The Erisa Trap: When Employees Can’t Win

Workers Find Limited Rights To Sue Over Insurance Claims; Pension Act `Turned on Its Head’

By Christopher Oster
The Wall Street Journal via Dow Jones

IN 1997, when Donya Anderson decided to deduct $7.36 a month from her paycheck
to pay for disability-income insurance, she thought it was worth it for
peace of mind.

Her decision seemed vindicated three years later, when, three months pregnant
with her fourth child, she submitted a claim with the insurer, UnumProvident
Corp. Citing complications with Ms. Anderson’s previous pregnancies and
a job at a carpet factory that required lifting 50-pound bales of fabric
and pushing 1,000-pound carts, her obstetrician had told her she should
stop working.

But UnumProvident denied the claim, leaving Ms. Anderson, 36 years old,
no choice but to quit her job in the Andalusia, Ala., factory and apply
for government assistance. Then, when she tried to sue in state court, the
insurer successfully argued the case should be heard in federal court —
and she wasn’t eligible to seek punitive damages. An UnumProvident spokesman
said the company couldn’t discuss the case in detail “because we do
not have a signed authorization from Ms. Anderson to discuss the claim and
it’s our policy to protect the privacy of our policyholders.”

The unraveling of Ms. Anderson’s safety net highlights a new frustration
among hundreds of thousands of workers across the country who have used
chunks of their paychecks to buy insurance policies, as Ms. Anderson did,
through an employer.

The catch has come in the form of a 30-year-old law that long has hamstrung
employees’ ability to sue over disputes involving their employer-sponsored
health-care coverage. Known as the Employee Retirement Income Security Act, or Erisa, the law was passed in the early 1970s to protect individuals’ pension rights. The law exempted employer-sponsored pension plans from state law and the Supreme Court later ruled that punitive damages couldn’t be awarded in Erisa cases. Over the years, courts have ruled that insurance policies considered employee benefits also are subject to Erisa’s state-law pre-emption. Long a bone of contention with plaintiffs’ lawyers, the law has withstood multiple court challenges.

In a development with far-reaching implications for workers, Erisa’s grasp
now extends far beyond pensions and health insurance. During the past decade,
insurers have ratcheted up sales of other policies through employers. Sales
of so-called group policies are growing at twice the pace of individual
policies. Disability-income insurance, dental coverage, long-term care and
dread-disease coverage are among the most popular.

And in rapidly increasing numbers, workers themselves are paying the premiums.
Many workers believe they are getting a better deal by buying insurance
through their employers. The premiums typically are cheaper and the insurers
aren’t as likely to turn away applicants. But, like Ms. Anderson, many consumers
aren’t aware that the policies carry restrictions, should disputes arise,
that policies bought by shopping around wouldn’t.

Insurers and benefits consultants call this growing type of coverage a
“voluntary” benefit. As recently as the late 1980s, insurance
policies purchased through employers, but paid for by employees, were rare.
But during the past decade, premiums collected by insurers for such coverage
has grown roughly 15% a year, according to benefits-expert Eastbridge Consulting,
of Avon, Conn. Between 1997 and 2002 alone, premiums paid on such policies
jumped to $4 billion from $2 billion. Sixty-four percent of U.S. employers
offer at least one “voluntary” benefit, according to Eastbridge.

Insurers, including UnumProvident and MetLife Inc., say the increasing
emphasis on selling insurance through employers has nothing to do with the
advantages offered by Erisa. Instead, they say, the channel simply is more
efficient than trying to peddle one policy at a time outside the workplace.
They note it also allows them to spread their risks better.

But it is clear they have a lot to gain by going this route. While some
policies sold through a workplace with employee-paid premiums aren’t subject
to Erisa, U.S. Department of Labor guidelines issued in 1975 specify that
the bar is high for exceptions. If an employer has endorsed a program or pays
some portion of the premiums, then the policyholder likely will find that
Erisa kicks in.

“They’ve turned Erisa on its head,” says Joseph Belth, professor
emeritus for insurance at Indiana University in Bloomington. “It was
supposed to protect employees, and it’s being used to protect insurers.”

The insurers say Erisa has no bearing on their claims decisions. But a
1995 Provident Corp. memorandum, unearthed by policyholders’ attorneys and
introduced as evidence in a lawsuit in federal court in San Francisco decided
last year in favor of a policyholder, shows that UnumProvident, at least,
is aware of the benefits available under Erisa. (Provident Corp. and Unum
Corp. merged in 1999 to form UnumProvident.) In the memo, a Provident assistant
vice president wrote that a colleague had identified 12 claims settled for
$7.8 million, that, if governed by Erisa, “our liability would have
been between zero and $0.5 million.” The memo states, “While our
objective is to pay all valid claims and deny invalid claims, there are
some gray areas, and Erisa applicability may influence our course of action.”

