F.3d at 932.

     Finally, the actions of the employer establishing the plan do not control whether a plan is an ERISA plan or a non-ERISA payroll practice. “[M]ere labeling by a plan sponsor or administrator is not determinative on whether a plan is governed by ERISA.” Langley, 502 F.3d at 481. Indeed, a plan description document can contain citations to ERISA, include a description of the employee’s ERISA rights, be filed as an ERISA plan with the IRS and Labor Department, be administered by a third-party insurance company, and an employer can even tell its employees that ERISA applies, but if the program meets the payroll practice regulatory definition and the facts so support, it will be regarded as a non-ERISA payroll practice, and not an ERISA benefit plan:

    The way in which an employer characterizes its plan may be one factor, among others, in determining ERISA coverage. Nevertheless, even if IBM has treated the Program as an ERISA plan with respect to government filings, its mere labeling of the plan should not determine whether ERISA applies. Allowing this could lead to a form of “regulation shopping.” Where, as here, an employer pays an employee’s normal compensation for periods of mental or physical disability entirely from its general assets, the program constitutes an exempted payroll practice under 29 C.F.R. § 2510.3-1(b) and not an ERISA plan.

Stern, 326 F.3d at 1374 (citations omitted); see also, Carmouche v. MEMC Pasadena, Inc., No. 06-2074, 2008 WL 2838474, *12 n. 2 (S.D. Tex. July 21, 2008).

     Ultimately, these specific short-term benefit plans are preempted from ERISA coverage because they fall outside the primary purposes of ERISA. Congress enacted ERISA to prohibit employers from mismanaging monies they accumulate to fund employee benefits, and also to prohibit them from failing to pay such benefits due to employees from the accumulated funds. Extensive reporting, disclosure, and fiduciary duty requirements are imposed on employers to ensure that benefit funds are not dissipated through poor management. The short-term plans at issue in the payroll practice regulation are not vulnerable to either of these dangers. They are occasional, temporary benefits paid from an employer’s general assets, so there is no benefit fund to abuse or mismanage, and no special risk of loss or nonpayment of funds. Accordingly, there is no need to impose the stringent ERISA requirements on employers with respect to such plans.

[1] Chevron USA, Inc. v. Natural Resources Defense Counsel, Inc., 104 S. Ct. 2778 (1984), requires deference to an agency’s interpretation of a statute, unless the regulation conflicts with “the unambiguously expressed intent of Congress.” It should be noted that courts have rejected the argument that the payroll practice regulation conflicts with ERISA and is therefore superseded by the statute. No court has found that Congress expressed an unambiguous intent that ERISA should encompass self-funded short-term disability plans, so ERISA does not supersede or preempt the payroll practice regulation. Monkhouse v. Stanley Associates, Inc. Short Term Disability Income Plan, 2010 U.S. Dist. LEXIS 40555 (S.D. Tex. April 26, 2010).



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A smattering of recent Oklahoma Supreme Court tort and insurance decisions

       I know many of you may have thought the Court to be inactive these last many months when it comes to insurance and tort matters. Rest easy, – the Court has actually been pretty busy with some really interesting decisions ranging from res ipsa to slips and falls and all points in between. As you can see below, we have some interesting splits on the Court, and occasionally some rather forceful dissents (or two). So without further ado, let’s go a-Courtin’…

      1. Slip-Slidin’-Away…

      The area of premises liability has been fairly steady and not overly active for the past, say, 50 years. Sure, there’s been the occasional Spirgis v. Circle K Stores, 743 P.2d 682 (Okl. Ct. App. 1987) (pothole in a parking lot not necessarily open and obvious/MSJ not responded to doesn’t guarantee a victory). But mostly, we’ve been dependent on Buck v. Del City Apartments, 431 P.2d 360 (Okla. 1967) for the proposition that where a hazard is open and obvious to an “invitee” (i.e., somebody who was invited there for a business reason – like a customer, for example), there is no liability for a landlord.

      Until now, anyway. At least in a limited holding. The Oklahoma Supreme Court has at least partially modified that age-old stance in the new (and as of press time not released for publication) opinion of Wood v. Mercedes-Benz of OKC, 2014 OK 68, __ P.3d __ (July 16, 2014). In a 5-4 decision with not one but two very strong dissents (by Justices Taylor and Combs), the Court decided that liability existed against Mercedes-Benz of OKC because a sprinkler system had gone off, creating ice around the dealership, and Ms. Wood had to encounter that ice to get into the dealership where she was working for a caterer that day. The majority discarded nearly 50 years of “open and obvious” precedence and found “under the facts of this particular case” that liability did exist on the dealer. “We agree with Wood that under the peculiar facts of this case, Mercedes-Benz owed a duty to take remedial measures to protect her from the icy conditions surrounding the entry to its facility” Wood, at para. 9. So, expect the floodgates to open (pardon the pun) for slip-and-fall cases, despite the Court’s language limiting the decision to the facts of that case.

      2. Res Ipsa? Locate Her!

      In another case that I’m still not sure I totally understand, the Court of Appeals has ruled that the doctrine of res ipsa loquitur was available to a plaintiff who was moved from one department of the hospital to another and somewhere in there they lost track of the female decedent for a period of time and she ultimately died. Rogers v. Mercy Health Center, 2014 OK Civ. App. 69 (2014). The Court of Appeals held that the plaintiff should have been allowed to utilize the res ipsa doctrine, based upon the fact that the defendants had control over the decedent when her health took a downward turn.

      I certainly understand a negligence theory there, but not why res ipsa applies. If the treatment was sub-standard, that’s certainly an available theory that, of course, the plaintiff would have to prove. But allowing plaintiff to use res ipsa to get past summary judgment and to a jury doesn’t make much sense to me.

