Shirley O. Fought v. Unum Life Insurance Company of America
Docket: 02-2176
Court: Court of Appeals for the Tenth Circuit; August 13, 2004; Federal Appellate Court
Shirley O. Fought appealed the denial of long-term disability benefits by UNUM Life Insurance Company, arguing entitlement under her employer's group disability plan. Following a severe staph infection post-heart surgery, UNUM denied her claim, asserting that her disability was due to a pre-existing coronary artery condition as per the plan's language. After exhausting internal appeals, Fought filed a civil suit under 29 U.S.C. § 1132(a)(1)(B). UNUM acknowledged a conflict of interest as both the payor and administrator, but the magistrate judge denied discovery on this issue. The district court granted summary judgment in favor of UNUM.
The Tenth Circuit, exercising jurisdiction under 28 U.S.C. § 1291, found that the district court applied an incorrect standard of review regarding the plan administrator's denial. Consequently, the court reversed the summary judgment and remanded for further proceedings. Fought had enrolled in the UNUM plan in May 1998, with specific exclusions for disabilities related to pre-existing conditions, defined as those for which medical treatment occurred or symptoms existed within three months prior to coverage. Prior to enrollment, she had been diagnosed with coronary artery disease and underwent subsequent medical procedures shortly after her enrollment.
During surgery, doctors identified Ms. Fought's narrow and osteoporotic sternum, necessitating a specialized closure procedure. Post-surgery, her recovery was expected to be difficult due to wound concerns. She was discharged six days later, on March 22, 1999, with no signs of infection and good wound healing. However, three weeks post-discharge, her wound split open, leading to her readmission on April 8, 1999, where cultures revealed a few Klebsiella pneumonia bacteria. After five days of intensive care and antibiotic treatment, she was transferred to a skilled nursing facility, discharged on April 19, 1999, with a satisfactory wound appearance.
On May 7, 1999, Ms. Fought experienced chest pain and was readmitted on May 11, 1999, with elevated white blood cell counts and a low-grade fever. Exposed sternal wires were found, and cultures tested positive for Klebsiella pneumonia and methicillin-resistant Staphylococcus aureus. She required intensive care, underwent multiple surgeries, including significant sternal wound reconstruction, and was discharged on July 15, 1999, to another facility for ongoing wound care.
On September 13, 1999, UNUM denied her long-term disability claim, citing her pre-existing condition as a contributing factor to her disability. Ms. Fought contested this decision, providing letters from three doctors stating that her staph infection was not related to her coronary artery disease. Despite reviewing the medical opinions, UNUM maintained its denial, arguing that the staph infection stemmed from surgery for a condition diagnosed during the pre-existing period.
Ms. Fought engaged legal counsel to appeal UNUM's denial of her long-term disability claim. UNUM reaffirmed its denial, asserting that her staph infection stemmed from cardiac surgery related to a pre-existing condition. Following this, the New Mexico Public Relations Commission intervened, and UNUM clarified that the infection resulted from coronary bypass surgery necessitated by her pre-existing cardiac issues.
In August 2001, Ms. Fought filed a lawsuit in federal court against UNUM for violating 29 U.S.C. § 1132. UNUM acknowledged a conflict of interest due to its dual role as claims administrator and payor. Ms. Fought sought discovery to explore this conflict, which the magistrate judge denied. UNUM subsequently moved for summary judgment, and the district court, recognizing the conflict, interpreted the contractual language regarding causation broadly, concluding the staph infection was a foreseeable complication of her pre-existing condition. The court ruled in favor of UNUM, determining the denial of benefits was not arbitrary or capricious, and ordered Ms. Fought to cover UNUM's costs.
Ms. Fought is now appealing, presenting three main arguments: the district court incorrectly applied the standard of review, UNUM's denial was an unreasonable interpretation of the plan, and the court overlooked UNUM's obligation to ensure that plan provisions were clear to average participants. The analysis will focus on the appropriate standard of review, including the Tenth Circuit's "sliding scale" approach, its application in conflict of interest scenarios, and the relevance of a reduced deference standard in this case.
The analysis focuses on whether the plan administrator, UNUM, reasonably interpreted the plan language in light of Ms. Fought's arguments. Key considerations include: (a) the plan's exclusion clause, (b) the importance of causation in that clause, (c) relevant Department of Labor regulations regarding pre-existing conditions, (d) case law from various circuits and districts on similar issues, and (e) the potential availability of clearer exclusionary language. A critical aspect is the standard of review, which is de novo for summary judgment orders, similar to district court standards.