It adds: “The advantages of Erisa coverage in litigious situations
are enormous.”

UnumProvident says the memo was merely an attempt by the company to comply
better with an employee-benefit law that governs many of its claims practices.

Consumers’ frustrations with the legal restrictions that accompany their
payroll purchases just now may be reaching a boiling point, with disability-income
cases the first to surface in the legal system.

In Ms. Anderson’s instance, she and her employer, Shaw Industries of Dalton,
Ga., a unit of Berkshire Hathaway Inc., contend her disability-income insurance
wasn’t an employee benefit at all. In court documents filed by Ms. Anderson’s
lawyer, Shaw’s head of human resources indicated the company’s role was
limited to referencing the optional insurance in its employment materials
and withholding the premium payments from Ms. Anderson’s paychecks, which
it forwarded to UnumProvident. Shaw’s “employee information portfolio,”
which describes the company’s benefits package, contains no reference to
Erisa. The actual disability-income insurance policy — which Ms. Anderson
never saw because the document wasn’t routinely supplied to Shaw’s insured
employees does contain language noting Erisa’s application.

Ms. Anderson’s lawsuit, filed in federal court in Montgomery, Ala., says
UnumProvident forced her “to choose between the welfare of her three
children and the welfare of her unborn child.” Ms. Anderson’s lawyer,
Thomas Sinclair of Campbell, Waller & Poer LLC, in Birmingham, Ala.,
says his client, if allowed, will seek punitive damages in federal court
in an amount that would discourage UnumProvident from continuing what he
says are “bad-faith claims practices.” While the American Council
of Obstetricians and Gynecologists guidelines require doctors to decide
whether pregnant women are disabled, Unum overruled Ms. Anderson’s physician
after a single call from one of its nurses to a billing clerk at the doctor’s office, according to court filings by Mr. Sinclair. Unum’s spokesman says the company didn’t deny the claim based on the single phone call.

Mr. Sinclair filed a motion asking the court to reconsider a ruling from
this past November that the policy is governed by Erisa. But last month,
Judge Ira DeMent again ruled that it was an Erisa policy. He stayed Ms.
Anderson’s litigation, however, pending her lawyer’s appeal of the Erisa
matter to a federal appeals court.

In rare instances, judges have found ways to punish insurers despite Erisa.
For instance, John G. Schwartz, a state judge in Redwood City, Calif., awarded
attorneys’ fees of $1.25 million in a case in which the plaintiff was awarded
one-tenth that amount. When UnumProvident’s lawyers sought for lower attorneys’
fees, Judge Schwartz scolded that Unum’s actions in denying the claim “shock
my conscience.” The case was heard in state court because a federal
judge held that Unum hadn’t proved the case concerned an Erisa plan and
sent it back to state court. The state-court judge, however, determined
the case was subject to Erisa.

The case involved Patricia Patrick, 56, a weigh-master at a rock quarry
in Brisbane, Calif., who had paid her own disability-income insurance premiums
through payroll deduction during the mid-1980s. She had lost her hearing
while working at the quarry. Ms. Patrick challenged UnumProvident’s decision
to end her benefits in 1994, after she had collected benefits for five years.

Once Unum was successful in contending that Erisa applied, punitive damages
were off limits to Ms. Patrick. But Judge Schwartz, in his decision awarding
Ms. Patrick $124,664.15 in past benefits, took special note of the actions
of a 23-year-old UnumProvident claims specialist who acknowledged he had
“never been trained” in certain aspects of the company’s claims
processes. An appeals court later ordered the trial court to redetermine
the amount of attorneys’ fees and the parties settled for fees of $500,000.

Even some workers who consider themselves self-employed have falled under
the Erisa shield. Bernard Turnoy, 48, is an independent insurance agent
in Chicago who helps big businesses arrange life, health and disability-income
insurance for their employees. So when he filed a disability-income claim
in December 2001, after being diagnosed with a debilitating spinal condition,
he understood the business well enough to know his insurer, Liberty Mutual
Insurance Co., would ask questions.

But he never anticipated that Liberty, which denied his claim, would say
his policy was an employee benefit. “It was unfathomable that someone
who is an independent contractor and paying for his own insurance would
be governed by Erisa,” says Mr. Turnoy, who filed suit in August 2002 against Liberty in federal court in Chicago, alleging the insurer wrongly denied his claim and seeking restoration of benefits, payment for emotional distress and punitive damages.

The court in January determined Mr. Turnoy’s suit was pre-empted by Erisa
because he had purchased it through Massachusetts Mutual Life Insurance
Co., one of the insurers whose policies Mr. Turnoy sold. The court said
Mr. Turnoy’s lawyer, Mark DeBofsky of Daley, DeBofsky & Bryant in Chicago,
would need to file an amended complaint alleging Erisa-based claims. Liberty
declined to comment on the case, citing concerns about continuing litigation.

Does ERISA help you or hurt you?