Abatie v. Alta Health & Life Ins. Co.

• Citation: 458 F.3d 955
• Decision Date: 15 August 2006
• Docket Number: No. 03-55601.,D.C. No. CV-01-06699-JFW.,03-55601.
• Parties: Karla H. ABATIE, Plaintiff-Appellant, v. ALTA HEALTH & LIFE INSURANCE COMPANY, a Delaware corporation, f/k/a Anthem Home Life Insurance Company, f/k/a Home Life Financial Assurance Company, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

458 F.3d 955

Karla H. ABATIE, Plaintiff-Appellant, v. ALTA HEALTH & LIFE INSURANCE COMPANY, a Delaware corporation, f/k/a Anthem Home Life Insurance Company, f/k/a Home Life Financial Assurance Company, Defendant-Appellee.

No. 03-55601.

D.C. No. CV-01-06699-JFW.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted En Banc March 23, 2006.

Filed August 15, 2006.

Daniel Feinberg, Cassie Springer-Sullivan, Lewis, Feinberg, Renaker & Jackson, P.C., Oakland, California; Craig Price, Griffith & Thornburgh, Santa Barbara, California, for the plaintiff-appellant.

R. Daniel Lindahl, Bullivant Houser Bailey, Portland, Oregon; Waldemar J. Pflepsen, Jr., Jorden Burt LLP, Washington, D.C., for the defendant-appellee.

Jay E. Sushelsky, AARP Foundation Litigation, Washington, D.C.; John Will Ongman, Barnes & Thornburg, LLP, Washington, D.C., for the amici curiae.

Appeal from the United States District Court for the Central District of California John F. Walter, District Judge, Presiding.

Before: Mary M. Schroeder, Chief Judge, and Alex Kozinski, Diarmuid F. O'Scannlain, Pamela Ann Rymer, Andrew J. Kleinfeld, Barry G. Silverman, Susan P. Graber, M. Margaret McKeown, Kim McLane Wardlaw, William A. Fletcher, Ronald M. Gould, Richard A. Paez, Johnnie B. Rawlinson, Jay S. Bybee, and Consuelo M. Callahan, Circuit Judges.

Opinion by Judge Graber.

Concurrence by Judge Kleinfeld.

Concurrence by Judge Gould.

GRABER, Circuit Judge:

After Dr. Joseph Abatie died, his widow—Plaintiff Karla H. Abatie—sought life insurance benefits from Alta Health & Life Insurance Company under an employee welfare benefit plan regulated by the Employee Retirement Income Security Act of 1974 ("ERISA"). Alta, which was both the administrator and the funding source of the plan, denied benefits. Plaintiff then brought this action. The district court upheld Alta's decision. Plaintiff's appeal questioned the standard of review that the district court had used to review her claim.

We took this case en banc¹ to reconsider our approach to ERISA cases in which a plan administrator denies benefits and (1) the wording of the plan confers discretion on the plan administrator and (2) the plan administrator has a conflict of interest. In answering that question, we have returned to first principles, the Supreme Court's opinion in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989). We conclude that our earlier opinion in Atwood v. Newmont Gold Co., 45 F.3d 1317 (9th Cir. 1995), misinterpreted Firestone. We now establish a more comprehensive approach to ERISA cases in which a conflict of interest exists. As we will explain below, abuse of discretion review, tempered by skepticism commensurate with the plan administrator's conflict of interest, applies here.

In addition, this case requires us to consider how a court is to review an ERISA plan administrator's decision when the procedure that produced the decision did not follow all statutory requirements. For the reasons that we will develop, we conclude that when a decision by an administrator utterly fails to follow applicable procedures, the administrator is not, in fact, exercising discretionary powers under the plan, and its decision should be subject to de novo review. Lesser irregularities, like the one in this case, do not remove the decision from abuse of discretion review, but rather should be factored into the calculus of whether the administrator abused its discretion.

I. FACTUAL AND PROCEDURAL BACKGROUND

Dr. Abatie worked for the Santa Barbara Medical Foundation Clinic from 1971 until November 1992, when he took a medical leave of absence after developing non-Hodgkin's lymphoma. The Clinic sponsored for its employees an employee welfare benefit plan, which provided for disability benefits, and an unfunded life insurance plan. Only life insurance is at issue in this appeal.

Shortly after taking leave from the Clinic, Dr. Abatie applied for and received disability benefits. Dr. Abatie never returned to work and, beginning in 1993, received permanent disability benefits. From September 1998 until April 2000, Dr. Abatie experienced a partial remission but, in June 2000, he died. After his death, Plaintiff filed a claim for life insurance benefits.

