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Nature of Suit Code: 791
Nature of Suit: Employee Retirement Income Security Act (ERISA)
Cause of Action: 

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United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 06-2818

___________

Kenny J. Werdehausen; Anita *

Werdehausen, *

*

Plaintiffs - Appellants, * Appeal from the United States

* District Court for the

v. * Eastern District of Missouri.

*

Benicorp Insurance Company, *

*

Defendant - Appellee. *

___________

Submitted: December 13, 2006

 Filed: May 29, 2007

___________

Before LOKEN, Chief Judge, JOHN R. GIBSON and MURPHY, Circuit Judges.

___________

LOKEN, Chief Judge.

Kenny Werdehausen had neck surgery and submitted a benefits claim under his

employer’s group health plan reflected in an insurance policy issued by Benicorp

Insurance Company. In reviewing the claim, Benicorp discovered that Werdehausen

had failed to disclosed the need for neck surgery in his policy enrollment application.

Benicorp determined that this was a material misrepresentation because disclosure

would have increased the employer’s group health policy premium by $2,000 per

month (the estimated cost of the surgery spread over two years). Benicorp

retroactively rescinded Werdehausen’s enrollment and denied all pending claims for

plan benefits submitted by Werdehausen and his wife. The Werdehausens sued.

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After Benicorp removed their state court action, the Werdehausens filed an

amended complaint seeking to recover plan benefits under the Employee Retirement

Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 et seq.; and alleging that

Benicorp violated the Health Insurance Portability and Accountability Act of 1996

(HIPAA), Pub. L. No. 104-191, 110 Stat. 1936, by engaging in health status

discrimination, and violated the Missouri Health Care Utilization Review Act

(MHCURA), Mo. Rev. Stat. § 376.1361(13), by denying insurance coverage for

preauthorized medical treatment. The district court granted Benicorp summary

judgment on the ERISA claims, dismissed the HIPAA claim, and held the MHCURA

claim preempted by ERISA. The Werdehausens appeal. We reverse. 

I. Background

Werdehausen became a participant in the group health plan in 1994. His

employer changed insurers to Benicorp at the end of 2002. To remain participants,

Werdehausen and other employees had to complete Benicorp’s enrollment application

form. The form required disclosure of Werdehausen’s medical history, including any

condition that he knew might require surgery -- information Benicorp’s underwriters

then used in setting the group health policy premium, 75% of which was paid by the

employer. The form stated that Werdehausen’s answers must be “true and complete”

and warned that “misstatements or omissions of information may be basis for denying

payment of a claim or voiding coverage entirely.” Werdehausen’s November 13,

2002, application disclosed that he had undergone lower back surgery in April 2002

but did not disclose that a doctor told him on October 29, 2002, that he would

eventually need surgery for a herniated disc in his neck. Werdehausen claims the nondisclosure was innocent; he expected Benicorp to obtain his full medical records from

the doctor listed in the application.

When Werdehausen submitted a claim to recover the costs of his neck surgery,

Benicorp obtained and thoroughly reviewed his prior medical records from various

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medical providers. These records revealed that Werdehausen was first treated for

neck pain in September 2000, was advised in March 2002 that he needed neck surgery

but elected to have back surgery first, and was again advised in October 2002 that he

would eventually need neck surgery. 

Benicorp’s lengthy group policy included the following General Provisions: 

STATEMENTS - MISSTATEMENTS. . . . . If an Insured Employee’s

or Insured Person’s misstatement of facts affects his/her amount or type

of insurance, the truth shall be used in deciding the coverage in force, if

any. Premiums and/or benefits may be adjusted to reflect premium

and/or coverage for the age or medical condition of the Insured Person.

 

* * * * *

TERMINATION FOR . . . MATERIAL MISSTATEMENTS

. . . . We reserve the right to terminate the coverage of an Insured Person

who has made a material misstatement in their Group Enrollment Form.

