Hess, Susan v. Hartford Life

In the

United States Court of Appeals

For the Seventh Circuit

Nos. 00-2043 and 00-4229

Susan E. Hess,

Plaintiff-Appellee,

v.

Hartford Life & Accident

Insurance Company,

Defendant-Appellant.

Appeals from the United States District Court

for the Central District of Illinois.

No. 97 C 2051--Michael P. McCuskey, Judge.

Argued April 10, 2001--Decided December 13, 2001

Before Coffey, Rovner, and Diane P. Wood,

Circuit Judges.

Diane P. Wood, Circuit Judge. Susan Hess

worked for Fleet Mortgage Company as a

loan officer until she became disabled in

April 1996. Throughout her tenure at

Fleet, Hess was covered by long-term

disability insurance under a group policy

provided by Hartford Life and

AccidentInsurance. When she became

disabled, Hess filed for benefits under

the Hartford plan. Hartford agreed to

begin paying benefits, but at a level

lower than the amount to which Hess

thought she was entitled. Hess brought

this suit under the Employee Retirement

Income Security Act of 1974, 29 U.S.C.

sec. 1001 et seq., commonly known as

ERISA. The district court, ruling on

stipulated facts, held that Hartford’s

calculation of Hess’s benefits was

arbitrary and capricious and ordered

Hartford to pay benefits at the full rate

Hess sought. We see no error in the

district court’s analysis of the case and

therefore affirm its judgment.

I

The long-term disability policy that

Hartford sold to Fleet, which governed

Hess’s benefits, provided that a

participant who became disabled while

insured under the plan would be paid a

monthly benefit calculated, in relevant

part, by multiplying the participant’s

"Monthly Rate of Basic Earnings" (MRBE)

at the time of disability by a benefit

percentage, which for Hess was 66.67%.

The term "Monthly Rate of Basic Earnings"

was defined as "your regular monthly pay,

from the Employer, not counting: (1)

commissions; (2) bonuses; (3) overtime

pay; or (4) any other fringe benefit or

extra compensation." Thus, the benefit to

which Hess was entitled depended on what

qualified as her "regular monthly pay" at

the time she became disabled.

Hess’s compensation as a loan officer at

Fleet was based entirely on commissions.

This might make one think that she had no

MRBE for purposes of the long-term

disability plan, but that is not how

things worked. Instead, prior to 1996,

Fleet paid Hess a biweekly "draw" against

her commissions and then paid her the

remaining commissions in a monthly lump

sum. Her 1995 contract with Fleet stated

that her level of benefits, including

long-term disability benefits, would be

determined according to her "base

compensation," which the contract defined

as the amount of her draw. Hess’s draw

for 1995 amounted to $23,400. Fleet

withheld insurance premiums for the

Hartford policy from Hess’s draw

payments.

In 1996, Fleet decided to phase out the

draw system for fully-commissioned

employees like Hess. Hess’s 1996 contract

with Fleet stated that the draws would

end as of April 5, 1996. The contract

also stated that benefit levels,

including those for the long-term

disability plan, would be based on Hess’s

"base salary and/or draw." Although the

contract did not define "base salary,"

Fleet stipulated that it calculated that

amount by averaging the employee’s total

commissions over the previous two years.

Using this definition, Hess’s base salary

in 1996 was a little over $45,000. For

reasons unexplained, Fleet did not phase

out the draw on April 5, 1996, as it was

contractually obligated to do; the phase-

out was extended until June 1, 1996. On

that date, Fleet increased the amount of

the insurance premiums it withheld from

Hess’s monthly compensation to reflect

the change from the draw system to the

base salary system of calculating

benefits.

Hess became disabled on April 19, 1996.

When she filed her claim under the long-

term disability policy in October 1996,

Hartford had on file a document from

Fleet stating that her annual base salary

was $23,400, which was the draw she had

received under her 1995 contract.

Hartford calculated her benefits based on

this amount and awarded her a monthly

benefit of $1,300. Hess objected. She

reasoned that she did not become disabled

until after April 5, which was when her

contract with Fleet stated that Fleet

would phase out her draw and begin basing

her benefits on the average of her total

commissions over the past two years. On

this basis, she appealed the benefits

decision within Hartford.

