Insurer Wins Reimbursement for Payments
August 26, 2008
The 7th U.S. Circuit Court of Appeals recently applied an analysis under the Employment Retirement Income Security Act to disability benefits received by a medical doctor under a group disability plan, and found that the doctor, while unable to continue working as a surgeon, was not completely disabled and therefore no longer entitled to benefits, and, moreover, he was obligated to reimburse the insurer for certain payments already received. Gutta v. Standard Select Trust Insurance Plans, 530 F.3d 614 (7th Cir. June 26).
The doctor, Gandhi Gutta, was represented by Mark D. DeBofsky of Daley, DeBofsky & Bryant. Sebastian von Schleicher and Michael J. Smith of Smith, von Schleicher & Associates represented the disability plan administrator, Standard.
Due to various ailments, Gutta decided that he could no longer work as a laparoscopic surgeon in August of 2000 and filed for disability benefits under a group health policy that his employer had with Standard. Standard paid him disability benefits for two years. At that point, in order to be eligible for continuing benefits, he had to show not just that he was unable to perform his own occupation, but that he was unable to perform any gainful occupation for which he was suited.
Standard continued to pay benefits for a third year while it investigated Gutta's continuing eligibility. Under the terms of the group policy, Standard had the express and exclusive authority to manage the policy and resolve all questions regarding its applicability, including the right to determine the entitlement to benefits. Standard's authority, according to the policy language, was conclusive and binding.
Standard's investigation determined that Gutta, in fact, was not able to continue working as a surgeon, but it further found that he had not offered persuasive evidence showing that he could not perform other activities in the medical field. In particular, Standard found that Gutta had had many years' experience in medical administrative positions, and it concluded that he had the essential skills to become a medical director or assistant medical director. Based on this determination, Standard concluded that Gutta was not eligible for continuing benefits.
After exhausting administrative appeals, Gutta filed suit against Standard in district court claiming the right to receive continued benefits. Standard counterclaimed for restitution of about $74,000, consisting of nearly all the disability benefits it had paid Gutta. The counterclaim was based on a provision in the plan that stated that long term disability benefits paid under the plan would be reduced by income the recipient received from other group insurance plans. Standard claimed that the benefits from an insurance policy that Gutta obtained through his membership in the American Medical Association constituted such income.
The parties filed cross motions for summary judgment, and the district court found in favor of Standard. Gutta took this appeal.
In an opinion by Judge Diane P. Wood, the 7th Circuit affirmed. Wood initially addressed Gutta's argument that the parties had reached a settlement in the district that was subject to enforcement. Gutta claimed that the agreement was set forth in an e-mail he received from Standard stating that it would "entertain" the idea of a "walk-away" settlement, an offer which Gutta subsequently accepted. After acceptance, Standard drafted a three-page document containing additional terms, which Gutta refused to sign.
Wood looked to Illinois law to determine the binding nature of the settlement agreement. She determined that Standard's commitment to "entertain" the proposed settlement approach did not obligate it to enter into a walk-away deal containing no other terms, and that there was therefore no meeting of the minds for an enforceable settlement agreement.
On the merits, Wood said that the case turned largely on whether the language of the disability plan gave Standard discretion in determining benefits. If it did, according to Wood, the standard of review under ERISA, 29 U.S.C. [sec] 1132(a)(1)(B), would be the arbitrary and capricious standard. Otherwise, the court would apply a de novo standard to a denial of benefits.
Here the plan, while not specifically using the word "discretion," did use language communicating the message that payment of benefits was subject to Standard's discretion. Wood thus said that the deferential arbitrary and capricious standard would apply and that the court, on review, would not consider evidence outside that which was before Standard. Applying such a standard, Wood agreed with the district court that the evidence disclosed that Gutta had the essential skills to become a medical director and that he was not entitled to continuing benefits.
With respect to Standard's counterclaim for reimbursement of benefits already paid, Gutta argued initially that the claim was one for damages and therefore outside the scope of ERISA, which preempted state-law theories of recovery. Wood, however, found that Standard's counterclaim was based on a reimbursement provision in the plan and constituted an "equitable lien by agreement," thereby being properly viewed as seeking equitable relief under ERISA, 29 U.S.C. [sec] 1132(a)(3). The counterclaim therefore was not barred on jurisdictional grounds.
Gutta further argued that he had disclosed to Standard the fact that he was receiving benefits from the AMA policy and that, in light of Standard's knowledge, the benefits paid by Standard were voluntary payments made with full knowledge of the facts. The evidence, however, disclosed that Standard had not been aware that the AMA policy constituted a group plan -- which triggered the offset provision -- and that Gutta had had an obligation to disclose that fact. Wood therefore rejected this argument.
Gutta's alternative argument was that the AMA policy did not, in fact, provide group coverage but rather was better characterized as franchise insurance. Wood again disagreed, finding that the policy had been issued to the AMA as the "holder," that it had a group policy number, and that, while the policy could be converted to an individual plan under certain conditions, it apparently had not been so converted but remained as a group plan.
The court therefore affirmed summary judgment in favor of Standard on both Gutta's claim and Standard's counterclaim for reimbursement.
