Legal Interpretation of “Any Occ” Disability under California State Law:
Most Long Term Disability (LTD) plans provide 24 months of "Own Occupation" coverage, which means the plan pays LTD benefits if the claimant can't perform the material duties of his own occupation. Generally, after the first 24 months, an "Any Occupation" definition of "Disability" applies. Under that standard, a claimant is said to be "disabled" if he cannot perform the material duties of any occupation, consistent with his education, training and / or experience. But what exactly does that mean? The answer is often unclear and as a result this issue gives rise to most LTD disputes.
Under California state law, the rule is clear and has been for more than 70 years. It’s often called the Erreca standard, since the banner case on point is Erreca v. Western States Life Ins Co. (1942) 19 Cal.2d 388, 396. That case and its progeny firmly establish that "total disability does not signify an absolute state of helplessness but means such a disability as renders the insured unable to perform the substantial and material acts necessary to the prosecution of a business or occupation in the usual or customary way." Erreca, at 394-395; See also: Moore v. American United Life Ins. Co. (1984) 150 Cal.App.3d 610, 618, 632, 630; 197 Cal.Rptr. 878; Austero v. National Cas. Co. (1978) 84 Cal.App.3d 1, 22, 148 Cal.Rptr. 653.
"When coverage provisions in general disability policies require total inability to perform 'any occupation', the courts have assigned a common sense interpretation to the term ‘total disability’ so that total disability for purposes of coverage results whenever the employee is prevented from working ‘with reasonable continuity in his customary occupation or in any other occupation in which he might reasonably be expected to engage in view of his station and physical and mental capacity.'" Moore, supra at 618, quoting Erreca, supra at 394-395.
"(I)t is the established rule that ‘in determining whether the insured is disabled to such an extent as to prevent him from engaging in any occupation or performing any work for any kind of compensation within the meaning of a [disability] policy, the test is not some fanciful or imaginary occupation in which there is no likelihood of anyone employing the insured.’ [citation omitted] This rule recognizes that the ability of an insured to work cannot be rationally divorced from a consideration of the market for the insured's skills or services." Moore, supra at 630.
What all this means in plain English is that "any occupation" clauses in LTD plans are not to be interpreted literally. Rather, they are to be given a "common-sense" interpretation, which takes into account various factors. For example, a disabled nuclear scientist is not required to go out on the street and try to sell pencils before he can receive LTD benefits.
State Law Saved From ERISA Preemption:
Whether the Erreca standard applies in the context of an ERISA LTD case has been the subject of debate. In Wible v. Aetna Life Ins. Co., 375 F. Supp. 2d 956 (CD CA, 2005), District Court Judge Tevrizian in the Central District held that Erreca and Moore were "unpreempted California law relating to regulation of insurance policies”.
But seven years later, the Northern District held differently in Brady v. United of Omaha Life Ins. Co., 902 F. Supp. 2d 1274 (ND CA, 2012). In that case, Judge Chen found that Wible did not sufficiently explain why it thought California law was not preempted by federal common law on this point, nor did it acknowledge the Ninth Circuit's countervailing precedent in Evans and McClure. "As such, the Court finds Wible unpersuasive”. Id at 1283.
A year after that in Ramos v. United Omaha Life Insurance Company, Case No. C 12-3761 PJH, Dist. Court, ND California (January 3, 2013), Judge Spero, in the Northern District, citing Brady, likewise found that "that California's definition of 'total disability' is not applicable to an ERISA disability insurance policy". Later that same month, in Smith v. Hartford Life & Accident, Case No. 11-03495, Dist. Court, ND California (January 30, 2013), Magistrate Judge Beeler, in the Northern District, opined that the Erreca Standard does not apply in an ERISA case. Her reasoning was as follows:
"Under 29 U.S.C. § 1144, any state law that ‘relate[s] to . . . employee benefit plan[s]’ is preempted by ERISA. 29 U.S.C. § 1144(a). The savings clause excepts from preemption any law that ‘regulat[es] insurance.' 29 U.S.C. § 1144(b)(2)(A). To fall under ERISA's savings clause, a state law must be ‘specifically directed toward entities engaged in insurance' and 'substantially affect the risk pooling arrangement between the insurer and the insured'; laws of general applicability that have only some bearing on insurers do not qualify. Kentucky Ass'n of Health Plans, Inc. v. Miller, 538 U.S. 329, 334, 341-42 (2003).
In enacting the enforcement provisions of ERISA, 29 U.S.C. § 1132, Congress clearly expressed an intent that those provisions be the exclusive vehicle for actions by ERISA- plan participants and beneficiaries asserting improper processing of claims for benefits, and that varying state law causes of action for claims within the scope of 29 U.S.C. § 1132 would pose an obstacle to the purposes and objectives of Congress. . . . Accordingly, the Ninth Circuit has ‘held that state laws of insurance policy interpretation do not qualify for the saving[s] clause exception and are preempted.’”
The following year, the issue was raised in Sethi v. Seagate US LLC Group Disability Income Plan, Case No. 12-17215 (9th Cir. 2014), but the Ninth Circuit declined to reach the issue, stating that "Sethi argues for the first time in her reply brief that Liberty's interpretation of the Plan should have been governed by Erreca v. Western States Life Insurance Co., 121 P.2d 689, 694 (Cal. 1942), . . . Sethi waived these arguments by failing to raise them in her opening brief." Therefore, as of this date, the Ninth Circuit has yet to directly address this important issue.