The Certificate Book provided to Werdehausen also contained these provisions. On

August 5, 2003, Benicorp sent Werdehausen a letter reviewing his medical history in

detail and concluding:

Had your actual medical history been revealed in the application for

insurance . . . the coverage for your employer group would have been

issued at a higher premium rate. Therefore . . . your coverage . . . has

been rescinded . . . pursuant to our rights as set forth in the application

for insurance, the Policy and the certificate booklet. . . . The result of this

action is to void your coverage back to the effective date, as though it

was never in effect. Consequently, no benefits are payable for any

expenses incurred by your family. 

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Werdehausen timely appealed this decision. Benicorp’s Claim Review Committee

affirmed and advised Werdehausen of its adverse decision in a lengthy letter dated

September 12, 2003.

II. The ERISA Standard of Review Dispute 

The group health policy granted Benicorp discretionary authority to interpret

the policy and determine eligibility for benefits. Such a plan provision normally

triggers judicial review of a benefits denial under a deferential abuse-of-discretion

standard. However, “if a benefit plan gives discretion to an administrator or fiduciary

who is operating under a conflict of interest, that conflict must be weighed as a factor

in determining whether there is an abuse of discretion.” Firestone Tire & Rubber Co.

v. Bruch, 489 U.S. 101, 115 (1989) (quotation omitted). To obtain the advantage of

less deferential review, the claimant must show a “palpable” financial conflict of

interest that “has a connection to the substantive decision reached” and raises “serious

doubts as to whether the result reached was the product of an arbitrary decision or the

plan administrator’s whim.” Sahulka v. Lucent Techs., Inc., 206 F.3d 763, 768 (8th

Cir. 2000) (quotations omitted).

In the district court, the Werdehausens argued that Benicorp operated under

such a conflict of interest. The district court properly allowed discovery on this issue.

The Werdehausens deposed Brad Meyers, Benicorp’s claim review manager who

signed the two letters advising of the adverse claim decision. Meyers testified:

Q So the insurance policy says that you can, in the case of a

misstatement, amend or revise the premium retroactively; is that correct?

A The Werdehausen policy says that premiums . . . may be adjusted to

reflect . . . the age or medical condition of the insured person. So we do

have the option to adjust the premium . . . . 

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Q However, the company practice and policy is that you never adjust the

premium; is that correct?

A The current company policy is that we do not, yes.

Q And was that the policy that was in effect at the time the

Werdehausen case was handled?

A Yes.

Q So in the process of handling the Werdehausen case, neither you nor

anybody else with Benicorp ever considered adjustment of premium?

A No. We followed company policy and performed the rescission.

The district court concluded that Benicorp had a financial conflict of interest but was

nonetheless entitled to deferential review because the Werdehausens failed to prove

that the conflict of interest caused a breach of fiduciary duty. Consistent with abuseof-discretion review, the court then limited its review of the merits of Benicorp’s

decision to the administrative record before the claims administrators.

III. The ERISA Claims

The parties raise many complex issues on appeal. But in our view the problem

boils down to a relatively focused issue of ERISA law that in turn reveals a genuine

issue of disputed fact precluding the grant of summary judgment on this record.

In Shipley v. Arkansas Blue Cross & Blue Shield, 333 F.3d 898 (8th Cir. 2003),

an employee enrolled in his employer’s benefit plan and failed to disclose repeated

prior treatments for symptoms of emphysema. Some months later, when the employee

was diagnosed with cancer and emphysema, the insurer rescinded the policy and the

employee sued. We joined other circuits in concluding that “federal common law

allows for the equitable rescission of an ERISA-governed insurance policy that is

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Under ERISA, an insurer’s benefit determinations are “part and parcel of the

ordinary fiduciary responsibilities connected to the administration of a plan.” Aetna

Health Inc. v. Davila, 542 U.S. 200, 219 (2004). 

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procured through the material misstatements or omissions of the insured.” 333 F.3d

at 902. Applying the abuse-of-discretion standard of review, we upheld the insurer’s

decision to rescind the policy because the application form “clearly limited coverage

for preexisting conditions” and therefore the non-disclosures were material in

determining the extent of coverage and premium amounts. 333 F.3d at 905.

