Decision begins to explain problems with ERISA litigation
Chicago Daily Law Bulletin
June 12, 2006
by MARK D. DEBOFSKY
Dennis Paese, a long-time employee and director of labor relations for Sequa Corporation, was severely injured in a car accident. Paese v. Hartford Life and Accident Insur. Co., 2006 U.S.App.LEXIS 13007 (2d U.S. Circuit Court of Appeals May 24,2006).
Although he tried to return to work, due to severe pain, Paese had to discontinue his employment and apply for disability benefits. The claim was initially approved, but Hartford cut off the benefit payments just a few months later even though Paese had undergone elbow, arm and back surgery just a few months earlier.
Paese appealed Hartford's decision and submitted a substantial amount of additional medical evidence as well as notification of approval of Social Security disability benefits, which connoted his inability to engage in ''any substantial gainful activity.'' 42 U.S.C. §423(d)(1)(A) - definition of ''disabled'' under Social Security Act. During the course of Paese's appeal, the period of time under which he would be deemed disabled if unable to perform his own occupation ran out and continuation of benefits was only possible if he were unable to perform the duties of any occupation. Upon further review by Hartford and a consulting physician, the benefit termination was upheld and Paese then filed suit.
The parties stipulated to a bench trial on the record without witnesses. At that trial, Paese sought to introduce a report prepared by an independent physician who had examined him on behalf of the opposing insurer during the course of a personal injury suit. Although the report had not been previously considered by Hartford, the court considered it and relied on that report in awarding Paese benefits through the date of judgment.
After disposing of some minor issues, including upholding the admission of the examination report on the ground that the court did not abuse its discretion in admitting the evidence, and because ''good cause existed to admit the evidence because the report was highly probative and written by a disinterested party who had actually examined Paese, and because Paese was not at fault for the report's initial absence from the record,'' the court turned to the main issues in the case.
First of all, the court found no reason to disturb the lower court's factual findings. The court also construed Black & Decker Disability Plan v. Nord, 538 U.S. 822 (2003), to mean that while a court need not automatically accord special weight to the opinions of treating physicians, ''this does not mean that a district court, engaging in a de novo review, cannot evaluate and give appropriate weight to a treating physician's conclusions, if it finds these opinions reliable and probative.'' Likewise, it was perfectly permissible for the court to consider the Social Security determination as ''some evidence of total disability.'' The court added: True, the SSA's determination did not bind either the ERISA Plan or the district court. However, it does not follow that the district court was obligated to ignore the SSA's determination, especially if the district court found the determination probative, if not necessarily dispositive, as was the case here.
The court then turned to the key issue in the case: Whether it was permissible ''to grant Paese permanent long-term benefits under the any occupation standard because he had not exhausted his administrative remedies and had not given Hartford the opportunity, in the first instance, to decide the issue.'' First, the court pointed out that the ERISA statute contains no exhaustion requirement; it simply allows a participant to bring a civil action to recover benefits under the plan. Nonetheless, the federal courts have recognized a policy favoring exhaustion of administrative remedies in ERISA cases. That raises the question of whether exhaustion of remedies implicates subject matter jurisdiction or is solely an affirmative defense. Acknowledging that the courts have been ''casual when discussing the judicially-created exhaustion requirements'' under the ERISA law,'' with some decisions referring to exhaustion as jurisdictional and others as procedural, even in employment discrimination suits, exhaustion is not jurisdictional and is subject to waiver, estoppel and equitable tolling according to Zipes v. Trans World Airlines Inc., 455 U.S. 385 (1982). The court further noted that even under the Labor Management Relations Act, 29 U.S.C. §185, exhaustion is an affirmative defense, not a jurisdictional bar. The court also mentioned a recent 7th Circuit case holding that the failure to exhaust administrative remedies under the Individuals with Disabilities Education Act (IDEA), 20 U.S.C. §1400 et seq., is an affirmative defense, not jurisdictional. Mosely v. Board of Educ., 434 F.3d 527, 532-33 (7th Cir. 2006). In general, the 2d Circuit concluded that ''unless the failure to exhaust administrative remedies is 'essential to the existence of the claim, or to ripeness, and therefore to the presence of an Article III case or controversy,' '' the statutory requirement to exhaust administrative remedies is not jurisdictional. (citing Richardson v. Goord, 347 F.3d 431, 434 (2d Cir. 2003) (per curiam) (quoting Perez v. Wis. Dep't of Corr., 182 F.3d 532, 535-36 (7th Cir. 1999)).
The court then examined the stated purpose of exhaustion in ERISA cases as set forth in Kennedy v. Empire Blue Cross & Blue Shield, 989 F.2d 588, 594 (2d Cir. 1993): ''[to] uphold Congress' desire that ERISA trustees be responsible for their actions, not the federal courts; [to] provide a sufficiently clear record of administrative action if litigation should ensue; ... [to] assure that any judicial review of fiduciary action (or inaction) is made under the arbitrary and capricious standard, not de novo[;] ... to help reduce the number of frivolous lawsuits under ERISA; to promote the consistent treatment of claims for benefits; to provide a non adversarial method of claims settlement; and to minimize the costs of claims settlement for all concerned.''
None of those purposes, though, have ''bearing on the existence of a claim, or on ripeness, and therefore have little to do with the presence of an Article III case or controversy.'' Therefore, particularly since exhaustion is non-statutory and is a purely judge-made concept, failure to exhaust cannot be made jurisdictional. Turning, then, to the question of whether Hartford could successfully assert its affirmative defense, the court found nothing in the record to show that Hartford made any effort to raise its affirmative defense despite a prayer for relief in the complaint seeking benefits through the date of judgment, which was already well into the ''any occupation'' period under the policy. Hence, Hartford was deemed to have waived its affirmative defense.
