In the ongoing effort to determine what constitutes appropriate remedies under ERISA, the Sixth Circuit U.S. Court of Appeals has gone farther than any court before it. Earlier this month the court affirmed a judgment directing a disability insurer to pay not only benefits due, but also an additional amount representing the profits it allegedly made on the benefits.
The case at issue is Rochow v. Life Ins. Co. of N. America. Rochow was an executive who fell seriously ill and applied for long-term disability benefits, which were denied. He appealed internally and then sued. Both a lower and appeals court found that the insurers denial was arbitrary and capricious.
Unfortunately, Rochow died in 2008, but his estate sued for attorneys fees and argued that the insurer unjustly enriched itself with the money it should have paid to Rochow. His estate sought disgorgement of profits in addition to benefits, and the court awarded $3.78 million that consisted of $910,629 in denied benefits and $2.8 million more in earnings based Life Insurance Company of North Americas rate of return on equity, which ranges between 11% and 39% per year.
The court ruled that ERISA permitted a participant to recover both the benefits payable under the plan (502(a)(1)) plus additional equitable relief (502(a)(3)). The court majority acknowledged that this position conflicts with the Supreme Courts ruling in Varity Corp. v. Howe, 516 U.S. 489 (1996), which generally holds that equitable relief ordinarily would not be available to a participant seeking plan benefits. But the majority said that there could be exceptions, such as when a participant seeks benefits that allegedly were wrongfully denied under the plan or requests equitable relief for misrepresentations about how long he would be covered under a different plan provision.
Thus, the majority concluded that their remedy was a logical extension of the remedies available under ERISA and prior case law. According to the majority, merely awarding benefits was not adequate relief, so more relief was required. There was a dissent, which pointed out that there is a need for a distinct injury to the plaintiff, but the majority ignored this position. The dissent was also concerned with the potential a ruling like this might allow plaintiffs to expand every abuse-of-discretion claim into a claim for returns on investments or profits which could create serious problems for plans that are self-insured.
This is probably not the last we will hear about this case. But it should serve as a wake-up call about the possibility that an abuse of discretion by a plan administrator can lead to much more serious consequences than simply having to pay benefits if they are wrong.
Keith R. McMurdy is a partner with Fox Rothshild focusing on labor and employment issues; he can be reached at email@example.com or 212-878-7919.
The information in this Legal Alert is for educational purposes only and should not be taken as specific legal advice.
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