TRIAL

Your client may have no choice but to bring suit under this statute, but that doesn't mean the claim is doomed to fail.

You've determined that your client can file suit only under the Employee Retirement Income Security Act (ERISA).1 How do you maximize your advantage? What steps are crucial to success in court? Understanding the specifics of the statute and the relevant case law can set you on the right path.

Lay the groundwork for success

Nothing you will do in litigating an ERISA case will be more important than the actions you take before filing suit. If your client's claim is denied, don't immediately resort to litigation; ERISA affords claimants the right to a "full and fair review."2 That provision has been held to virtually mandate administrative exhaustion, which bars litigation of claims before administrative appeals are complete. Exhaustion of remedies may be excused, however, if there is a lack of meaningful access to the review procedures or if exhaustion would be futile.3

The first exception applies where the "claimant attempts to initiate higher levels of review procedure, but a party has denied [the] claimant access to higher levels of review." The second exception occurs where the administrator of the benefit plan has allowed an appeal but informs the claimant that the decision will not be changed—that is, that the appeal is "doomed to fail."4

A third exception, although rarely used, is a danger of irreparable harm, which usually arises in medical claims where denial of urgent medical care could have immediate life-or-death consequences. In Henderson v. Bodine Aluminum, Inc., for example, the insurer denied the claimant, who was dying of cancer, potentially lifesaving treatment.5 The Eighth Circuit ruled that the emergency situation excused administrative exhaustion.

Another case, Smith v. Blue Cross & Blue Shield United of Wisconsin, involved medical insurance.6 The plaintiffs were denied reimbursement for medical ex penses relating to weight reduction and brought suit. However, because the plaintiffs had not exhausted administrative remedies before bringing the claim, the Seventh Circuit affirmed a summary judgment ruling in favor of the insurer. The lesson to be learned is that a failure to exhaust may preclude consideration of a dispute's merits.

The more typical remedy, however, is that the court will remand the claim for reconsideration by the plan administrator.7 Gallegos v. Mt. Sinai Medical Center, however, serves as a warning to claimants who fail to submit a timely appeal.8 The Court ruled that a plan's time limit for submitting an appeal could operate as a statute of limitations and that if no timely appeal were filed, a lawsuit would be barred.

Although the administrative-exhaustion doctrine can be viewed in a negative light, it can also be used to tremendous advantage in litigation. Plaintiff attorneys can often seriously undermine claim decisions made by insurers or administrators of self-funded benefit plans by building a favorable record before going to court.

As the Fourth Circuit explained in Quesinberry v. Life Insurance Co. of North America, in most benefits-claims cases, the court should consider only the evidence presented to the plan administrator.9 Thus, no further evidence will be admitted in later court proceedings except in exceptional circumstances where the district court reviews a claim de novo.

· claims that require consideration of complex medical questions or issues regarding the credibility of medical experts

· the availability of very limited administrative review procedures with little or no evidentiary record

· the necessity of evidence regarding interpretation of the plan's terms rather than specific historical facts

· instances where the payer and the administrator are the same entity and the court is concerned about impartiality

· claims that, before ERISA, would have been considered insurance-contract claims

· circumstances in which there is additional evidence that the claimant could not have presented in the administrative process.10

Therefore, since new evidence is generally not allowed once the case reaches the court, if the claimant presents a compelling case, the insurer will usually have no opportunity to cross-examine witnesses or submit rebuttal expert-witness reports in court. As a result, a claim record that overwhelmingly supports payment of benefits significantly enhances the chances of success.

