The U.S. Court of Appeals for the Sixth Circuit agreed with AARP’s brief, affirming the district court’s decision to order an insurer who wrongly denied disability benefits to pay not only the benefits withheld, but also the profits it earned on the wrongfully withheld funds.
Daniel Rochow, an employee of Arthur Gallagher & Co., was enrolled in the company’s disability plan under Life Insurance Co. of North America (LINA) when he applied for benefits because of conditions that were later linked to brain trauma. The insurer denied his claim, arguing that his inability to function did not occur until his hospitalization after he stopped working. Rochow challenged the denial, exercising his rights under the federal Employee Retirement Income Security Act (ERISA), the main federal law overseeing employee benefits.
A federal district court agreed with Rochow that LINA’s denial was arbitrary and capricious, awarded Rochow his benefits, and dismissed the case. Upon appeal, the U.S. Court of Appeals for the Sixth Circuit went even further. The court found that LINA was arbitrary and capricious, that its decision was unsupported by the evidence, and the process by which the decision was reached was flawed, finding that LINA violated ERISA’s duty of loyalty, and remanded the case for determination of relief.
Rochow argued that LINA should pay not only the denied benefits, but also the profits it earned on those denied benefits. The district court agreed and awarded almost $3.8 million in profits. Now, more than 10 years later, LINA appealed, arguing among other things that disgorgement of profits was not the proper remedy in this case, and that Rochow was limited to the amount of the denied benefits, no more.
AARP Foundation Litigation attorneys filed AARP’s friend-of-the-court brief on behalf of Rochow. The brief points out that the intent of ERISA and precedential decisions regarding ERISA and its underlying area of law (trusts) clearly support this restitution when a fiduciary has breached its fiduciary duty, as the appeals court found here that LINA had. Disgorgement of profits — in essence, requiring the entity to pay back not only the benefits it should have paid in the first place but also the interest and profits earned by LINA in holding on to those monies unjustly — is not only appropriate, but also supported by precedent.
What’s at Stake
Requiring an insurer to pay back not only denied benefits but also the profits earned on those denied benefits will act as a deterrent to benefit denials where the insurer clearly knew it should have paid the benefit. This remedy will encourage insurers to properly pay benefits without requiring individuals to challenge the denial.
Rochow v. LINA was decided by the U.S. Court of Appeals for the Sixth Circuit.