:: Ninth Circuit Finds Abuse of Discretion Due to Procedural, Substantive, and Structural Flaws

We will customarily uphold an administrator’s decision if it is “grounded on any reasonable basis.”  This deference is tempered where, as here, the plan administrator has a structural conflict of interest, being the entity that both funds and administers the benefits plan.

Other case-specific factors heighten our judicial scrutiny of an administrator’s benefits decision, including procedural irregularities, the quality and quantity of the medical evidence, and the administrator’s reliance on a paper review of the claimant’s medical records.

Yox v. Providence Health Plan, 2016 U.S. App. LEXIS 16600 (9th Cir.) (September 9, 2016)

This recent 9th Circuit opinion offers a good overview of factors that might lead to a reversal of a claim denial even under the very forgiving abuse of discretion standard.

After a seizure-induced fall fractured the plaintiff’s jaw, her group health plan covered the costs for initial surgeries. Nonetheless, the plan denied preauthorization for additional trauma-related dental services under the Plan.

Failure to Follow Procedural Guidelines

The Court noted that Providence did not follow important procedural requirements.

For example, Providence failed to adequately notify Yox of her right to bring a civil action under ERISA § 502(a). See 29 C.F.R. § 2560.503-1(g)(1)(iv) and (j)(4). Moreover, Providence also failed to consult a professional with “appropriate training and experience in the field of medicine involved in the medical judgment.” See 29 C.F.R. § 2560.503-1(h)(3)(iii).

Ignoring these regulations “contravenes the purpose of ERISA” and weighs in favor of finding an abuse of discretion. Abatie, 458 F.3d at 974.

Failure to Meet Procedural Obligations

In assessing the substance of her claim. Providence continually asserted that the plaintiff’s treatment was dental rather than medical.  Yet, it provided no evidentiary basis for its decision.

Furthermore, Providence failed to consult with adequately trained professionals when analyzing her preauthorization request.  In addition, Providence arbitrarily refused to address the clinical evaluation submitted by her treating dentist. See Black & Decker Disability Plan v. Nord, 538 U.S. 822, 834, 123 S. Ct. 1965, 155 L. Ed. 2d 1034 (2003). When Providence did address the evaluation provided by another dentist, it discounted the dentist’s opinion as “insufficient” without further explanation.

Providence’s conclusory opinion does not satisfy its duty under ERISA. See Salomaa, 642 F.3d at 680. “An administrator does not do its duty under the statute and regulations by saying merely ‘we are not persuaded’ or ‘your evidence is insufficient.'”).

Presence of Structural Conflict of Interest

Based upon the foregoing, the Court concluded that a structural conflict of interest played a role in the benefits denial.

 Because of this manifest conflict of interest, we must view Providence’s decision with heightened skepticism; it is simply not enough for us to “scan[] the record for medical evidence supporting” Providence’s decision, even if such evidence exists. Montour, 588 F.3d at 630. The district court did not err in factoring Providence’s conflict of interest into its abuse of discretion analysis.

Note:   The district court’s decision was also affirmed on its ruling that the scope of the plaintiff’s claim did not include the expanded services she requested after starting her internal appeal.

Providence never had a chance for first review of the additional claim, because the appeals process addresses only the scope of the initial denial. That Providence did not change its appeals process to include Yox’s expanded claim is not arbitrary, nor does it conflict with the plain language of the Plan. See Schikore v. BankAmerica Supplemental Ret. Plan, 269 F.3d 956, 960 (9th Cir. 2001).

Practice Pointer – The plaintiff attacked the benefit denial on three grounds – procedural, substantive, and structural flaws.  The first two issues helped support the finding of a structural conflict of interest.

Treating Physician Rule –  Although plan administrators are not bound to give any special weight to the opinions of treating physicians, they may not arbitrarily refuse to credit a claimant’s reliable evidence, including the opinions of a treating physician.  Black & Decker Disability Plan v. Nord, 538 U.S. 822, 834 (U.S. 2003)

Claims Regulations – See,  Department of Labor, Employee Benefits Security Administration, http://www.dol.gov/ebsa/faqs/faq_claims_proc_reg.html, Question B-4

Ninth Circuit Authority – The key case on judicial review of benefit decision is Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955 (9th Cir. Cal. 2006).

Scholarship – I co-authored a law review article that might be helpful in this context:  “Weighing Medical Judgments: Explaining Evidentiary Preferences for Treating Physician Opinions in ERISA Cases after Black and Decker v. Nord” , 13 Michigan State Law School Journal of Medicine and Law 157 (2009)

:: Exhaustion of Administrative Remedies – Exceptions Explained

Although “the text of ERISA nowhere mentions the exhaustion doctrine,” both “the legislative history and the text of ERISA” make clear that Congress “intend[ed] to grant . . . authority to the courts” to “apply that doctrine in suits arising under ERISA.” See Amato v. Bernard, 618 F.2d 559, 566-67, 569 (9th Cir. 1980) (affirming dismissal  of ERISA claim for benefits, where plaintiff had not exhausted administrative remedies available under plan; finding “sound policy requires the application of the exhaustion doctrine in suits under the Act”) . . .

Kaminskiy v. Kimberlite Corp., 2014 U.S. Dist. LEXIS 72061 (D. Cal. 2014)

Two recent cases provide an important reminder that the judicial gloss on ERISA’s claim procedure imposing exhaustion of remedies before filing suit must be carefully considered in any ERISA benefits case.  As noted in the excerpt above, the requirement will not be found in the statute so attentive regard to the pertinent case law.

Aside from compliance with the plan’s administrative review and appeal processes, the plaintiff must allege compliance with those procedures in any subsequent federal suit.

Form of Allegation

For example, in Kaminiskiy, the Court stated: “Here, plaintiff alleges she submitted a claim for benefits on August 29, 2013, and that her claim was thereafter denied. Such allegation is insufficient to allege exhaustion of the administrative remedies available under the ESOP.”

So what sort of allegation is required?  The allegation need not be complex (although providing factual details is undoubtedly the prudent course).   The essential formula according to the Kaminiskiy court reduces to an allegation that “following the denial of her claim for benefits, she submitted a written request for review and that any such request subsequently was denied.”

Exceptions to Requirement

The plaintiff argued that the exhaustion doctrine did not apply to her claims based upon Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. Cal. 1984).  That case involved a distinction between claims that arise under the terms of a plan versus claims created by statute.

#1 Where a claim involves a determination of rights granted under the plan document, then internal appeal procedures apply and exhaustion of remedies is required.

#2 On the other hand, if the claim amounts to a challenge that the plan terms or application thereof violate the statute, then “[t]here is no internal appeal procedure either mandated or recommended by ERISA . . . ”

The court rejected the plaintiff’s argument, however, since it found that the plaintiff’s claims were encompassed in situation #1 above and thus exhaustion was required.  N.B., please see the circuit split below regarding which courts permit exception #2.

Continue reading

:: NAIRO White Paper On External Review Questionable

The NAIRO released a white paper covering a number of points on the new external review requirements. A press release on the white paper appears here.

Under the DOL’s point of view, the decision of the external review organization is binding.  In other words, if Sue Smith requests external review of a benefit denial, the external review organization’s decision will be the final word, absent further judicial review to the extent available.

The drafters of the interim guidance show a woeful lack of perspective on the existing state of the law under Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) and ancillary legal concerns over fiduciary status and deference in judicial review. Continue reading

:: Failure To Substantially Comply With Claims Procedures Proves Costly To Plan

“ERISA provides certain minimal procedural requirements upon an administrator’s denial of a benefits claim.” Wade v. Hewlett-Packard Dev. Co. LP Short Term Disability Plan, 493 F.3d 533, 539 (5th Cir. 2007). The plan administrator must “provide adequate notice in writing to any participant or beneficiary whose claim for benefits under the plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant.”  29 U.S.C. § 1133(1).

Baptist Mem. Hosp. – Desoto v. Crain Auto., 2010 U.S. App. LEXIS 17518 (5th Cir. Miss. Aug. 19, 2010) (unpublished)

The plan fiduciary’s failure to follow the claims regulations had a surprisingly harsh effect on the outcome in this recent claim for benefits case.   Neither the standard of review nor the contractual limitations period served to deflect an award of benefits, attorneys’ fees and costs in favor of the claimant.

The Facts

Crain Automotive operates a series of automobile dealerships and related businesses in central Arkansas, and employs approximately 400 people. Crain Automotive sponsored a self-funded, ERISA-covered employee health plan for its employees.

CoreSource served as third party administrator and network discounts were secured for medical expenses through with NovaSys Health Network (“NovaSys”).  Under the network agreements, Baptist Health Services Group and its participant, Baptist Memorial Hospital—Desoto, Inc. (“BMHD”) agreed to discount charges for all inpatient and outpatient services by 15%.

After Dennis Brown, a plan beneficiary, had two cardiac stents implanted at BMHD during a November 6 to November 8, 2003 hospital confinement, BMHD rendered billed charges in the amount of $41,316.95. Before discharge, Brown assigned his benefits under the plan to BMHD.

BMHD submitted a claim to CoreSource on December 3, 2003, in the amount of $41,316.95, minus the 15% preferred-provider discount and CoreSource adjudicated the claim.  Crain did not fund the claim, however, and a dispute arose over the charges.

According to the opinion, Larry Crain (who had ultimate authority over payment) called BMHD’s billing office on April 12, 2004 and attempted to negotiate the bill.   When that approach failed, Crain called the next day to say that “he [was] not going to pay” until BMHD “answer[ed] all his questions.”

After some further exchanges between the parties failed to resolve the issue, BMHD ultimately filed suit on August 25, 2005, seeking recovery of plan benefits under 29 U.S.C. § 1132(A)(1)(B).  The district court t court found for BMHD in the amount of $39,751.08 plus prejudgment interest.  In addition, the district court awarded BMHD half of its requested fees and all of its requested costs, for a total award of fees and costs of $110,961.48.

On appeal, Crain argued that the district court erred in four respects (the fees and costs award analysis is omitted in the following discussion).

Failure To Exhaust Administrative Remedies

The district court found that because the plan never issued a formal denial letter to BMHD, the claim was “technically and practically . . . never denied.”   The Fifth Circuit agreed.

Noting that “ERISA does not require strict compliance with its procedural requirements,” the Court nonetheless found that the plan failed to meet the less demanding “substantial compliance” standard.  The Court further observed that the plan failed to timey provide written notice of the denial with specific reasons tied to the pertinent plan provisions.

One Year Contractual Limitations Period

The Plan appeared to have a good defense based on a one year contractual limitations period, a period which has been sustained in many similar cases.  In this case, however, the Court held that “the the Crain Plan’s one-year limitations period is unreasonable under the circumstances presented here.”

First, the one-year limitations period begins to run when a participant merely files a completed claim, potentially long before the claimant’s ERISA cause of action even accrues. The administrator’s initial denial of a claim could take as long as 90 days under the Crain Plan, depending on whether the administrator requests that the claimant submit additional information. The claimant then has an additional 180 days to administratively appeal the denial of a claim, and the administrator then has 60 days to issue a decision on the appeal. In total, the Crain Plan’s claim and internal appeal procedures could take as long as 330 days, leaving an unsatisfied claimant with only 35 days to file suit.

. . .

We know of no decisions, and Crain Automotive has pointed to none, approving such a short limitations period, particularly where the administrator utterly failed to adhere to its procedural obligations. Accordingly, we conclude that Crain Automotive’s failure to follow its obligation to properly deny the claim, coupled with its communications leading BMHD to believe that its claim was actively under consideration, caused the one-year limitations period to be unreasonably  [*18] short in this case.

Standard Of Review

The plan’s argument that the district court applied an incorrect standard of review met with equally unfavorable treatment based upon the procedures applied by the plan fiduciaries in reaching its decision.

We need not consider whether Crain Automotive applied a legally correct interpretation of the plan because, even under its interpretation, Crain Automotive abused its discretion in determining that the charges were not “customary and “reasonable.”

In sum, Crain Automotive and its responsible party, Larry Crain, had no evidence upon which to base its decision to deny BMHD’s claim. Rather, Larry Crain relied only on his own speculation and uninformed assessment of the reasonableness of the charges to conclude they were not customary and were unreasonable.

Note: The dissenting judge agreed with the majority that the plan’s failure to comply with the claims regulations precluded any need for the plaintiff to exhaust administrative remedies.

On the other hand, the dissenting judge found much to disagree with in the majority opinion:

I disagree, therefore, with the majority opinion’s attempt to divorce this exhaustion analysis from its assessment of the contractual limitations period. Instead, the majority opinion assesses the contractual limitations period under a “worst case scenario” approach to conclude that a fully exhausted claim could leave a party with only thirty-five days to file suit. But that did not happen in this case. Instead, BMHD’s claim was  fully accrued and exhausted upon the operation of § 2560.503-1(l). Thus, in ascertaining whether the period of limitations was “reasonable,” I would consider only how the limitations period applied under the facts of this case and not under a worst-case hypothetical.

On the reasonableness of the contractual limitations period, on the worst case analysis of when the claim accrued:

Additionally, I do not necessarily accept that thirty-five days  to file suit following a thorough and complete eleven month review process would leave a party with an unreasonably short period to bring an action. Previous courts have found short periods of limitations reasonable in light of the preparation for suit afforded by the administrative processing period. See, e.g., Northlake Reg’l Med. Ctr. v. Waffle House Sys. Employee Benefit Plan, 160 F.3d 1301, 1304 (11th Cir. 1998) (finding that a ten month appeals process combined with a ninety day limitations period provided an adequate opportunity to investigate a claim and file suit).

