ERISA is an acronym for the Employee Retirement Income Security Act of 1974. As soon explained, the full title hints at the story behind this vast and crucial federal law.[i] ERISA is crucial because it directly impacts the lives of working Americans as it governs health care, wages, pensions…. and most employer provided disability plans. ERISA is not the only federal law regulating employee benefits, but certainly the most comprehensive and important employee benefits law. Our scope is limited to employer provided disability plans, policies, claim procedure and litigation.
The “S” is ERISA stands for security. To the American worker “security” mostly means reliable wages, health care, pensions and disability insurance—precisely the scope of ERISA. ERISA is the only area of law where a defendant’s decision, which is the subject of litigation, is given deference by a court.
Disability Appeal Process
Most ERISA governed plans set out a procedure for an initial “independent” administrative review by a new disability claims examiner. Not completing the administrative appeal prior to suit, may result in dismissal for “failure to exhaust administrative remedies”.
The deadline to administratively appeal the initial denial is usually 180 days from date of denial. After the appeal is perfected, the plan administrator has 45 days to notify the claimant of an adverse decision and then two 30-day extensions if made before the expiration of the prior period.
Many states have attempted enact laws that resist federal preemption, but so far that effort has been largely resisted by the US Supreme Court. The US Supreme Court does, however, recognize States’ right to enact laws that regulate insurance and allocate risk. State laws that meet both prongs of that test are “saved” and thus not pre-empted by ERISA as long as such laws do not attempt to duplicate, add to or replace ERISA.
ERISA, while initially intended to protect benefits of worker pensions from union abuses, ERISA is now generally known as a pro-insurance law. For example, disabilities plans frequently give the plan administrator discretion to administer the plan. The disability insurer or the employer is often the plan administrator. Critics suggest this arrangement is tantamount to the “fox guarding the hen house”. In general when a Plan confers discretion on the plan administer to interpret the plan, the court will review the plan administrator’s decision for an “abuse of discretion”.
In spite of this apparent conflict, most ERISA civil litigation does not involve jury trials, live testimony or discovery beyond the claim file. One notable exception to the general limitation involves discovery requests seeking information relevant to the inherent conflict of interest.
Cases litigated under ERISA are usually resolved on Summary Judgment based on evidence contained in the claims file. Thus, a key to reversing a disability denial under ERISA is timely submission of medical and vocational evidence into the claim file that tracks the policy’s definitions of disability. Medical evidence submitted after a final claims decision has been made, may be too late for consideration.
Typically, ERISA governed disability policies contain two definitions of “disability”. In most cases during the first 24 months of disability the claimant must show that she cannot perform the essential duties of her “own occupation” or earn a certain percentage of what she earned in her “own occupation”. Often the best of evidence of a job’s essential duties are contained in a claimant’s personnel file. Since employers frequently send the personnel file to legal before releasing it, it is important to request the claim file as soon as possible.
After the initial 24 months of disability many ERISA based policies switch from an “own occupation” disability standard to an “any occupation” disability standard. Under the “any occupation” disability definition, a claimant usually must prove that she cannot perform “any occupation” for which she is reasonably qualified.
Obviously, proving one cannot perform “any occupation” is more difficult than proving inability to perform one’s “own occupation”. Disability insurers know this. As a result, many claims initially accepted under the “own occupation” standard are denied after 24 months when the new “any occupation” standard is triggered.
But, not all plans are the same. If the plan unambiguously allocates power to determine benefits to the plan administrator or other fiduciary, then abuse of discretion standard of review applies. When discretion is interpret policy terms is also granted, then the usually rule that the contract (insurance policy) is interpreted against the drafter (the insurer) may not apply.
Under an abuse of discretion standard, an administrator’s discretion is usually upheld if there is reasonable basis to do so. States including Oregon have enacted laws seeking to limit discretionary powers. Should the plan not allocate discretion to the administrator, do so improperly or breach its fiduciary obligation through self- interest, federal court review is de novo. If de novo standard applies, then the court does not defer to the administrator but instead, makes its own disability determination. How did we get here? A brief review of ERISA history illuminates ‘employee security’ as a central theme to ERISA’s intent and spirit. [ii]
Before 1974 the pensions of American employees were vulnerable. Many employers did not take adequate steps to protect employee pension plans. As a result, thousands of American workers lost retirement benefits when employers went out of business. Momentum to solve the dissolving pension problem peaked in 1963 when a Studebaker-Packard Corporation plant in South Bend Indiana closed. In turn, the company defaulted on its promise to pay pension benefits to hourly workers. See, Wooton Buffalo Law Review, Vol. 49, P. 683, 2001 .