In this case, the Benicorp policy expressly authorized rescission for material

misstatements in the enrollment application. In granting summary judgment

dismissing the Werdehausens’ ERISA claims, the district court noted that Shipley

permits rescission for knowing material misstatements, even if not made with

fraudulent intent. Applying the abuse-of-discretion standard of review, the court

concluded that Werdehausen’s non-disclosures were material because, had Benicorp

known of his cervical problems, “it would have issued coverage at a significantly

higher premium rate.” We agree with the court’s analysis of these issues, which the

Werdehausens virtually concede on appeal.

However, Shipley permits but does not require retroactive rescission for

innocent material non-disclosures. When the benefit plan makes alternative remedies

available, the benefits decision-maker must act in accordance with its duties as an

ERISA fiduciary in choosing among those remedies.1

 Here, Benicorp’s claims

manager testified that the policy gave Benicorp the option of retroactively increasing

the premium. Yet Benicorp retroactively rescinded Werdehausen’s enrollment and

denied all his pending claims because, Meyers testified, it is the company’s policy to

rescind in every case, regardless of the circumstances. 

That policy was likely adopted for business reasons. When the prior group

health policy insuring the employer’s plan expired, Benicorp competed for the

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renewal business. Benicorp could require employees to disclose their medical

histories to remain enrolled in the plan. But unlike the facts in Shipley, see 333 F.3d

at 905, HIPAA precluded Benicorp from enforcing its exclusion of preexisting

medical conditions. See 29 U.S.C. § 1181(a)(3), (c)(1). Disclosure of adverse

medical conditions was still important to Benicorp for underwriting purposes, because

HIPAA does not “restrict the amount that an employer may be charged for coverage

under a group health plan.” 29 U.S.C. § 1182(b)(2)(A). The effect of HIPAA in this

situation is to increase the relative cost of the plan by compelling continued health

care coverage for employees who are likely to incur greater-than-average health care

expenses. 

As coverage for preexisting conditions was assured, enrolling employees such

as Werdehausen had little reason to submit intentionally false applications to

Benicorp. It is predictable in these circumstances that a certain number of employees

will carelessly fail to disclose their relevant medical histories on the Benicorp

enrollment form, particularly because the form provided a small blank space in which

the applicant was asked to describe, for each prior treatment: “Details of medical

conditions; treatment (past, current and planned), medication (past, current and

planned); degree of recovery and other helpful information.” After receiving the

enrollment forms, Benicorp could wait to conduct a thorough review of a claimant’s

medical history until that employee submitted a substantial claim. Then, if a material

non-disclosure was uncovered, Benicorp would automatically rescind the employee’s

coverage retroactive to its inception. Rescission increased Benicorp’s profit by the

amount of the claims thereby denied, offset by a smaller refund of the premium

attributable to that employee. Premium refunds reduced the cost of the group health

plan to the employer, Benicorp’s customer. 

The fortuitous business impact of this automatic rescission policy comes at the

expense of the federal policy enacted in HIPAA -- it results in retroactive noncoverage of employees who are most in need of group health care coverage because

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of preexisting medical conditions, when under HIPAA those employees could not

have been excluded from the plan because of preexisting conditions at the time the

policy issued. If an ERISA fiduciary decides to retroactively rescind an employee’s

coverage solely on the basis of an automatic rescission policy, when it could have

recouped any loss to the plan by retroactively increasing the employer’s premium, we

find it hard to conceive of a more “palpable” financial conflict of interest, directly

connected to the substantive benefit decision made and demonstrating that the result

reached was an arbitrary exercise of the fiduciary’s discretion that conflicts with its

obligation to “discharge [its] duties with respect to a plan solely in the interest of the

participants and beneficiaries.” 29 U.S.C. § 1104(a)(1). Judicial review of such a

decision is therefore de novo. If the employee’s non-disclosure was intentional, fraud

would perhaps justify rescission, despite the availability of another remedy. But if the

non-disclosure was inadvertent, the decision to rescind must be reversed. 

