Federal Court Rules On Disability Insurance Interest Claim
The 2nd Circuit Court of Appeals says members of employee benefit plans may be able to collect interest on unreasonably late benefits payments from disability insurers and other benefits providers.
The U.S. Supreme Court and other courts have usually held that Section 502(a)(3) of the Employee Retirement Income Security Act of 1974 prohibits plan members from suing in federal court for cash payments other than those specifically required by the terms of the plan contract.
But a three-judge 2nd Circuit panel has ruled in favor of the plaintiff in Helen Dunnigan, et al. vs. Metropolitan Life Insurance Company, a suit filed by a former auditor who says Metropolitan Life, New York, ought to pay her interest on back benefits payments it awarded her after four years and eight months of appeals.
“Unless such a delay is justified, we see no reason why it does not constitute a breach of fiduciary duty,” Circuit Judge Pierre Leval writes in an opinion for the court.
“Award of interest is [a] cognizable claim where plaintiffs seek restitution of the wrongful gain that the plan obtained by having the interest-free use of money rightfully theirs under the terms of the plan,” Leval adds, quoting a 1999 opinion from the 3rd Circuit Court of Appeals.
The ruling deals only with interpretation of ERISA, not with the merits of the underlying case.
If the ruling survives appeals, it will send the Dunnigan case back to the U.S. District Court in New York for consideration of the request for class-action status.
Lawyers for Dunnigan are seeking court permission to represent a class consisting of long-term disability insurance beneficiaries who have received lump-sum, retroactive benefits payments without also receiving interest.
A spokeswoman for MetLife declined to comment.
Michael Schoeman, a partner with Schoeman, Updike & Kaufman L.L.P., New York, who helped represent Dunnigan, welcomed the ruling.
“We think its an excellent decision,” Schoeman says.
If the ruling survives appeals, its effect on disability insurers may be modest, Schoeman predicts. “It just means insurance companies are going to have to move more promptly,” he says.
The lead plaintiff in the case joined her employers long-term disability insurance program in 1990, while she was working for a large accounting firm in New York.
She says she was diagnosed with Chronic Fatigue Syndrome in March 1994 and became totally disabled. In July 1994, she applied for LTD benefits, according to court documents.
Metropolitan Life denied the initial claim after 125 days, although federal regulations limit the determination period to 90 days, lawyers for Dunnigan allege.
Dunnigan filed two more appeals with Met Life, then hired a lawyer who spent three more years filing more appeals, according to lawyers for Dunnigan.
On Feb. 10, 1998, MetLife reversed itself without explanation and paid Dunnigan 55 months of retroactive benefits in the form of one large lump sum, according to lawyers for Dunnigan.
A federal district court in New York threw out Dunnigans initial complaint but ruled she could seek interest if she re-filed her complaint and showed Met Life had acted in bad faith.
Met Life argued that requiring it to pay interest on late benefits payments would amount to imposing the kind of noncontractual, noncompensatory damages forbidden by ERISA.
But “MetLife does not contend that the timing of its ultimate coverage decision depended on some change in circumstance over the intervening years, such as the submission of additional information, a change in diagnosis, a change in coverage, policy or procedure, or a change in medical knowledge,” Judge Leval writes.
Unless an insurer shows good cause to violate the 90-day federal limit on ERISA plan claim determination period, it might owe a claimant interest on benefits when it violates the time limits, Leval writes.
Reproduced from National Underwriter Life & Health/Financial Services Edition, January 21, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.