Clarity needed on contractual periods of limitation

Clarity needed on contractual periods of limitation

Chicago Daily Law Bulletin
September 21, 2009

by MARK D. DEBOFSKY

The application of contractual periods of limitation that shorten the statutory limitation period during which suit can be brought continues to be a hot topic of litigation in ERISA claims.

Scharff v. Raytheon Company Short Term Disability Plan, 2009 U.S.App.LEXIS 20130 (Sept. 9), is the most recent example, and offers a cautionary lesson to benefit claimants. In Scharff, a 9th U.S. Circuit Court of Appeals ruling, Raytheon Company's short-term disability plan contained a contractual provision stating that if benefits were denied, any action at law or equity must be filed within one year of the date of the denial of the appeal from an initial claim denial irrespective of any federal or state statutes of limitations. The suit in this case was filed one year and 20 days after the claim appeal was denied; and the court of appeals upheld a ruling dismissing the suit as untimely.

Although the plaintiff had argued that the display and placement of the contractual limitations period defeated the reasonable expectations of the plan participant, the court found the question of whether the reasonable expectations doctrine was applicable to a self-funded welfare plan was immaterial.

The reasonable expectations doctrine is explained in a leading treatise on contract law as follows: "Under the so-called 'doctrine of reasonable expectations,' which is often applied in interpreting or construing policies of insurance, the meaning of an insurance policy is determined in accordance with the reasonable expectations of the insured. In other words, the meaning of the terms in an insurance policy is to be determined by considering it in light of whether a reasonable person in the position of the insured would expect coverage. The term 'insured's reasonable expectations' refers to what a hypothetical reasonable insured would glean from the wording of the particular policy and kind of insurance at issue, rather than how a particular insured who happened to buy the policy might understand it." Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 49:20, at 111-12 (4th ed. 2000) (footnotes omitted)

The plaintiff's argument was that the placement of the limitations period should have gone in the administrative section of the summary plan description rather than in the disability section, and that the deadline should have been displayed more conspicuously. The court disagreed.

Although the reasonable expectations doctrine was recognized in ERISA cases involving insured benefits in Saltarelli v. Bob Baker Group Medical Trust, 35 F.3d 382, 387 (9th Cir. 1994), in the context of a preexisting condition exclusion, the court found it need not address the question of whether the reasonable expectations doctrine applied in the context of a self-funded rather than an insured plan because it deemed the doctrine inapplicable, finding the manner of disclosure of the limitations period sufficient.

The court cited Abena v. Metro. Life Ins. Co., 544 F.3d 880, 884 (7th Cir. 2008), which determined that the placement of a contractual limitations period in the same section as where it was placed in the Raytheon plan to have been reasonable.

The court also found the deadline was written in a manner that was clearly understandable and which met the requirements of the ERISA regulations, which state: "Any description of exception, limitations, reductions, and other restrictions of plan benefits shall not be minimized, rendered obscure or otherwise made to appear unimportant. Such exceptions, limitations, reductions, or restrictions of plan benefits shall be described or summarized in a manner not less prominent than the style, captions, printing type, and prominence used to describe or summarize plan benefits." 29 C.F.R. § 2520.102-2(b).

The court further ruled the summary plan description met the requirement that limitations be placed in close conjunction to benefits provisions, or refer the participant to the page numbers on which the relevant restrictions appear.

Finally, the court refused to incorporate as a matter of federal common law a requirement from California that the plan administrator disclose in its written communications the date it deemed the limitations period would expire. Thus, the court deemed the dismissal of the case as untimely to have been warranted.

Judge Harry Pregerson dissented. His reading of the summary plan description was that it was confusing and too easy to miss the one year contractual limitation. He also expressed his view that the provision was not set forth in a "clear, plain and conspicuous statement in the plan."

Pregerson further cited a recent district court ruling involving the same plan where the court concluded, "it is dubious that a lay person would understand that her limited right to file any 'action at law or in equity' referred to her right under ERISA to 'file suit in state or federal court.'" Solien v. Raytheon Long Term Disability Plan, No. CV 07-456, 2008 U.S. Dist. LEXIS 43194, 2008 WL 2323915 at 7 (June 2, 2008 D.Ariz.). Thus, he would have found a violation either of the ERISA summary plan description requirements or the doctrine of reasonable expectations.

The shortening of statutory limitations periods by provisions found in insurance policies or employee benefit plans has triggered a substantial amount of litigation; and there have been several recent appellate rulings on this issue.

A ruling last year from the 7th Circuit, Abena v. Metropolitan Life Ins.Co., 544 F.3d 880, held that the limitations period accrues while the pre-litigation appeal is pending; and in Rice v. Jefferson Pilot Financial Ins.Co., 2009 U.S.App.LEXIS 18962 (6th Cir. Aug. 24), the court issued a similar ruling, finding that the limitations period is measured from when proof of loss is required, irrespective of mandated pre-suit claim appeals.

Another recent decision, Burke v. Pricewaterhousecoopers LLP Long Term Disability Plan, 572 F.3d 76 (2d Cir. 2009), also held that the limitations period accrues prior to the exhaustion of pre-suit appeals; and in Abdel v. U.S.Bancorp, 457 F.3d 877 (2006), the 8th Circuit held that a limitations period accrued when an insurer notified the insured that a policy provision limiting the duration of benefit payments was applied to the claim, and that even though the insured presented a mandated pre-suit appeal to the insurer immediately upon the expiration of benefits, the limitations period was not extended. Taking a different approach, though, in White v. Sun Life Assur.Co. of Canada, 488 F.3d 240 (4th Cir. 2007), the 4th Circuit ruled the limitations period was tolled during the course of the claim appeal.

Because of the risk of uncertainty posed by the cases cited above, and because courts have identified limitations language in ERISA benefit plans that is or at least has the potential to be confusing and ambiguous, particularly in situations involving disability benefits that have been terminated after benefits had been paid for several years, it would be helpful to have a regulation that is clear and leaves no doubt as to the parties' rights.

That could easily be accomplished by the incorporation in the ERISA claim regulations of an amendment to an existing regulation, 29 C.F.R. § 2560.503-1(j), to incorporate a concluding provision requiring: A statement that all applicable limitations periods are tolled during the claim appeal. The claim administrator must also include in its final denial notification a statement setting forth the date calculated by the claim administrator on which the relevant limitations period expires.

Such a provision has already been proposed to the U.S. Department of Labor and is under consideration.