Oklahoma Federal Judge Rejects Insurance Bad Faith Expert Evidence


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In insurance “bad faith” cases, the main issue is typically whether the insurer, in addressing the claim of its insured, acted reasonably and in good faith, or whether its conduct was unreasonable and in “bad faith.”  In order to address these issues, courts sometimes allow testimony from so-called “bad faith” experts to address insurer practices and industry standards.  The Tenth Circuit, and Oklahoma federal courts, have been reluctant to allow such expert evidence, as was recently found in Higgins v. State Farm Property & Casualty Insurance Co., 2012 WL 2369007 (N.D. Okla. June 21, 2012).  In Higgins, the court rejected testimony from experts by both parties as to claims handling standards and bad faith.  Higgins involved an insurer’s denial of uninsured motorist benefits relating to a motor vehicle accident of its insured.  The plaintiff in Higgins sponsored a practicing attorney who had many years of experience litigating insurance claims as a “bad faith” expert on proper claims practices.  The insurer sponsored a long-time claims adjuster who had worked for another property-casualty insurer.  Both parties moved to exclude the other’s expert.

The court first addressed the plaintiff’s expert, noting that portions of the expert’s proffered testimony consisted of his “intricate, comprehensive, and opinionated view of Oklahoma insurance law.”  The court further noted that the expert’s report included “extensive, and often argumentative, citations to Oklahoma law that support [his] opinions. . .”  The court found that while the report might assist the court in its “legal analysis,” allowing this evidence to be heard by the jury “would be both unhelpful and inappropriate, as any such presentation would likely lead to confusion and would ultimately subvert the role of the Court as the sole judge of the law applicable to a given case.”  The court in Higgins also found, “similarly unhelpful are [the expert’s proffered] opinions as to industry standards and his detailing the multiple ways in which the Defendant allegedly breached the duty of good faith and fair dealing in relation to those standards. . . [The expert’s] opinion on whether or not Defendant breached its duty is at best superfluous, and at worst, would serve to confuse the issues of this already complicated case.  In addition to being unhelpful, [the expert’s] opinion purports to answer the ultimate issue of fact in this case, impermissibly invading the fact-finding provinces of the jury.”

Thus, the court found, “the whole of [the expert’s] testimony is not relevant because it fails to assist the trier of fact in understanding any fact in issue and it further impermissibly invades the Court’s role in instructing the jury as to the applicable law and the jury’s role in applying that law to the facts at hand.”  After rejecting the plaintiff’s proposed expert, the court similarly found that the insurer’s rebuttal expert, who opined that the conduct of the insurer was “reasonable,” suffered from the same deficiencies, and was likewise inadmissible.

The court’s bottom line was that a properly instructed jury would be fully capable of assessing issues as to whether the insurer acted reasonably and in good faith, or unreasonably and in bad faith, without the assistance an expert.  This is not to say that there are no circumstances where it could be helpful to identify an expert to testify in an insurance matter.  There may be circumstances that would necessitate an expert’s opinion about specific insurance-related issues.

Court Supports Insurers Right to Deny Claim Based on Operating Vehicle While Intoxicated.



“Operate” Means “Operate”

In a recent opinion from the Western District of Oklahoma, Goeringer v. Sun Life Assur. Co. of Canada, 2012 WL 393618 (W.D. Okla. 2012), the court reviewed an accidental death and dismemberment claim determination.  The insured died from acute carbon monoxide intoxication.  He was found in the driver’s seat of his truck in his closed garage.  His key was in the ignition in the “on” position and the battery was dead.  On autopsy, his blood alcohol level was determined to be above the legal limit.  The insurer denied the claim because the policy excluded any loss resulting from the insured’s operation of a motorized vehicle while intoxicated.

The plaintiffs argued that the exclusion should not apply because the vehicle in question was not being used for transportation, but was parked in the insured’s garage at the time of his death.  However, the court found that the term “operate” should be given its plain and ordinary meaning, which is quite broad.  The court thus held that the insurer’s determination that the death resulted from the operation of a motorized vehicle while intoxicated was reasonable and supported by substantial evidence and should be upheld.

This case is interesting because many people normally associate an intoxication exclusion with “drunk driving.”  However, as this case demonstrates, the wording of an intoxication exclusion is significant because it can also reach other situations with which we would not typically associate its application.  In this instance, the insurer did not need to invoke the suicide exclusion, which can be difficult to support, because the intoxication exclusion’s use of “operate” was broad enough to apply.




In February 2009, as part of the economic stimulus legislation known as the American Recovery and Reinvestment Act, Congress enacted the Health Information Technology for Economic and Clinical Health Act (HITECH).  HITECH not only provided federal incentives for medical care providers to accelerate implementation of electronic health records systems, but also broadened the categories of those responsible for protecting the patient health information contained in those records and significantly increased the penalties for HIPAA violations.

The original HIPAA Privacy Rule finalized in 2002 applied only to “covered entities” such as health care providers, health plans, health care clearinghouses and later, sponsors of drug discount cards under Medicare. The Department of Health and Human Services Office for Civil Rights (OCR) is responsible for civil enforcement of HIPAA privacy regulations.  Under the original Privacy Rule, OCR lacked direct enforcement authority against the  “business associates” of covered entities such as billing agencies, law firms and accountants. HITECH expanded the reach of HIPAA’s criminal and civil penalties to business associates, and increased those penalties.

