Employee Benefit Plan Review – From the Courts

March 4, 2019 | Ian S. Linker | Insurance Coverage

Court Denies Motion to Dismiss on Failure to Exhaust Grounds When Plan Documents Were Apparently Silent with Respect to Exhaustion

The U.S. district court in Connecticut recently denied a claim administrator’s motion to dismiss a Complaint seeking short-term disability benefits under an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) for failing to exhaust administrative remedies, a fundamental principle of ERISA.

The Case

An employee of Joker’s Wild Entertainment, LLC, sought short-term disability benefits under the company’s ERISA-governed employee welfare benefit plan.

The claim administrator denied the employee’s claim and stated in its denial letter that the employee could request a review of the adverse determination by submitting a request in writing. In the denial letter, the claim administrator added that the review request had to be “submitted within 180 days of your receipt of this letter” and had to state the reasons for seeking review. The claim administrator advised the employee that “[y]our failure to request a review within 180 days of your receipt of this letter may constitute a failure to exhaust the administrative remedies available under [ERISA], and effect [sic] you [sic] ability to bring civil [sic] action under the Act.”

The employee sued and the claim administrator moved to dismiss, arguing among other things that the employee had not exhausted administrative remedies.

The plaintiff argued that the plan’s exhaustion language was ambiguous and, therefore, that the lawsuit should not be dismissed. In particular, the plaintiff argued that the plan did not state that a claimant must appeal a denial of benefits before challenging the denial in court. The plaintiff also argued that the claim administrator stated in the denial letter that failure to request review of a denial “may” constitute a failure to exhaust and that this provision should be held to be permissive, rather than mandatory.

For its part, the claim administrator contended that there was no requirement that plan documents notify claimants of the plan’s appeal procedures, but nevertheless, the claim administrator provided the appeal procedure in the denial letter.

The Court’s Decision          

In its decision denying the claim administrator’s motion to dismiss, the court stated that the plan itself “lacks clear procedures for a denial of benefits.” The court noted that the plan stated that claimants could file legal actions if they did so within 60 days after written proof of loss was required, suggesting the plan contained no exhaustion requirement.

Indeed, the court stated a plaintiff might “reasonably interpret[] the plan terms not to require exhaustion” and, therefore, think that he or she “may proceed in federal court.”

The court was not persuaded that the denial letter should govern, observing that the claim administrator did not provide “any authority” justifying why a denial letter – and the exhaustion provisions included in the letter – could override plan language. The court also stated that the ERISA regulations stipulate what “notice of appeal rights” must be included in a denial letter, but imply that the plan documents provided appeal procedures.

The court concluded that the “ambiguity” in the plan documents compelled it to deny the claim administrator’s motion to dismiss. [Germana v. Reliance Standard Life Ins. Co., No. 3:16-cv-01611 (VAB) (D. Conn. Aug. 28, 2018).]

11th Circuit Upholds ERISA Plan Administrator’s Adverse Benefit Determination of Long-Term Disability Claim Based on Video Surveillance 

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed a district court decision upholding a claim administrator’s determination that the plaintiff employee was no longer eligible for long-term disability benefits based in part on surveillance video of the plaintiff.

The Case

After the plaintiff, an employee of the New England Regional Council of Carpenters, was injured in a motorcycle accident, he filed a claim for long-term disability benefits under a plan in which he participated that was governed by the Employee Retirement Income Security Act of 1974 (ERISA). Under the terms of the plan, a claimant was entitled to benefits up to 24 months if the claimant was incapable of performing the material duties of his or her occupation due to disease or injury. A claimant was entitled to benefits beyond the initial 24-month period if the claimant was incapable of working “any reasonable occupation” due to disease or injury.

The claim administrator initially approved the claim, finding that the plaintiff was disabled because he was unable to perform the material duties of his occupation due to injury or illness. After the plaintiff received 24 months of benefits, the claim administrator determined that he was incapable of working any reasonable occupation and it continued to pay him long-term disability benefits.