      3. Claim? What claim? (Oh, THAT claim…)

      And finally, we have the case of Chandler v. Valentine, 2014 OK 61, in which the defendant insurer tried to cancel a “claims made” policy when it had knowledge of a possible (but not yet asserted) claim against the insured. The company (with knowledge of the potential claim) had canceled the coverage, stating it was due to the “Company’s decision” and had offered him trial coverage. Then it sent the plaintiff ANOTHER letter dealing with premium refund issues and saying that the policy was canceled at his request. On this one, the Oklahoma Supreme Court hit it squarely:

      “The issue in this matter is whether an insurer may agree to cancel a ‘claims made’ policy with the knowledge that a potential claim is pending without violating the statutory prohibition on retroactive annulment of an insurance policy following the injury, death, or damage for which the insured may be liable. See Okla. Stat. tit. 36, § 3625 (2011). This Court holds that it may not and affirms the holding of the trial court.”

Chandler, 2014 OK 61 at para. 1.

      It’s really difficult to imagine what that insurance company was thinking. And that comes from a guy who represents insurance companies (though not this particular one). I’m a big student of the “two sides to every story” school, but I will admit this company’s actions have me stumped to come up with one here.

      And that, as they say, is all she wrote. Until next time!

Will the Supreme Court Change the Law on Limitations?


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Written by: Leasa M. Stewart

On Tuesday, the United States Supreme Court heard oral argument in an ERISA-governed long term disability benefits case, Heimeshoff vs. Hartford Life and Wal-Mart Stores Inc. (Case Number 12-729). The plaintiff in the case has asked the Court to hold that a limitations period on filing suit cannot begin to run until a claimant has exhausted the administrative review that must be provided for under ERISA. During oral argument, Justice Stephen Breyer specifically asked what problems carriers would face if the court held that claimants must be able to exhaust the internal appeals process before the statute of limitations period on suits can start. Such a holding would drastically change current law and might negate ERISA plan terms which expressly provide a time limit for filing suit that begins at a time different than when the internal appeals process is exhausted, such as from the time proof of loss is required under the plan. As pointed out by Hartford Life’s counsel at oral argument, such a holding would undermine Congress’s goal of wanting to assure employers the courts will respect ERISA plan terms. Practically speaking, declaring that time limits to file suit cannot begin to run until internal appeals have been exhausted would also promote uncertainty in the process as the exhaustion date is not always an easy date to determine. Hopefully, the Supreme Court will decide to continue to respect ERISA plan terms and allow employers the freedom to contract for the limitations period they would like a plan to have.

PPACA/HIPAA Wellness Programs and Rewards Final Regulations Issued


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by: Tim Carney

The Treasury Department, Department of Labor and Department of Health and Human Services issued final regulations on wellness programs and rewards for group health plans on May 29, 2013. The regulations implement provisions of the Patient Protection and Affordable Care Act of 1996 (PPACA) and amend guidance previously issued under the Health Insurance Portability and Accountability Act (HIPAA).


HIPAA generally prohibits group health plans (insured or self-insured) from discriminating against participants and beneficiaries with respect to eligibility, benefits, premiums or contributions based on eight specified “health factors” (i.e., health status, medical condition, claim experience, receipt of health care, medical history, genetic information, evidence of insurability and disability). However, HIPAA makes an exception to this general prohibition for plan provisions that vary benefits (including copayments, deductibles or coinsurance) or the premium or contributions for similarly situated individuals in connection with programs of health promotion or disease prevention (“wellness programs”). The PPACA includes a provision that extends the HIPAA nondiscrimination protections to the individual market and also increases the permissible wellness-related financial rewards from the amount previously established under HIPAA rules.

When the Regulations go into Effect

The regulations apply to insured and self-insured group plans, both grandfathered and non-grandfathered, for plan years beginning on or after January 1, 2014.


The regulations are over 120 pages in length. This is intended to summarize certain key features of the regulations, not to serve as a comprehensive outline of all of the regulations.

Types of Wellness Programs

1. Participatory Wellness Programs

Participatory Wellness program rewards are based only on participation, not on meeting specific health standards. Examples include:

• A program that reimburses all or part of the cost of membership at a fitness center.
• A diagnostic testing program that provides a reward for participation in the program and does not base any part of the reward on outcomes. For example, a wellness program that provides a reward for taking a series of biometric tests (regardless of the results).
• A program that encourages preventive care through the waiver of the copayment or deductible requirement under a group health plan for the costs of, for example, prenatal care or well-baby visits (although the PPACA’s preventive services mandate requires non-grandfathered plans to provide certain preventive health services without participant cost sharing).
• A program that reimburses employees for the costs of, or otherwise provides a reward for participating in, a smoking-cessation program regardless of whether the employee quits smoking.
• A program that provides a reward to employees for attending a monthly, no-cost health education seminar.
• A program that provides a reward to employees who complete a health risk assessment regarding current health status, without any further action (educational or otherwise) required by the employee with respect to the health issues identified in the assessment.

There are no limits on the rewards that may be offered for Participatory Wellness programs. Therefore, any rewards provided in connection with a participatory wellness program do not count toward the maximum permissible reward thresholds (discussed below). Also, participatory wellness programs are not required to meet the five special requirements applicable to health-contingent wellness programs (discussed below). Also, reasonable alternative standards (discussed below) need not be made available under participatory wellness programs.

2. Health-Contingent Wellness Programs

Health-Contingent Wellness programs are those that require individuals to meet a “health standard” or to participate in a health program to receive a reward. Every individual eligible for the program must be given an opportunity to qualify for the reward once a year. The reward cannot exceed the maximum limits discussed further below.

The standard may require a participant to perform or complete an activity relating to a health factor, or to attain or maintain a specific health outcome. According to regulators, this may constitute discrimination among plan participants and beneficiaries based on their health status, which is generally prohibited under current HIPAA rules and the PPACA. However, if a plan complies with five special requirements for health-contingent wellness programs (as described below), the final regulations continue to permit such rewards.

Health-Contingent programs are of two types.

(a) Activity-Only Wellness Programs

In these programs, participants are rewarded based on participation, not outcomes. Examples include:

• A walking program.
• An exercise program.
• A diet program.

An activity-only program may require completion of the program in order to qualify for the reward, but it cannot require participants to achieve a certain outcome, such as losing weight.

Some individuals may be unable to participate in an activity-only wellness program due to a health factor. The final regulations require that individuals be given a reasonable opportunity through a “reasonable alternative standard” to qualify for the reward. That standard is discussed below.

