• Ninth Circuit Refuses to Recognize ERISA Plan’s Right to Recover Overpayment of LTD Benefits
  • March 7, 2013
  • Law Firm: Wilson Elser Moskowitz Edelman Dicker LLP - New York Office
  • On February 19, 2013, the Supreme Court of the United States denied First Unum Life Insurance Company’s petition for a writ of certiorari in a case in which the Ninth Circuit refused to recognize an ERISA plan’s right to recover an overpayment of long-term disability (LTD) benefits consistent with the terms of the applicable policy. Although the Supreme Court recently heard argument in a somewhat similar case, the decision not to hear Unum’s appeal could cast serious doubts on a carrier’s ability to recover overpaid LTD benefits, at least in certain circumstances, particularly in the Ninth Circuit.

    In Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012), the Ninth Circuit vacated the District Court’s entry of summary judgment on Unum’s counterclaim seeking reimbursement of LTD benefits. Unum paid benefits subject to the policy’s requirement that the insured reimburse it for “any overpayment resulting from my receipt of benefits from any other source.” Specifically, Unum sought recovery of approximately $36,000 in LTD benefits it overpaid as the result of plaintiff receiving social security disability benefits. Because Unum denied coverage after 24 months under the “any occupation” definition of disability, it was not able to offset its overpayment using future LTD payments. Rather, Unum necessarily sought to recover directly from Ms. Bilyeu.

    Ninth Circuit’s Findings & Decision
    In finding that Ms. Bilyeu was not required to honor the policy language, the Ninth Circuit first noted that ERISA provides fiduciaries with only the right to seek equitable relief to enforce the terms of a plan and, as such, Unum’s sole basis for seeking recovery was its claim that the policy language created an “equitable lien by agreement.” See 29 U.S.C. § 1132(a)(3) (§ 502(a)(3) of ERISA). The Ninth Circuit’s Bilyeu analysis revolves in significant part on the panel’s interpretation of the Supreme Court’s decision in Sereboff v. Mid Atlantic Med. Servs., 547 U.S. 356; 126 S. Ct. 1869 (2006). Specifically, notwithstanding contrary case law from at least five other circuits that interpret Sereboff as not requiring a fiduciary to trace the specific funds in question, the Ninth Circuit held that regardless of policy language, an ERISA fiduciary can recover overpayments only “from specifically identified funds in the beneficiary’s possession, rather than from general assets” (emphasis in original).

    In its decision, the court recognized that the Social Security Act prevented Unum from arguing that its lien attached to Ms. Bilyeu’s social security benefits, which otherwise would have been a “particular fund” capable of being attached. Thus, the court analyzed the case under what it termed Unum’s “[attempt] to circumvent the congressional prohibition on assignment and attachment of social security benefits” by identifying the “funds” at issue as the benefit payments that it overpaid to Ms. Bilyeu. Relying on the fact that those funds could no longer be specifically traced or identified, in large part because Ms. Bilyeu had already spent them, the Bilyeu court held that Unum had not satisfied the requirements for an equitable lien by agreement. The Ninth Circuit vacated the District Court’s judgment on Unum’s behalf and remanded the case for further consideration.

    Although the Bilyeu decision can, and should, be interpreted narrowly based on the particular facts of the case, a broader reading of its rationale would pose a significant threat to a carrier’s ability to recover for overpayments, regardless of policy language, except in rare situations in which such funds are directly traceable. Claimant’s counsel in all jurisdictions are almost certain to encourage both a broad reading and a broad application of the Ninth Circuit’s Bilyeu opinion. Of note, however, the U.S. Supreme Court recently heard oral argument in another case involving a group policy carrier’s attempt to seek recovery for LTD benefit overpayment. U.S. Airways, Inc. v. McCutchen, 663 F.3d 671 93d Cir. 2011), cert granted 80 U.S.L.W. 3707 (U.S. June 2012)(No. 11-1285). Although the specific issue in McCutchen involves overpayment of LTD benefits as the result of the claimant’s third-party tort recovery, the Supreme Court’s decision there could touch on the issues presented in Bilyeu.

    The decision in Bilyeu may turn out to be more detrimental to claimants. Many disability plans allow for the offsetting of estimated social security benefits. Plan insurers have typically waived that provision if the claimant agrees to sign a reimbursement agreement. Now, plan insurers may be reluctant to waive their right to offset estimated social security benefits, knowing that they cannot recover the overpayment when an actual award is made.