ERISA and Life Insurance News by Smith Moore Leatherwood

January

2015

ERISA & LIFE INSURANCE NEWS Cover ing ERISA and Life, Health and Disability Insurance Litigation

Dudenhoeffer and Stock Drop Cases:

INSIDE THIS ISSUE Denial of STD Claim Upheld, Based on Failure to Provide Objective Medical Evidence

Employer Which Prevented Timely Conversion of Life Policy Properly Sued as Fiduciary for Surcharge under Â§ 1132(a)(3)

Right of Reimbursement Provision Found Only in SPD Enforceable if Not in Conflict with Other Plan Documents

ERISA Derivative Action is Subject to Arbitration Under Hospitalâ&#x20AC;&#x2122;s Provider Services Agreement

Extrinsic Evidence Used to Construe Unambiguous Plan Term; Insurer Not Liable for Breach of Fiduciary Duty

ERISA Cause of Action Accrues when Participant Has Reason to Know that Claim Has Been Denied

To Avoid Liability, Fiduciary Must Show that Prudent Fiduciary Would Have Made the Same Decision

Failure to Sue Within Contractual Limitations Period Bars Action to Recover LTD Benefits

Claims for STD and LTD Benefits Barred by Contractual and Statutory Limitations Periods

Between the Devil and the Deep Blue Sea

The Supreme Court this year upended nearly 20 years of lower court jurisprudence by unanimously rejecting the so-called Moench Presumption, a judicial creation which provided some protection to fiduciaries of employee stock ownership plans in stock drop cases. Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2450 (June 25, 2014). In the course of its decision, the Court made clear that plan language cannot trump fiduciary obligations imposed by ERISA. At the same time, the Court equally made clear that drafting allegations in stock drop cases sufficient to avoid dismissal under Iqbal and Twombly standards would be no simple task. The Moench Presumption Employee stock ownership plans, or ESOPs, are intended to encourage employee ownership through investment in employer securities. In furtherance of that goal, Congress created a qualified exemption from the prudence requirement imposed on fiduciaries of ESOPs, which provides that the diversification requirement and the continued on page 2 >>

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prudence requirement (only to the extent that it requires diversification) are not violated by acquiring or holding qualified employer securities. 29 U.S.C. § 1104(a) (2). Still, fiduciaries of such plans have been frequent targets of “stock drop” lawsuits, in which plan participants allege – in the wake of a decline in the stock value – that the fiduciaries violated the prudence requirement by continuing to invest in employer stock, or by failing to divest the plan of such stock altogether. The quandary for fiduciaries of such plans – which may require investment in employer stock – is complicated by ERISA’s requirement that fiduciaries act “in accordance with the documents … governing the plan insofar as such documents … are consistent with the provisions [of ERISA].” 29 U.S.C. § 1104(a) (1)(D). In the face of (or even just the risk of) declining stock values, which ERISA mandate does the fiduciary follow? Recognizing the problem, the Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), developed the following presumption of compliance with ERISA: “[A]n ESOP fiduciary who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision. However, the plaintiff may overcome that presumption by establishing that the fiduciary abused its discretion by investing in employer securities.” 62 F.3d at 571. The Moench Presumption thereafter was adopted by every circuit court that considered the question. See, e.g., Lanfear v. Home Depot, Inc., 679 F.3d 1267, 1279 (11th Cir. 2012). (“[c]loser judicial scrutiny would force ESOP fiduciaries to choose between the devil and the deep blue sea”).

A mini-split was created by Pfeil v. State Street Bank and Trust Co., 671 F.3d 585 (6th Cir. 2012), which held that the presumption was not to be applied at the pleadings stage. Rather, the Moench Presumption was an evidentiary presumption to be applied at a later stage of the case. The Sixth Circuit also developed a different standard for rebutting the presumption, requiring “a plaintiff to prove that ‘a prudent fiduciary acting under similar circumstances would have made a different investment decision.’” Id. at 595.

On appeal, the Sixth Circuit quickly dispensed with the Moench Presumption analysis based on its decision in Pfeil. The court reasoned that “the proper question at the Rule 12(b)(6) stage ... is whether the ... Complaint pleads ‘facts to plausibly allege that a fiduciary has breached its duty to the plan’ and a causal connection between that breach and the harm suffered by the plan – ‘that an adequate investigation would have revealed to a reasonable fiduciary that the investment [in Fifth Third Stock] was improvident.’” 692 F.3d 410, 419.

The Origin of Dudenhoeffer

The complaint satisfied those requirements, the Sixth Circuit concluded. “Plaintiffs allege that Fifth Third engaged in lending practices that were equivalent to participation in the subprime lending market, that Defendants were aware of the risks of such investments ... and that such risks made Fifth Third Stock an imprudent investment.” Id. at 419-20. Further, plaintiffs alleged that “[a] prudent fiduciary acting under similar circumstances would have acted to protect participants against unnecessary losses, and would have made different investment decisions.” Id.