The Supreme Court's guidance in ERISA cases indicates that deference is granted to administrators when they possess discretionary authority, making their decisions subject to an 'arbitrary and capricious' standard unless the plan allows for a de novo review. In this case, the plan explicitly grants UNUM discretion to determine eligibility for benefits. Consequently, the court's review focuses on whether UNUM's actions were reasonable and made in good faith, considering factors such as the reasoning behind interpretations, consistency with previous interpretations, alignment with external standards, and adherence to the plan's purposes. Additionally, under the arbitrary and capricious standard, courts limit their review to the administrative record compiled by the administrator during the decision-making process.
An administrator's potential conflict of interest significantly influences the analysis of decision-making under ERISA. Such conflicts indicate that a fiduciary's decisions may be arbitrary and capricious, necessitating that any discretion granted to a conflicted administrator be scrutinized for potential abuse. Case law, including Caldwell v. Life Ins. Co. and Firestone, establishes that a conflicted fiduciary might favor its own interests over those of plan beneficiaries. Courts uniformly agree that a conflict of interest leads to a less deferential review standard, although they differ in how this adjustment is applied. The "sliding scale" approach, adopted in Chambers, maintains an arbitrary and capricious standard while reducing deference in proportion to the conflict's severity. This approach allows for a more rigorous judicial inquiry when conflicts are evident, as seen in cases like Ladd v. ITT Corp. and Spangler v. UNUM Life Ins. Co. However, the lack of clarity regarding the degree of reduced deference has resulted in inconsistent guidance for district courts, leading to increased litigation.
A less deferential standard of review is established for fiduciaries with conflicts of interest under ERISA. This standard aims to clarify guidance for lower courts and litigants, promoting sound public policy. In cases where a fiduciary has multiple roles, if a plaintiff fails to demonstrate a serious conflict, the conflict will still be considered as a factor in evaluating whether a denial of benefits was arbitrary and capricious. A burden-shifting rule is also introduced: fiduciaries with inherent conflicts must prove by substantial evidence that their denial of benefits was not arbitrary and capricious.
In scenarios categorized as "standard" conflicts of interest, the plaintiff must demonstrate the conflict's existence, which requires evidence showing the dual role of the plan administrator affected their impartiality. Factors to assess this include whether the plan is self-funded, the relationship between the administrator's compensation and the denial of benefits, and the economic impact of providing benefits on the company.
In cases involving inherent conflicts, proven conflicts, or serious procedural irregularities, a further reduction in deference is warranted. Under this standard, the plan administrator must justify the reasonableness of their decision according to the arbitrary and capricious standard.
The plan administrator is required to show that its interpretation of the plan's terms is reasonable and supported by substantial evidence. The district court must carefully evaluate the evidence and arguments to ensure that the administrator's decision is a rational application of the plan's terms and not influenced by any conflict of interest. It is proposed that in cases where a conflict of interest exists, the burden should shift to the fiduciary to demonstrate the reasonableness of its decision. This approach ensures that the plan administrator is aware that its decisions will be scrutinized for reasonableness and provides a record that proves the conflict did not bias the decision. This aligns with the Firestone standard, which allows courts to consider conflicts of interest while applying a reasonableness review.
The burden-shifting method offers several advantages: it aligns with post-Firestone rulings that maintain the arbitrary and capricious standard of review, allows for adjustments based on identified biases or self-dealing, provides clear guidance to courts and litigants, and ensures that less deferential review does not unduly raise insurance costs. In the context of this case, there is a clear inherent conflict of interest and procedural irregularity, as UNUM acknowledged a conflict yet resisted discovery regarding its extent and denied Ms. Fought's claim without independent review. Consequently, in light of these factors, a significant reduction in deference to the plan administrator's decision is warranted.
Under ERISA, insurers are required to prove the facts supporting any exclusion of coverage, with such claims treated as affirmative defenses in federal courts. The burden lies with the plan administrator to demonstrate, by a preponderance of the evidence, that a covered employee's illness is excludable under the policy. In reviewing a case involving UNUM, the district court acknowledged UNUM's conflict of interest but did not clearly articulate how this recognition influenced its review of the denial of benefits to Ms. Fought. The court's analysis emphasized whether the plan administrator's decision was objectively reasonable based on the administrative record, which closely aligns with the arbitrary and capricious standard of review. Under this standard, decisions do not need to be the only logical ones but must be supported by reasonable evidence. However, previous rulings indicate that when a conflict of interest is evident, a higher standard of justification is required. Consequently, UNUM was obligated to provide substantial evidence to justify its denial of coverage, and the case now requires examination of both the policy language and the evidence supporting UNUM's decision. The relevant policy states that disabilities caused by pre-existing conditions are not covered.
