Hess v. Hartford Life & Accident Insurance Co.

Decision Date13 December 2001
Docket NumberNos. 00-4229,DEFENDANT-APPELLANT,00-2043,PLAINTIFF-APPELLEE,s. 00-4229
Citation274 F.3d 456
Parties(7th Cir. 2001) SUSAN E. HESS,, v. HARTFORD LIFE & ACCIDENT INSURANCE COMPANY,
CourtU.S. Court of Appeals — Seventh Circuit

Appeals from the United States District Court for the Central District of Illinois. No. 97 C 2051--Michael P. McCuskey, Judge. [Copyrighted Material Omitted]

[Copyrighted Material Omitted] Glenn A. Stanko (argued), Rawles, O'Bryne, Stanko & Kepley, Champaign, IL, for Susan E. Hess.

Donald A. Murday (argued), Peterson & Ross, Chicago, IL, for Hartford Life & Accident Ins. Co.

Before Coffey, Rovner, and Diane P. Wood, Circuit Judges.

Diane P. Wood, Circuit Judge.

Susan Hess worked for Fleet Mortgage Company as a loan officer until she became disabled in April 1996. Throughout her tenure at Fleet, Hess was covered by long-term disability insurance under a group policy provided by Hartford Life and AccidentInsurance. When she became disabled, Hess filed for benefits under the Hartford plan. Hartford agreed to begin paying benefits, but at a level lower than the amount to which Hess thought she was entitled. Hess brought this suit under the Employee Retirement Income Security Act of 1974, 29 U.S.C. sec. 1001 et seq., commonly known as ERISA. The district court, ruling on stipulated facts, held that Hartford's calculation of Hess's benefits was arbitrary and capricious and ordered Hartford to pay benefits at the full rate Hess sought. We see no error in the district court's analysis of the case and therefore affirm its judgment.

I.

The long-term disability policy that Hartford sold to Fleet, which governed Hess's benefits, provided that a participant who became disabled while insured under the plan would be paid a monthly benefit calculated, in relevant part, by multiplying the participant's "Monthly Rate of Basic Earnings" (MRBE) at the time of disability by a benefit percentage, which for Hess was 66.67%. The term "Monthly Rate of Basic Earnings" was defined as "your regular monthly pay, from the Employer, not counting: (1) commissions; (2) bonuses; (3) overtime pay; or (4) any other fringe benefit or extra compensation." Thus, the benefit to which Hess was entitled depended on what qualified as her "regular monthly pay" at the time she became disabled.

Hess's compensation as a loan officer at Fleet was based entirely on commissions. This might make one think that she had no MRBE for purposes of the long-term disability plan, but that is not how things worked. Instead, prior to 1996, Fleet paid Hess a biweekly "draw" against her commissions and then paid her the remaining commissions in a monthly lump sum. Her 1995 contract with Fleet stated that her level of benefits, including long-term disability benefits, would be determined according to her "base compensation," which the contract defined as the amount of her draw. Hess's draw for 1995 amounted to $23,400. Fleet withheld insurance premiums for the Hartford policy from Hess's draw payments.

In 1996, Fleet decided to phase out the draw system for fully-commissioned employees like Hess. Hess's 1996 contract with Fleet stated that the draws would end as of April 5, 1996. The contract also stated that benefit levels, including those for the long-term disability plan, would be based on Hess's "base salary and/or draw." Although the contract did not define "base salary," Fleet stipulated that it calculated that amount by averaging the employee's total commissions over the previous two years. Using this definition, Hess's base salary in 1996 was a little over $45,000. For reasons unexplained, Fleet did not phase out the draw on April 5, 1996, as it was contractually obligated to do; the phase-out was extended until June 1, 1996. On that date, Fleet increased the amount of the insurance premiums it withheld from Hess's monthly compensation to reflect the change from the draw system to the base salary system of calculating benefits.

Hess became disabled on April 19, 1996. When she filed her claim under the long-term disability policy in October 1996, Hartford had on file a document from Fleet stating that her annual base salary was $23,400, which was the draw she had received under her 1995 contract. Hartford calculated her benefits based on this amount and awarded her a monthly benefit of $1,300. Hess objected. She reasoned that she did not become disabled until after April 5, which was when her contract with Fleet stated that Fleet would phase out her draw and begin basing her benefits on the average of her total commissions over the past two years. On this basis, she appealed the benefits decision within Hartford.