Judge Beeler’s analysis in Smith v. Hartford, seemed to completely neglect the most important case addressing what is and what is not a state law that "regulates insurance". i.e. Unum Life Ins. Co. of America v. Ward, 526 U.S. 358, 367 n.1 (1999). In Unum v. Ward, the United States Supreme Court held that: "Common-law rules developed by decisions of state courts are 'State law' under ERISA. See 29 U.S.C. § 1144(c)(1) (‘The term 'State law' includes all laws, decisions, rules, regulations, or other State action having the effect of law.’)”. Unum v. Ward 526 at 367, n. 1. Judge Tevrizian’s decision in Wible made perfect sense because Erreca most certainly did state a "common law developed by decisions of state courts".
"Our precedent provides a framework for resolving whether a state law ‘regulates insurance’ within the meaning of the saving clause. First, we ask whether, from a ‘common-sense view of the matter,’ the contested prescription regulates insurance. . . Second, we consider three factors employed to determine whether the regulation fits within the ‘business of insurance’ as that phrase is used in the McCarran-Ferguson Act, . . . 15 U.S.C. § 1011 et seq.: 'first, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry.’”
Unum v. Ward supra at 472, quoting Metropolitan Life Ins. Co. v. Massachusetts 471 U.S. 724, 740, 743, 85 L. Ed. 2d 728, 105 S. Ct. 2380 (1985).
The law at issue in Ward was California's judicially created "notice prejudice rule", which prohibits an insurance company from denying an untimely insurance claim unless the insurer can establish actual prejudice by the late filing. The Court held the law "effectively creates a mandatory contract term that requires the insurer to prove prejudice before enforcing a timeliness-of-claim provision," regardless of what is contained in the policy. Id. (emphasis added.). The Supreme Court also held that general laws of contract interpretation are preempted by ERISA, but when a state common law rule is specific to the insurance industry, only, and not an application of a general rule also applied to the insurance industry, (like the notice-prejudice rule that was at issue in Ward), then that rule is saved from preemption, if it otherwise meets the standards for the insurance saving clause. Four years later the Supreme Court held that in order to be "saved" from preemption, the law must: 1) be specifically directed toward the insurance industry; and 2) it must substantially affect the risk pooling arrangement between the insurer and the insured. Kentucky Ass 'n of Health Plan, Inc. v. Miller, 538 U.S. 329, 334 (2003). A law affects the risk pooling arrangement by affecting the cost to the insurer of providing insurance for the premiums that insureds pay. Id. at 338.
The California Erreca definition of disability clearly meets the two-part test under Miller. First, like the notice-prejudice rule in Ward, the California definition is aimed at the insurance industry and does not merely have an impact on it. Ward, 526 U.S. at 368; see also, Standard Ins. Co. v. Morrison, 584 F.3d 837, 843 (9t Cir. 2009). Second, it is clear that the definition substantially affects risk pooling. Insureds cannot forego the California definition of total disability in exchange for a more affordable premium, because it is read into all California insurance disability policies. See, e.g., Ward, 562 U.S. at 358 (insureds cannot reject notice-prejudice rule); Metropolitan Life Ins. Co. v. Massachusetts 471 U.S. 724, 740, 743, 85 L. Ed. 2d 728, 105 S. Ct. 2380 (1985). (insureds are denied the ability to accept plans without minimum mental-health coverage).
Federal Common Law:
Even if the Erreca standard were held to be preempted, the Ninth Circuit has held that the Federal courts are to refer to and be "guided by principles of state law when appropriate." Saltarelli v. Bob Baker Group Medical Trust, 35 F.3d 382, 386 (9th Cir. 1994).
Also, Federal courts, generally, in the post-ERISA era have rejected excessively stringent interpretations of plans' disability definitions in the context of ERISA claims, applying federal law, even under a deferential standard of review. See: Torix v. Ball Corp., 862 F.2d 1428 (10th Cir., 1988); See also: Helms v. Monsanto 728 F.2d 1416, 1420 (11th Cir., 1984) (defining the very general phrase "any occupation or employment for remuneration or profit," the court rejected a literal reading of that definition, and required that "gainful activity means performance of substantial services with reasonable regularity, either in competitive or self-employment." The court discarded a literal reading of "any occupation or employment for remuneration or profit" because it would render the plan totally meaningless if benefits were only paid if claimant had no conscious life. Id at 1420. "Common knowledge of the occupations in the lives of men and women teach us that there is scarcely any kind of disability that prevents them from following some vocation or other, except in cases of complete mental incapacity." Id, at 1421. Helms was cited, approvingly, by the Ninth Circuit in Saffle v. Sierra Pacific Power Company Bargaining Unit 85 F.3d 455, 458-450 (9th Cir. 1996 (rejecting a "literal" construction of plan language in favor of a "reasonable" one, consistent with case law from other circuits); Mitchell v. Eastman Kodak Co., 119 F.3d 433, 443 (3d Cir. 1997) (Mitchell's chronic and unpredictable fatigue and loss of concentration made it impossible for him to sustain regular paid employment); Ellis v. Egghead Software Plans, 64 F.Supp.2d 986, 995 (E.D. Wash. 1999) ("These documents establish that Ellis has been disabled from all occupations for more than a year. When they are read together with the earlier medical records and reports, the following picture emerges: a man who is continuously drowsy and fatigued, unable to concentrate, unable to perform the most simple physical tasks, unable to stand, sit, or walk for more than an hour at a time, unable to work more than 15 hours per week, and unable to predict which hours he will be available, if at all. This court cannot imagine any occupation that such a person could fill successfully, much less an employer who would be willing to hire him.")
So what is the answer to the question posed by the title of this article? Until the Ninth Circuit further addresses the issue, it will likely depend on which judge hears the case (and perhaps whether the attorney, who argues it takes care to timely raise the issue for consideration).
Just How Disabled is "Disabled", When it
Comes to "Any Occupation" Disability?
By: Michael A. McKuin
ERISA Disability Lawyer