Rather than merely finding that an individual was entitled to benefits due, a federal appeals court ordered an insurer to pay a large monetary award under ERISA based on the equitable theories of unjust enrichment and disgorgement of ill-gotten profits. The 6th U.S. Circuit Court of Appeals held that the insurer used money it should have paid out in benefits to generate profits.
In Rochow v. LINA, 2:04-cv-73628 (6th Cir., Dec. 6, 2013), the appeals court awarded the plaintiff not only relief under Section 502(a)(1) (ERISA benefits due), but a three times greater amount under Section 502(a)(3) (other equitable relief, for a fiduciary breach) to compensate for profits the company allegedly generated using the unpaid benefit.
Dissent Calls This an Impermissible Expansion of ERISA Remedies
Although the case involved a long-term disability plan, it has larger implications, as noted by a dissenting opinion. There, a 6th Circuit judge said the decision bordered on compensatory and punitive relief, and that it expands the scope of ERISA remedies.
The Facts
Daniel Rochow, an executive with the Gallagher Insurance Co., fell seriously ill and applied for long-term disability benefits, which were denied. He sued, and both a lower and appeals court found that LINA’s denial was arbitrary and capricious. After Rochow died in 2008, his estate sued for attorney’s fees and argued LINA unjustly enriched itself with the money it should have paid to Rochow. It sought disgorgement of profits the company thus gained. The $3.78 million award sought consisted of $910,629 in denied benefits and $2.8 million more in earnings based LINA’s rate of return on equity.
In the March 2012 ruling on Rochow v. LINA, 851 F. Supp 2d 1090 (E.D. Mich. 2012), the district court based its outsized award on the fact that plan had comingled the funds it should have paid in benefits and used them for business purposes.
In response, LINA argued that permitting disgorgement was outside the scope of ERISA’s mandate, but the court refused to consider this. LINA appealed. The 6th Circuit said it would look at whether the disgorgement order and the method of calculating the disgorgement amount clashed with ERISA norms.
The Appeals Court Weighs In
Writing for the appeals court, Circuit Judge Arthur Tarnow said the district court was right to impose the double liability on the plan to deprive the company of illicit profits it made.
Propriety of remedy under ERISA
Initially, LINA argued that disgorgement was inappropriate because equitable relief under Section 502(a)(3) (for “other relief available in equity”) should be available only where Section 502(a) (for “benefits due under the plan”) solutions do not provide an adequate remedy. (See Varity v. Howe 516 U.S. 489 (1996) and Wilkins v. Baptist Healthcare System, Inc., 150 F.3d 609 (1998).)
U.S. Supreme Court precedent led courts to routinely deny relief beyond reimbursing benefits due as prescribed in Section 502(a)(1). If a plaintiff received such relief, further relief under Section 502 (a)(3) (under alternative theories of equity) most often was rejected as double relief.
ERISA remedies not always mutually exclusive
But the court saw no complete bar to simultaneous awards under Sections 502(a)(1)(B) and 502(a)(3), Tarnow stated. Bifurcated awards can be allowed if the extra relief:
- is not a repackaged claim for benefits, as when an ongoing business-wide practice must cease in order to prevent further losses to participants; and
- responds to plan misconduct that (for example a misrepresentation) damages the victim in ways that are not remedied by restoration of benefits alone.
The appeals court noted the lower court gave two awards: (1) restoration of benefits denied under 502(a)(1)(B); and (2) equitable relief to prevent the plan from profiting from its own fiduciary breach, under 502(a)(3).
Amount of disgorgement
In many cases, the supplemental award is scaled to the damage to the plaintiff, and not to an improper windfall gained by the defendant. However, nothing limits Section 503(a)(3) remedies to the extent of plaintiff injuries, Tarnow wrote.
An accounting for profits is typically available in equity and therefore is appropriate under Section 503(a)(3), Tarnow said. Nor could the disgorgement be looked at as “punitive,” because it left the company no worse off than it would have been had it paid benefits when the law required, Tarnow added.
LINA argued that a double award would undermine ERISA’s goal of a consistent system of benefit determinations. But the court said ERISA had another purpose: ensuring that plans act in participants’ interest and only for providing benefits to them.
If no remedy beyond an award of benefits were allowed, insurance companies would have the perverse incentive to deny benefits for as long as possible, risking only litigation costs in the process, the judge wrote.
Dissent
In a dissenting opinion, Circuit Judge David McKeague said the ruling diverged from ERISA’s remedial purpose of making plaintiffs whole, because it focused its remedy on the size of profits made, not on the damage to the participant. Being paid disability benefits and attorney’s fees would have made Rochow whole. Allowing him to recover “profits” above and beyond denied benefits was “an improper repackaging of the benefits claims” and “a second recovery for the same injury.”