By Patrick A. Calhoon
Let’s face it, the Employee Retirement Income Security Act (“ERISA”) is the bane of a bad faith attorney’s existence. Nothing is worse than getting a call from a potential client who describes what sounds like the most ridiculous and baseless insurance claim denial you’ve ever heard, only to learn that the policy is governed by ERISA. The facts can be heartbreaking. Maybe it’s a widow trying to recover life or accidental death benefits. It could be the sole provider of a family seeking disability benefits intended to keep his family afloat while he can’t work. Unfortunately, if the policy in question is a group policy offered by an employer, chances are high that it is an ERISA policy. Under ERISA, claims must be brought in federal court, there is no right to a jury trial, and all state common law claims, including breach of the implied covenant of good faith and fair dealing, are preempted. You can’t recover for emotional distress or punitive damages! Basically, the best you can do is recover the wrongfully denied policy benefits and, if you’re lucky, the court might agree to award some attorney’s fees and small penalties. Not much of a deterrence against unfair claims practices, right?
Now, this might not seem that bad, but here’s the kicker: Most ERISA policies contain a “discretionary clause,” which provides the insurer the discretion to interpret the policy and determine eligibility for benefits. If there is a discretionary clause, a reviewing court will only overturn the insurer’s denial if there was an abuse of discretion, i.e., the insurer was arbitrary and capricious. The reviewing court gives deference to the insurer and must uphold the decision unless it was “illogical, implausible, or without support in inferences that may be drawn from the facts in the record.” Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666, *676 (9th Cir. 2011). With such a difficult standard of review, ERISA insurers often take a bold stance because they know few attorneys are willing to take on such difficult cases.
Understandably, from the perspective of an ERISA insurer, discretionary clauses are extremely important. In fact, the U.S. Supreme Court described discretionary clauses “highly prized” by insurers. Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, *384 (2002). Fortunately for insured’s in this state, however, the California legislature has taken efforts to grant the right to a “fair review of claims denials” to all California residents under certain ERISA policies. Snyder v. Unum Life Ins. Co. of America, 2014 WL 7734715, at *10-11 (C.D.Cal. Oct. 28, 2014).
California Has Made Efforts to Protect ERISA Plan Members
First, as of January 1, 2012, California banned discretionary clauses in all life and disability policies when it enacted Section 10110.6(a) of the California Insurance Code. That section states:
If a policy, contract, certificate, or agreement offered, issued, delivered, or renewed, whether or not in California, that provides or funds life insurance or disability insurance coverage for any California resident contains a provision that reserves discretionary authority to the insurer, or an agent of the insurer, to determine eligibility for benefits or coverage, to interpret the terms of the policy, contract, certificate, or agreement, or to provide standards of interpretation or review that are inconsistent with the laws of this state, that provision is void and unenforceable.
Since that Section was enacted, federal courts in California have consistently enforced California’s ban on discretionary clauses in life and disability policies. (“Disability insurance” includes accidental death and dismemberment. Cal. Ins. Code. § 106.) Further, the Ninth Circuit has determined that ERISA’s broad preemption of state law does not bar application of this powerful statute. Standard Ins. Co. v. Morrison, 584 F3d 837 (9th Cir.2009). Even a choice of law provision stating that the policy will be construed in accordance with the laws of another state will not trump California’s anti-discretionary clause statute. Hirschkron v. Principal Life Ins. Co., 141 F. Supp. 3d 1028, *1031 (N.D. Cal. 2015) (The plain language of the Section voids discretionary provisions even if the relevant policy contains a choice of law provision.)
Second, California has sought to level the playing field with regard to certain policy exclusions ERISA insurers frequently invoke to deny coverage. ERISA disability policies often exclude situations where as disease, sickness, treatment of a disease, or intoxication caused the injury or death. Thankfully again, California has also enacted Section 10369.1 of the Insurance Code which places limits on certain policy exclusions. Section 10369.1 provides in relevant part:
[N]o disability policy delivered or issued for delivery to any person in this State shall contain provisions respecting the matters set forth in Sections 10369.2 to 10369.12, inclusive, unless such provisions are in the words in which the same appear in such sections; provided however, that the insurer may, at its option, use in lieu of any such provision a corresponding provision of different working approved by the commissioner, which is not less favorable in any respect to the insured or the beneficiary.