The Dudenhoeffer saga arose in the Sixth Circuit before the decision in Pfeil. A defined contribution plan sponsored by Fifth Third Bancorp included the “Fifth Third Stock Fund,” an ESOP in which all employer matching contributions were initially invested. The complaint alleged Fifth Third changed from a conservative lender to a subprime lender, so that investment in its stock became too risky for a retirement plan. The plaintiffs alleged that the plan’s fiduciaries should have stopped investing in the stock and should have divested the plan of the stock. According to the complaint, Fifth Third stock dropped 74% in value between July 2007 and September 2009. The defendants moved to dismiss the complaint and, applying the Moench Presumption, the district court concluded that plaintiffs’ complaint failed to state a claim. “While the Court must accept that Fifth Third embarked on an improvident and even perhaps disastrous foray into subprime lending, which in turn caused a substantial decline in the price of its common stock, the complaint fails to establish that Fifth Third was in the type of dire financial predicament sufficient to establish a breach of fiduciary duty under Kuper and Moench,” the district court concluded. 757 F. Supp. 2d 753, 761.

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The Supreme Court’s Decision The Supreme Court granted the resulting petition for certiorari “[i]n light of differences among the Courts of Appeals as to the nature of the presumption of prudence applicable to ESOP fiduciaries ....” 134 S. Ct. at 2465. The Court, however, resolved those differences by jettisoning the presumption altogether. The Court concluded that “the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP’s holdings.” Id. at 2467. This conclusion followed from the fiduciary provisions in 29 U.S.C. § 1104. That statute – which dispenses with the diversification requirement for ESOP

fiduciaries – “makes no reference to a special ‘presumption’” nor does it require plaintiffs “to allege that the employer was on the ‘brink of collapse,’ under ‘extraordinary circumstances,’ or the like.” Id. The Court rejected the defendants’ argument that because the purpose of an ESOP is to encourage employee ownership, rather than merely to maximize retirement savings, the claim that an ESOP fiduciary was imprudent should be viewed “unfavorably.” The Court noted the requirement that fiduciaries act “in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter.” Id., quoting § 1104(a)(1) (D) (emphasis in original). “This provision makes clear that the duty of prudence trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary.” Id. The Court agreed that an ESOP fiduciary might “find [ ] himself between a rock and a hard place: If he keeps investing and the stock goes down he may be sued for acting imprudently in violation of § 1104(a)(1) (B), but if he stops investing and the stock goes up he may be sued for disobeying the plan documents in violation of § 1104(a) (1)(D).” Id. at 2470. Still, the presumption was not “an appropriate way to weed out meritless lawsuits ....” Id. “Such a rule,” the Court wrote, “does not readily divide the plausible sheep from the meritless goats.” Id. Iqbal and Twombly Redux Finding the presumption inappropriate, the Court nonetheless denominated the motion to dismiss as an “important mechanism for weeding out meritless claims,” and vacated the Sixth Circuit’s conclusion that the plaintiffs’ complaint stated a claim. Id. at 2471. The Court reiterated that the lower courts were to

apply “the pleading standard as discussed in Iqbal and Twombly” and made specific observations concerning the contents of the plaintiffs’ complaint. First, the plaintiffs had alleged that Fifth Third’s fiduciaries knew or should have known that holding the stock was imprudent “in light of publicly available information.” The Court stated that “where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” Id. To the contrary, “a fiduciary usually ‘is not imprudent to assume that a major stock market ... provides the best estimate of the value of the stocks traded on it that is available to him.’” Id. Next, the plaintiffs had alleged that Fifth Third’s fiduciaries were imprudent “by failing to act on the basis of nonpublic information that was available to them because they were Fifth Third insiders.” Id. “To state a claim for breach of the duty of prudence on the basis of inside information,” the Court wrote, “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” Id. The duty of prudence, the Court emphasized, “under ERISA as under the common law of trusts, does not require a fiduciary to break the law.” Id. To the extent that a complaint blames fiduciaries for not refraining from additional stock purchases on the basis of inside information, or for failing to disclose information to the public, courts should “consider the extent to which an ERISA-based obligation” in either respect could conflict with insider trading laws. Id. Finally, the courts should consider

“whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases – which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment – or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price....” Id. Ultimately, the Court left it to the lower courts to apply the Court’s guidance to the plaintiffs’ complaint. Broader Application Does Dudenhoeffer have application beyond stock drop cases to ERISA cases generally, or to welfare benefits cases specifically? The rejection of the Moench Presumption is rather text specific, relying heavily on the language of § 1104. The Court did, however, make the point that plan terms cannot trump duties imposed by ERISA. While the Court has not suggested otherwise in the past, previous decisions have emphasized fidelity to the language of the plan. See, e.g., Kennedy v. Plan Administrator for DuPont Savings and Inv. Plan, 555 U.S. 285 (2009). The decision in Dudenhoeffer is perhaps something of a mild counterweight to that principle. Whether that distinction has any practical application going forward remains to be seen. More significantly, while rejecting the Moench Presumption, the Court nonetheless arguably set up a row of minihurdles which will pose difficulties for plaintiffs in stock drop cases. The Court accomplished this through its emphasis on the plausibility standard for pleadings set forth in Iqbal and Twombly and its endorsement of the motion to dismiss as an “important mechanism for weeding out meritless claims ....” 134 S. Ct. at 2471.