About nine years after the motorcycle accident, the claim administrator determined that the plaintiff was no longer eligible for benefits. The claim administrator notified the plaintiff of its determination and advised him that the evidence in the administrative claim file no longer supported the conclusion that he was eligible for benefits under the plan. The claim administrator explained that it had conducted surveillance on the plaintiff and it showed that he was able to drive, carry a garbage can to his garage, and dance at a nightclub.

The claim administrator also indicated that its determination was based on the opinion of an independent physician who had reviewed the plaintiff’s medical records and had spoken with the plaintiff’s treating physician. The claim administrator acknowledged that the Social Security Administration had determined that the plaintiff was disabled, but explained that its decision was based on new information that had been unavailable to the Social Security Administration when it awarded the plaintiff benefits years before.

The plaintiff appealed, but the claim administrator upheld its determination to discontinue benefits. It explained that after performing a “comprehensive review of all records in [the plaintiff’s] claim file,” it found that there was a lack of evidence establishing his inability to perform the duties of any reasonable occupation. It said that the evidence it considered included the surveillance footage as well as peer review reports from the physicians who had reviewed the medical records.

The plaintiff sued. The U.S. District Court for the Northern District of Florida granted the claim administrator’s motion for summary judgment on the grounds that the benefit determination was “reasonable and not arbitrary and capricious.”

The plaintiff appealed to the Eleventh Circuit.

The Eleventh Circuit’s Decision

In its decision affirming the district court, the court explained that although ERISA does not provide a standard for courts reviewing the benefits determinations of plan administrators, it had established the following six-step framework, applied exclusively by the Eleventh Circuit, for reviewing a plan administrator’s decision:

  1. Apply the de novo standard to determine whether the claim administrator’s benefit determination is “wrong” (i.e., the court disagrees with the administrator’s determination); if it is not, then end the inquiry and affirm the determination.
  2. If the court decides the administrator’s determination is “de novo wrong,” then the court decides whether the plan granted the administrator discretion to make benefit determinations; if not, end the judicial inquiry and reverse the determination.
  3. If the administrator’s determination is “de novo wrong” and the plan granted the administrator discretion to make benefit determinations, then decide whether “reasonable” grounds supported the administrator’s determination, i.e., the court will review the benefit determination under the deferential “arbitrary and capricious” standard.
  4. If no reasonable grounds exist, then end the inquiry and reverse the administrator’s determination; if reasonable grounds exist, then determine whether the administrator operated under a conflict of interest.
  5. If there is no conflict, then end the inquiry and affirm the benefit determination.
  6. If there is a conflict, the conflict should merely be a factor for the court to consider when determining whether the administrator’s determination was arbitrary and capricious.

The court then applied the framework to review the claim administrator’s determination that the plaintiff was no longer eligible for long-term disability benefits.

For purposes of applying its six-step framework, the court assumed that the decision to terminate benefits was de novo wrong and skipped the first step.

The court then found that the plan granted the claim administrator discretion to make benefit determinations.

For step three, the court concluded that reasonable grounds supported the claim administrator’s determination that the plaintiff was no longer eligible for long-term disability benefits. Although the court recognized that there was “some evidence” in the administrative record – including the plaintiff’s self-reported symptoms and opinions from some medical providers – that supported a conclusion that the plaintiff remained disabled and thus, eligible for  benefits, other evidence in the record – including the surveillance footage and the opinions of the peer-review physicians who reviewed the plaintiff’s medical records – supported the conclusion that the plaintiff’s functioning was no longer impaired. The court then held that because the claim administrator “was entitled to rely on the surveillance evidence and the assessments of [the plaintiff’s] capabilities by independent physicians who reviewed [the plaintiff’s] medical files, its decision was not arbitrary and capricious.”

