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Home > Blog > District Court Permits Sun Life to Proceed with Fraud Counterclaim in Dispute Over ERISA-Governed Long-Term Disability Benefits

District Court Permits Sun Life to Proceed with Fraud Counterclaim in Dispute Over ERISA-Governed Long-Term Disability Benefits

The ERISA claims and appeals process is rife for areas of disagreement. In what was filed as a run-of-the-mill long-term disability benefit lawsuit under the Employee Retirement Income Security Act of 1974 (“ERISA”)—Sun Life McKeown v. Sun Life Assurance Company of Canada, No. 16 C 748, 2021 WL 916079 (N.D. Ill. Mar. 10, 2021)—Sun Life took a relatively novel tactic. It filed a counterclaim against the plaintiff, McKeown, alleging common law fraud. Specifically, Sun Life alleges that McKeown concealed information while pursuing her claim for disability benefits. McKeown moved to dismiss the counterclaim and the court granted her motion only in part.

What were the series of events giving rise to Sun Life’s counterclaim? McKeown filed a claim with Sun Life for long-term disability benefits based on migraine-associated vertigo and post-concussive syndrome. She authorized Sun Life to obtain her mental health records. Sun Life denied her claim, finding “there is no clinical support for a functionally impairing psychological or physical condition that would preclude you from performing your current occupation as a Public Relations Manager.” McKeown appealed the denial to Sun Life, but Sun Life upheld the denial disclaiming that McKeown had any impairment.

McKeown filed her first lawsuit in 2016 and Sun Life moved for judgment on the pleadings on the basis that she had not complied with its requests for proof of claim before filing suit. The court denied the motion and the parties later agreed to remand the case for further consideration. By this time, the Social Security Administration (“SSA”) determined that McKeown was totally disabled due to her vertigo. Thereafter, Sun Life reversed its position and admitted that McKeown was disabled but by psychological conditions which are subject to only 24 months of payment.

McKeown reopened her case with the court seeking review of Sun Life’s denial of benefits beyond 24 months. In its answer, Sun Life filed a counterclaim for fraudulent misrepresentation and fraudulent concealment. It alleges that McKeown made false statements and concealed facts regarding her psychological impairments to avoid the mental illness limitation. Sun Life had requested her SSA file which included raw data from neuropsychological testing. Sun Life claims that McKeown’s attorney had access to the SSA file but falsely stated that “we are unable to further assist Sun Life in obtaining the additional Social Security documentation” and that the documentation was “outside of our control to produce.” Sun Life claims that such statements were fraudulent and that the test results demonstrate McKeown’s impairment was psychological. It further claims it would have approved her initial claim based on psychological impairment had it had the exam results.

In moving to dismiss the counterclaim, McKeown argued that: (1) Sun Life’s common-law fraud counterclaim is preempted by ERISA; and (2) alternatively, Sun Life has failed to plead the reliance and injury elements necessary for a fraud claim under Illinois law, because the only injury it alleges is payment of attorneys’ fees and costs.

On the issue of ERISA preemption, the court found on point the Seventh Circuit decision in AFTRA Health Fund v. Biondi, 303 F.3d 765, 773 (7th Cir. 2002). In AFTRA, the court permitted a fraud claim to proceed against a plan participant who reported his ex-wife as a spouse to the AFTRA Health Fund. The Fund then provided her with medical benefits that she was not entitled to receive. The Seventh Circuit found that the fraud claim was not preempted by ERISA because the plan participant had a separate and distinct duty under Illinois tort law not to misrepresent his marital status and to not conceal his divorce from the Fund.”

The district court found similarities between AFTRA and this case. It explained that McKeown “owed the Fund a separate and distinct duty under Illinois tort law not to misrepresent that she had access to test results that revealed her psychological impairment.” For this reason, the court concluded that Sun Life’s fraud claim is not preempted by ERISA.

With respect to whether Sun Life pleads certain elements of fraudulent misrepresentation and fraudulent concealment, the court set forth the requirements for each claim.

A fraudulent misrepresentation claim under Illinois law requires:

(1) a false statement of material fact, (2) knowledge or belief of the falsity by the party making it, (3) intention to induce the other party to act, (4) action by the other party in reliance on the truth of the statements, and (5) damage to the other party resulting from such reliance.

A fraudulent concealment claim under Illinois law requires:

(1) the concealment of a material fact; (2) the concealment was intended to induce a false belief, under circumstances creating a duty to speak; (3) the innocent party could not have discovered the truth through a reasonable inquiry or inspection, or was prevented from making a reasonable inquiry or inspection, and relied upon the silence as a representation that the fact did not exist; (4) the concealed information was such that the injured party would have acted differently had he been aware of it; and (5) that reliance by the person from whom the fact was concealed led to his injury.

McKeown argued that Sun Life failed to allege reliance and damages. With respect to reliance, Sun Life was aware of McKeown’s psychological disability before the remand of this action, and it cannot claim it was deceived after remand. Sun Life responded that it is only seeking expenses incurred in 2014 and 2015 in the initial review of McKeown’s claim, including the costs of “retaining a neuropsychologist and paying employees to review her incomplete psychological records.” The court found that this sufficiently alleges reliance.

With respect to damages, the court agreed with McKeown that Sun Life’s allegation of damages in the form of attorneys’ fees and costs that it incurred to defend the action prior to remand does not satisfy the injury element to support a fraud claim under Illinois law. There is no support for the position that attorneys’ fees are damages when they are incurred prior to the discovery of the fraud. The court granted McKeown’s motion to dismiss the fraudulent misrepresentation and fraudulent concealment counterclaim on this ground.

In sum, the court determined that Sun Life may pursue these claims only with respect to expenses it incurred to review McKeown’s psychological history prior to remand, but it cannot seek damages in the form of attorneys’ fees and costs incurred in this litigation or any claims-processing expenses after remand.

What is curious about Sun Life’s tactic in this case is that Sun Life could have obtained the SSA file on its own. Insurers routinely request that claimants sign authorizations allowing them to obtain a copy of the SSA file. It is unclear from the opinion what efforts Sun Life made to obtain the SSA file beyond asking McKeown’s attorneys to get it for Sun Life. While the fraud claim is permitted to proceed, it will be interesting to see whether Sun Life can actually prevail on the merits of the claim.

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