The dissenting judge actually felt that BMHD had much longer than 35 days to file:

At the latest, BMHD was on notice that Mr. Crain was not going to adhere to the parameters of the Crain Plan on April 12, 2004. At that point, BMHD had been informed by CoreSource, the claims processor, that Mr. Crain was refusing to release payment. Moreover, on that date, Mr. Crain contacted BMHD to try to settle the outstanding debt outside of the Crain Plan’s claims review process. Thus, BMHD appears to have had approximately 214 days to file suit from the time its cause of action accrued under § 2560.503-1(l).

On the accrual on the cause of action, the dissent made a very good point about jurisdiction.

I cannot accept the majority opinion’s reasoning that “BMHD’s ERISA cause of action had not yet accrued as of October 13, 2004.” By that logic, BMHD’s claim never accrued because it has not been formally denied even now. Not only does the majority opinion’s position conflict with the aforementioned exhaustion analysis, but, taken to its logical conclusion, the majority opinion’s position suggests this matter is not yet ripe for adjudication. Thus, if that position was correct, the court would be required to dismiss this case for lack of jurisdiction.

I disagree, therefore, with the majority opinion’s attempt to divorce this exhaustion analysis from its assessment of the contractual limitations period. Instead, the majority opinion assesses the contractual limitations period under a “worst case scenario” approach to conclude that a fully exhausted claim could leave a party with only thirty-five days to file suit. But that did not happen in this case. Instead, BMHD’s claim was  [*31] fully accrued and exhausted upon the operation of § 2560.503-1(l). Thus, in ascertaining whether the period of limitations was “reasonable,” I would consider only how the limitations period applied under the facts of this case and not under a worst-case hypothetical. 1 See Dye v. Assocs. First Capital Corp. Long-Term Disability Plan 504, 243 F. App’x 808, 810 (5th Cir. 2007) (unpublished) (holding that the actual application of procedural safeguards made a 120-day period reasonable “in this specific case” (emphasis added)) 2; see also Davidson v. Wal-Mart Assocs. Health & Welfare Plan, 305 F. Supp. 2d 1059, 1074 (S.D. Iowa 2004) (cited favorably by Dye after finding 45-day period reasonable as applied to the facts of that case); Sheckley v. Lincoln Nat’l Corp. Employees’ Ret. Plan, 366 F. Supp. 2d 140, 147 (D. Me. 2005) (cited favorably by Dye after finding that, under the pled facts, “there [was] no causal connection between the Plan’s failure to follow the claims procedures laid out in [the plan document] and Plaintiff’s failure to file this action . . . [until] after the Plan’s six-month limitation period had run”).
FOOTNOTES
1 Additionally, I do not necessarily accept that thirty-five days  [*32] to file suit following a thorough and complete eleven month review process would leave a party with an unreasonably short period to bring an action. Previous courts have found short periods of limitations reasonable in light of the preparation for suit afforded by the administrative processing period. See, e.g., Northlake Reg’l Med. Ctr. v. Waffle House Sys. Employee Benefit Plan, 160 F.3d 1301, 1304 (11th Cir. 1998) (finding that a ten month appeals process combined with a ninety day limitations period provided an adequate opportunity to investigate a claim and file suit).
2 Although an unpublished decision is not precedent, it is cited for its persuasive reasoning. Moreover, Dye appears to constitute our court’s only direct attempt thus far to assess the reasonableness of an ERISA contractual limitations period.
In keeping with the exhaustion analysis, the first step in assessing the reasonableness of the contractual limitations period is pinpointing the exact date at which § 2560.503-1(l) cleared the way for BMHD to bring suit. 3 At the latest, BMHD was on notice that Mr. Crain was not going to adhere to the parameters of the Crain Plan on April 12, 2004. At that point, BMHD had been  [*33] informed by CoreSource, the claims processor, that Mr. Crain was refusing to release payment. Moreover, on that date, Mr. Crain contacted BMHD to try to settle the outstanding debt outside of the Crain Plan’s claims review process. Thus, BMHD appears to have had approximately 214 days to file suit from the time its cause of action accrued under § 2560.503-1(l).
FOOTNOTES
3 I cannot accept the majority opinion’s reasoning that “BMHD’s ERISA cause of action had not yet accrued as of October 13, 2004.” By that logic, BMHD’s claim never accrued because it has not been formally denied even now. Not only does the majority opinion’s position conflict with the aforementioned exhaustion analysis, but, taken to its logical conclusion, the majority opinion’s position suggests this matter is not yet ripe for adjudication. Thus, if that position was correct, the court would be required to dismiss this case for lack of jurisdiction. Cf. Paris v. Profit Sharing Plan for Employees of Howard B. Wolf, Inc., 637 F.2d 357 (5th Cir. 1981) (“[C]laims filed before a pension actually has been denied might be challenged for lack of ripeness.”); Schwob v. Std. Ins. Co., 37 F. App’x 465, 469-70 (10th Cir. 2002) (unpublished)  [*34] (dismissing as unripe after plan administrators reopened administrative review to reconsider denial of benefits).

Benefit Accrual Cases – The Fourth Circuit held that a limitations period that begins to run before the ERISA cause of action accrues is unreasonable per se. White v. Sun Life Assur. Co., 488 F.3d 240, 247 (4th Cir. 2007) (holding that a plan limitations period that “start[s] the clock ticking on civil claims while the plan is still considering internal appeals” is categorically unreasonable).

The court did not go so far as to adopt that standard and collected the following cases on the issue:

Other circuits have disagreed with the Fourth Circuit’s approach, opting instead to consider reasonableness on a case-by-case basis—even when the limitations period begins to run before a cause of action accrues. See Salisbury v. Hartford Life & Accident Co., 583 F.3d 1245, 1249 (10th Cir. 2009); Burke v. PriceWaterHouseCoopers LLP Long Term Disability Plans, 572 F.3d 76, 81 (2d Cir. 2009); Abena v. Metro. Life Ins. Co., 544 F.3d 880 (7th Cir.2008); Clark v. NBD Bank, N.A., 3 F. App’x 500 (6th Cir. 2001); Blaske v. UNUM Life Ins. Co. of Am., 131 F.3d 763 (8th Cir. 1997).

The Second Circuit in Burke concluded that we also declined to follow the Fourth Circuit’s rule with our decision in Harris Methodist. Although Harris Methodist involved a three-year limitations period that began  to run with the filing a completed claim, and thus before the claimant’s ERISA cause of action accrued, we had no occasion to address this question because the parties did not dispute the reasonableness of the limitations period. See Harris Methodist, 426 F.3d at 337-38. This case similarly presents no occasion to decide the question because the limitations period is unreasonable in the circumstances of this case, even assuming arguendo that we would decline to follow the Fourth Circuit’s holding in White.

For claims administrators and fiduciaries, this case demonstrates the importance of careful attention to the claims regulations and supporting claims decision rationale on technical issues with expert opinion.

:: Plan Administrators Cannot Invoke “SPD Prevails” Rule To Cure Plan Language Deficiencies

Here, there are no terms in the plan which allow it to be amended by inserting into the SPD such critical provisions as the administrator’s discretionary authority to interpret the plan or to determine eligibility for benefits. Indeed, this particular plan wholly fails to comply with § 1102(b)(3)’s requirement to include a procedure governing amendment of the plan.

Thus, there is no basis for concluding that the purported grant of discretion in the SPD is a procedurally proper amendment of the policy, and therefore “the policy’s failure to grant discretion results in the default de novo standard.” Jobe, 598 F.3d at 486. “Consequently, the district court should not have reviewed the administrator’s decision for abuse of discretion but, rather, should have reviewed it de novo.” Id.

Ringwald v. Prudential Ins. Co. of Am. (8th Cir.) (06/21/10)

It is not unusual to see plan documents and summary plan descriptions merged into one document these days, or for summary plan descriptions to take on the role as the source of authority and documentation of administrative practices.   This recent Eighth Circuit opinion should give plan fiduciaries pause as they delegate such paperwork to their claims administrators and benefit communications consultants.

Here, the question was whether the plan granted discretionary authority to the plan administrator so as to invoke the benefit of an abuse of discretion standard of review.  The answer – the summary plan description did, but the plan document did not.  And therefore, a de novo standard of review applied.

Some of you may be saying, but I thought the summary plan description controlled in the case of a conflict between the plan and the SPD?   The Eighth Circuit observes that this rule of “SPD prevails” only applies where necessary to protect the plan participants.

the policy underlying the “SPD prevails” rule was ERISA’s important goal of providing complete disclosure to plan participants, such that where disclosures made in an SPD pursuant to 29 U.S.C. § 1022(a)(1) . . .  ERISA’s policy of full disclosure – inuring to the benefit of employees, not employers – would not be advanced by a blanket rule indicating an SPD “prevails over the policy in all circumstances.”

Thus, the door opens for the plan participant to introduce the plan document as a means of impeaching the SPD.   ERISA forbids a plan administrator from using the SPD “to enlarge the rights of the plan administrator at the expense of plan participants when the plan itself does not confer those rights.”

Note: This case does not address the combination of the plan and the SPD into one document.   It does illustrate, however, the risks incurred when plan administrators deviate from ERISA’s documentary scheme.

ERISA contemplates plan documents which control many important legal matters, such as allocation of fiduciary responsibilities, specification of amendment procedures, eligibility, participation and claims adjudication rules.  ERISA further contemplates an SPD or SMM that put these matters in the vernacular for the plan participants.

In view of Ringwald, if important language fails to appear in the plan document, such as a grant of discretion, the SPD cannot cure this deficiency. Plan fiduciaries should review and compare the plan language on this issue as well as other important issues, such as ERISA subrogation and reimbursement rights, to ensure consistency in plan documentation.

:: PPACA Imposes External Review On ERISA Plans

SEC. 2719(b) of the PPACA imposes new external review requirements on group health plans.    (Grandfathered plans, i.e., a health plan in which an individual was enrolled on March 23, 2010, escapes Sec. 2719.)

This is a significant augmentation of plan participant rights.

(b) EXTERNAL REVIEW.—A group health plan and a health insurance issuer offering group or individual health insurance coverage—

(1) shall comply with the applicable State external review process for such plans and issuers that, at a minimum, includes the consumer protections set forth in the Uniform External Review Model Act promulgated by the National Association of Insurance Commissioners and is binding on such plans;
or

(2) shall implement an effective external review process that meets minimum standards established by the Secretary through guidance and that is similar to the process described under paragraph (1)—

(A) if the applicable State has not established an external review process that meets the requirements of paragraph (1); or

(B) if the plan is a self-insured plan that is not subject to State insurance regulation (including a State law that establishes an external review process described in paragraph (1)).

(my emphasis)

The NAIC model act on available for review on the NAIC website.

http://www.naic.org/documents/commit…_model_act.pdf

Note particularly the sections pertaining to the binding effect of the external review.* Are those sections a part of the process that must be incorporated into self-funded plans that are not grandfathered? It would seem so. I’d be interested in your comments on that particularly, and any general comment on external review from prior experience with state laws imposing similar requirements.

* From the NAIC Model Act:

Section 11. Binding Nature of External Review Decision

A. An external review decision is binding on the health carrier except to the extent the health carrier has other remedies available under applicable State law.
B. An external review decision is binding on the covered person except to the extent the covered person has other remedies available under applicable federal or State law.
C. A covered person or the covered person’s authorized representative may not file a subsequent request for external review involving the same adverse determination or final adverse determination for which the covered person has already received an external review decision pursuant to this Act.

Note:  Certain plans are exempt from Subtitles A and C of the PPACA.  These are group health plans that were in existence on March 23, 2010.

We don’t know yet what regulations will be forthcoming on this issue but it would be an expensive mistake to, say, subject a plan to the new external review requirements because of plan amendments.  So be careful.

From a Leonard Street & Deinard commentary:

As with the implementation of many other aspects of health care reform, the finer details pertaining to retaining grandfathered status are still to be determined. It is clear that enrolled individuals may add family members to their coverage if on March 23, 2010, the plan permitted this enrollment. It is also clear that new employees and their families can be enrolled without jeopardizing the plan’s grandfathered status.

Apart from these two allowances, PPACA is silent on the changes that may be made to a grandfathered plan without losing grandfathered status or even if grandfathered status can be lost. There is hope that some design changes are permissible, because earlier versions of health reform bills expressly prohibited changes. But before more guidance on this is issued, any changes to a grandfathered plan should be very carefully considered.

Further caution – Grandfathered plans are still subject to a number of the new requirements, such as PHSA Sec. 2708 (excessive waiting periods), PHSA Sec. 2711 (lifetime limits),PHSA Sec. 2712 (rescissions) and  PHSA Sec. 2714 (extension of dependent coverage).

Effective Date – Plan years beginning six months after enactment.  Since most plans are calendar year, 1/1/2011 will be the first plan year for the majority of plans.

:: Ninth Circuit Checklist of Abuse Of Discretion Factors

In ERISA cases, abuse of discretion review is “informed by the nature, extent, and effect on the decision-making process of any conflict of interest that may appear in the record.” Abatie, 458 F.3d at 967. Thus, where, as here, a structural conflict exists because the insurance company administrator both funds and administers the Plan, “the court must consider numerous case-specific factors, including the administrator’s conflict of interest, and reach a decision as to whether discretion has been abused by weighing and balancing those factors together.” .

Sterio v. HM Life, 2010 U.S. App. LEXIS 4615 (9th Cir. Cal. Mar. 4, 2010) (unpublished) (citing Montour v. Hartford Life & Acc. Ins. Co., 588 F.3d 623, 630 (9th Cir. 2009)).