Sections 10369.2 through 10369.12 cover a variety of issues that are intended to provide ERISA plan members in California a certain amount of protection from unscrupulous claims decisions. For example, Section 10369.10 (Conformity with State Statutes) indicates that any policy provision that conflicts with a California statute is amended to conform to that statute. As will be discussed below, another example is Section 10369.12 which deals with exclusions for “intoxicants and controlled substances.”
Application of a “Intoxication” Exclusion
Your client’s accidental death and dismemberment policy contains a provision that broadly excludes an injury that was “caused in whole or in part by, or resulting in whole or in part from … being under the influence of drugs or intoxicants.” Your client slipped and fell down a flight of stairs while he was carrying dishes, badly fracturing his pelvis. At the hospital his blood alcohol level was found to be extremely high and he admitted to drinking heavily throughout the day. While in the hospital recovering from the fall, he developed an infection which kept him hospitalized longer. Shortly before he was to be discharged, however, he had to be returned to the intensive care unit after he experienced a significant cardiac condition. Attempts to stabilize him were unsuccessful and he passed away.
The medical examiner listed the manner of death as an accident and stated that the death was caused by complications following pelvic fractures with other significant conditions, including cardiovascular disease and alcohol abuse. There is evidence that your client very likely died from a pulmonary embolism caused by his decreased mobility during his hospital stay.
Your client’s wife makes a claim under the accidental death policy he obtained through his employer. After reviewing the medical records, the insurance company promptly denies the claim. The denial letter mentions that the medical records show your client was intoxicated at the time of his fall and the medical examiner related the death to alcohol abuse and pelvic fractures. At first blush it would appear that the insurer is right and the intoxication exclusion applies. After all, his blood alcohol levels were high and he even admitted to drinking all day when he fell down the stairs. It would seem that your client can’t recover the accidental death benefits she desperately needs.
Thankfully that’s not the case for policies issued for delivery in California. Section 10369.12 provides:
Intoxicants and controlled substances: The insurer shall not be liable for any loss sustained or contracted in consequence of the insured’s being intoxicated or under the influence of any controlled substance unless administered on the advice of a physician.
Applying Section 10369.1, the language of Section 10369.12 differs from the Policy’s intoxication exclusion because, while Section 10369.12 excludes “any loss sustained or contracted in consequence of the insured’s being intoxicated,” the Policy excludes “any loss caused in whole or in part by, or resulting in whole or in part from … the Insured Person being under the influence of drugs or intoxicants.”
Thus, the next issue under Section 10369.1 becomes whether the Policy’s intoxication exclusion is less favorable than the language set forth in Section 10369.12. If the Policy’s exclusion is less favorable than the language provided in Section 10369.12, then the statutory language should be substituted in place of the Policy language. See Smith v. Stonebridge Life Ins. Co., 582 F.Supp.2d 1209, *1220 (N.D.Cal.2008) (“[T]he statutory language controls if the Policy’s language is ‘less favorable’ to insureds.”) (citing Olson v. American Bankers Ins. Co., 30 Cal.App.4th 816, 828, 35 Cal.Rptr.2d 897 (1994)).
The answer to whether your client’s Policy language is less favorable than the statutory language is clear. A loss that is caused/resulting “in whole or in part” from the insured’s being intoxicated is more expansive than a loss that is “in consequence of” the insured’s being intoxicated. Accordingly, under the Policy’s language, the insurance company is able to deny more claims than it would be able to under the statutory language. Thus, the Policy’s intoxication exclusion should be replaced with the statutory language of Section 10369.12.