A pre-existing condition is defined as a medical condition for which an individual has received treatment or exhibited symptoms within three months prior to their coverage effective date, and the resulting disability occurs within the first 12 months of that coverage. The document emphasizes that the interpretation of health care agreements should reflect the true intent of the parties, using common and ordinary meanings of terms as understood by a reasonable participant.
In the case of Ms. Fought, there is contention over whether UNUM properly applied the pre-existing condition exclusion to her claim, as it appears to extend the policy language to deny coverage for disabilities resulting from surgery related to a pre-existing condition. Ms. Fought argues that surgery itself is not a pre-existing condition but a consequence of one, raising questions of causation. UNUM defends its position by asserting that the language of the exclusion allows for coverage denial if the disabling condition was caused by, contributed to, or resulted from a pre-existing condition, regardless of whether it was the sole cause. UNUM's interpretation hinges on a broad understanding of causation, suggesting that the pre-existing condition played a significant role in the development of the disabling condition. Ms. Fought counters this by illustrating the causation argument with a metaphor about being struck by lightning after going outside in the rain, highlighting the complexity of distinguishing between pre-existing conditions and subsequent disabling events.
Ms. Fought's argument highlights the extreme attenuation of causation in UNUM's defense regarding her disability claim. UNUM posits that her pre-existing coronary artery disease indirectly led to her disability through a convoluted series of events: the disease led to surgery, which created a surgical wound. This wound, complicated by her osteoporotic sternum and large breasts, resulted in wound dehiscence and ultimately a staph infection that rendered her disabled. The argument emphasizes that there are multiple intervening stages between the pre-existing condition and the disability, questioning the validity of UNUM's interpretation of causation as a basis for denying coverage.
Further, the Department of Labor’s regulations provide a crucial framework for understanding pre-existing condition exclusions. An example clarifies that a leg fracture resulting from an accident is not considered related to an individual’s diabetes, despite the diabetes contributing to circumstances surrounding the accident. This distinction reinforces the necessity for plan sponsors to evaluate whether conditions are "directly attributable" to a pre-existing condition before applying exclusions. The guidelines suggest that conditions contributing to an injury but not directly causing it may not warrant exclusion under such clauses, allowing for nuanced arguments regarding causation in disability claims.
UNUM's interpretation of the exclusion for pre-existing conditions may be excessively broad, as it must demonstrate that the disabling condition is substantially or directly linked to the pre-existing condition, rather than just a contributing factor. In Ms. Fought's case, her staph infection is not related to her coronary artery disease, even though unstable angina, linked to her coronary condition, contributed to her surgical need. Contract law principles dictate that exclusions should be interpreted narrowly. The burden falls on the insurer to prove that a claim falls under an exclusion. Case law supports this approach, as seen in *Cash v. Wal-Mart Group Health Plan*, where the court found a direct link between diverticular disease and diverticulitis. In contrast, there is no necessary precursor link between Ms. Fought's coronary condition and her staph infection. Additionally, the *Holsey v. UNUM Life Ins. Co. of America* case illustrates that complications like blindness from diabetes are recognized, unlike staph infections in relation to coronary artery disease. The *Currie v. Metropolitan Life Ins. Co.* case further emphasizes that conditions arising from the same source are treated as related, but this does not apply to Ms. Fought's situation, where the staph infection stems from a different cause.
The central issue pertains to the sufficiency of the causal connection between a disability and an underlying condition, rather than the source of the disability itself. In Reinert v. Giorgio Foods, Inc., the court ruled against the denial of benefits for a plaintiff who suffered a distinct ulceration caused by an insulin needle, despite her pre-existing conditions of diabetes and Charcot joint disease. The court acknowledged that while the different ulcerations could be subtle, the needle ulceration was considered a separate injury. Conversely, in Vander Pas v. UNUM Life Ins. Co. of America, the court criticized UNUM for failing to provide a proximate cause analysis regarding a subdural hematoma resulting from Coumadin, a medication taken due to a pre-existing heart condition. The court emphasized that the mere existence of a pre-existing condition does not equate to it being the cause of the disability. UNUM misinterpreted the ruling by suggesting that the court did not base its decision on proximate cause, when in fact it required UNUM to demonstrate that the use of Coumadin was a pre-existing condition contributing to the disability. Similarly, UNUM must establish that the staph infection causing the disability was linked to a pre-existing condition.