(b) Outcome-Based Wellness Programs

Under an outcome-based wellness program, an individual must attain or maintain a specific health outcome in order to obtain a reward. Individuals who do not meet the required standard must take additional, steps such as working with a health coach or completing a health improvement plan, to receive the reward.

Examples of outcome-based wellness programs include biometric screening that tests individuals for specified medical conditions or risk factors, such as high cholesterol, high blood pressure, abnormal BMI (body mass index) or high glucose level, and provides a reward to employees identified as within a normal or healthy range (or at low risk for certain medical conditions). Employees who are identified as outside the normal or healthy range (or at high risk) are required to take additional steps, such as meeting with a health coach, taking a health or fitness course, adhering to a health improvement action plan or complying with a health care provider’s plan of care, to obtain the same reward.

Reasonable Alternative Standards

If an individual does not qualify for a Health-Contingent reward, a reasonable alternative standard or waiver must be available.

• For Activity-Only programs, a reasonable alternative for obtaining the reward must be provided if it is unreasonably difficult due to a medical condition, or it is medically inadvisable for an individual to attempt, to complete the activity.
• For Outcome-Based programs, a reasonable alternative must be provided to all individuals who do not meet the initial standard.

As an example, a reasonable alternative for an individual who failed to meet a BMI standard might be participation in a weight loss program or to require the participant to reduce BMI by a small amount or percentage over a year’s time.

Any information provided to employees that describes wellness programs must address the availability of reasonable alternatives and provide contact information to request an alternative. Reasonable alternatives do not need to be defined in advance and can be determined on an individual basis.

Five Requirements for Health-Contingent Wellness Programs

As under current HIPAA rules, health-contingent wellness programs will be permitted in a group health plan only if they satisfy all five requirements, as revised in the final regulations. The five special requirements are:

1. Frequency of opportunity to qualify
2. Size of reward
3. Reasonable design
4. Uniform availability and reasonable alternative standards
5. Notice of availability of reasonable alternative standards

1. Frequency of Opportunity to Qualify

Individuals eligible for the health-contingent wellness program must be given the opportunity to qualify for the reward at least once per year. The once-per-year requirement is a bright-line standard for determining the minimum frequency consistent with a reasonable design for promoting good health or preventing disease.

2. Size of Reward

The maximum wellness reward amounts allowed:

• The maximum wellness program reward is 30 percent of the total cost of medical coverage, including both employer and employee contributions.
• The maximum wellness program total reward may be increased to 50 percent for programs related to tobacco use.
• Rewards can take many forms, such as premium discounts or surcharges, reduced cost sharing, enhanced benefits, gift cards or deposits to Health Savings Accounts or Health Reimbursement Accounts.
• The reward must be available at least once per year for all similarly situated individuals.
• If family members participate in wellness programs, the reward can be based on the total cost of coverage for all covered family members. If some family members are eligible for the reward and others are not, employers have flexibility in determining the portion of the reward attributable to each family member.

For this purpose, the total cost of coverage is determined based on the total amount of employer and employee contributions toward the cost of coverage for the benefit package under which the employee is (or the employee and any dependents are) receiving coverage. Any rewards offered in connection with participatory wellness programs do not count toward the maximum permissible reward and may be provided over and above those maximum permissible rewards.

The final regulations include the following examples to illustrate maximum permissible rewards:
Example 1
 Facts. An employer sponsors a group health plan. The annual premium for employee-only coverage is $6,000 (of which the employer pays $4,500 per year and the employee pays $1,500 per year). The plan offers employees a health-contingent wellness program with several components, focused on exercise, blood sugar, weight, cholesterol and blood pressure. The reward for compliance is an annual premium rebate of $600.
 Conclusion. In this example, the reward for the wellness program, $600, does not exceed the applicable percentage of 30% of the total annual cost of employee-only coverage, $1,800 ($6,000 × 30% = $1,800).
Example 2
 Facts. Same facts as Example 1, except the wellness program is exclusively a tobacco prevention program. Employees who have used tobacco in the previous 12 months and who are not enrolled in the plan’s tobacco-cessation program are charged a $1,000 premium surcharge (in addition to the employee contribution toward the coverage). Those who participate in the plan’s tobacco-cessation program are not assessed the $1,000 surcharge.
 Conclusion. In this example, the reward for the wellness program (absence of a $1,000 surcharge), does not exceed the applicable percentage of 50% of the total annual cost of employee-only coverage, $3,000 ($6,000 × 50% = $3,000).
Example 3
 Facts. Same facts as Example 1, except that, in addition to the $600 reward for compliance with the health-contingent wellness program, the plan also imposes an additional $2,000 tobacco premium surcharge on employees who have used tobacco in the previous 12 months and who are not enrolled in the plan’s tobacco-cessation program. Those who participate in the plan’s tobacco-cessation program are not assessed the $2,000 surcharge.
 Conclusion. In this example, the total of all rewards (including absence of a surcharge for participating in the tobacco program) is $2,600 ($600 + $2,000 = $2,600), which does not exceed the applicable percentage of 50% of the total annual cost of employee-only coverage ($3,000) and, tested separately, the $600 reward for the wellness program unrelated to tobacco use does not exceed the applicable percentage of 30% of the total annual cost of employee-only coverage ($1,800).
Example 4
 Facts. An employer sponsors a group health plan. The total annual premium for employee-only coverage (including both employer and employee contributions toward the coverage) is $5,000. The plan provides a $250 reward to employees who complete a health risk assessment, without regard to the health issues identified as part of the assessment. The plan also offers a healthy-heart program, which is a health-contingent wellness program, with an opportunity to earn a $1,500 reward.
 Conclusion. In this example, even though the total reward for all wellness programs under the plan is $1,750 ($250 + $1,500 = $1,750, which exceeds the applicable percentage of 30% of the cost of the annual premium for employee-only coverage ($5,000 × 30% = $1,500)), only the reward offered for compliance with the health-contingent wellness program ($1,500) is taken into account in determining whether the rules regarding the size of the reward are met. (The $250 reward is offered in connection with a participatory wellness program and therefore is not taken into account.) Accordingly, the health-contingent wellness program offers a reward that does not exceed the applicable percentage of 30% of the total annual cost of employee-only coverage.

