The following case–Ruttenberg v. United States Life Insurance Company–illustrates the great struggle that courts are having with these long-term disability cases which fall under the purview of ERISA. The facts of the case involved an individual (“plaintiff”) who worked as an independent commodity trader at the Chicago Board of Trade and Mercantile Exchange. The district court opinion (Ruttenberg v. United States Life Ins. Co., 2004 US Dist. Lexis 3676 (ND Ill. March 10, 2004) states that, in general, such floor trading required extensive use of one’s vocal cords including “screaming and yelling to gain the attention of other Traders and Brokers” and also involved “frequent exposure to pushing and shoving.” According to the opinion, plaintiff was, at times, making over $30,000 a month in profits, and paying premiums on a disability policy which assured him of $10,000 a month if he became disabled. Plaintiff allegedly could no longer function in his work due to vocal cord disfunction and filed for disability.
While the facts of the case demonstrate how the progression of plaintiff’s claim quickly evolved into a battle of medical opinions, the case is worth noting for other reasons:
(1) The case illustrates a consistent problem that many of these disability plans have–and that is that there are basically no plan documents. As the Seventh Circuit so aptly said in the case of Health Cost Controls of Illinois v. Valerie Washington (opinion written by Judge Posner):
“This kind of confusion is all too common in ERISA land; often the terms of an ERISA plan must be inferred from a series of documents none clearly labeled as “the plan.”
Generally, a court reviews de novo an ERISA plan denial of benefits unless the plan grants to the plan administrator the discretionary authority to construe plan terms. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). When there are no plan documents, it is hard for the plan administrator to argue that it has the necessary Firestone discretion to avoid a de novo review. In this particular case, the insurance company tried to argue that a ““Master Policy Application” was part of the “plan document” and contained the necessary Firestone language, but neither the district court nor the Seventh Circuit bought that argument, so the court reviewed the denial of plaintiff’s claim de novo. While the following excerpt from the district court case may seem long and tedious to some, it illustrates the predicament that many courts find themselves in when looking for plan documents and the legal gymnastics that they must go through to piece together a plan document (It sort of reminds me of the search for Waldo in the children’s book entitled “Where’s Waldo?“, only here the quest is “Where’s the plan document?”):
. . . [T]he issue concerns whether the necessary language was placed in an appropriate location to grant the administrator discretion. Case law requires reference to the “language of the plan,” see Postma v. Paul Revere Life Ins. Co., 223 F.3d 533, 538 (7th Cir.2000), but that in and of itself is a nebulous concept. . . Ruttenberg points to a summary plan description (“SPD”) provided to the participants and beneficiaries in the plan, and that SPD clearly does not contain any language reserving discretion to the administrator. United States Life points to a document entitled “Master Application for Employee Benefits” that SMW submitted to United States Life. That document contains a section stating that, if the insurance contract compromises a part of an employee benefit plan, the United States Life Insurance Company is granted sole discretionary authority to determine eligibility, make all factual determinations and to construe all terms of the policy. The United States Life Insurance Company has no responsibility or control with respect to any other benefit which may be provided beyond this contract or any other plan of benefits. . . According to United States Life, this document must be considered part of the ERISA “plan” and is sufficient to notify any participants or beneficiaries that the plan administrator has the sole discretionary authority to determine eligibility.Notably, neither party points to anything resembling the main section of the policy or plan (i.e., a document similar to the “Subscriber’s Service Agreement” in Health Cost). Both the certificate of insurance contained in the record (R. 0275) and the SPD attached to Ruttenberg’s Complaint (Ex. A pg. 2) state that these documents only serve as a “summary” of the “group policy provisions.” No group policy is identified in the record. In any event, if there is a group policy in the record, the court assumes that it does not have the language above contained in the “Master Policy Application” because, if it did, United States Life would have brought this rather important point to the court’s attention.
Nevertheless, United States Life argues that the “Master Policy Application” must be considered part of the plan documents and does sufficiently reserve the necessary discretion to the employer. It points to Plumb v. Fluid Pump Serv., Inc., 124 F.3d 849 (7th Cir.1997) and Cannon v. Wittek Cos., Int’l, 60 F.3d 1282 (7th Cir.1995). The court in Plumb was confronted with the issue of whether an insurance company was a fiduciary for purposes of ERISA. Id. at 854. The court noted that in making that determination the place to look was the plan documents. Id. Accordingly, the court examined a document entitled “Participating Employer Application and Agreement” in addition to the policy and certificate of insurance. Id. at 854-55. In Cannon the court considered whether a waiting period serving as a prerequisite to eligibility under a plan required consecutive days of employment. Id. at 1284. The court noted that nothing in the “plan” required such consecutive employment, although United States Life points out that the court did consider a “plan document” entitled “Supplement to the Benefit Application.” Id. at 1284-85.