However, even if there had been no waiver, the court ruled that Hartford could not successfully assert its affirmative defense since the change in definition occurred during the appeal period and Paese argued throughout for benefits under both standards of disability, occupational and general. Hartford was held to be estopped from raising the affirmative defense because its correspondence led the plaintiff to believe that disability under both standards would be considered. The court found that if Hartford was unwilling to consider any occupation disability, it should have expressly communicated that fact. The failure to do so rendered any additional effort by Paese to appeal denial of any occupation disability futile. Accordingly, the award of benefits was affirmed.
The court did reverse on one issue, though. The district court awarded damages to the plaintiff for his expenditure in purchasing substitute life insurance when his benefits from Hartford (which included a life insurance waiver of premium) were terminated. The court found the evidence relating to the substitute coverage was unclear and did not support the judgment.
The court also upheld a fee award rendered by the district court. Finding that a fee award did not require subjective bad faith, merely violating the ERISA law made the insurer culpable and thus subject to payment of fees in accordance with ERISA's fee-shifting statute, 29 U.S.C. §1132(g).
This decision fires the opening shot in exposing much of what is wrong with how the courts adjudicate claims brought under the ERISA law. Acknowledging that the exhaustion doctrine is judge-created, the court is not far off from recognizing that the sui generis civil procedure accorded ERISA claims, which treats them as ''review proceedings,'' is also non-statutory and inconsistent with the Federal Rules of Civil Procedure. The courts have created a quasi-administrative law that finds no support in either the text of the statute or in its history.
From a common sense perspective, this case was easily decided. In view of the independent medical examination, the opinions of the treating doctors, and the Social Security determination, Hartford's denial of benefits lacked substantial evidentiary support. Hartford had two medical record reviews performed by consultants who frequently review files for Hartford; there were no examination findings supporting the benefit termination. Were this not an ERISA case, no court would have ever sustained the insurer's position since the lack of percipient witness testimony could not possibly outweigh the examining doctors' findings, even putting aside the issue of the lack of cross-examination since the parties stipulated to a paper trial. The Supreme Court made clear in Richardson v. Perales, 402 U.S. 389 (1971), that non-testifying doctors' reports may constitute substantial evidence in Social Security proceedings but only if the doctor has conducted an examination, is subject to cross-examination, and the claim is heard by a neutral decision-maker. Also see, Gehin v. Wisconsin Group Insurance Bd., 278 Wisc.2d 111, 692 N.W.2d 572 (2005), where the court disallowed reports from physicians who did not testify, and characterized those reports as uncorroborated hearsay under a doctrine known as the ''legal residuum rule.'' These principles need to be reiterated in all ERISA litigation.
Nor should it matter what standard of court review applies. No court should countenance reliance on the non-examining physician reports when the truly neutral examining doctor's report points the way to both the correct and common-sense determination. Although this case was decided under the de novo standard of review, it would be tragic to think that just the opposite conclusion could have been reached under a deferential standard of review.
The Paese ruling also takes away an entirely disingenuous defense we have been seeing in many cases. The insurer terminates benefits close to the expiration of the own occupation definition of disability (usually 24 months). If that determination is challenged in court, the insurer asks for a remand to have the opportunity to deny the claim again under the any occupation definition. Most courts are quick to remand, although there has been some opposing commentary by others. For example, in Grosz-Salomon v. Paul Revere Life Ins. Co., 237 F.3d 1154, 1163 (9th Cir. 2001), the court held: ''[A] plan administrator will not get a second bite at the apple when its first decision was simply contrary to the facts.'' Also see, Cook v. Liberty Life Assur. Co. of Boston, 320 F.3d 11, 24 (1st Cir. 2003).
Several district courts have reached the same conclusion. In Watson v. Unum Provident Corporation, 185 F.Supp.2d 579, 587 (D.Md. 2002), the court found:
''[I]t is not appropriate to permit a plan administrator/insurer laboring under a manifest conflict of interest to avoid the consequences of its unreasonable and unprincipled deliberative process through the expedient of a remand. As this case does not involve pension or life insurance benefits, a refusal to grant a remand so that Unum might cure its flawed process in terminating Watson's disability benefits is of no moment. That is, under the terms of the policy, Unum is free to conduct a further review, a ''principled process,'' at its election.
In yet another ruling, Fleet v. Independent Credit Union, No. 1:04-cv-00507-DFH-TAB, 2005 U.S.Dist.LEXIS 11778 (S.D.Ind. 2005), the court characterized a remand when the insurer improperly denied benefit payments as a ''mulligan'' and explained:
''If the procedure were to become routine, it would pose a serious risk of simply allowing 'Mulligans' to sloppy plan administrators - at the expense of both the courts and plan participants and beneficiaries. The 7th Circuit has cautioned against such a risk: 'It would be a terribly unfair and inefficient use of judicial resources to continue remanding a case to [the plan administrator] to dig up new evidence until it found just the right support for its decision to deny an employee her benefits.' Dabertin v. HCR Manor Care Inc., 373 F.3d 822, 832 (7th Cir. 2004), citing Vega v. National Life Ins. Servs. Inc., 188 F.3d 287, 302 n.13 (5th Cir. 1999) (en banc) (parties must make their full records before coming to federal courts and not allow the case to 'oscillate between the courts and the administrative process').''
Other courts should take a lesson from Paese and begin a reexamination of ERISA litigation and how it has been transformed from what one of its sponsors, Senator Jacob Javits, hailed as ''the greatest development in the life of the American worker since Social Security'' into a litigation nightmare for claimants.