3. Reasonable Design

The regulations require that health-contingent wellness programs (whether activity-only or outcome-based) be reasonably designed to promote health or prevent disease. This reasonable design requirement is intended prevent abuse and, according to the regulators, is ‘‘intended to be an easy standard to satisfy.” The final regulations state that a wellness program is reasonably designed if it has a reasonable chance of improving the health of, or preventing disease in, participating individuals, and is not overly burdensome, is not a subterfuge for discrimination based on a health factor and is not highly suspect in the method chosen to promote health or prevent disease. The determination of whether a health-contingent wellness program is reasonably designed is based on all the relevant facts and circumstances. The regulators note that wellness programs are not required to be accredited or based on particular evidence-based clinical standards, and continue to provide plans and issuers flexibility and encourage innovation.

Nothing in the final regulations prevent a plan from establishing more favorable rules for eligibility or premium rates (including rewards for adherence to certain wellness programs) for individuals with an adverse health factor than for individuals without the adverse health factor.

Finally, as described in further detail below, to ensure that an outcome-based wellness program is reasonably designed, a reasonable alternative standard to qualify for the reward must be provided to any individual who does not meet the initial standard based on a measurement, test or screening that is related to a health factor (such as not smoking or attaining certain results on biometric screenings). The final regulations include a new requirement that all individuals must be provided with a reasonable alternative standard to qualify for the reward. Before, this standard applied only to those for whom meeting the initial standard is unreasonably difficult due to a medical condition to satisfy or medically inadvisable to attempt to satisfy.

4. Uniform Availability and Reasonable Alternative Standards

(a) Activity-only wellness programs

Activity-only wellness programs, such as walking programs, diet programs and/or exercise programs, must make the full reward available to all similarly situated individuals. A reward under an activity-based wellness program is not available to all similarly situated individuals for a period unless the program allows a reasonable alternative standard (or waiver of the otherwise applicable standard) for obtaining the reward as to for any individual that, for that period, it is either: (i) unreasonably difficult due to a medical condition to satisfy the otherwise applicable standard or (ii) medically inadvisable to attempt to satisfy the otherwise applicable standard.

For example, if it is unreasonably difficult for an individual, due to a medical condition, to participate in a walking, diet or exercise program, or if it is medically inadvisable for the individual to attempt to participate in a walking, diet or exercise program, the plan must provide the individual a reasonable alternative standard that would allow the individual to receive the award, or alternatively, to simply waive the requirement to participate in the wellness program to obtain the reward.

The final regulations do not require plans to determine a particular reasonable alternative standard in advance of an individual’s request for one; however, a reasonable alternative standard must be furnished by the plan upon the individual’s request, or the condition for obtaining the reward must be waived.

All facts and circumstances are to be taken into account in determining whether a plan has furnished a reasonable alternative standard, including things such as the following:

• If the reasonable alternative standard is completion of an educational program, the plan must make the educational program available or assist the individual in finding such a program (instead of requiring an individual to find such a program unassisted) and may not require an individual to pay for the cost of the program. Thus, the additional costs associated with providing educational programs must be borne by the plan.
• The time commitment required must be reasonable (for example, requiring attendance nightly at a one-hour class would be unreasonable).
• If the reasonable alternative standard is a diet program, the plan is not required to pay for the cost of food but must pay any membership or participation fee.
• If an individual’s personal physician states that a plan standard (including, if applicable, the recommendations of the plan’s medical professional) is not medically appropriate for that individual, the plan must provide a reasonable alternative standard that accommodates the recommendations of the individual’s personal physician with regard to medical appropriateness. Plans may impose standard cost sharing under the plan or coverage for medical items and services furnished pursuant to the physician’s recommendations.

It is permissible for a plan to seek verification, such as a statement from the individual’s personal physician, that a health factor makes it unreasonably difficult for the individual to satisfy, or medically inadvisable for the individual to attempt to satisfy, the otherwise applicable standard, if reasonable under the circumstances. Thus, plans are permitted to seek verification under an activity-only program, but not under an outcome-based program.

(b) Outcome-based wellness programs

Outcome-based wellness programs allow plans to conduct screenings and employ measurement techniques in order to target wellness programs effectively. For example, plans are able to target only individuals with high cholesterol for participation in cholesterol-reduction programs, or individuals who use tobacco for participation in tobacco-cessation programs, rather than the entire population of participants and beneficiaries, with the reward based on health outcomes or participation in reasonable alternatives.

In order for outcome-based wellness programs to meet the requirement that the reward be available to all similarly situated individuals, the final regulations require that the program allow a reasonable alternative standard (or waiver of the otherwise applicable standard) for obtaining the reward for any individual who does not meet the initial standard based on a measurement, test or screening. Therefore, if an individual does not meet a plan’s target biometrics (or other, similar outcome-based initial standards, such being a non-tobacco user), that individual must be provided with a reasonable alternative standard regardless of any medical condition or other health status factor, to ensure that outcome-based initial standards are not a subterfuge for discrimination or underwriting based on a health factor.

Also, as noted above, with respect to outcome-based programs a plan is not permitted to seek verification such as a statement from the individual’s personal physician that a health factor makes it unreasonably difficult for the individual to satisfy, or medically inadvisable for the individual to attempt to satisfy, the otherwise applicable standard. Instead, an individual is allowed to request a reasonable alternative standard even if the individual does not meet these health factor requirements. For example, a plan must offer a tobacco user a reasonable alternative standard (for example, participation in a tobacco-cessation program), and is not allowed to first require that such individual get a statement from his or her physician that a health factor (e.g., addiction to nicotine) makes it unreasonably difficult for the individual to satisfy the nonsmoker standard. This is significantly different from the earlier HIPAA rules.

If a plan provides a reasonable alternative standard to the otherwise applicable measurement, test or screening that involves an activity (as opposed to an outcome) that is related to a health factor, then the rules for activity-only wellness programs apply to that component of the wellness program, and the plan may, if reasonable under the circumstances, seek verification that it is unreasonably difficult due to a medical condition for an individual to perform or complete the activity (or it is medically inadvisable to attempt to perform or complete the activity). For example, if an outcome-based wellness program requires participants to maintain a certain healthy weight and provides, as a reasonable alternative standard, a diet and exercise program for individuals who do not meet the targeted weight, a plan or issuer may seek verification, if reasonable under the circumstances, that a second reasonable alternative standard is needed for certain individuals because, for those individuals, it would be unreasonably difficult due to a medical condition to comply, or medically inadvisable to attempt to comply, with the diet and exercise program (i.e., the first reasonable alternative standard) due to a medical condition.