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The Court’s forceful invocation of the plausibility standard, and its affirmation of the role of motions to dismiss,may be helpful in the welfare plan context in addressing claims that stray beyond a straightforward claim for benefits under § (a)(1)(B), such as breach of fiduciary duty claims and claims for administrative penalties premised on de facto administrator theories.

Denial of STD Claim Upheld, Based on Failure to Provide Objective Medical Evidence McGhee v. Aetna Life Ins. Co., 2014 WL 5475042 (W.D.N.C. Oct. 29, 2014)

McGhee, a senior vice president with Bank of America, sought short-term disability benefits under an ERISA-regulated plan administered by Aetna. McGhee claimed that he was unable to perform the essential Does the complaint plausibly set forth a functions of his occupation due to severe claim of breach of fiduciary duty which anxiety, depression and post-traumatic is distinct from the underlying claim for stress disorder. benefits? Does the complaint set out facts plausibly demonstrating that the insurer Aetna denied the claim and informed acted as a de facto administrator when the McGhee that he had not provided plan document identifies the employer as sufficient clinical information to show the plan administrator? that he was unable to perform the duties of his occupation. McGhee appealed and Any occasion that the Supreme Court speaks on ERISA cases is significant. While submitted additional medical information, the unanimous decision in Dudenhoeffer and Aetna upheld the denial of his claim.

processed McGhee’s initial claim fairly and clearly informed him of the type of medical evidence it needed in order to approve STD benefits. With respect to McGhee’s appeal, the court noted that Aetna considered all of the medical evidence submitted by McGhee, solicited a peer review, and communicated with McGhee’s treating physicians.

The court concluded that Aetna’s review was reasonable, principled, and deliberate. The court further found that Aetna’s decision to deny STD benefits because McGhee had failed to provide objective medical evidence of disability is directly applicable to stock drop cases, The district court reviewed Aetna’s claim was supported by substantial evidence. there may be opportunities to utilize some of its language in a broader context for decision under an abuse of discretion Accordingly, the court granted summary standard. The court found that Aetna judgment for Aetna. motion practice in welfare plan cases.

Employer Which Prevented Timely Conversion of Life Policy Properly Sued as Fiduciary for Surcharge under § 1132(a)(3) Biller v. Prudential Ins. Co. of Am., 2014 WL 4230119 (N.D. Ga. Aug. 26, 2014) Biller was a participant in an ERISAgoverned plan and was covered under a group life insurance policy issued by Prudential. Upon termination of her employment, Biller sought to convert her group life insurance to an individual policy. She had a limited time within which to apply for conversion.

Biller’s beneficiaries under the plan filed a claim for life insurance benefits with Prudential. Prudential denied the claim. The beneficiaries then sued Prudential and the employer under 29 U.S.C. § 1132(a)(3), alleging breaches of fiduciary duties and seeking equitable relief “to make [them] whole under, but not limited to, theories of surcharge, restitution or equitable estoppel.” The beneficiaries did not assert a claim for benefits under 29 U.S.C. § 1132(a)(1)(B). In fact, they conceded they were not entitled to benefits because Biller did not timely submit the conversion application.

The complaint alleged that Biller’s employer was responsible both for providing proper advice regarding her conversion rights and for timely providing the necessary application form. It was further alleged that Biller’s employer did neither. When Biller finally received the application from her employer, she was told by Prudential that it would not be accepted because it The employer moved for dismissal of the was untimely. Biller died unexpectedly two complaint. The motion was denied. months later. 4 | ERISA and Life Insurance News | January 2015

The district court rejected the employer’s argument that all fiduciary duties under the policy had been delegated to Prudential. Although the employer had delegated its discretionary authority to determine eligibility for benefits under the policy, the plan also stated that the employer was a “named fiduciar[y] of the Plan” and that the employer had “the authority to control and manage the operation and administration of the plan.” Furthermore, the employer’s IRS Form 5500 identified the employer as the plan administrator. Because the activity that was the subject of the breach of fiduciary duty claim was the conversion application process – not a claim for benefits – the court held that the beneficiaries plausibly alleged that

Biller’s employer owed her a fiduciary duty pertaining to the conversion process. The district court also rejected the employer’s argument that the beneficiaries could not maintain an action under 29 U.S.C. § 1132(c) because they had a remedy available under 29 U.S.C. § 1132(a) (1)(B). “Plaintiffs could not have brought a claim under § 1132(a)(1)(B) for benefits due under the policy precisely because they concede they are not entitled to any as a result of Defendants’ breach.” Finally, the district court rejected the employer’s argument that the beneficiaries did not seek appropriate equitable relief “because they essentially [sought] money damages.” Citing CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011), the district court noted that surcharge is an appropriate form of

equitable relief where harm results from a fiduciary’s breach, even if the fiduciary is not unjustly enriched as a result of the breach. Finding the surcharge claim to be appropriate, and based on the procedural

posture of the case, the court left open the question whether the beneficiaries would be entitled to other forms of equitable relief.

