Schleibaum v. Kmart Corp.

• Decision Date: 18 September 1998
• Docket Number: No. 97-2202,97-2202
• Citation: 153 F.3d 496
• Parties: 22 Employee Benefits Cas. 1649, Pens. Plan Guide (CCH) P 23945X David SCHLEIBAUM, Sandy Schleibaum and Judith Kimmerling, Plaintiffs-Appellants, v. KMART CORPORATION, as Named Fiduciary of the Kmart Corporation Master Welfare Benefit Plan, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 496

153 F.3d 496

22 Employee Benefits Cas. 1649,

Pens. Plan Guide (CCH) P 23945X

David SCHLEIBAUM, Sandy Schleibaum and Judith Kimmerling, Plaintiffs-Appellants, v. KMART CORPORATION, as Named Fiduciary of the Kmart

Corporation Master Welfare Benefit Plan, Defendant-Appellee.

No. 97-2202.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 7, 1998.

Decided Aug. 25, 1998.

Rehearing and Suggestion for Rehearing

En Banc Denied Sept. 18, 1998.

Geoffrey M. Grodner (argued), Mallor, Clendening, Grodner & Bohrer, Bloomington, IN, for Plaintiffs-Appellants.

Debra McVicker Lynch, Sommer & Barnard, Indianapolis, IN, Julia Turner Baumhart (argued), Kienbaum, Opperwall, Hardy & Pelton, Birmingham, MI, for Defendant-Appellee.

Before MANION, KANNE and ROVNER, Circuit Judges.

ILANA DIAMOND ROVNER, Circuit Judge.

The untimely death of an ERISA claimant gave rise in this case to interesting questions about the appropriate remedy for a violation of 29 U.S.C. § 1133 (failure to give adequate notice of a denial of a claim for benefits) when a remand would be futile. One of the questions we must consider is whether a plaintiff in an ERISA action has a duty to mitigate damages when an employer provides inadequate notice of a denial of plan benefits. Only one other circuit has addressed the issue of mitigation in the context of ERISA and has concluded that a plaintiff has no such duty. We affirm the district court's ruling that the employer here violated 29 U.S.C. § 1133 when it failed to give the claimant adequate notice of a denial of benefits. But we reverse the district court's holding that the only appropriate remedy was the cost of covering the insurance benefit, which, in effect, required the plaintiff to mitigate his damages.

I.

Glen Schleibaum worked for Kmart as an Automotive Manager. ¹ In November 1991, he took an approved medical leave from his job in order to undergo hip replacement surgery. Unfortunately, the operation was not successful, and approximately one week after Mr. Schleibaum was released from the hospital, in January 1992, the hip socket dislocated and he returned to the hospital for further treatment. Mr. Schleibaum never completely recovered, and was subsequently found to be disabled for the purposes of Social Security disability benefits and for the purposes of Kmart's long-term disability insurance. He also held a life insurance policy through Kmart, and Kmart's benefit plan provided that if an employee suffered from a permanent and total disability, Kmart would continue to pay the life insurance premiums until the employee turned sixty-five. At the time of his hip replacement, Mr. Schleibaum was fifty-nine.

In August 1992, Kmart's benefits administrator informed Mr. Schleibaum by letter that, after reviewing the medical evidence, he found that Mr. Schleibaum was not permanently and totally disabled and that Kmart would not, therefore, continue to pay the premiums for the life insurance policy. The letter advised that Mr. Schleibaum should "forward any additional information or medical reports which you wish to have considered as part of your appeal." The conclusory letter did not explain any specific reason for the finding that Mr. Schleibaum was not disabled nor did it detail any particular information that could be submitted to cure the defect and perfect the claim. The letter informed Mr. Schleibaum that he could convert his coverage to an individual policy if he requested conversion within 31 days of the termination of his group policy. Mr. Schleibaum's group policy coverage was due to terminate in November 1992, after the completion of one year of approved medical leave. Mr. Schleibaum responded by supplying Kmart with a copy of the Attending Physician's Statement that Kmart required him to submit for his long-term disability benefits, which Kmart had approved. On the form, his physician indicated that Mr. Schleibaum had a "Class 4" level of impairment, meaning a "moderate limitation of functional capacity; capable of clerical/administrative (sedentary) activity. (60-70%)." Apparently confused by the form, the physician also indicated that Mr. Schleibaum was "totally disabled" from his current job and "any other work." In light of this apparent conflict in the medical evidence, Kmart again found that Mr. Schleibaum was not permanently and totally disabled, and denied his appeal. Once more, Kmart did not specify what information it required from Mr. Schleibaum to perfect his claim or why such information was necessary. Compounding the confusion was the fact that the plan did not define the term "totally and permanently disabled," and Mr. Schleibaum was apparently under the impression that if he was disabled for the purposes of Kmart's long-term disability policy and for the purposes of Social Security disability benefits, he was also disabled for the purposes of the life insurance plan.