The Hartford claims examiner assigned to

Hess’s case looked into the situation and

determined (1) that Hess’s pay had been

based entirely on commissions, (2) that

(in his view) the language of the policy

excluded commissions from the MRBE

calculation, but (3) that Hess had paid

premiums for disability insurance, and

(4) that Fleet intended for Hess to be

covered. The examiner testified that, in

his view, Hartford had three options:

first, it could find that Hess was not

entitled to any benefits because her pay

was based entirely on commissions;

second, it could continue to pay benefits

based on the draw amount notwithstanding

her date of disability; or third, it

could pay Hess benefits based on her

"base salary," which was in turn a

function of her total commissions. The

examiner chose the second option, to

continue paying benefits based on the old

draw amount. Before making this decision,

he spoke with a Fleet representative who

told him that Fleet intended for Hess to

be covered and that it had viewed the

draw amount as Hess’s base pay. The Fleet

representative told the examiner that

Fleet had switched from the draw system

to a system based on total commissions on

June 1, but because this date fell after

Hess became disabled, the examiner

disregarded this information. The

examiner had received a letter from

Hess’s lawyer explaining that, according

to Hess’s contract with Fleet, the key

date for the change-over should have been

April 5, not June 1, and Hess’s payments

should therefore have been based on her

total commissions. Although the letter

made explicit reference to Hess’s

contract with Fleet and quoted the

relevant portions, the examiner did not

read the letter. One consequence of his

omission was that he remained ignorant of

the contents of Hess’s contract. Despite

the fact that the Hartford policy

documents explicitly stated that "[i]f

[Fleet] gives The Hartford any incorrect

information, the relevant facts will be

determined to establish if insurance is

in effect and in what amount," the

examiner made no effort to investigate

the discrepancy between the Fleet

representative’s claim that the switch

from the draw system to the average

commission system occurred on June 1 and

Hess’s claim that it occurred on April 5.

After Hartford informed her of its

decision, Hess filed this ERISA claim in

the district court seeking benefits based

on her average annual commissions.

Finding that Hartford’s handling of

Hess’s claim was arbitrary and

capricious, the district court ordered

Hartford to pay $50,927.10 in back

benefits and to begin paying Hess’s

monthly benefits at a rate of $2,512.55.

The court also awarded Hess a little over

$40,000 in attorneys’ fees. In this

appeal, Hartford challenges both the

judgment against it and the award of

attorneys’ fees. In addition, Hartford

argues that even if the judgment against

it was correct, the district court erred

in ordering it to pay benefits at the

higher level rather than remanding the

case to Hartford to allow it to

recalculate the benefits.

II

The parties disagree over the standard

of review that should govern our

decision. The district court entered its

judgment after receiving a stipulation of

the facts that made up the administrative

record from the parties. Hartford urges

that a judgment on stipulated facts is

akin to a summary judgment, and

accordingly that our review of the

district court’s decision should be de

novo. It is true that the facts, to the

extent they are stipulated, will not be

in dispute, but we think that the

procedure the parties followed here is

more akin to a bench trial than to a

summary judgment ruling. See May v.

Evansville-Vanderburgh Sch. Corp., 787

F.2d 1105, 1115-16 (7th Cir. 1986) (where

parties agree to a judgment on stipulated

facts, "[i]n effect the judge is asked to

decide the case as if there had been a

bench trial in which the evidence was the

depositions and other materials gathered

in pretrial discovery."). The standard of

review that governs is therefore the one

found in Fed. R. Civ. P. 52(a). As we

would after a bench trial, we will review

the district court’s legal conclusions de

novo and review any factual inferences

the district court made from the

stipulated record as well as its

application of the law to the facts for

clear error. See Johnson v. West, 218

F.3d 725, 729 (7th Cir. 2000).

The parties agree that Hartford’s policy

gave Hartford discretion to interpret its

terms. As the district court recognized,

this meant that it was required only to

determine whether Hartford’s conclusion

was arbitrary and capricious. See

Herzberger v. Standard Ins. Co., 205 F.3d

327, 329 (7th Cir. 2000). This is, of

course, a deferential standard of review.

Under the arbitrary and capricious

standard, a plan administrator’s decision

should not be overturned as long as (1)

"it is possible to offer a reasoned

explanation, based on the evidence, for a

particular outcome," (2) the decision "is

based on a reasonable explanation of

relevant plan documents," or (3) the

administrator "has based its decision on

a consideration of the relevant factors

that encompass the important aspects of

the problem." Exbom v. Central States,

Southeast and Southwest Areas Health and

Welfare Fund, 900 F.2d 1138, 1142-43 (7th

Cir. 1990) (citations omitted).

Nevertheless, "[d]eferential review is

not no review," and "deference need not

be abject." Gallo v. Amoco Corp., 102

F.3d 918, 922 (7th Cir. 1996). In some

cases, the plain language or structure of

the plan or simple common sense will

require the court to pronounce an

administrator’s determination arbitrary

and capricious. Id. We agree with

thedistrict court that this is such a

case.