Right of Reimbursement Provision Found Only in SPD Enforceable if Not in Conflict with Other Plan Documents Board of Trustees of the Nat’l Elevator Industry Health Benefit Plan v. Montanile, 2014 WL 6657049 (11th Cir. Nov. 25, 2014) Montanile was a participant in an ERISAgoverned health benefits plan established under a collective bargaining agreement for members of the International Union of Elevator Constructors. Documents relating to the plan included (1) a trust agreement, which established the plan, (2) a bargaining agreement, which provided that the board of trustees had discretion to increase or decrease benefits, and (3) a summary plan description, which established the benefits available to plan participants and beneficiaries. In 2008, Montanile was injured in a car accident involving a drunk driver. The plan paid his medical expenses of more than $121,000. Montanile later sued the other driver and obtained a $500,000 settlement. From the settlement, he paid his lawyer $200,000 as a contingency fee and $63,700 to reimburse expenses.

After Montanile accepted the settlement, the board of trustees, as fiduciary for the plan, sought to be reimbursed from the settlement proceeds for the medical expenses paid by the plan on Montanile’s behalf. The board relied on the summary plan description, which provided:

The summary plan description was the only document that set forth the plan’s rights to subrogation and reimbursement from amounts recovered by a plan participant from another party. The trust agreement and the bargaining agreement contained no similar provisions.

The Plan has the right to recover benefits advanced by the Plan to a covered person for expenses or losses caused by another party ….

Montanile argued that the plan did not have a right of reimbursement because the summary plan description was not a “governing plan document.” Rather, he contended, only the trust agreement and the bargaining agreement were “governing plan documents,” and they did not create any right of subrogation or reimbursement that could be enforced by the plan.

Amounts that have been recovered by a covered person from another party are assets of the Plan by virtue of the Plan’s subrogation interest and are not distributable to any person or entity without the Plan’s written release of its subrogation interest …. When attempts to negotiate a settlement failed, the board sued Montanile to enforce the plan’s reimbursement provision.

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plan document required by ERISA, and that reimbursement was a remedy available to the plan as “appropriate equitable relief” under 29 U.S.C. § 1132(a)(3). On appeal, the Eleventh Circuit noted that section 1132(a)(3)(B) authorizes plan fiduciaries to seek “appropriate equitable relief … to enforce … the terms of the plan.” The statute “does not specify where the ‘terms of the plan’ must be found,” the court said, although it requires that every employee benefit plan must be “established and maintained pursuant to a written instrument,” citing 29 U.S.C. § 1102(a) (1). ERISA also mandates that a “summary plan description of any employee benefit plan shall be furnished to participants and beneficiaries.” Id.

Montanile argued that the summary plan description could not be a governing plan document in view of CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), in which the Supreme Court stated that the requirement “that participants and beneficiaries be advised of their rights and obligations ‘under the plan,’ suggests that the information about the plan provided [in a summary plan description] is not itself part of the plan.” Id. at 1877 (emphasis in original). The Eleventh Circuit rejected that argument, stating that “Amara only precludes courts from enforcing summary plan descriptions … where the terms of that summary conflict with the terms specified in other, governing plan documents. However, the Amara Court had no occasion to consider whether the terms of a summary plan description are enforceable where it is the only document

that ‘specif[ies] the basis on which payments are made to and from the plan, as required by § 1102(b).” Here, the reimbursement provision in the summary plan description did not create a conflict with any other plan documents. “The terms specified in that summary plan description are enforceable, pursuant to § 1132(a)(3),” the court said, “because (1) no other document lays out the rights and obligations of plan participants and (2) the Trust Agreement contemplated the rights and obligations would be set forth in a separate document.” Consequently, the court held that the plan’s board of trustees could enforce the reimbursement provision and could recover from the settlement funds that Montanile obtained from the drunk driver the amounts paid on his behalf under the plan.

ERISA Derivative Action is Subject to Arbitration Under Hospital’s Provider Services Agreement Greenville Hospital Sys. v. Employee Welfare Benefits Plan for Employees of Hazelhurst Management Co., 2014 WL 4976588 (D.S.C. Oct. 3, 2014) Greenville Hospital System (“GHS”) and Aetna Life Insurance Company entered into a Hospital Services Agreement, under which GHS became a preferred Aetna provider and could submit claims directly to Aetna for hospital services provided to patients covered by an Aetna health insurance plan.

binding arbitration of “any controversy or claim arising out of or relating to this Agreement or the breach, termination, or validity thereof ...” Additionally, the top of each page of the Agreement contained the following provision: NOTICE: THIS AGREEMENT IS SUBJECT TO MANDATORY ARBITRATION PURSUANT TO