Although Kmart did not inform Mr. Schleibaum of any continued right to appeal, he nevertheless tried again, this time including a letter from his physician stating that he would never "be able to return to active employment other than that of the most sedentary kind." Kmart responded by quoting a Rule of Administration adopted by Kmart to define the terms of the Group Term Life Insurance policy: "The term 'permanently and totally disabled' means that the employee, due to illness or injury, is not engaged in his or any other gainful occupation, and will continue to be unable, for life, to engage in any gainful occupation for which he is, or may reasonably become, fitted by education, training or experience." See Appellant's Appendix 2, at 41 (emphasis in original). Kmart also cited the language from the physician's letter, stating that Mr. Schleibaum would be unable to return to active employment other than that of the most sedentary kind, implying that he would be able to engage in some, albeit sedentary, gainful employment. Again the letter did not inform Mr. Schleibaum of any right to appeal, and did not inform him what information he could submit to perfect his claim. At this point, Mr. Schleibaum gave up.

In May 1993, approximately six months after the last volley of letters, Mr. Schleibaum suffered a cerebral hemorrhage. He remained hospitalized until his death in September 1993. Mr. Schleibaum's policy, which would have been worth approximately $260,000 had it been in effect at the time of his death, named his adult children as beneficiaries. The Schleibaum children attempted to recover the benefits they believed were due under the policy whereupon Kmart informed them that it had not maintained the policy in light of its finding that Mr. Schleibaum was not totally and permanently disabled. The Schleibaum children then brought an action in federal court pursuant to ERISA. The action focused on Kmart's failure to give adequate notice of the reasons for denying coverage and its failure to inform Mr. Schleibaum of information necessary to make a meaningful appeal. As a result, the Schleibaum children argued, their father was wrongfully denied life insurance coverage, and they sought an award of the face value of the policy.

The district court found that Kmart had indeed violated 29 U.S.C. § 1133, the ERISA provision that requires the plan administrator to provide adequate notice to a plan participant whose claim for benefits has been denied. That section requires the administrator to set "forth the specific reasons for such denial, written in a manner calculated to be understood by the participant." 29 U.S.C. § 1133(a). The provision also requires administrators to "afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim." 29 U.S.C. § 1133(b). The district court found that Kmart failed on both counts by providing Mr. Schleibaum with only a cursory form letter that failed to detail the reasons for the denial or the specific materials the claimant could submit to perfect his claim. The district court also found, however, that although the notices were inadequate, Kmart did clearly inform Mr. Schleibaum that it intended to terminate his insurance coverage. The district court found, therefore, that the appropriate remedy was not the face value of the insurance policy, as the Schleibaum children requested, but rather the amount Mr. Schleibaum would have paid in premiums for an individual conversion policy available to him under Kmart's plan. Because the Schleibaum children presented no evidence regarding the amount of those premiums, the court found that they failed to prove the amount of damages and awarded them nothing. The Schleibaum children appealed.

II.

Kmart raises a weak challenge to the district court's finding that Kmart violated § 1133 of ERISA. The company admits it did not strictly comply with the statute but argues that it substantially complied by eventually providing all of the required information in a series of letters. See Donato v. Metropolitan Life Ins. Co., 19 F.3d 375, 382 (7th Cir.1994) (substantial compliance with ERISA regulations is sometimes sufficient to overcome procedural defects); Halpin v. W.W. Grainger, Inc., 962 F.2d 685, 693-94 (7th Cir.1992) (substantial compliance with ERISA regulations is sufficient, so long as the notice given provides the plan participant and the courts a sufficiently precise understanding of the ground for denial to permit a realistic opportunity for review). Although Kmart did eventually imply that the reason for the denial of benefits was Mr. Schleibaum's residual capacity to perform some sedentary work, Kmart never told Mr. Schleibaum what medical information to submit to perfect his claim.

Most importantly, Kmart did not impart this critical information to the claimant at a time when he could have still done something about it. In the second and third letters, Kmart merely informed Mr....