Jose Cardoza filed a lawsuit against United of Omaha Life Insurance Company under the Employee Retirement Income Security Act (ERISA) concerning the calculation of his long-term disability (LTD) benefits. United of Omaha contended its calculations were correct and counterclaimed for reimbursement of alleged overpayments of short-term disability (STD) benefits. The district court ruled in favor of Cardoza, finding United of Omaha's calculations arbitrary and capricious.
On appeal, the court found that the district court erred regarding the LTD benefits calculation, determining that United of Omaha's approach to calculating Cardoza’s LTD benefits based on verified earnings was reasonable and in good faith. In contrast, the court upheld the district court's decision concerning the STD benefits, concluding that United of Omaha's recalculation based on earnings verified by premium, rather than Cardoza’s actual earnings, was unreasonable.
The court exercised jurisdiction under 28 U.S.C. § 1291, reversing the decision in part and affirming it in part, and remanded the case for further proceedings. Cardoza's employment as a truck driver with Durango-McKinley Paper Company ended following a disabling accident in July 2008. He received STD benefits calculated from his actual 2007 earnings and subsequently applied for LTD benefits, which were also approved based on a different calculation method outlined in the policy.
Commissions, overtime pay, and employee contributions to deferred compensation plans are included in the calculation of Cardoza's basic monthly earnings for long-term disability (LTD) benefits, while Policyholder contributions, bonuses, shift differentials, and other extra compensation are excluded. United of Omaha calculated Cardoza’s LTD benefits based on an annual earnings figure of $24,273.60, which it claimed was reported and used by Durango-McKinley for premium payments in 2007. United of Omaha categorized Cardoza as an hourly employee with annual earnings below $40,000 for both LTD and short-term disability (STD) policies. Cardoza contested this calculation, providing evidence of his actual earnings, which primarily included tonnage pay, not fully captured in United of Omaha’s figure. United of Omaha maintained that tonnage pay constituted 'extra compensation' and thus was excluded from the LTD calculation.
Additionally, United of Omaha acknowledged a miscalculation in Cardoza’s STD benefits and sought reimbursement for alleged overpayments, which Cardoza refused. After an unsuccessful appeal through United of Omaha’s process, Cardoza filed a lawsuit challenging the LTD benefits calculation and seeking attorney’s fees. United of Omaha counterclaimed for the STD overpayment. The district court favored Cardoza, finding United of Omaha's exclusion of tonnage pay arbitrary and capricious, and denied United of Omaha’s motion to limit Cardoza’s benefits under the policy’s maximum provision for employees earning less than $40,000. The court also awarded Cardoza attorney’s fees and costs. United of Omaha appealed these decisions, arguing that its calculations were reasonable and made in good faith. The court reviews summary judgment orders de novo, focusing solely on the administrative record in ERISA cases where no trial is necessary.
No deference is granted to the district court's decision regarding United of Omaha's handling of claims under the LTD and STD policies, which allow for discretion in interpreting policy terms. The court will determine if United of Omaha's interpretations were reasonable and made in good faith, using the arbitrary and capricious standard. Factors indicating a potentially arbitrary denial include lack of substantial evidence, legal errors, bad faith, and conflicts of interest. Substantial evidence is defined as more than a trivial amount but less than a preponderance.
Cardoza contends that United of Omaha's dual role as claims administrator and payor of benefits creates a conflict of interest that undermines its fiduciary duty. Cardoza argues that this conflict warrants reduced deference to United of Omaha's decisions. In response, United of Omaha asserts that its conflict did not influence its benefit calculations and should receive minimal consideration. Limited discovery allowed Cardoza to investigate United of Omaha's conflict and its initial claim of lacking internal guidelines for claims determinations.
Testimony from United of Omaha's Director of Customer Service outlined measures taken to mitigate bias, including restricting claims analysts' access to financial information, physically separating claims personnel from other departments, and ensuring claims staff are compensated based on overall company performance rather than individual claims outcomes. The court finds that these measures demonstrate United of Omaha's efforts to minimize bias, leading to a determination that Cardoza has not provided contrary evidence.
Ultimately, the court will factor in United of Omaha's conflict of interest when assessing the arbitrariness of its decisions but will assign it minimal weight due to the company's proactive steps to ensure accuracy. The court concludes that the calculation of Cardoza's LTD benefits was reasonable and made in good faith, as established by the policy terms and the administrative record, interpreting them as a reasonable person in Cardoza's position would understand.