Aetna agreed to pay GHS directly for those services at rates established by the parties, and GHS agreed that it would not bill Aetna insureds for the denial of payments. GHS also agreed to abide by Aetna’s requirement for precertification and to notify Aetna within two business days, or as soon as reasonably possible, of all admissions of Aetna insureds. The

agreement

also

contained

mandatory arbitration provision, requiring 6

THE FEDERAL ARBITRATION ACT OR, IF THE FEDERAL ARBITRATION ACT IS DETERMINED TO

INAPPLICABLE, THE

UNIFORM

ARBITRATION ACT, § 15–48–10, ET SEQ., CODE OF LAW OF SOUTH CAROLINA (1976), AS AMENDED.

In August 2011, GHS treated a participant in a health insurance plan established by Hazelhurst Management Company and underwritten by Aetna. The patient’s mother signed a consent for treatment,

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which included an assignment of the patient’s benefits under the plan to GHS. Thereafter, GHS submitted a claim, which Aetna denied on the ground that GHS had failed to obtain precertification as required by the provider services agreement. GHS appealed, and Aetna upheld the denial. GHS then filed an ERISA action in the federal district court, alleging failure to pay benefits and failure to provide plan documents in a timely manner. Aetna filed a motion to dismiss the complaint and to compel arbitration pursuant to 9 U.S.C. § 3 of the Federal Arbitration Act and Rule 12(b)(1) and (6) of the Federal Rules of Civil Procedure. Aetna argued that by filing the action, GHS was attempting to avoid arbitration required by the agreement, and that its claims were not about whether services

were covered under the plan, but rather the failure of GHS to obtain precertification as a condition for payment. GHS contended that it bought the action as a derivative action on behalf of the insured, and that it should have the right to pursue the claim under ERISA and not be compelled to arbitrate. GHS cited CardioNet, Inc. v. Cigna Health Corp., 751 F.3d 165 (3d Cir. 2014), to support its position that a provider’s direct and derivative claims fell outside of the agreement’s arbitration clause. In CardioNet, the Third Circuit held that a provider’s derivative claim against the insurer on behalf of the insured was not subject to an arbitration clause in the administrative services agreement between the insurer and the provider.

Relying on another recent opinion, Greenville Hospital System v. United Healthcare Insurance Company, No. 6:13– 2837–HMH (D.S.C. Apr. 3, 2014), the court agreed with Aetna, and found that the dispute between GHS and Aetna fell under the agreement and was subject to arbitration. The court reasoned that GHS filed a claim with Aetna on behalf of the insured and pursuant to the agreement. Aetna denied the claim based on the agreement. While GHS contended that it did not agree to arbitrate whether services were covered under the employee welfare benefits plan, the court noted that it did agree to arbitrate “any controversy or claim arising out of or relating to this Agreement or the breach, termination, or validity thereof ...”

While a determination of benefits under the plan may fall within ERISA, the court found that GHS’s claims related to the scope of the agreement, which provided: “Except when a Member requires Emergency Services, Hospital agrees to comply with any applicable precertification and/or referral requirements under the member’s Plan prior to the provision of Hospital Services. Hospital agrees to notify Company within two (2) business days, or as soon as reasonably possible of all admissions of Members, and all services for which Company requires notice.” The court granted Aetna’s motion to compel arbitration and dismissed the case without prejudice.

Extrinsic Evidence Used to Construe Unambiguous Plan Term; Insurer Not Liable for Breach of Fiduciary Duty Snow v. Boston Mut. Life Ins. Co., 2014 WL 5285981 (11th Cir. Oct. 16, 2014) Snow was a participant in an ERISA plan sponsored by his employer, Meadowcraft, Inc. Under a group policy issued to Meadowcraft by Boston Mutual, Snow was provided life insurance of approximately $115,000. Snow worked at Meadowcraft from 1993 until he became disabled in 2002. He died in 2009 at the age of 66 years and nine months. His widow and beneficiary, Dorothy Snow, submitted a claim for life insurance benefits. Boston Mutual denied the claim, because Snow’s coverage had terminated when he reached “Normal Retirement Age” of 65. Mrs. Snow sued Boston Mutual, alleging that she was owed a death benefit under the group policy, and that Boston Mutual had breached certain fiduciary duties it owned to Snow. She also sued Meadowcraft, which was no longer in business.

The district court held that Snow’s life insurance coverage was not in force, because he died after attaining “Normal Retirement Age,” and that Boston Mutual did not owe fiduciary duties to Snow, because it was not the plan administrator.