The trigger for administrative appeal is the claim-denial letter, which must comply with specific regulatory guidelines. As stated by the Seventh Circuit, "in a nutshell, ERISA requires that specific reasons for denial be communicated to the claimant and that the claimant be afforded an opportunity for 'full and fair review' by the administrator."11

Section 503 of the act specifies that to meet those requirements, denial notices must include the specific reasons for the denial; specific reference to pertinent plan provisions on which the denial is based; descriptions of additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and appropriate information on the steps to be taken if the participant or beneficiary wishes to submit the claim for review.12

If there is a lack of substantial compliance with these requirements, the claimant is deemed to have been denied a full and fair review, and the benefit denial may be vacated.13 In Booton v. Lockheed Medical Benefit Plan, the Ninth Circuit quoted an immortal line from the movie Cool Hand Luke—"what we've got here is a failure to communicate"—to overturn a dental-claim denial because the defendant's denial letter was unintelligible and failed to trigger the dialogue contemplated by §503.14

Upon receipt of the notice of denial, the claimant must be afforded a reasonable period of time to appeal, which varies de pending on the nature of the claim, but can be as long as 180 days. The appeal must be decided as quickly as within 72 hours for claims involving urgent health care determinations. Disability claims must be decided within 45 days. Other claim decisions may take as long as 60 days, although an extension may be grant ed for certain circumstances beyond the control of the plan.15

For the review to be "full and fair," the claimant or his or her representative must be allowed to appeal the determination, which includes having the "opportunity to submit written comments, documents, records, and other information relating to the claim for benefits."

In addition, the claimant is entitled to be provided, "upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant's claim for benefits." The relevancy of a document, record, or other information to a claim for benefits is determined by reference to paragraph (m)(8) of §2560.503.

Finally, the claimant is entitled under ERISA to a "review that takes into account all comments, documents, records, and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination."16

Of those factors, the most important is the claimant's ability to secure "relevant" documents since, according to Halpin v. W.W. Grainger, Inc.,

the persistent core requirements of review intended to be full and fair include knowing what evidence the decision-maker relied upon, having an opportunity to address the accuracy and reliability of that evidence, and having the decision-maker consider the evidence presented by both parties prior to reaching and rendering his decision.17

Amendments to the regulations governing ERISA claim appeals make it clear that a plan's failure to provide a full and fair review will cause an immediate exhaustion of the need to appeal, allowing a claimant to proceed directly to court.18 Other penalties may result "on the basis that the plan has failed to provide a reasonable claims procedure that would yield a decision on the merits of the claim."19

Should you litigate?

The standard of review that will be applied in court is a significant threshold issue in deciding whether to litigate. If the court applies a highly deferential standard and does not reweigh the evidence, the issue is not whether the claimant meets the requirements to receive benefits; it is whether the insurer's decision to deny benefits was arbitrary and capricious, a much more difficult burden. As long as the insurer can point to some rational justification for its decision—even if the overwhelming weight of the evidence favors the claimant—the court will uphold it.

The U.S. Supreme Court held in Firestone Tire & Rubber Co. v. Bruch that the "default" standard of review is de novo.20 Insurers can overcome the presumption of plenary review by incorporating language in benefit plans reserving discretionary authority to construe the terms of their plans and to determine claims. To ascertain the appropriate standard of review, examine the plan language.

In Perez v. Aetna, the Sixth Circuit held that a plan's requiring submission of "satisfactory" proof was sufficient to trigger an "arbitrary and capricious" standard of review.21 Such language, the court said, implies deference to determine whether the evidence is indeed satisfactory.

Several recent rulings have shaken that viewpoint. The Ninth, Second, and Seventh circuits deemed policy language requiring satisfactory proof insufficient to confer a deferential standard of review.22

Even if courts apply them, "arbitrary and capricious" or "abuse of discretion" standards for reviews of employee benefit claims are not always absolute. In Firestone, the Court briefly mentioned that a conflict of interest may exist if the plan administrator is also the payer of benefits. The Court held that such a conflict "must be weighed as a factor in determining whether there is an abuse of discretion."23

The federal circuits vary dramatically as to what constitutes a conflict of interest. In the best discussion on the issue, the Third Circuit expressed concern that an insured plan may have greater financial disincentives to pay benefits than a self-insured plan established as a trust. In such cases, it said, courts should apply a "continuum," or "sliding scale," that treats a review as more or less penetrating, depending on the suspicion of partiality.24