Hartford’s arguments in favor of its

examiner’s decision fall into three broad

categories. First, Hartford points out

that the policy documents exclude

"commissions" from the benefit base and

suggests that, on this basis, it could

have justified denying Hess benefits

entirely. This argument appears to imply

that Hartford’s decision to grant Hess

some benefits in the face of the

exclusion for commissions must therefore

have been fair and reasonable. Second,

Hartford argues that the district court

should not have taken Hess’s contract

with Fleet into consideration, both

because it was not before the examiner

and because it is not a plan document.

Finally, Hartford argues that it made a

reasonable decision in treating June 1,

rather than April 5, as the date on which

Fleet switched Hess’s benefit base from

the draw to her average commissions. We

will consider each of these arguments in

turn.

We agree with the district court that

Hartford’s argument that it could have

denied Hess benefits entirely because her

compensation was based solely on

commissions ignores both the plain

language of the policy and the intent of

the parties. As the district court noted,

the Hartford policy based an employee’s

benefits on her "regular monthly pay . .

. not counting: (1) commissions; (2)

bonuses; (3) overtime pay; or (4) any

other fringe benefit or extra

compensation." In Hess’s case, her

"regular monthly pay" was determined

based on a formula derived from her

commissions; she received no other form

of compensation. Unless the plan was to

be read as creating a class of employees

who had no regular monthly pay at all,

which was at a minimum not Fleet’s

position, the notion of a regular monthly

pay that was dependent in some sense on

commissions was the only interpretation

consistent with the contract. On this

reading, employees who had both a regular

monthly pay plus extra commissions would

not have been entitled to credit for the

commissions. The district court held that

Hess’s commissions were not this kind of

"extra" compensation, and therefore were

not subject to the exclusion quoted

above. To read the contract as Hartford

urges, so that commissions are excluded

regardless of whether they are "extra"

compensation or are an employee’s only

compensation, renders the word "extra" in

the exclusion superfluous. In addition,

we note that Fleet withheld insurance

premiums from Hess’s pay throughout her

tenure at Fleet, and Hartford concedes

that Fleet intended for fully-

commissioned employees such as Hess to be

covered by the insurance policy. Thus,

Hartford’s argument that it could

reasonably have denied Hess all benefits

is unavailing. (Also, if this was indeed

what the plan meant, Hartford would have

had no business paying Hess even the

amount it was willing to give her; plan

administrators cannot randomly pay

benefits to individuals not entitled to

them.)

Turning to Hartford’s contention that we

should disregard Hess’s contract with

Fleet, we find Hartford’s arguments on

this point to border on the frivolous.

Hartford is, of course, correct that in

evaluating a plan administrator’s

decision under an arbitrary and

capricious standard of review, we should

consider only the evidence that was

before the administrator when it made its

decision. See Trombetta v. Cragin Fed.

Bank for Sav. Employee Stock Ownership

Plan, 102 F.3d 1435, 1437 n.1 (7th Cir.

1996). Hartford argues that its examiner

never saw Hess’s contract and that we

therefore may not consider it. That

characterization is not, however, a fully

accurate account of the information

before the examiner. In fact, the

examiner had before him a letter from

Hess’s attorney that made explicit

reference to the contract and even quoted

the relevant portions. The contract

itself apparently had been attached to

the letter at some point, although it had

been removed before the letter reached

the examiner’s desk. Nevertheless, the

examiner had been alerted not only to the

contract’s existence, but also to the

very language on which Hess was relying;

he easily could have obtained a complete

copy through a simple phone call to

Hess’s lawyer or to Fleet. The fact that

the examiner did not bother to read

pertinent evidence actually before him

cannot shield Hartford’s decision from

review. To the contrary, this court has

noted that the fact that an administrator

blatantly disregards an applicant’s

submissions can be evidence of arbitrary

and capricious action. See Perlman v.

Swiss Bank Corp. Comprehensive Disability

Protection Plan, 195 F.3d 975, 982 (7th

Cir. 1999) (discussing hypothetical

situation in which "application was

thrown in the trash rather than evaluated

on the merits"). Similarly, we are not

persuaded by Hartford’s argument that the

contract is irrelevant because it is not

a plan document but an independent

agreement between Hess and Fleet, to

which Hartford was not a party. The

policy Hartford sold to Fleet explicitly

based Hess’s benefit level on Hess’s

compensation, and Hess’s contract with

Fleet is the best evidence of what that

compensation was. Far from being

irrelevant, the contract was the most

critical evidence of the benefits to

which Hess was entitled.