ERISA sought to increase the security by establishing uniform “minimum standards” for employee benefits. 29 USC §1001(a) 2006. ERISA set minimum standards including:
- Government re-insurance for benefit plans;
- Disclosure, funding and vesting requirements;
- Remedies if ERISA is violated; and
- Fiduciary duties on plan administrators.
According to trust law, a “fiduciary” is a someone who owes a duty of loyalty to safeguard the interests of another person or entity, such as a trustee of a testamentary trust, a guardian of the estate of a minor, a guardian, committee or conservator of the estate of an incompetent person, an executor of a will, an administrator of the estate of a decedent or an advisor or consultant exercising control over a testamentary or express trust.
For purposes of ERISA, a fiduciary is a person or entity who has discretionary authority or discretionary authority in the benefit plan administration. 29 USC §1002(21) (A) (iii). ERISA is based on trust concepts. In fact, employer sponsored plans almost always make use of trust instruments. ERISA requires that qualified benefit plans name a fiduciary whose duty it is to control and manage the operation and administration of the plan in the beneficiary’s best interest. 29 USC § 1102( a) (1), 1104(a) (1).
Before ERISA, employee benefits were governed by a mish-mash of state laws. To add predictability and uniformity ERISA, by own its’ terms, pre-empts inconsistent or conflicting state law. Legislative history shows that uniformity via federal pre-emption was designed and intended to protect plan beneficiaries, rather than insurers or plan administrators. See, 120 Cong. Rec. 29197 (1974). On September 2, 1974, President Gerald R. Ford signed ERISA into law he commented “Under this law the men and women of our labor force will have much more clearly defined rights to pension funds and greater assurances that retirement dollars will be there when they are needed.” Because ERISA was primarily designed to protect workers’ pensions, with consideration was given to employee welfare benefits such as disability insurance. And, as discussed further below, courts have consistently narrowly construed the rights of beneficiaries who have been denied plan benefits. Meanwhile, many thoughtful commentators call for legislative amendments to ERISA.
Standard of Review
What should be the standard of review is by far, the most litigated ERISA issue. And, for good reason. Victory verses loss often hinges upon the standard of review. It seems bizarre that the very detailed and comprehensive ERISA fails to clearly address the standard of review issue.
Firestone Tire & Rubber v. Brush 49 US 101 (1989) is the seminal case in this area. The Firestone court held that ERISA“…is to be reviewed under a de novo standard unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or construe the terms of the plan.” Id at 115.
In writing Firestone, Justice O’Conner intentionally left open the possibility of a more deferential standard of review when full discretion is given to the plan administrator and no conflict of interest exists.
Of course, plan administrators responded to Firestone by promptly amending plans to give plan administrators discretionary authority hoping to skirt the de novo standard for a more deferential standard. And it is seeming to work. For example, in Jordan v. Northrop the 9th Circuit applied an “abuse of discretion” standard because the plan accorded discretion to the administrator. The Second Circuit applies a similar if not identical arbitrary and capricious standard where the plan grants the plan administrator full discretion.
The Model Act
“Not so fast!” cried the National Association of Insurance Commissioners (NAIC). Congress by means of a “savings clause” carved out for state regulation “…laws of any State which regulates insurance banking or securities”. 29 USC § 1144 (b) (2) (A).
In 2002 the NAIC adopted the “Model Act” which encourages state legislatures adopt its language prohibiting discretionary clauses. The Model Act sought to stem perceived abuses by plan administrators at the claim and appeal levels. Those in favor of the Model Act point to ERISA regulations which require a ‘full and fair” claim review “ that takes into account all comments, documents, records, and other information submitted by the claimant relating to the plan”.
In addition, ERISA regulations require that any denial set out “the specific reason or reasons for the adverse determination.” 29 CFR §2560.503 – 19(h) & (j). Model Act proponents further stress that a plan administrator act as five fiduciary when exercising discretionary authority. See, 29 USC §1104 9 (a) (1) (B) e.g. Central States, 472 US at 570 note 10. That section requires plan administrators to “discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and… for the exclusive purpose of providing benefits to dispense and their beneficiaries…” Id.
Nonetheless, in 2008 the Supreme Court reaffirmed its Firestone holding. See, Metropolitan Life Insurance Company v. Glenn, 554 US 105, 120 (2008). Glenn, a 7-2 opinion, relied on Firestone Tire & Rubber Co. v. Bruch to hold that a possible conflict of interest should be taken into account in determining the legality of a claim denial, but does not alone strip a plan of deference. In other words, the “mere” fact that a decider (the administrator) is also a party to the litigation is not enough to trigger a de novo review. Glenn held that a conflict of interest is just one factor to be considered by a reviewing court.
Of course, how much deference a Court should give to the plan administrator also depends on specific plan language, whether a discretionary clause exists and whether the state where the policy was issued bans discretionary plan language. In Kearney v. Standard Insurance, 175 F. 3rd the 9th Circuit has found that the language requiring “satisfactory written proof” was not enough to confer discretion.