The Hartford claims examiner assigned to Hess's case looked into the situation and determined (1) that Hess's pay had been based entirely on commissions, (2) that (in his view) the language of the policy excluded commissions from the MRBE calculation, but (3) that Hess had paid premiums for disability insurance, and (4) that Fleet intended for Hess to be covered. The examiner testified that, in his view, Hartford had three options: first, it could find that Hess was not entitled to any benefits because her pay was based entirely on commissions; second, it could continue to pay benefits based on the draw amount notwithstanding her date of disability; or third, it could pay Hess benefits based on her "base salary," which was in turn a function of her total commissions. The examiner chose the second option, to continue paying benefits based on the old draw amount. Before making this decision, he spoke with a Fleet representative who told him that Fleet intended for Hess to be covered and that it had viewed the draw amount as Hess's base pay. The Fleet representative told the examiner that Fleet had switched from the draw system to a system based on total commissions on June 1, but because this date fell after Hess became disabled, the examiner disregarded this information. The examiner had received a letter from Hess's lawyer explaining that, according to Hess's contract with Fleet, the key date for the change-over should have been April 5, not June 1, and Hess's payments should therefore have been based on her total commissions. Although the letter made explicit reference to Hess's contract with Fleet and quoted the relevant portions, the examiner did not read the letter. One consequence of his omission was that he remained ignorant of the contents of Hess's contract. Despite the fact that the Hartford policy documents explicitly stated that "[i]f [Fleet] gives The Hartford any incorrect information, the relevant facts will be determined to establish if insurance is in effect and in what amount," the examiner made no effort to investigate the discrepancy between the Fleet representative's claim that the switch from the draw system to the average commission system occurred on June 1 and Hess's claim that it occurred on April 5.

After Hartford informed her of its decision, Hess filed this ERISA claim in the district court seeking benefits based on her average annual commissions. Finding that Hartford's handling of Hess's claim was arbitrary and capricious, the district court ordered Hartford to pay $50,927.10 in back benefits and to begin paying Hess's monthly benefits at a rate of $2,512.55. The court also awarded Hess a little over $40,000 in attorneys' fees. In this appeal, Hartford challenges both the judgment against it and the award of attorneys' fees. In addition, Hartford argues that even if the judgment against it was correct, the district court erred in ordering it to pay benefits at the higher level rather than remanding the case to Hartford to allow it to recalculate the benefits.

II.

The parties disagree over the standard of review that should govern our decision. The district court entered its judgment after receiving a stipulation of the facts that made up the administrative record from the parties. Hartford urges that a judgment on stipulated facts is akin to a summary judgment, and accordingly that our review of the district court's decision should be de novo. It is true that the facts, to the extent they are stipulated, will not be in dispute, but we think that the procedure the parties followed here is more akin to a bench trial than to a summary judgment ruling. See May v. Evansville-Vanderburgh Sch. Corp., 787 F.2d 1105, 1115-16 (7th Cir. 1986) (where parties agree to a judgment on stipulated facts, "[i]n effect the judge is asked to decide the case as if there had been a bench trial in which the evidence was the depositions and other materials gathered in pretrial discovery."). The standard of review that governs is therefore the one found in Fed. R. Civ. P. 52(a). As we would after a bench trial, we will review the district court's legal conclusions de novo and review any factual inferences the district court made from the stipulated record as well as its application of the law to the facts for clear error. See Johnson v. West, 218 F.3d 725, 729 (7th Cir. 2000).

The parties agree that Hartford's policy gave Hartford discretion to interpret its terms. As the district court recognized, this meant that it was required only to determine whether Hartford's conclusion was arbitrary and capricious. See Herzberger v. Standard Ins. Co., 205 F.3d 327, 329 (7th Cir. 2000). This is, of course, a deferential standard of review. Under the arbitrary and capricious standard, a plan administrator's decision should not be overturned as long as (1) "it is possible to offer a reasoned explanation, based on the evidence, for a particular outcome," (2) the decision "is based on a reasonable explanation of relevant plan documents," or (3) the administrator "has based its decision on a consideration of the relevant factors that encompass the important aspects of the problem." Exbom v. Central States, Southeast and Southwest Areas Health and Welfare Fund, 900 F.2d 1138,...

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