1st Circuit Overlooks Crucial ERISA Distinction
Chicago Daily Law Bulletin
June 20, 2005
by MARK D. DEBOFSKY
In a very significant ruling, the 1st U.S. Circuit Court of Appeals offered its view on the scope of a de novo judicial review of a benefits denial claim governed by the ERISA law: ''The claimant was not entitled to trial or to admit desired new evidence outside the administrative record or to discovery.''
Plaintiff Jacob M. Orndorf, a perfusionist (someone who operates a heart-lung machine for patients undergoing chest surgery), began receiving disability benefits in 1995 due to drug dependency, a condition for which benefits were limited under the policy to five years.
However, before the benefits ran out, Orndorf advised Paul Revere Life Insurance Co. that he also was disabled independent of his drug abuse; he cited back, neck and ankle impairments and hypertension. The insurer disagreed, and cut off benefits, which eventually led to a lawsuit being filed after internal appeals were exhausted.
The U.S. District Court for the District of Massachusetts upheld the insurer's determination that Orndorf was not disabled due to his physical conditions, and the appeals court affirmed that finding. Orndorf v. Paul Revere Life Insurance Co., 2005 U.S. App. LEXIS 6344 (1st Cir., April 15).
In laying out the issues on appeal, the court first made the curious observation that summary judgment is not really summary judgment in an ERISA case and is ''simply a vehicle for deciding the issue,'' and that the non-movant ''is not entitled to the usual inferences in its favor.'' Thus, the court rejected Orndorf's contention that a conflict in the evidence would preclude the court from entering summary judgment.
''Orndorf may be arguing,'' the court explained, ''that on review of an administrative record through summary judgment the court must relieve him of his burden of proving he is disabled because under summary judgment all inferences are drawn against the movant. We have already rejected this argument in Liston [ v. Unum Corp. Officer Severance Plan, 330 F.3d 19 (1st Cir. 2003)] 330 F.3d at 24, and we apply Liston to de novo review, as noted above.
''Alternatively, Orndorf may be arguing that a court faced with an administrative record with conflicting medical opinions should then hold a trial with witnesses to resolve the disputes. He filed a motion to that effect, which was denied by the District Court. The court was correct to deny the motion. Trial is not warranted because the record shows one doctor's diagnosis disagrees with another's, and the fact that judicial review is de novo does not itself entitle a claimant to a trial or to put on new evidence.''
According to the 1st Circuit, ''Some courts have stated that 'factual findings' made by the administrative decision maker are reviewed de novo and have suggested that this warrants the introduction of new evidence to the trial court, perhaps in the form of an evidentiary hearing or a trial de novo. See Luby v. Teamsters Health, Welfare & Pension Trust Funds, 944 F.2d 1176, 1184-85 (3d Cir. 1991). Where review is properly confined to the administrative record before the ERISA plan administrator, as we explain below is the case here, there are no disputed issues of fact for the court to resolve.
''Review of the ultimate conclusion of whether the evidence supports the finding of a disability does not itself warrant introduction of new evidence about historical facts. See Masella v. Blue Cross & Blue Shield Inc., 936 F.2d 98, 104 (2d Cir. 1991). Nor does it warrant calling as witnesses those persons whose opinions and diagnosis or expert testimony and reports are in the administrative record.
''Rather, de novo review generally consists of the court's independent weighing of the facts and opinions in that record to determine whether the claimant has met his burden of showing he is disabled within the meaning of the policy. While the court does not ignore facts in the record, see Recupero v. New England Telephone & Telegraph Co., 118 F.3d 820, 830 (1st Cir. 1997), the court grants no deference to administrators' opinions or conclusions based on these facts.''
Scope of Evidence
The court then made it clear that no ''extra-record medical evidence'' may be submitted.
''The decision to which judicial review is addressed is the final ERISA administrative decision,'' the appeals court noted. ''It would offend interests in finality and exhaustion of administrative procedures required by ERISA to shift the focus from that decision to a moving target by presenting extra-administrative record evidence going to the substance of the decision. Liston, 330 F.3d at 24.'' The court deemed the final ''administrative decision'' a ''temporal cutoff point,'' although the court conceded that Liston was a deferential review case involving severance benefits and not a de novo review of a disability benefit determination based on conflicting medical evidence.
