Failure of insurer to correctly calculate benefit amount results in drastic underpayment.

Richard Hineman v. Long Term Disability Plan of E*Trade Group, Inc. 279 Fed. Appx. 546 (9th Cir. 2008), CV 06-1527 JFW; (9th Cir. Case No. 07-55079)

Mr. Hineman worked as a computer software engineer for E*Trade for approximately 15 years until he unexpectedly had to leave work due to heart problems, which resulted in heart transplant surgery. After the surgery, he tried to return to work on a full time basis, but he was unable to do so. He immediately experienced extreme fatigue and an inability to concentrate. He couldn’t remember things or carry tasks forward from one day to the next. Having never encountered such problems before, he mistakenly believed they were caused by the anti-rejection drugs he was taking at the time. He assumed that once the drugs were removed or adjusted the problems would go away. He reported for work every day, but found he was only able to handle about 3-5 hours, before he had to go home, exhausted. So he made arrangements with E*Trade to reduce his work hours to 20 per week (i.e. one half of his normal work hours). For this he was to be paid one-half of his normal salary).

This "half time / half salary" arrangement was done strictly at Mr. Hineman’s request. E*Trade graciously accommodated his partial disability, allowing him to work as many hours as he could. This reduction in work hours was done solely because of his physical inability to work an 8-hour work day as the result of his medical condition and for no other reason. It was never the intent of either E*Trade or Mr. Hineman to effect any change to his employment status, actual salary, or benefits as a result of this accommodation arrangement. Although he worked reduced hours (and at times he worked no hours) during this period, Mr. Hineman was never considered to be a mere part time employee. He remained, at all times, a regular, salaried employee of E*Trade, whose stated “salary” never changed. It was the intent of both Mr. Hineman and E*Trade that this accommodation arrangement would continue only until such time as his condition improved and he could resume a full work load. Unfortunately, his condition never improved.

Subsequent neuropsychological testing revealed the full extent of Mr. Hineman’s cognitive impairment. And MRI revealed that the cause of this impairment was not his medications, but was believed to have been caused by cerebrovascular illness or stroke. Ultimately Mr. Hineman left work on total disability.

The insurer, AIG, freely admitted that he was totally disabled. However, AIG used his “half salary” as the benchmark for computing the amount of his Long Term Disability benefit, rather than his actual stated “salary”. Because of the Social Security Disability offset that was applied, the net effect of that computation was to drastically reduce Mr. Hineman’s benefit amount to a pittance. When AIG made this determination, it had already been informed by E*Trade that Mr. Hineman’s occupational status had not changed. But AIG refused to change its position.

Result: A lawsuit was filed in the District Court. The Judge, applying a deferential standard of review, upheld AIG’s determination. The case was appealed to the Ninth Circuit, which reversed the District Court’s judgment, finding that “the rate” of Mr. Hineman’s earnings never changed, even though the actual amount of his earnings was reduced by his partial disability. Accordingly, his disability benefit was to be computed based on his full salary, not his “half-salary”.

A judgment in favor of Mr. Hineman was entered by the District Court and he was paid the full amount of his Long Term Disability benefit amount, plus attorney fees and costs.

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