Since neither Plumb nor Cannon dealt with the issue here of whether discretionary language contained in an application for benefits is sufficient to allow only arbitrary and capricious review of a plan administrator’s decision, the court views both cases as only providing limited persuasive value. Moreover, such limited persuasive value is lessened when one considers the reasoning in Herzberger. The court there made clear that an employee needed to be clearly told that a plan administrator was entitled to determine whether to pay an insured’s claim subject to only arbitrary and capricious judicial review. 205 F.3d 333 . This is because the more “discretion lodged in the administrator” the “less solid an entitlement the employee has and the more important it may be to him, therefore, to supplement his ERISA plan with other forms of insurance.” Id. at 331. Here, there is no basis whatsoever in the record to support the notion that this “Master Policy Application” would ever be shown or even made available to participants or beneficiaries in the Plan. The document itself consists mostly of information about the applicant of the Plan (i.e., SMW) and the alleged discretionary language is under a portion of the document entitled “Applicant’s Declaration.” There is nothing to suggest that this document clearly informed participants and beneficiaries under this Plan that the administrator reserved the discretion to deny benefits to any insured. The court, therefore, rejects United States Life’s argument that the “Master Policy Application” is part of the ERISA Plan itself. Moreover, since there is no evidence that any part of the ERISA Plan contains the required language reserving discretion to the administrator, this court’s standard of review in this case will be de novo.
(2) The case also illustrates how the fuzzy distinctions between worker classifications can wreak havoc with benefit plans. In this case, the plaintiff was being treated as an independent contractor for IRS purposes (as evidenced by the fact that his income was reported on a 1099), but for purposes of the disability plan, he was being treated as an “employee” because “employee” was defined under the Certificate of Insurance to include certain independent contractors.
The plaintiff tried to argue in the preemption phase of the case that he was an independent contractor and therefore not an “employee” under the plan for purposes of supporting his theory that his state law claims weren’t preempted by ERISA. However, the district court held, and the 7th Circuit agreed, that plaintiff was a “beneficiary” under the Plan, even if he wasn’t a “participant” for purposes of ERISA. Thus, his state law claims were preempted.
However, when determining whether the plaintiff was eligible for the plan in the first place, the insurance company tried to use this very same argument (that plaintiff had used in the preemption phase) to their advantage, i.e. they tried to argue that the plaintiff was not covered under the plan (even though the plaintiff had been paying premiums for coverage) because he wasn’t an “employee” and wasn’t “full time.” The Certificate of Insurance had defined “eligible employees” as “all full-time employees of the Participating Employer who are: managers and officers earning over $20,000 annually, traders who report earnings on their 1099 form, firm traders who report prior years on their 1099 DDE form, but not those who are temporary, part-time or seasonal.” In rejecting the insurance company’s argument and holding that the plaintiff was covered under the plan, the district court stated:
Since the Plan both states that only employees are eligible but nevertheless includes traders who report income on 1099 Forms, the best way to handle this apparent ambiguity in the policy is to simply construe the contract against the policy’s drafter . . . Accordingly, being an “employee” is not a necessary condition to coverage and traders who reported income on IRS 1099 Forms and who were affiliated with SMW (such as Ruttenberg) would be eligible for coverage, even if they are not considered “employees” of SMW.
The Seventh Circuit agreed:
The inclusion of form 1099 in defining the contractual term “employee” thus indicates that the term includes more than just common law employees, and that other workers may be eligible under the policy. Those other workers may include independent contractors like Mr. Ruttenberg, but the scope of the contractual term is ambiguous. . . Allowing Mr. Ruttenberg to purchase insurance for which U.S. Life now claims that he is ineligible constitutes the type of “trap for the unwary” that contra proferentem is meant to prevent. The district court correctly found the term “employee” to be ambiguous, and properly construed the term against the policy’s drafter, U.S. Life.
Please note that, from an IRS standpoint, inclusion of a worker in an employer’s benefit plans is actually one of the factors that the IRS will look to in determining whether or not a worker is properly classified as an “employee” or not. If a worker is included in the employer’s benefits plans, this factor would lean towards the worker being treated as an “employee” for IRS purposes, rather than an “independent contractor.” (The IRS looks to a number of factors though–not just this one–in making its determination.) See this previous post here discussing how “worker classification issues” are almost always examined in an IRS employment tax audit or employee plan audit.
Also, more posts on worker classification issues relating to benefits here.