Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

R.G. WEGMAN CONSTRUCTION CO. v. ADMIRAL INSURANCE CO. (January 14, 2011)

Brian Budrik suffered serious injuries in a fall at a construction site where he was working. He brought a negligence action against several parties, including R.G. Wegman Construction Company, which managed the site. Wegman was an additional insured on a $1 million policy with Admiral Insurance Company. Wegman also had an excess policy with a $10 million limit. Wegman tendered the case to Admiral, which accepted and controlled the defense. According to Wegman, Admiral knew fairly early on that Budrik's injuries were quite serious, and knew that there was a significant possibility that the ultimate loss would exceed the policy limits, and yet failed to advise Wegman of that risk. Wegman claims that it did not appreciate the risk until right before trial. It advised its excess carrier immediately but the carrier refused coverage because of the late notice. Budrik prevailed at trial and the court entered a judgment in excess of $2 million against Wegman. Wegman filed suit against Admiral, alleging that it breached its duty of good faith. Judge Zagel (N.D. Ill.) dismissed the complaint. Wegman appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Tinder reversed and remanded. The Court first had to deal with a jurisdictional issue. After Admiral removed the case to federal court, Wegman amended its complaint to add Budrik as a defendant. Since Budrik and Wegman are both Illinois citizens, the federal court may not have had diversity jurisdiction. But the Court noted that Wegman sought no relief against Budrik. Since there was no basis for adding him, and he is not necessary to resolve the case, the Court dismissed him and proceeded to the merits. The Court noted that a defendant with insurance coverage frequently has no interest in the litigation. If there is no reason to believe that the outcome will exceed the policy limits, only the insurer has a financial stake in the case. In those cases, it makes sense for the insurer to control the defense, to retain competent counsel, and to stay informed of the progress of the litigation. But here, accepting the allegations as true, Admiral learned early on that the outcome could exceed the $1 million policy limit. This fact created a conflict of interest between Admiral and Wegman. The existence of the conflict of interest requires the insurer to notify the insured. Admiral was duty bound to advise Wegman so that Wegman could take whatever steps were necessary to protect its own interest. Of course, the Court emphasized that it was relying only on the pleadings and that Wegman would still have to prove its allegations.

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 HOLMSTROM v. METROPOLITAN LIFE INSURANCE CO. (August 4, 2010)

Lanette Holmstrom developed a painful nerve condition in her right arm in 2000 and stopped working. Metropolitan Life Insurance Company administered her employer's benefit plan. MetLife paid disability benefits first under the "own-occupation" standard and then under the "any-occupation" standard for several years. Meanwhile, Holmstrom underwent three surgeries. None of the surgeries relieved her pain. Her physician diagnosed complex regional pain syndrome and concluded that further surgical intervention was unwarranted. Instead, Holmstrom was placed on a heavy pain medication regimen. With MetLife's help, Holmstrom applied for and began receiving Social Security benefits. Despite any lack of improvement in her condition, MetLife terminated Holmstrom's benefits in 2005 after a periodic review. Its rationale for the denial was that the medical data "no longer support(ed)" the severity of her impairment. Holmstrom appealed and provided substantial additional information, including a 2005 Functional Capacity Evaluation ("FCE") and a detailed statement from her physician with his diagnosis and his conclusion that she could perform no hand functions. MetLife denied the appeal, noting a lack of "objective findings." MetLife specifically noted that it could have reached a different decision had it been provided a more thorough FCE. Holmstrom submitted the requested FCE and additional test results. MetLife's physicians concluded that Holmstrom's physical limitations were not severe and that her diagnosis was not established by medical data. After a further exchange, one of MetLife's physicians recommended an independent medical examination. MetLife upheld its denial of benefits without seeking such an examination. Holmstrom brought suit under ERISA. Judge Dow (N.D. Ill.) granted summary judgment to MetLife. Holmstrom appeals.

In their opinion, Judges Kanne, Wood, and Hamilton reversed and remanded. Even applying the arbitrary and capricious standard of review, the Court found error. The Court first rejected three of Holmstrom arguments: a) that MetLife could not periodically review and reverse prior benefit decisions, b) that MetLife had to prove that her condition actually improved to reverse its course, and c) that the court could take into consideration MetLife's "batting average" in other federal cases challenging its benefit decisions. On the other hand, the Court found that several factors supported an arbitrary and capricious conclusion: a) erroneously concluding that certain normal test results contraindicated the diagnosis, b) unreasonably demanding objective pain data were no objective test exists, c) not adequately explaining its rejection of the FCEs, d) failing to even consider the Social Security determination, e) discounting Holmstrom's own extensive medical history, f) rejecting the evidence of Holmstrom's cognitive impairment resulting from the medication regimen, g) relying on the opinion of the records-review doctors in the face of overwhelming contrary evidence, h) ignoring the recommendations of its own physician to conduct an independent medical examination, and i) its repeated practice of asking for new data and then rejecting the data for reasons never communicated to Holmstrom. Holmstrom submitted evidence sufficient to establish her disability -- MetLife failed to counter it with sound reasoning supported by the record. The Court added that it saw several factors that suggested a conflict of interest existed. Finally, with respect to the remedy, the court conceded that the normal remedy in such a case is a remand for a fresh administrative decision. Here, however, there was an earlier award of benefits, there has been no apparent positive change in Holmstrom's condition, and the Court had a "firm grasp" of the merits. It decided that the appropriate remedy was a reinstatement of benefits. It remanded for the district court to consider the request for fees, costs, and interest.