This recent Ninth Circuit opinion provides a nice checklist of issues that may turn a structural conflict of interest into a claimant’s victory even in the face of the lenient abuse of discretion standard of review.

The Facts

In this case, Sterio, a former receptionist, claimed she was disabled “primarily due to sciatic pain, restricted mobility and depression following several hip surgeries.” HM Life, was both the insurer and the administrator of the ERISA-governed disability plan.

The Benefit Dispute

Sterio’s benefit claim was denied by the plan, a denial upheld by the district court:

HM Life engaged Broadspire Services to process Sterio’s claim. Broadspire, in turn, hired six independent physicians to review Sterio’s medical records. The reviewing physicians all concluded that Sterio was not disabled. Broadspire initially denied Sterio’s claim and HM Life denied Sterio’s appeal, both concluding that the objective medical evidence did not support her disability claim. The district court conducted a bench trial and concluded that HM Life did not abuse its discretion in light of “conflicting evidence.”

The Appeal

On appeal, the Ninth Circuit reversed. The Court agreed that the abuse of discretion standard of review applied, but disagreed with the district court’s application of the standard.

The critical points are as follows:

# 1  First, the quantity and quality of the medical evidence supports Sterio’s disability claim. HM Life failed to credit this reliable medical evidence which included the following:

  • An EMG test confirmed that Sterio had right sciatic neuropathy after her last hip revision surgery.
  • Two MRI exams revealed excess metal artifacts in Sterio’s pelvis region. Two x-ray exams revealed bone thinning in Sterio’s right foot.
  • Sterio’s records show consistent use of strong pain medication.
  • A Functional Capacity Evaluation (“FCE”) submitted by Sterio’s treating physician reported that Sterio could not sit, stand or walk for more than 1-hour a day.
  • Both of Sterio’s treating physicians concluded that she was permanently disabled, which is consistent with the evaluations of Sterio’s treating neurologist and two orthopedists.

# 2  HM Life failed to distinguish or even acknowledge the SSA’s contrary disability determination despite having knowledge of it, raising the question of whether the denial was the product of a principled and deliberative reasoning process.”

# 3  HM Life failed to conduct an in-person medical evaluation of Sterio. HM Life’s choice to rely on a pure paper review, “raises questions about the thoroughness and accuracy of the benefits determination . . . as it is not clear the Plan presented [the six reviewing doctors] with all of the relevant evidence.”

# 4  HM Life failed to adequately investigate Sterio’s claim and request necessary evidence.

For example:

  • HM Life did not procure the SSA file or ask Sterio to do so.
  • Nor did HM Life request any specific evidence that it, or its reviewing physicians, concluded was necessary to prove up Sterio’s claim.
  • HM Life failed to communicate these specific deficiencies to Sterio or ask her to supplement the record.

# 5   HM Life violated ERISA’s procedures by “tack[ing] on a new reason for denying benefits in [its] final decision, thereby precluding [Sterio] from responding to that rationale for denial at the administrative level.”

In its final decision, HM Life added for the first time that Sterio’s hospitalizations did not entitle her to long term benefits because she was not deemed disabled at the onset of her disability effective date and because mental health coverage ends at 24 months.

HM Life’s last-minute addition of a new reason for denial suggests not only a conflict of interest, but can also be “categorized as a procedural irregularity where, as here, [Sterio was] foreclosed from presenting any response to the new reason.”

These factors, taken together, persuaded the Court that HM Life abused its discretion in denying Sterio benefits.

Note: This case illustrates an application of the recent opinion in Montour v. Hartford Life & Accident Ins. Co., 588 F.3d 623 (9th Cir. Cal. 2009) which in turn applies the seminal Ninth Circuit opinion in Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 962 (9th Cir. 2006) (en banc).

:: Tenth Circuit Notes Circuit Split On Contractual Limitations Periods

ERISA does not contain a limitations provision for private enforcement actions under 29 U.S.C. § 1132.  Thus, we generally “apply the most closely analogous statute of limitations under state law.”  “Choosing which state statute to borrow is unnecessary, however, where the parties have contractually agreed upon a limitations period.”

Salisbury v. Hartford Life & Accident Ins. Co. (1oth Cir.) (9/30/2009) (internal citations omitted)

The Tenth Circuit has rendered a decision resoundingly affirming the validity of an ERISA plan’s contractual limitations period in an opinion that highlights a circuit split on the issue.

In Salisbury, a disability case, the provision in issue read as follows:

“Legal action cannot be taken against us: 1. sooner than 60 days after due Proof of Loss has been furnished; or 2. three years after the time written Proof of Loss is required to be furnished according to the terms of the Policy.” Aplt. App. at 152. In turn, the section regarding Proof of Loss provides: “Written Proof of Loss must be sent to us within 90 days after the start of the period for which we owe payment.”

Citing Northlake Regional Med. Ctr. v. Waffle House Sys. Employee Benefit Plan, 160 F.3d 1301, 1303 (11th Cir. 1998), the Court stated that:

“An ERISA plan is nothing more than a contract, in which parties as a general rule are free to include whatever limitations they desire.”

The Tenth Circuit sustained the limitations period as against a challenge that it permitted the limitations period to commence before the claimant could bring suit.

Continue reading

:: Addendum To Nolan v. Heald College Post

I gave an overview of this highly significant Ninth Circuit opinion in :: Ninth Circuit Requires Application Of Normal Summary Judgment Rules In Benefits Denial Review

Brian S. King, Esq., who regularly practices in that jurisdiction, (and a moderator on erisaboard.com)  has posted a very helpful commentary on his site which gives a very valuable perspective on this case.

Brian comments:

While the Ninth Circuit relied primarily on circuit precedent for its decision, it made clear that Glenn was consistent with its ruling.  There is little question that Nolan is correct on this point. The case will likely serve as a guidepost for other circuit and district courts as they wrestle with how to properly apply the language of Glenn.

The entire commentary can be viewed here.

:: Fourth Circuit Splits With Sixth Circuit On Procedural Violation Remedy

The district court’s reliance on the Sixth Circuit’s decision in Wenner was misplaced, both because it is contrary to the law of this circuit and because that decision’s rationale is flawed. In Wenner, a claimant’s ERISA benefits were ordered reinstated, a substantive remedy, even though the only ERISA violation was a 29 U.S.C. § 1133 procedural violation and the merits of the claim had not been decided.

Gagliano v. Reliance Standard Life
, No. 07-1901 (4th Cir.) (November 18, 2008)

The Fourth Circuit minced no words in this recent ERISA claim for benefits case wherein it reversed the district court with chiding comment on a Sixth Circuit opinion relied upon by the district court. In fairness to the district court, it appears that the clarity of Fourth Circuit authority on the issue was less pronounced than the panel claimed. Nonetheless, the Court very clearly evinced its distaste for the reasoning employed by the Sixth Circuit in Wenner
v. Sun Life Assurance Co. of Canada
, 482 F.3d 878 (6th Cir.
2007).

(The Wenner case is discussed in :: Claims Denials – Denial Letter Must Properly State Reason.)

The Fourth Circuit panel saw the issue in terms of its prior opinion in White v. Provident Life & Accident Insurance Co., 114 F.3d 26 (4th Cir. 1997), a case in which the insurer issued an insurance policy based upon “a legitimate ‘mistake.'” The Court was concerned that a procedural violation not lead to an award of benefits beyond those conferred by the plan, and accepted the defendant’s argument that benefit reinstatement on the facts presented amounted to incorporation of waiver and estoppel principles.

The Wenner decision really does not approach the issue that way. The Sixth Circuit distinguishes cases in which benefits are initially conferred and then improperly terminated (due to procedural errors) and cases in which benefits are denied at the outset. In the former case, the effect of Wenner is to place the claimant’s claims in payment status as they were prior to the defective termination.

The policy issue here is who should bear the cost of the procedural error. Under the Fourth Circuit view, the claimant’s claims remained terminated, albeit though through a process tainted with error, as the case returns for further internal appeals proceedings.

Note: The fact pattern in Gagliano and Wenner involves claims denial for one reason, and on internal appeal, a sustaining of the denial for a different reason. This fact pattern should be distinguished from one in which the reason is the same, but the evidence differs, e.g.,:

Although not phrased as such by plaintiff, plaintiff’s argument can be construed as one that plaintiff is entitled to a further appeal because the final decision was based on new evidence, as opposed to a new reason. That is, because Dr. Thomas’ IME was the last exam to be completed, she did not have an opportunity to respond with her own evidence and thus, she should be entitled to an additional appeal.

This type of argument has been rejected by the courts. In the leading case, Metzger v. UNUM Life Insurance Co., 476 F.3d 1161, 1167 (10th Cir. 2007), the court concluded that documents “generated during the administrative appeal . . . must be disclosed after a final decision on appeal.” [*26] Id. 8 The court held that “[p]ermitting a claimant to receive and rebut medical opinion reports generated in the course of an administrative appeal – even when those reports contain no new factual information and deny benefits on the same basis as the initial decision – would set up an unnecessary cycle of submission, review, re-submission, and re-review” and that such a cycle would increase both the cost and length of the appeals process. Id. at 1166. Based on the strong language from Metzger, it is clear that plaintiff is not entitled to yet another opportunity to submit additional information to rebut the report of Dr. Thomas . . .

Balmert v. Reliance Std. Life Ins. Co., 2008 U.S. Dist. LEXIS 85102 (S.D. Ohio Sept. 22, 2008)

The Metzger fact pattern is discussed in :: Review of Claim Denials (Unit 2): Disclosure Requirements On Administrative Appeal

Correction, Errata, Etc. – A “clear, unambiguous” correction letter, timely issued, may cure the Wenner problem. See, Washington v. Comcast Corp., 268 Fed. Appx. 423 (6th Cir. Mich. 2008) (unpublished)

Additional Contrary Authority – The Seventh Circuit view:

In Halpin, we concluded that an employer-sponsored disability plan had failed to comply substantially with ERISA and its implementing regulations in terminating the plaintiff’s benefits. On the question of remedy, we held that a district court did not abuse its discretion when it ordered the reinstatement of the plaintiff’s benefits as of the date the benefits were terminated. Halpin, 962 F.2d at 697. Furthermore, in other cases, we have suggested [*630] that “retroactive reinstatement of benefits is the proper remedy” when, for instance, a plan’s claims procedure “did not comply with ERISA’s requirements for full and fair review.” Quinn v. Blue Cross & Blue Shield Ass’n, 161 F.3d 472, 477 (7th Cir. 1998) (citing Grossmuller v. Int’l Union, United Auto., Aerospace & Agric. Implement Workers of America, UAW, 715 F.2d 853, 858-59 (3d Cir. 1983)).

Schneider v. Sentry Group Long Term Disability Plan, 422 F.3d 621 (7th Cir. Wis. 2005)

See also – Rob Hoskins has started a thread on this subject on ERISABoard.com.

:: Proposed Cancer Treatment Deemed “Experimental”

There is a temptation here to argue that, because all other forms of treatment have not been successful with Mrs. Reimann, it must be “medically necessary” to keep trying even unproven therapies such as a multivisceral transplant. The argument takes on extra force when doctors as eminent as Dr. Lillemoe, Dr. Vianna, and Dr. Tzakis recommend this treatment. The argument has considerable emotional force, especially where the patient suffers from a progressive disease that will cause death if not treated successfully, and no other form of therapy offers hope.

The legal response to this appealing argument is that Anthem simply did not agree to cover the costs of any form of therapy that such a patient’s doctors – even extraordinarily talented doctors – might deem worth trying when they have run out of proven alternatives. . . . The standard of medical necessity applied here is not novel or selfish. It is an established mechanism for keeping medical costs under at least minimal control for all who pay for health insurance. It has been considered and applied in this case carefully and fairly. The court cannot find an abuse of discretion in Anthem’s denial of coverage for this unproven proposed treatment.

Reimann v. Anthem Ins. Cos.
, 2008 U.S. Dist. LEXIS 88562 (S.D. Ind. Oct. 31, 2008)

This lengthy opinion provides analysis of a benefit denial under a medical necessity exclusion, with particular emphasis on the “experimental” or “investigational” aspect of the proposed treatment.

The court decided the case under an abuse of discretion standard of review.

The key substantive question before the court is whether Anthem’s denial of coverage for the proposed multivisceral transplant to treat metastasized cancer was an abuse of discretion. See Metropolitan Life Ins. Co. v. Glenn, 554 U.S. , , 128 S. Ct. 2343, 2348 (2008). The Supreme Court has cautioned against formulas that will take the place of actual judging or that serve as “instruments of futile casuistry.” Glenn, 128 S. Ct. at 2352.

Noting that “identifying relevant factors can provide a useful way to organize thoughts”, the district court cited the following factors relied upon by the Seventh Circuit:

  • the impartiality of the decision maker,
  • the complexity of the issue, the process afforded to the parties,
  • the extent to which the decision maker used help from outside experts where necessary, and
  • the soundness of the fiduciary’s reasoning.

(citing, Chalmers v. Quaker Oats Co., 61 F.3d 1340, 1344 (7th Cir. 1995); Hughes v. Life Ins. Co. of North America, 112 F. Supp. 2d 780, 793 (S.D. Ind. 2000))

The court concluded that the administrator did not abuse its discretion, though several procedural irregulaties were noted.

Mrs. Reimann raises a host of procedural challenges to Anthem’s handling of her claim, arguing that individually and in sum the alleged violations show that Anthem abused its discretion in denying her claim. All of these challenges are subject to the substantial compliance standard. As explained below, the court rejects most of the challenges. And although there were some procedural errors, those errors either did not cause any substantive harm or have already been remedied by Anthem. None of the errors call for the remedy that Mrs. Reimann seeks.

