To err may be human but forgiveness has its price.
Say your long term disability plan is fully insured (as opposed to self-funded) and your claim has been wrongfully denied. You've exhausted all ERISA-mandated administrative appeals, but without success. So it's time to file a lawsuit against the insurer, right? Wrong, at least for the time being. A strange quirk of ERISA (here in the 9th Circuit) is that if an Insurance Company denies your claim, you can't sue that insurer (unless it is also acting as the “plan administrator”, which it will never do).
The cases on point are Gelardi v. Pertec Computer Corp 761 F.2d 1323 (9th Cir. 1985), Everhart v. Allmerica Financial Life Ins. Co. 275 F.3d 751 (9th Cir., 2001) and Ford v. MCI Communications Corporation Health and Welfare Plan, 399 F.3d 1076 (9th Cir., 2005). These cases hold that any action for plan benefits brought under 29 U.S.C. § 1132(a)(1)(B), must be brought against the “Plan” or the “Plan Administrator”.
Absurd? Of course it is. After all, it is the insurer and no one else, who is responsible for paying all benefits under “the Plan”. Moreover, in all likelihood it is that that very same insurer, who is the designated fiduciary under “the Plan”, with "discretionary authority", so as to accord its claims decisions deference under the rule in Firestone Tire & Rubber Co. Rubber Co. v. Bruch, 489 U.S. 101, 103 L. Ed. 2d 80, 109 S. Ct. 948 (1989). However, that insurer cannot be named as a defendant in any action for ERISA benefits.
Now think about this for a second. ERISA was enacted to protect plan participants (or beneficiaries), and yet it is the insurer of the plan benefits, who is protected FROM the plan participants by ERISA. Even though that insurer is responsible for paying all benefits under the Plan, no legal action may be brought against it for those very benefits. This absurd result is true, even if the insurer is exercising complete control over the administration of the plan, as far as the payment of plan benefits is concerned.
How is this possible? Like so many other ridiculous aspects of ERISA, this immunity from suit is a judicial creation. It is the byproduct of an interpretation of 29 U.S.C. Section 1132(d) (2), which provides that “any money judgment . . . against an employee benefit plan shall be enforceable only against the plan as an entity and shall not be enforceable against any other person unless liability against such person is established in his individual capacity under this title.”
Arguably, Section 1132(d)(2) was only intended to prohibit ERISA claimants from seeking money damages on the benefit claim that is separate, distinct, or in addition to the benefits provided by “the Plan”. And that ERISA Code section would certainly suggest that an insurer of benefits would be liable in its individual capacity for those benefits that it “insures”. But not so say the courts. Any action for benefits must be brought against “the Plan” and any judgment for benefits is enforceable only against “the Plan”.
Federal Rule of Civil Procedure, Rule 19 (Joinder of Persons Needed for Just Adjudication) provides in pertinent part that: “A person . . . shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.”
If an employer is small and if “the Plan” is funded entirely by an insurance policy issued by an insurer, then by what quirk of logic is that insurer not a party “needed for just adjudication” under Rule 19? Would not a judgment against “the Plan” affect that insurer's interest? (i.e. impair or impede it's ability to protect its interest if not before the Court). How can “complete relief” be provided in its absence? It is true that “the Plan” would have an independent action against an insurer, if it didn't pay any such post-judgment claim. But the very purpose of Rule 19 is twofold: (1) provide complete relief to the existing parties and (2) prevent repeated lawsuits on the same subject matter. Therefore, to hold that the insurer is not a proper party to an ERISA benefits action is illogical.
The 9th Circuit's decision in Everhart is confusing, as Judge Reinhardt’s dissenting opinion demonstrates. And the implications of Everhart are complex. Perhaps the good news is that Everhart's days may be numbered. On March 22, 2011, the 9th Circuit heard en banc the case of Cyr v. Reliance Standard. As of this date, the Court has not issued its decision, but many ERISA practitioners believe it likely that the Court will overrule Everhart , replacing it with a more logical approach to ERISA litigation.
Postscript: This article was originally written in 2005 and it was accurate at the time. On June 22, 2011, the Ninth Circuit issued its decision in Cyr v. Reliance Standard, 642 F.3d 1202 (9th Cir., 2011), overturning Everhart, and specifically holding that the insurance company (Reliance Standard) could in fact be sued for benefits under ERISA. This now makes the above comments moot, as far as the law goes. However, I have left the article up to demonstrate just how absurd judicial interpretations have been in this area of law.
DON'T SUE ME, I'M JUST AN INNOCENT
By: Michael A. McKuin
ERISA Disability Lawyer