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Sixth Circuit Punishes Insurer: Not Just Benefits Due But Profits As Well

Posted in Court Cases, Plan Administration

In the ongoing effort to determine what constitutes appropriate remedies under ERISA, the Sixth Circuit Court of Appeals has gone further than any court before it, by affirming a judgment directing a disability insurer to pay not just benefits due, but also and additional amount representing disgorgement of profits it allegedly made on the benefits.  This is a giant expansion of ERISA remedies that undoubtedly cause ripples in the world of benefit plans.

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, and both a lower and appeals court found that LINA’s denial was arbitrary and capricious.  Unfortunately, Rochow died in 2008, but his estate sued for attorney’s fees and argued LINA 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 award that consisted of $910,629 in denied benefits and $2.8 million more in earnings based LINA’s 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 Court’s 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 sought benefits that allegedly were wrongfully denied under the plan, and also sought 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 or the plan to support a claim for equitable relief on top of a claim for benefits, 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 were 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.  Tread carefully when considering appeals lest you find yourself in this type of quagmire.