However, the summary judgment record does not conclusively establish that we

have accurately described the factual setting in this case. In Paragraph 8 of its

Statement of Uncontroverted Material Facts in support of its motion for summary

judgment to the district court, Benicorp asserted:

8. Notwithstanding the [premium adjustment] provision [in the

policy], the Employer Application specifically limited Benicorp’s right

to adjust premiums under the Policy by guaranteeing the initial premium

rates for the first twelve months of coverage. 

This is highly relevant. Werdehausen’s neck surgery occurred during the first twelve

months of coverage. This provision, if applicable, would deny Benicorp the ability

to provide coverage for this claim and retroactively adjust the premium. If a plan

cannot adjust the premium to recoup the unforeseen costs of an employee’s material

misstatement, then retroactive rescission under circumstances permitted by Shipley

may be the claims administrator’s proper decision. However, Benicorp’s assertion is

not an uncontroverted fact. In response, the Werdehausens stated:

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Plaintiffs Werdehausen admit that the quoted portion of the [employer]

application is quoted correctly [in Benicorp’s paragraph 8]. However .

. . . [t]he specific application of premium adjustment authorized in the

[policy] sections dealing with misstatements is an obvious exception to

the general guarantee of rates in the application.

We conclude this is a material dispute that precludes the grant of summary

judgment to either party on this record. Therefore, we must remand the ERISA claims

to the district court to resolve the issue, applying well-established principles of ERISA

plan interpretation. See Hughes v. 3M Retiree Medical Plan, 281 F.3d 786, 790 (8th

Cir. 2002); Barker v. Ceridian Corp, 122 F.3d 628, 638-39 (8th Cir. 1997); Jensen v.

SIPCO, Inc., 38 F.3d 945, 950 (8th Cir.), cert. denied, 514 U.S. 1050 (1994). If the

premium adjustment provision applied to the Werdehausens’ claims during the first

twelve months of coverage, then Benicorp’s reliance on its policy of automatic

rescission was wrongful and the Werdehausens are entitled to an order granting relief

under 29 U.S.C. § 1132(a)(1)(B), including, at a minimum, retroactive reinstatement

as a covered employee and spouse and an award of monetary relief for their

wrongfully denied claims. On the other hand, if the guaranteed rate provision applied,

the court must determine, de novo, whether to uphold Benicorp’s decision to

retroactively rescind. 

III. Other Claims and Issues

HIPAA. The Werdehausens’ initial state court complaint alleged that

Benicorp’s retroactive rescission violated the federal law mandating “portability and

eligibility” of employer health plans. After removing, Benicorp moved to dismiss this

claim on the ground that there is no implied private right of action under HIPAA. The

district court agreed, concluding “that Plaintiffs may not maintain a private cause of

action for Benicorp’s alleged failure to comply with HIPAA.” The Werdehausens

then filed an amended complaint alleging as part of their ERISA claims that Benicorp

discriminated “on the basis of health status, medical condition, claims experience,

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receipt of healthcare, and medical history,” the operative language in 29 U.S.C.

§ 1182(a)(1), one of the HIPAA provisions codified in the ERISA subchapter of Title

29. The district court granted summary judgment dismissing the ERISA claims

without referring to HIPAA.

On appeal, the Werdehausens argue that 29 U.S.C. § 1182 is in the subchapter

that includes ERISA’s statutory remedies and therefore may be enforced by an ERISA

participant’s claim “to enjoin any act or practice which violates any provision of this

subchapter.” 29 U.S.C. § 1132(a)(3). We agree. On the other hand, Benicorp did not

directly violate § 1182(a)(1). It afforded Werdehausen coverage consistent with

HIPAA and then retroactively rescinded coverage because of material non-disclosures

on the application. Thus, the Werdehausens have no ERISA claim based directly on

a HIPAA violation. However, though the Werdehausens have no direct ERISA claim

for a violation of HIPAA, as we have explained the congressional intent underlying

HIPAA is relevant in determining whether Benicorp’s policy of automatic rescission

breached its fiduciary duty as an ERISA benefits decision-maker. In other words, like

the unpreempted state insurance law in UNUM Life Ins. Co. of America v. Ward, 526

U.S. 358, 377 (1999), HIPAA supplies a “relevant rule of decision” for the

Werdehausens’ claim to recover benefits and enforce the terms of the plan under 29

U.S.C. § 1132(a)(1)(B).