The court rejected the plaintiff’s argument that the claim administrator’s benefit determination was unreasonable because it was inconsistent with or failed to consider the  Social Security Administration’s and the Massachusetts Medicaid administrator’s findings that the plaintiff was disabled and eligible for government benefits, declaring that those decisions were “not considered dispositive on the issue of whether a claimant satisfies the requirement for disability under an ERISA-covered plan.”

The court also addressed the plaintiff’s argument that the claim administrator failed to consider Massachusetts Medicaid’s findings. Because the claim administrator advised the plaintiff that it had considered “every piece of evidence” in the administrative claim file, including Medicaid, the court rejected the plaintiff’s argument. Further, the substance of the claim administrator’s benefit determination clearly showed the administrator considered and addressed the underlying medical evidence that Massachusetts Medicaid relied upon in making its determination. As such, the court rejected the plaintiff’s argument.

For step four, the court concluded that the claim administrator operated under a conflict of interest, because it both made benefit eligibility determinations and paid benefits out of its own funds.

Finally, the court considered the claim administrator’s conflict of interest in deciding whether the benefit determination was arbitrary and capricious. The court added that even when there was a conflict of interest, “courts still owe deference to the plan administrator’s discretionary decision-making as a whole.” The court then held that, even considering the claim administrator’s conflict as a factor, the benefit determination was not unreasonable or arbitrary and capricious given the surveillance video and the peer-review physicians’ assessments. [O’Leary v. Aetna Life Ins. Co., No. 17-15162 (11th Cir. Oct. 1, 2018).] 

Court Strikes Exhibit from Complaint Because Plaintiff Had Not Provided It to ERISA Plan Administrator During Administrative Process 

A federal district court in Missouri recently granted a defendant’s motion to strike a physician’s letter attached as an exhibit to the plaintiff’s complaint against the defendant claim administrator of an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) because the letter was not part of the administrative record.

The Case

In her complaint, the plaintiff alleged that the claim administrator improperly determined that she was ineligible for long-term disability benefits under the plan, because the pre-existing condition exclusion applied.

The plaintiff attached as Exhibit A to her complaint a letter in which a doctor concluded that the plaintiff’s pain “was not a preexisting condition.” The plaintiff stated that she tried to provide the letter to the claim administrator before she filed her lawsuit, but after the administrator made its determination on plaintiff’s appeal, to show that her condition was not pre-existing, but that the claim administrator “rejected the additional medical evidence and stated that the administrative record and administrative appeal” had become final months earlier.

The claim administrator moved to strike Exhibit A, arguing that it was not part of the administrative record and, therefore, could not and should not be considered by the court in deciding the plaintiff’s claim under 29 U.S.C. § 1132(a)(1)(B).

The plaintiff contended that the court should consider Exhibit A because it “clarifie[d]” the administrative record. She suggested that the need for clarification demonstrated “good cause” for why the court could consider Exhibit A, notwithstanding the general rule that a court’s review of ERISA benefits cases is limited to the administrative record.

The Court’s Decision

In its decision granting the motion to strike, the court explained that judicial review of an administrator’s decision typically was limited to the administrative record “created during the administrative process.”

According to the court, the plaintiff’s “matter-of-fact conclusions” that she had “met her burden of good cause” were insufficient to bypass the general rule otherwise excluding evidence outside the administrative record.

The court pointed out that nothing had barred the plaintiff from offering Exhibit A to the administrator during her administrative appeal and that if the court allowed her late submission under the guise of clarification, then the exception would ultimately swallow the rule.

Accordingly, the court granted the claim administrator’s motion to strike. [Waite v. Sun Life Assurance Co. of Canada, No. 1:18-cv-00208-SNLJ (E.D. Mo. Oct. 24, 2018).]

Fifth Circuit Affirms Decision Upholding Determination Granting Life Insurance Benefits to Named Beneficiary Rather Than Decedent’s Spouse

The U.S. Court of Appeals for the Fifth Circuit recently affirmed a district court’s decision upholding the determination of a claim administrator of a welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) denying a husband’s claim for life insurance benefits following the death of his spouse, the plan participant.