Mrs. Snow appealed, and the Eleventh Circuit affirmed. Under the group policy’s waiver of premium provision, a disabled employee’s continued on page 8 >>

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life insurance would remain in effect, but not “beyond the Normal Retirement date in effect as of the date of ... disability.” Additionally, the policy provided that an employee’s coverage would terminate “when he leaves his job,” but that the coverage could remain in force “until the employee’s normal retirement date” if he left his job due to disability. The plan defined “Normal Retirement Date” as the “normal retirement date provided for by the Policyholder’s published or accepted personnel practices.” The Eleventh Circuit first held that the district court did not err in considering extrinsic evidence to construe the term “Normal Retirement Date” in the group policy. “Courts routinely examine extrinsic evidence to determine the meaning of contract terms even while holding that the contract is unambiguous.” “[N]ot only was the term not ambiguous,” the court said, “but the district court did not clearly err in construing the Normal Retirement Date to be 65 years old. This age was found in a summary of

Meadowcraft’s 401(k) plan, which provided that ‘your normal retirement age is the date you reach age sixty-five,’ and in testimony from Meadowcraft human resources employees …. Although Mr. Snow was not a 401(k) participant, the record shows that the summary was made available to all salaried employees, and that Mr. Snow attended open-enrollment meetings where attendees received the 401(k) summary ….” Consequently, the court held that “the district court did not err in concluding that Mr. Snow’s life insurance lapsed prior to his death at age 66, and that [Mrs.] Snow was not entitled to any benefits under the Plan.” The court also rejected Mrs. Snow’s claim that Boston Mutual breached fiduciary duties by failing to provide Snow with a summary plan description and with other information related to benefits and coverage. “Because these disclosure obligations are statutorily vested with Plan Administrators, the district court looked to the Plan documents and the ERISA statute to determine which entity – Boston Mutual

or Meadowcraft – was the administrator of Meadowcraft’s Plan.” The court affirmed the district court’s holding that Boston Mutual was not the plan administrator. Nevertheless, Mrs. Snow argued that Boston Mutual qualified as a plan administrator because it “drafted all plan documents” and had to “consent” to any amendments to the plan. The court disagreed, noting that Boston Mutual did not unilaterally design the plan. “Meadowcraft, as the Plan Sponsor, negotiated the terms of the coverage and crafted the design of the Plan as reflected in the application,” the court said. Additionally, “the design and adoption of an ERISA Plan is a settlor function, not a fiduciary act.” Citing Lockheed Corp. v. Spink, 517 U.S. 882, 890 (1996). Finally, the court stated that “the design of the Plan has nothing to do with [Mrs.] Snow’s claim for equitable relief; rather, her grievance lies with Meadowcraft’s alleged failure to provide her late husband with a plan description or other meaningful disclosures regarding the Plan. Again, Boston Mutual, the Plan insurer, was not responsible for making those disclosures.”

ERISA Cause of Action Accrues when Participant Has Reason to Know that Claim Has Been Denied Witt v. Metropolitan Life Ins. Co., 772 F.3d 1269 (11th Cir. 2014) Witt submitted a claim for disability Nothing was heard from Witt during the benefits under an ERISA plan in May 1997, next 12 years, until May 29, 2009, when his asserting that he was entitled to benefits attorney contacted MetLife and requested a beginning December 29, 1995. Although status update on the claim. After reviewing the claim was untimely, MetLife, the claims Witt’s file, MetLife wrote to his attorney administrator, approved the claim and and stated that if Witt wished to have his granted retroactive benefits. Benefits claim reviewed beyond May 1, 1997, then were terminated effective May 1, 1997, supporting medical documentation would for failure to provide supporting medical be required. More than a year later, MetLife documentation. MetLife’s internal records received some additional notes from reflected that a termination letter was Witt’s doctors. After reviewing the notes, sent to Witt on May 22, 1997. Witt later MetLife informed Witt’s attorney by letter contended that he never received the dated March 21, 2011, that the claim would letter. 8 | ERISA and Life Insurance News | January 2015

remain terminated. The letter indicated that Witt could submit an administrative appeal. Witt appealed, and the decision was upheld by MetLife by letter dated May 4, 2012. MetLife’s letter stated that administrative remedies had now been exhausted and that Witt had the right to bring a civil

action under ERISA. The letter did not assert a time bar. On June 3, 2012, Witt filed suit. During the litigation, MetLife moved for summary judgment on the grounds that Witt’s action was barred by the applicable sixyear statute of limitation. The district court granted judgment in favor of MetLife based on the expiration of the statute of limitation. On appeal, the Eleventh Circuit addressed the question “what happens when the defendant says it issued a formal denial letter and the plaintiff says he never received the letter, but it is undisputed that defendant terminated benefits and did not pay the plaintiff any benefits for 12 years?” The court determined that the cause of action had accrued when Witt had reason to know of the repudiation of his claim for benefits. Even assuming that he had

not received the denial letter, MetLife’s conduct “demonstrated a clear and continuing repudiation of Witt’s rights by failing to provide him any monthly benefits after April 30, 1997.” Given the length of time that had elapsed, the court did not need to “decide the exact number of missing monthly benefits payments that were required to put Witt on notice that his claim had been clearly repudiated and thus denied.” Even if the court were to require 12 months of nonpayment, Witt “could not have reasonably believed but that his claim had been denied” by May 1, 1998. As a result, the six-year limitation period (based on Alabama’s most analogous state law statute of limitation) had expired by May 1, 2004. The court also rejected Witt’s argument that the limitations period must be tied to a formal denial letter. “[W]e reject Witt’s