LTD benefits are determined by an insured's basic monthly earnings, defined as the average gross monthly earnings received from the Policyholder and verified by premiums during the calendar year preceding the onset of disability. For Cardoza, whose disability began in 2008, this means his earnings were based on the verification from Durango-McKinley for the year 2007. United of Omaha claims Cardoza's verified earnings for that year were $24,273.60 annually, supported by screenshots from their records, showing his earnings as $23,568.50 effective February 1, 2007, and increasing to $24,273.60 on June 4, 2007.
United of Omaha asserts that these figures align with premiums paid by Durango-McKinley, based on Cardoza's classification as an 'Eligible Hourly Employee' earning less than $40,000. An internal record from December 2008 confirms that benefits were calculated based on the reported salary, noting that 'per load' earnings were not included. Throughout the claims process, United of Omaha maintained that the premiums were based on the $24,273.60 figure, a position Cardoza has not disputed. In fact, he admitted during summary judgment that this premium figure was accurate.
Cardoza cites Mort v. United of Omaha Life Ins. Co. to argue that the 'verified by premium' clause does not prohibit the use of accurate income statements for calculating benefits. He claims, similar to Mort, that the policy allowed United of Omaha to directly obtain income documentation from Durango-McKinley without further verification and adjust premiums accordingly if there was a change in benefit eligibility.
Cardoza contends that the verification clause in his Long-Term Disability (LTD) policy does not prevent the use of accurate income statements for calculating benefits, despite the premium received by United of Omaha. He claims that United of Omaha was aware of his actual earnings in 2007 as of July 2008 but did not adjust their premium rates. However, he misinterprets the precedent set in Mort, where the Ninth Circuit determined that the policy allowed for adjustments based on updated income documentation, a provision absent in Cardoza's LTD policy. The LTD policy permits United of Omaha to obtain income documentation from Durango-McKinley without further verification, but it does not allow for adjustments to benefit payments based on this information. Changes in premium rates could occur only if there was a change in eligibility for benefits, and any potential adjustment based on 2008 information does not influence the 2007 earnings calculation for LTD benefits.
Cardoza also alleges that United of Omaha's error led to Durango-McKinley paying an incorrect premium, asserting that United of Omaha was responsible for determining the premium based on its underwriting knowledge. The district court supported this view, referencing an internal communication suggesting that Durango-McKinley did not report all earnings. However, the statements do not confirm any error in the premium determination and merely question whether 'per load' earnings were considered as commissions. Cardoza provides no additional evidence to substantiate his claim of error by United of Omaha, and the existing evidence suggests otherwise.
United of Omaha determined Cardoza's disability insurance premium based on information from Durango-McKinley, which classified him as an hourly employee earning under $40,000, with reported earnings of $24,273.60 for 2007. Cardoza did not contest these points, and no evidence suggests he ever did. Both Long-Term Disability (LTD) and Short-Term Disability (STD) policies required Durango-McKinley to provide accurate information for policy administration, and United of Omaha relied on this information. When a discrepancy in Cardoza's earnings was identified, United of Omaha offered Durango-McKinley the chance to pay back premiums based on actual earnings, which they declined.
For LTD benefits, United of Omaha's calculation based on the reported earnings of $24,273.60 was deemed reasonable and made in good faith. In contrast, for STD benefits, the calculation based on the same earnings figure was found unreasonable. The STD policy specifies that benefits should be calculated from Cardoza's average weekly earnings for the year preceding his disability, which amounted to $61,881.47 in 2007. Therefore, United of Omaha's reliance on the lower earnings figure for STD benefits was contrary to the policy's clear language. Cardoza is not required to return any STD payments received, as these were calculated using the correct earnings figure. United of Omaha contends that its calculations were reasonable based on the information provided, yet the absence of verified earnings language in the STD policy undermines this assertion.
Durango-McKinley is criticized for potentially misrepresenting earnings to lower premium payments for Short-Term Disability (STD) coverage while later reporting higher earnings to claim increased benefits. This misrepresentation does not justify United of Omaha's calculation of Cardoza's STD benefits based on the 2007 reported earnings since the policy specifies benefits should be calculated solely on earnings. Regarding attorney's fees and costs under ERISA, a fee claimant does not need to be a prevailing party but must show some success on the merits. The court considers five factors for awarding fees: the opposing party's bad faith, ability to pay, deterrence, benefits to all ERISA participants, and the merits of the case. The district court initially granted Cardoza's motion for fees based on the unreasonableness and lack of good faith in United of Omaha's calculations, but this court found the LTD calculation to be reasonable and in good faith. Consequently, the court reverses the summary judgment in favor of Cardoza regarding the LTD calculation, affirms the judgment related to the STD benefits recalculation, and remands for reevaluation of attorney's fees and costs.