The court did, however, suggest that while the default rule is to bar all extrinsic evidence under either de novo or deferential standards of review, there are circumstances where additional evidence can be submitted.
''For example, evidence outside the administrative record might be relevant to a claim of personal bias by a plan administrator or of prejudicial procedural irregularity in the ERISA administrative review procedure. We need not catalog the situations in which new evidence is admissible, other than to note it is more obviously relevant when the attack is on the process of decision-making as being contrary to the statute than on the substance of the administrator's decision. Also, evidence may be relevant to explain a key item, such as the duties of the claimant's position, if that was omitted from the administrative record. Such explanatory extrinsic evidence was admitted by the District Court in this case; Revere has not disputed this admission.''
The court then turned to the claim decision, and in comparing the medical evidence to the duties of Orndorf's occupation, the court held that Orndorf lacked sufficient physical restrictions to preclude his return to that occupation. Although there was an abundance of evidence of a history of back problems, the court found little evidence in the record of the other claimed conditions. The court also commented repeatedly on notes in the record of Orndorf taking lengthy bicycle trips.
The court also discussed a favorable Social Security determination that Orndorf had received, but pointed out that the decision was based on a combination of physical and mental impairments even though drug addiction was not deemed material to the disability award. The Veterans Administration also awarded Orndorf disability based on his ankle impairment, which stemmed from an accident that occurred while the plaintiff was in the U.S. military.
Although the court recognized that Paul Revere never had the claimant examined, the court believed that review by a board-certified internist was sufficient. The court then summed up the evidence and concluded that too many factors were contrary to the plaintiff's claim of disability due to spinal impairment, such as the length of time he worked with the back problem, engaging in recreational activities that struck the court as inconsistent with back problems, and the fact that Orndorf never alleged he was disabled due to his spinal impairment until shortly before the benefits were due to expire. Accordingly, the 1st Circuit upheld the District Court.
Standards of Review
This ruling defies the notion of a ''de novo'' review. The court drew inferences without hearing testimony subject to cross-examination. The fact that the insurer's determination was based on an internist's review is contrary to the ERISA claim regulations that require an orthopedist or equivalent medical expert to be consulted in relation to the claim. See Crespo v. Unum Life Insurance Company of America, 294 F. Supp. 2d 980 (N.D. Ill., Dec. 18, 2003) (citing 29 C.F.R. §2560.503-1(h)(3)(iii) as incorporated by 29 C.F.R. §2560.503-1(h)(4)).
Fundamentally, though, the decision blurs any distinction between de novo and deferential review. The key sentences in the opinion are where the court writes: ''The decision to which judicial review is addressed is the final ERISA administrative decision. It would offend interests in finality and exhaustion of administrative procedures required by ERISA to shift the focus from that decision to a moving target by presenting extra-administrative record evidence going to the substance of the decision. Liston, 330 F.3d at 24.''
The court's statement that ''there are no disputed issues of fact for the court to resolve'' also cannot be reconciled with the conflict in the medical evidence.
Orndorf is an illustration of the bizarre sui generis approach to ERISA cases taken by the federal courts as the result of categorizing employee benefit claims as administrative law cases.
In administrative law claims, judicial review occurs after there has been a fully developed record made before a neutral fact-finder subject to due process - all of which is completely absent in ERISA cases, where an insurance company renders the claim decision often based on medical opinions rendered by in-house doctors who review the claim record and who are never subject to cross-examination.
Yet in ERISA cases, the federal courts close the ''record'' before suit is filed and decide the case based on stale records, contrary to the Federal Rules of Civil Procedure which govern all disputes of a civil nature, and allow the parties to conduct discovery, call witnesses to testify and have juries resolve disputed factual issues.
