Ninth Circuit Finds Claim Preclusion Does Not Apply to Second Lawsuit Seeking ERISA-Governed Long-Term Disability Benefits

In Flores v. Life Insurance Company of North America, No. 22-55779, 2024 WL 222265 (9th Cir. Jan. 22, 2024), the Ninth Circuit reversed the district court’s dismissal of Plaintiff-Appellant Kayle Flores’s lawsuit seeking long-term disability (“LTD”) benefits, finding that it was not barred by claim preclusion. Applying the dispositive fourth factor of the court’s four-factor test for determining claim preclusion—whether the two suits arise out of the same transactional nucleus of facts—the court found that Flores’s second lawsuit seeking LTD benefits did not arise from the same set of facts supporting her first lawsuit seeking both short-term disability (“STD”) benefits and LTD benefits. Judge Collins dissented on the basis that Flores had already litigated and lost her LTD benefit claim.

Flores applied for STD benefits in July 2018, which LINA denied in October 2018. Flores filed her first lawsuit against LINA, Flores I, in May 2020 alleging breach of the STD policy and the implied covenant of good faith and fair dealing. At that time, Flores had not yet filed a claim for LTD benefits, but she sought to recover LTD benefits. She argued that it would be futile to file an LTD claim based on LINA’s denial of the STD claim. The district court found that Flores was entitled to STD benefits, but not LTD benefits because she had not filed an LTD claim or provided proof of loss as required by the LTD policy. After the district court entered final judgment in Flores I, Flores applied for LTD benefits, which LINA denied. Immediately thereafter, Flores filed Flores II alleging violations of California contract law and ERISA.

The court explained that claim preclusion requires “(1) an identity of claims, (2) a final judgment on the merits, and (3) privity between parties.” Flores conceded that the second and third requirements are met so the only dispute is whether the claims are identical. To evaluate whether claims are identical, the court applies a four-factor test: “(1) whether rights or interests established in the prior judgment would be destroyed or impaired by prosecution of the second action; (2) whether substantially the same evidence is presented in the two actions; (3) whether the two suits involve infringement of the same right; and (4) whether the two suits arise out of the same transactional nucleus of facts.” The court started and ended its evaluation with the “most important” fourth factor.

The court determined that Flores’s two lawsuits do not arise out of the same nucleus of facts because the cause of action for Flores II did not accrue until after she filed the operative complaint in Flores I. The court explained that an ERISA cause of action accrues when benefits are actually denied or when the insured has reason to know that the claim has been denied. Here, Flores’s LTD claim did not accrue until LINA denied the claim in April 2022. This claim could not have been brought in January 2021 when Flores filed her amended complaint in Flores I. In addressing the dissent which argued that Flores I “squarely held” that Flores was not entitled to LTD benefits, the court explained that the district court’s determination was based on the fact that Flores had not complied with a condition precedent to payment of LTD benefits. Flores diligently went back to LINA and complied with the precondition. Because the district court determined that Flores was not entitled to LTD benefits before she had complied with the terms of the LTD policy does not prevent her second lawsuit for LTD benefits after she complied with the policy terms. Because Flores II accrued after Flores filed the operative complaint in Flores I, and the claims could not have been brought together, the court held that claim preclusion does not apply. Judgment reversed.