Stephan v. Unum Life Ins. Co. of Am.

Decision Date12 September 2012
Docket NumberNo. 10–16840.,10–16840.
PartiesMark STEPHAN, Plaintiff–Appellant, v. UNUM LIFE INSURANCE COMPANY OF AMERICA, Defendant–Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

OPINION TEXT STARTS HERE

Mark D. DeBofsky, Daley, DeBofsky & Bryant, Chicago, IL; Terrence J. Coleman and Brian H. Kim, Pillsbury & Levinson, LLP, San Francisco, CA, for the appellant.

Anna M. Martin and Kevin G. Gill, Rimac Martin, P.C., San Francisco, CA, for the respondent.

Appeal from the United States District Court for the Northern District of California, Marilyn H. Patel, Senior District Judge, Presiding. D.C. No. 3:08–cv–01935–MHP.

Before: DIARMUID F. O'SCANNLAIN, ROBERT E. COWEN,* and MARSHA S. BERZON, Circuit Judges.

Opinion by Judge BERZON; Dissent by Judge O'SCANNLAIN.

OPINION

BERZON, Circuit Judge:

In August 2007, just three months after he had begun a new job at Thomas Weisel Partners (“TWP”), PlaintiffAppellant Mark Stephan (Stephan) had a bicycling accident that resulted in a spinal cord injury, rendering him quadriplegic and thus permanently disabled. Stephan was insured under TWP's long-term disability insurance plan, underwritten and administered by DefendantAppellee Unum Life Insurance Company (Unum). Stephan disputes Unum's calculation of his pre-disability earnings, upon which his disability benefits were based. In calculating his earnings, Unum included only Stephan's monthly salary but not his annual bonus. Stephan's earnings, and therefore his disability benefits, would be considerably higher if the bonus were included.

The central issue in this appeal is whether the bonus should have been counted. The district court reviewed Unum's decision and upheld Unum's benefit determination. The court also denied Stephan's motion to compel discovery of a series of internal memoranda created by Unum's in-house counsel regarding Stephan's claim. Stephan appeals from each of the district court's rulings.

We agree with the district court that the applicable standard of review is abuse of discretion. The district court also correctly held that because Unum was responsible both for evaluating benefits claims and paying them, it operated under a conflict of interest, which ‘must be weighed as a factor in determining whether there is an abuse of discretion’ (quoting Metro. Life Ins. Co. v. Glenn, 554 U.S. 105, 113, 128 S.Ct. 2343, 171 L.Ed.2d 299 (2008)). However, in determining what weight ought to be given the conflict, the district court erred in three ways: First, it failed to apply the traditional rules of summary judgment to its analysis of whether and to what extent a conflict of interest impacted Unum's benefits determination. Second, it incorrectly held that certain internal memoranda between Unum's claims analyst and its in-house counsel were not discoverable. Finally, it did not take into account substantial evidence that Unum's conflict of interest “infiltrated the entire decision-making process” and therefore ought to be accorded “significant weight.” Montour v. Hartford Life & Accident Ins. Co., 588 F.3d 623, 634 (9th Cir.2009).

We remand to the district court to reconsider the impact of Unum's conflict of interest; correspondingly, what weight to accord the conflict in determining whether Unum abused its discretion; and ultimately whether Unum did indeed abuse its discretion in failing to include Stephan's bonus in his predisability earnings.

I. FACTUAL AND PROCEDURAL BACKGROUND
A. The Plan

The long-term disability insurance policy (“the Plan”) issued by Unum to TWP, Stephan's employer, “provide[d] financial protection” for TWP employees should they become disabled, by ensuring that disabled employees would continue to receive sixty percent of their monthly earnings up to a maximum of $20,000. The Plan authorized Unum to interpret its provisions and to determine claimants' eligibility for benefits.

B. Stephan's Claim

On April 18, 2007, TWP offered Stephan a position as Managing Director in its Institutional Sales department. Stephan's offer letter stated, in relevant part:

Your salary rate will be $200,000 annually. Your salary will be paid semi-monthly, less payroll deductions and all required withholdings. You will be eligible to participate in Thomas Weisel Partners' discretionary bonus program. Although bonuses are generally discretionary, you will be guaranteed [a] $300,000 bonus for your first 12 months of employment, provided you perform at the level both you and we anticipate and that you have not voluntarily terminated your employment or been terminated for cause prior to the relevant payment dates.