This problem was discussed by Judge Richard A. Posner in a 7th Circuit ruling in which I represented the plaintiff, Herzberger v. Standard Insurance Co., 205 F.3d 327 (7th Cir. 2000). Herzberger also involved a dispute over disability insurance benefits. In denying the insurer deference, the court explained the impropriety of courts' utilization of an administrative law paradigm:
''What may have misled courts in some cases is the analogy between judicial review of an ERISA plan administrator's decision to deny disability benefits and judicial review of the denial of such benefits by the Social Security Administration.
''Judicial review of the latter sort of denial is of course deferential, and it is natural to suppose that it should be deferential in the former case as well. But the analogy is imperfect, quite apart from its having been implicitly rejected by the Supreme Court in Firestone Tire & Rubber Co. v. Bruch, [489 U.S. 101 (1989)] when it determined that the default standard of review in ERISA cases is plenary review, and quite apart from the fact that the Social Security statute specifies deferential ('substantial evidence') review. 42 U.S.C. §405(g). The Social Security Administration is a public agency that denies benefits only after giving the applicant an opportunity for a full adjudicative hearing before a judicial officer, the administrative law judge. The procedural safeguards thus accorded, designed to ensure a full and fair hearing, are missing from determinations by plan administrators.''
Role of Insurance
The unusual civil procedure accorded ERISA cases was also raised by another judge of the District of Massachusetts. Chief U.S. District Judge William Young in Radford Trust v. First Unum Life Insurance Company of America, 321 F.Supp.2d 226 (D. Mass. 2004), who wrote:
''Before delving into the merits, some general comments about ERISA cases are in order. The decisions whether and how to ensure that disability does not lead to poverty are obviously of great societal importance. In this country, although we provide limited disability insurance through Social Security, we rely primarily on private insurance, typically in the form of disability benefits plans administered by insurance companies under contract with employers. A number of current trends suggest that if anything, the role of Social Security may diminish in the coming years, perhaps ultimately ceding the field entirely to private insurance.
''The benefits of relying on private insurers to carry out this essential public function may be considerable, and Congress has obviously decided that they outweigh the costs. The profit motive may well drive private insurers to tailor plans to beneficiaries' needs, evaluate risk, and cut waste and inefficiency more effectively than a government bureaucracy would. The government can in many cases accomplish public purposes effectively through reliance on choice and competition.
''There are also obvious drawbacks to relying on private insurers, however. Although the profit motive drives companies toward efficiency, it creates a substantial risk that they will cut costs by denying valid claims. The market is somewhat inapt to punish insurers for engaging in such practices, particularly if the denials are not too flagrant, because the complexity of the insurance market and the imperfect information available to consumers make it difficult to determine whether an insurer is keeping its costs down through legitimate or illegitimate means. An individual claimant who encounters an insurance company that is disposed to deny valid claims must struggle to vindicate his rights at a time when he is at his most vulnerable. Often a newly disabled person will simultaneously confront increased medical bills and either termination of employment or diminished pay.
''The judiciary provides a check on these potential abuses; under ERISA, aggrieved claimants can seek redress in the courts of justice. Congress and the courts have made two decisions, however, that limit this checking effect. The first is to place limitations on judicial review of plan administrators' and fiduciaries' decisions similar to the ones placed on judicial review of governmental agency action, even though, unlike officials in governmental agencies, administrators and fiduciaries are not answerable to the public or to elected officials.
''Second, and perhaps more troubling, the courts have interpreted ERISA to restrict or eliminate the role of juries in deciding disputes between claimants and insurers. See Liston, 330 F.3d at 24 & n. 4; Andrews-Clarke v. Travelers Insurance Co., 984 F. Supp. 49, 63 and n. 74 (D. Mass. 1997). In the process, they have removed one of the most important guarantees of fairness in the judicial process.'' 321 F.Supp.2d at 240-41.
Posner and Young make valid points that the 1st Circuit Court of Appeals missed altogether. Perhaps if a trial had taken place, the same outcome would have resulted, but in the face of disputed medical evidence, it was unfair to deny the plaintiff the opportunity to prove his claim with live testimony of witnesses who could be cross-examined and whose credibility could be assessed by the trier of fact.
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