Under the original HIPAA enforcement scheme, the maximum civil penalty was $25,000. A violator could avoid penalties altogether if the violator did not know of the violation, was not willfully negligent and corrected the issue within 30 days of discovery.

Under HITECH, civil penalties for HIPAA violations are subject to a four-tier system that increases penalties based upon level of culpability. The lowest tier imposes a minimum fine of $100 upon a violator, even if the violator did not know of the violation. The highest tier targets willful neglect and includes a maximum fine of $1.5 million per year. In addition to increasing the civil penalties, HITECH also clarifies that HIPAA’s criminal penalties apply to both covered entities and their employees.

The OCR has stepped up its efforts to uncover alleged violations and impose penalties upon violators under HITECH.  OCR is also using its Privacy & Security Audit Program, under which it awarded a $9 million contract to one of the nation’s largest accounting firms to conduct random HIPAA privacy and security audits. While its current audit program is limited to health care providers, insurers and clearinghouses, OCR has indicated that future programs will include business partners.

OCR’s aggressive enforcement efforts should be noted.  For example, OCR entered into a settlement with a small surgical center in Phoenix in April 2012 called Phoenix Cardiac Surgery, P.C. (PCS). In that settlement, PCS agreed to pay $100,000 and to take corrective action to implement policies and procedures to safeguard the protected health information of its patients.

The incident giving rise to OCR’s investigation was a report that PCS was posting clinical and surgical appointments for its patients on an Internet-based calendar that was publicly accessible. During its investigation, OCR also found that PCS had been lax in implementing policies and procedures to comply with the HIPAA Privacy and Security Rules.

Specifically, OCR’s investigation revealed the PCS failed to implement adequate policies and procedures to appropriately safeguard patient information, failed to document that it trained any employees on its policies and procedures on the Privacy and Security Rules, failed to identify a security official and conduct a risk analysis, and failed to obtain business associate agreements with Internet-based email and calendar services where the provision of the service included storage of and access to its electronic Protected Health Information.

In March 2012, OCR announced a settlement with Blue Cross and Blue Shield of Tennessee (BCBST), under which BCBST agreed to pay $1.5 million and enter into a corrective action plan to address its HIPAA compliance issues. The BCBST settlement resulted from an investigation triggered after a report was received indicating that a number of unencrypted BCBST hard drives that included patient records for over a million individuals were stolen from a leased facility in Tennessee.

The stolen hard drives contained recordings of customer service calls between BCBST representatives and over one million individuals. The hard drives were located in a network data closet on a leased facility BCBST had recently vacated. The drives contained unencrypted protected health information such as member names, social security numbers, diagnosis codes, dates of birth and health plan identification numbers. BCBST reported the breach to OCR as required, and OCR initiated an investigation that concluded the theft may have occurred as a result of BCBST’s failure to appropriately implement required Security Rule procedures.

After investigating, OCR concluded that BCBST had “failed to implement appropriate administrative safeguards to adequately protect information remaining at [its] leased facility by not performing the required security evaluation in response to operational changes” and failed “to implement appropriate physical safeguards by not having adequate facility access controls.”

In 2011, OCR undertook similar enforcement efforts that included, among other things, imposing a $4.3 million fine against Cignet Health for refusing to provide access to the medical records of patients and ignoring multiple letters and phone calls from OCR investigators.  OCR also entered into a $1 million settlement against Massachusetts General Hospital, after an employee left records of over sixty patients on a subway. OCR also imposed a fine totaling $865,000 against the UCLA Health System after several employees viewed celebrity patients’ medical records without permission.

These and other enforcement proceedings by OCR make clear that covered entities and business partners should take HIPAA privacy and security regulations seriously and should ready themselves for potential audit before OCR and its auditors arrive at their doorsteps.  Appropriate measures would include ensuring that HIPAA privacy and security protocols exist and are current with HITECH’s heightened privacy and security requirements, and that these security protocols are actually being followed by employees. Entities should also ensure that HIPAA policies, procedures and compliance efforts are documented, organized and easily accessible. The audit procedures released by the OCR suggest that auditors will be give little advanced warning and may require entities to produce documents for review within 10 days.


In addition to OCR’s civil enforcement of the HIPAA regulations, a recent decision may make it easier for the government to bring proceedings for criminal violations.

On May 10, 2012, in United States v. Zhou, the Ninth Circuit Court of Appeals held that an individual will not be protected from criminal liability for a violation of HIPAA’s prohibition against obtaining protected health information without authorization even if the individual does not know it is illegal to do so under HIPAA.

Zhou was a former research assistant at the UCLA Health System, who, after his employment terminated, accessed patient records without authorization on at least four occasions.  The government charged Zhou with four criminal counts for knowingly obtaining and causing to be obtained individually identifiable health information under 42 U.S.C. §1320d-6(a)(2), which provides in part that a “person who knowingly and in violation of this part . . . obtains individually identifiable health information related to an individual” without authorization is guilty of a misdemeanor.  The statute provides for a fine of not more than $50,000, imprisonment of not more than one year, or both for violations.

At the district court, Zhou moved to dismiss the proceeding contending that the information filed by the government did not allege that he knew that the statute prohibited him from obtaining the health information. When the district court denied Zhou’s motion to dismiss, he entered a conditional guilty plea, preserving the right to appeal the denial of his motion to dismiss.