Note: The court ruled against the plaintiff and permitted supplementation of the record as to the reviewing physician’s credentials.  The rationale may have more general applicability on the important question of when the record may be supplemented.  The court stated:

The court overrules plaintiff’s objection to the supplemental record with the more complete qualifications. In Semien, the Seventh Circuit recognized that even under the abuse of discretion standard, some discovery may be allowed into certain limited subjects when the plaintiff makes at least a preliminary showing that there is reason to question the fairness or impartiality of the decision. 436 F.3d at 813-14 (although discovery is normally disfavored in ERISA cases, limited discovery outside of the administrative record is appropriate to ensure that plan administrators have not acted arbitrarily and that conflicts of interest have not contributed to an unjustifiable denial of benefits). Mrs. Reimann has done so in her challenge to the credentials of the outside reviewers based on the more limited information that was initially available. When the challenge is raised, it seems only fair to allow a response, particularly in the wake of Metropolitan Life Ins. Co. v. Glenn, 554 U.S.    , 128 S. Ct. 2343 (2008). When there is a challenge to the objectivity and honesty of the plan administrator’s decision, Glenn recognized, the plaintiff must have the opportunity to supplement the record (and, presumably, to conduct at least some targeted discovery). For example, a reviewing court may consider evidence about the insurance company’s record of biased or unfair claims administration, or evidence about the insurance company’s efforts to ensure that decision makers will be objective and independent. 128 S. Ct. at 2531; accord, Hogan-Cross v. Metropolitan Life Ins. Co., 568 F. Supp. 2d 410 (S.D.N.Y. 2008) (allowing  discovery related to financial conflict of interest).

Evidence of both types will ordinarily not be included in the individual claim file that provides the usual administrative record in an ERISA case. This reasoning based on Glenn extends to Mrs. Reimann’s challenge to the qualifications and expertise of the outside reviewers. If the supplement were not allowed, the appropriate remedy for review by someone not shown to have the requisite expertise would probably be a remand for another review by someone more expert. That approach here would be pointless, especially in light of the excellent credentials of all four outside reviewers. In response to Mrs. Reimann’s challenge, it seems more reasonable to allow each side to supplement that limited administrative record, as each side has done in this case. Plaintiff’s objection to the record supplements with the reviewers’ credentials (Dkt. No. 74) is therefore overruled.

Substantial Compliance – What is the penalty if an administrator fails to substantially comply with procedural requirements?  The court appeared baffled:

By making this exaggerated claim about “special interest,” Dr. Lane and Anthem did not substantially comply with ERISA or its regulations.

What remedy is appropriate for such a violation? In ERISA cases, the court must base its remedy determination “‘on what is required in each case to fully remedy the defective procedures given the status quo prior to the denial or termination’ of benefits.” Pakovich v. Broadspire Services, Inc., 535 F.3d 601, 607 n.3 (7th Cir. 2008), quoting Schneider v. Sentry Group Long Term Disability Plan, 422 F.3d 621, 629-30 (7th Cir. 2005); Hackett v. Xerox Corp. Long Term Disability Income Plan, 315 F.3d 771, 776 (7th Cir. 2003).

Here, the first reviewer was qualified to render an opinion, but the exaggeration of his credentials might have led Mrs. Reimann to be less likely to question or appeal Anthem’s denial. The exaggeration did not produce that effect, which affects the appropriate remedy. A return to the status quo, in this situation, would not require remand to Anthem for a new evaluation; the first reviewer was  in fact well-qualified to evaluate Mrs. Reimann’s claim. For a different claimant who could show prejudice as a result of Anthem’s overstatement, a return to the status quo might require remand or referral for a new independent, binding outside review. Mrs. Reimann did not rely on Anthem’s statement, and she was not deterred in pursuing her appeal rights. Anthem’s and Dr. Lane’s exaggeration may warrant further scrutiny in other cases, see, e.g., Glenn, 128 S. Ct. at 2351 (noting that evidence of plan administrator’s violations in other cases may be relevant in evaluating whether denial of benefits was abuse of discretion), but the court sees no further suitable remedy in this case.

Consistent Explanation – The court observed that the case was distinguishable from one in which the basis for denial changed:

Mrs. Reimann is correct that in some cases a change in the basis for a denial of benefits from “not medically necessary” to “experimental” can demonstrate an abuse of discretion. Pl. Br. 27, citing Velez v. Prudential Health Care Plan, 943 F. Supp. 332, 343 (S.D.N.Y 1996). In Velez, the first denial letter the plaintiff received stated that the treatment she requested was “medically unnecessary,” without any explanation or specific grounds on which that determination was based. Id. at 336. The second denial letter stated that the  treatment was “experimental” but did not explain how the policy definition had been applied. The third denial letter stated that the treatment requested was both medically unnecessary and experimental, again, without further explanation. Id. at 337. U

Unlike the plan here, the plan in Velez did not define “medically unnecessary” to include “experimental” treatments, and the insurer offered no explanation for its decision that Velez’s treatment was excluded. Here, as previously explained, Anthem’s reliance on the “not medically necessary” exclusion and its later reliance on the more specific “experimental” exclusion was not evidence of abuse of discretion. In each denial letter, Anthem explained its reasoning in ways that have been sufficiently clear and consistent throughout the process.

:: Internal Appeals Processes Require Strict Compliance By Claimants

In support of its Motion for Summary Judgment, Unum argues that Smith cannot maintain a cause of action under ERISA because she failed to exhaust her administrative remedies. On this issue, the United States Court of Appeals for the Fifth Circuit has held: “This court requires that claimants seeking benefits from an ERISA plan must first exhaust available administrative remedies under the plan before bringing suit to recover benefits.” Bourgeois v. Pension Plan for Employees of Santa Fe Int’l Corps., 215 F.3d 475, 479 (5th Cir. 2000)(citing Denton v. First Nat’l Bank of Waco, 765 F.2d 1295, 1300 (5th Cir. 1985)).

Smith v. UNUM Life Ins. Co. of Am., 2008 U.S. Dist. LEXIS 80638 (S.D. Miss. Oct. 10, 2008)

Two important judicial doctrines converge in this case, both to the detriment of the plaintiff.  First, the court finds that the plan administrator “substantially complied” with the claims regulations; second, the court applied the failure to exhaust administrative remedies defense, rebuffing the plaintiff’s justification based upon futility.  The caselaw continues to demonstrate that claimants must carefully attend to all requirements of internal appeals processes and resolve any close cases with further application to the appeals avenues offered under the plan.

Smith involved a denied disability claim that apparently followed a denied workers’ compensation claim.   The disability claim became ensnarled in a dispute over who had to provide clarification – the disability carrier as to the reason for the denial or the claimant as to the circumstances of her accident.

The Factual Dispute

Though the compensatory regimes divide categorically into occupational and non-occupational fields, human experience is not as easily deconstructed.  Here, it appears that the claimant’s physician may have shown some equivocation in the cause of the accident at least one stage of the proceedings.  He attributed the accident to “uncertain etiology”.

Matters eventually reached the point of impasse:

On March 15, 2005, Unum sent Smith a letter informing her: “As you may recall, we previously requested additional information that was necessary to evaluate your claim for disability benefits. Since we did not receive the requested information within the specified time period, regrettably, we must close your file…” Id., Ex. C, at 141-43. The letter again cites to the policy provision that requires a claimant to provide information regarding the time of disability, place of disability,  circumstances of disability, nature of disability, and name and address of employee.

The Claims Regulations

After the claimant sued in state court, the case was removed and the issues consolidated in a motion for summary judgment.  The claimant contended that the carrier failed to comply with the claims regulations.

The Fifth Circuit has recognized that “ERISA provides certain minimal procedural requirements upon an administrator’s denial of a benefits claim”, which are “set forth in 29 U.S.C. § 1133 and the regulations promulgated by the Department of Labor thereunder.” Wade v. Hewlett-Packard Dev. Co. LP Short Term Disability Plan, 493 F.3d 533, 539 (5th Cir. 2007).

The district court ruled that the carrier had substantially complied with the regulations,noting the Fifth Circuit’s view on the issue:

Challenges to ERISA procedures are evaluated under the substantial compliance standard. Lacy v. Fulbright & Jaworski, 405 F.3d 254, 256-57 & n.5 (5th Cir. 2005). This means that the “technical noncompliance with ERISA procedures will be excused so long as the purpose of section 1133 has been fulfilled.” Robinson v. Aetna Life Ins., 443 F.3d 389, 393 (5th Cir. 2006). The purpose of section 1133 is “to afford the beneficiary an explanation of the denial of benefits that is adequate to ensure meaningful review of that denial.” Schneider v. Sentry Long Term Disability, 422 F.3d 621, 627-28 (7th Cir. 2005).

The “substantial compliance” test also “considers all communications between an administrator and plan participant to determine whether the information provided was sufficient under the circumstances.” Moore v. LaFayette Life Ins. Co., 458 F.3d 416, 436 (6th Cir. 2006). “All communications” may include oral communications. White v. Aetna Life Ins. Co., 341 U.S. App. D.C. 155, 210 F.3d 412, 417 (D.C. Cir. 2000)(citing Heller v. Fortis Benefits Ins. Co., 330 U.S. App. D.C. 39, 142 F.3d 487, 493 (D.C. Cir. 1998)). Wade, 493 F.3d at 539.

Thus, “Section 1133 and its corresponding regulations require that the Plan: (1) provide adequate notice; (2) in writing; (3) setting forth the specific reasons for such denial; (4) written in a manner calculated to be understood by the participant; and (5) afford a reasonable opportunity for a full and fair review by the administrator.” Id. at 540.

“Taken as a whole”, the court held that UNUM had sufficiently advised that she was required to provide information regarding her claimed disability – including the time, place, circumstances, and nature of the disability – to have her claim evaluated.

The Futility Doctrine

The claimant’s invocation of the futility doctrine fared no better than her challenge based upon the regulations.  The court stated the Fifth Circuit rule as follows:

Smith also argues that she was excused from exhausting her administrative remedies because an appeal of the decision regarding her claim for short term disability benefits would have been futile.

The Fifth Circuit has “recognized an exception to the affirmative defense of failure to exhaust administrative remedies when such attempts would be futile.” Bourgeois, 215 F.3d at 479 (citing Hall v. National Gypsum Co., 105 F.3d 225, 232 (5th Cir. 1997)). See also Ogden, 367 F.3d at 336 n.61.

The Fifth Circuit, however, has also recognized that the “failure to show hostility or bias on the part of the administrative review committee is fatal to a claim of futility.” McGowin v. ManPower Int’l, Inc., 363 F.3d 556, 559 (5th Cir 2004). See also Denton, 765 F.2d at 1302 (finding that the futility exception to the exhaustion requirement did not apply in a case in which there was no showing that the administrative review committee was hostile or bitter toward the plaintiff).

The court was dissatisfied with the plaintiff’s showing on this point.

Smith has not presented any evidence to show bias, hostility, or bitterness. Instead, she argues that appealing the administrative decision would have been futile because Unum had already ignored the medical findings of her treating physicians and denied her claim, thereby evidencing a predisposition to rejecting her claim. The Court first finds this argument is not supported by the record.

Finding that the plaintiff failed to exhaust her administrative remedies through appeal, and likewise failed to offer a justification under the futility doctrine, the court granted the carrier’s motion for summary judgment.

Note:  Since the failure to exhaust administrative remedies enjoys great favor with the courts, claimants have little choice but to persevere through the appeals process.   Repeated requests for clarification cannot be ignored.

Furthermore, another recent case, Wiggins v. Life Ins. Co. of N. Am., 2008 U.S. Dist. LEXIS 80500 (E.D. Wash. Oct. 10, 2008), shows that the denial of an appeal may be insufficient grounds to file suit without further recourse to internal appeals processes.  In that case, the attorney appealed a denial and the appeal was denied in a letter that offered a further appeal.  The attorney then wrote the plan administrator, stating:

Please be advised Ms. Wiggins does not wish to seek another written request for review with the Life Insurance Company of North America. In addition, there is no new documentation, other than what has previously been forwarded to the insurance company.

The district court found this insufficient exhaustion of administrative remedies, stating:

It is well established that a person seeking benefits under an ERISA plan “must avail himself or herself of a plan’s own internal review procedures before bringing suit in federal court.” Diaz v. United Agric. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir.1995) (citing Amato v. Bernard, 618 F.2d 559, 566-68 (9th Cir.1980)). Ms. Wiggins concedes she did not do so. Despite making this concession, she urges the Court not to dismiss her complaint. She argues that requesting further review would have been futile because LINA had repeatedly denied her appeals for benefits, both short- and long-term, and she had no new medical information with respect to her condition.

Futility is one of the exceptions to the exhaustion requirement. 50 F.3d at 1485. However, the fact a plan administrator has repeatedly denied an applicant’s appeals does not, by itself, excuse the applicant from exhausting her administrative remedies. Id. In order to establish futility, the applicant must demonstrate the administrator has prejudged the evidence and the outcome of the appeal is predetermined. See id. at 1486. Ms. Wiggins bears the burden [*5] of production on this issue. See id. at 1485-86. The defendants are entitled to summary judgment unless she identifies evidence from which a rational fact-finder could resolve this issue in her favor. She has failed to carry her burden. As the record now stands, a rational fact-finder could not find that LINA representatives had prejudged the evidence and, thus, the opportunity for internal review that Ms. Bedikian described in her letter of May 9th was illusory because the appeal was certain to be denied.