As with activity-only wellness programs, the regulations do not require plans to determine a particular reasonable alternative standard in advance of an individual’s request for one. In addition, as with activity-only wellness programs, all the facts and circumstances are taken into account in determining whether a plan or issuer has furnished a reasonable alternative standard.

To the extent a reasonable alternative standard under an outcome-based wellness program is, itself, an activity-only wellness program, the activity-only reasonable alternative standard must comply with the requirements for activity-only programs as if it were an initial program standard. Therefore, for example, if a plan provides a walking program as an alternative to a running program, the plan must provide reasonable alternatives to individuals who cannot complete the walking program because of a medical condition. Moreover, to the extent that a reasonable alternative standard under an outcome-based wellness program is, itself, another outcome-based wellness program, the outcome-based reasonable alternative standard must generally comply with the requirements for outcome-based wellness programs, subject to the following special rules:

• The reasonable alternative standard cannot be a requirement to meet a different level of the same standard without additional time to comply that takes into account the individual’s circumstances. For example, if the initial standard is to achieve a BMI less than 30, the reasonable alternative standard cannot be to achieve a BMI less than 31 on that same date. However, if the initial standard is to achieve a BMI less than 30, a reasonable alternative standard for the individual could be to reduce the individual’s BMI by a small amount or small percentage, over a realistic period of time, such as within a year.
• An individual must be given the opportunity to comply with the recommendations of the individual’s personal physician as a second reasonable alternative standard to meeting the reasonable alternative standard defined by the plan, but only if the physician joins in the request. The individual can make a request to involve a personal physician’s recommendations at any time, and the personal physician can adjust the physician’s recommendations at any time, consistent with medical appropriateness.

The regulations require plans to disclose the availability of a reasonable alternative standard to qualify for the reward (and, if applicable, the possibility of a waiver of the otherwise applicable standard) in all plan materials describing the terms of a health-contingent wellness program (for both activity-only and outcome-based wellness programs). A disclosure of the availability of a reasonable alternative standard must include contact information for obtaining the alternative and a statement that recommendations of an individual’s personal physician will be accommodated. For outcome-based wellness programs, this notice must also be included in any disclosure that an individual did not satisfy an initial outcome-based standard.

For all health-contingent wellness programs (both activity-only and outcome-based), if plan materials merely mention that such a program is available, without describing its terms, this disclosure is not required. For example, a Summary of Benefits and Coverage that notes that cost sharing may vary based on participation in a diabetes wellness program, without describing the standards of the program, would not trigger this disclosure. In contrast, a plan disclosure that references a premium differential based on tobacco use, or based on the results of a biometric exam, is a disclosure describing the terms of a health-contingent wellness program and, therefore, must include this disclosure.

The regulations provide the following sample language:

“Your health plan is committed to helping you achieve your best health. Rewards for participating in a wellness program are available to all employees. If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means. Contact us at [insert contact information] and we will work with you (and if you wish, with your doctor) to find a wellness program with the same reward that is right for you in light of your health status.”

The regulations also provide sample language addressing specific types of potential programs:

“Your health plan wants to help you take charge of your health. Rewards are available to all employees who participate in our Cholesterol Awareness Wellness Program. If your total cholesterol count is under 200, you will receive the reward. If not, you will still have an opportunity to qualify for the reward. We will work with you and your doctor to find a Health Smart program that is right for you.”

* * *

“Fitness Is Easy! Start Walking! Your health plan cares about your health. If you are considered overweight because you have a BMI of over 26, our Start Walking program will help you lose weight and feel better. We will help you enroll. (If your doctor says that walking isn’t right for you, that’s okay, too. We will work with you [and, if you wish, your own doctor] to develop a wellness program that is.)”

EEOC Guidance

Although the regulations govern whether a program is HIPAA/PPACA-compliant, the EEOC has cautioned that compliance with the regulations does not automatically ensure compliance with other federal laws such as the Americans with Disabilities Act (ADA) or the Genetic Information Nondiscrimination Act (GINA).

Accordingly, employers and issuers need to keep this in mind when drafting and implementing, or revising, wellness programs. Although the regulations do not go into effect until January 1, 2014, employers should begin reviewing their plans now.

Tenth Circuit Approves Steps Taken to Minimize Impact of Conflict of Interest in ERISA Case

In the recent case of Cardoza v. United of Omaha Life Insurance Company, 708 F.3d 1196 (10th Cir. 2013), the Tenth Circuit Court of Appeals shed some light on steps ERISA claim administrators can take to minimize the impact of the conflict of interest that arises when an insurer performs the dual roles of administering an ERISA benefits plan and paying benefits under the plan. In Metropolitan Life Ins. Co. v. Glenn, 554 U.S 105 (2008), the U.S. Supreme Court held that the existence of such a conflict does not change the standard a court uses to review a benefits decision; when the plan provides the administrator with discretionary authority to decide claims, the standard of review does not change from abuse of discretion to de novo, but the court still must weigh the existing conflict as “a factor in determining whether there was an abuse of discretion.” Id. at 115. The weight given the conflict should be proportionate to its seriousness, becoming “less important (perhaps to the vanishing point) where the administrator has taken steps to reduce bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decision making irrespective of whom the inaccuracy benefits.” Id. at 117. Although discovery beyond production of the official “administrative record” compiled during a claims review is generally not permitted in ERISA cases, the language in Glenn implied that some discovery would be appropriate to allow claimants to explore the scope of a conflict of interest. Id. at 117; 123.

Subsequently, in Murphy v. Deloitte & Touche, 619 F.3d 1151 (10th Cir. 2010), the Tenth Circuit confirmed that discovery beyond the administrative record on the merits of an ERISA disability claim is not permissible, but recognized that Glenn opened the door to limited discovery into a dual role conflict. The claimant who seeks such extra-record discovery has the burden to demonstrate necessity and relevance pursuant to Rule 26(b) of the Federal Rules of Civil Procedure. Id. at 1162.