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MARRS v. MOTOROLA, INC. (August 14, 2009)

Years ago, Michael Marrs developed a psychiatric condition that forced him to leave his job at Motorola and go on disability leave. Six years after he started his leave, Motorola amended its disability plan. It imposed a two-year limit on disability benefits resulting from mental, rather than physical, conditions. Marr's benefits were terminated by Motorola two years after the amendment. Marrs brought a class action under ERISA. The district court granted summary judgment to Motorola. Marrs appeals.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Posner affirmed. ERISA limits a plan's ability to amend its terms. It provides that no amendment can adversely affect benefits with respect to periods of disability prior to the date of the amendment. The Court rejected Marrs' interpretation under which a plan could not affect any benefits for a period of disability that began before the amendment, but continues to run. The Court also addressed and rejected Marrs' argument that the Supreme Court's Glenn decision required a different outcome. Normally, the Court stated, if the plan administrator is given discretion to interpret the terms of the plan, a court will only reject its interpretation if it is unreasonable. That discretion exists in Motorola's plan. In Glenn, the Supreme Court addressed the situation when a plan administrator is laboring under a conflict of interest. Here, however, the Court concluded that the record did not establish that the administrator had a serious conflict of interest.
 

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RAYBOURNE v. CIGNA LIFE INSURANCE COMPANY (August 6, 2009)

After 23 years on the job, Edward Raybourne went on long-term disability. He was about to have the first of four surgeries on the big toe of his right foot. His disability plan provided payments for 24 months upon a showing that he was unable to perform his regular job. After 24 months, he had to show that he was unable to perform any job in order to continue receiving benefits. After an independent medical examination concluded that Raybourne could return to work, Cigna terminated his long-term disability benefits. Raybourne's treating physician continued to state that he was unable to return to work. After his internal appeals were unsuccessful, Raybourne brought suit under ERISA. The district court granted summary judgment to Cigna, concluding that it had not abused its discretion. Raybourne appeals.

In their opinion, Judges Rovner, Wood and Williams vacated and remanded. An abuse of discretion standard, stated the Court, is appropriate when the plan administrator has discretionary authority. The Court found that Cigna had such authority, notwithstanding Raybourne's contention that the grant of discretion is not included in a plan document. Under that standard, an administrator's decision will be upheld as long as it is supported by evidence in the record and specific reasons are communicated to the claimant. Here, however, the Court noted that the Supreme Court released its opinion in Glenn just a few days before the district court's summary judgment decision. Glenn held that one factor in the abuse of discretion analysis is the structural conflict of interest when a plan administrator is both the arbiter of claims and the payor of successful claims. The Court concluded that the district court's passing reference to Glenn required a remand for a proper analysis of the structural conflict.

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NATIONAL CASUALTY COMPANY v. FORGE INDUSTRIAL STAFFING INC. (June 3, 2009)

Forge Industrial Staffing, Inc. is an employee staffing company. It has insurance coverage through National Casualty Company (NCC) that insurers it, among other things, from intentionally discriminating against its employees. When several of Forge's former employees brought anti-discrimination charges before the EEOC, NCC agreed to defend Forge but reserved the right to deny coverage later. Given NCC's reservation of rights and the exclusion in the policy of coverage for punitive damages or claims arising from Forge’s intentional or reckless disregard of the law, Forge requested independent counsel. NCC refused. After Forge hired its own counsel, NCC brought a declaratory judgment action to resolve the issue. The district court found no actual conflict and concluded that NCC did not have to pay for Forge’s own counsel. Forge appeals.

In their opinion, Judges Cudahy, Williams and Tinder affirmed. The Court noted that Illinois law provides a broad duty to defend as well as a right to direct the defense. Only if an actual conflict exists does the insured have a right to have the insurer pay for independent counsel. The Court looked to the allegations of the complaint and the terms of the policy to determine whether an actual conflict existed. An actual conflict exists if the underlying complaint contains two mutually exclusive theories of liability, only one of which is covered by the policy. Here, the Court held that neither the possibility of punitive damages in future litigation nor the policy exclusion of willful conduct created an actual conflict. The possibility of punitive damages was too speculative. With respect to the policy exclusion, there were no allegations of willful conduct and there were no allegations which would preclude coverage if resolved a certain way. Thus, the requirements for independent counsel were not met.

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