2. Is Reliance Required Under the Atwood Doctrine?
One issue that Atwood does not explicitly discuss is whether, in order for the terms of the SPD to supersede the plan under the Atwood doctrine, a plaintiff is required to show that he relied on the SPD. Other circuits have split on this issue. The Second, Fifth, and Sixth Circuits have held that reliance is not-required. See Hansen, 940 F.2d at 982; Heidgerd v. Olin Corp., 906 F.2d 903, 907-08 (2d Cir. 1990); Edwards, 851 F.2d at 136-37. The First, Third, Seventh, and Eleventh Circuits, on the other hand, have held that reliance is required. See Branch v. G. Bernd Co., 955 F.2d 1574, 1579 (11th Cir. 1992); Seinker v. Hartford Life & Accident Ins. Co., 948 F.2d 1050-51 (7th Cir. 1991); Gridley v. Cleveland Pneumatic Co., 924 F.2d 1310, 1319 n.8 (3d Cir.), cert. denied, 501 U.S. 1232, 115 L. Ed. 2d 1023, 111 S. Ct. 2856 (1991); Bachelder v. Communications Satellite Corp., 837 F.2d 519, 522-23 (1st Cir. 1988).
Three district court decisions within the Ninth Circuit hold that reliance is required for an SPD to take precedence over underlying plan documents. See Adams v. J.C. Penney Co., 865 F. Supp. 1454, 1459-60 (D. Or. 1994), aff'd mem., 83 F.3d 426 (9th Cir. 1996); Kaiser Permanente Employees Pension Plan v. Bertozzi, 849 F. Supp. 692, 698 (N.D. Cal. 1994); Berry v. Blue Cross of Washington & Alaska, 815 F. Supp. 359, 364-65 (W.D. Wash. 1993). However, relying mainly on authority published after these three district court decisions were issued, we respectfully disagree with the three decisions, and hold that reliance is not required under the Atwood doctrine.
The first reason for our conclusion that reliance is not required under the Atwood doctrine is that the Ninth Circuit Court of Appeals decisions favoring the doctrine do not appear to support including a reliance requirement in the doctrine. Atwood, 45 F.3d at 1321, which was decided after Adams, Kaiser, and Berry, and which was the first Ninth Circuit case to clearly adopt the doctrine that an SPD takes precedence over separate policy documents, says nothing about a reliance requirement. The two earlier Ninth Circuit cases that appeared to favor the adoption of the Atwood doctrine, Price, 2 F.3d at 988 n.1, and Arnold, 926 F.2d at 785 n.3, also do not mention a reliance requirement. Moreover, the two cases from other circuits cited with approval by Price and Arnold for the proposition that an SPD supersedes a conflicting plan, Hansen, 940 F.2d at 982, and Edwards, 851 F.2d at 136-37, both hold that reliance is not required.
The second and strongest reason supporting our conclusion that reliance is not required under the Atwood doctrine is that such a requirement would not make sense in view of the Ninth Circuit's adoption of the reasonable expectations doctrine in Saltarelli v. Bob Baker Group Medical Trust, 35 F.3d 382 (9th Cir. 1994). Saltarelli was decided after the three district court decisions which favor a reliance requirement.
The reasonable expectations doctrine requires an ERISA benefits plan to be interpreted in accordance with the reasonable expectations of the insured. See Saltarelli, 35 F.3d at 386-87. A prerequisite for application of the reasonable expectations doctrine is that the plan must be ambiguous or an exclusionary provision in the plan must not be sufficiently conspicuous. See infra § III(E) (3); Peterson v. American Life & Health Ins. Co., 48 F.3d 404, 411 (9th Cir.), cert. denied, 133 L. Ed. 2d 301, 116 S. Ct. 377 (1995); Krishan v. McDonnell Douglas Corp., 873 F. Supp. 345, 353 n.7 (C.D. Cal. 1994). When there is both an SPD and separate, underlying policy documents, the authorities suggest (and we conclude below) that it is correct to examine the SPD, not the separate policy documents, in determining whether the reasonable expectations doctrine is applicable (and in applying the doctrine). See infra § III(E)(3); Saltarelli, 35 F.3d at 385.
The reasonable expectations doctrine examines "objectively reasonable expectations of coverage." See Saltarelli, 35 F.3d at 387 (emphasis added). There is absolutely no allusion to the insured's actual state of mind or to "reliance" in any of the decisions by courts within the Ninth Circuit that apply or discuss the reasonable expectations doctrine. See, e.g., McClure v. Life Ins. Co. of North America, 84 F.3d 1129, 1135-36 (9th Cir. 1996); Saltarelli, 35 F.3d at 385-87; Henry v. Home Ins. Co., 907 F. Supp. 1392, 1396-97 (C.D. Cal. 1995). Thus, the available decisional law strongly supports a conclusion that there is no reliance element under the reasonable expectations doctrine as applied to ERISA plans by the Ninth Circuit.
It would be anomalous, at best, to impose a reliance requirement under the Atwood doctrine but to impose no such requirement under the reasonable expectations doctrine. The Atwood doctrine applies where the SPD unambiguously conflicts with the plan; the reasonable expectations doctrine applies where the SPD is ambiguous or contains an insufficiently conspicuous exclusion. Certainly, courts should be more willing to disregard underlying plan documents where the plan clearly conflicts with the SPD than where the plan only conflicts with reasonable expectations based on an ambiguous SPD or where exclusions in an SPD are insufficiently prominent. Yet adopting a reliance requirement under the Atwood doctrine but not under the reasonable expectations doctrine would produce precisely the opposite result -- it would become more difficult for a clear SPD to supersede a conflicting plan than for an ambiguous SPD to do the same!