On appeal, Zhou contended that the government’s allegations failed because the government did not explicitly allege that Zhou knew that obtaining the protected information was illegal. Thus, under Zhou’s interpretation, a defendant would be guilty of a violation only if he knew that obtaining the personal health information was illegal. The court rejected this argument, finding that it contradicted the plain language of HIPAA. According to the court, the word “and” in the phrase “a person who knowingly and in violation of this part….” unambiguously provides for two elements to a §1320d-6(a)(2) violation: (1) knowingly obtaining individually identifiable health information related to an individual, and (2) obtaining that information in violation of HIPAA.  The court found that “knowingly” applies only to the act of obtaining the health information, so that the individual must know that he or she actually obtained the information.

The Zhou case should be a wake up call to entities and individuals who come in contact with personal health information under HIPAA, and should lead entities to undertake heightened efforts to review whether policies and protocols are HIPAA-compliant and to educate and train personnel on compliance.

GableGotwals Obtains Victory for Life Insurance Company before Tenth Circuit Court of Appeals.



Timothy Carney and Erin Dailey recently obtained a victory for the Life Insurance Company of North America (“LINA”) before the Tenth Circuit Court of Appeals.  The issue in Brimer v. Life Insurance Company of North America, No. 11-5032 (10th Cir. Feb. 10. 2012), was whether the wife and children of James Brimer were entitled to accidental death benefits after Mr. Brimer died of an overdose of prescription drugs.  Read the full decision.

Mr. Brimer was insured under the group accidental death and dismemberment policy issued by LINA to his former employer.  Following his death, his wife and children (“Plaintiffs”) made a claim for accidental death benefits.  LINA investigated and initially denied the claim on the basis of the policy’s Exclusion 7, which excluded benefits for loss “resulting from … [v]oluntary self-administration of any drug or chemical substance not prescribed by, and taken according to the directions of, a licensed physician.”  Plaintiffs appealed the denial, arguing that Exclusion 7 was ambiguous.  In response, LINA requested that Plaintiffs submit evidence to show that Mr. Brimer’s death was not foreseeable, or that “Mr. Brimer’s death was not the result of medical or surgical treatment or the result of a sickness, disease, or bodily infirmity,” language taken from the policy’s “medical treatment exclusion,” Exclusion 6.

Plaintiffs declined to submit additional information, and LINA affirmed its denial of the claim on the bases that: (1) Mr. Brimer’s death was not accidental, as it was the foreseeable result of his own voluntary actions; (2) the loss was excluded under the plan’s medical treatment exclusion [Exclusion 6]; and (3) the loss was excluded by Exclusion 7.

Plaintiffs then filed suit.  Because the terms of the plan did not give LINA discretion to determine whether benefits were payable, the de novo standard of review applied.  Plaintiffs argued that Exclusion 7 was ambiguous and should be construed against LINA, and that LINA could not rely upon Exclusion 6 because it was not raised in the initial denial letter. 

The district court initially upheld LINA’s decision on the basis that the death was foreseeable and therefore not an accident, and, in the alternative, that the medical treatment exclusion [Exclusion 6] excluded coverage for the loss.  Plaintiffs filed a “Motion for New Trial.”  In their Reply in Support of their Motion for New Trial, Plaintiffs argued for the first time that Exclusion 6 conflicted with Exclusion 7, creating an ambiguity such that Exclusion 6 should also be construed against LINA.  The district court entered an amended order, this time finding that the death was not foreseeable and was thus an accident, but upholding LINA’s denial of accidental death benefits on the basis of Exclusion 6.  In the amended order, the district court also found that Exclusion 7 was ambiguous and should be construed against LINA.  The district court did not address Plaintiffs’ argument regarding an alleged ambiguity between Exclusions 6 and 7 because the argument was not timely raised.

Plaintiffs appealed.  The Tenth Circuit held that LINA committed a procedural error when it did not rely upon Exclusion 6 until the decision on Plaintiffs’ administrative appeal.  However, the Court determined that the district court properly applied Exclusion 6, because Plaintiffs were not prejudiced by the procedural error.  Specifically, the Court observed that it was undisputed that Mr. Brimer died of an overdose of prescribed drugs and Plaintiffs conceded that the policy itself was the only evidence relevant to determining whether Exclusion 6 barred their claim.  The Tenth Circuit also declined to address Plaintiff’s argument regarding an alleged ambiguity between Exclusions 6 and 7, agreeing with the district court that this argument was waived.

The take-away lessons from this decision include:

  1. If a claim is going to be denied, an ERISA claims administrator should identify and include in the initial denial letter all reasonable grounds for denying benefits that may apply, even if it may seem duplicative or unnecessary;
  2. If an ERISA claims administrator wishes to add a new basis for a claim denial during the administrative process, it should explicitly inform the claimant of the new basis that is being considered and allow the claimant to submit information relevant to the new basis or risk a court finding that a procedural error was committed;
  3. Even if a procedural error occurs in the claim decision process, a court may require the claimant to show prejudice in order to obtain a remedy for the error.

Experts Are Allowed “Reasonable Elaboration”



In a recent appeal of an accidental death policy coverage action, the First Circuit rejected the argument that the district court erred in allowing an expert to testify that an injury was not “a major cause” of the insured’s death.  Gay v. Stonebridge Life Ins. Co., — F.3d —, 2011 WL 5083220, C.A.1 (Mass.), October 26, 2011 (NO. 10-1559).  Plaintiff argued that because the  opinion exceeded the bounds of the expert’s report, the district court erred in allowing the testimony.  The court of appeals found no error, noting that although the expert’s testimony used different words than his report, “it was a reasonable elaboration of the opinion disclosed in the report.”  The court of appeals found that the district court was correct in concluding that, based on the expert report, the plaintiff reasonably could have anticipated and could not have been unfairly surprised by the expert’s testimony.  Additionally, the court of appeals further pointed out, albeit in a footnote, that to the extent plaintiff did not fully apprehend the expert’s opinion, he could have deposed the expert prior to trial, but did not.

