Every Summary Plan Description has to include one, a claims procedure that set forth the requirements for processing benefit claims and appeals.
The underlying ERISA statute was written in a paternalistic manner with explicit provisions intended to offer protection to “the interests of participants in employee benefit plans and their beneficiaries…by providing for appropriate remedies, sanctions, and ready access to the Federal courts.”
The Litigation Reality
However, despite ERISA’s lofty goals, the last 40-plus years of litigation have shown just the opposite as the courts have strongly favored employee benefit plan administrators and their insurers in disputes over entitlement to benefits claimed. Here’s our ways how that happened.
First, the courts have systematically stripped ERISA benefits claimants of rights they would otherwise retain in ordinary civil litigation such as the right to a trial by jury and the right to conduct depositions and to utilize other typical pre-trial investigative procedures.
Second, the courts have also barred claimants from collecting damages – both compensatory and punitive – regardless of the consequences of the benefit denial and irrespective of culpability.
Third, time limitations within which to bring suit are often shortened from what would ordinarily be the case if state statutes of limitations applied. And without any regulatory oversight, plans have been drafted to limit benefits and expand the circumstances under which benefit eligibility is curtailed or which would allow recoupment of benefits previously paid.
The fourth and final factor has been the one most damaging to benefit claimants: the inclusion of terms that trigger a standard of court review that almost always leads to a judicial outcome that upholds the denial of benefits.
The Firestone Supreme Court Decision and Judicial Review
In 1989, the Supreme Court decided Firestone Tire & Rubber Co. v. Bruch. Ostensibly a ruling in favor of benefit plan participants, Firestone was actually a huge victory for plan administrators and insurers that provide benefits such as health, life and disability insurance.
The Supreme Court held that a standard of judicial review that would afford no deference to either party in a dispute over entitlement to benefits was the norm and would be the default method of reviewing benefit claims.
However, the Court granted benefit plans carte blanche to incorporate plan terms that would reserve “discretion” to decide claims or even to interpret plan terms in a self-serving manner.
The consequence of the inclusion of such provisions in an employee plan means that a court hearing a benefit dispute case must defer to the benefit determination and uphold it, even if the decision was erroneous, so long as it was reasonable.
That standard of judicial review, known as the “arbitrary and capricious” or “abuse of discretion” standard has governed most litigation of employee benefit disputes until recently.
The change that has occurred has to do with insured plans. While the ERISA law normally trumps or preempts the application of state law to a dispute over benefits, a significant exception is that laws regulating insurance are saved from preemption.
In 2004, the National Association of Insurance Commissioners decided that consumers needed added protection against arbitrary claim denials and issued a model law that prohibited the inclusion of discretion-granting clauses in insurance policies, including policies that were subject to ERISA.
Since then, approximately half the states have issued statutes, regulations, or rulings that have incorporated some form of the model law. Recently, the Illinois Insurance Regulation prohibiting discretionary clauses adopted in 2005 was upheld following a court challenge.
The Fontaine Case as a Victory for Claimants
In Fontaine v. Metropolitan Life Insurance Company, a case brought by our firm, the U.S. Court of Appeals for the Seventh Federal Circuit rejected several arguments raised by MetLife, including an assertion that if the discretionary language is incorporated in a plan document other than an insurance policy or certificate, it would not be subject to the regulation.
The court cited a prior Supreme Court ruling that found such efforts to evade state insurance laws were ineffective so long as the plan was insured. Fontaine will undoubtedly even the playing field in future employee benefits litigation by removing the thumb on the scale in favor of plan administrators that a discretionary clause permits.
But not completely. The Fontaine ruling is applicable only to insured plans; and self-funded benefit plans and most retirement plans are exempt from that ruling.
About the Author
Mark D. DeBofsky is an attorney and the Principal of DeBofsky & Associates, P.C. His firm represents individuals in Chicago and nationwide in claims and litigation involving disability benefits, life and health insurance, pension or retirement, and long-term care insurance. Many of his cases have resulted in precedent setting decisions issued by the United States Court of Appeals for the Third, Seventh, Eighth, and Ninth Circuits. He is also an adjunct professor of law at John Marshall Law School, and a prolific author and speaker.
Disclaimer: The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this article may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.
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