The life insurance policy under the plan was originally issued by Home Life Financial Assurance Company. Alta is the successor in interest to Home Life's rights and responsibilities. The policy requires that a beneficiary work full-time for the employer in order for insurance coverage to start. The policy also provides that coverage ends when employment ends, unless otherwise provided for by the policy.

The policy specifies two ways in which an employee can continue to receive life insurance coverage after ending employment. First, the insured may continue to pay premiums. Dr. Abatie did not do that.

Second, if an insured becomes totally disabled while still covered by the policy, the insured may request what is commonly referred to as a "waiver of premium application." If a waiver is granted, the insured continues to receive life insurance coverage without paying premiums and without working. The policy defines total disability as being "not able to work at all at any job or business for pay or profit due to injury or sickness." In order to be eligible for a waiver, the insured must provide the insurer with "proof of ... total disability within 12 months after the date [of] becom[ing] totally disabled." The policy further provides that, even after a waiver of premium application is granted, coverage will end if the insured is "no longer totally disabled" or fails to provide "proof of continued disability."

Several months after Dr. Abatie's death, the Clinic wrote to Alta requesting payment of life insurance benefits to Plaintiff. The Clinic's insurance broker sent a letter to Alta noting that, "due to administrative error, the waiver of premium application was not filed." Despite that error, the Clinic sought "retroactive" qualification of Dr. Abatie for insurance coverage.

In March 2001, Alta denied the claim for life insurance benefits. It did so because it concluded that Dr. Abatie had not submitted proof of his total disability within 12 months of becoming totally disabled. Alta noted that the Clinic admitted that Dr. Abatie had never filed a waiver of premium application. Accordingly, Alta concluded, Dr. Abatie was not covered by the life insurance plan when he died.

Plaintiff filed suit against Alta in California state court. Alta removed the case to federal court pursuant to 28 U.S.C. § 1441(a).

The parties conducted discovery, supplementing the administrative record. As part of that discovery, the Clinic produced documents that suggested, contrary to its previous admission, that it had filed a waiver of premium application on behalf of Dr. Abatie, which Alta's predecessor in interest, Home Life, had approved. Specifically, the Clinic produced an internal document stating, Dr. Abatie's "[p]remiums waiver requested in January, 1994. Should be receiving confirmation any day." A handwritten note next to that entry says, "waiver was granted 2/94." And a separate note to the file asserts that Dr. Abatie's "life insurance premium is waived."

In conjunction with the Clinic's discovery of those documents, Plaintiff took depositions to shed more light on whether the waiver of premium application was in fact submitted to and approved by Alta's predecessor. One Clinic employee, Melissa Peter, testified in deposition that she was responsible for those notes and that she had sought and obtained a waiver for Dr. Abatie. However, she did not remember the circumstances under which she wrote the notes and acknowledged that it was customary to obtain official confirmation of a waiver of premium—a document not found in the Clinic's files. Similarly, Alta's files contained no documentation showing that Dr. Abatie had applied for a waiver of premium, and he was not listed on the roster of employees granted waivers that Alta acquired from its predecessor, Home Life. But a Home Life "Renewal Census Report" dated May 8, 1997, listed Joseph D. Abatie as having life insurance coverage of $500,000 under Policy No. G40612, with an effective date of August 1, 1992.

In view of this additional evidence, the parties agreed to allow Alta to conduct an additional review and render a final determination of the claim instead of proceeding directly to trial.² On review, Alta again denied Plaintiff's claim for life insurance benefits. Alta concluded that there was insufficient evidence to prove that the Clinic had submitted a waiver of premium application for Dr. Abatie. It reasoned that the Clinic earlier admitted that it had failed to send the application (albeit inadvertently), that neither the Clinic nor Alta had a record in its files that Dr. Abatie filed a waiver of premium application, and that the Clinic had unsubstantiated handwritten notes, but no formal documentation that an application had been submitted and approved.

In addition, Alta stated for the first time that it was denying coverage because there was insufficient evidence in the record that Dr. Abatie had remained totally disabled from the time he left work until his death, as required under the policy. In particular, Alta questioned whether Dr. Abatie had remained totally disabled from September 1998 through April 2000—the time of his partial remission.

The parties then resumed litigation in court. The district court conducted a bench trial. In response to the new rationale provided by Alta for denying benefits, Plaintiff presented a declaration from Dr. Abatie's treating physician. The declaration, created after Alta's final determination, stated that Dr. Abatie was totally disabled and could not have engaged in any work from September 1998 through April 2000, as a result of numerous complications from lymphoma and anemia.

Following the trial, ...