Exhaustion of Administrative Remedies–the Effect on Claims Alleging Statutory Violations of ERISA


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In Pikas v. Williams Companies, Inc., 2011 WL 4606705 (N.D. Okla. Sept. 30, 2011), Judge Frizzell of the United States District Court for the Northern District of Oklahoma ruled that although statutory claims are not subject to the exhaustion of administrative remedies requirement, exhaustion of remedies may affect when a claim is clearly repudiated and therefore when the statute of limitations is triggered. Plaintiff Pikas filed a class action on behalf of himself and all others who took lump sum pension payments under the Williams Pension Plan, alleging the plan illegally denied lump sum pension recipients the actuarial equivalent of a cost of living adjustment in violation of anti-cutback and nonforfeitability provisions of ERISA. Williams moved to dismiss Pikas’ individual claims as time barred, arguing that although claims for benefits due under the terms of a plan are subject to administrative exhaustion, statutory claims are not, and Pikas filed his lawsuit more than three years after he received the lump sum payment about which he complains. Judge Frizzell agreed with Williams that administrative exhaustion was not required for statutory violation claims, stating “[i]nterests of judicial economy would not be served by requiring administrative exhaustion because the dispute is one of law, not fact.” Id. at *3. Judge Frizzell turned to the issue of what facts and circumstances lead to a clear repudiation of the plaintiffs’ claims, concluding that “class plaintiffs’ claims accrued when they received their lump sum payments.” Id. at *5. However, because Pikas questioned whether he received a COLA and pursued his administrative remedies, his claims did not accrue until the administrative remedies were exhausted because “Pikas did not have clear knowledge he would be denied a COLA until after he exhausted his administrative remedies.” Id. Among other things, Judge Frizzell noted language in the relevant plan that stated beneficiaries must file a claim and “request a review of any complete or partial denial prior to seeking a review of your claim for benefits in a court of law” and noted that Williams had sent a letter to Pikas at the conclusion of the administrative process stating that Pikas “has now” exhausted his remedies and has a right to bring a civil action. Pikas, 2011 WL 4606705 at *5. Judge Frizell held that “[b]ecause Pikas relied on the Plan and pursued his administrative remedies, and because Williams then communicated that he had a right to bring a civil action, Williams is now estopped from claiming otherwise….Pikas timely pursued his administrative remedies as directed by the Plan, and should not now be penalized for doing so.” Id. Judge Frizzell declined Pikas’ invitation to extend the holding to require exhaustion of administrative remedies for clear repudiation to occur. Id. Thus, the class was left with one rule for Pikas (trigger upon exhaustion of administrative remedies) and another for the rest of the class (trigger upon receipt of the lump sum payment). Judge Frizzell noted that Williams had advised the result could make class treatment inappropriate but did not seek to decertify the class or withdraw its stipulation that the case qualified for class treatment. Id. at *1.

Flood, hail, locusts — What happens when your damage is caused by all the Biblical plagues but some of the plagues are excluded in your policy?


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A typical policy of insurance contains a general description of the coverage provided by the policy followed by a list of “exclusions” specifically reducing the scope of coverage.  The Oklahoma Supreme Court has defined the role of an exclusion as a contract term that eliminates coverage where, were it not for the exclusion, coverage would have existed.  Often, an insured will suffer a loss that is attributable to multiple causes, some of which are covered and some of which are excluded.  In this scenario, the question arises whether the insurer has an obligation to pay for the loss.

To deal with this situation, the Oklahoma Supreme Court recognized in 1954 what is known as the “efficient proximate cause doctrine.”  This doctrine allows an insured to recover if the loss can be attributed to a cause, which is covered and not excluded, even if the loss may have been incidentally and indirectly contributed to by other causes that are excluded.  However, in recognition that an insurance policy is a contract between the insured and the insurer, Oklahoma courts have held that the parties to that contract may agree to negate the application of the efficient proximate cause doctrine.

Recently, in National American Ins. Co. v. Gerlicher Co., LLC, et al., 2011 OK CIV APP 94, the Oklahoma Court of Civil Appeals addressed the efficient proximate cause doctrine in a modern context.  The National American Court was presented with a case in which it was asked to decide whether damage from water intrusion and mold could be recovered by an insured despite an apparently applicable policy exclusion.  

The case involved water intrusion, high humidity and mold in a building.  The owner retained an environmental testing company to evaluate the problem and it determined the problems were caused by three different issues working in tandem:  (1) the use of a vinyl wall covering on the interior side of the exterior wall, (2) the sloping of the brick row ledges toward the building instead of away from it and (3) the presence of holes and cracks in the EIFS (Exterior Insulation and Finish System), which allowed water into the building.  The owner of the building sued the general contractor, which then asked its insurer to indemnify the general contractor against any loss and to provide a defense.  The insurer brought a separate suit asking the Tulsa County District Court to declare that the EIFS exclusion in the applicable insurance policy precluded coverage for the claimed loss.  The general contractor resisted that declaration arguing that the efficient proximate cause doctrine should allow coverage because EIFS was only one of the three causes identified in the testing company’s report.

