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Employee Benefits

Employee Benefits Developments 11/3 to 11/14 2003

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Case of the Week

Briefcase Full? Lunch Pail Probably Not The Best Alternative … Lesson #1: always follow a plan’s beneficiary designation change procedures or risk having your benefit paid to an unintended beneficiary. Lesson #2: clean out your lunch pail at least once each week. James Leeson worked for Roadway Express, where he was covered by a $103,000 group term life insurance policy. While James was “between wives,” he named his sister, Paula, as the beneficiary under the insurance policy. James married Lindea in October 1998, and made it known to a number of family members that he intended to change the beneficiary designation so Lindea would receive the death benefit. James signed the beneficiary designation change forms in March 1999 and asked Lindea “to take care of [them].” The signed forms, however, sat in the dining room until July 1999; so James took the forms and stuck them in his lunch pail with the apparent intention of submitting them to his employer. Shortly thereafter, James was killed in an auto accident; the forms were still sitting in the lunch pail. Recently, the Sixth Circuit Court of Appeals upheld the lower court’s determination that James’s sister Paula, not Lindea, was entitled to the death benefit. The actions James took to make the beneficiary change were determined to be neither compliant with the plain policy language requiring the beneficiary change to be received by the employer nor substantially compliant because the insured did not do all he could to make the beneficiary change. (Life Insurance Co. of North America v. Leeson (6th Cir. 2003).)

Rulings, Etc.

PBGC Announces Maximum Guaranteed Benefit for 2004 Plan Terminations. Against the backdrop of an underfunding crisis and talk of a government bailout, the Pension Benefit Guaranty Corporation (“PBGC”) announced November 13 the maximum guaranteed benefit (payable as a single life annuity beginning at age 65) for retirees covered under a single-employer defined benefit pension plan that terminates in 2004 will be $3,698.86 per month (up from $3,664.77 per month in 2003) or $44,386.32 per year (up from $43,977.24 per year in 2003). (Pension Benefit Guaranty Corporation News Release, November 13, 2003.)

Cases

Film at 11:00: Disability Benefits Upheld Despite Damning Video. In a case tailor-made for “60 Minutes,” Ronald Osbun secured disability benefits under Auburn Foundry Inc.’s retirement income plan on the basis of a physician’s determination that Osbun was “totally disabled and [unable to engage] in gainful employment.” In fact, an independent physician found “Osbun could not stand or walk for any length of time, lift more than five pounds, drive, climb, bend, stoop, squat, or push and pull with his arms, legs, or body.” Subsequently, however, a private investigator captured Osbun on videotape driving a vehicle, carrying a water jug, picking up bricks and tricycles, attaching a trailer to a vehicle, and cleaning two other vehicles. Auburn immediately terminated Osbun’s benefits, contending he was no longer totally disabled for purposes of its plan.

Slam dunk for the employer, right?  Wrong. Here’s the twist: the District Court for the Northern District of Indiana considered the termination of benefits to be arbitrary and capricious in the absence of supporting medical evidence. Said the court, “Auburn reached the conclusion that a mentally retarded, illiterate, partially blind, partially deaf, arthritic man with arteriosclerotic heart disease, thyroid insufficiency, and high blood pressure is capable of gainful employment, simply because he performed 1.5 hours of light physical tasks over the course of two days, and in spite of three medical reports finding total disability. This conclusion is ‘downright unreasonable.’” Well, when you put it that way … (Osbun v. Auburn Foundry, Inc. (N.D. Ind. 2003).)

Physician Is Not “Employee” for ERISA Purposes. The courts have long been divided over the status of small business owners under the Employee Retirement Income Security Act of 1974 (“ERISA”):  are they “employees,” who enjoy ERISA’s protections, or are they strictly “employers,” who do not? The answer to this question can set the entire tone for a lawsuit, because ERISA cases are heard exclusively in federal courts (which, many believe, favor defendants), while non-ERISA cases may be brought in state courts (which tend to favor plaintiffs). A recent case illustrates this point:

Dr. Richard Pearl, a shareholder in a small medical practice, suffered a disability and sought to collect benefits under three separate insurance policies owned by his group. The insurance carriers refused, so Pearl sued them in state court. The carriers successfully removed the suit to federal court, arguing Pearl’s claims arose under a welfare benefit plan governed by ERISA. But Pearl may have the last laugh. Recently, the federal District Court for the Eastern District of New York sent the case back to state court, holding Pearl is not an “employee” of his practice for ERISA purposes because he is “significantly independent in his own professional duties,” is a co-equal with his partners, cannot be fired, supervises his own work, reports to no one, and exercises significant influence over the organization. (Pearl v. Monarch Life Insurance Company (E.D.N.Y. 2003).)

Speak Now or Forever Hold Your Peace. A plan participant’s failure to raise arguments or develop a factual record during the administrative appeals process can be detrimental to his or her case. Just ask Joseph Suozzo. He worked at a law firm for some 30 years and was covered by the firm’s defined benefit pension plan. Following an appeal under the plan’s claims procedures, Suozzo sued and alleged his benefit under the plan had been miscalculated and that he was entitled to a larger benefit. As part of his case, Suozzo attempted to raise issues and introduce supporting evidence he had not presented during the administrative review process. The law firm, in opposition, moved to prevent Suozzo from introducing that evidence. The District Court for the Southern District of New York granted the law firm’s motion. The court not only agreed with the law firm’s position that Suozzo was attempting to raise new issues not considered during the administrative review process, it also concluded there was an insufficient demonstration of “good cause” to supplement the administrative record with respect to these issues. (Suozzo v. Bergreen (S.D.N.Y. 2003).)

Deemed Denial of Appeal Allows Claimant to Proceed to Court Review. Department of Labor regulations clearly provide a claims administrator must respond to a request for review of an adverse claim within 60 days, unless special circumstances warrant a 120-day review period. As Prudential recently learned, failure to heed the claims procedure time periods can be costly. Dr. Schmir was a surgical anesthesiologist who suffered from regular, severe migraine headaches, so he applied for long-term disability (LTD) benefits under his employer’s LTD plan. Prudential, the underwriter of the policy and administrator of the plan, determined Schmir was eligible for LTD benefits beginning in 1995. Prudential conducted periodic reviews and terminated Schmir’s benefits in October 2002. Schmir appealed the decision by letter in December 2002, but in June 2003—well past the 120-day deadline—Prudential denied the appeal and invited Schmir to appeal again. Instead, Schmir sued Prudential in August 2003. Prudential attempted to have the case dismissed on the grounds Schmir had failed to exhaust his administrative remedies before bringing suit. The court, however, ruled Prudential’s June 2003 response to the initial repeal was untimely (i.e., beyond the 120-day maximum period allowed for benefit determinations on review) and constituted a deemed denial allowing Schmir to proceed directly to court review. Prudential could not avail itself of another level of administrative review because it did not make the review available in a timely fashion. (Schmir v. Prudential Insurance Co. of America (D. Me. 2003).)