The Claims Regulations – Section 1133, at issue in Smith on the substantial compliance issue,  provides:

In accordance with regulations of the Secretary, every employee benefit plan shall –

(1) provide adequate notice in writing to any participant or beneficiary whose claim for benefits under the plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant, and

(2) afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim.

29 U.S.C. § 1133. The applicable federal regulations in force at the time Smith’s claim [*16] was denied provide:

The notification shall set forth, in a manner calculated to be understood by the claimant –

(i) The specific reason or reasons for the adverse determination;

(ii) Reference to the specific plan provisions on which the determination is based;

(iii) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary;

(iv) A description of the plan’s review procedures and the time limits applicable to such procedure …

29 C.F.R. 2560.503-1(g)(1)(i)-(iv)(2000).

See also:: District Court Rejects “Substantial Compliance” Argument As Justification For Failure To Exhaust Administrative Remedies

:: Class Action Complaint Sufficient To Meet Twombley Standards

The complaint, however, clearly states what Anthem is alleged to have done: deny, as a matter of policy and in violation of ERISA, Plaintiff’s request for insurance benefits to cover RFA treatment, on the basis that the treatment is considered investigational. This is far from a “formulaic recitation of the elements of a cause of action,” id., and is sufficient to withstand a motion to dismiss. Nor does Anthem need a more definite statement in order to enable it to raise its defenses in the answer. Cady v. Anthem Blue Cross Life & Health Ins. Co., 2008 U.S. Dist. LEXIS 76783, 17-18 (N.D. Cal. Oct. 2, 2008)

Cady presents a challenge to denial of health plan benefits based upon an “investigational” classification in a class action context.  The lexicographical bent of this case showed itself ahead of the dispute over what treatments are investigational, however, as the principal defendant began with the parsing of terms descriptive of the “plan administrator.”

Anthem concedes that Plaintiff has standing to sue it, but asserts that the complaint is nonetheless insufficient to state a claim against it. It notes that the complaint does not identify Anthem as a “plan administrator,” and argues that it is therefore not a proper defendant.

For this proposition, Anthem relied upon Everhart v. Allmerica Financial Life Insurance Co., 275 F.3d 751, 756 (9th Cir. 2001), which affirmed that an ERISA action for benefits may not be brought against a third-party insurer who acts as a claims administrator, but rather must be brought against the plan administrator. The district court turned to its dictionary.  The OED resolved the dispute in favor of the plaintiff, as the court observed that:

It is true that the complaint does not state that Anthem is the “plan administrator.” But it states, “Cady is a participant in a group health plan . . . administered by defendant BC Life [(Anthem)].” Compl. P 49. Alleging that the plan is “administered by Anthem” is no different than alleging that Anthem is the “plan administrator.” (citing, Oxford English Dictionary, 2d Ed. (1989) (defining “administrator” as “[o]ne who administers”)).

Personally, I am a bit leery of case outcomes determined by resort to dictionaries.  If a statute defines a term, as does ERISA, usage should be ascertained by that special, technical lexicon, not the OED.  In this case, however, the outcome appears substantially justified, and the issue may be revisited if warranted by further factual developments as noted below.

From the plaintiff’s point of view, however, it seems clear enough that specific reference to defendants by statutory designation in the drafting of the complaint will avoid needless linguistic speculations at the motion stage of the case.

The dispute then turned to specificity in the allegations.  Here, the standard is defined in Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955 (2007), a case that is getting cited quite a bit these days.  In that case, the Supreme Court stated that:

in order to survive a motion to dismiss, the factual allegations “must be enough to raise a right to relief above the speculative level.” 127 S. Ct. at 1965.

Once again, the plaintiff cleared the hurdle.

he complaint, however, clearly states what Anthem is alleged to have done: deny, as a matter of policy and in violatiTon of ERISA, Plaintiff’s request for insurance benefits to cover RFA treatment, on the basis that the treatment is considered investigational.  This is far from a “formulaic recitation of the elements of a cause of action,” id., and is sufficient to withstand a motion to dismiss. Nor does Anthem need a more definite statement in order to enable it to raise its defenses in the answer.

Note: The OED will not have the last word.  The issues arose in the posture of a motion to dismiss.  Subsequent proceedings may show that Anthem is not the plan administrator, and that would be a critical failing of the plaintiff’s claims:

Anthem also cites Ford v. MCI Communications Corp. Health and Welfare Plan, 399 F.3d 1076 (9th Cir. 2005), in support of its position. In Ford, the Ninth Circuit characterized its decision in Everhart as “reject[ing] the argument that an insurer who controlled the administration of the plan and made the discretionary decisions as to whether benefits were owed could be sued under § 1132(a)(1)(B).” Id. at 1082 (internal quotation marks omitted). The court also noted that ERISA defines a “plan administrator” as “the person specifically so designated by the terms of the instrument under which the plan is operated.” 29 U.S.C. § 1002(16)(A)(I). However, neither Ford nor Everhart addressed the sufficiency of the allegations in the complaint on a motion to dismiss; in both cases, it had already been established that the defendant, despite arguably administering the plan, was not designated as the plan administrator in the operative instrument. If the evidence demonstrates that Anthem is not in fact the administrator designated in the plan’s instrument, Anthem may move for summary judgment. However, dismissing the complaint at this stage would elevate form over substance and would not serve the goal of judicial efficiency, in that Plaintiff would be given leave to amend the complaint to allege that Anthem is the plan administrator.

Detailed Factual Obligations Not Required – From Twombley

:

While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ibid.; Sanjuan v. American Bd. of Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (CA7 1994), a plaintiff’s obligation to provide the  “grounds” of his “entitle[ment] to relief” requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do, see Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932, 92 L. Ed. 2d 209 (1986) (on a motion to dismiss, courts “are not bound to accept as true a legal conclusion couched as a factual allegation”). Factual allegations must be enough to raise a right to relief above the speculative level, see 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp 235-236 (3d ed. 2004) (hereinafter Wright & Miller) (“[T]he pleading must contain something more . . . than . . . a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”), on the assumption that all the allegations in the complaint are true (even if doubtful in fact), see, e.g., Swierkiewicz v. Sorema N. A., 534 U.S. 506, 508, n. 1, 122 S. Ct. 992, 152 L. Ed. 2d 1 (2002); Neitzke v. Williams, 490 U.S. 319, 327, 109 S. Ct. 1827, 104 L. Ed. 2d 338 (1989) (“Rule 12(b)(6) does not countenance . . . dismissals based on a judge’s disbelief of a complaint’s factual allegations”); Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 40 L. Ed. 2d 90 (1974) (a well-pleaded complaint may proceed even if it appears “that a recovery is very remote and unlikely”).

Twombley has particular importance for ERISA practitioners given the substantial amount of motion practice in this field.  LEXIS shows over 10,000 cites to the opinion (granted not all in the ERISA context) which I think is simply amazing given its relatively recent vintage.

:: Remands To Plan Administrators (Part 2) – A List Of Circuit Courts Of Appeal Decisions

What follows are a series of notes on authorities on the question of when district court orders remanding cases to plan administrators are final and appealable. After a listing of seminal cases, a brief overview follows setting forth possible justifications for finding such orders final and appealable. (The first part of this series is found in :: Returning The ERISA Case To The Plan Administrator: Administrative Agency Analogies (Part 1))

Remands Orders Are Non-Final And Nonappealable

Bowers v. Sheet Metal Workers’ Nat’l Pension Fund, 365 F .3d 535, 537 (6th Cir.2004)

Borntrager v. Central States, Southeast and Southwest Areas Pension Fund, 425 F.3d 1087 (8th Cir. 2005)

Petralia v. AT & T Global Info. Solutions Co., 114 F.3d 352, 354 (1st Cir.1997)

Shannon v. Jack Eckerd Corp., 55 F.3d 561, 563 (11th Cir.1995)

Remand Orders Are Final And Appealable

Perlman v. Swiss Bank Corp. Comprehensive Disability Prot. Plan, 195 F.3d 975, 977-80 (7th Cir.1999)

Orders Evaluated On A Case By Case Basis

Rekstad v. First Bank System, Inc., 238 F.3d 1259, 1263 (10th Cir.2001)

Hensley v. N.W. Permanente P.C. Ret. Plan & Trust, 258 F.3d 986, 994 (9th Cir.2001) ( overruled on other grounds by Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 966 (9th Cir.2006)) may fit here, but the case could be an example of the collateral order doctrine.

Exceptions Permitting Appeal

  • The “Collateral Order” Doctrine

The essential requirements for a district court order to fall within this exception are that the order:

  1. conclusively determine the disputed question,
  2. resolve an important issue completely separate from the merits of the action, and
  3. be effectively unreviewable on appeal from a final judgment.

See, Will v. Hallock, 126 S.Ct. 952 (2006)

One may be tempted to say the the collateral order doctrine is an exception to the “final decision” requirement. Though common sense might suggest that characterization, the Supreme Court has not favored it (though the Court itself has termed the doctrine an “exception” on at least one occasion).  The Supreme Court prefers to say that the collateral order doctrine is “best understood not as an exception to the ‘final decision’ rule laid down by Congress in § 1291, but as a ‘practical construction’ of it.”

– A “Small Class Of Cases”

Nor should one assume the doctrine has broad application. The Supreme Court has observed that:

the collateral order doctrine accommodates a small class of rulings, not concluding the litigation, but conclusively resolving claims of right separable from, and collateral to, rights asserted in the action. The claims are too important to be denied review and too independent of the cause itself to require that appellate consideration be deferred until the whole case is adjudicated.

Will v. Hallock, 126 S.Ct. 952 (2006) (internal quotation marks and citations omitted)


– Stringent Conditions

The conditions for applying the doctrine are “stringent”, according to the Court, so as to protect the substantial finality interests § 1291 is meant to further:

judicial efficiency, for example, and the “sensible policy ‘of avoid[ing] the obstruction to just claims that would come from permitting the harassment and cost of a succession of separate appeals from the various rulings to which a litigation may give rise.’

Haddock, at 957 (citing Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368, 374, 101 S.Ct. 669, 66 L.Ed.2d 571 (1981)

In noting the doctrine’s scope, the Court describes the doctrine as a “narrow” exception to the general rule:

Accordingly, we have not mentioned applying the collateral order doctrine recently without emphasizing its modest scope. See, e.g., Digital Equipment, 511 U.S., at 868, 114 S.Ct. 1992 (“[T]he ‘narrow’ exception should stay that way and never be allowed to swallow the general rule that a party is entitled to a single appeal, to be deferred until final judgment has been entered …” (citation omitted)). And we have meant what we have said; although the Court has been asked many times to expand the “small class” of collaterally appealable orders, we have instead kept it narrow and selective in its membership.

  • The ‘Practical Finality” Rule

Described as a rule rather than a doctrine, this concept may be though of as supplying another exception to the final order requirement. Under this rule, “an order is final only if finality is necessary to ensure that the court of appeals is able to review an important legal question which the remand made effectively unreviewable.”

This exception is best understood as a part of the administrative agency analogy that federal courts often draw upon in determining the scope of review of benefit claim decisions by plan administrators. For example, the Tenth Circuit, where this rule holds sway, has commented as follows:

. . . consider a district court order remanding a claim to an administrative agency-perhaps the best analogue to an ERISA remand. In the administrative context, a remand order is “generally considered a nonfinal decision … not subject to immediate review in the court of appeals.” Baca-Prieto v. Guigni, 95 F.3d 1006, 1008 (10th Cir.1996). Employing a “practical finality” rule, we have nevertheless reviewed administrative remand orders where it was necessary “ ‘to ensure that the court of appeals was able to review an important legal question which the remand made effectively unreviewable.’ ” Id. at 1009 (quoting Travelstead v. Derwinski, 978 F.2d 1244, 1248 (Fed.Cir.1992)). This rule exists in the administrative agency context, if nowhere else, because agencies may be barred from seeking district court (and thus circuit court) review of their own administrative decisions. Consequently, if a district court remands an issue to an administrative agency and essentially instructs the agency to rule in favor of the plaintiff, the agency “ ‘may well be foreclosed from again appealing the district court’s determination at any later stage’ ” of the proceeding. Id. at 1008 (quoting Bender v. Clark, 744 F.2d 1424, 1428 (10th Cir.1984)).

Under this rule, the determination of whether the district court’s order is “final” has turned on the fact that the district court allowed for review of the plan administrator’s decision upon motion by either party:

Transporting the practical finality rule to the ERISA context, we still cannot say that the district court’s remand order was final. The remand to the plan administrator will not foreclose future appellate review of any important legal questions because, no matter the administrator’s ultimate decision, the district court has expressly stated that either party may obtain court review of the administrator’s determination simply by filing a motion. In that event, we then could review the final decision of the district court regarding the administrator’s determination along with any other issues that Defendants now ask us to address. If neither party seeks district court review of the plan administrator’s decision on remand, the district court may dismiss or otherwise conclude that aspect of the case and Plaintiff can then properly appeal the ADA claim.