The trial court agreed with the insurer and granted the declaration.  On appeal, the Court of Civil Appeals (“CCA”) first briefly discussed whether the efficient proximate cause doctrine was still viable in Oklahoma and concluded it is.  The CCA then reviewed the language of the policy to determine (a) whether damage caused by faulty EIFS was excluded and (b) whether the language of the insurance policy negated application of the efficient proximate cause doctrine.  The CCA determined that EIFS damage was clearly and unambiguously excluded in the applicable policy:

            The EIFS Exclusion begins with a provision that clearly states the policy ‘does not apply to ‘property damage’…that arises out of, is caused by, or is attributable to [EIFS] whether in whole or in part.’  The EIFS exclusion is neither masked by technical or obscure language nor hidden in the policy.  Indeed it is prominently displayed by a separate ‘Policyholder Notice’ regarding the EIFS exclusion….

National American Ins. Co., at ¶20.  The CCA addressed the second question and concluded the parties had also agreed to negate the efficient proximate cause doctrine:

            The only reasonable construction of the exclusion is that when more than one cause is involved in a loss that includes EIFS, whether directly or indirectly, there is no coverage regardless of whether the causes acted concurrently or in any combination with EIFS.  When loss is caused by both covered perils and EIFS, the NAICO policy contains language that expressly precludes coverage and avoids application of the efficient proximate cause doctrine.

Id.  The CCA did not specify which words in the policy negated the efficient proximate cause doctrine.  However, the presence of common policy phrases like “in whole or in part” and “directly or indirectly” was apparently sufficient evidence of the parties’ agreement to negate the doctrine.  Consequently, although the efficient proximate cause doctrine lives on in Oklahoma, it is likely that typical policy exclusion language will sufficiently evidence agreement to negate its application.

Attorney Fee Awards Under ERISA: How Much Success is Enough?


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Last year in Hardt v. Reliance Standard Life Ins. Co., 130 S. Ct. 2149 (2010), the U.S. Supreme Court addressed a split between the federal courts of appeal on whether an ERISA litigant must be a prevailing party in order to obtain fees under 29 U.S.C. §1132(g)(1), which provides “the court in its discretion may allow a reasonable attorney’s fee and costs of action to either party.”  The Court held that prevailing party status is not required, and set a new standard that broadened the class of litigants who can qualify for fees under the statute.  An ERISA litigant now must only achieve “some degree of success on the merits of a case” to be eligible for fees.  The Court did not, however, elaborate on the scope of the new standard, and left open questions regarding just how much success in an ERISA matter is enough to sustain a fee claim:  (1) Is a court order remanding a case to a plan administrator for further review enough success? (2) How does the standard apply if the claimant loses on remand? (3) What if a case settles prior to a decision?  

The Hardt case arose from these facts.  Hardt stopped working due to carpal tunnel syndrome, and applied for long-term disability benefits under her employer’s ERISA plan.  The plan administrator, Reliance Standard Life Insurance Company, approved Hardt’s claim temporarily while she underwent a functional capacities evaluation at its request.  Reliance asserted that even though the test confirmed her neck and hand limitations, it showed she could perform sedentary work.  Hardt appealed and the administrator partially reversed, finding she was totally disabled from her regular occupation and was entitled to 24 months of benefits.  Id. at 2152.

While her appeal was pending, Hardt was diagnosed with neuropathy.  She applied for and was awarded Social Security disability benefits based on her treating physicians’ reports that she could not perform even sedentary work. Shortly thereafter, her 24 months expired, and Reliance declined to continue benefits on the grounds that the medical records did not show she was totally disabled from working at any occupation.  Hardt appealed again and submitted her neuropathy records.  Reliance had her undergo another FCE, but did not ask the evaluator to review her for neuropathic pain, even though it knew of her diagnosis.  The exam results were invalid, so Reliance obtained additional reviews.  Again, it did not require a physical exam of Hardt or a review of all her records.  Based on the reports it received, Reliance denied Hardt’s second appeal.  Id. at 2153.

Hardt brought suit, alleging Reliance wrongfully denied her benefits claim.  The district court did not grant Hardt’s summary judgment motion, but found Reliance did not give her the kind of review she was entitled to under ERISA.  It did not adequately consider Hardt’s treating physicians’ findings and its physician’s report was vague and conclusionary.  The record in fact demonstrated compelling evidence of total disability due to neuropathy.  Although inclined to rule for Hardt, the court instead ordered Reliance to address the deficiencies on remand, instructing it to “adequately consider” all of the evidence, and warning that judgment would be entered for Hardt if it did not do so within 30 days.  Id. at 2154.

After another review, Reliance awarded long term benefits, and Hardt moved for attorney’s fees under §1132 (g)(1).  The district court concluded she was a prevailing party, and, applying the “five-factor” test requiring evaluation of factors such as the relative merits of the parties’ positions, granted fees to Hardt.  See, e.g., Gordon v. United States Steel Corp., 1724 F. 2d 106, 108 (10th Cir. 1983).  On appeal, the Fourth Circuit Court of Appeals reversed the fee award.  It found Hardt was not a prevailing party because the remand order did not require Reliance to award benefits to her, so there was no enforceable judgment on the merits or court ordered consent decree, which was required for “prevailing party” status.  Id. at 2155.

 Hardt asked the U.S. Supreme Court on writ of certiorari to consider two questions:  (1) whether the Fourth Circuit correctly held that fee recovery under §1132 (g)(1) was limited to a prevailing party, and (2) whether an order remanding a benefits claim was, without more, sufficient to support a fee award under the statute.  Id. at 2155-56. 

