Paying for Your Own Disability Policy May Not Avoid ERISA
Many clients and attorneys alike often think that if they paid for a policy themselves, then it should be a policy governed by state law and not federal law. In other words, the Employee Retirement Income Security Act should not govern the claim. That is not necessarily true, and a recent case provides a good example.
Dr. Campbell was an owner in Mount Auburn Cardiology Associates, Inc. He signed an application for a disability policy with Provident Life and Accident Insurance Company (Provident), which operates under the tradename Unum Group. Provident issued the policy to Dr. Campbell and three other cardiology employees. His policy and the other employees were all in the same risk group. Billing was sent to the employer and paid by the employer. A premium discount of 12% was allowed because the employer sponsored all of the policies. About four years later Dr. Campbell signed an application to increase his coverage and Mount Auburn was to pay for the increase in coverage.
Things changed in 2010, about 15 years after the increase in coverage. Dr. Campbell’s policy was removed from the list, bills and premium notices were instead sent directly to Dr. Campbell, and he paid the premium directly. However, unbeknownst to him, he still received a discount because he was part of the risk group. Nine years after that Dr. Campbell filed a disability claim due to an injury, which precluded him from working as an interventional cardiologist. The claim was initially approved, but about one month later it was denied because Unum thought the disability was due to sickness and not an accident.
Dr. Campbell filed a lawsuit in state court the next year, after the matter could not be worked out and Unum removed the matter to federal court contending that ERISA governed. Dr. Campbell sought to remand the matter because he was paying for this policy himself, and always considered it a private policy. His employer had no involvement with it, other than at one time years ago he paid premiums. Also, there was no separate written plan so ERISA could not govern. Unum countered that the employer delegated all the administration of the plan to Unum and that Dr. Campbell was in a risk group with other employees and so was part of a plan. There was no need for a separate formal written plan document other than the policy.
The court in Campbell v. Unum Grp., Civil Action 21-11637-TSH, at *6 (D. Mass. Sep. 27, 2022) cited to Wickman v. Northwestern Nat’l Ins. Co., 908 F.2d 1077, 1083 (1st Cir.1990) that “an expressed intention by the employer to provide benefits on a regular and long-term basis” is the key requirement for a plan to be established and ERISA to govern. Even though Dr. Campbell paid for premiums himself later on, and even though he indirectly paid the premiums before because he was an owner of the employer, and even though there was no separate written plan document apart from the policy provided to him, the fact that the policy was provided through the employer and as part of a risk group established for that employer, was enough. All state law claims asserted were preempted by ERISA, which now significantly changed the value and trajectory of the case.
This policy could have been set up so as to be exempt from ERISA. The ERISA statute has a safe harbor regulation, which if followed exempts a policy from ERISA. However, all elements could not be met here. As is often the case, after discounts are applied and policies issued, there is typically little discussion on what law would govern if a claim arose.
When a claim arises, factual issues not previously known, can greatly affect the value of a case and also whether it is amicably settled or not. For example, ERISA precludes a jury trial, but a private policy does not. Further, ERISA precludes any extra contractual damages, such as mental anguish and punitive damages, while a private policy claim may invoke those damages in many jurisdictions. Attorney’s fees can be awarded under ERISA for “some degree of success on the merits”, but that does not happen as often as most plaintiffs would prefer and rarely in some jurisdictions.
Finally and perhaps most importantly, policies under state law are not impacted by discretionary clauses, but under ERISA, discretionary clauses are enforceable in many jurisdictions. That alone can make a difference as to whether the case is won or lost. Clearly, it is tragically unfair that discretionary clauses can have this level of impact and it is time that they were made unlawful on the federal level.
Dr. Campbell’s case is staying in federal court. So what are the practical considerations to ponder? I do not know the fee arrangement, but I do know from 30 years of experience that he will likely pay out over $100,000 and perhaps more than $300,000 to litigate this case. Or if represented on a contingency fee basis, he will receive less than the full policy benefit, because a significant percentage will be paid to his attorney. An award of attorney’s fees then is his only hope of being made whole.
Even with an award of fees, the court may not award all attorney’s fees. Thus, even though he paid premiums to receive a policy benefit of perhaps $20,000 per month, because of ERISA he will not receive that full value when taking into account litigation costs and fees. These are the same issues for every claimant, and insurance companies know this. Maybe you understand a little better now why our brand is “Rebuilding Justice one case at a time.” ERISA is a trap for the unwary and unfair to claimants on many levels.