An insurer can pursue a claim for restitution of overpaid short-term disability benefits as an equitable remedy under the Employee Retirement Income Security Act, the U.S. Court of Appeals for the Second Circuit ruled yesterday.
Addressing an open question in the circuit, the court said that Aetna Life Insurance Company’s counterclaim to recover disability benefits paid to an employee who also had recovered no-fault insurance money from a car accident constitutes “appropriate equitable relief” under ERISA, 29 U.S.C. §1132(a)(3).
What qualifies as “appropriate equitable relief” under ERISA, the circuit said in Thurber v. Aetna Life Insurance, 12-370-cv, “is an issue that continues to perplex courts despite efforts by the Supreme Court during the past decade to shed some light on the matter.”
The issue came before the court on the appeal of plaintiff Sharon Thurber and the cross-appeal of Aetna from decisions by Western District Judge William Skretny (See Profile).
Thurber, a client services representative for Quest Diagnostics from 1993 until 2007, broke both her legs in a car accident in 1983, leaving one leg shorter than the other. On Aug. 17, 2007, she was in another car accident, and has not worked since.
Aetna approved her initial claim for short-term disability benefits for “traumatic arthritis in both knees,” and she received those benefits for six months before applying for long-term disability.
Thurber informed Aetna she had received “other income” of $1,202 per month through no-fault insurance while she was on short-term disability.
When Aetna denied her claim for long-term disability, Thurber sued in the Western District and Aetna counterclaimed for equitable restitution of its overpayment of $7,214.
Skretny granted summary judgment for the insurer on long-term disability but dismissed its counterclaim on the grounds he lacked subject matter jurisdiction under ERISA because the claim was legal in nature rather than equitable.
Thurber appealed to the Second Circuit on the first issue and Aetna cross-appealed on the second. Judges Richard Wesley (See Profile), Peter Hall (See Profile) and Gerard Lynch (See Profile) heard oral argument on Dec. 14, 2012, from Lisa Poch of Chiacchia & Fleming in Hamburg, for Thurber, and Michael Bernstein of Sedgwick for Aetna.
The circuit upheld Skretny on the denial of long-term disability benefits, finding that the “summary plan description” gave Aetna the broad discretion to deny benefits and rejecting Thurber’s claim that she should have actually received the plan documents in order to be subject to that discretion. The panel also agreed that the denial was supported by substantial evidence.
But the judges reversed Skretny on the counterclaim.
Writing for the panel, Wesley said the “nature of Aetna’s claim is equitable.”
“The insurer seeks specific funds (overpayments resulting from Thurber’s simultaneous receipt of no-fault insurance benefits and short-term disability benefits) in a specific amount (the total overpayment, $7,213.92) as authorized by the plan,” Wesley said. “These funds were entrusted to Thurber.”
Wesley said the panel saw no “basis for distinguishing between certain ‘funds’ identified by ERISA plans—i.e., between ‘third-party recoveries’ and benefits that become ‘overpayments’ as a result of third-party recoveries.”
He added, “Both constitute particular, identifiable sums over which an insurer may assert an equitable lien authorized by its plan.”
Thurber had argued that Aetna could not seek return of the overpayments because she had spent the money, and, therefore, Aetna was similar to a general creditor seeking a return of funds in an action at law, not equity.
But the panel said it was joining the Third Circuit in Funk v. CIGNA Group Ins., 648 F.3d 182 (2011), and going against the Ninth Circuit in Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (2012), by finding immaterial the fact that the specifically identified assets have been dissipated.
“Whether or not the beneficiary remains in possession of those particular dollars is not relevant as long as she was on notice that the funds under her control belonged to the insurer; she held the money in a constructive trust,” Wesley wrote.
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