Ms. Fought argues that the contract language regarding long-term disability benefits could be clearer in excluding coverage for complications from surgery. She references a circuit court case, Kaus v. Standard Ins. Co., which specifically states that benefits are not payable for disabilities caused by preexisting conditions or their treatments. The district court acknowledges that while Kaus's language is clearer, the current contract's broad language suffices to encompass the treatment received. However, Ms. Fought contends that UNUM, a knowledgeable party, had the chance to include explicit language similar to Kaus but did not do so, making it unreasonable to apply the exclusion retroactively to her detriment. The conclusion drawn is that the exclusion provision should not be interpreted as broadly as UNUM suggests, in light of Department regulations on proximate cause and the precedent requiring narrow interpretations of exclusion clauses.
Furthermore, the evaluation of evidence regarding the denial of benefits is critical. UNUM's denial was partly based on a discharge report from Dr. Waljii, which noted complications during Ms. Fought's heart bypass surgery, including a narrow and osteoporotic sternum that required complex surgical reinforcement. Post-surgery, she faced significant risks of wound complications, which materialized when she was readmitted for wound care due to sternal dehiscence and a possible infection, ultimately diagnosed as methicillin-resistant Staphylococcus aureus in her bloodstream.
Ms. Fought filed her long-term disability application in June 1999, citing an inability to work due to complications following open-heart surgery for coronary artery disease, including a staph infection. Her hospitalization lasted two months, during which she underwent multiple procedures to address the infection. UNUM's internal review linked her condition to pre-existing severe hypertension and left ventricular hypertrophy, despite acknowledging that the staph infection was not present prior to the surgery. Ms. Fought provided statements from three doctors asserting that the staph infection was unrelated to her coronary artery disease and did not have a preceding history. UNUM contended that these doctors' notes did not establish that the staph infection caused her disability, noting that one doctor attributed her disability to her heart condition. The document emphasizes that conflicting evidence may indicate a reasonable decision by a plan administrator; however, UNUM must provide substantial evidence justifying its denial of benefits. The majority of Ms. Fought's medical records suggest she was recovering well from surgery, with the staph infection identified as the debilitating condition. UNUM failed to present sufficient evidence linking the infection to her pre-existing heart condition and did not conduct an independent evaluation, despite its acknowledged conflict of interest.
In cases of conflict of interest, the Seventh Circuit mandates that fiduciaries conduct a thorough independent investigation to ensure their actions align with the best interests of plan beneficiaries. Seeking expert advice is a key indicator of such diligence. Relevant case law emphasizes that failing to obtain independent reviews in situations where claims involve uncommon conditions may constitute procedural irregularities. Specifically, in the case involving UNUM, the court found that their denial of benefits lacked substantial evidence, particularly given the conflict of interest. The court ruled that UNUM's reasoning did not adequately connect the claimant's pre-existing condition with the current disability. Consequently, the district court's summary judgment favoring UNUM was reversed, and the case was remanded for further proceedings. The analysis also noted that plan administrators must not disregard reliable evidence, including treating physicians' opinions, but are not required to give them special weight under the law. The terms "arbitrary and capricious" and "abuse of discretion" are treated as synonymous in this legal context.
Several circuit courts have recently debated the appropriateness of the "abuse of discretion" versus the "arbitrary and capricious" standards of review in legal cases, with most concluding that the distinction lacks significance. The prevailing consensus adheres to the arbitrary and capricious standard. Reviews from various circuits reveal inconsistencies on how to handle conflicts of interest in fiduciary decisions, with courts suggesting a reduction in deference proportional to the conflict's influence. Notable cases illustrate that while some deference is warranted, it should be adjusted based on the specific circumstances of the conflict. The Third Circuit highlights the awkwardness of labeling the review as a "heightened arbitrary and capricious" standard, noting the ambiguity in how the standard shifts when a conflict is present. Additionally, there is authority indicating that the burden lies with insurers to prove that benefit denials fall within narrowly defined exclusionary clauses, a principle reinforced by ERISA regulations which require plan administrators to demonstrate that claims meet exclusion criteria. The document concludes with a reversal of the district court’s summary judgment in favor of UNUM and vacates the order requiring UNUM to recover its costs from Ms. Fought.