attempt to exploit MetLife’s failure to locate a 12-year-old document where Witt had reason to know of the acts giving rise to his cause of action, regardless whether he received the 1997 letter,” the court wrote. Finally, the court rejected Witt’s theory that MetLife’s silence concerning time bars in the 2012 correspondence and MetLife’s statement concerning the right to bring a civil action constituted a waiver. As the court noted, the statute of limitation had expired before Witt’s attorney contacted MetLife in 2009. “MetLife’s voluntary reconsideration of Witt’s benefit claim cannot revive or resurrect that alreadytime-barred claim,” the court added. Moreover, the court noted, Witt could identify no document which contained an express waiver of the statute of limitation defense, and he failed to establish that MetLife had the “requisite intent” to waive the defense.

To Avoid Liability, Fiduciary Must Show that Prudent Fiduciary Would Have Made the Same Decision Tatum v. RJR Pension Investment Committee, 761 F.3d 346 (4th Cir. 2014) Tatum brought a class action on behalf of participants in RJR’s 401(k) retirement savings plan, alleging that the company breached its fiduciary duties by liquidating two funds held by the plan without sufficient investigation into the prudence of those actions. Tatum contended that

the fiduciaries’ action required disposing of Nabisco stock at a time when its price had reached a low mark, even though analysts at the time were recommending that investors buy or at least hold the stock. After the divestment, the value of the stock increased significantly.

The district court found that RJR provided no evidence of “any process by which fiduciaries investigated, analyzed, or considered the circumstances regarding the Nabisco stocks and whether it was appropriate to divest.” Thus, the district court concluded that a breach of fiduciary duty had occurred and that RJR had the burden of demonstrating that its breach did not cause the alleged losses to the plan. The district court determined, however, that RJR had met that burden because its decision was “one which a reasonable and prudent fiduciary could have made after performing such an investigation.” On appeal to the Fourth Circuit, Tatum argued that the district court applied an incorrect standard for determining continued on page 10 >>

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continued from page 9 >>

the causation issue. Specifically, Tatum argued that the lower court “incorrectly considered whether a reasonable fiduciary, after conducting a proper investigation, could have sold the Nabisco Funds at the same time and in the same manner, as opposed to whether a reasonable fiduciary would have done so.” RJR, in turn, argued that the correct standard had been applied, but that the district court had erred in its threshold conclusion that a breach had occurred. The Fourth Circuit first upheld the district court’s finding of a breach. “By conducting no investigation, analysis, or review of the circumstances surrounding the divestment, RJR acted with procedural imprudence no matter what level of scrutiny is applied to its actions,” the court wrote.

The Fourth Circuit also agreed with Tatum that the district court had applied the incorrect standard. RJR was required to prove that notwithstanding its imprudence, the ultimate investment decision was “objectively prudent.” According to the court, “a decision is ‘objectively prudent’ if ‘a hypothetical prudent fiduciary would have made the same decision anyway.” Citing the Supreme Court’s opinion in Knight v. Comm’r, 552 U.S. 181 (2008), the court emphasized that this distinction was not merely a matter of semantics. In Knight, the Supreme Court had “instructed that ‘could’ describes what is merely possible while ‘would’ describes what is probable.” The Fourth Circuit reasoned that “[w]e would diminish ERISA’s enforcement provision to an empty shell if we permitted a breaching fiduciary to escape liability

Failure to Sue Within Contractual Limitations Period Bars Action to Recover LTD Benefits

by showing nothing more than the mere possibility that a prudent fiduciary ‘could have’ made the same decision.” The court remanded the case to the district court to apply the more demanding standard. In a lengthy and vigorous dissent, one of the judges on the panel wrote, among other things, that loss causation “remains part of the plaintiff’s burden in establishing monetary liability under ERISA” and that the “minute parsings” of the differences between “would have” and “could have” constituted “semantics at its worst.” In the dissenting judge’s view, the decision will “lead to ... litigation at every stage behind reasonable investment decisions by ERISAplan fiduciaries.”

HR Academy: Effective Employee Investigations

Benson v. Life Ins. Co. of North America, 2014 WL 6666944 (E.D.N.C. Nov. 29, 2014)

Please join us for in-depth training on effective employee investigations.

Benson sought long-term disability benefits under a policy issued by Life Insurance Company of North America (“LINA”) and governed by ERISA. The policy included the following contractual limitations provision: “No action at law or in equity may be brought to recover benefits under the policy ... more than three years after the time satisfactory proof of loss is required to be furnished.” The policy required that proof of loss be given “within 90 days after the date of the loss for which a claim is made.”

