Retirement – LTD benefits – Pre-existing condition

Listen to this article

Where a plaintiff brought suit alleging that the denial of his long-term disability benefits claim violated the Employee Retirement Income Security Act, the lower court did not err in entering a judgment for the plaintiff despite the defendant insurance company’s assertion that the plan’s exclusion for disabilities caused by pre-existing conditions applied.

“After being diagnosed with malignant melanoma, John Lavery applied for benefits under his employer’s long-term disability benefits plan, which Aetna Life Insurance Company administered and funded. After Aetna denied Lavery’s application under the plan’s exclusion for disabilities caused by pre-existing conditions, Lavery brought this lawsuit in federal district court against Aetna and the plan, alleging that the denial of his disability benefits claim violated the Employee Retirement Income Security Act (ERISA), 29 U.S.C. section1001 et seq. The district court agreed with Lavery and awarded him back benefits, interest, fees, and costs. …

“The defendants argue that Lavery’s April 2014 office visit with Dr. [Anthony] Lopez sufficiently qualified his malignant melanoma as a pre-existing condition during the March 1, 2014, to May 31, 2014, look-back period (the ‘initial look-back period’). …

“Lavery contends that because Dr. Lopez did not think he had melanoma and simply referred him to another doctor, Dr. Lopez could not have diagnosed, treated, provided services for, or provided drugs or prescriptions for ‘the disease or injury’ that caused Lavery’s subsequent disability. Rather, argues Lavery, Dr. Lopez preliminarily diagnosed a different, non-disabling disease and provided no treatment, services, or drugs for it. He simply referred Lavery to another doctor for a second opinion. That second doctor then correctly diagnosed the melanoma on June 19 and, later that month, provided treatment and services ‘for the [melanoma].’

“We previously found materially identical plan language ambiguous. …

“So, how do we resolve that ambiguity? In Hughes [v. Bos. Mut. Life Ins. Co., 26 F.3d 264, 268 (1st Cir. 1994)], the plan administrator claimed no discretion under the plan. We therefore invoked the standard rules for interpreting insurance policies, narrowly construing ambiguous language against the insurer under the doctrine of contra proferentum. … Here, though, the Plan contains a clause plainly reserving to Aetna discretionary interpretation authority. The existence of this clause requires that we defer to Aetna’s reasonable reading of the Plan unless Aetna’s decision to deny a benefits claim was arbitrary and capricious. …

“… [F]or purposes of this case we find it helpful to frame our analysis by asking a simple question: To what extent has Aetna conducted itself as a true fiduciary attempting to fairly decide a claim, letting the chips fall as they may? To the extent Aetna has not so conducted itself in deciding Lavery’s claim, we would tend to move in the direction of viewing its decision as arbitrary and capricious rather than fair and reasoned.

“To answer that question, we turn first to Aetna’s structural conflict of interest. We have held that ‘a conflict exists whenever a plan administrator, whether an employer or an insurer, is in the position of both adjudicating claims and paying awarded benefits.’ … There is no doubt that such a conflict is present here, as Aetna is both the Plan’s underwriter and claims administrator. That said, Aetna produced evidence showing steps it has taken to minimize the effects of this conflict. Such precautions would normally cause us to afford little to no weight to Aetna’s structural conflict. … However, as the remainder of our analysis will show, we find that Aetna’s behavior suggests that its structural conflict of interest continued to play a role in its handling of Lavery’s benefits claim. …

“In explaining its denial decision to this court, Aetna avers that it was Lavery’s burden to ‘show[] that he was free from melanoma during the look-back period.’ This assertion contradicts the plain language of the Plan. The Plan states that a disease is a pre-existing condition if, during the look-back period, the disease was ‘diagnosed or treated,’ or the applicant received ‘services’ or took prescribed or recommended drugs for the disease. Lavery did not have to show that he was free from melanoma during the look-back period in order to be covered under the Plan. Nor does the fact that Lavery had melanoma during the look-back period establish that the disease was a pre-existing condition as defined by the Plan.

“Aetna’s flatly incorrect interpretation of the Plan strongly suggests that either Aetna has been mistakenly relying on an overly broad reading of the pre-existing condition exclusion or that it is behaving like a conflicted party intent on advocating for a desired result rather than a fiduciary explaining its decision…. Taking all of this together, we find that Aetna’s denial of Lavery’s claim was less the decision of a reasoned fiduciary and more the product of an arbitrary attempt to justify a preferred result, and so Aetna’s decision is not entitled to deference.

“… Applying contra proferentum, we read the Plan just as [Therese] Leimback and the two clinical technicians read it: Dr. Lopez did not treat melanoma, provide services for melanoma, prescribe or recommend drugs for melanoma, or diagnose Lavery’s disabling disease as melanoma. We therefore agree with the district court that Lavery’s claim should not have been denied based on his office visit with Dr. Lopez during the initial look-back period. …

“… It was not until its September 2015 final denial decision that Aetna first told Lavery that there was a corrected look-back period upon which Aetna relied as an alternative basis for denial. Indeed, prior to the September decision, Aetna repeatedly told Lavery that his look-back period was March 1, 2014, to May 31, 2014. Because Aetna made clear that the September decision was ‘final’ and that Aetna would take ‘no other action,’ Lavery was never given an opportunity to respond to the corrected look-back period. We find this to be a clear violation of 29 C.F.R. section2560.503-1(h)(4)(ii). …

“… Because it is apparent from the record that Lavery was lulled into foregoing the presentation of the substantial argument that he qualified even under the amended Plan, we find that Lavery has met his burden of showing that he was prejudiced by Aetna’s last-minute, unchallengeable invocation of the corrected look-back period in the final letter rejecting his appeal. …

“Recognizing that more than a year has passed since the district court’s order and initial judgment, we remand with instructions for the district court to extend its award of back benefits through the date of the mandate corresponding with our opinion today. If Lavery seeks any further disability benefits for time periods after that date, he must proceed pursuant to Aetna’s administrative process under the Plan’s ‘any occ’ standard. …

“For all the reasons stated above, we find that Aetna’s resolution of the relevant ambiguity was arbitrary and that an unconflicted fiduciary would likely have found coverage. We therefore affirm and remand to the district court for further proceedings that may be necessary in view of this opinion and the passage of time from the prior entry of judgment.”

Lavery v. Restoration Hardware Long Term Disability Benefits Plan, et al. (Lawyers Weekly No. 01-206-19) (29 pages) (Kayatta, J.) Appealed from a decision by Casper, J., in the U.S. District Court for the District of Massachusetts. Lori A. Medley, with whom Kenneth J. Kelly and Epstein Becker & Green were on brief, for the defendants-appellants; Stephen Churchill, with whom Fair Work, P.C. was on brief, for the plaintiff-appellee (Docket Nos. 18-1885 2027) (Sept. 3, 2019).

Click here to read the full text of the opinion.