A common theme among Supreme Court decisions affirming the of abuse of discretion standard is that Congress enacted ERISA to make sure plan sponsors would be subject to a uniform, predictable standards minimizing administrative and financial burdens of complying with conflicting directives. Ingersoll Rand Co. v. Mc Clendon, 498 US 133, 142 (1990) See also, Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 129 S. Ct. 875, 875 – 76 (2009); See also, Rush Prudential HMO, Inc. v. Moran, 536 US 355, 379 (2002).
Critics of efforts to prohibit plans that confer discretion to a plan administrator argue that uniformity should trump fairness. Those critics conveniently overlook that ERISA was enacted to provide increased benefit security for workers.
Nonetheless, in Conkright v. Frommert 559 U.S. 506, 130 S. Ct. 1640 (2010) the Supreme Court, with a nod to Firestone’s reliance on trust law principles, refused to apply a de novo standard while acknowledging the plan administrator had misinterpreted plan terms and violated ERISA in doing so.
Plaintiffs in Conkright were participants in the Xerox Corporation pension plan who left Xerox, received a lump sum distribution of their accrued pension benefits at that time and were later rehired with accrued additional pension at rehire. For purposes of calculating the plaintiffs’ current pension benefits, the plan bridged pre‐distribution service credits with benefits “offset by the accrued benefit attributable” prior distributions.
Chief Justice Roberts, who authored Conkright’s majority opinion, interpreted Firestone as granting the plan administrator (trustee) power to construe disputed or doubtful plan terms so long as the trustee’s interpretation is “reasonable“. In other words, under Conkright a standard of review favorable to the administrator (such as abuse of discretion) may be appropriate in spite of the plan administrators past violation of ERISA and plan misinterpretation. Id.
Justice Roberts characterized the Xerox administrator’s distribution plan as a “single honest mistake” made in good faith is insufficient to invoke a de novo review standard. Id. At least one commentator astutely observes that “Conkright is a strange case” which may be limited to its unique facts. See, Mistakes and Complexeties: Conkright v. Frommert.
Rejecting a bright-line litmus test for reasonableness, the Ninth Circuit gleans, “there are no talismanic words that can avoid the process of judgment,” Salomaa v. Honda Long Term Disability Plan, 642 F.3d at 666, 675-676 (9,h Cir. 2011). A plan administrator “abuses discretion” when the court is “left with a definite and firm conviction that a mistake has been committed …” To do so, the court considers “whether application of a correct legal standard was (1) illogical, (2) implausible, or (3) without support in inferences that may be drawn from the facts in the record.” Salomaa, 642 F.3d at 675-676.The Salomaa Court found discretion abused where:
(1) Every doctor who personally examined Salomaa concluded that he was disabled;
(2) The plan administrator demanded objective tests to establish the existence of a condition for which there are no objective tests;
(3) The administrator failed to consider the Social Security disability award;
(4) The reasons for the denial shifted as they were refuted, were largely unsupported by the medical file, and only the denial stayed constant; and
(5) The plan administrator failed to engage in the meaningful dialogue with Salomaa.” Id., at 676; see Montour v. Hartford Life &Acc. Ins. Co., 588 F.3d 623 (9th Cir. 2009); Mondolo v. UNUMLife Ins. Co., 2013 US Dist. LEXIS 7464 (CD Cal 2013).
Solomma is cited for the proposition that law cannot require what science cannot objectively show. Id.
9th Circuit Court apply mid-tier heightened level of scrutiny in two situations: (1) Conflict of interest; and (2) Procedural error.
“Payment to an administrator by an employer to determine whether the employer must pay disability claims, will create a conflict of interest such that the administrator’s decisions should be reviewed under a modified abuse of discretion standard[.]” See Barnes v. BellSouth Corp., 2003 WL 22399567 at *7 (WDNC 2003). A structural conflict of interest exists where an ERISA plan administrator “both funds the plan and evaluates the claims.” Sqq Metro Life Ins. Co. v. Glenn, 554 U.S. 105,112,128 S.Ct. 2343 (2008) However, courts have found that a Plan Administrator has a conflict of interest even if it does not fund the plan and make benefits determinations. 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. Id. A court must therefore “temper the abuse of discretion standard with skepticism ‘commensurate’ with the conflict.” Nolan v. Heald College, 551 F.3d 1148, 153 (9,h Cir. 2009) (citing Abatie, 458 F.3d at 959,965, 969).
[i] ERISA is codified in in the federal tax code (26 U.S.C.) as well as the labor code (29 U.S.C.). Thus, ERISA administration is split between the Internal Revenue Service (I.R.S.) and the Department of Labor.