Discovery battles in ERISA cases certainly did not abate after the Glenn and Murphy decisions, on issues such as when discovery on a conflict is appropriate, and what types of information an administrator may have to provide. See, e.g., Todd v. CP Kilco, et al., 2011 WL 838848 (E.D. Oka. Mar. 1, 2011); Tillotson v. Life Ins. Co. of N. Am., 2011 WL 285815 (D. Utah Jan. 28, 2011). The Cardoza case, however, appears an unlikely one to have involved such a dispute. It was not a denial of benefits case, but a seemingly uncomplicated argument about the earnings calculations used to determine the amount of benefits that were admittedly payable. The insurer had produced the administrative record to the claimant, including policy provisions and documents on the calculation of benefits, correspondence, and the decision and review. After receiving the record, the claimant sought what it termed “limited” additional discovery, including 11 depositions as well as voluminous interrogatories and document requests on issues far beyond the nature and extent of the administrator’s conflict. In response to one request, the insurer supplemented the record with an affidavit explaining the claims decision-making process, the compensation system and the set up of the claims department. The claimant continued to demand additional information, which the insurer refused to produce.

The Cardoza case affirms the Tenth Circuit’s commitment to the view held by the majority of circuit courts, that an appellate court’s review of an ERISA benefits decision is generally limited to the administrative record under the abuse of discretion standard, and that only in the unusual case should supplementation of the record be permitted. See, Weber v. GE Group Life Assur. Co., 541 F.3d 1002 (10th Cir. 2008); Fought v. UNUM Life Ins. Co. of Amer., 379 F.3d 998 (10th Cir. 2004); Hall v. Unum Life Ins. Co. of Am., 300 F.3d 1197 (10th Cir. 2002); Chambers v. Family Health Plan Corp., 100 F.3d 818, 823-24 (10th Cir. 1996). However, due to the particular facts in Cardoza, that an employee of the insured initially stated by mistake that no internal guidelines existed relating to the decision (which mistake the insurer immediately rectified upon learning of it), the claimant was permitted to conduct one Rule 30 (b)(6) deposition and limited written discovery, restricted to the conflict and whether the insurer had produced all guidelines applicable to the benefits determination.

In the appeal of the case, the claimant argued to the Tenth Circuit that the dual role conflict adversely affected the administrator’s decision. The Court held, however, that it would “accord the conflict little weight” in determining whether the decision was arbitrary, because the insurer “had taken active steps to reduce potential bias and promote accuracy in its decision making process.” Cardoza, 708 F.3d at 1202. Referring to the affidavit the insurer had submitted early on, the Court found that the facts set forth therein were adequate to address the conflict, as they explained how claims analysts were compensated and that analysts had no access to information on claim reserves or on any effect their claims handling may have had on company finances:
…United of Omaha’s Director of Customer Service in the Clinical Services Department of its Claims Division attested to the following facts, which show the steps United of Omaha took to minimize the conflict of interest: (1) “claims analysts are not allowed access to claim reserve information and are not provided actuarial or financial information regarding their claims handling or the effect of their claims handling on company financial results” and (2) “all claims analysts are physically segregated from the Premium, Sales, Underwriting, and Actuary Departments, as well as quality Auditors.” Additionally, “claims personnel are paid a salary or hourly wage and are not paid any incentive compensation payment or denial of claims” and “any bonus pay is based on company-wide performance.” Thus the record shows United of Omaha has taken active steps to reduce potential bias and to promote accuracy. Cardoza has provided no contrary evidence to the Court.
Obviously, time-consuming and costly discovery attempts by ERISA claimants will continue. Claim administrators would do well, therefore, to heed the steps taken by the insurer and approved by the Tenth Circuit in Cardoza. Insurers should have on hand relevant materials describing claims handling procedures and specific steps they have taken to protect against bias in the decision-making process. This could include information on issues such as how claim handlers are compensated through wages, bonuses or incentives, evaluations of claim handling accuracy, any limits placed on claim handlers’ access to information on claim reserves or how their decisions affect company finances, and even the physical layout and interaction of company employees in different relevant departments. Information can be made available as appropriate and necessary, by including such facts in adverse determination letters sent to claimants, including them in administrative records, or in affidavits of knowledgeable employees.

Oklahoma Supreme Court Addresses Misrepresentation Statute


On December 18, 2012, the Oklahoma Supreme Court decided Benson v. Leaders Life Insurance Co., 2012 OK 111, ___ P.3d ___.  The Benson case involved the interpretation of section 3609 of Title 36, which deals with when an insurer may rescind a policy due to misrepresentations, omissions, concealment of facts, or incorrect statements made in the application for the insurance policy.  As noted in the opinion, the Oklahoma Supreme Court has held on several occasions that the statute requires a finding of an “intent to deceive” the insurer before a policy may be avoided by reason of the insured’s false statement or omission in the application.  However, in discussing the insurer’s purported failure to use a medical release provided by the insured at the time of application (Id. at ¶ 9), the Benson opinion brings into question other Oklahoma Supreme Court and federal court pronouncements stating that insurers do not have a duty to investigate the statements made in an application to see if they are true.

For example, the Oklahoma Supreme Court has previously stated that the fact that an applicant gave his physician’s name and signed a medical authorization did not provide actual notice to an insurer that it needed to investigate the applicant’s medical history.  See Vaughn v. Amer. Nat’l Ins., 543 P.2d 1404, 1406 (Okla. 1975).  Likewise, the Court of Civil Appeals has held that an insurer is entitled to rely on the assertions of the insured in the application and does not have a duty to verify the information given.  See Hobbs v. Prudential Prop. and Cas. Co., 853 P.2d 252, 255 (Okla. Ct. App. 1993).  And the Tenth Circuit has held that it did not find any requirement in Oklahoma law that insurers conduct investigations prior to issuing policies.  Hays v. Jackson Nat’l Life Ins. Co., 105 F.3d 583, 590-91 (10th Cir. 1997).  The Benson case seems to be a departure from these cases.

