An insurance company will have to pay $3.8 million in disgorgement damages for unjust enrichment after it withheld disability benefits from a man who suffered from a debilitating brain infection.
In affirming what a dissenting judge called a “windfall” to the plaintiff, the 6th U.S. Circuit Court of Appeals held that disgorgement of profits is an appropriate remedy under the federal ERISA law and that the plaintiff’s expert properly relied on a “Return on (Average) Equity” (ROE) formula to calculate the damages.
The 6th Circuit also affirmed the trial court’s rejection of the formula used by the defendant’s expert, which treated the withheld benefits as though they were interest-earning investment assets of the insurer.
Battle over Benefits
The plaintiff in the case, Daniel J. Rochow, had been an employee of Arthur J. Gallagher & Co., where he had been covered under a disability insurance policy provided by Life Insurance Company of North America (LINA). In 2001, he began to experience short-term memory, chills, sweating, and stress at work. By Jan. 2, 2002, his symptoms had worsened to the degree that he was forced to resign from his job.
A month after he resigned, Rochow was diagnosed with HSV-Encephalitis, a rare and severely debilitating brain infection. In December 2002, he filed a claim for long-term disability benefits. LINA denied the claim on the grounds that Rochow’s employment ended before his disability began.
Asserting that his disability began while he was still employed, Rochow made a series of attempts to resolve his claim through LINA. After all his attempts failed, Rochow filed a lawsuit in federal court in Michigan alleging ERISA violations. The trial judge granted summary judgment in his favor, finding that LINA had acted arbitrarily and capriciously in denying his claim.
LINA appealed to the 6th Circuit, which affirmed the summary judgment order and remanded the case to the District Court for further proceedings. After remand, Rochow filed a motion seeking an equitable accounting and disgorgement of LINA’s unjust enrichment profits.
Dueling Expert Testimony
In support of his motion, Rochow presented the testimony of an expert who used the ROE method to calculate LINA’s unjust enrichment. He concluded that LINA used the benefits it withheld from Rochow to earn between 11 and 39 percent annually. Ultimately, LINA made approximately $2.8 million by retaining Rochow’s benefits, the expert calculated.
LINA moved to strike the expert’s testimony as unreliable under Federal Rule of Civil Procedure 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). The trial judge denied the motion, ruling that many of LINA’s objections went to the weight of the expert’s testimony, not its admissibility.
Subsequently, LINA presented the testimony of its own expert, the chief accounting officer for the group insurance division of Cigna. He calculated that the profits LINA earned by withholding Rochow’s benefits were just $32,732. He arrived at that amount by treating the withheld benefits as though they were earning interest as part of LINA’s investment assets.
The trial judge concluded that the plaintiff’s expert’s ROE metric was the correct basis for determining the profits LINA gained by withholding Rochow’s benefits. Ultimately, the trial judge ordered disgorgement in the amount of nearly $3.8 million.
Determining the Proper Metric
Once again, LINA appealed to the 6th Circuit, which first addressed the propriety of disgorgement damages under ERISA. LINA challenged the damages on the ground that ERISA prevents a plaintiff from recovering both the actual amount of withheld benefits and equitable damages for unjust enrichment.
The 6th Circuit concluded that nothing in ERISA limits the plaintiff to remedies that focus directly on his lost benefits. Rather, the statute’s language authorizing “other appropriate equitable relief” allows the type of damages awarded here.
The 6th Circuit then turned to the testimony of the plaintiff’s expert. LINA challenged the expert’s calculations as “absurd” and argued that they did not constitute a reasonable approximation of its unjust enrichment. LINA also challenged the expert on the grounds that his opinion was unsupported by scholarly authority and that he lacked experience in the insurance industry.
Rejecting LINA’s challenge, the 6th Circuit concluded that the district court did not abuse its discretion by accepting ROE as the metric for calculating LINA’s profits. While acknowledging that there is “a dearth of case law” applying the ROE metric to determine unjust enrichment, the 6th Circuit said that LINA did not provide any cases that expressly rejected ROE as a metric for disgorgement of profits.
Rather, LINA’s primary opposition to the ROE method was based on the size of the damages calculation, the court said. “At bottom, LINA suggests the disgorgement award must be unlawful because it is large, as it significantly exceeds the principal amount of benefits LINA wrongfully withheld from Rochow.”
But LINA’s argument misconstrued the basic concept of equitable accounting, the court said. “Since disgorgement is fundamentally tied to profits, it follows that where profits are sizeable, the disgorgement will be proportionately sizeable.”
The trial judge’s selection of the ROE metric fit the facts of this case, the court concluded, and provided a common sense approach to arriving at a reasonable approximation of LINA’s unjust profits.
The court also rejected LINA’s arguments concerning the expert’s lack of experience in the insurance industry and lack of scholarly support. As to his experience, the court noted that the expert had taught economics courses that included the economics of the insurance industry. As to the lack of scholarly work supporting the ROE metric, the court said that this is not a sufficient basis to conclude that the trial judge abused his discretion.
In a scathing dissent, Circuit Judge David W. McKeague criticized the opinion as being an “unprecedented and extraordinary” expansion of the scope of ERISA coverage resulting in an “astonishing windfall” for the plaintiff.
Sadly, the plaintiff did not live to see the outcome of the case. He died in 2008, four years after filing his lawsuit and six years after filing his original disability claim.
The case is Rochow v. Life Insurance Company of North America, No. 12-2074 (6th Cir. Dec. 6, 2013).