If the deferential standard of review applies, however, a decision is found to be arbitrary and capricious (or an abuse of discretion) "where the decision is in bad faith, not supported by substantial evidence, or erroneous on a question of law."25 Further, an abuse of discretion may be found where an ERISA plan administrator makes a decision that "conflicts with the plain language of the plan."26 An abuse of discretion may also be found in welfare benefit claims where the plan administrator seeks to place greater weight on the opinions of reviewing physicians than on the opinions of treating and examining doctors.27

What are the rules?

If a case is litigated, a claim for benefits is brought under ERISA §502.28 Principally, claims for welfare benefits (health, life, and disability insurance) are brought under §1132(a)(1)(B), which states, "a civil action may be brought . . . by a participant or beneficiary—to recover benefits due to him under the terms of his plan, to reinforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan."

Section 1132(d)(2) reads, "Any money judgment . . . against an employee benefit plan shall be enforceable only against the plan as an entity and shall not be enforceable against any other person unless liability against such person is established in his individual capacity. . . ." Courts have relied primarily on this language in holding that the only proper party defendant to an ERISA claim is the plan itself.29

Because ERISA is considered a law of equity, plaintiffs in these cases have no right to a jury trial since, historically, courts of equity render judgments without juries.30 As the Supreme Court has interpreted ERISA, most recently in Great West Life & Annuity Insurance Co. v. Knudson, the law permits only equitable remedies.31 In Rush Prudential HMO, Inc. v. Moran, the Court further explained that ERISA litigation does not permit remedies that either supplant or supplement the remedies available under §502—all ERISA cases are decided by judges without juries.32

Indeed, usually there is no trial. In the typical situation—where there is a reservation of discretion and court review is deferential—most benefit claims under ERISA are resolved by summary judgment. If the standard of review is de novo, however, a "trial" will consist of the court's reviewing the claim record and weighing that evidence.33

Courts have also restricted discovery in ERISA litigation. Because the administrative claim record is the only evidence reviewed in most ERISA cases, courts find no reason to allow discovery, even on the issue of whether the insurer is acting under a conflict of interest.34 In Perlman v. Swiss Bank Corp., the Seventh Circuit viewed discovery as unnecessary because, it said, the administrative record is the only relevant evidence.35 The appeals court later characterized the basis for that ruling in Herzberger v. Standard Insurance Co. as a faulty analogy between Social Security cases and ERISA cases.36

In Social Security cases, although no discovery is allowed, court review occurs only following an administrative hearing with the opportunity to cross-examination adverse witnesses. No such hearings occur in most ERISA cases.

In Richardson v. Perales, the leading decision on due process in Social Security disability claims, the Supreme Court held that because the parties to the lawsuit have the right to subpoena and cross-examine witnesses, claimants receive due process protection absent in ERISA cases.37 Thus, to argue that ERISA claimants have no right to discovery—which deprives them of due process—seems ludicrous and contradicts the statute's remedial purpose.

What can your client recover?

ERISA's statutory scheme allows plaintiffs to recover only benefits or equitable relief.38 It does not allow recovery of damages, even bad-faith damages.39

Although extracontractual damages are not allowed in ERISA litigation, under §1132 (g), the court may use its discretion to award attorney fees and costs to the prevailing party. Although an award of fees is not required, one is "expected absent special circumstances which would make an award unjust."40

In Bittner v. Sadoff & Rudoy Industries, the Seventh Circuit set forth a five-factor test to determine whether a prevailing plaintiff is entitled to fees.41 Most circuits apply a nearly identical test. The factors are:

· the degree of the offending parties' ability to satisfy personally an award of attorney fees

· whether an award of attorney fees against the offending parties would deter others acting under similar circumstances

Of those factors, bad faith and substantial justification for the losing party's position are key.