:: Tenth Circuit Holds That Participant Cannot Appeal Order Remanding Case To Plan Administrator

We must first consider whether we have jurisdiction. Circuit courts generally have jurisdiction only over “final decisions of the district courts.” 28 U.S.C. § 1291; cf. id. § 1292 (describing circuit courts’ jurisdiction over interlocutory decisions). In Rekstad v. First Bank System, Inc., 238 F.3d 1259, 1263 (10th Cir.2001), we held that a district-court order remanding a case to an ERISA plan administrator for a determination of LTD benefits was not a final appealable decision over which we had jurisdiction. Accord Graham v. Hartford Life & Accident Ins. Co., Nos. 06-5054 & 06-5142, 2007 WL 2405264 (10th Cir. Aug. 24, 2007) (dismissing for lack of jurisdiction when the district court had concluded that substantial evidence did not support a denial of benefits and remanded the claim to the plan for redetermination). Garner v. US West Disability Plan, — F.3d —-, 2007 WL 2570221 (C.A.10 (Colo.)) (September 07, 2007)

In yet another decision on the scope of judicial review of district court orders remanding claims decisions back to plan administrators, the Tenth Circuit continues to thin the federal docket of such issues. Garner emphasizes that the Tenth Circuit views remand orders as essentially nonappealable except in narrow circumstances.

Continue reading

:: Returning The ERISA Case To The Plan Administrator: Administrative Agency Analogies (Part 1)

We note that although circuits vary on how they approach the issue of finality in cases involving ERISA remand orders, [ see Metzger v. UNUM Life Ins. Co. of America, 476 F.3d 1161 (C.A.10 (Kan.)) (Feb 21, 2007)] (describing the circuit split), Graham would fare no better under most of those approaches. The majority of circuits have relied on one of the analogues invoked in Rekstad or the collateral order doctrine in deciding whether a decision to remand a benefits decision to a plan administrator is final. . . . Accordingly, we dismiss this appeal for lack of jurisdiction under 28 U.S.C. § 1291. Graham v. Hartford Life And Accident Ins. Co. — F.3d —-, 2007 WL 2405264 (C.A.10 (Okla.)) (August 24, 2007)

One of the ironies of ERISA jurisprudence lies in the variety of judicial conclusions as to how claims must be advanced and evaluated under its purportedly “comprehensive and reticulated” scheme. Graham v. Hartford underscores this point in the Tenth Circuit’s review of the variety of channels open to parties after a determination on a claim for benefits by a plan administrator.

The Tenth Circuit has been at some pains of late in attempting to articulate a standard for deciding whether parties may appeal a determination by a district court “remanding” a claim for benefits to the plan administrator for further proceedings. Whether the Court succeeded in its goal or simply added additional layers of criteria to the analysis will be left to the reader.

In this Part 1, the Tenth Circuit view will be addressed – Part 2 will provide an overview by circuit courts of appeal.

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:: State Law Claims Against ERISA Fiduciary Escape ERISA Preemption

. . . Plaintiff alleges that the insurance investigators “attacked Mr. Barker’s credibility and suggested that he was lying about his illnesses” and asked “belittling questions” in an effort to “shame Mr. Barker into returning to work.”. . . Plaintiff alleges that Defendant directly harassed and shamed him about his disability in what Plaintiff describes as several humiliating phone calls. . . . To be sure, an insurer’s right to inquire about a customer’s entitlement to benefits does not extend to intentional and calculated humiliation and belittlement. See, Barker v. The Hartford Life and Acc. Ins. Co., Slip Copy, 2007 WL 2192298 (N.D.Tex.) (July 31, 2007)

With that prologue, the United States District Court in Barker v. The Hartford Life and Acc. Ins. Co. allowed a long term disability plan participant’s state law claims of intentional infliction of emotional distress to go forward against Hartford, the insurance carrier.

The case reveals a possible gap in ERISA preemption of state law claims which merits careful consideration by plan administrators and claimants alike. The case provides some useful authority on another important issue, that of when an ERISA claim accrues for purposes of the applicable statute of limitations. On this point, the court endorsed a recent Third Circuit view enforcing a conservative view on claims accrual.

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:: Review of Claim Denials (Unit 3): Limitation Of Argument To The Administrative Record

[P]laintiffs filed suit against the Plan on June 14, 2004 to recover benefits under § 502(a)(1)(B) of ERISA. See 29 U.S.C. § 1132(a)(1)(B). The district court certified the class on November 4, 2004, which was later enlarged to include four Spokane plaintiffs. The total amount of benefits sought by Plaintiffs is $6,701,626.32 . . . the Plan’s argument that the WFSP is not arranged by the Company for its employees generally is wholly unsupported and entirely inconsistent with its past practices. It would be unreasonable to deny benefits based on this ground. The Plan has articulated no other rationale for denying benefits, and we can conceive of none that is either apparent or meritorious. Thus, this is a case where a remand is unnecessary and we must award Plaintiffs the benefits to which they are clearly entitled. Flinders v. Workforce Stabilization Plan of Phillips Petroleum Co., — F.3d —-, 2007 WL 1894825 C.A.10 (Utah) (July 03, 2007)

This article follows two previous discussions on the theme of review of claim denials.

:: Review of Claim Denials (Unit 1): The Tenth Circuit Explains Its View On When “Remands” To Plan Administrators May Be Appealed

:: Review of Claim Denials (Unit 2): Disclosure Requirements On Administrative Appeal

As in the previous two units, a Tenth Circuit opinion provides the background for this article.

Continue reading

:: Review of Claim Denials (Unit 2): Disclosure Requirements On Administrative Appeal

Permitting a claimant to receive and rebut medical opinion reports generated in the course of an administrative appeal-even when those reports contain no new factual information and deny benefits on the same basis as the initial decision-would set up an unnecessary cycle of submission, review, re-submission, and re-review. This would undoubtedly prolong the appeal process, which, under the regulations, should normally be completed within 45 days. Metzger v. UNUM Life Ins. Co. of America, 476 F.3d 1161 (C.A.10 (Kan.)) (Feb 21, 2007)

In a previous article, the Metzger decision (“Metzger II”) provided a starting point for discussion of when “remands” by a district court to a plan administrator may be considered “final” for purposes of filing a judicial appeal. Readers of that article will recall that the issue arises in the context of federal court subject matter jurisdiction –

As a general rule, federal appellate courts have jurisdiction solely over appeals from “ final decisions of the district courts of the United States.” 28 U.S.C. § 1291. A final decision is one that “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631, 89 L.Ed. 911 (1945). The issue is one of appellate jurisdiction.

This article addresses another aspect of Metzger II, namely, the scope of the plan administrator’s disclosure obligations during an administrative appeal of a claim denial.

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:: Sixth Circuit Holds Cash Balance Plan Benefit Calculations Violate ERISA

To rule in favor of AK Steel on this ground would present future plaintiffs who would otherwise qualify for the futility exception to the exhaustion requirement with an untenable dilemma-having to concede their claim on the merits in order to survive a motion to dismiss for failure to exhaust administrative remedies. AK Steel, in our view, oversimplifies West’s argument in an attempt to strip him of any remedy for the alleged violation of ERISA. West v. AK Steel Corp., — F.3d —-, 2007 WL 1159951 (C.A.6 (Ohio)) (April 20, 2007)

This case involves an application of the futility doctrine that merits consideration as well as an analysis of ERISA § 502(a)(3) and ERISA § 502(a)(1)(B). As the subjects arise in the context of cash balance pension plans, however, some background may be helpful for context. In the final analysis, the case arguably broadens the reach of ERISA § 502(a)(1)(B).

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:: Review of Claim Denials (Unit 1): The Tenth Circuit Explains Its View On When “Remands” To Plan Administrators May Be Appealed

We analyze the finality of an ERISA remand order, such as the 2004 order, “on a case-by-case basis applying well-settled principles governing final decisions.” Rekstad v. First Bank System, Inc., 238 F.3d 1259, 1263 (10th Cir.2001) (quotation omitted). In Rekstad, we compared ERISA cases to the administrative law context, in which “a remand order is ‘generally considered a nonfinal decision … not subject to immediate review in the court of appeals.’ Metzger v. UNUM Life Ins. Co. of America, 476 F.3d 1161 (C.A.10 (Kan.)) (Feb 21, 2007)

A series of recent appellate decisions address the administrative appeals process in claim denials as well as when district court orders are final so that they may be appealed. This article is one of a multi-part series. See Review of Claim Denials (Unit 2): Disclosure Requirements On Administrative Appeal

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:: Claims Review Lapses Result In Reversal of Benefits Denial And Order To Pay Disability Benefits

This case reveals substantial confusion on the Plan’s part about the basic eligibility requirements for applying for benefits, the substantive standard for awarding benefits, and the procedures for taking an administrative appeal from the denial of benefits. We evaluate the Plan’s procedural missteps in light of ERISA’s requirement that plans provide clear notice to potential claimants of their substantive and procedural rights . . . We have invoked our equitable and common law powers to prevent a plan from taking actions, even in good faith, which have the effect of “sandbagging” claimants. See Glista, 378 F.3d at 131-32. Other courts have shared our concern. Bard v. Boston Shipping Ass’n, — F.3d —-, 2006 WL 3717376 C.A.1 (Mass.) (December 19, 2006)

Bard v. Boston Shipping Ass’n provides an example of how failure to follow the claims procedure regulations can lead to reversal of a benefits denial.

In Bard, “an unusually complex denial of benefits case”, the claimant was diagnosed with a variety of psychological disorders. He obtained social security disability benefits on the basis that he had been suffering from a “severe” disability since July 22, 2001- which was one day before Bard received a termination letter from his employer.

He then applied for disability benefits from BSA-ILA, a multi-employer employee benefits plan, governed by a Board of Trustees composed of 14 members. The complexity of the case derives in large part from “the troubled journey of that application”.

One of the key issues for the court was the failure of the plan to advise Bard of its position that he must be totally and permanently disabled before termination of employment, his submission of evidence that contradicted that requirement, and the prejudice to his claim that ensued.

The First Circuit ultimately held for the plaintiff and remanded with instructions to enter an order awarding Bard disability benefits. The criticism of the claims review process in the opinion outlines important points for consideration by plan administrators and claimants alike.

1. Plans must provide clear notice to potential claimants of their substantive and procedural rights.

a. Eligibility Requirements

The need for clear notice pervades the ERISA regulatory structure. For example, one of the key purposes of an SPD is to state in normal everyday language both what the eligibility requirements are, and what procedures the claimant must follow. See 29 U.S.C. § 1022(a).

b. Basis For Claim Denial

Similarly, when a plan denies benefits, it is required to provide a notification that sets forth “specific reasons for such a denial, written in a manner calculated to be understood by the participant.” Id. § 1133; see also 29 C.F.R. § 2560.503-1(g)(1) (requiring that the notification of a denial of benefits provide its explanation “in a manner calculated to be understood by the claimant”).

Under the Department of Labor’s regulations, a plan must provide “written or electronic notification of any adverse benefit determination.” 29 C.F.R. § 2560.503-1(g)(1). This notification must state “[t]he specific reason or reasons for the adverse determination,” id. § 2560.503-1(g)(1)(i); it must make reference “to the specific plan provisions on which the determination is based,” id. § 2560.503-1(g)(1)(ii); and it must include information about how the claimant can pursue further review and rectify the deficiencies in his application, see id. § 2560.503-1(g)(1)(iii), (iv).

2. Plans must assure objectivity of administrative review.

An appeal must be decided, without any deference to the prior determination, by an appropriate plan fiduciary “who is neither the individual who made the [initial] adverse benefit determination ··· nor the subordinate of such individual.” Id. § 2560.503-1(h)(3)(ii), (h)(4). This may require consultation from an appropriate medical expert. See id. § 2560.503-1(h)(3)(iii), (h)(4) (requiring an appellate body to consult an appropriate medical expert in reviewing a claim of this nature); id. § 2560.503-1(h)(3)(v), (h)(4) (requiring that the Board’s medical expert on review be an expert not consulted in the initial benefits determination). Continue reading

:: Fourth Circuit Joins Circuits Limiting Section 502(a)(3) Fiduciary Breach Claims

We join our sister circuits and hold that § 1132(a)(1)(B) affords the plaintiff adequate relief for her benefits claim, and a cause of action under § 1132(a)(3) is thus not appropriate. Plaintiff insists that § 1132(a)(1)(B) is inadequate because, “[u]nless MetLife is required to answer for its actions under [§ 1132(a)(3) ], its illegal practices will remain free from scrutiny.” But this is not the case. This court has held that review of a benefits determination under § 1132(a)(1)(B) should consider, among other factors, “whether the decisionmaking process was reasoned and principled,” “whether the decision was consistent with the procedural and substantive requirements of ERISA,” and “the fiduciary’s motives and any conflict of interest it may have.” Booth v. Wal-Mart Stores, Inc. Assocs. Health & Welfare Plan, 201 F.3d 335, 342-43 (4th Cir.2000). These factors address exactly the kinds of procedural deficiencies alleged by the plaintiff, in the context of review of actual benefits claims under § 1132(a)(1)(B). Korotynska v. Metropolitan Life Ins. Co.— F.3d —-, 2006 WL 3616275, C.A.4 (Md.) (December 13, 2006)

The recent case, Korotynska v. Metropolitan Life Ins. Co., highlights yet another split in the Circuits as to the proper interpretation of ERISA in the familiar battleground of ERISA Section 502(a)(3). Distilled to the core issue, the circuits disagree on whether Varity Corp. v. Howe, 516 U.S. 489, 514-15, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), allows simultaneous claims under section (a)(1)(b) and section (a)(3).

In Korotynska, the plaintiff brought an action “on behalf of herself and others similarly situated” against defendant Metropolitan Life Insurance Company (“MetLife”). Nonetheless, no class action had been certified, and Korotynska was at this stage of review the sole plaintiff.

Korotynska, through previous employment, was a participant in a disability plan for which MetLife acted as insurer and fiduciary. Her dispute with MetLife arose after it terminating disability benefits some two years after having initially approved benefits on the claim that Korotynska was no longer disabled.