The Supreme Court reversed on the first question.  Congress had not included in the plain text of §1132(g)(1) an express “prevailing party” limitation on attorney fee awards, nor did anything in the statute suggest such a limitation.  Instead, the statute by its terms gave courts discretion to award fees to either party.  Id. at 2156.

The Court then addressed other statutes that, like prevailing party statutes, deviate from the “American Rule,” which requires each litigant in a lawsuit to pay its own fees, unless a statute or contract provides otherwise.  The Court cited to its interpretation of the Clean Air Act fee provision, under which fees are recoverable “whenever appropriate” as long as a party “achiev[ed] some success” on the merits, even if not a “major success.”  Id. at 2157.  The Court applied a similar standard, holding an ERISA fee claimant must show “some degree of success on the merits” before discretionary fees can be awarded.  The Court further found the five-factor test had no role in the success on the merits analysis, although it observed in a footnote that the factors could possibly play some role once success was shown.  The Court did not, unfortunately, go on to clearly explain what an ERISA litigant must show to prove it had achieved some degree of success.  Instead, it simply observed that a claimant does not satisfy the requirement by achieving “trivial success” or a “purely procedural victory,” but does satisfy it if one can “fairly call the outcome of the litigation some success on the merits without concluding a lengthy inquiry into the question whether a particular success was substantial or occurred on a central issue.”  Id. at 2158.

In the Court’s view, the facts of Hardt’s particular case showed she had achieved far more than trivial success or a procedural victory.  She had not prevailed on summary judgment, but had:  (1) produced compelling evidence that she was totally disabled, (2) persuaded the district court that Reliance inadequately reviewed her claim and failed to follow ERISA guidelines, and (3) obtained an order that led Reliance to reverse its decision and award her benefits.  Id. at 2159.

The Court explicitly declined to decide the second question raised on certiorari – whether an order remanding a benefits denial for further review, without more, is sufficient “success on the merits” to support a fee award under §1132 (g)(1).  Id.

The Hardt decision thus left in its wake several open issues.  First, because a clear order on the merits is no longer required to qualify an ERISA claimant for statutory fees, courts differ on what exactly is required.  Some have found that the remand of an ERISA benefits decision to a plan administrator without “something more,” such as an explicit court finding of an ERISA violation or total disability as expressed in Hardt is not enough success on which to base a fee award.  See, Dickens v. Aetna Life Ins. Co., 2011 WL 1258854 (S.D. W. Va.); Christoff v. Ohio Northern Univ. Emp. Benefit Plan, 2010 WL 3958735 (N.D. Ohio).  

Others, however, have held that the fact a court has remanded an ERISA case to a plan administrator for further consideration is enough success to entitle an ERISA plaintiff to fees.  Although remand does not guarantee that the plaintiff will obtain the exact relief it seeks, such as a full award of benefits, it at least sends the case back for a second administrative review of the evidence, providing another shot at benefits.  See, e.g., Richards v. Johnson & Johnson, 2010 WL 3219133 (E.D. Tenn.); Blajei v. Sedgwick Claims Management Services, Inc., 2010 WL 3855239 (E.D. Mich.); Olds v. Retirement Plan of International Paper Co., 2011 WL 2160264 (S.D. Ala.).  Indeed, it has been held that even if an ERISA claimant completely loses a case on remand, she can still be entitled to fees by virtue of achieving the remand order.  See,  Scott v. PNC Bank Corp. & Affiliates Long Term Disability Plan, 2011 WL 2601569 (D. Md.).

Second, the point at which a request for fees is appropriate remains a question.  Citing Hardt, at least one court has determined that fees can be awarded to an ERISA claimant even before a plan administrator has reviewed and decided a case remanded to it, because the litigant achieved sufficient success on the merits by the remand alone.  Blajei, supra.  Others have refused to consider fee requests until the plan administrator makes a final benefits determination after remand, or until the appellate process on a benefits determination made after remand is completed.  Mohamed v. Sanofi-Aventis Pharmaceuticals, 2010 WL 2836617 (S.D.N.Y.); Spradley v. Ownes-Illinois Hourly Employees Welfare Benefit Plan, 2011 WL 209164 (E.D. Okla.).

Third, how “success on the merits” is achieved remains an open question after Hardt.  Courts have indicated that the voluntary settlement of a claim by an administrator after an ERISA suit is filed perhaps can meet the new standard, as well as an administrator’s voluntary dismissal of a counterclaim for reimbursement of benefits.  See, Taaffe v. Life Ins. Co. of N. Am., 769 F. Supp. 2d 530 (S.D. N.Y. 2011); Simonia v. Glendale Nissan/Infiniti Disability Plan, 608 F. 3d 1118 (9th Cir. 2010).

Finally, the Hardt Court’s treatment of the five-factor test has elicited different results among courts.  The Hardt Court believed the test was unnecessary to the analysis of ERISA fee entitlement.  One court has interpreted the Court’s consideration of this issue as entirely prohibiting application of the test.  Taaffe, supra.  Others continue to apply the test.  Some say it is required in the analysis, Simonia, infra, while others say the five factors “may” be considered as guidelines in exercising fee entitlement discretion, once success on the merits is established.  See, e.g., Williams v. Metropolitan Life Ins. Co., 609 F.3d 622 (4th Cir. 2010); Thompson v. Union Security Insurance Co., 2011 WL 346467 (D. Kan); Bowers v. Hartford Life and Accident Insurance Co., 2010 WL 4117515 (S.D. Ohio).