However, bad faith in the ERISA context is not the same as subjective insurance bad faith. According to Production & Maintenance Employees' Local 504, Laborers' International Union v. Roadmaster Corp.,

requiring a showing of subjective bad faith would defeat the purpose of [a modest presumption in favor of fee awards] . . . because of the difficulty of proving subjective bad faith. . . . Instead, we take Meredith's reference to "good faith" and "harassment" simply to mean that a party who pursues a position that is not substantially justified—that is, a position without a "solid basis"—has, in an objective sense, really done nothing more than harass his opponent by putting him through the expense and bother of litigation for no good reason.42

Attorney fees may be awarded to a prevailing defendant. However, such awards are rare and are generally made only in wholly frivolous cases or those involving plaintiff bad faith.43 In an unusual decision, a California district court imposed attorney fees against plaintiff counsel even in the absence of bad faith.44

No fees are payable for work performed before litigation—that is, the administrative appeal.45 Nonetheless, fees incurred in preparing for litigation following the appeal, as well as fees incurred in the event that a court remands a case for further examination by the insurer or plan administrator, are compensable.46

ERISA cases can be rewarding. The litigation can usually be handled both expeditiously and inexpensively. However, careful case selection is crucial, as is the need to thoroughly prepare the case before filing suit by submitting unimpeachable evidence supporting the claim. Otherwise, if the "arbitrary and capricious" standard of review applies and the evidence is inconclusive, the case is likely unwinnable.

In any event, plaintiff lawyers should neither fear nor avoid ERISA claims. There is a dire need for additional attorneys to handle these cases involving the denial of health, life, and disability insurance benefits at a time when such benefits can make a life-or-death difference or affect a claimant's financial well-being following the disability or the death of a family's principal wage-earner. These cases offer the opportunity to do well by doing good.

3. Smith v. Blue Cross & Blue Shield United of Wis., 959 F.2d 655, 658-59 (7th Cir. 1992).

4. Diaz v. United Agric. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1485 (9th Cir. 1995); see also Fallick v. Nationwide Mut. Ins. Co., 162 F.3d 410 (6th Cir. 1998).

10. Id. at 1027 (recognized as authority in Casey v. Uddeholm, 32 F.3d 1094 (7th Cir. 1994)); see also Chambers v. Family Health Plan Corp., 100 F.3d 818 (10th Cir. 1996) (catalogs cases on whether, and under what circumstances, additional evidence may be submitted in court).

13. See Halpin, 962 F.2d 685; Conley v. Pitney Bowes, 34 F.3d 714 (8th Cir. 1994); White v. Jacobs Eng'g Group Long Term Disability Benefits Plan, 896 F.2d 344 (9th Cir. 1989).

17. 962 F.2d 685, 689 (quoting Brown v. Ret. Comm. of Briggs & Stratton Ret. Plan, 797 F.2d 521 (7th Cir. 1986)).

18. Amendments to Summary Plan Description Regulations, 65 Fed. Reg. 70245 (Sept. 21, 2000).

22. Kearney v. Standard Ins. Co., 175 F.3d 1084 (9th Cir. 1999); Kinstler v. First Reliance Standard Life Ins. Co., 181 F.3d 243 (2d Cir. 1999); Herzberger v. Standard Ins. Co., 205 F.3d 327 (7th Cir. 2000).

23. See Firestone, 489 U.S. 101, 115 (quoting RESTATEMENT (SECOND) OF TRUSTS §187, cmt. d (1959)).

24. Pinto v. Reliance Standard Life Ins. Co., 214 F.3d 377, 392-93 (3d Cir. 2000) (quoting Wildbur v. ARCO Chem. Co., 974 F.2d 631, 638 (5th Cir. 1992)).

