By Pension and Benefits Editorial Staff
A store manager who was diagnosed with malignant melanoma was entitled to benefits under his employer-sponsored long-term disability (LTD) insurance plan, the U.S. Court of Appeals for the First Circuit held, finding that Aetna Life Insurance Company’s denial of benefits based on the plan’s exclusion for preexisting conditions was arbitrary and capricious. The evidence showed that Aetna’s structural conflict of interest played a role in its handling of the insured’s claim and that the company violated ERISA regulations by using new or additional rationales for its denial without affording the insured an opportunity to respond. According to the court, although the insured had visited his physician for a skin lesion prior to the effective date of his coverage, the preexisting conditions exclusion did not apply because the physician neither diagnosed nor treated melanoma at that time.
In April 2014, the insured asked his primary care doctor to check a lesion that had been on his back for several months. Thinking that it might be basal-cell carcinoma, the doctor referred the insured to a dermatologist. The doctor did not provide any treatment or prescribe any medications. In June 2014, a dermatologist diagnosed the insured with malignant melanoma. He underwent surgery shortly thereafter and, in September 2014, stopped working.
Plan provisions. The LTD plan at issue excluded coverage for disabilities caused by a preexisting condition. A disease or injury was deemed a preexisting condition if, during the three-month period prior to an insured’s effective date of coverage (i.e., the “look-back” period): (1) “it was diagnosed or treated”; (2) “services were received for the disease or injury”; or (3) the insured “took drugs or medicines prescribed or recommended by a physician for that condition.”
Benefits denial. Aetna initially denied the insured’s claim for LTD benefits on the ground that he had sought medical treatment during the look-back period (March 2014 through May 2014). After the insured commenced an administrative appeal, an appeal coordinator for Aetna determined that, due to plan amendments, the insured’s effective date of coverage was actually July 1, 2014 and not June 1, 2014, such that the look-back period included the date on which the insured was diagnosed with melanoma. Accordingly, Aetna’s final decision rejected the insured’s appeal and denied benefits based on the following reasons: (1) the insured was treated and diagnosed with malignant melanoma during the look-back period; and (2) even if the original look-back period applied, the insured’s condition would still be a preexisting condition because “he was seen for the spot on his back that caused the diagnosis.” The insured filed suit, and the district court ruled in his favor. Aetna appealed.
Preexisting condition. Taking into account the plan’s language, the appellate panel determined that the pivotal question in this case was whether, at the April 2014 office visit, any of the following had occurred: (1) the primary care doctor “diagnosed or treated” the melanoma; (2) the insured “received” services “for the” melanoma; or (3) the insured “took drugs or medicine prescribed or recommended” by the primary care physician “for [the] condition.”
This language was ambiguous, the court observed. One could say that a doctor would not be able to diagnose, treat, or provide anything “for” a disease or injury if the doctor did not know or believe that the disease or injury even existed. On the other hand, the exclusion could be broadly construed to include treatment or services provided for any symptom that, in hindsight, appeared to be a manifestation of the disabling sickness or injury. Because the plan granted Aetna discretionary interpretation authority, the court was required to defer to Aetna’s reasonable reading of the plan unless its decision to deny benefits was arbitrary and capricious. To make that assessment, the court had to determine the extent to which Aetna had conducted itself as a true fiduciary attempting to fairly decide a claim.
Conflict of interest. As both the underwriter and claims administrator for the plan, Aetna had a structural conflict of interest. Although it produced evidence showing that it had taken steps to minimize the effects of that conflict, the court found that the conflict continued to play a role in the insurer’s handling of the insured’s claim. For example, although an Aetna disability benefits manager and two clinical technicians had concluded in two separate reviews that the insured was entitled to benefits, they were overruled by supervisors without explanation. Aetna also justified its final denial of benefits with two new rationales: (1) during the initial look-back period, the insured “was seen for the spot on his back … that caused the [later] diagnosis”; and (2) a different, later look-back period applied, during which the melanoma was diagnosed and treated.
Aetna’s argument that the insured bore the burden of showing that he was free from melanoma during the look-back period contradicted the plan’s plain language, which stated that a disease was a preexisting condition if, during the look-back period, the disease was “diagnosed or treated,” or the insured received “services” or took prescribed or recommended drugs for the disease. In the court’s view, Aetna’s denial of benefits was an arbitrary attempt to justify a preferred result. As such, its decision was not entitled to deference. Construing the exclusion against the drafter, the court concluded that the insured’s primary care physician did not treat melanoma, provide services for melanoma, prescribe or recommend drugs for melanoma, or diagnose the insured’s disabling disease as melanoma. Therefore, the insured’s claim should not have been denied based on his office visit during the original look-back period.
Modified look-back period. In addition, Aetna never gave the insured a chance to respond to its alternative basis for denial: i.e., the “corrected” look-back period. This was a clear violation of ERISA, the court instructed. Moreover, the insured met his burden of showing that he was prejudiced by the violation because he was foreclosed from arguing that he was working for his employer in a coverage-eligible position before May 2014, thereby creating a pre-June 2014 look-back period even under the amended plan.
Remedy. There was compelling evidence in the record to conclude that, at least at the time his benefits claim was denied, the insured was disabled. As such, he was denied benefits to which he was clearly entitled. The record also suggested that his disability had not lessened. Thus, the appropriate equitable relief was to affirm the district court’s order of back benefits. Because more than a year had passed since that order, the appellate panel remanded the matter with instructions for the lower court to extend its award of back benefits through the date of the mandate corresponding with the current opinion.
SOURCE: Lavery v. Restoration Hardware Long Term Disability Benefits Plan, (CA-1), No. 18-1885, September 3, 2019.
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