MHCURA. The Werdehausens’ amended complaint included a state law claim

that Benicorp violated MHCURA when it preauthorized Kenny Werdehausen’s neck

surgery and then refused to cover the surgery after it was performed. Mo. Rev. Stat.

§ 376.1361(13). The violation was pleaded both as an element of their ERISA claims

and as a separate claim, but they did not invoke the judicial review remedy expressly

authorized by state law. See Mo. Rev. Stat. § 376.1387(1). The district court

dismissed this claim on the ground that Mo. Rev. Stat. § 376.1361(13) is preempted

by ERISA. We disagree. 

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The statute applies to a “health carrier,” a term defined elsewhere to include

entities such as hospitals that are not insurers. See Mo. Rev. Stat. § 276.1350.22.

However, this type of overbreadth does not prevent § 376.1387.13 from being a state

law regulating insurance within the meaning of the ERISA saving clause. See Rush

Prudential HMO, Inc. v. Moran, 536 U.S. 355, 372 (2002); Prudential Ins. Co. of

America v. Nat’l Park Med. Ctr., Inc., 413 F.3d 897, 910-12 (8th Cir. 2005). 

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ERISA broadly preempts “State laws to the extent that those laws relate to any

employee benefit plan” but expressly saves from preemption “any law of any State

which regulates insurance.” UNUM, 526 U.S. at 363, quoting from 29 U.S.C.

§§ 1144(a), (b)(2)(A). In Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S.

329 (2003), the Supreme Court modified its prior standard for determining whether

a state law “regulates insurance” within the meaning of the ERISA saving clause.

Under the new standard, to avoid ERISA preemption a state law must (1) “be

specifically directed toward entities engaged in insurance” and (2) “substantially

affect the risk pooling arrangement between the insurer and the insured.” 538 U.S.

at 342. Benicorp concedes that § 376.1361(13) is specifically directed toward health

insurers2

 but argues that it does not substantially affect the risk pooling arrangement.

In Miller, the Court ruled that a Kentucky statute substantially affected the risk

pooling arrangement because it “alter[ed] the scope of permissible bargains between

insurers and insureds in a manner similar to . . . the notice-prejudice rule we sustained

in UNUM.” 538 U.S. at 338-39. The California notice-prejudice rule in UNUM

required insurers to pay untimely claims unless the insurer was prejudiced by the

delay. 526 U.S. at 364. Like the California rule, Mo. Rev. Stat. § 376.1361(13) limits

an insurer’s contractual ability to deny claims. The California rule limited

enforcement of a policy provision creating a time bar. The Missouri statute bars

enforcement of a provision excluding coverage if the insurer preauthorized the

medical procedure. Each increases the insurer’s liability for health care services

already provided. Each “dictates to the insurance company the conditions under

which it must pay for the risk that it has assumed.” Miller, 538 U.S. at 339 n.3. 

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We conclude that the substance of § 376.1361(13) satisfies both components

of the Miller standard and is therefore saved from ERISA preemption. Of course, any

state law remedy is preempted by ERISA’s comprehensive remedial scheme. See

Davila, 542 U.S. at 209; Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54 (1987). But

again like the unpreempted notice-prejudice rule in UNUM, § 376.1361(13) supplies

a relevant rule of decision in resolving the Wederhausens’ ERISA claims under 29

U.S.C. § 1132(a)(1)(B). 526 U.S. at 376-77; see also Rush Prudential, 536 U.S. at

380. Not surprisingly, whether Benicorp or its agent preauthorized Werdehausen’s

neck surgery is a disputed issue of fact. It must be resolved in the district court on

remand. 

Other Issues. As we have reversed the grant of summary judgment dismissing

the Werdehausens’ ERISA claims under 29 U.S.C. § 1132(a)(1)(B), we need not

address their arguments that the district court committed evidentiary and discovery

errors in the summary judgment proceedings.

The judgment of the district court is reversed in part and the case is remanded

for further proceedings not inconsistent with this opinion.

______________________________

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