Having determined that Hess’s 1996

employment contract is properly a part of

the administrative record the district

court was entitled to consider, we must

next decide whether Hartford could

reasonably have determined that Hess’s

benefits as of April 19, 1996, should

have been based only on her 1995 draw

amount. Like the district court, we

cannot read the contract that way. Hess’s

1996 contract clearly states that the

draw system was to be phased out as of

April 5. The contract also specifies that

her benefits, including long-term

disability benefits, would be calculated

based on her "base salary and/or draw."

(We note in passing that the phrase

"and/or" has its critics. Bryan A. Garner

reports in A Dictionary of Modern Legal

Usage 56 (2d ed. 1995), that "and/or has

been vilified for most of its life-- and

rightly so." He goes on to say, however,

that the expression, while "undeniably

clumsy, does have a specific meaning (x

and/or y = x or y or both)." Id.) Here,

this would mean that Hess could have her

benefits calculated on the basis of her

base salary, or her draw, or both. In the

context of Fleet’s transition away from a

draw system, the only reasonable

interpretation of this provision was that

the benefits would be based on the draw

while it was in effect and on the base

salary thereafter. As of April 5, Hess

was thus contractually entitled to a

benefits package based on her base

salary--that is, based on the average of

her previous two years’ commissions. The

fact that Fleet may have breached the

contract (or been slow in implementing

its details) by failing to move from the

draw system to the base salary system

until June 1 does not change the package

of compensation and benefits to which

Hess was contractually entitled. Nor

could the fact that Fleet failed to

inform Hartford about the date the

change-over was to have occurred affect

Hess’s benefit amount. The Hartford

policy states that "[i]f [Fleet] gives

The Hartford any incorrect information,

the relevant facts will be determined" to

establish the correct benefit amount.

Once informed by Hess’s attorney that

Hess believed the information Fleet

provided Hartford was incorrect, it was

incumbent on the examiner to refer to

Hess’s employment contract to determine

her actual regular monthly pay. Had he

done so, he would have seen that Hess

became entitled to the higher level of

benefits on April 5, two weeks before her

disability. The district court therefore

did not err when it concluded that

Hartford’s failure to consider the

contract was arbitrary and capricious.

Having determined that Hartford’s

calculation of Hess’s benefits was

arbitrary and capricious, the court

ordered Hartford to pay Hess benefits

based on the average of her last two

years’ commissions. Hartford complains

that the district court should not have

ordered it to pay a specific amount but

instead should have remanded the case to

Hartford for reconsideration of the

appropriate benefit. We do not dispute

the fact that such a remand is sometimes

the appropriate step to order. See Gallo,

102 F.3d at 923. Remand is unnecessary,

however, when "the case is so clear cut

that it would be unreasonable for the

plan administrator to deny the

application for benefits on any ground."

Id. Here, only two levels of benefits

were possible: either Hess was entitled

to benefits based on her draw, or she was

entitled to benefits based on her base

salary, which Fleet calculated by

averaging her previous two years’ commis

sions. Once the district court determined

that the latter benefit level was the

correct one, there was nothing left for

Hartford to calculate. The benefit amount

was clear cut, and the district court

made no error in ordering Hartford to pay

that amount.

Nor did the district court err in

awarding attorneys’ fees to Hess. ERISA

permits the district court to award a

reasonable attorneys’ fee to either

party, see 29 U.S.C. sec. 1132(g)(1), and

there is a modest presumption that the

prevailing party in an ERISA case is

entitled to a fee. See Bowerman v. Wal-

Mart Stores, Inc., 226 F.3d 574, 592 (7th

Cir. 2000). Although we have formulated

the test for when attorneys’ fees should

be awarded under ERISA in various ways,

we have recently noted that the various

formulations boil down to the same

bottom-line question: "Was the losing

party’s position substantially justified

and taken in good faith, or was that

party simply out to harass its opponent?"

Id. at 593. We review the district

court’s grant of fees only for abuse of

discretion, see Wyatt v. UNUM Life Ins.

Co. of Am., 223 F.3d 543, 548 (7th Cir.

2000), and we find no abuse in this case.

In deciding to award fees, the court

stressed that Hartford’s examiner had

failed to read the letter from Hess’s

lawyer outlining Hess’s arguments for the

higher benefit level and had failed to

consider Hess’s employment contract,

which was the most reliable evidence as

to what her compensation was. Had the

examiner considered this information, the

court believed, this litigation could

have been avoided. As we discussed above,

we share the district court’s view of the

examiner’s lackadaisical approach in this

case, and we find that the court was

within its discretion in awarding fees.

Compare Filipowicz v. American Stores

Benefit Plans Comm., 56 F.3d 807, 816

(7th Cir. 1995) (approving award of fees

where plan administrator failed to learn

"what plan documents were actually in ef

fect" at the relevant time).

The judgment of the district court, both

with respect to liability and fees, is

Affirmed.