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Guest Article

Court Implies That Certain Monetary Damages May Be Recoverable Under ERISA


Summary: A federal district court refused to dismiss an ERISA claim for monetary damages stemming from a denied benefit -- even though the plan participant was deceased and never received the benefit -- because it believed that allowing the claim to be dismissed would create an incentive for plan administrators to prolong a lawsuit to the point where receiving the benefit would be pointless.

In rejecting a plan's motion to dismiss an ERISA claim, a federal district court in Texas ruled that although a plan participant is deceased and never received treatment for a denied benefit, his estate may pursue a claim to recover the monetary value of that treatment under ERISA. To allow otherwise, the court said, would give plan administrators an incentive to prolong an ERISA lawsuit until a participant dies or cannot have the disputed procedure. The court did rule, however, that the estate did not have standing to pursue an injunction prohibiting the plan from denying that treatment for similarly situated beneficiaries. The case is Erwin v. Texas Health Choice, 2002 WL 335460 (N.D. Tex., Feb. 22, 2002).

Facts of the Case

The opinion did not provide many details about the facts of the case. It appears that Charles Erwin was covered under U-Haul's group health HMO, which was issued by Texas Health Choice (THC). Apparently, he was denied coverage for a liver transplant (which therefore he didn't get) and subsequently died. The executor of his estate then sued Texas Health Choice for various state-law and ERISA claims. Some of the state-law claims were dismissed by a federal district court, leaving claims that included:

  1. ERISA violations, namely that THC violated ERISA by "wrongfully withholding benefits due" under the plan terms. For this claim, Erwin's estate sought the "full value" of the liver transplant and other benefits Erwin would have been entitled if he had lived, an injunction against THC's denial of transplant benefits to similarly situated plan beneficiaries, attorneys' fees, costs and any other relief; and

  2. Bad-faith claims under common law and state law.

ERISA Violations

In defending against the estate's ERISA claim, THC contended that monetary damages such as the "full value of the liver transplant" are not recoverable under ERISA. The court said that THC interpreted ERISA's civil enforcement provision to provide that plan participants can sue to recover benefits while still in a position to receive the medical treatment or can receive reimbursement for out-of-pocket expenses that they paid for medical services. Accordingly, in the court's view, THC contended:

  • Because Erwin was deceased, he was not in a position to receive the liver transplant allegedly covered by the plan; and

  • Because Erwin did not pay for and receive a liver transplant before he died, he was not entitled to recover the benefits allegedly due -- the value of a liver transplant.

The court found no case law to support THC's argument. However, no case law was cited to support the estate's argument either. In the court's view, THC's position conflicts with ERISA's "public policy rationale" to protect the interests of plan participants and beneficiaries, because it would give plan administrators an incentive to prolong a case until a participant dies or cannot have the disputed procedure. The court gave an example of a plan administrator that is sued after wrongfully refusing to cover a liver transplant. The plan participant, who cannot afford the treatment on his own, dies while the lawsuit is pending. The plan administrator would therefore "escape responsibility," according to the court.

"The poorer the patient, and the more expensive the service, the higher the incentive would be for the plan administrator to withhold benefits. As a consequence, the people who need the benefits the most -- those in serious condition and with few financial resources -- would be the most harmed under the interpretation of ERISA that [THC champions]," the court said.

The court added that it was "cognizant" that its interpretation of ERISA may result in a "windfall" recovery for Erwin's estate, which, if it prevails, would be entitled to receive the amount that THC would have been required to pay for the liver transplant. However, the court concluded that its interpretation was "more in line with the Congressional intent of ERISA, which was, at core, to provide a unified remedy for people wrongfully denied benefits, not to strip away all remedies for such breaches that were previously available to plaintiffs."

However, the court did find that Erwin's estate could not pursue an injunction prohibiting THC from denying transplant benefits to similarly situated beneficiaries, because Erwin's executor did not have standing to seek injunctive relief.

Bad-Faith Claims

Erwin's estate also alleged that THC was liable for both common-law and state-law bad faith for denying coverage for the liver transplant. THC contended that those claims clearly "relate to" its coverage decisions and therefore were preempted by ERISA. The estate then countered that: (1) the 5th U.S. Circuit Court of Appeals has previously held such bad-faith claims are not preempted by ERISA; and (2) even if the claims were preempted, they occurred under laws that regulate insurance and therefore were saved from preemption.

In rejecting the estate's first argument, the court distinguished the 5th Circuit rulings cited by the estate from the facts of the current case. Those 5th Circuit cases were "explicitly limited" to bad-faith claims brought by third-party health care providers for a plan administrator's alleged misrepresentation regarding whether a plan covered certain services, the court noted.

Furthermore, the 5th Circuit held that ERISA does preempt bad-faith claims relating to the "rights of the plan beneficiaries [including third-party assignees, such as hospitals] to recover benefits under the terms of the plan." Therefore, since Erwin was a plan participant or beneficiary seeking to recover plan benefits, the Erwin court found that the bad-faith claims were preempted by ERISA.

The estate then argued that the claims were saved from preemption for the following reasons: (1) the state-law claim was based on Texas insurance law, which "[o]n its face" is limited to entities in the insurance industry; and (2) the common-law claim was essentially based on state insurance law because a bad-faith claim can only be brought against insurers.

The court rejected these arguments, first noting that the 5th Circuit previously held that the Texas insurance law at issue did not regulate insurance. Furthermore, the court indicated that the U.S. Supreme Court held in Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987) that a common law bad faith claim does not relate exclusively to insurance and therefore is not saved from preemption. This reasoning also applies to the Texas law of bad faith, the court determined. In addition, based upon Texas case law, the duty of good faith and fair dealing is not exclusive to insurance contracts, according to the court. Accordingly, the court ruled that the bad-faith claims were not saved from preemption.

Implications

Unfortunately, the facts of the case are too sparse to understand the court's reasoning. For example, there is no discussion of why the liver transplant was denied or whether such transplants are excluded from coverage. Thus far, it must be assumed that the plan covered the treatment, based upon the court's conclusion. Presumably, more facts will come out when the claim for ERISA benefits is fully argued.

Nonetheless, the case should be disturbing to plan sponsors. It proposes that the value of benefits for services never provided should be paid to an estate. Hopefully, a subsequent ruling will address whether this is a legal remedy not allowed under ERISA or a permissible equitable remedy, particularly in light of the recent U.S. Supreme Court ruling in Great-West Life & Annuity Insurance v. Knudson, 534 U.S. 204 (2002).

Another key aspect of the ruling is the court's distinction between a bad-faith claim by a plan participant, which is preempted by ERISA, and a misrepresentation claim by a health care provider acting on a participant's behalf, which is not preempted. ERISA protects the rights of plan participants and beneficiaries -- not third parties. By protecting participants, ERISA also limits their available remedies. However, as the court noted in the Crouch case, a participant may bring a state-law claim -- traditionally preempted by ERISA -- against a plan.

Since the Supreme Court decision in Travelers reversed a line of rulings interpreting ERISA to have broad preemptive effect, courts have created a confusing patchwork of decisions that erodes ERISA's preemptive effect regarding state-law claims and other potential remedies available to ERISA participants.

Excerpted from the May 2002 supplement to Employer's Guide to Self-Insuring Health Benefits, © Thompson Publishing Group, Inc., 2002. All rights reserved.

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