So what’s the take-away from Benson?  While the Oklahoma Supreme Court has not stated that an insurer has any duty to investigate before issuing a policy, insurers should be aware that asking for and receiving a medical release in the application process may be used as evidence that the insured did not “intend to deceive” under Oklahoma law, even when the insured concealed or misrepresented significant information.  In the words of the Benson dissenters:  “What is wrong with this picture?”



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Very recently, in Durham v. Prudential Insurance Co. of America, 2012 WL 3893604 (S.D.N.Y. Aug. 28, 2012), the court rejected an argument by the insurer of an ERISA-regulated disability plan that, based upon a provision in the summary plan description (SPD) for the plan, it was entitled to exercise discretionary authority in determining benefits under the plan, and was therefore entitled to deferential review of its claim denial by the court. The court found that the SPD was not part of the plan and could not be the source of the insurer’s claimed discretionary authority, relying upon the Supreme Court’s 2011 decision in CIGNA Corp. v. Amara,131 S. Ct. 1866 (2011) where the Court held that a summary plan description (SPD) for an employee benefit plan is not an official plan document unless it is expressly incorporated or otherwise specifically made a part of a plan.

While the Durham court agreed that the SPD clearly conferred discretion in the consideration of claims, it found that under Amara “statutorily required plan summaries (or summaries of plan modifications)—like the SPD—may not be enforced as if they are the terms of the plan itself.” The court stated that while the SPD was contained in the same bound booklet as the Group Insurance Certificate that governed benefits, “an insurer is not entitled to deferential review merely because it claims the SPD is integrated into the Plan. Rather, the insurer must demonstrate that the SPD is part of the Plan, for example, by the SPD clearly stating on its face that it is part of the Plan.” For this proposition, the court cited a Tenth Circuit case, Eugene S. v. Horizon Blue Cross Blue Shield of N.J., 663 F.3d 1124, 1131 (10th Cir.2011), where the SPD was expressly made part of the plan. The Durham court distinguished Eugene S., noting that the SPD in the case before the court expressly provided that it was not part of the Group Insurance Certificate, and therefore it could not be part of the plan.

Durham highlights the importance of a careful review of all plan-related documents, and for plan sponsors and insurers to make deliberate decisions as to whether to incorporate the terms of SPDs into plans.

Oklahoma’s Wicked Weather Wallops the Insurance Industry


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Hail.  Tornados.  Floods.  Ice.  Snow.  Droughts.  Wildfires.  And now earthquakes?  Is there any natural disaster that Mother Nature won’t throw at Oklahoma?

The fact is that this state’s destructive weather has resulted in devastating property losses in Oklahoma over the past five years.  One insurance industry professional from Oklahoma Farm Bureau Insurance put it this way:

Here’s the stark reality for Oklahoma:  This marketplace over the last five years had the most historic amount of loss in the history of all organizations – not just one individual insurance company…catastrophic…in both numbers of claims and the severity of those claims…

Confirming industry data shows that claimed losses on state homeowners policies more than quintupled from 2005 to 2010, with insurers paying out far more than they took in each of the past three years.  Statistics from the National Association of Insurance Commissioners detail that insurers paid out $319.2 million for Oklahoma homeowners claims while collecting $804.1 million in premiums.  Just three years later, in 2008, claims surpassed $1 billion.  By 2011, claims totaled more than $1.6 billion, and in that year, insurers paid out $622 million more in homeowners claims than they earned in premiums.

What makes these numbers even more compelling is that the extreme weather events of the past few years have occurred in so many different segments, from flooding events to tornados to drought.  Indisputably, however, claims for hail and wind damage, often in connection with tornados, take highest honors in terms of property damage to both homes and autos.  On a nationwide map showing hail activity in the United States, Oklahoma is the bulls-eye, with the second highest hail claim frequency of the fifty states, trailing only South Dakota.  Approximately three fourths of the premium dollars paid by Oklahoma insureds go to hail and wind losses.  Add to this losses resulting from the 2007, 2009 and 2010 ice storms, the 2010 floods, the ongoing tornados and the record breaking droughts of 2011 and 2012, and it is easy to see why Oklahoma weather makes this state a tough insurance market for both insurance providers and customers.

Another stark result of severe weather is the damage caused to Oklahoma’s agricultural crops, such as cotton and wheat.  The 2011 cotton crop, for example, was hard hit by drought, down 79 percent from the 2010 harvest, according to the U.S. Department of Agriculture (“USDA”).  Some Oklahoma farmers believe the state’s 2012 cotton crop will be a “near zero gain, just like last year.”  Any rains that fall now would come too late to save this year’s planting.  Many farmers have already decided to forego harvesting a 2012 crop, which typically begins in late September, and will file claims on federal crop insurance policies.

The impact of this wicked weather trickles down into other areas of Oklahoma’s economy.  Farm operators generally hire a number of seasonal workers to help with cotton harvest, but that is unlikely to happen in large numbers this year, and one Oklahoma co-op has reported permanent employee lay-offs.  It is also felt in the area of new farm equipment sales, which has cost at least one Oklahoma company an estimated loss of $5-6 million in 2011, and in higher prices for food and consumer goods.

Response to Staggering Losses

In addition to rising costs from the number and severity of weather-related claims, harsh weather events mean insurance companies also pay more in premiums to reinsurers on coverage for catastrophic events involving property damage.  Meanwhile, insurers’ returns on their investments – roughly 70% of such assets are in bonds – have been quite low.

The ways companies insuring Oklahoma properties can handle such losses are limited.  The most obvious one is through general or targeted rate increases.  After rising steadily for the past few years, homeowners insurance premiums across the nation were expected to jump another 5% in 2012 to $1,004, according to the Insurance Information Institute.  That’s the biggest annual increase in some time, and would mark the first time the national average premium is above $1,000.

Oklahomans already pay above average premiums, ranking in the top five in the nation for homeowners insurance, which in 2009 was an average of $1,123 for a year’s coverage.  While there is no way to quantify how much property insurance costs will increase in Oklahoma in the future, rates continue to rise due to experienced losses from the recent severe storms, and to the anticipated need to pay future catastrophic claims.  State Farm raised its rates in Oklahoma about 10% last year, and Oklahoma Farm Bureau raised rates from 5% to more than 30% based on different criteria for individual customers.