The cases interpreting Hardt illustrate that the new standard established by the Supreme Court has not simplified the ERISA fee process.  The decision merely replaced the determination of whether an ERISA claimant is the “prevailing party” with a more fact-intensive determination of whether the claimant has achieved “some degree of success on the merits” through remand, settlement, or other action.  Therefore, in the assessment of ERISA cases with respect to fees after Hardt, factors such as the particular language or facts surrounding a remand order, the timing of a fee application, and the possibility that fees may be awarded to an ERISA claimant even when a case is resolved through settlement or voluntary dismissal are significant.  Notwithstanding the disparate court views on these factors, one issue is clear after Hardt.  Even with the Hardt Court’s express recognition that §1132(g)(1) authorizes discretionary fees to either party when some success on the merits is achieved, ERISA plan administrator defendants – even when completely successful in a case – remain unlikely to obtain fee awards under the statute.  See, Toussaint v. J.J. Weser, Inc., 2011 WL 2175987 (2nd Cir.); Tomlinson v. El Paso Corp., 2011 WL 1158637 (D. Co.).

Patient Protection and Affordable Care Act Individual Health Insurance Mandate Struck Down by 11th Circuit, Setting Up Supreme Court Showdown


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On August 12, 2011, the Eleventh Circuit Court of Appeals held that the individual mandate provision of the Patient Protection and Affordable Care Act, passed in 2010, is unconstitutional. The divided three-judge panel struck down the requirement that Americans must carry health insurance or face penalties.  The Eleventh Circuit ruling conflicts with the June 29, 2011 Sixth Circuit ruling upholding the constitutionality of the statute’s individual mandate, which was the first appeals court decision to rule on a challenge to the law. Other appeals are presently pending in the 4th Circuit and D.C. Circuit.

The Eleventh Circuit ruling makes it more likely that the Supreme Court will soon grant certiorari to resolve the conflicting decisions regarding the constitutionality of the individual mandate provisions of the statute, and possibly others. Challenging the 6th Circuit’s opinion, the Thomas More Law Center filed a petition for certiorari to the Supreme Court on July 26, 2011. The Justice Department will no doubt challenge the 11th Circuit opinion, and so the Supreme Court may take the issue up fairly soon.

The 11th Circuit’s 2-1 ruling by Judge Frank Hull, a Clinton appointee,  was joined by Chief Judge Joel Dubina, appointed by George H.W. Bush.  Judge Stanley Marcus, in a dissenting opinion, said the mandate is constitutional. He was also appointed by Clinton.

The panel found that even though the individual mandate is unconstitutional, the remainder of the law can stand. The panel also said that the law’s expansion of Medicaid is constitutional.  In striking down the individual mandate, the panel noted, among other things, that, “Properly formulated, we perceive the question before us to be whether the federal government can issue a mandate that Americans purchase and maintain health insurance from a private company for the entirety of their lives. These types of purchasing decisions are legion. Every day, Americans decide what products to buy, where to invest or save, and how to pay for future contingencies such as their retirement, their children’s education, and their health care. The government contends that embedded in the Commerce Clause is the power to override these ordinary decisions and redirect those funds to other purposes.” 

The panel rejected such a reading of the Commerce Clause, saying “the Supreme Court has always described the commerce power as operating on already existing or ongoing activity.” All prior cases “involved attempts by Congress to regulate preexisting, freely chosen classes of activities.” Not buying health insurance is not an already existing or ongoing activity, or a preexisting class of activity, the panel found.  The panel concluded, “The government’s position amounts to an argument that the mere fact of an individual’s existence substantially affects interstate commerce, and therefore Congress may regulate them at every point of their life. This theory affords no limiting principles in which to confine Congress’s enumerated power.”

Judge Marcus, who dissented, called the decision “wooden, formalistic and myopic.”  He said that Congress has shown time and again that it has power over the national health care markets, especially in its ability to set prices under Medicare, its regulatory authority over insurers and drugmakers and its ability to issue rules that cut across both how care is delivered and covered. “Both the congressional intent to link the two and the empirical relation between the purchase of health insurance and the consumption of health care services are clear,” Marcus wrote.

The 11th Circuit decision contrasts with the 6th Circuit’s 2-1 June 2011 decision upholding the law.  

The 6th Circuit found, “Congress had a rational basis for concluding that the minimum coverage provision is essential to [Obamacare’s] larger reforms to the national markets in health care delivery and health insurance,” Judge Boyce F. Martin, a Carter appointee, wrote for the majority in the 2-1 ruling.  Judge Jeffrey Sutton, a George W. Bush appointee, concurred. Judge James Graham, a Reagan appointee who is a U.S. district judge, dissented.  Judge Martin dismissed the argument that there’s a difference between economic activity and inactivity, because “the text of the Commerce Clause does not acknowledge a constitutional distinction between activity and inactivity, and neither does the Supreme Court.”  Judge Martin further note that “there is no constitutional impediment to enacting legislation that could be characterized as regulating inactivity.”  After rejecting this argument, however, Judge Martin found that “far from regulating inactivity, the minimum coverage provision regulates individuals who are, in the aggregate, active in the health care market.”

In his concurring opinion, Judge Sutton noted that “the lingering intuition—shared by most Americans, I suspect—that Congress should not be able to compel citizens to buy products they do not want.” However, he then found that health care is different, because it involves “regulating how citizens pay for what they already receive.”  Thus, Congress may regulate this conduct through the Commerce Clause.