The only remaining question is how the court will construe Section 10369.12’s “in consequence of” term. For that, federal courts analyze the connection between the insured’s excluded state (e.g., intoxication) and the insured’s loss. There is a bevy of federal decisional law on that subject, however, one good example is Kellogg v. Metropolitan Life Insurance Company, 549 F.3d 818 (10th Cir.2008). There, a driver crashed into a tree and later died at the hospital. A witness observed the driver appeared to be having a seizure before turning into the tree. The coroner stated the insured suffered a “subarachnoid hemorrhage” and a “basilar skull fracture” from a “solo motor vehicle accident.” The post mortem report showed that the insured had a drug in his bloodstream at the time of his death that increased the risk of seizures.
The insurer based its denial for accidental death benefits on a physical illness exclusion. In answering the question of whether the insured’s death was “caused” by his apparent seizure, the Tenth Circuit stated “the car crash—not the seizure—caused the loss at issue, i.e., [the insured’s] death.” The court held that the exclusionary clause of the policy did not apply. Id. at *829. In reaching that conclusion, the court relied on Vickers v. Boston Mutual Life Insurance Co., 135 F.3d 179 (1st Cir.1998).
In Hastie v. J.C. Penney Life Insurance Company, 115 F.3d 895, *896 (11th Cir.1997) a motorcyclist died after colliding with a vehicle that switched into his lane. The death certificate listed “multiple blunt traumatic injuries” as the immediate cause of death, “motorcycle-motor vehicle accident” as the “underlying cause of death.” Because the insured’s blood alcohol level was measured at .254 at the time of his autopsy, the death certificate also listed “acute alcohol intoxication” as a “significant condition contributing to death but not resulting in the underlying cause.”
The insurer denied the accidental death benefits claim by the insured’s wife under two insurance policies based on intoxication exclusions. One exclusion provided, “[n]o benefit shall be paid for Loss caused by or resulting from … an Injury occurring while the Covered Person is intoxicated ….” The other exclusion stated “[n]o benefit shall be paid for any loss … which is caused by or results from … an Injury occurring while the Covered Person is intoxicated.” The insurer argued the insured’s intoxication triggered the exclusions. The Eleventh Circuit rejected the insurer’s argument as unreasonable and required some proof of a causal connection between an insured’s intoxication and his death.
Applying the above federal common law, the insurer will bear the burden to prove the causal connection between your client’s husband’s intoxication and his death. However, the evidence showed that his death was caused by a pulmonary embolism. The pulmonary embolism was caused by decreased mobility from his hospitalization for pelvic fractures. The pelvic fractures were caused by the fall. But, there is no direct evidence that intoxication actually caused the fall.
The fall could have been related to slippery shoe soles, the type of flooring on the stairs, the fact that he was carrying dishes, or any other factors. Given the medical examiner’s conclusion that the death was caused by “complications following pelvic fractures” with “alcohol abuse” (not intoxication) as only a contributing factor to death, a reviewing court may find that the insurance company could not have reasonably decided intoxication was the proximate cause of his death. Therefore, the intoxication exclusion should not apply. See Ciberay v. L-3 Commc’ns Corp. Master Life & Acc. Death & Dismemberment Ins. Plans, 2013 WL 2481539, at *14 (S.D. Cal. June 10, 2013).
Clearly, without the application of Section 10369.12, the result could be much different. The policy language of “any loss caused in whole or in part by, or resulting in whole or in part from…intoxication” can be more easily read to include losses resulting from falling down a flight of stairs after a day of heavy drinking.
Conclusion
Don’t despair if it turns out your bad faith case is governed by ERISA. As shown above, California has taken steps toward providing protections to ERISA plan members. Do your research to see if Sections 10369.1 through 10369.12 of the Insurance Code can be applied to find coverage. Often ERISA plan members are the people who need the benefits the most. If these types of cases aren’t taken up, ERISA insurers will continue to deny claims with impunity on spurious grounds. It’s up to us to hold ERISA insurers accountable. Use the tools California has provided to ensure that our clients receive a “fair review of claims denials” as intended by the legislature.