Some insurance carriers take different steps to cope with staggering losses.  Some have curtailed business in high density areas of the state, including Tulsa and Oklahoma counties.  Others have changed policy terms.  Allstate recently introduced a new homeowners policy in Oklahoma and Kansas that changes the way it pays claims on roofs that incur hail or wind damage.

A more permanent way insurers deal with huge losses is to close down shop entirely.  About 130 companies offer homeowners insurance in Oklahoma, and two of those, State Farm and Farmers, account for more than 40% of the market share.  Last year, State Farm, the largest, paid out $405.5 million in claims in Oklahoma but collected only $275.4 million in premiums.  While there has not been a mass exodus of insurers from the Oklahoma property insurance market, at least one company, GHS Property & Casualty Co., has said it will withdraw from the Oklahoma auto insurance market primarily due to “the staggering effect of multiple natural disasters that have left GHS with irreconcilable underwriting losses.”

Statutory Aid

The Oklahoma Insurance Commissioner cited Oklahoma’s extreme weather events in a recent explanation of amendments to Oklahoma’s fraud statutes, which may provide some small measure of relief to both insurers and insureds.  On July 1, 2012, Senate Bill 1439 and its amendments to various statues including the Fraud on Insurance Companies Act, 21 O.S. § 1662 et seq., became law, strengthening provisions relating to insurance fraud, which is generally defined an act committed with the intent to fraudulently obtain payment from an insurer.  Fraudulent claims costing billions of dollars annually account for a significant portion of all claims received by insurers, including the common occurrence of fraud in connection with severe weather events.  As noted by Commissioner John Doke, “unscrupulous contractors” follow the destructive paths of severe Oklahoma storms, with schemes to take advantage of consumers dealing with property losses, eventually leading to insurance fraud.  The laws contain tougher penalties for such fraud by provisions that, among other things:  (1) classify as a felony the presentation of any false or fraudulent insurance claim, (2) allow prosecutors to group together several smaller violations alleged against the same perpetrators, such as “unscrupulous contractors,” to enable more serious crimes to be charged, (3) increase penalties, and (4) provide civil immunity for insurance fraud whistleblowers.

These laws have been applied in several recent cases.  Charges filed on August 12, 2012, by the Oklahoma Attorney General involved an insured who allegedly filed a false claim for hail damage to her vehicle.  She represented that while she was out of town, her vehicle was parked at a relatives’ residence and was severely damaged during a hail storm.  She further contended that there was no prior damage to the car.  The insurer, however, provided proof that the insured had filed at least 10 previous claims on the same car.  During an investigation by the AG’s Insurance Fraud Unit, the insured admitted that she had lied about the car’s location during the hail storm, that she had already filed multiple claims, and that she had only had the car repaired twice.  http://www.oag.ok.gov.

With respect to crop damage caused by severe weather in Oklahoma, federal statutory protection means both insureds and insurers can fare better due to federal government aid.  As explained by Dennis A. Shields, Agriculture Policy Specialist, in a December 2010 report on the program, although farming is generally regarded as a financially risky business, and most agricultural production is subject to factors including the vagaries of weather, Congress put in place a limited federal crop insurance program in 1938 to address the effects of the Great Depression and crop losses from the Dust Bowl.  The Federal Crop Insurance Corporation was created to carry out the program, which focused on major crops in major producing regions.  The program remained limited until passage of the Federal Crop Insurance Act of 1980, as amended, 7 U.S.C. § 1501 et seq., which expanded the program to include many more crops and regions of the country.  Congress enhanced the program in 1994 and again in 2000, in part to encourage greater participation.  Today, many banks require that farmers purchase crop insurance as a condition to obtaining operating loans.

The program is overseen and regulated by the USDA’s Risk Management Agency (“RMA”).  It essentially protects farmers from declines in yields and crop prices by the federal government subsidizing the premium amounts farmers pay, and reimbursing private insurers to offset their operating and administrative costs that would normally be paid by the farmers.  Crop insurance policies are sold and completely serviced through 16 approved private insurance companies.  The RMA sets the rates that can be charged for the policies.  Independent insurance agents sell the policies and are paid sales commissions by the insurance companies, whose losses are reimbursed by the USDA, along with their administrative and operating costs.  In actuality, the USDA pays an average of 60 cents of each dollar of premiums for such policies, and can currently subsidize up to a limit of $13 billion a year on insurance company overhead costs.  It also shares the financial burden in catastrophic loss cases.

This federal program was most recently modified in the 2008 Farm Bill, when Congress revised it to achieve budget savings and to supplement crop insurance with a permanent disaster payment program.  The 2008 Farm Bill is set to expire this year, including its disaster relief provisions.  The outlook for the Bill is cloudy.  Chairman of the House Agriculture Committee Frank Lucas, who represents districts with many Southwest Oklahoma cotton farmers as constituents, explained in a recent interview that other issues are overshadowing the Farm Bill, including a resolution to fund government activities for the next six months and the paring down of the defense budget.  He reports that some members of Congress are calling for the passage of a stripped down, short-term extension of the 2008 Farm Bill even if is only for a few months.  This would allow for some disaster relief and would push consideration of a comprehensive farm bill into the next Congressional session.  Others want reforms now.  Even so, Lucas says that obtaining support from legislators in some farm states is difficult because even with the drought, the individual producers in those states have not yet been sufficiently impacted to raise concern about the 2012 Farm Bill:

Right now, the circumstances may be such that producers can survive.  And maybe their bankers can stay with them.  And maybe their suppliers can stay with them.  But a farm bill is not about the next six months.  A farm bill is about year three and four and five years from now.  That’s why I’m so frantic about passing a new farm bill establishing for five more years the safety net so that when the bottom falls out of demand, or supply goes berserk, or Mother Nature goes on a multi-year tear as we’ve seen in Oklahoma, that we have some way to keep rural America from collapsing.

While it is not known whether Mother Nature’s recent severe storm tear through Oklahoma is the result of permanently changing weather patterns or just a short-term phenomenon, Oklahoma’s wicked weather will almost certainly continue to have a significant impact on the insurance industry.