In his dissent, Judge Graham stated: “If the exercise of power is allowed and the mandate upheld, it is difficult to see what the limits on Congress’ Commerce Clause authority would be.” He asked, “What aspect of human activity would escape federal power?”

The clear division among these jurists, and the primary issue that will be framed for the Supreme Court, is how far Congress may go in regulating individuals under the Constitution’s Commerce Clause? Can Congress regulate inaction, e.g., an individual’s decision not to purchase an item, or not to purchase a specific kind of item? Can Congress force individuals to purchase something they don’t want or believe they don’t need? Can Congress regulate a purely private transaction (or failure to transact) that by itself may have no direct impact on interstate commerce?  The Supreme Court has at times viewed the Commerce Clause as an expansive grant of power to Congress to regulate conduct that only incidentally touches interstate commerce. Other times, the Court has refused to read the clause as expansively. It is an important issue that may have a much broader impact on businesses and individuals than simply with respect to purchasing health care coverage.

Insurers who act in bad faith, or who settle bad faith claims, may not look to insurance agents as a source of indemnity or contribution


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The Oklahoma Court of Civil Appeals recently addressed whether an insurer that had settled a claim by its insured for a violation of the duty of good faith and fair dealing could seek to recover a portion of the settlement from its soliciting agent under indemnity or contribution theories.  In GuideOne America Ins. Co., Inc. et al. v. Shore Ins. Agency and Nancy Shore, 2011 OK CIV APP 69, the Court held that no such recovery was permissible.  That facts that led to the dispute were as follows.  The insured called the soliciting agent (Shore) following an automobile accident.  Shore initially called the insurer (GuideOne) to check the insured’s coverage.  Shore later spoke to the insured and told her that GuideOne’s UM coverage would not “kick in” until the other driver’s liability insurance “paid everything.”  The insured asked Shore not to report the claim because she was afraid the new claim, when combined with her prior claim history, would cause the cancellation of her policy with GuideOne.

Roughly three months later, the insured apparently changed her mind and submitted a claim to GuideOne.  The insured spoke directly with a GuideOne representative and relayed the incorrect advice previously received from Shore about when her UM coverage would kick in.  Despite knowing that Shore’s advice was incorrect, the GuideOne representative failed to correct the insured’s misimpression.

The insured filed suit against GuideOne for breach of contract and for breach of the duty of good faith and fair dealing.  GuideOne settled the suit by its insured.  GuideOne sued for indemnity and contribution from the Shore Insurance Agency, which moved for and was granted summary judgment on GuideOne’s claims for indemnity, implied indemnity and contribution.

The Court of Civil Appeals made short work of the indemnity claim based on the Independent Agent Contract with GuideOne.  Because that contract contained no provision requiring the Shore Agency to indemnify GuideOne, the Court of Civil Appeals held that summary judgment on that claim was appropriate. 

The Court of Civil Appeals next considered GuideOne’s claim for implied indemnity.  GuideOne sought implied indemnity because it claimed the settlement represented a payment on behalf of the Shore Agency–presumably as a result of vicarious liability  The Court of Civil Appeals rejected that claim too, finding the undisputed evidence established that GuideOne paid the settlement, at least in part, because its representative knew the insured was operating under a misimpression about her UM coverage but failed to correct it and for that reason was ineligible to seek implied indemnity.

Lastly, the Court of Civil Appeals addressed whether GuideOne could seek contribution from the Shore Agency.  The Shore Agency argued against contribution pointing out that GuideOne’s duty of good faith and fair dealing was non-delegable.  Recognizing this problem, GuideOne responded by arguing the Shore Agency negligently failed to timely report the insured’s claim and further asserted the Shore Agency owed a duty to “assist policyholders and cooperate with adjustors in reporting and handling claims and render such other services to policyholders as may properly and reasonably be provided by an Agent” arising out of the Independent Agent Contract with GuideOne.  The Court of Civil Appeals rejected the contract-based contribution claim.  In reference to the Independent Agent Contract, the Court held that this contract was not the contract on which the insured based her claim against GuideOne and in any event contribution cannot be had for joint breach of a contract.  The Court of Civil Appeals also rejected the negligence based claim.  Here, the Court of Civil Appeals noted that GuideOne could not have been liable (or paid a settlement) for mere negligence because the bad faith claim brought against it by its insured requires a showing of more than mere negligence.  Thus, even if GuideOne was correct that the Shore Agency was negligent, that conduct could not have been the responsibility of GuideOne, which could not be held liable for mere negligence in dealing with its insured.  The Court of Civil Appeals concluded that the Shore Agency and GuideOne were not and could not be “jointly or severally liable in tort for the same injury” to the insured and thus summary judgment in favor of the Shore Agency was appropriate.

The GuideOne America Ins. Co. decision reiterates the Oklahoma Supreme Court’s earlier holdings that require more than mere negligence to establish liability for breach of the duty of good faith and fair dealing.  The decision also reinforces the rule that soliciting agents do not owe a separate duty of good faith and fair dealing to insureds.  Finally, GuideOne America Ins. Co. established clear guidance for drafting agent agreements between Soliciting Agents and insurers.  Any insurer that wishes to allocate between itself and its soliciting agent all or some of a later determined bad faith liability must very clearly provide for that allocation via contract.  Absent a clear contractual provision, the insurer will bear the entire liability in a bad faith scenario even if the soliciting agent negligently initiated or contributed to the problem.