Diaz v. Prudential Insur.Co. of America

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Diaz v. Prudential Insur.Co. of America, 2005 U.S.App.LEXIS 20098 (7th Cir. 9/20/2005)( Issue: Standard of Review) . This opinion, issued in one of our cases, puts to rest the notion that a deferential standard of review is due merely because the insurance policy requires proof of disability satisfactory to the insurer. The plaintiff, a computer programmer/analyst for Bank One in Chicago, experienced back problems that ultimately led him to undergo spinal fusion surgery. Unfortunately, the surgery did not lead to medical improvement; instead, Diaz's severe pain persisted and even worsened. Although Diaz remained under the care of both his spine surgeon and a pain specialist, who both certified the plaintiff's disability, Prudential refused to pay benefits. Diaz appealed; and Prudential finally had a physician, Dr. Gale G. Brown, Jr., review the file which had not previously been done. Dr. Brown reported that while Diaz was disabled for a period of time, he ceased being disabled the day before the elimination period expired. Thus, the benefit denial was upheld, triggering litigation.

The district court, applying a deferential standard of review, found on summary judgment that Prudential's decision was reasonable. The court of appeals reversed, ruling the district court erroneously applied an arbitrary and capricious standard of review. The Seventh Circuit found that the language in the Prudential policy failed to give adequate notice from which plan participants would be able to discern that the plan reserved discretion. Relying on Herzberger v. Standard Insur.Co., 205 F.3d 327 (7th Cir. 2000), the court held that policy language stating benefits will be paid "when Prudential determines" the following conditions are met, or language that eligibility for ongoing benefits requires proof, "satisfactory to Prudential," that the insured is under the care of a doctor, fail to meet the requisite standards for clearly and unambiguously giving notice of discretion. Herzberger suggested safe harbor language: "Benefits under this plan will be paid only if the plan administrator decides in his discretion that the applicant is entitled to them." (205 F.3d at 331); and while the court ruled that recitation of that precise formulation is not required, the Seventh Circuit held in Diaz that any doubt remaining after Herzberger that a requirement of furnishing satisfactory proof would suffice is erased. Thus, the court overruled two earlier decisions that had retained some viability after Herzberger: Donato v. Metropolitan Life Insurance Co., 19 F.3d 375 (7th Cir. 1994), which stated that disability benefits would be paid "upon receipt of proof," and that "all proof must be satisfactory to us [the plan administrator]" (19 F.3d at 379) and Bali v. Blue Cross & Blue Shield Ass'n, 873 F.2d 1043 (7th Cir. 1989), which spoke of "such true and correct information as the Committee may reasonably request," and noted that disability was "determined on the basis of medical evidence satisfactory to the Committee." Id. at 1047 & n.6.

Acknowledging that other Circuits have viewed language comparable to "satisfactory to us" sufficient to convey an intent to reserve discretionary authority, the Seventh Circuit departed from those rulings in order to clarify the issue henceforth, explaining:

No single phrase such as "satisfactory to us" is likely to convey enough information to permit the employee to distinguish between plans that do and plans that do not confer discretion on the administrator. And this is a matter that may well be of interest to employees considering where to work: some may prefer the certainty of plans that do not confer discretion on administrators, while others may think that the lower costs that are likely to attend plans with reserved discretion are worth it. We must therefore ask what must be satisfactory to the plan's administrator: did the evidence comply with prescribed standards ( i.e., no discretion), or did the evidence comply with the plan administrator's subjective notions of eligibility, disability, or other terms in the plan ( i.e., discretion). Prudential's LTD Plan requires "proof of continuing disability, satisfactory to Prudential, indicating that [the claimant is] under the regular care of a doctor." This language does not alert the plan participant to the possibility that Prudential has the power to re-define the entire concept of disability, or regularity of physician care, on a case-by-case basis. Fairly read, it suggests only that the plan participant must submit reliable proof of two things: continuing disability and treatment by a doctor. In short, under Prudential's Plan, the only discretion reserved is the inevitable prerogative to determine what forms of proof must be submitted with a claim--something that an administrator in even the most tightly restricted plan would have to do. *13-*14.

Holding the "satisfactory to us" language insufficient to give adequate notice of discretion, the court ruled the standard of review must be de novo.

Discussion: Although many insurers have reacted to the trio of cases issued in 1999 and 2000 challenging the "satisfactory proof" formulation ( Kearney v. Standard Insurance Company, 175 F.3d 1084 (9th Cir. 1999); Kinstler v. First Reliance Standard Life Insurance Company, 181 F.3d 243 (2d Cir. 1999); and Herzberger)) by altering their policies to more clearly spell out discretionary authority, Prudential has remained a notable exception. In the Seventh Circuit, Prudential's policies will no longer suffice for courts to grant discretionary review. Although the Diaz victory may appear to be one destined to last only so long as it takes for insurers to modify their policies, in Illinois, at least, that route is foreclosed by the prohibition against discretionary clauses recently promulgated by the Division of Insurance, 29 Ill.Reg. 10172, amending the 50 Illinois Administrative Code to add §§2001.1 and 2001.3, and amending 2001.10. California has also administratively outlawed discretionary clauses, as has Montana.

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