Review of Benefits Denial Versus Claims Of Breach of Fiduciary Duty

Critical to the case was the plaintiff’s decision to pursue Section 502(a)(3) (29 U.S.C. § 1132(a)(3)) claims against MetLife – not claims for review of the benefits determination under 29 U.S.C. § 1132(a)(1)(B).

In this action, Korotynska maintains that she is not seeking individualized review of her adverse benefits determination under 29 U.S.C. § 1132(a)(1)(B). Instead, Korotynska seeks equitable relief under 29 U.S.C. § 1132(a)(3). Section 1132(a)(3) provides, “A civil action may be brought ··· by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.” 29 U.S.C. § 1132(a)(3).

The plaintiff’s goal in so doing was to obtain judicial review of MetLife’s claims review practices. Thus, under § 1132(a)(3), the plaintiff alleged “systemic improper and illegal claims handling practices” which it used “to deny her and other ERISA beneficiaries a full and fair review of their claims for disability benefits and a full and fair review of claims.” To support this claim, the plaintiff alleged several examples, including:

a. Targeting types of claims that have self-reported symptoms, lack of objective medical findings supporting the claims, or an undefined diagnosis, without due regard for the actual impact of the claimants’ conditions on their ability to work;

b. Targeting low-benefit claimants for denial and/or termination with the expectation that such claimants will not have the wherewithal or financial incentive to engage counsel to pursue their rights, or have the physical or emotional fortitude to fight over these benefits;

c. Employing claim practices that ignore treating physician opinions, ignore subjective complaints of pain, and/or ignore the effects of medications upon claimants’ abilities to work;

d. Failing to consider in its handling of these claims, pursuant to 29 C.F.R. § 2560.503-1(h)(2)(iv), all comments, documents, records and other information submitted by the claimant relating to the claim;

e. Requesting inappropriate, unnecessary and burdensome materials from claimants, all in furtherance of delaying claims determinations;

f. Designing a system in which claimants cannot receive a full and fair review of their claims, by virtue of its reliance upon Medical Examinations from Interested Physicians (called “Independent” Medical Examinations), Functional Capacity Evaluations (“FCE’s”) and/or peer reviews;

g. Utilizing the services of professional entities that perform medical and/or vocational reviews, including but not limited to National Medical Review, that are biased against claimants based upon financial incentives provided by Met Life;

h. Developing and utilizing claim management plans that are designed to terminate benefits not based upon the actual condition of claimants, but, rather, upon duration guidelines used to determine when to terminate claims;

i. Developing claim management plans to deny or terminate claims without due regard for the actual impact of the claimants’ conditions on their ability to work; and

j. By employing numerous other practices that pressure claims handling personnel into denying or terminating legitimate claims.

Application of Varity To Preclude Section 502(a)(3) Relief

The Fourth Circuit rejected the plaintiff’s contention that she could elect to make out a case for breach of fiduciary duty rather than state a claim for benefits. In the Fourth Circuit’s view, Section 502(a)(3) relief is limited under Varity to instances in which relief under other ERISA provisions is inadequate. The Court stated:

Assuming that Korotynska’s previous denial of benefits and alleged subjection to improper claims procedures qualify her to bring a claim under § 1132(a)(3), that statutory provision is only available for claims of breach of fiduciary duty in the circumstances outlined by the Supreme Court in Varity. See 516 U.S. at 507-15. In Varity, the Supreme Court held that § 1132(a)(3) authorizes some individualized claims for breach of fiduciary duty, but not where the plaintiff’s injury finds adequate relief in another part of ERISA’s statutory scheme. Id. at 512, 515.

In Varity, the plaintiffs’ employer consolidated unprofitable divisions into a new subsidiary and then persuaded employees to transfer their benefit plans to the new subsidiary through deceptive depictions of its financial outlook. The subsidiary subsequently failed and the employees lost their nonpension benefits. The issue was joined when the plaintiffs sued for reinstatement of the benefits they would have been owed under their previous plan.

The pertinent portion of Varity in the view of the Fourth Circuit appears in the following excerpt:

The plaintiffs in this case could not proceed under [§ 1132(a)(1) ] because they were no longer members of the [original] plan and, therefore, had no benefits due them under the terms of the plan. They could not proceed under [§ 1132(a)(2) ] because that provision, tied to [§ 1109], does not provide a remedy for individual beneficiaries. They must rely on [§ 1132(a)(3) ] or they have no remedy at all.

From this treatment of Section 502(a)(3), the Fourth Circuit concluded that claims under the provision must be limited to claims not “redressable elsewhere in ERISA’s scheme”. The analysis can be reduced to the following points:

1. As an initial matter, there is no question that what plaintiff is pressing is a claim for individual benefits.

2. The plaintiff’s injury is redressable elsewhere in ERISA’s scheme inasmuch as under § 1132(a)(1)(B), a plan participant may bring a civil action “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” 29 U.S.C. § 1132(a)(1)(B).

3. Therefore, “[t]he fact that the plaintiff has not brought an § 1132(a)(1)(B) claim does not change the fact that benefits are what she ultimately seeks, and that redress is available to her under § 1132(a)(1)(B).”

Contrary View of the Second Circuit

The Fourth Circuit noted that the Second Circuit had taken a different view of Varity in Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76, 89 (2d Cir.2001), cert. denied, 537 U.S. 1170, 123 S.Ct. 1015, 154 L.Ed.2d 911 (2003). The Court aligned itself, however, with “the great majority of circuit courts [that] have interpreted Varity to hold that a claimant whose injury creates a cause of action under § 1132(a)(1)(B) may not proceed with a claim under § 1132(a)(3)”, citing, Antolik v. Saks, Inc., 463 F.3d 796, 803 (8th Cir.2006); Ogden v. Blue Bell Creameries U.S.A., Inc., 348 F.3d 1284, 1287-88 (11th Cir.2003); Tolson v. Avondale Indus., Inc., 141 F.3d 604, 610-11 (5th Cir.1998); Wilkins v. Baptist Healthcare Sys., Inc., 150 F.3d 609, 615-16 (6th Cir.1998); Forsyth v. Humana, Inc., 114 F.3d 1467, 1474-75 (9th Cir.1997); Wald v. Sw. Bell Corp. Customcare Medical Plan, 83 F.3d 1002, 1006 (8th Cir.1996).

Note: This Fourth Circuit decision raises the bar even further for plaintiffs seeking remedies under Section 502(a)(3). None of the cases cited by the Fourth Circuit stated so clearly a distinction between challenging fiduciary duties of the plan administrator versus restating a claim for benefits in the guise of a fiduciary breach claim. In fact, the plaintiff in Korotynsky did not even allege a claim under 1132(a)(1)(B).

The stakes were significant in that the Fourth Circuit’s approach folds challenges to claims administration into simply a factor in evaluating the proper standard of review. This approach served the Court’s interests in limiting what it perceived as duplicative claims under two sections of ERISA. The Court stated:

Not only is relief available to the plaintiff under § 1132(a)(1)(B), but the equitable relief she seeks under § 1132(a)(3)-the revision of claims procedures-is pursued with the ultimate aim of securing the remedies afforded by § 1132(a)(1)(B). The plaintiff admits that she reserves her § 1132(a)(1)(B) claim so that she might bring it at a later date under reformed claims procedures achieved through the current litigation. It may be that plaintiff perceives in § 1132(a)(3) a clearer path to § 1132(a)(1)(B) relief while possibly circumventing § 1132(a)(1)(B)’s standard of review of abuse of discretion. But Varity allows equitable relief when the available remedy is inadequate, not when the legal framework for obtaining that remedy is, to the plaintiff’s mind, undesirable. “To permit the suit to proceed as a breach of fiduciary duty action would encourage parties to avoid the implications of section 502(a)(1)(B) by artful pleading.” Coyne & Delany Co. v. Blue Cross & Blue Shield of Va., Inc., 102 F.3d 712, 714 (4th Cir.1996).

Thus, the well-pleaded complaint rule has limited efficacy in the context of a Section 502(a)(3) claim in jurisdictions adhering to this view, and the relief granted the plaintiffs in Varity emerges as a further limitation on the reach of Section 502(a)(3) claims. Unless a claim cannot be redressed under any other provision of ERISA’s scheme, no claim will lie under Section 502(a)(3).

:: Sixth Circuit Applies Futility Exception To Enforce Consistency In Claims Review

Courts and applicants may fairly assume that a company will treat benefits claims consistently and coherently; they should not be required to insist on exhaustion on the assumption that the company may have a bad day. Otherwise, the futility exception would never apply-as the specter of a mistake or inconsistent application of the plan’s terms would always hold out the possibility of relief . . . Because it indeed would have been futile for Dozier to ask the insurance company to find that he could not perform “any occupation” for which he was qualified (the eligibility requirement for obtaining a waiver of life insurance premiums) after the company had already concluded that he could perform his “own occupation” (making him ineligible for long-term-disability benefits), we reverse. Dozier v. Sun Life Assur. Co. of Canada, 2006 WL 3040129 (C.A.6 (Ky.), (October 27, 2006)

In Dozier v. Sun Life Assur. Co. of Canada, the Sixth Circuit precluded a life and disability carrier from requiring exhaustion of administrative remedies when the grounds for one claim denial was substantially similar (and in fact, more stringent) than the claim for the second benefit.

The plaintiff, Dozier, participated in long-term disability and life insurance policies underwritten by Sun Life Assurance Company of Canada. To qualify for long-term-disability benefits the policy, an claimant had to be “unable to perform the Material and Substantial Duties of his Own Occupation.”

A similar condition applied in qualifying for a waiver of premium benefit under the life insurance policy. To qualify for the waiver of premium benefit the life insurance policy required that the employee be “unable to perform the material and substantial duties of any occupation for which he is or becomes reasonably qualified for by education, training or experience.”

After a back injury in 2001 and a subsequent diagnosis as being “permanently incapacitated”, Dozier applied for benefits under each policy through a single application form provided by Sun Life.

Sun Life denied Dozier’s claim for long-term-disability benefits on the grounds that his work was “sedentary” and Dozier was not precluded from performing sedentary work. One week later, Sun Life issued a letter denying Dozier’s claim for waiver-of-premium benefits, again based upon Sun Life’s findings that the plaintiff could perform sedentary work.

Denial of LTD and Waiver of Premium Benefits

In each denial letter Sun Life provided an explanation for the process for filing an appeal from the insurance company’s decision. Under the terms of the policy, Dozier had 180 days to decide whether to appeal either the long-term-disability or the waiver-of-premium decisions, and Sun Life had 90 days to issue a decision with respect to each potential appeal.

Administrative Review

Pursuant to the terms of the letter denying LTD benefits, Dozier sought administrative review of the adverse decision. In response, Sun Life notified Dozier that it would adhere to its initial decision in denying his long-term-disability claim and that “[a]ll administrative remedies ha[d] been exhausted and no additional information [would] be reviewed.” When Sun Life issued this letter, Dozier still had 32 days to seek administrative review of the denial of waiver of premium benefits.

Filing of State Court Action and Removal

Rather than seeking review of the waiver of benefits denial, Dozier filed a lawsuit in state court against Sun Life seeking long-term-disability and waiver-of-premium benefits. Sun Life removed the case to federal court on diversity grounds.

The district court ruled for Dozier on his claim for long term disability benefits. On the waiver-of-premium issue, however, the district court dismissed Dozier’s claims without prejudice for failure to exhaust administrative remedies. When Dozier asked Sun Life to review the decision to deny waiver of premium benefit, Sun Life refused on the ground that Dozier was outside the 180-day window for appealing the decision.

In a subsequent litigation over this issue, the district court sided with Sun Life and dismissed Dozier’s claim with prejudice for failure to exhaust his administrative remedies and because the time for seeking administrative review had expired.

The Sixth Circuit Holds That The Futility Doctrine Applies

On appeal, Dozier argued that any administrative appeal would have been futile since Sun Life had denied his long-term-disability appeal before the time for appealing the other claim had expired. The Sixth Circuit began its review by observing that when resort to the administrative review process would be an exercise in futility, the exhaustion of remedies doctrine does not apply. The Court stated:

Generally speaking, we have applied the administrative-futility doctrine in two scenarios: (1) when the “Plaintiffs’ suit [is] directed to the legality of [the plan], not to a mere interpretation of it,” Costantino v. TRW, Inc., 13 F.3d 969, 975 (6th Cir.1994) (emphases omitted); see also Fallick, 162 F.3d at 420, and (2) when the defendant “lacks the authority to institute the [decision] sought by Plaintiffs,” Hill v. Blue Cross & Blue Shield of Mich., 409 F.3d 710, 719 (6th Cir.2005). To meet the “quite restricted” standard for establishing administrative futility, we have required a litigant to “make a clear and positive indication” that further administrative review would have come to naught. Fallick, 162 F.3d at 419.

Turning to the facts of the case at bar, the Court concluded that Dozier had every reason to believe that administrative review of the waiver-of-premium claim would have been pointless. In the Court’s view, Dozier could fairly assume that the same company would apply these two tests consistently, meaning that the denial of the one claim would foreclose eligibility for relief on the other, stating:

Sun Life had made a final determination that Dozier was able to perform “the Material and Substantial Duties of his Own Occupation.” JA 145 (emphasis added). That determination necessarily precluded him from arguing with a straight face to the same insurance company that he was “unable to perform the material and substantial duties of any occupation,” JA 41 (emphasis added), the eligibility standard for obtaining the waiver-of-premium benefit. The denial of the easier-to-obtain claim precluded eligibility for the more-difficult-to-prove claim.