25. Williamson v. UNUM Life Ins. Co. of Am., 943 F. Supp. 1226, 1228 (C.D. Cal. 1996) (citing Nevill v. Shell Oil Co., 835 F.2d 209, 212 (9th Cir. 1987)); see also Morton v. Smith, 91 F.3d 867 (7th Cir. 1996) (abuse of discretion found when a decision is "not just clearly incorrect but downright unreasonable") (citation omitted).

26. Saffle v. Sierra Pac. Power Co., 85 F.3d 455, 458 (9th Cir. 1996) (quoting Equitable Life Assurance Soc'y, 9 F.3d 1469, 1472 (9th Cir. 1993)).

27. See, e.g., Donaho v. FMC Corp., 74 F.3d 894, 901 (8th Cir. 1996); Dodson v. Woodmen of the World Life Ins. Soc'y, 109 F.3d 436, 439 (8th Cir. 1997).

29. Gelardi v. Pertec Computer Corp., 761 F.2d 1323, 1324 (9th Cir. 1985); Jass v. Prudential Health Care Plan, Inc., 88 F.3d 1482 (7th Cir. 1996).

30. See, e.g., Wardle v. Cent. States, Southeast & Southwest Areas Pension Fund, 627 F.2d 820 (7th Cir. 1983); Morgan v. Ameritech, 26 F. Supp. 2d 1087 (C.D. Ill. 1998); Thomas v. Oregon Fruit Prods. Co., 228 F.3d 991 (9th Cir. 2000).

33. See, e.g., Kearney v. Standard Ins. Co., 175 F.3d 1084 (9th Cir. 1999); Wilkins v. Baptist Healthcare Sys., Inc., 150 F.3d 609 (6th Cir. 1998); Hess v. Hartford Life & Accident Ins. Co., 274 F.3d 456 (7th Cir. 2001).

34. See, e.g., Newman v. Standard Ins. Co., 997 F. Supp. 1276 (C.D. Cal. 1998); Palmer v. Univ. Med. Group, 21 E.B.C. 1824, 1834 (D. Or. 1997); but see Tremain v. Bell Indus., 196 F.3d 970 (9th Cir. 1999).

39. See, e.g., Mertens v. Hewitt Assoc., 508 U.S. 248 (1993); Great-West v. Knudson, 122 S. Ct. 708 (2002).

40. See, e.g., Stanton v. Larry Fowler Trucking, Inc., 52 F.3d 723 (8th Cir. 1995); Smith v. CMTA-IAM Pension Trust, 746 F.2d 587 (9th Cir. 1984).

42. 954 F.2d 1397, 1405 (7th Cir. 1992); see also Bowerman v. Wal-Mart Stores, Inc., 226 F.3d 574 (7th Cir. 2000).

43. See, e.g., Maune v. IBEW Local 1, 83 F.3d 959 (8th Cir. 1996); Little v. Cox's Supermarkets, 71 F.3d 637 (7th Cir. 1995).

44. Ghorbani v. Pac. Gas & Elec. Co. Group Life Ins., 100 F. Supp. 2d 1165 (N.D. Cal. 2000).

45. In Cann v. Carpenters' Pension Trust for Northern California, 989 F.2d 313 (9th Cir. 1993), and Anderson v. Proctor & Gamble, 220 F.3d 449 (6th Cir. 2000), the Ninth and Sixth Circuits, respectively, ruled that the fee-shifting language of §1132(g) applies only to litigation.

October 2002
Vol. 38, No. 10

In this issue:

FAQs about TRIAL

Past issues of TRIAL

Send your comments regarding the online version of TRIAL to: trial@atlahq.org

Health care and the law

Lay the groundwork for success

Should you litigate?

What are the rules?

What can your client recover?

October 2002 Vol. 38, No. 10

In this issue:

FAQs about TRIAL

Past issues of TRIAL

Send your comments regarding the online version of TRIAL to: trial@atlahq.org

Health care and the law

Lay the groundwork for success

Should you litigate?

What are the rules?

What can your client recover?

October 2002
Vol. 38, No. 10