When he accepted his new position, Stephan became insured under TWP's policy, underwritten by Unum.

Four months later, Stephan suffered a severe spinal cord injury in a bicycling accident, as a result of which he became quadriplegic. Shortly thereafter, he applied for disability benefits under the Plan. On December 3, 2007, Unum sent Stephan a letter stating that his disability claim had been approved and specifying that Stephan would receive disability benefits of $10,000 per month. Unum based this amount on Stephan's annual salary of $200,000 per year. Later that month, TWP paid Stephan the $300,000 bonus promised in his offer letter.

Stephan appealed Unum's benefits determination, arguing that his benefits should have been based not on his annual salary of $200,000 per year but on an annual income of $500,000—his base salary plus the annual bonus guaranteed to him in his offer letter. In support of his appeal, Stephan pointed to the disability claim form submitted by TWP Human Resources, which stated that Stephan's annual earnings were $500,000; the insurance premiums TWP paid Unum based on that rate of compensation; and Stephan's offer letter guaranteeing him a bonus of $300,000. Stephan also attached several additional documents to his appeal: He provided Unum a memo from TWP explaining that “in each month prior to the date of [Stephan's] disability, TWP recorded compensation expense, associated with the cash component of [his] guaranteed bonus payment”; another memo from TWP explaining how the company calculated its insurance premiums; and a letter from accountant and former Unum Director of Financial Assessment, Carol Poulin, analyzing Stephan's claim and finding that “Mr. Stephan's monthly income,” on which his disability benefits should be based, “consists of both his pro-rated salary and pro-rated guaranteed bonus.”

Unum rejected Stephan's appeal, maintaining “that the original basic monthly earnings calculation was correct.” The letter from Unum rejecting Stephan's appeal observed:

As Mr. Stephan began working in April and stopped working in August he did not work a full 12 months and it is apparent that TWP went outside their own employment agreement when [Stephan] received a bonus in December 2007. This is consistent with the information provided in a December 14, 2007 conference call with TWP representatives when they indicated that they intended to morally honor his contract.

Further, Unum stated that it did

not appear [Stephan's] bonus was a true accrual as indicated by TWP. If it were truly an accrual, the bonus would have been paid monthly, which would have been reflected in [Stephan's] payroll records.

Unum noted that contrary to Stephan's claim that TWP paid insurance premiums on a salary of $500,000, Unum's “premium billing department confirmed that premiums for [Stephan's disability] coverage were based on earnings of $100,000; not his salary at the time of disability and not including any bonus.” Finally, Unum rejected the analysis of accountant Carol Poulin. Poulin, Unum stated, did “not take into account the fact that [Stephan's] bonus [was] contingent on a level of performance over the 12 months of employment, which [Stephan] did not complete.” “Accordingly,” Unum continued, we have determined that his analysis and conclusions are flawed.”

C. Procedural History

This case was initially filed in the Superior Court of California and then removed by Unum to federal court. The district court resolved it in three stages.

First, the court ruled on the parties' cross-motions for summary adjudication regarding the standard of review to be applied to the case. Because the Plan contained a provision delegating discretionary authority over its interpretation to Unum, the court held that the proper standard of review was abuse of discretion. The court rejected Stephan's contention that the discretionary provision was void either because of a settlement agreement between Unum and the State of California or because it was in violation of California public policy.

In addition, the district court's initial decision held that, absent attorney-client privilege, certain memoranda between Unum's in-house counsel and the claims analyst responsible for Stephan's claim were discoverable, because they might help demonstrate whether and to what extent Unum was operating under a conflict of interest. The court withheld any determination, however, on whether the attorney-client privilege protects these documents pending briefing on the applicability to the documents of the fiduciary exception to attorney-client privilege.

Second, after the parties briefed the issue, the district court ruled on the discoverability of these memoranda. Although the court assumed without deciding that the fiduciary exception to attorney-client privilege generally applies to wholly-insured ERISA plans such as TWP's, it held that the exception did not apply in this case, because “the interests of plaintiff and defendant had sufficiently diverged at the time the disputed memoranda were created.” Therefore, it held, Unum need not produce the documents.

Finally, on cross-motions for summary judgment on the merits, the district court ruled that “Unum's conflict of interest did not weigh heavily upon its decision-making process in ...

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