Further, the Court viewed Sun Life’s handling of the two claims as supporting the plaintiff’s position. Sun Life treated Dozier’s single application as an application for both benefits. Therefore, given the interconnectedness of the two applications and the policy’s requirement that appeals must be decided within 90 days, Dozier was fully entitled to seek review of the easier-to-obtain benefit and wait to decide whether to seek review of the harder-to-obtain benefit until after a response from the company. “[W]hen Sun Life denied the long-term-disability benefit, the eligibility criteria for the two benefits made the appeal of the waiver-of-premium decision look utterly pointless to anyone save a litigation-hungry employee.”

Note: The purpose of the futility doctrine is succinctly stated in the phrase: “The law does not require parties to engage in meaningless acts or to needlessly squander resources as a prerequisite to commencing litigation.” See, Fallick v. Nationwide Mut. Ins. Co., 162 F.3d 410 (6th Cir.1998).

The Court enumerated several factors behind the policy, citing Costantino v. TRW, Inc., 13 F.3d 969, 975 (6th Cir.1994):

  • To help reduce the number of frivolous law-suits under ERISA.
  • To promote the consistent treatment of claims for benefits.
  • To provide a nonadversarial method of claims settlement.
  • To minimize the costs of claims settlement for all concerned.
  • To enhance the ability of trustees of benefit plans to expertly and efficiently manage their funds by preventing premature judicial intervention in their decision-making processes.
  • To enhance the ability of trustees of benefit plans to correct their errors.
  • To enhance the ability of trustees of benefit plans to interpret plan provisions.
  • To help assemble a factual record which will assist a court in reviewing fiduciaries’actions.

To these, the Court added: cost savings for the company and applicant; elimination of frivolous claims; timeliness in bringing the dispute to a close; and, most importantly, “the consistent treatment of claims for benefits.”

For treatment in other circuits, see:

Paese v. Hartford Life & Accident Ins. Co., 449 F.3d 435, 449 (2d Cir.2006); (noting that “Hartford’s decision that Paese was not totally disabled from his ‘own occupation’ necessarily implies a decision that he was not totally disabled from ‘any occupation’ ”); and

Lindemann v. Mobil Oil Corp., 79 F.3d 647, 650 (7th Cir.1996) (holding exhaustion required despite futility argument because “[t]he two claims are not so identical that Mobil’s denial of the claim for separation benefits demonstrates with certainty that it would deny the ERISA claim as well”).

:: Fourth Circuit Interprets Ambiguous Policy Language Against Insurer

[T]he fact is, when an entity both administers and insures a plan, its profits (or losses) depend in part on how the actual cost of providing coverage diverges from the projections on which it based premiums. Over time, a predilection to deny coverage pays well, even for inexpensive and infrequent treatments. Of course, in a chalkboard-perfect market, consumers might punish a particularly biased insurer; but in reality, health insurance companies benefit financially when they deny claims. This conflict demands diminished deference to the administrator’s decisions, whatever the amount at issue. Carolina Care Plan Inc. v. McKenzie, 2006 WL 3000432 C.A.4 (S.C.) (October 23, 2006)

In Carolina Care Plan Inc. v. McKenzie, 2006 WL 3000432 C.A.4 (S.C.) (October 23, 2006), the defendant, Carolina Care Plan, Inc. (CCP), argued that, though it acted as administrator and insurer, its decision should receive substantial deference because the financial impact of the plaintiff’s claim was minimal.

The Basis For CCP’s Denial

CCP had steadfastly denied the plaintiff’s claim for cochlear implants. These devices operate to “replace the function of a permanently inoperative [cochlea]” and, in the plaintiff’s case, restore a profound hearing loss. CCP originally relied upon (1) an exclusion under the “Comfort and Convenience” section of its policy which excluded “[d]evices and computers to assist in communication and speech” and (2) an exclusion for “hearing aids” under the Vision and Hearing section of its policy. Apparently based upon further technical information from the plaintiff’s expert as to the operation of the implants, CCP dropped the “hearing aid” defense.

The plaintiff sued in state court and CCP removed the case to federal court. Finding that CCP abused its discretion in refusing to authorize the cochlear implant, the district court ordered CCP to provide coverage and awarded the plaintiff attorneys’ fees.

Application of The Abuse of Discretion Standard

Based upon language in the policy, the district court applied an abuse of discretion standard of review without objection from the plaintiff. Nonetheless, on appeal, CCP found fault with the district court’s decision, arguing that the district court “did not sufficiently defer to CCP as an ERISA plan administrator with discretion to interpret the plan.”

CCP did not contest the finding that it operated under a conflict of interest, as both administrator and insurer, but argued for application of a financial impact analysis. On this view, “the mere fact that a defendant is acting as administrator and insurer should not, without more, have a significant impact on the deference granted to its decision” when the claim had minimal financial impact on the insurer.

Under the Fourth Circuit’s “sliding scale” approach, when a decision to award or deny benefits impacts the administrator’s own financial interests, the Court reduces the deference accorded to the ERISA administrator “to the degree necessary to neutralize any untoward influence resulting from the conflict.”

Assessment of the “Financial Impact” Factor

Observing that “precedent offered little support for CCP’s position, the Court stated:

We have consistently reduced the deference afforded to administrators based on the “mere” fact that they also insure the plan and thus profit by denying claims. See, e.g., Stup v. Unum Life Ins. Co., 390 F .3d 301, 307 (4th Cir.2004); Evans v. Metro. Life Ins. Co., 358 F .3d 307, 311 (4th Cir.2004) . . In so holding, we have recognized that the Supreme Court has directed that “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, 489 U.S. at 115 (internal quotation marks omitted) (emphasis added). Moreover, recently the Court has questioned “the degree to which a plan provision for unfettered discretion in benefit determinations guarantees truly deferential review ··· when the judicial eye is peeled for conflict of interest.” Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 384 n. 15 (2002).”

The Court did not view evidence of cost as irrelevant, noting that “a frequent and expensive claim might well demand comparatively more scrutiny on the ‘sliding scale’ than an inexpensive and infrequent claim.” On the other hand, the Court took a practical view that, over time, “when an entity both administers and insures a plan, its profits (or losses) depend in part on how the actual cost of providing coverage diverges from the projections on which it based premiums.”

Evaluation of Reasonableness of CCP’s Decision

The Court therefore applied a modified abuse of discretion standard whereby an administrator’s decision will be upheld if it is reasonable, noting the following non-exclusive factors in assessing reasonableness:

(1) the language of the plan; (2) the purposes and goals of the plan; (3) the adequacy of the materials considered to make the decision and the degree to which they support it; (4) whether the fiduciary’s interpretation was consistent with other provisions in the plan and with earlier interpretations of the plan; (5) whether the decision making process was reasoned and principled; (6) whether the decision was consistent with the procedural and substantive requirements of ERISA; (7) any external standard relevant to the exercise of discretion; and (8) the fiduciary’s motives and any conflict of interest it may have. Booth v. Wal-Mart Stores, Inc. Assocs. Health and Welfare Plan, 201 F.3d 335, 342-43 (4th Cir.2000).

None of the foregoing factors weighed in CCP’s favor in the Court’s view, and several interesting observations emerged from the analysis. The most significant of these was the Court’s affirmation of its precedent in applying the doctrine of contra proferentem.

Application of the Doctrine of Contra Proferentem

Since CCP prepared the policy and supplied its language, the Court applied the common law contractual doctrine requiring that any ambiguities be construed against it. The Court justified this approach as follows:

When an ERISA plan vests discretion in an administrator who also insures the plan, reasonable exercise of that discretion requires that the administrator construe plan ambiguities against the party who drafted the plan. We note that applying this principle does not deprive an administrator-insurer of its discretion under an ERISA plan. When an administrator applies unambiguous plan terms to the facts of a particular claim, courts will defer to every judgment the administrator makes that is supported by substantial evidence and a reasoned decisionmaking process. But when plan language is ambiguous, this well-established doctrine of contra proferentem does apply, and for good reason. Ambiguity imposes costs on the parties to a contract: one party may rely on an errant interpretation, or find its original intent flouted if a dispute arises. Contra proferentem shifts the cost of ambiguity to the party best positioned to avoid and bear it-the administrator-insurer who drafts the plan and who can spread the costs of ambiguity across all policy-holders . . . Construing ambiguity against the drafter encourages administrator-insurers to write clear plans that can be predictably applied to individual claims, countering the temptation to boost profits by drafting ambiguous policies and construing them against claimants.

Applying these principles, the Court held that the ambiguity of the exclusion language, the inconsistency between CCP’s interpretation and several other provisions in the ERISA plan, and CCP’s failure to construe the ambiguous language against the drafting party, all supported a finding of abuse of discretion.

Observing that ERISA establishes no presumption for the award of fees to a “prevailing insured or beneficiary”, however, the Court reversed the award of attorney’s fees to the plaintiff on the view that CCP did not act in bad faith or in a culpable manner.

Note: The opinion in McKenzie will require a careful review of plan provisions in view of its parsing analysis of section headings and category exclusions. For example, the Court gave short shrift to the standard provision purporting to limit the legal significance of section headings:

When a contract groups clauses under a common heading, like the exclusions listed under “Comfort or Convenience,” interpretation of one provision is informed by the company it keeps. See, e.g., Md. Cas. Co. v. City of S. Norfolk, 54 F.2d 1032, 1037 (4th Cir.1932). Indeed, the policy itself notes that, although its headings do not define an exclusion, they group items that fall into a similar category.

This searching analysis, combined with application of the contra proferentem principle, requires a thoroughgoing and consistent approach to drafting of plan coverage and exclusions.

:: Ninth Circuit Sets New Criteria For Standard of Review

In Abatie v. Alta Health & Life Ins. Co., — F.3d —-, 2006 WL 2347660 (9th Cir. 2006) (August 15, 2006), the Ninth Circuit held that its earlier opinion Atwood v. Newmont Gold Co., 45 F.3d 1317 (9th Cir.1995) “misinterpreted” the Supreme Court’s opinion in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). The Court set forth in Abatie “a more comprehensive approach to ERISA cases in which a conflict of interest exists.”

Having found the necessary grant of discretion in the plan language for implementing an “abuse of discretion” standard of review, and then turned to analysis of the proper standard
of review. The analysis found the Atwood precedent inadquate in several ways, including (1) failing to adhere to the Firestone dichotomy of de novo or abuse of discretion review, (2) “skipping the careful review that trust law demands of actions taken by obviously conflicted parties” and (3) imposing improper burdens on plan participants in proving motives.

The Court went to great pains to avoid adopting a “sliding scale” approach, stating:

“[o]ur approach is substantially similar to that adopted by several other circuits, but with aconscious rejection of their “sliding scale” metaphor. See Stup v. Unum Life Ins. Co. of Am., 390 F.3d 301, 307 (4th Cir.2004) (applying a sliding scale abuse of discretion review in conflict of interest cases; a court must apply less deference “ ‘to the degree necessary to neutralize any untoward influence resulting from the conflict” . . Insofar as those cases recognize that weighing a conflict of interest as a factor in abuse of discretion review requires a case-by-case balance, we agree. A district court, when faced with all the facts and circumstances, must decide in each case how much or how little to credit the plan administrator’s reason for denying insurance coverage. An egregious conflict may weigh more heavily (that is, may cause the court to find an abuse of discretion more readily) than a minor, technical conflict might. But in any given case, all the facts and circumstances must be considered and nothing “slides,” so we find the metaphor unnecessary and potentially confusing.

On the contrary, the Ninth Circuit opted for what it described as “[a] straightforward abuse of discretion analysis” under which the reviewing court tailor[s] its review to all the circumstances before it. The Court then gave some examples of the level of skepticism proper to various circumstances:

The level of skepticism with which a court views a conflicted administrator’s decision may be low if a structural conflict of interest is unaccompanied, for example, by any evidence of malice, of self-dealing, or of a parsimonious claims-granting history. A court may weigh a conflict more heavily if, for example, the administrator provides inconsistent reasons for denial . . . ; fails adequately to investigate a claim or ask the plaintiff for necessary evidence . . . ; fails to credit a claimant’s reliable evidence . . . ; or has repeatedly denied benefits to deserving participants by interpreting plan terms incorrectly or by making decisions against the weight of evidence in the record.

After restating the applicable standard of review, the opinion took a more practical turn and addressed the evidence that may be considered when the plan administrator strays from the procedural requirements of the plan. Finding the case before it one in which the plan administrator failed to follow procedural requirements, the Court observed:

When the plan fails to follow a procedural requirement of ERISA, the court may have to consider evidence outside the administrative record. For example, if the administrator did not provide a full and fair hearing, as required by ERISA, 29 U.S.C. § 1133(2), the court must be in a position to assess the effect of that failure and, before it can do so, must permit the participant to present additional evidence. As we noted earlier, if the plan administrator’s procedural defalcations are flagrant, de novo review applies. And as we also noted, when de novo review applies, the court is not limited to the administrative record and may take additional evidence. Even when procedural irregularities are smaller, though, and abuse of discretion review applies, the court may take additional evidence when the irregularities have prevented full development of the administrative record. In that way the court may, in essence, recreate what the administrative record would have been had the procedure been correct.

In short, the Ninth Circuit’s opinion adopts criteria very similar to the factors employed under the “sliding scale” approach, despite its disavowal of that analysis. The opinion provides a useful survey of the standards of review applied in the various circuits and some helpful instruction in development of the administrative record. In the final analysis, however, it appears the net effect of the opinion is a conformity of the Ninth Circuit in rough measure to opinions such as Stup v. Unum Life Ins. Co. of Am.

For more discussion of this topic with additional citations, see the Tutorial.