Greenville, SC - February 5, 2015 Charleston, SC - February 19, 2015 Charlotte, NC - February 26, 2015

Benson’s alleged disability date was June 10, 2010. Under the terms of the policy, Benson had 90 days - until September 8, 2010 - to submit her proof of loss. Benson exhausted her administrative remedies on February 18, 2011, the date that LINA

denied her final appeal. Benson did not file suit until February 7, 2014, nearly three years later. LINA argued that the contractual limitations period required Benson to bring suit by September 8, 2013, which was three years from the deadline to submit proof of loss. The district court agreed with LINA and dismissed the claim for LTD benefits. Citing Heimeshoff v. Hartford Life & Accident Ins. Co., 134 S.Ct. 604 (2013), the court found that the contractual limitations provision afforded Benson a reasonable amount of time to file the suit following the exhaustion of all administrative remedies. Because Benson failed to file suit within the three years provided by the policy, her LTD claim was precluded by the limitation provision.

| ERISA and Life Insurance News | January 2015

This attorney-led program presents interactive exercises in which participants tackle real-life workplace controversies. Participants will review witness statements, assess strategies for conducting investigations based on a variety of facts, and develop plans for an effective investigation aimed at resolving the conflict and avoiding litigation.duties—getting to the bottom of complaints and deciding what to do about them. This program has been approved for 4 specified credit hours (general) by the HR Certification Institute. Register online: www.smithmoorelaw.com/events Questions? Please contact Michelle LaFata:  michelle.lafata@smithmoorelaw.com  336.378.5309

Claims for STD and LTD Benefits Barred by Contractual and Statutory Limitations Periods Hyatt v. Prudential Ins. Co. of Am., 2014 WL 5530130 (W.D.N.C. Oct. 31, 2014) Hyatt sought to recover short-term disability and long-term disability benefits under the Thermo Fisher Scientific, Inc. Health and Welfare Plan, an ERISA plan for which Prudential administered claims. She sued the plan, Prudential, and Thermo Fisher. Hyatt alleged that she became disabled on March 16, 2010. She was initially approved for short-term disability benefits through April 15, 2010, but was denied both shortterm and long-term disability benefits after May 25, 2010. Prudential denied her appeals. On November 29, 2011, Hyatt was approved for disability benefits by the Social Security Administration. The plan required written notice of a longterm disability claim within 30 days of the date the disability began, and written proof of the claim no later than 90 days after the elimination period ended. If written proof

was not available within 90 days, it was required to be provided within one year. The plan also stated that a legal action to recover long-term disability benefits must be initiated within three years of the time the proof of claim was required. Similarly, the plan required written notice of a short-term disability claim within 90 days of the expiration of the elimination period, but in no case later than one year. The plan did not specify a limitations period for short-term disability claims. The defendants all moved to dismiss the complaint, arguing that Hyatt’s claim was barred by the three-year contractual limitations period in the plan. In granting the defendants’ motion, the court reasoned that the three-year limitations period was reasonable, even if it began to run during the period while Hyatt was still required to pursue administrative remedies.

The court rejected Hyatt’s argument that the limitations period on her long-term disability claim did not begin to run until the expiration of one year following the deadline for the proof of claim, because she gave her proof of claim before the initial 90-day period expired. Thus, the threeyear contractual limitations period began to run at the end of the 90-day period. Similarly, the court found that Hyatt’s claim for short-term disability was barred by North Carolina’s three-year statute of limitations for breach of contract. The court reasoned that Hyatt provided proof of her claim within the initial 90-day period, and her administrative appeals were exhausted as of February 2, 2011. Thus, the three-year statutory period expired on February 2, 2014, but Hyatt did not file her lawsuit until February 11, 2014.

Message from the Editors Kent Coppage of Smith Moore Leatherwood’s Atlanta office has been named Chair-Elect of the Life Insurance Law Committee of the American Bar Association’s Tort, Trial & Insurance Practice Section. As Chair in 2016, Kent will lead the annual ABA TIPS Mid-Winter Symposium on Insurance and Employee Benefits. The symposium is co-sponsored by the Life Insurance Law Committee, the Employee Benefits Committee, the Health and Disability Insurance Law Committee, and the Insurance Regulation Committee.

Sanders Carter

Kent Coppage

Andrea Cataland

Contributors to this Issue

Manning Connors Greensboro, NC

Jennifer Rathman Atlanta, Ga

Mary Ramsay Charleston, SC

Peter Rutledge Greenville, SC

Heather White Charlotte, NC

Smith Moore Leatherwood LLP | Attorneys at Law |

ERISA AND LIFE INSURANCE LITIGATION Smith Moore Leatherwood’s ERISA and Life Insurance Litigation Team has earned a national reputation for excellence. The Team is comprised of attorneys who have represented ERISA entities and insurers in hundreds of cases in federal and state courts throughout the nation. In addition to claims brought under ERISA, the firm’s attorneys defend a broad variety of actions, including those brought under federal and state RICO Acts, the ADA, class actions, discriminatory underwriting claims, actions involving allegations of agent misconduct, and breach of contract claims for the recovery of life, accidental death, disability, and health insurance benefits.

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