THE CASE

In April 2008, the decedent, who worked as a flight attendant for Southwest Airlines, enrolled in an ERISA-governed life insurance benefit plan sponsored by her employer. At that time, she designated via paper form her great-nephew as the primary beneficiary.

The decedent married the plaintiff in 2011. When she died three years later, she had $431,000 in life insurance coverage under the plan. The plaintiff believed that the decedent had designated him as the beneficiary of her life insurance benefits after they had married. Thus, the plaintiff notified the claim administrator of the death and submitted a claim for the plan benefits.

The claim administrator had no record of the decedent ever designating the plaintiff as the beneficiary. Accordingly, the claim administrator determined that the plaintiff was not the beneficiary of the plan benefits and paid the proceeds to the designated beneficiary, the decedent’s great-nephew.

After the plaintiff exhausted the plan’s administrative remedies, he sued the claim administrator under ERISA.

The U.S. District Court for the Northern District of Texas granted summary judgment in favor of the claim administrator and the plaintiff appealed to the Fifth Circuit.

THE FIFTH CIRCUIT’S DECISION

The Fifth Circuit affirmed the district court decision.  The court reviewed the claim administrator’s determination for an abuse of discretion, because the plan granted discretion to the claim administrator to interpret the plan’s terms.

When the claim administrator took over administration in 2013, it distributed a summary plan description (SPD), expressly incorporated into the plan. According to the SPD:

Beneficiary Designation: Life Insurance Beneficiary Designation must be completed through the MetLife web site at www.metlife.com/mybenefits. Effective June 15, 2013, paper life insurance designation forms will not be accepted by the Health & Wellness Team except for Committed Partner designations as described immediately below.

The plan provided the following default rule for when the plan had no beneficiary designation on file:

BENEFICIARIES: When You Enroll in the Life and AD&D Insurance Program, You must name a beneficiary who will receive Your benefit if You die. . . . If You do not name a beneficiary for the . . . Program or if no beneficiary survives You, then the Insurance Carrier will pay in order to (i) Your surviving Spouse . . ., (ii) Your surviving children in equal amounts, (iii) Your surviving parents in equal amounts, (iv) Your surviving brothers or sisters in equal amounts, or, finally, (v) Your estate.

The court held that these provisions were unambiguous and so it would not construe them in the plaintiff’s favor.  The June 2013 cut off was forward looking.  The 2008 beneficiary designation was already on file with the plan in 2013, because it had been accepted in 2008. Thus, it remained in effect, even after the SPD’s 2013 paper designation cut off.

Therefore, the claim administrator correctly honored the 2008 designation, even though the decedent plan participant had submitted it on paper. Accordingly, the plan’s default rule providing for benefits payable to a surviving spouse in the absence of a designated beneficiary was inapplicable.

The court was unpersuaded by the plaintiff’s argument that because the claim administrator never notified plan participants that their prior beneficiary designations remained valid, the decedent assumed the opposite and chose not to designate the plaintiff because the participant believed the benefits would default to her spouse. The court stated that “nothing in the summary plan description” suggested that prior paper designations “vanished into thin air.” The claim administrator’s failure to warn against an inference that was nowhere contemplated in the SPD could not create an ambiguity where none existed.

The court also rejected the plaintiff’s contention that the decedent’s 2008 designation did not apply to the plan after the claim administrator took over in 2013. Among other things, the court said, benefit plans often change administrators, while remaining the same plan, and the plaintiff’s approach would require each participant to renew his or her elections every time a new administrator took over.

The court concluded that the claim administrator’s interpretation of the plan was not only a “fair reading” of the plan, but also the only permissible one. [Crawford v. Metropolitan Life Ins. Co., No. 17-11058 (5th Cir. Nov. 28, 2018).]

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