Our conclusion about this issue is further bolstered by policy considerations. Using a wholly objective test, instead of one with a possibly subjective reliance element, to determine whether an SPD overrides a plan should lead insureds and insurers to have clearer expectations about the likely outcomes of disputes, reducing litigation incentives and costs. It also should encourage insurers to make sure SPDs clearly reflect plan exclusions, benefitting all persons covered by ERISA plans, and promoting the full flow of information essential to the efficient functioning of our free market system. In addition, a reliance requirement would make it harder for courts to decide ERISA controversies on summary judgment, since there will frequently be factual disputes over whether the plaintiff actually relied on the SPD, which will cause litigation costs to rise and use up scare judicial resources. For all these reasons, we conclude that there is no "reliance" requirement under the Atwood doctrine.
3. Application of the Atwood Doctrine.
We now proceed to apply the Atwood doctrine to the facts of this case.
One of the reasons given by U.S. Shoe and Prudential for their denial of Lancaster's claim was that Lancaster had exhausted a 365-day limit on "Extended Convalescent Care Benefits." See supra PP 35, 39. The Plan itself has a clear 365-day limit on payment of convalescent care benefits arising out of one injury or illness. See supra P 16.
However, the SPD
only states that there is a $ 6,570 limit on room and board benefits under "Extended Convalescent Care Benefits." The "Extended Convalescent Care Benefits" section of the SPD states that the Plan covers "room and board provided by the Facility except any charge that exceeds that Daily Room and Board Benefit of $ 18 to a maximum of $ 6,570 per disability."
See supra P 7. The SPD then lists six other categories of coverage, such as coverage for "routine nursing care," in the "Extended Convalescent Care Benefits" section, but does not set any kind of durational or monetary limit for benefits under those categories. See supra P 7. Nor does any other section of the SPD set any monetary or durational limits on "Extended Convalescent Care Benefits."
The only reasonable interpretation of the SPD is that a $ 6,570 limit is set only on room and board and that the only cap on the other benefits is the $ 1,000,000 overall limit.
It follows that the SPD and the Plan conflict. For this reason, we hold that the 365-day limit on convalescent care benefits that is articulated only in the Plan itself is unenforceable. U.S. Shoe may enforce the 365-day limit only with respect to room and board benefits.
4. Validity of Possible Denial of Coverage on Basis that all Greenridge Charges Were for Room and Board.
There are some indications in the administrative record that the denial of Lancaster's claim may have been in part based on a belief by Prudential and/or U.S. Shoe that all the Greenridge charges were charges for "room and board." See supra PP 36-37. If U.S. Shoe and/or Prudential reached such a conclusion, this was an abuse of discretion. The administrative record clearly indicates that Greenridge provided services to Lancaster other than "room and board." Greenridge certainly provided Lancaster with "routine nursing services," as Lancaster needs assistance with virtually all his daily living activities. See supra PP 28-32. Thus, if U.S. Shoe concluded that Lancaster was, as a matter of historical fact, getting only "room and board" at Greenridge, this was a clearly erroneous finding of fact.
If U.S. Shoe interpreted the term "room and board" as covering services such as nursing services, or covering "custodial" nursing services, this was an unreasonable interpretation of both the Plan and the SPD. Both the Plan and the SPD, in their convalescent care benefits sections, list separately coverage for "room and board," and for six other categories, such as "routine nursing care" and "physical or speech therapy." See supra PP 7, 16. The only reasonable interpretation of the convalescent care benefits sections is that "room and board" does not include the services and supplies discussed in the six other categories, such as "routine nursing care."
Thus, to the extent that U.S. Shoe and/or Prudential may have treated all the Greenridge charges as "room and board" charges, this was an abuse of discretion. On remand, U.S. Shoe may not treat all the charges for Lancaster's confinement at Greenridge as "room and board" charges. We realize, however, that U.S. Shoe and Prudential may have legitimate concerns about whether the $ 18 per day for room and board that Greenridge billed fairly reflected the actual cost of those two components of Lancaster's residency there. At the conclusion of this opinion, we will give U.S. Shoe instructions about how to deal on remand with the potentially difficult issue of determining what proportion of Greenridge's charges is fairly allocable to room and board and what proportion is fairly allocable to services and supplies other than room and board. See infra § IV.
E. Reasonable Expectations
1. The Doctrine.
The leading Ninth Circuit case on the application of the reasonable expectations doctrine to ERISA benefits plans is Saltarelli v. Bob Baker Group Medical Trust, 35 F.3d 382 (9th Cir. 1994). In Saltarelli, the Ninth Circuit explicitly adopted "the doctrine of reasonable expectations as a principle of the uniform federal common law informing interpretation of ERISA-governed insurance contracts." Id. at 387. Under the reasonable expectations doctrine, where "attempted exclusion[s]" in an insurance policy are "not clear, plain, and conspicuous enough to negate [a] layman['s] . . . objectively reasonable expectations of coverage," they are "unenforceable." See id. at 387.
Explaining the doctrine, the court stated:
In general, courts will protect the reasonable expectations of applicants, insureds, and intended beneficiaries regarding the coverage afforded by insurance carriers even though a careful examination of the policy provisions indicates that such expectations are contrary to the expressed intention of the insurer.
Id. at 386 (quoting Robert E. Keeton & Alan I. Widiss, Insurance Law: A Guide to Fundamental Principles, Legal Doctrines, and Commercial Practices § 6.3 (West 1988)). The court added:
An insurer wishing to avoid liability on a policy purporting to give general or comprehensive coverage must make exclusionary clauses conspicuous, plain, and clear, placing them in such a fashion as to make obvious their relationship to other policy terms, and must bring such provisions to the attention of the insured.